TIDMWATR
RNS Number : 1662Q
Water Intelligence PLC
17 June 2020
Water Intelligence plc (AIM: WATR.L)
("Water Intelligence", the "Group" or the "Company")
Audited results for the year ended 31 December 2019
Outlook for 2020
Water Intelligence, a leading multinational provider of
precision, minimally-invasive leak detection and remediation
solutions for both potable and non-potable water, is pleased to
present its full, audited results for the year ended 31 December
2019 and Outlook for 2020.
In 2019, the Company completed its five-year growth plan
(2014-19) producing a compounded annual growth in revenues of 35%
and profit before tax of 33%. For 2020, the Company remains in-line
with market expectations.
Copies of the Annual Report will be made available to view on
the Company's website at www.waterintelligence.co.uk
Group Results Highlights
-- Revenue growth once again strong at 27% reaching $32.4 million (2018: $25.5 million)
o Total franchise System-wide sales (franchisee gross sales from
which royalty income is derived) and corporate-operated sales of
approximately $125 million
o Sales footprint across the United States and in UK, Australia,
and Canada creates distribution platform for matrix of residential,
commercial, and municipal products and solutions
-- Profit before tax growth exceeds revenue growth at 34%
reaching $2.4 million (2018: $1.8 million)
o Profit before tax adjusted for non-core costs (non-recurring,
amortization, and share-based payments) grows 34% to $3.4 million
(2018: $2.5 million)
-- EPS (fully diluted) grows 22% to 11.1 cents (2018: 9.1 cents)
-- Balance sheet strong at 31 December 2019
o Cash: $5.3 million
o Cash net of borrowings: $2.0 million
Core business units - American Leak Detection (ALD) and UK-based
Water Intelligence International (WII) each grows strongly to
establish a broad matrix of residential, commercial and
municipal/water utility solutions to address both clean water and
wastewater problems
o ALD revenue grows 28% to $29.0 million (2018: $22.6
million)
-- Royalty income from franchisees grows by 4% to $6.50 million
(2018: $6.27 million) despite additional franchise
reacquisitions
-- Insurance channel grows strongly by 41% to $7.1 million
(2018: $5.0 million)
-- Corporate-operated sales grow strongly by 43% to $14.4
million (2018: $10.1 million)
o WII revenue grows 16% to $3.4 million for 2019 (2018: $2.9
million)
2019 Operational and Post-Period Highlights
-- 2019 Corporate Development
o Corporate finance transaction in May to accelerate growth:
approximately $2.7 million net from equity placement and $6 million
available from expanded acquisition and working capital lines of
credit
o Franchise reacquisitions: 4 strategic locations - Ontario,
Canada and South Atlanta, Orlando, and Tucson in the US
o National accounts: executed contracts with one nationwide
insurance company and one nationwide retailer of home services
o Technology investments: (i) Sewer diagnostic product; (ii)
Entertainment AI to enable video e-commerce so that ALD may provide
customers opportunities to buy additional water-related products as
part of the growing "Insuretech" market
-- Through May 2020 Corporate Development
o Scottsdale Franchisee Convention in March unveiling ambitious
five-year growth plan
o Navigation of COVID-19 crisis with continued operations as
"essential service provider"
o 2 strategic reacquisitions of franchises - Minneapolis and San
Jose in the US
o Implementation of Salesforce.com customer relationship
management software to automate dispatch, reporting and invoicing
in a secure environment creating greater operational efficiencies
and enable rapid scaling
-- In-line with 2020 market expectations
Dr. Patrick DeSouza, Executive Chairman of Water Intelligence,
commented: "Superb 2019 results in both revenue and profit before
tax growth once again validated our strategic direction. We grew
our sales footprint and American Leak Detection brand to gain a
critical mass of $125 million in total sales to third parties from
franchisees and corporate-operated locations. We are fast becoming
a multinational distribution platform - a 'One Stop Shop' - that
provides a matrix of service solutions to residential, commercial
and municipal customers and an opportunity for follow-through sales
of additional products. Our recently announced Salesforce.com
implementation will accelerate the development of our platform.
We appreciate our investors who increased their support of our
efforts with another oversubscribed capital raise during 2019.
Despite COVID-19, we have had a strong first half of 2020 and
continue to execute our core strategy. Our well-attended franchise
Convention in Scottsdale, Arizona adopted our next five-year plan
with the goal of doubling the size of the business during the plan
horizon. Given the increasing demand around the world for water
infrastructure services - even during COVID-19 - we welcome the
opportunity to aim high and to continue to deliver."
The information communicated within this announcement is deemed
to constitute inside information as stipulated under the Market
Abuse Regulations (EU) No. 596/2014. Upon the publication of this
announcement, this inside information is now considered to be in
the public domain.
Enquiries:
Water Intelligence plc
Patrick DeSouza, Executive Chairman Tel: +1 203 654 5426
Adrian Hargrave, VP, Corporate Development Tel: +44 (0)7775 701
838
WH Ireland Limited - NOMAD and Broker Tel: +44 (0)20 7220 1666
Adrian Hadden
James Sinclair-Ford
Matthew Chan
Dowgate Capital Limited - Joint Broker Tel: +44 (0)7920 599
Stephen Norcross 793
Chairman's Statement
Overview .
We closed the last Annual Report with a look at the first third
of 2019 followed by our outlook on the year ahead. We indicated
that we remained confident about delivering on our vision of a
world-class water infrastructure services company. As reported
below, we delivered again. We had another remarkable year both in
terms of financial and operating performance. We completed a
five-year growth plan that produced compounded annual growth in
sales of 35% and profits before tax of 33%.
Similarly, at the end of this year's Chairman's Statement, we
will be reviewing the first third of 2020 and then presenting our
Outlook for the remainder of the year. One might think that our
tone would be circumspect with the Covid-19 crisis marking the
first third of this year. On the contrary, we remain confident
about our prospects. As discussed below, we are navigating the
crisis well and accelerating our growth plans in order to
distinguish ourselves from others in the marketplace.
Global demand for preventing water loss through infrastructure
products and services is only increasing, crisis or not. Moreover,
as illuminated by Covid-19, consumer demand for solutions to public
health concerns emerging from sanitary overflow and poor wastewater
infrastructure as people "shelter in place" is also becoming more
acute. We remain confident about our ability to meet such market
demand because of our attention to scaling our business over the
last five years as we discussed in last year's report. We have also
reinvested into proprietary new products, such as a residential
sewer diagnostic tool that will be deployed in the market during Q3
2020. In fact, because of our extensive and growing sales footprint
- over $125 million in sales to third parties from both franchise
operations (from which our royalty income is derived) and corporate
operations - across 46 states of the US, we are much more than a
valuable water infrastructure services company. Rather, having
provided solutions for over 200,000 customers across the US, we are
becoming an even more valuable distribution platform for
follow-through sales that address related water and wastewater
problems - a "One Stop Shop". As discussed below, we will be
accelerating this strategic direction.
2019 Group Fundamentals . As reflected by our 2019 results, we
continue to scale nicely. During 2019, much like 2018, more of our
results dropped to the bottom-line as the rate of growth in
statutory profits before tax at 34% exceeded the rate of growth of
revenue at 27%; of course, we were pleased by both results. In
absolute terms, revenue reached $32.36 million (2018: $25.47
million). Statutory profits before tax reached $2.36 million (2018:
$1.75 million). Profits before tax adjusted for non-cash and
non-recurring costs grew 34% to $3.35 million (2018: $2.47
million). Profit per share on a fully diluted basis grew 22% to
11.1 cents a share.
Our balance sheet also remained strong enabling us to reinvest
to execute our long-range growth plan. At 31 December 2019, the
Group had $5.3 million in cash. This amount balanced all borrowings
and deferred consideration from franchise reacquisitions which
together totalled $5.3 million. Given our fundamentals, our balance
sheet is fairly conservative. Borrowings and deferred consideration
are amortized over four-to-five years while the Group has a store
of $5.3 million in cash that itself is growing annually since we
also generate cash from operations. Strong growth and prudent
corporate finance put us in a good position during these uncertain
times. Overall, assets grew 36% to $28.12 million (2018: $20.71
million).
Operating Businesses and KPIs . The Group has two wholly-owned
operating subsidiaries: our flagship, American Leak Detection
("ALD") and our UK-based, Water Intelligence International ("WII").
These two subsidiaries use acoustic and infrared technologies to
provide minimally-invasive solutions for all types of leak
problems: residential, commercial and municipal. Our solutions
apply to both potable and non-potable water lines. The Group's
subsidiaries work closely together to execute a growth plan that
envisions a "One-Stop Shop" for customers as noted above. Our core
business - American Leak Detection - focuses on residential and
commercial leak detection and repair solutions across the US,
Canada and Australia. ALD delivers services through both
franchise-operated and corporate-operated locations. As noted
above, sales to third parties from our franchise locations are
recorded as royalty income that is derived from such gross sales.
WII complements ALD by providing solutions for municipal customers
for both clean water and wastewater. Because of ALD's reputation
across the US, WII has been able to cross-sell municipal solutions
to an increasing number of communities in the US. Moreover, WII has
been instrumental in introducing municipal solutions to ALD's
Australian locations. In the near future, ALD will be returning the
favour by cross-selling into WII's UK base of operations providing
residential and commercial leak detection and repair services.
Working together each subsidiary reduces customer acquisition costs
for the other and enables efficiencies in service delivery.
The success of our two subsidiaries and overall growth plan are
captured by certain KPIs set forth in our Strategic Report. First,
our core service delivery platform is expanding. Royalty growth
from the ALD franchise system remains strong. During 2019, ALD
royalty income grew 4% to $6.5 million (2018: $6.2 million) in
absolute terms despite four strategic reacquisitions that removed
royalty income from the pool: Ontario, Canada and in the US - South
Atlanta; Orlando; and Tucson. The latter two locations previously
contributed significant royalty income. The health of our franchise
system is important because its sales and execution contribute to
market presence across the US. Such reach produces an efficient
multiplier effect enabling the Group to be a significant
distribution platform for additional follow-through sales to
customers. As a collateral benefit, monthly recurring royalty
income enables the Group to optimize its capital formation through
bank debt, especially in today's low interest rate environment.
Second, our insurance business-to-business channel continues to
grow rapidly. Demand from national insurance companies remains
strong as water-related claims ($13 billion+ market) continue to
grow along with the price of water. Insurance companies seek to
leverage ALD's nationwide operational footprint to provide
minimally-invasive leak detection and repair services wherever
claims arise. During 2019, our insurance channel grew by 41% to
$7.1 million (2018: $5.0 million). We added two national accounts
last year which will fuel continued growth in 2020 and beyond. As
noted in the Strategic Report, the business-to-business channel
feeds our franchise system and enables scaling by providing jobs to
the franchise system at lower customer acquisition costs through a
centralized corporate system.
Third, ALD corporate-run operations complement our franchise
system by (i) executing our service offerings and opening-up new
offerings; and (ii) unlocking value in terms of financial
performance. ALD corporate operations are made up of both franchise
locations that have been reacquired and greenfield operations.
During 2019 corporate-run operations grew 43% to $14.5 million
(2018: $10.1 million). Profit before taxes grew 67% to $2.0
million. (2018: $1.2 million). It should be noted, however, that
such growth is not due simply to reacquisition and conversion of
franchisee revenue and profits into corporate revenue and profits.
We have demonstrated that corporate operations can add value to
territories formerly run by franchisees. If one evaluates corporate
locations owned prior to January 1, 2018, sales grew 10% to $8.6
million (2018: $7.8 million). Profit before taxes, on the other
hand, grew 37% to $1.30 million (2018: $0.95 million). As
corporate-run operations increase profit margins while still
reinvesting in growth, they unlock shareholder value because the
net profits that they produce are higher than foregone net royalty
income for doing the same execution activity in the location under
the same brand.
Corporate operations also are helpful to the franchise system in
introducing new service offerings. In addition to standard ALD
residential and commercial solutions, US corporate-run locations
also have introduced WII municipal solutions to the US. During
2019, US corporate locations built a book of business amounting to
$1 million in municipal contracts, $500,000 of which was executed
during 2019. It should also be noted that fast-growing corporate
locations reinforce franchise operations with increased local
marketing presence and general management support.
Fourth, UK-based WII continues to grow steadily. WII complements
ALD with municipal offerings and leads our multinational growth
efforts. During 2019, WII grew revenue by 16% to $3.37 million
(2018: $2.9 million). As noted above, it introduced a new municipal
offering in the US and is helping the franchise system bid for more
municipal contracts during 2020. In addition, WII is growing in
Australia through its Sydney operations and has begun to market its
offerings in the EU and South Africa.
Our two operating businesses work synergistically and set the
stage for providing more products and services to our customers in
order to handle an increasingly wide range of water infrastructure
problems. As we enter new geographies, we believe that offering a
full service matrix of solutions for various types of pipes
(residential, commercial and municipal) and situations (clean water
and wastewater) will be attractive to our customers and will
enhance our prospects for long-term growth.
Covid-19 and First Third of 2020 .
Despite Covid-19, we look to remain ambitious with our growth
plans. As an "essential service" provider, we have continued to
operate across the US, UK, Canada and Australia. We have
contributed valuable solutions in our communities with respect to
clean water provisioning and solving for sanitary overflow as
homeowners "shelter in place". To a degree, Covid-19 adversely
impacts our 2Q 2020 performance relative to our typical growth
trajectory. Consumers have had to adjust to service providers
visiting their homes even though their demand for water and
wastewater solutions has remained high. We are seeing evidence that
June performance is returning to our typical upward trajectory.
Nonetheless, we are still making prudent budgetary choices such
as increasing our inventories of protective personal equipment
(PPE). We are taking actions to safeguard our various stakeholders:
corporate employees, franchisees, customers, business partners,
such as insurance companies, and shareholders. By working together
in more proactive fashion, we are navigating the crisis as well as
can be expected. In certain ways, the Covid-19 crisis may have
actually brought our company, our franchisees and our customers
closer together given the saliency of dealing with water loss and
sanitary overflow alongside the realities of shelter in place. The
pandemic also reaffirms our decision during 2019 to invest in video
e-commerce technology as homeowners in a post-Covid-19 world will
be more likely to seek information on-line about water-related
products and solutions.
Scottsdale Convention and First 60 Days .
In mid-March, before the onset of shelter in place policies, our
American Leak Detection franchise System and corporate leadership
team gathered in Scottsdale, Arizona for our annual convention.
This year's Convention proved to be special. As a testament to the
commitment of our franchisees and corporate staff, the event was
extraordinarily well-attended with team members coming from across
the US, UK, Canada and Australia. The purpose of Convention 2020
was to communicate our next five-year growth plan. Given the
success of our last five years with compounded annual growth of 35%
in revenue and 33% in profit before taxes, our stakeholders
expected a robust, ambitious plan.
I am proud to say that we had strong consensus in Scottsdale
that Covid-19 would not deter us in our mission to be a market
leader in transforming the water infrastructure business through
our use of minimally-invasive technologies. We set, as our next
target, to double total sales under our brand (whether franchise or
corporate) to $250 million by the end of 2023. Both franchise and
corporate operations are committed to making the necessary
investments to reach this goal.
During the first sixty days after leaving Scottsdale, while
Covid-19 created disruptions across the global economy, we have
been focused on taking clear steps to hit the ground running
towards the revenue and profit targets provided by our next
five-year plan. We are immediately building on initiatives that
have marked the last five years.
First, we reacquired two franchises in strategic locations:
Minneapolis, Minnesota and San Jose, California. Both are accretive
transactions and the territories have room for further organic
growth. Minneapolis will enable us to have a stronger presence in
the Upper Midwest of the US where we already have traction in
winning municipal contracts with our UK-based Water Intelligence
International offerings. We would like to expand our municipal
business from this base of operations. In addition, from
Minneapolis, we may be able to open some greenfield locations in
Canada. San Jose, meanwhile will enable us to have a regional
corporate office in Silicon Valley. The Bay Area is currently home
to two very successful multi-million dollar franchises. Given the
size of the addressable market and sensitivity of the entire Bay
Area to sustainability issues, we believe that the San Jose
operation has the opportunity to work with the neighbouring
franchises and expand our presence significantly. Moreover,
technology innovation is core to our brand and to our future. We
plan to work with partners in Silicon Valley to develop new
products.
Second, we extended our national account structure with wins
from regional insurance companies. Such regional accounts enable us
to deepen our insurance company relationships. We anticipate
signing additional accounts with national insurance companies prior
to the end of Q3 2020.
Third, we started field trials to launch of our newest
technology product - a residential sewer diagnostic tool. We plan
to go to market with this device over the summer. The sewer
diagnostic tool is valuable in a Covid and post-Covid world because
sewer blockages will increase as homeowners dispose of sanitary
wipes in toilets. Conventional sewer diagnostic approaches use
video cameras which are cumbersome. Our tool uses acoustics and
analyses the data efficiently in the cloud. Our product enables
analysis of blockages an order of magnitude faster than other
products in the market.
As we develop our brand, we seek to introduce more technology
products. We have strong R&D relationships at Columbia
University, Yale and University of Chicago. Pre-crisis, we were
sponsoring a water product design competition with Columbia
Business School to mark the University's Year of Water Initiative.
We anticipate the design competition to be rescheduled for later
this year. With our reacquisition of the San Jose franchise, we
seek to partner with venture capital firms and Stanford University
in launching sustainability products. As noted above, because of
our services footprint across the United States touching over
200,000 homes annually, we are really a distribution platform for
new products that complement our service offerings.
Finally, as recently announced, we have signed a long-term
relationship with the world's leading cloud-based CRM (customer
relationship management) platform - Salesforce.com - to automate
our execution processes from dispatch of technicians to invoicing
of customers to follow-up with additional customer services and
sales. In the 2018 Chairman's Statement, we discussed certain
attributes of scaling our business. We noted that with our critical
mass of sales and matrix of product and services offerings we had
the makings of a valuable distribution platform. With the
integration of enterprise technology from Salesforce.com, we are
taking a giant step towards realizing efficiencies in execution and
becoming a "One Stop Shop" as we have communicated over the years.
Further, we see our coming video e-commerce offerings as a seamless
complement whereby customers can be educated in sustainability,
order products and services on-line and have our technicians
instantaneously scheduled and routed to deliver the solution.
Conclusion .
We are off to a good start in 2020 despite the Covid-19 crisis.
The Covid-19 crisis has underscored the value of our business both
in good times and bad as an "essential service" provider. For our
shareholders, we are "acyclical" and a relative safe-haven. The
crisis has also highlighted the value of our brand and reputation
in the United States as a trusted service provider on whom
homeowners and insurance companies may count. Navigated well,
crises do present opportunities to distinguish oneself. We had an
excellent Convention in Scottsdale and have come out of the gates
fast on a mission to make a difference in the marketplace and to
continue our trajectory of strong compounded annual growth for our
next five-year plan.
Dr. Patrick DeSouza
Executive Chairman
16 June 2020
Strategic Report
Business Review and Key Performance Indicators
The Chairman's Statement provides an overview of the year and
the Outlook for Water Intelligence plc and its subsidiaries,
referred to as the "Group". The business indicators offered below
are meant to capture for the Board not only the state of
performance but also the evolution of our business model to a
platform company that is a "One-stop Shop" for growing base of
customers through additional cross-sales of solutions from across
our business units and also the up-sales of technology products to
fulfil more of the needs of our customers.
The Water Intelligence platform has two wholly-owned
subsidiaries: American Leak Detection (ALD) and Water Intelligence
International (WII). These business units are distinguished by the
degree of franchise-operated and corporate-operated locations and
their respective priorities on residential, business-to-business
and municipal customers. ALD, our core business, is largely a
franchise business with strategic corporate-operated locations. ALD
is a leader in using technology to pinpoint and repair water leaks
without destruction. Solutions target both residential and
business-to-business customers, such as insurance companies, which
value our minimally invasive value proposition. ALD has
approximately $125 million of sales to end-users of our brand. That
critical mass of sales is derived from direct sales via
corporate-operated locations and indirect sales measured by royalty
income from franchisees, which, in turn, is based on franchisee
gross sales to end-users. With its installed and growing base of
residential customers, ALD can also upsell technology home services
products to meet growing consumer demand for solutions to water
loss and water quality. Meanwhile, WII, our UK-based operation that
the Group acquired in Q4 2016, focuses on municipal solutions given
the world-wide problem of failing water infrastructure. WII's
solutions are also technology-centred. It is exclusively a
corporate-run unit that leads the Group's international expansion.
WII does have the capability to execute ALD service offerings and
is currently doing so at our corporate-operated location in Sydney.
WII also cross-sells complementary municipal offerings and
residential wastewater solutions to ALD for municipal customers in
the US.
The Group's growth strategy is evaluated through key performance
indicators (KPIs) and incorporates both corporate-operated and
franchise-operated organic growth from ALD and WII solutions, as
well as, unlocking additional sales growth and shareholder value
through acquisition, especially by selectively converting ALD
franchises to corporate-operated locations. Such re-acquisitions of
franchisee operations enable some amount of the approximately $100
million in highly profitable franchisee sales to end-users of our
solutions, recorded as royalty income, to be converted to the
Group's direct P&L. One measure of unlocking value for
shareholders from such reacquisitions is based on our ability to
grow converted corporate locations faster than would be the case
under franchisee operation. As a by-product of such acquisition-led
P&L growth, it is also important to separate continuing
operating costs from non-core costs related to transactions that
are executed as part of the Group's growth plan. Finally, because
of the recurring and growing nature of monthly royalty income from
the franchise business, the Group is able to be efficient in its
capital formation using both equity and bank debt. As a result, it
is important that the Group manage to the right balance in capital
formation by monitoring the level of net borrowings.
Six key performance indicators (KPIs) are used by the Board to
monitor the above described business model: (i) growth in ALD
franchise royalty income, (ii) growth in ALD franchise-related
activities that include both business to business sales and sales
of parts and equipment, (iii) growth in ALD corporate-operated
locations in the United States, (iv) growth in WII corporate
activities located outside the United States, (v) non-core costs
and (vi) net borrowings. These six indicators are reported to the
Board on a monthly basis and used to assist the Board in the
management of the business.
2019 Conclusions Drawn From 6 KPIs:
i. ALD Franchise System is expanding its sales and brand
presence across the United States as indicated by royalty growth
which furthers our evolution as a "One-Stop Shop" distribution
platform. Royalty growth continues given market demand despite
franchisee reacquisitions which remove some royalty from the pool
of eligible royalty income.
ii. ALD Business-to-Business Channel takes advantage of our
national execution presence under one brand and, led by the growth
of insurance company channel, is fuelling expansion in both
franchise-operated and corporate-operated locations.
iii. ALD corporate-operated locations add to critical mass of
Group revenue and profits and through selective reacquisitions from
our expanding franchise System further unlocks the Group's equity
value
iv. WII complements our ALD brand and contributes complementary
municipal sales to the Group's overall sales presence in the US and
international geographies
v. Non-core costs, largely legal transactions costs, are an
acceptable trade-off relative to the operating P&L benefits of
adding critical mass to the Group's revenue and profits
vi. Net-borrowing position is favourable for Group's continued
growth and business plan especially given the consistent growth of
monthly recurring income and low interest rate environment
(i) Franchise Royalty Income.
The continued growth of the core ALD franchise business is the
foundation for the business strategy of the Group. ALD is the
centrepiece of the Group's distribution strategy as a "One-Stop
Shop" platform because of its sales footprint in 46 states of the
US and multiple locations in Australia and Canada. Moreover,
because of the recurring nature of its royalty stream, the Group is
able to increase shareholder value in its capital formation with a
mix of debt and equity. As System-wide franchisee sales increase,
the Board can decide whether to selectively reacquire franchises
and convert them to corporate-operated locations adding critical
mass of revenue and profits to the Group or to keep adding high
margin royalty income to the Group. Royalty income in 2019 grew in
absolute terms by 4% compared with 2018 despite significant
reacquisitions during 2019 which had the effect of reducing the
eligible pool of royalty income. Such royalty growth is
attributable in part to the benefits arising from the Group's
insurance channel which expands the franchise System. Profit before
taxes from this business line grew by 11%. The Group has 103
franchises at the end of 2019 which represents a decrease of 2
franchises (2018: 105). The net decrease was the result of the
reacquisition and conversion of 4 franchises into corporate-run
locations and an increase of 2 new franchises. Performance from
royalty income is as follows:
Year ended Year ended
31 December 31 December
2019 2018 Change
$'000 $'000 %
----------------------------- -------------- -------------- -------
Total USA 6,356 6,087 4%
International 143 178 (20)%
----------------------------- -------------- -------------- -------
Total Group Royalty Income 6,499 6,265 4%
----------------------------- -------------- -------------- -------
Profit before tax (see note
4) 1,603 1,448 11%
----------------------------- -------------- -------------- -------
(ii) Franchise-related Activities.
US franchise-related activities provide supporting evidence for
the strength of the core ALD business. Parts and equipment sales
are one indication of franchisee reinvestment in growth of their
respective operations. Business-to-Business channels, such as
insurance and property management represent national customers and
are an indication that these customers value ALD's nationwide brand
and sales footprint - an important aspect of competitive strategy.
Jobs for franchisees are sourced by Corporate headquarters from
insurance companies using a centralized processing system. The jobs
are then dispatched to franchisees from corporate administration
with corporate administration taking liability and payment risk.
Finally, sales of franchise units represent the decision to develop
a new territory through a franchisee. This line item conveys the
Group's current priority with respect to adding corporate-operated
locations as opposed to franchisee-operated locations in order to
develop and grow a territory. Revenue from franchise-related
activities in 2019 grew by 31% compared to 2018 largely because of
the growth of the Group's business-to-business channel. Profit
before taxes grew 24% in 2019 compared with 2018. Performance from
franchise-related activities are as follows:
Year ended Year ended
31 December 31 December
2019 2018 Change
$'000 $'000 %
----------------------------- -------------- -------------- -------
Parts and equipment sales 854 1,076 (21)%
Business-to-Business sales 7,106 5,023 41%
Sales of Franchise Units 90 55 64%
----------------------------- -------------- -------------- -------
Total Revenue from US Other
Activities 8,050 6,154 31%
----------------------------- -------------- -------------- -------
Profit before tax (see note
4) 601 484 24%
----------------------------- -------------- -------------- -------
(iii) US Corporate Operated Locations (ALD).
Corporate-run locations both greenfield and initiated after
reacquisition of franchise locations contribute revenue and profits
to the Group. In addition, such operations support the franchise
System with strategy, marketing and execution support in further
developing territories. Performance of the US corporate-run
locations post-reacquisition is also an indication of the success
of the Group's strategy to selectively reacquire ALD franchises to
meet increasing market demand for our minimally invasive leak
detection and repair solutions. The Group directly operates 18
territories, an increase of 3 territory (2018: 15). Sales growth
from corporate-operated locations grew strongly both organically
and from reacquisitions when compared with 2018.
As set forth below, ALD Corporate-operated revenue grew 43% to
$14.4 million (2018: $10.1 million). Meanwhile profit before taxes
grew strongly by 67% to a little more than $2 million (2018: $1.2
million). This KPI table was redesigned in 2018 to add information
for the Board. We have begun to measure the difference between
near-term corporate growth through reacquisitions of franchisees
and longer-run corporate-operated organic growth post
reacquisition. We have included a line item for corporate locations
owned during the comparison years. Holding aside 2019 franchise
reacquisitions, sales growth from corporate-operated locations
owned prior to 1 January 2018 grew 10% to $8.6 million (2018: $7.8
million). Profit before taxes for the same subset of
corporate-operated locations grew 37% to $1.3 million (2018: $0.95
million).
Table (iii) also enables us to assess the trade-off between
franchise royalty growth and corporate-operated growth by examining
yield in terms of Group profit before tax. Corporate store profit
before tax amount to $2 million. If the same $14.4 million of sales
to the same customers was executed by a franchisee, the Group would
receive approximately $0.23 million or 11% of the profit before
taxes. ($14.4 million of sales multiplied by 6% royalty fee equals
approximately $0.86 million of royalty income; and $0.86 million is
then multiplied by 27% profit margin of royalty income - see KPI #1
- to yield $0.23 million of profit before taxes to the Group).
Hence, when compared to the $2 million in corporate store profits
before taxes contributed to the Group, the incremental profit of
reacquiring franchises unlocks shareholder value. On the other
hand, it should be noted that, recurring monthly royalty revenue is
especially valuable for optimal capital formation by reinforcing
non-dilutive bank finance. The Board will use this KPI to evaluate
the trade-offs.
Performance from corporate-operated locations is as follows:
Year ended Year ended
31 December 31 December
2019 2018 Change
$'000 $'000 %
----------------------------- -------------- --- -------------- -------
Revenue 14,446 10,141 43%
Locations owned prior to
1 January 2018 8,567 7,759 10%
Profit before tax (see note
4) 2,025 1,213 67%
Locations owned prior to
1 January 2018 1,301 952 37%
----------------------------- -------------- --- -------------- -------
(iv) International Corporate Operated Locations (WII)
The Group continues to strengthen its multinational presence
through its UK-based WII subsidiary. WII was established during Q4
2016 with the acquisition of NRW Utilities Ltd. WII has expanded
its operational scope by managing the corporate location
established in Sydney, Australia after the reacquisition of a
former ALD franchisee in 2017 and now Ontario, Canada after another
reacquisition.
The objective was for UK-based WII to lead the Group's
international expansion. Sales have grown 16% during 2019 to $3.4
million. (2018: $2.9 million). Most importantly, profits grew
strongly. (2019: $0.22 million; 2018: $0.03 million). Performance
from Water Intelligence International is as follows:
Year ended Year ended
31 December 31 December
2019 2018 Change
$'000 $'000 %
---------------------------------- -------------- -------------- -------
UK-based WII 1,386 1,628 (15)%
Sydney, Australia 1,421 1,279 11%
Ontario, Canada 562 N/A
Total Revenue from International
Corporate Activities 3,369 2,907 16%
---------------------------------- -------------- -------------- -------
Profit before tax (see note
4) 226 31 630%
---------------------------------- -------------- -------------- -------
(v) Non-Core Costs.
During 2019, the Group incurred what are considered to be
non-core costs relating to (i) legal costs relating to transactions
executed for the future growth of the business and (ii) a
prepayment write off for a service that had not been performed. As
discussed herein, understanding non-core costs, as distinct from
continuing operating costs, enables the Board to evaluate capital
allocation choices made to accelerate operations organically and to
scale through acquisition. In 2019, there were $493,000 of non-core
costs. During 2018, there were $287,000 of non-core costs. Please
see table below for details:
Year ended Year ended
31 December 2019 31 December 2018
$'000 $'000
----------------------------------- ----------------- -----------------
Product development legal costs - 60
Technology product write-off 93 60
Plumbing unit write-off related to
acquisition 187 32
Transaction-related employee costs 82 -
Transaction-related legal costs 131 135
Total 493 287
----------------------------------- ----------------- -----------------
(vi) Net Borrowings.
Management of financial resources is important for making
various decisions regarding the reinvestment rate in the growth of
operations. As noted herein, the recurring income from franchise
royalty provides the Group with attractive attributes for using
bank debt to complement equity sources of capital. In the current
macroeconomic environment, bank debt is a relatively cheaper cost
of capital than equity. Net cash is currently approximately $2.0
million .
Group
Year ended Year ended
31 December 31 December
2019 2018
$'000 $'000
----------------------------------- ---- ---- -------------- --------------
Lines of credit: acquisition and
working capital 1,264 1,616
Term loan 2,047 822
----------------------------------- --------- -------------- --------------
3,311 2,438
Less: Cash
Held in US Dollars 4,127 3,569
Held in GBP Sterling 633 1,239
Held in CDN Dollars 121
Held in AU Dollars 400 208
----------------------------------------- ---- -------------- --------------
5,281 5,016
---------------------------------------- ---- -------------- --------------
Total Net Borrowings/(Cash) (1,970) (2,578)
----------------------------------------- ---- -------------- --------------
Principal Risks and Uncertainties
The Group's objectives, policies and processes for measuring and
managing risk are described in note 23. The principal risks and
uncertainties to which the Group is exposed include:
Market Risk
The Group's activities expose it to the financial risk of
changes in foreign currency exchange rates as it undertakes certain
transactions denominated in foreign currencies. There has been no
change to the Group's exposure to market risks. The Group monitors
exposure to foreign exchange rate changes on a daily basis by a
daily review of the Group's cash balances in the US, UK, Canada and
Australia.
Interest Rate Risk
The Group's interest rate risk arises from its short and term
loan borrowings.
Whilst borrowing issued at variable rates would expose the Group
to cash flow risks, as at year-end, the Company does not have any
variable rate borrowings.
Credit Risk
The Group's credit risk is primarily attributable to its cash
and cash equivalents and trade receivables. The credit risk on
other classes of financial assets is considered insignificant.
Liquidity Risk
The Group manages its liquidity risk primarily through the
monitoring of forecasts and actual cash flows.
Covid-19 Risk
The Group delivers water and wastewater services and is
considered a supplier of "essential services" under governmental
policies covering shelter-in-place. As such the Group has continued
to operate during the pandemic. While 2Q has produced slowing, as
homeowners evaluated the risks of residential delivery of
solutions, a combination of Company health and safety protocols for
our technicians and the continued consumer demand for water and
wastewater solutions has enabled the Group to return to executing
its operating plan. The Group has sufficient cash to execute its
plan and work protocols for the health and safety of all our
stakeholders, especially our technicians and our customers.
Other Risks
There is a risk that existing and new customer relationships and
R&D will not lead to the sales growth and increased profits.
The Group is reliant on a small number of skilled managers. The
Group is reliant on effective relationships with its franchisees,
especially in the US.
Corporate Governance statement S172 of the UK's Companies
Act
Each director must act in a way that, in good faith, would most
likely promote the success of the Group for the benefit of its
stakeholders. The Board of Directors consider, both individually
and together, that they have acted in the way they consider, in
good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole (having regard to
the stakeholders and matters indicated in S172) in the decisions
taken during the year ended 31 December 2019. Following is an
overview of how the Board performed its duties during 2019.
Shareholders
The Executive Chairman, Chief Financial Officer, members of the
Board and senior executives on the management team have regular
contact with major shareholders. The Board receives regular updates
on the views of shareholders which are taken into account when the
Board makes its decisions. During May 2019, the Company raised
capital from largely its current shareholders and received feedback
during that process. Also, given investor communication, the Board
continues to invest in Water Intelligence International to grow
both in the UK and US.
Employees
The Board recognizes the importance of advanced human capital to
a technology and services-led business. The Board works through its
human resources director to provide on-going training and benefits.
It also provides advancement opportunities in its various
corporate-operated locations. As noted in the Directors' Report,
the Group has taken a variety of steps to address the COVID-19
pandemic in terms of its employees.
Franchisees
The Group holds an annual convention for its franchisees which
includes education and training sessions. Franchisees have an
Advisory Committee that provides input to the Board with quarterly
meetings. One of our Board members, Bobby Knell, successfully
developed the Dallas franchise and retired as one of our leading
franchisees. He provides an additional channel for input from the
franchise System.
Customers
ALD has a reputation for high quality service delivery across
the United States for over thirty years. Given the importance of
our reputation with customers, especially insurance companies, the
Board pays significant levels of attention to the quality of our
service delivery. Management gathers data that it shares with the
Board on customer satisfaction.
Community and Environment
The Group's brand stands for the conservation of water and the
importance of providing solutions to wastewater leaks. Through our
advertising and marketing the Group seeks to communicate to the
public the importance of sustainability, particularly with respect
to water. For example, the Group took an active role in not only
providing leak detection services to local government in Flint,
Michigan - a community known for its lead in the water crisis - but
also working to educate community members on the importance of
on-going water monitoring. The Board has sought to be active with
respect to education and water. During 2019 and 2020, members of
the Board have worked with Columbia University to contribute to its
"Year of Water" education campaign. In that context, the Board has
also worked with non-profits focused on global water-related
issues, especially among the poor in Africa.
By order of the Board
Patrick DeSouza
Executive Chairman
16 June 2020
Directors' Report
The Directors present their report on the affairs of Water
Intelligence plc (the "Company") and its subsidiaries, referred to
as the Group, together with the audited Financial Statements and
Independent Auditors' report for the year ended 31 December
2019.
Principal Activities
The Group is a leading provider of minimally-invasive leak
detection and remediation services. The Group's strategy is to be a
"One-stop Shop" for solutions (including products) for residential,
commercial and municipal customers.
Results
The financial performance for the year, including the Group's
Statement of Comprehensive Income and the Group's financial
position at the end of the year, is shown in the Financial
Statements.
2019 was marked by sustained and balanced multinational growth
for both ALD and WII - ideal for scaling of operations. Total
revenue grew 27% to $32.4 million and profit before tax grew 34% to
$2.36 million when compared with 2018. Our ALD subsidiary grew
revenue 28% to $29 million and profit before tax 24% to $2.13
million when compared with 2018. Our WII subsidiary grew revenue
16% to $3.37 million and turned sharply upward in profit before
taxes to $0.23 million. More generally, Water Intelligence 2019
results are consistent with its 2014-19 CAGR of 35% revenue growth
and 33% profit before taxes growth even though the Group has grown
much larger in absolute terms of revenue and profit before taxes.
The splits between ALD and WII revenue remained consistent with
2018 with approximately 90% of total revenue attributable to ALD
and 10% of total sales attributable to WII consistent with balanced
growth.
Going Concern
The Directors have prepared a business plan and cash flow
forecast for the period to April 2021. The forecast contains
certain assumptions about the level of future sales and the level
of margins achievable. These assumptions are the Directors' best
estimate of the future development of the business. The Directors
acknowledge that the Group in the near-term is funded mainly on
cash generation by its profitable and growing US-based franchise
business, ALD. The Directors also note that the Group has cash net
of borrowings of $1.97 million on its balance sheet as of 31
December 2019 (see Strategic Report) and has diversified its
operations further with growth in WII. Moreover, after an
oversubscribed capital raise in May 2019, the Directors believe
that funding will be available on a case-by-case basis for
different additional initiatives. The Directors conclude that the
Group will have adequate cash resources both to pursue its growth
plan and to accelerate execution if it so chooses. The Directors
are satisfied that the Group has adequate resources to continue in
operational existence for the foreseeable future and accordingly,
continue to adopt the going concern basis in preparing the
financial statements.
Research Design & Development
Expenditure on pure research and development, all of which was
undertaken by third parties not related to the Group, was $10,152
(2018: $64,285). The Group's focus is currently on reinvestment for
commercialization of products not pure R&D. The Group remains
committed to anticipate market demands and has spent money on new
product development during the year which has been capitalised.
Dividends
The Directors do not recommend the payment of a dividend (2018:
$nil).
Share Price
On 31 December 2019, the closing market price of Water
Intelligence plc ordinary shares was 233.0 pence. The highest and
lowest prices of these shares during the year to 31 December 2019
were 450.0 pence and 171.5 pence respectively.
Capital Structure
Details of the authorised and issued share capital are shown in
Note 21. No person has any special rights of control over the
Company's share capital and all issued shares are fully paid.
Future Developments
Future developments are outlined throughout the Chairman's
Statement.
Financial Risk Management
Financial risk management is outlined in the principal risks and
uncertainties section of the Strategic Report.
Subsequent Events
On 15 June 2020, the Group announced that it has launched an
implementation of Salesforce.com's customer relationship management
software across its ALD corporate and franchise operations. The
implementation will enable ALD to automate its entire workflow from
customer leads to service dispatch of technicians anywhere in the
US to customer reporting upon job completion to invoicing. The
implementation will produce much greater efficiencies and
capability to execute on a faster rate of growth. ALD's franchise
System will share in the licensing and implementation
investment.
On 1 June 2020, the Group completed the reacquisition of its San
Jose, California franchise territory within the Group's ALD
franchise business. San Jose is a strategic reacquisition because
of its location in Silicon Valley. The Group plans to use this
corporate base to advance its innovation roadmap and R&D. The
reacquisition also enables the Group to add further scale to Water
Intelligence financially and operationally. The purchase price was
approximately $1.05 million. 2019 sales for San Jose franchise
location were approximately $0.7 million and pre-tax profits were
approximately $0.2 million. The reacquisition also reinforces
growth in the Bay Area with its multimillion dollar franchises in
the San Francisco and Berkeley territories.
On 30 April 2020, the Group completed the reacquisition of its
Minneapolis, Minnesota franchise within the Group's ALD franchise
business. Minneapolis is a significant reacquisition that enables
the Group to add further scale to Water Intelligence financially
and operationally. The purchase price was approximately $1.3
million to be paid evenly over four years. 2019 sales for the
Minneapolis franchise location was approximately $0.98 million and
pre-tax profits were approximately $0.31 million. Operationally,
the reacquisition of Minneapolis creates a corporate base in the
Upper Midwest region of the United States. During 2019, the Group
executed several significant municipal contracts in the Upper
Midwest affording cross-selling opportunities from the Group's
Water Intelligence International subsidiary.
The provisional fair values of the acquisitions subsequent to
year end are detailed below:
Minneapolis San Jose Total
--------------------------------------
$ $ $
-------------------------------------- ------------ ---------- ----------
Fair value of assets and liabilities
acquired
Equipment 64,730 69,397 132,127
Vehicles 40,922 - 40,922
Other 10,990 16,000 26,990
Net assets acquired 116,642 85,397 200,039
-------------------------------------- ------------ ---------- ----------
Consideration
Cash 329,670 380,000 707,670
Deferred consideration - discounted
to present value 983,012 667,000 1,650,012
-------------------------------------- ------------ ---------- ----------
Total consideration 1,312,682 1,047,000 2,357,682
-------------------------------------- ------------ ---------- ----------
Intangible asset arising on
acquisition 1,196,040 961,603 2,157,643
-------------------------------------- ------------ ---------- ----------
During 2019, a claim was brought against the Company by a former
franchise owner which was settled subsequent to the end of the year
in February 2020. The parties agreed to an adjustment to the
original purchase price for the reacquisition for the franchise. In
addition, among other items, the former franchise owner agreed to a
covenant not to compete and an extension of confidentiality over
intangible assets of the Company in perpetuity. As such, the
Company accrued the settlement as of 31 December 2019, totalling a
net amount of $200,000 and recorded a covenant not to compete asset
in connection with the accrual. The covenant not to compete
commences in February 2020 for a period of one year from that
date.
COVID-19
PPP Program - The Paycheck Protection Program (PPP) brings much
needed relief to business owners affected by the coronavirus. Not
only does this loan program provide funding to help cover payroll
and other expenses, but if used for qualifying purposes, part or
all of the loan can be forgiven. ALD applied for and received
funding of $1,869,800 under this program in April 2020.
Work Protocols and PPE - The Group reviewed all applicable
Shelter-in-Place Orders and determined that our operations qualify
as services related to essential/critical infrastructure with
respect to water and wastewater and that we are able to continue to
operate under those Orders. The Group has taken health and safety
measures with respect to all personnel and increased significantly
its inventory of Personal Protective Equipment (PPE). The Group has
issued work protocols with respect to our service technicians who
are essential to the delivery of our water and wastewater solutions
to customers. All non-essential personnel have been notified to
work remotely until further notice. All employees have been
instructed to comply with social distancing rules/requirements in
their jurisdictions, as well as other safety and health precautions
including use of PPE, frequent hand-washing and sanitizing of all
equipment.
Directors
The Directors who served the Company during the year and up to
the date of this report were as follows:
Executive Directors
Patrick DeSouza - Executive Chairman
John Weigold (Resigned 17January 2019)
Bobby Knell (Appointed 12 March 2019)
Non-Executive Directors
Laura Hills
Michael Reisman
David Silverstone
The biographical details of the Directors of the Company are set
out on the Corporate Governance section of the report and on the
Company's website www.waterintelligence.co.uk
Directors' emoluments
2019 Salary, Fees
& Bonus Benefits Redundancy Total
-------------------------
$ $ $ $
------------------------- ------------- --------- ----------- --------
Executive Directors
P DeSouza 517,346 20,034 - 537,380
B Knell 40,000 - - 40,000
J Weigold 41,250 - - 41,250
------------------------- ------------- --------- ----------- --------
Non-Executive Directors
D Silverstone 21,000 - - 21,000
L Hills 20,000 - - 20,000
M Reisman 20,000 - - 20,000
659,596 20,034 679,630
------------------------- ------------- --------- ----------- --------
2018 Salary, Fees
& Bonus Benefits Redundancy Total
-------------------------
$ $ $ $
------------------------- ------------- --------- ----------- --------
Executive Directors
P DeSouza 479,417 22,455 - 501,872
------------------------- ------------- --------- ----------- --------
J Weigold 125,000 125,000
------------------------- ------------- --------- ----------- --------
Non-Executive Directors
D Silverstone 21,000 - - 21,000
M Reisman 20,000 - - 20,000
L Hills 20,000 - - 20,000
------------------------- ------------- --------- ----------- --------
665,417 22,455 - 687,872
------------------------- ------------- --------- ----------- --------
Directors' interests
The Directors who held office at 31 December 2019 and subsequent
to year end had the following direct interest in the ordinary
shares of the Company at 31 December 2019 and at the date of this
report, excluding the shares held by Plain Sight Systems, Inc.
Number of shares % held at
at 31 December 31 December Number of shares % held at
2019 2019 at 1 June 2020 1 June 2020
Patrick DeSouza* 5,042,110 29.83 5,042,110 29.83
Michael Reisman* 177,599 1.05 177,599 1.05
David Silverstone - - - -
John Weigold - - - -
Laura Hills 114,230 0.67 114,230 0.67
-------------------- ---------- ------------- ----------------- -------------
*Included in the total above, Patrick DeSouza received (i)
600,000 Partly Paid Shares during 2016 (ii) 750,000 in March 2018
and (iii) 800,000 in May 2019. These will not be admitted to
trading or carry any economic rights until fully paid.
*Patrick DeSouza and Michael Reisman are directors and
shareholders in Plain Sight Systems, Inc.
Share option schemes
To provide incentive for the management and key employees of the
Group, the Directors award stock options. Details of the current
scheme are set out in Note 7.
Substantial Shareholders
As well as the Directors' interests reported above, the
following interests of 3.0% and above as at the date of this report
were as follows:
Number of shares % held
------------------------------ ---------------- ------
Plain Sight Systems, Inc. 2,430,000 14.38
State Street Nominees Limited 1,000,000 5.92
Canaccord Genuity Group Inc. 959,106 5.67
Amati AIM VCT 814,200 4.82
George D. Yancopoulos 759,996 4.50
------------------------------ ---------------- ------
Corporate Responsibility
The Board recognises its employment, environmental and health
and safety responsibilities. It devotes appropriate resources
towards monitoring and improving compliance with existing
standards. An Executive Director has responsibility for these areas
at Board level, ensuring that the Group's policies are upheld and
providing the necessary resources.
Employees
The Board recognises that the Group's employees are its most
important asset.
The Group is committed to achieving equal opportunities and to
complying with relevant anti-discrimination legislation. It is
established Group policy to offer employees and job applicants the
opportunity to benefit from fair employment, without regard to
their sex, sexual orientation, marital status, race, religion or
belief, age or disability. Employees are encouraged to train and
develop their careers.
The Group has continued its policy of informing all employees of
matters of concern to them as employees, both in their immediate
work situation and in the wider context of the Group's well-being.
Communication with employees is effected through the Board, the
Group's management briefings structure, formal and informal
meetings and through the Group's information systems.
Independent Auditors
Crowe UK LLP has expressed their willingness to continue in
office. In accordance with section 489 of the Companies Act 2006,
resolutions for their re-appointment and to authorise the Directors
to determine the Independent Auditors' remuneration will be
proposed at the forthcoming Annual General Meeting.
Statement of disclosure to the Independent Auditor
Each of the persons who are directors at the time when this
Directors' report is approved has confirmed that:
-- so far as that Director is aware, there is no relevant audit
information of which the Company and the Group's auditor is
unaware; and
-- that Director has taken all the steps that ought to have been
taken as a director in order to be aware of any relevant audit
information and to establish that the Company and the Group's
auditor is aware of that information.
By order of the Board
Patrick DeSouza
Executive Chairman
16 June 2020
Corporate Governance Statement
As a Board, we believe that practising good Corporate Governance
is essential for building a successful and sustainable business in
the long-term interests of all stakeholders. Water Intelligence's
shares are listed on AIM, a market operated by the London Stock
Exchange.
IFRS 15 (Revenue from Contracts with Customers) came into effect
1 January 2018 replacing IAS 18 (Revenue and Related
Interpretations). We have expanded our discussion in footnote 3 to
cover each type of customer: residential, business-to-business,
municipal and franchise.
With effect from September 2018, Water Intelligence has adopted
the QCA Corporate Governance Code. The Company has adopted a share
dealing code for the Board and employees of the Company which is in
conformity with the requirements of Rule 21 of the AIM Rules for
Companies. The Company takes steps to ensure compliance by the
Board and applicable employees with the terms of such code.
The following sections outline the structures, processes and
procedures by which the Board ensures that high standards of
corporate governance are maintained throughout the Group.
Further details can be found on our website at
www.waterintelligence.co.uk/corporate-Board-and-governance.
Takeovers and Mergers
The Company is subject to The City Code on Takeovers and
Mergers.
Board
The Board, chaired by Patrick DeSouza, comprises two executive
and three non-executive directors and it oversees and implements
the Company's corporate governance programme. As Chairman, Dr.
DeSouza is responsible for the Company's approach to corporate
governance and the application of the principles of the QCA Code.
Michael Reisman and David Silverstone are the Company's independent
directors. The Board is supported by two committees: audit and
remuneration. The Board does not consider that it is of a size at
present to require a separate nominations committee, and all
members of the Board are involved in the appointment of new
directors.
Each Board member commits sufficient time to fulfil their duties
and obligations to the Board and the Company. They are required to
attend at least 4 Board meetings annually and join regular Board
calls that take place between formal meetings and offer
availability for consultation when needed.
Board papers are sent out to all directors in advance of each
Board meeting including management accounts and accompanying
reports from those responsible.
Meetings held during the period between 1 January 2019 and 31
December 2019 and the attendance of directors is summarised
below:
Board meetings Audit committee Remuneration committee
Possible (attended) Possible (attended) Possible (attended)
------------------- -------------------- -------------------- -----------------------
Patrick DeSouza 6/6
Bobby Knell 6/6
Michael Reisman 6/6 2/2 2/2
David Silverstone 6/6 2/2
Laura Hills 6/6 2/2
Board Committees
The Board has established an Audit Committee and a Remuneration
Committee with delegated duties and responsibilities.
(a) Audit Committee
Laura Hills, Non-Executive Director, is Chairman of the Audit
Committee. The other member of the Committee is Michael Reisman.
The Audit Committee is responsible for ensuring that the financial
performance, position and prospects for the Company are properly
monitored, controlled and reported on and for meeting the auditors
and reviewing their reports relating to accounts and internal
controls.
(b) Remuneration Committee
Michael Reisman, Non-Executive Director, is Chairman of the
Remuneration Committee. The other member of the Committee is David
Sliverstone. The Remuneration Committee is responsible for
reviewing performance of Executive Directors and determining the
remuneration and basis of service agreement with due regard for the
Combined Code. The Remuneration Committee also determines the
payment of any bonuses to Executive Directors and the grant of
options.
The Company has adopted and operates a share dealing code for
directors and senior employees on the same terms as the Model Code
appended to the Listing Rules of the UKLA.
Board Experience
All five members of the Board bring complementary skill sets to
the Board. One director is female and four are male. The Board
believes that its blend of relevant experience, skills and personal
qualities and capabilities is sufficient to enable it to
successfully execute its strategy. In addition, the Board receives
regular updates from, amongst others, its nominated adviser, legal
counsel and company secretary in relation to key rule changes and
corporate governance requirements, as well as regular liaison with
audit firms both in the UK and the US in respect of key disclosure
and accounting requirements for the Group, especially as accounting
standards evolve. In addition, each new director appointment is
required to receive AIM rule training from the Company's nominated
adviser at the time of their appointment.
Patrick J. DeSouza, Executive Chairman
Term of office: Appointed as Executive Chairman in July
2010.
Background and suitability for the role: Dr. DeSouza has been
Chairman of American Leak Detection since 2006 and Executive
Chairman since its reverse merger to create Water Intelligence plc
in 2010. He has 25 years of operating and advisory leadership
experience with both public and private companies in the defence,
software/Internet and asset management industries. Over the course
of his career, Dr. DeSouza has had significant experience in
corporate finance and cross-border mergers and acquisition
transactions. He has practised corporate and securities law as a
member of the New York and California bars. Dr. DeSouza has also
worked at the White House as Director for Inter-American Affairs on
the National Security Council. He is the author of Economic
Strategy and National Security (2000) and has been a visiting
lecturer at Yale Law School. He is a graduate of Columbia College,
the Yale Law School and Stanford Graduate School.
Bobby Knell, Executive Director
Term of office: Appointed March 2019.
Background and suitability for the role: The ALD franchise
business is central to the operations and value proposition of
Water Intelligence. Bobby has been serving as a managing director
at Water Intelligence responsible for franchise relations for the
last four years. Prior to this role, Bobby founded and grew the
Dallas franchise of American Leak Detection into a multi-million
dollar operation, an operation now run by his son. His appointment
furthers the alignment of strategy and interests between corporate
operations and the growing American Leak Detection franchise
business.
Michael Reisman, Independent Non-executive Director
Term of office: Appointed as a non-executive director on 30 July
2010.
Background and suitability for the role: Professor Reisman
currently serves as Myres S. McDougal Professor of International
Law at the Yale Law School, where he has been on the faculty since
1965 and has previously been a visiting professor in Tokyo, Berlin,
Basel, Paris, Geneva and Hong Kong Professor Reisman is the
President of the Arbitration Tribunal of the Bank for International
Settlements and a member of the Advisory Committee on International
Law of the Department of State. He has served as arbitrator and
counsel in many international cases. He was also President of the
Inter-American Commission on Human Rights of the Organization of
American States. Because of his experience and the international
character of the Company, Professor Reisman leads matters of
governance, corporate responsibility and remuneration. He is a
graduate of Yale Law School.
Laura Hills, Non-executive Director
Term of office: Appointed as a non-executive director on 6
February 2018 and Vice-Chairman in August 2019.
Background and suitability for the role: Laura has more than 30
years' experience as a legal professional, having spent 10 years
working for Overseas Private Investment Corporation (OPIC), where
she served as Associate General for the agency's finance program,
supervising a team of lawyers on all finance transactions ranging
from micro-lending and small business to multi-creditor
infrastructure project financing in emerging market countries. In
2002, Ms. Hills founded Hills, Stern & Morley LLP, an emerging
markets legal firm based in Washington D.C. Laura sits on the Board
of the Gerald Ford Presidential Foundation. Given her background in
finance and transactions, Laura heads the Audit Committee. Laura
brings considerable expertise in negotiating on infrastructure and
renewables related transactions globally. Moreover, Ms. Hills
experience with non-profits assists the Board in fulfilling its
responsibility to advance the mission of Water Intelligence to
support underserved communities globally. Laura holds
undergraduate, graduate and law degrees from Stanford
University.
David Silverstone, Independent Non-executive Director
Term of office: Appointed as a non-executive director on 6
February 2018, having previously been an Executive Director since
November 2011.
Background and suitability for the role: David has been involved
in water issues since the early 1970s. He served as Connecticut's
first consumer advocate on utility issues from 1974 to 1977. He
then practiced law focusing on utility issues representing water,
electric and gas utilities, consumer groups, large consumers and
small power producers until 1999. From 1999 to 2000 he was Group
Vice-President and Chief Administrative Officer of The Southern
Connecticut Gas Company, a local gas distribution company. From
2001 until his retirement in 2008 he was Chief Executive Officer of
the South Central Connecticut Regional Water Authority based in New
Haven, Connecticut. The Authority has over 400,000 consumers, 1600
miles of pipe, and an annual operating budget of over $75 million.
Since his retirement he has been Chairman and Chief Executive
Officer of Science Park Development Corporation, a non-profit
company charged with the redevelopment of commercial space adjacent
to Yale University into a high tech/bioscience mixed use
development. Mr. Silverstone graduated from Lehigh University with
a B.A, and from Columbia University School of Law with a J.D.
David's experience in the water sector provides the Board with
additional insight and knowledge as to how to work with the wider
water industry
The Group has a non-Board Chief Financial Officer, Pat Lamarco,
who attends all Board meetings and reports regularly to the Board
and assists in the preparation of Board materials and in reviewing
the budget and ongoing performance. Mr. Lamarco has significant tax
and audit experience. Mr. Lamarco was formerly a partner with RSM,
a global accounting firm.
The Company Secretary is responsible for ensuring that Board
procedures are followed and that all applicable rules and
regulations are complied with. Adrian Hargrave currently performs
the role of Company Secretary, providing an advisory role to the
Board. The Company Secretary is supported and guided in this role
by the Company's legal advisors.
The Directors have access to the Company's CFO, NOMAD, Company
Secretary, lawyers and auditors as and when required and are able
to obtain advice from other external bodies when necessary.
Board Performance and Effectiveness
The performance and effectiveness of the Board, its committees
and individual Directors is reviewed by the Chairman and the Board
an ongoing basis. Training is available should a Director request
it, or if the Chairman feels it is necessary. The performance of
the Board is measured by the Chairman and Michael Reisman, one of
the non-executive directors, with reference to the Company's
achievement of its strategic goals.
Risk Management
The Directors recognise their responsibility for the Group's
system of internal control and have established systems to ensure
that an appropriate and reasonable level of oversight and control
is provided. The Group's systems of internal control are designed
to help the Group meet its business objectives by appropriately
managing, rather than eliminating, the risks to those objectives.
The controls can only provide reasonable, not absolute, assurance
against material misstatement or loss.
The Executive Chairman with the assistance of the Company
Secretary and the Chief Financial Officer manages a risk register
for the Group that identifies key risks in the areas of corporate
strategy, financial, clients, staff, environmental and the
investment community. The Governance Committee of the Board are
provided with a copy of the register. The register is reviewed
periodically and is updated as and when necessary.
Within the scope of the annual audit, specific financial risks
are also evaluated in detail, including in relation to foreign
currency, interest rates, debt covenants, taxation and
liquidity.
The annual budget is reviewed and approved by the Board.
Financial results, with comparisons to budget and latest forecasts
are reported on a monthly basis to the Board together with a report
on operational achievements, objectives and issues encountered.
Significant variances from plan are discussed at Board meetings and
actions set in place to address them.
Approval levels for authorisation of expenditure are at set
levels throughout the management structure with any expenditure in
excess of pre-defined levels requiring approval from the Executive
Chairman and the Chief Financial Officer.
Measures continue to be taken to review and embed internal
controls and risk management procedures into the business processes
of the organisation and to deal with areas of improvement which
come to the management's and the Board's attention. We expect the
internal controls for the business to change as the business
expands both geographically and in terms of product
development.
The Company's auditors are encouraged to raise comments on
internal control in their management letter following their audit,
and the points raised and actions arising are monitored through to
completion by the Audit Committee.
Corporate Culture
Corporate Responsibility
The Board recognises its employment, environmental and health
and safety responsibilities. It devotes appropriate resources
towards monitoring and improving compliance with existing
standards. There is a professional Human Resources Director. David
Silverstone is responsible at the Board level. The Human Resources
Director reports directly to Mr. Silverstone. Mr. Silverstone
ensures that the Group's policies are upheld and providing the
necessary resources. All members of the Board have significant
experience in matters of public policy.
Employees
The Board recognises that the Group's employees are its most
important asset.
The Group is committed to achieving equal opportunities and to
complying with relevant anti-discrimination legislation. It is
established Group policy to offer employees and job applicants the
opportunity to benefit from fair employment, without regard to
their sex, sexual orientation, marital status, race, religion or
belief, age or disability. Employees are encouraged to train and
develop their careers. The Group has an employee handbook that is
provided to all employees upon starting their employment within the
Group.
The Group has continued its policy of informing all employees of
matters of concern to them as employees, both in their immediate
work situation and in the wider context of the Group's
well-being.
In addition, all directors and senior employees are required to
abide by the Group's share dealing code, which was updated in 2016
to reflect changes made to legislation following the introduction
of the Market Abuse Regulation.
Audit Committee Annual Review
The role of the Audit Committee is to monitor the quality of
internal controls and check that the financial performance of the
Group is properly assessed and reported on. It receives and reviews
reports from the Chief Financial Officer, other members of
management and external auditors relating to the interim and annual
accounts and the accounting and internal control systems in use
throughout the Group. The members of the Audit Committee are Laura
Hills (Chairman) and Michael Reisman.
The Executive Chairman and Chief Financial Officer are invited
to attend parts of meetings, with other senior financial managers
required to attend when necessary. The external auditors attend
meetings to discuss the planning and conclusions of their work and
meet with the members of the Committee. The Committee is able to
call for information from management and consults with the external
auditors directly as required.
The objectivity and independence of the external auditors is
safeguarded by reviewing the auditors' formal declarations,
monitoring relationships between key audit staff and the Company
and tracking the level of non-audit fees payable to the
auditors.
The Committee met twice during the year, to review the 2018
annual accounts and the interim accounts to 30 June 2019. The
Committee reviewed with the independent auditor its judgements as
to the acceptability of the Company's accounting principles.
In particular, the Committee discussed the application of the
new accounting standard, IFRS16. The Committee reviewed and
discussed the auditor's comments on improvements which could be
made to the internal controls. In addition, the Committee monitors
the auditor firm's independence from Company management and the
Company.
Remuneration Committee Annual Review
The Remuneration Committee convenes not less than once a year
and during the year it met on two occasions. The Committee
comprises Michael Reisman and David Silverstone, with Michael
Reisman as Chairman. The Remuneration Committee is responsible for
reviewing the performance of Executive Directors and determining
the remuneration and basis of service agreement. The Remuneration
Committee also determines the payment of any bonuses to Executive
Directors and the grant of options. Where appropriate the Committee
consults the Executive Chairman regarding its proposals. No
Director plays a part in any discussion regarding his or her own
remuneration.
Relations with Shareholders
The Company is available to hold meetings with its shareholders
to discuss objectives and to keep them updated on the Company's
strategy, Board membership and management.
The Board also welcome shareholders' enquiries, which may be
sent via the Company's website www.waterintelligence.co.uk .
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with the Companies Act
2006 and for being satisfied that the Financial Statements give a
true and fair view. The Directors are also responsible for
preparing the Financial Statements in accordance with International
Financial Reporting Standards ("IFRSs") as adopted by the European
Union.
Company law requires the Directors to prepare Financial
Statements for each financial period which give a true and fair
view of the state of affairs of the Company and the Group and of
the profit or loss of the Company and the Group for that period. In
preparing those Financial Statements, the Directors are required
to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
-- prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company and the
Group will continue in business.
The Directors confirm that they have complied with the above
requirements in preparing the Financial Statements. The Directors
are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions, disclose
with reasonable accuracy at any time the financial position of the
Company and the Group, and to enable them to ensure that the
Financial Statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Website publication
The Directors are responsible for ensuring the Annual Report and
Financial Statements are made available on a website. Financial
Statements are published on the Group's website (
www.waterintelligence.co.uk ) in accordance with legislation in the
United Kingdom governing the preparation and dissemination of
Financial Statements, which may vary from legislation in other
jurisdictions. The maintenance and integrity of the Group's website
is the responsibility of the Directors - the work carried out by
the auditors does not involve the consideration of these matters
and, accordingly, and the auditors accept no responsibly for any
changes that may have occurred in the accounts since they were
initially presented on the website. The Directors' responsibility
also extends to the ongoing integrity of the Financial Statements
contained there..
Independent Auditors' report to the members of Water
Intelligence plc
Opinion
We have audited the financial statements of Water Intelligence
plc (the "Parent Company") and its subsidiaries (the "Group") for
the year ended 31 December 2019, which comprise:
-- the Group statement of comprehensive income for the year ended 31 December 2019;
-- the Group and parent company statements of financial position as at 31 December 2019;
-- the Group and parent company statements of cash flows for the year then ended;
-- the Group and parent company statements of changes in equity for the year then ended; and
-- the notes to the financial statements, including a summary of
significant accounting policies.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
In our opinion:
-- the financial statements give a true and fair view of the
state of the Group's and of the Parent Company's affairs as at 31
December 2019 and of the Group's profit for the year then
ended;
-- the group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
-- the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union
as applied in accordance with the provisions of the Companies Act
2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the
FRC's Ethical Standard, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in
relation to which ISAs (UK) require us to report to you when:
-- The directors' use of the going concern basis of accounting
in the preparation of the financial statements is not appropriate;
or
-- The directors have not disclosed in the financial statements
any identified material uncertainties that may cast significant
doubt about the Group's or the parent company's ability to continue
to adopt the going concern basis of accounting for a period of at
least twelve months from the date when the financial statements are
authorised for issue.
Overview of our audit approach
Materiality
In planning and performing our audit we applied the concept of
materiality. An item is considered material if it could reasonably
be expected to change the economic decisions of a user of the
financial statements. We used the concept of materiality to both
focus our testing and to evaluate the impact of misstatements
identified.
Based on our professional judgement, we determined overall
materiality for the Group financial statements as a whole to be
$190,000 (2018: $165,000) based on a measure of profit before
taxation. We use a different level of materiality ('performance
materiality') to determine the extent of our testing for the audit
of the financial statements. Performance materiality is set based
on the audit materiality as adjusted for the judgements made as to
the entity risk and our evaluation of the specific risk of each
audit area having regard to the internal control environment.
Where considered appropriate performance materiality may be
reduced to a lower level, such as, for related party transactions
and directors' remuneration.
We agreed with management to report all identified errors in
excess of $5,000. Errors below that threshold would also be
reported to it if, in our opinion as auditor, disclosure was
required on qualitative grounds.
Overview of the scope of our audit
The Group and its UK subsidiaries are accounted for from a
location in the UK, whilst its material US subsidiaries and
Australian subsidiary are accounted for from the US. Our audit was
conducted from the main operating location in the UK and component
auditors were used to carry the audit work in the US. We visited
the US to carry out our review of component auditor working papers
as well as meet with group and local management.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
This is not a complete list of all risks identified by our
audit.
Key audit matter How the scope of our audit addressed
the key audit matter
================================== ============================================================
Revenue recognition Our audit procedures consisted of:
Revenue is recognised Validating that revenue is recognised
in accordance with the in accordance with the accounting
accounting policy set policies through testing an appropriate
out in the financial statements. sample of income from each revenue
The group has a number stream.
of different revenue streams, Assessing the appropriateness of
some of which contain the related disclosures in the financial
judgements, particularly statements.
in recognising when the
risks and rewards of ownership
have passed to the buyer.
This is determined with
reference to the underlying
contract with the purchaser
and the nature of the
service provided.
================================== ============================================================
Impairment of intangible We reviewed management's assessment
assets of the carrying value of the group's
The carrying value of intangible assets. In considering
intangible assets relates this assessment, we evaluated:
to trademarks, franchisor * The discounted cash-flow forecasts for the group and
activities, goodwill on the relevant cash generating units. This assessment
acquisitions and owned included consideration of the key assumptions, which
stores goodwill and indefinite principally included discount rate and growth rates.
life intangible assets.
There is a risk that the
carrying value could be * Board minutes, budgets and other operational plans
impaired as a result of
reduced activity. Any
significant future downturn * Discussion with management over plans and intentions
in performance or activity for the group
could also result in an
impairment of these assets.
================================== ============================================================
Our audit procedures in relation to these matters were designed
in the context of our audit opinion as a whole. They were not
designed to enable us to express an opinion on these matters
individually and we express no such opinion.
Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We
have nothing to report in this regard.
We have nothing to report in this regard.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion based on the work undertaken in the course of our
audit
-- the information given in the strategic report and the
directors' report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
-- the directors' report and strategic report have been prepared
in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the group and the
parent company and their environment obtained in the course of the
audit, we have not identified material misstatements in the
strategic report or the directors' report.
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
-- adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- the parent company financial statements are not in agreement
with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- we have not received all the information and explanations we require for our audit.
Responsibilities of the directors for the financial
statements
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group's and parent company's ability
to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council's website at: www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor's report.
Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
John Glasby (Senior Statutory Auditor)
for and on behalf of
Crowe U.K. LLP
Statutory Auditor
St Brides House
10 Salisbury Square
London
EC4Y 8EH
16 June 2020
Consolidated Statement of Comprehensive Income for the year
ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Notes $ $
-------------------------------------------- ----- --------------- ---------------
Revenue 4 32,363,935 25,466,651
-------------------------------------------- ----- --------------- ---------------
Cost of sales (7,448,289) (5,669,616)
-------------------------------------------- ----- --------------- ---------------
Gross profit 24,915,646 19,797,035
-------------------------------------------- ----- --------------- ---------------
Administrative expenses
- Other Income 48,027
- Share-based payments 7 (176,960) (104,652)
- Amortisation of intangibles 13 (319,041) (327,201)
- Other administrative costs (21,723,670 (17,450,905)
)
-------------------------------------------- ----- --------------- ---------------
Total administrative expenses (22,219,671) (17,834,731)
-------------------------------------------- ----- --------------- ---------------
Operating profit 2,695,975 1,962,304
Finance income 8 61,754 28,003
Finance expense 9 (400,241) (235,957)
-------------------------------------------- ----- --------------- ---------------
Profit before tax 2,357,488 1,754,350
Taxation expense 10 (662,062) (468,624)
-------------------------------------------- ----- --------------- ---------------
Profit for the year 1,695,426 1,285,726
Attributable to:
Equity holders of the parent 1,695,033 1,294,701
Non-controlling interests 393 (8,975)
-------------------------------------------- ----- --------------- ---------------
1,695,426 1,285,726
Other Comprehensive Income
Exchange differences arising on translation
of foreign operations (164,145) (439,517)
Fair value adjustment on listed equity
investment (net of deferred tax) 584,378 -
Total comprehensive profit for the year 2,115,660 846,209
-------------------------------------------- ----- --------------- ---------------
Attributable to:
Equity holders of the parent 2,115,267 855,184
Non-controlling interests 393 (8,975)
-------------------------------------------------- --------- -------
2,115,660 846,209
Profit per share attributable to equity holders Cents Cents
of Parent
-------------------------------------------------- --------- -------
Basic 11 11.7 9.7
Diluted 11 11.1 9.1
--------------------------------------- --------- --------- -------
The results reflected above relate to continuing activities.
Consolidated Statement of Financial Position as at 31 December
2019
Notes 2019 2018
$ $
ASSETS
Non-current assets
Goodwill and indefinite life
intangible assets 13 9,090,701 6,254,967
Listed equity investment 24 1,932,252 -
Other intangible assets 13 1,949,832 2,423,565
Property, plant and equipment 14 3,898,133 1,732,527
Trade and other receivables 17 605,234 618,005
17,476,152 11,029,064
---------------------------------------- ------ ------------- -------------
Current assets
Inventories 16 334,011 451,465
Trade and other receivables 17 5,036,149 4,211,981
Cash and cash equivalents 18 5,280,808 5,016,406
10,650,968 9,679,852
---------------------------------------- ------ ------------- -------------
TOTAL ASSETS 28,127,120 20,708,916
---------------------------------------- ------ ------------- -------------
EQUITY AND LIABILITIES
Equity attributable to holders
of the parent
Share capital 21 114,440 101,915
Share premium 21 9,717,349 6,887,739
Shares held in treasury 21 (539,834) -
Merger reserve 1,001,150 1,001,150
Share based payment reserve 416,700 239,740
Foreign exchange reserve (907,344) (743,198)
Reverse acquisition reserve 21 (27,758,088) (27,758,088)
Equity investment reserve 584,378 -
Retained earnings 34,894,649 33,246,277
---------------------------------------- ------ ------------- -------------
17,523,400 12,975,535
---------------------------------------- ------ ------------- -------------
Equity attributable to Non-Controlling
interest
---------------------------------------- ------ ------------- -------------
Non-controlling Interest 100,793 100,499
---------------------------------------- ------ ------------- -------------
Non-current liabilities
Borrowings 23 2,321,400 1,448,303
Deferred consideration 12 556,198 879,307
Deferred tax liability 20 588,684 316,221
3,466,282 2,643,831
---------------------------------------- ------ ------------- -------------
Current liabilities
Trade and other payables 19 4,596,085 2,550,280
Borrowings 23 1,163,055 989,736
Deferred consideration 12 1,277,505 1,449,035
7,036,645 4,989,051
---------------------------------------- ------ ------------- -------------
TOTAL EQUITY AND LIABILITIES 28,127,120 20,708,916
---------------------------------------- ------ ------------- -------------
The financial statements of Water Intelligence plc, company
number 03923150, were approved by the Board of Directors and
authorised for issue on 16 June 2020. They were signed on its
behalf by:
Patrick De Souza
Executive Chairman
The accompanying notes are an integral part of these financial
statements
Company Statement of Financial Position as at 31 December
2019
2019 2018
Notes $ $
ASSETS
Non-current assets
Investment in subsidiaries 15 7,206,394 6,971,382
Listed equity investment 24 1,932,252 -
----------------------------------- ------------------------- ----------------- ------------
9,138,646 6,971,382
----------------------------------- ------------------------- ----------------- ------------
Current assets
Trade and other receivables 17 5,006,073 4,818,232
Cash and cash equivalents 18 195,750 48,164
----------------------------------- ------------------------- ----------------- ------------
5,201,824 4,866,396
----------------------------------- ------------------------- ----------------- ------------
TOTAL ASSETS 14,340,470 11,837,778
----------------------------------- ------------------------- ----------------- ------------
EQUITY AND LIABILITIES
Equity attributable to holders of
the parent
Share capital 21 114,440 101,915
Share premium 21 9,717,349 6,887,739
Shares held in treasury 21 (539,834) -
Merger reserve 1,001,150 1,001,150
Share based payment reserve 416,700 239,740
Foreign exchange reserve (1,870,038) (2,013,369)
Equity investment reserve 584,378 -
Retained earnings 4,599,878 5,360,880
----------------------------------- ------------------------- ----------------- ------------
14,024,022 11,578,055
----------------------------------- ------------------------- ----------------- ------------
Non-current liabilities
Deferred tax liability 20 146,094 -
----------------------------------- ------------------------- ----------------- ------------
146,094 -
Current liabilities
Trade and other payables 19 170,353 259,723
----------------------------------- ------------------------- ----------------- ------------
170,353 259,723
----------------------------------- ------------------------- ----------------- ------------
TOTAL EQUITY AND LIABILITIES 14,340,470 11,837,778
----------------------------------- ------------------------- ----------------- ------------
The loss for the financial year in the financial statements of
the parent Company was $759,209 (2018: loss $694,325), which
related entirely to Plc costs.
The financial statements of Water Intelligence plc, company
number 03923150, were approved by the Board of Directors and
authorised for issue on 16 June 2020. They were signed on its
behalf by:
Patrick De Souza
Executive Chairman
Shares Share
held based Foreign Reverse Equity Retained Non-controlling
Share Share in Merger payment exchange Acquisition Investment (Losses)/ interest Total
Capital Premium Treasury Reserve reserve reserve Reserve Reserve Earnings Total $ Equity
$ $ $ $ $ $ $ $ $ $ $
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
As at 1 January
2018 65,305 980,436 (210,150) 1,001,150 135,088 (303,681) (27,758,088) - 32,021,892 5,931,952 39,158 5,971,110
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
Issue of
Ordinary
Shares 36,610 5,907,303 210,150 - - - - - - 6,154,064 - 6,154,064
Purchase
Non-controlling
interest (NWAR) - - - - - - - - (70,316) (70,316) (29,684) (100,000)
Share-based
payment
expense - - - - -- - - 104,652 - - - - 104,652 - 104,652
Capital
Contribution
by
non-controlling
interest - - - - - - - - - - 100,000 100,000
Profit for the
year - - - - - - - - - - - - 1,294,701 1,294,701 (8,975) 1,285,726
Other
comprehensive
loss - - - - - - - (439,517) - - - (439,517) - (439,517)
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
As at 31
December
2018 101,915 6,887,739 - 1,001,150 239,740 (743,198) (27,758,088) - 33,246,277 12,975,535 100,499 13,076,034
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
As at 1 January
2019 101,915 6,887,739 - 1,001,150 239,740 (743,198) (27,758,088) - 33,246,277 12,975,535 100,499 13,076,034
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
IFRS 16
Adjustment - - - - - - - - (44,869) (44,869) (99) (44,968)
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
Restated as at 1
January 2019 101,915 6,887,739 - 1,001,150 239,740 (743,198) (27,758,088) - 33,201,408 12,930,666 100,400 13,031,066
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
Issue of
Ordinary
Shares 11,237 2,714,604 - - - - - - - 2,725,841 - 2,725,841
Options purchase 515 115,006 - - - - - - - 115,521 - 115,521
Share-based
payment
expense - - - - -- - - 176,960 - - - - 176,960 - 176,960
Share buyback 773 - (539,834) - - - - - (1,792) (540,853) - (540,853)
Profit for the
year - - - - - - -- - - - - 1,695,033 1,695,033 393 1,695,426
Other
comprehensive
income - - - - - - - - (164,146) - 584,378 - 420,233 - 420,233
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
As at 31
December
2019 114,440 9,717,349 (539,834) 1,001,150 416,700 (907,344) (27,758,088) 584,378 34,894,649 17,523,401 100,793 17,624,194
----------------- -------- -------------------- ---------- -------------------- ---------------- ----------------- -------------------- -------------------- ----------------- ----------- ----------------- -----------
Consolidated Statement of Changes in Equity for the year ended
31 December 2019
The accompanying notes are an integral part of these financial
statements.
Company Statement of Changes in Equity for the year ended 31
December 2019
Share Equity
Shares based Foreign Investment Retained
Share Share held in Merger payment exchange Reserve (Losses)/ Total
Capital Premium Treasury Reserve reserve reserve $ Earnings Equity
$ $ $ $ $ $ $ $
--------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
As at 1 January
2018 65,305 980,436 (210,150) 1,001,150 135,088 (1,472,274) - 6,055,205 6,554,760
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
Issue of
Ordinary
Shares 36,610 5,907,303 210,150 - - - - - 6,154,063
Share buyback - - - - - - - - -
Share-based
payment
expense - - - - 104,652 - - - 104,652
Profit for the
year - - - - - - - (694,325) (694,325)
Other
comprehensive
loss - - - - - (541,095) - - (541,095)
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
As at 31
December 2018 101,915 6,887,739 - 1,001,150 239,740 (2,013,369) - 5,360,880 11,578,055
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
As at 1 January
2019 101,915 6,887,739 - 1,001,150 239,740 (2,013,369) - 5,360,880 11,578,055
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
Issue of
Ordinary
Shares 11,237 2,714,604 - - - - - - 2,725,841
Options
purchases 515 115,006 - - - - - - 115,521
Share-based
payment
expense - - - - 176,960 - - - 176,960
Share buyback 773 - (539,834) - - - - (1,792) (540,853)
Profit for the
year - - - - - - - (759,209) (759,209)
Other
comprehensive
income - - - - - 143,331 584,378 - 727,708
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
As at 31
December 2019 114,440 9,717,349 (539,834) 1,001,150 416,700 (1,870,038) 584,378 4,599,878 14,024,022
---------------- -------- ---------- ---------- ---------- -------- ------------ ------------ ---------- -----------
The following describes the nature and purpose of each reserve
within owners' equity:
Share capital Amount subscribed for share capital at nominal
value.
Share premium Amount subscribed for share capital in excess of
nominal value.
Shares held in treasury Amounts received for buyback of shares
Merger reserve Non-distributable reserve arising on reverse
acquisition.
Share based payment reserve Amounts recognised for the fair
value of share options granted in accordance with IFRS 2.
Foreign exchange reserve Foreign exchange differences on re-translation.
Retained profits/(losses) Cumulative net profits/(losses)
recognised in the Financial Statements.
The accompanying notes are an integral part of these financial
statements
Consolidated Statement of Cash Flows for the year ended 31
December 2019
Year ended
31 December
2018
Year ended
31 December
2019 $ $
------------------------------------------------- --------------- -----------------
Cash flows from operating activities
Profit before tax 2,357,488 1,754,350
Adjustments for non-cash/non-operating items:
Depreciation of plant and equipment 1,268,463 355,897
Amortisation of intangible assets 319,041 327,201
Share based payments 176,960 104,652
Interest paid 400,241 235,957
Interest received (61,754) (28,003)
------------------------------------------------- --------------- ---------------
Operating cash flows before movements in working
capital 4,460,439 2,750,054
------------------------------------------------- --------------- ---------------
Decrease/(Increase) in inventories 117,454 (91,492)
Increase in trade and other receivables (811,396) (1,950,597)
(Decrease)/Increase in trade and other payables 2,477,094 682,256
------------------------------------------------- --------------- ---------------
Cash generated by operations 6,243,591 1,390,221
------------------------------------------------- --------------- ---------------
Income taxes (535,693) (267,636)
Net cash generated from operating activities 5,707,898 1,122,585
Cash flows from investing activities
Purchase of plant and equipment (3,104,796) (789,591)
Purchase of intangible assets (200,000) (352,574)
Purchase of listed equity investment (1,201,780) -
Acquisition of subsidiaries (741,130) (330,174)
Reacquisition of franchises (2,480,417) (1,762,917)
Interest received 61,754 28,003
------------------------------------------------- --------------- ---------------
Net cash used in investing activities (7,666,369) (3,207,253)
------------------------------------------------- --------------- ---------------
Cash flows from financing activities
Issue of ordinary share capital 11,237 36,610
Premium on issue of ordinary share capital 2,714,604 5,907,302
Share buyback (540,853) 210,150
Options exercised 115,521
Interest paid (400,241) (235,957)
Proceeds from borrowings 1,854,936 926,472
Repayment of borrowings (808,520) (518,270)
Repayment of lease liabilities (723,812) -
Net cash (used by)/generated from financing
activities 2,222,873 6,326,307
------------------------------------------------- --------------- ---------------
Net increase in cash and cash equivalents 264,402 4,241,639
------------------------------------------------- --------------- ---------------
Cash and cash equivalents at the beginning of
year 5,016,406 774,767
------------------------------------------------- --------------- ---------------
Cash and cash equivalents at end of year 5,280,808 5,016,406
------------------------------------------------- --------------- ---------------
The accompanying notes are an integral part of these financial
statements
Company Statement of Cash Flows for the year ended 31 December
2019
Year ended Year ended
31 December 31 December
2019 2018
$ $
--------------------------------------------- -------------- --------------
Cash flows from operating activities
Loss before tax (759,209) (694,325)
Adjustments for non-cash/non-operating
items:
Share based payment expense 176,960 104,652
--------------------------------------------- -------------- --------------
Operating cash flows before movements in
working capital (582,249) (589,673)
--------------------------------------------- -------------- --------------
Increase in trade and other receivables (187,842) (3,067,445)
Decrease in trade and other payables (181,053) (2,448,857)
--------------------------------------------- -------------- --------------
Cash used by operations (951,144) .(6,105,975)
--------------------------------------------- -------------- --------------
Income taxes - -
--------------------------------------------- -------------- --------------
(951,144)
Net cash used by operating activities ) (6,105,975)
--------------------------------------------- -------------- --------------
Cash flows from investing activities
--------------------------------------------- -------------- --------------
Purchase of listed equity investment (1,201,780) -
Net cash used in investing activities (1,201,780) -
--------------------------------------------- -------------- --------------
Cash flows from financing activities
Issue of ordinary share capital 11,237 36,610
Premium on issue of ordinary share capital 2,714,604 5,907,303
Share buyback (540,853) 210,150
--------------------------------------------- -------------- --------------
Options exercised 115,521 -
--------------------------------------------- -------------- --------------
Net cash (used by)/generated from financing
activities 2,300,508 6,154,063
--------------------------------------------- -------------- --------------
Increase in cash and cash equivalents 147,585 48,088
--------------------------------------------- -------------- --------------
Cash and cash equivalents at the beginning
of period 48,164 76
--------------------------------------------- -------------- --------------
Cash and cash equivalents at end of period 195,750 48,164
--------------------------------------------- -------------- --------------
Notes to the Financial Statements
1 General information
The Group is a leading provider of minimally invasive, leak
detection and remediation services. The Group's strategy is to be a
"One-stop Shop" of water leak and repair solutions (services and
products) for residential, commercial and municipal customers.
The Company is a public limited company limited by shares.
Domiciled in the United Kingdom and incorporated under registered
number 03923150 in England and Wales. The Company's registered
office is 27-28 Eastcastle Street, London W1W 8DH.
The Company is listed on AIM of the London Stock Exchange. These
Financial Statements were authorised for issue by the Board of
Directors on 16 June 2020.
2 Adoption of a new International Financial Reporting Standard
Commencing 1 January 2019, the Group and Company adopted IFRS
16, replacing IAS 17, in respect of its treatment of operating
leases. On implementation of IFRS 16, the Group recognizes a right
of use asset and corresponding liability in respect of its current
lease obligations.
Right of use asset 2,415,643
Accumulated Depreciation (1,059,607)
-------------
Net Asset 1,356,036
Lease Liability 1,427,080
Retained Earnings (44,968)
Deferred Rent/Taxes (26,076)
During 2019, $736,880 was recorded as interest and depreciation
expense in regards to operating leases. Prior to the adoption of
IFRS 16, this would have been recorded as rent expense in the
amount of $723,812
3 Significant accounting policies
Basis of preparation
These Financial Statements of the Group and Company are prepared
on a going concern basis, under the historical cost convention
(with the exception of share-based payments and goodwill) and in
accordance with International Financial Reporting Standards (IFRS)
and IFRIC interpretations issued by the International Accounting
Standards Board (IASB) and adopted by the European Union, in
accordance with the Companies Act 2006. The Parent Company's
Financial Statements have also been prepared in accordance with
IFRS and the Companies Act 2006.
The preparation of Financial Statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and reported amounts of
assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical
experience and factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The Financial Statements are presented in US Dollars ($),
rounded to the nearest dollar.
Going concern
The Group's business activities, together with factors likely to
affect its future development, performance and position are set out
in the Directors' Report, Strategic Report and the Chairman's
Statement. The Directors have prepared a business plan and cash
flow forecast for the period to June 2021. The forecast contains
certain assumptions about the level of future sales and the level
of margins achievable.
These assumptions are the Directors' best estimate of the future
development of the business. The Directors acknowledge that the
Group in the near-term is funded on a mixture of cash generation by
its profitable US-based, ALD business and its existing cash
position, as well as available banking facilities. The Directors
believe that the funding will be available on a case by case basis
for different initiatives such that the Group will have adequate
cash resources to pursue its growth plan.
With respect to the Covid-19 pandemic of 2020, the Group has
reviewed all applicable Shelter-in-Place Orders and have determined
that our operations qualify as essential/critical infrastructure
and that we are able to continue to operate under those Orders. Our
service technicians are essential to the minimum basic operations
of our business. All non-essential personnel have been notified to
work remotely until further notice. Employees who are critical to
the minimum basic operations of the business have been instructed
to comply with social distancing rules/requirements in their
jurisdictions, as well as other safety and health precautions. In
view of the forgoing, operations may not be optimal, but management
does not feel that there are any Going Concern issues concerning
COVID-19 at the time of publication.
The Directors are satisfied that the Group has adequate
resources to continue in operational existence for the foreseeable
future and accordingly, continue to adopt the going concern basis
in preparing the financial statements.
Basis of consolidation
The Group financial statements consolidate the accounts of Water
Intelligence plc and all of its subsidiary undertakings made up to
31 December 2019. The Consolidated Statement of Comprehensive
Income includes the results of all subsidiary undertakings for the
period from the date on which control passes. Control is achieved
where the Group (or one of its subsidiary undertakings) obtains the
power to govern the financial and operating policies of an investee
entity so as to derive benefits from its activities.
The purchase method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of
the cost of acquisition over the fair value of the Group's share of
the identifiable net assets acquired is recorded as goodwill. If
the cost of acquisition is less than the fair value of the net
assets of the subsidiary acquired, the difference is recognised
directly in the income statement.
The acquisition of ALDHC in 2010 was accounted for as a reverse
acquisition. The assets and liabilities revalued at their fair
value on acquisition therefore related to the Company. Both a
merger reserve and a reverse acquisition reserve were created to
enable the presentation of a consolidated statement of financial
position which combines the equity structure of the legal parent
with the reserves of the legal subsidiary.
Inter-company transactions and balances and unrealised gains or
losses on transactions between Group companies are eliminated in
full.
Parent Company income statement - UK head office only
The Company has taken advantage of Section 408 of the Companies
Act 2006 in not presenting its own Statement of Comprehensive
Income. The Company's loss after tax for the year ended 31 December
2019 is $759,209 (2018: $624,009).
Inventories
The inventories, consisting primarily of equipment, parts, and
supplies, are recorded at the lower of cost (FIFO) or market
value.
Defined contribution pension scheme
Water Intelligence International provides a government run
pension scheme under UK legislation. Employees have the opportunity
to opt in or opt out. It is compulsory for companies to offer this
to their employees. This was implemented on 1 November 2017.
Taxation
Income tax expense represents the sum of the current tax and
deferred tax charge for the year.
Current tax
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from profit as reported in the
Statement of Comprehensive Income because it excludes items of
income or expense that are taxable or deductible in other periods
and it further excludes items that are never taxable or deductible.
The Group's and Company's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted by
the year end.
Deferred tax
Deferred income taxes are provided in full, using the liability
method, for all temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the
Financial Statements. Deferred income taxes are determined using
tax rates that have been enacted or substantially enacted and are
expected to apply when the related deferred income tax asset is
realised or the related deferred income tax liability is
settled.
The principal temporary differences arise from depreciation or
amortisation charged on assets and tax losses carried forward.
Deferred tax assets relating to the carry forward of unused tax
losses and are recognised to the extent that it is probable that
future taxable profit will be available against which the unused
tax losses can be utilised. The carrying amount of deferred tax
assets is reviewed at each balance sheet date and reduced to the
extent that it is probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Foreign currencies
(i) Functional and presentational currency
Items included in the Financial Statements are measured using
the currency of the primary economic environment in which each
entity operates
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year
end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the income statement.
(ii) Group Companies
The results and financial position of all the Group entities
that have a functional currency different from the presentational
currency are translated into the presentational currency as
follows:
(a) assets and liabilities for each statement of financial
position presented are translated at closing rate at the date of
the statement;
(b) the income and expenses are translated at average exchange
rates for period where there is no significant fluctuation in
rates, otherwise a more precise rate at a transaction date is used;
and
(c) all resulting exchange differences are recognised in other comprehensive income.
Leases
The Group recognizes a right-of-use asset and a lease liability
at the lease commencement date. The right of use lease is initially
measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before
commencement date plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset. The
right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the earlier of
the end of the useful life of the right-of-use asset or the end of
the useful life of the right-of-use asset or the end of the lease
term. The lease liability is initially measured at the present
value of the lease payments that are not paid at the commencement
date discounted using the Group incremental borrowing rate.
Revenue recognition
IFRS 15 (Revenue from Contracts with Customers) came into effect
on 1 January 2018 replacing IAS 18 Revenue and related
interpretations. Under IFRS 15, revenue is recognized when a
customer obtains control of a good or service and thus has the
ability to direct the use and obtain the benefits from the good or
service.
Nature of the Business
Water Intelligence plc operates through two wholly-owned
subsidiaries: American Leak Detection (ALD) and Water Intelligence
International (WII). Both subsidiaries provide precision water leak
detection and repair services. The services that are performed for
various customers are discrete activities - locating a water leak
or fixing a leak. The services are not bundled. Each service has a
price established in a rate book. Depending on customer preference,
a service technician may stop after locating the leak. The customer
would pay a fee for that service. Or following the leak detection
service, the technician may also provide repair services for
separate fee depending on what is contracted for by the customer.
Service jobs are typically short in duration, usually 1-2 hours for
a leak detection service. ALD delivers these services through
corporate locations and franchise locations across the United
States and in Canada and Australia. WII operates outside the United
States and delivers services only through corporate locations.
Customers and Sources of Revenue
Residential . Both ALD and WII provide services to residential
customers. Service technicians, whether from franchise-operated
locations or corporate-operated locations, provide services to
homeowners. When the service is delivered, the homeowner is
invoiced immediately upon completion of the service. The price of
the service is a fixed call-out charge for the technician to come
to the house and an hourly charge based on the time it takes to
find the leak. Revenue is recognized upon completion of the
service.
Business-to-Business . ALD has written national contracts with
nationwide insurance companies. The insurance company, as ALD's
customer, receives claims from homeowners or property management
for water-related damage. The insurance company contracts directly
with ALD headquarters. ALD headquarters, as the principal, takes
liability risk for performance of the service jobs and for
providing to insurance companies certain management services. A
national price book is established as part of the national
contract. After the leak detection service is performed, report
from ALD headquarters is delivered to the insurance company and the
insurance company is also invoiced for the job. Service is deemed
complete upon delivery of the report and invoice. Revenue is
recognized upon delivery of the report and invoice.
Municipal . WII headquarters or ALD headquarters will contract
with a municipality to provide leak detection services. Such leak
detection services largely consist of surveying kilometers of pipe.
During such surveys, a designated distance is covered each day with
a daily rate per technician per kilometer covered. A report is
prepared for the municipality weekly. When the report is delivered,
the service is deemed complete with respect to the distance
covered. The municipality will be billed for the week's work when
the report is conveyed. Revenue is recognized upon the delivery of
the report.
Franchise Sales, Equipment and On-going Royalty Payments . ALD
is a franchisor and leak detection services are delivered not only
by corporate-operated locations but also by ALD's franchise System.
Franchisees are independently owned and operated.
The franchise System has the following characteristics for
revenue recognition. ALD sells franchises to third parties. A
franchise is an exclusive territory in which a franchisee is
authorized to deliver ALD services, mainly leak detection and
repair. ALD headquarters provides training and advice to support
the delivery of services by franchisees.
The franchise sale is documented by means of a ten-year license
agreement that is renewable for ten-year increments based on
certain conditions derived from franchisee performance. The
agreement has three main components. First, the agreement provides
for the payment of an upfront fee in exchange for the exclusive
territory and training. The upfront fee is non-refundable. ALD
revenue is recognized with respect to most of the upfront fee at
the Closing of the franchise sale. The remaining portion of the
upfront fee is recognized as revenue over time using a
straight-line method to reflect the delivery of franchisor services
over the ten-year period. Second, the franchise agreement provides
that the franchisee may purchase proprietary equipment from ALD and
more general equipment from ALD-approved third parties. There is a
price book. ALD revenue is recognized upon the delivery of
equipment to franchisees and an invoice for the equipment. Third,
in accordance with the franchise license agreement, each franchise
pays a royalty fee to ALD each month based on a percentage of the
franchisee's gross sales for that month. Each month, a franchise
files a royalty report and pays the royalty amount. ALD revenue is
recognized upon the receipt of the royalty report.
In respect of the sale of franchise territories, the Group will
monitor on an ongoing basis the correct apportionment for each such
sale between recognition of upfront fees and fees which are
deferred over the length of the franchise agreement. This year such
sales were not a material part of the Group's revenue or
income.
Financial instruments
Financial assets and financial liabilities are recognised in the
Group's statement of financial position when the Group becomes a
party to the contractual provisions of the instrument.
Loans and receivables
Trade receivables, loans, and other receivables held with the
objective to collect the contractual cash flows are classified as
subsequently measured at amortised cost. These are initially
measured at fair value plus transaction costs. At each period end,
there is an assessment of the expected credit loss in accordance
with IFRS 9, with any increase or reduction in the credit loss
provision charged or released to other selling and administrative
expenses in the statement of comprehensive income. IFRS 9 was
adopted as at 1 January 2018 and as permitted the prior year
actuals comparatives were not restated.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, deposits held
at call with banks, and other short term highly liquid investments
with original maturities of three months or less.
Impairment of financial assets
The Group recognises an allowance for expected credit losses
(ECLs) for all debt instruments not held at fair value through
profit or loss. ECLs are based on the difference between the
contractual cash flows due in accordance with the contract and all
the cash flows that the Group expects to receive, discounted at an
approximation of the original effective interest rate. The expected
cash flows will include cash flows from the sale of collateral held
or other credit enhancements that are integral to the contractual
terms.
The Group always recognises lifetime expected credit losses
("ECL") for trade receivables and contract assets. The expected
credit losses on these financial assets are estimated using a
provision matrix based on the Group's historical credit loss
experience, adjusted for factors that are specific to the debtors,
general economic conditions and an assessment of both the current
as well as the forecast conditions at the reporting date, including
time value of money where appropriate.
For all other financial instruments, the Group recognises
lifetime ECL when there has been a significant increase in credit
risk since initial recognition. However, if the credit risk on the
financial instrument has not increased significantly since initial
recognition, the Group measures the loss allowance for that
financial instrument at an amount equal to 12 -- month ECL.
Financial liabilities
Financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs and are
subsequently measured at amortised cost using the effective
interest method.
Equity instruments
An equity instrument is any instrument with a residual interest
in the assets of the Company after deducting all of its
liabilities. Equity instruments (ordinary shares) are recorded at
the proceeds received, net of direct issue costs.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or they
expire.
Property, plant and equipment
All property, plant and equipment is stated at cost less
accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
Equipment and displays: 5 to 7 years
Motor vehicles: 5 years
Leasehold improvements: 7 years or lease term, whichever is shorter
The asset's residual values and economic lives are reviewed, and
adjusted if appropriate, at each reporting date. An asset's
carrying amount is written down immediately to its recoverable
amount if the asset's carrying amount is greater than its estimated
recoverable amount. Assets that are no longer of economic use to
the business are retired.
Gains and losses on disposals are determined by comparing the
proceeds with the carrying amount and are recognised within other
(losses) or gains in the income statement.
Goodwill
Goodwill represents the excess of the fair value of the
consideration over the fair values of the identifiable net assets
acquired.
Goodwill arising on acquisitions is not subject to amortisation
but is subject to annual impairment testing. Any impairment is
recognised immediately in the Consolidated Statement of
Comprehensive Income and not subsequently reversed.
Other intangible assets
Intangible assets are recorded as separately identifiable assets
and recognised at historical cost less any accumulated
amortisation. These assets are amortised over their definite useful
economic lives on the straight-line method.
Amortisation is computed using the straight-line method over the
estimated definite useful lives of the assets as follows:
Years
Covenants not to compete 1-3
Customer lists 5
Trademarks 20
Patents 10
Product development 3
Any amortisation is included within administrative expenses in
the statement of comprehensive income.
Intangible assets with indefinite useful lives are not
amortised, but are tested for impairment annually, either
individually or at the cash-generating unit level. The assessment
of indefinite life is reviewed annually to determine whether the
indefinite life continues to be supportable. If not, the change in
useful life from indefinite to finite is made on a prospective
basis.
The asset's residual values and economic lives are reviewed, and
adjusted if appropriate, at each balance sheet date. An asset's
carrying amount is written down immediately to its recoverable
amount if the asset's carrying amount is greater than its estimated
recoverable amount.
Gains and losses on disposals are determined by comparing the
proceeds with the carrying amount and are recognised within other
(losses) or gains in the Statement of Comprehensive Income.
Research and development
Research expenditure is recognised as an expense when incurred.
Costs incurred on development projects (relating to the design and
testing of new or improved products) are recognised as intangible
assets when the following criteria are fulfilled.
-- It is technically feasible to complete the intangible asset
so that it will be available for use or resale;
-- Management intends to complete the intangible asset and use or sell it;
-- There is an ability to use or sell the intangible;
-- It can be demonstrated how the intangible asset will generate
possible future economic benefits;
-- Adequate technical, financial and other resource to complete
the development and to use or sell the intangible asset are
available; and
-- The expenditure attributable to the intangible asset during
its development can be reliably measured.
Other development expenditures that do not meet these criteria
are recognised as an expense in the period incurred. Development
costs previously recognised as an expense are not recognised as an
asset in a subsequent period. Capitalised development costs are
recorded as intangible assets and are amortised from the point at
which they are ready for use on a straight-line basis over the
asset's estimated useful life.
Segment reporting
A business segment is a group of assets and operations engaged
in providing products or services that is subject to risks and
returns that are different from those of other business
segments.
Impairment reviews
Assets that are subject to amortisation and depreciation are
reviewed for impairment when events or changes in circumstances
indicate that the carrying amount may not be fully recoverable.
Assets that are not subject to amortisation and depreciation are
reviewed on an annual basis at each year end and, if there is any
indication that an asset may be impaired, its recoverable amount is
estimated. The recoverable amount is the higher of its net selling
price and its value in use. Any impairment loss arising from the
review is charged to the Statement of Comprehensive Income whenever
the carrying amount of the asset exceeds its recoverable
amount.
Share based payments
The Group has made share-based payments to certain Directors and
employees and to certain advisers by way of issue of share options.
The fair value of these payments is calculated either using the
Black Scholes option pricing model or by reference to the fair
value of any fees or remuneration settled by way of granting of
options. The expense is recognised on a straight-line basis over
the period from the date of award to the date of vesting, based on
the best estimate of the number of shares that will eventually
vest.
Critical accounting estimates and judgements
The preparation of Financial Statements in conformity with
International Financial Reporting Standards requires the use of
judgements together with accounting estimates and assumptions that
affect the reported amounts of assets and liabilities and the
reported amounts of income and expenses during the reporting
period. Although these judgements and estimates are based on
management's best knowledge of current events and actions, the
resulting accounting treatment estimates will, by definition,
seldom equal the related actual results.
The key judgements in respect of the preparation of the
financial statements are in respect of the accounting for
acquisitions, determination of separately identifiable assets on
acquisition, the determination of cash generating units, the
evaluation of segmental information, the evaluation of whether
there is any indication of any impairment in investments,
intangibles, goodwill or receivables and whether deferred tax
assets should be recognized for tax losses.
The estimates and assumptions that have a risk of causing
material adjustment to the carrying amounts of assets and
liabilities within the next financial year are the fair value of
assets arising on acquisition (see note 12), carrying value of the
goodwill, the carrying value of the other intangibles (see note 13)
and the carrying value of the investments. Please see relevant
notes for these areas.
4 Segmental Information
In the opinion of the Directors, the operations of the Group
currently comprise five operating segments, being (i) Franchise
royalty income, (ii) Franchise-related activities (including
product and equipment sales, business-to-business sales and sales
of franchises), (iii) US corporate operated locations, (iv)
International corporate operated locations and (v) head office
costs. Information reported to the Group's Chief Operating Decision
Maker (being the Executive Chairman), for the purpose of resource
allocation and assessment of division performance is now separated
into the four income generating segments (items (i) to (iv)), and
items that do not fall into these segments have been categorized as
unallocated head office costs (v).
The Group mainly operates in the US, with operations in the UK
and certain other countries especially Canada and Australia. No
single customer accounts for more than 10% of the Group's total
external revenue.
The following is an analysis of the Group's revenues and profits
from operations and assets by business segment.
Revenue Year ended Year ended
31 December 31 December
2019 2018
$ $
-------------------------------------------- ------------ ------------
Franchise royalty income 6,499,045 6,264,839
Franchise related activities 8,049,570 6,153,652
US corporate operated locations 14,446,286 10,140,892
International corporate operated locations 3,369,034 2,907,268
-------------------------------------------- ------------ ------------
Total 32,363,935 25,466,651
-------------------------------------------- ------------ ------------
Profit/(Loss) before tax Year ended Year ended
31 December 31 December
2019 2018
$ $
-------------------------------------------- ------------ ------------
Franchise royalty income 1,603,149 1,447,989
Franchise related activities 601,281 484,036
US corporate operated locations 2,025,095 1,213,304
International corporate operated locations 226,215 31,219
Unallocated head office costs (1,605,252) (1,135,435)
Non-core costs (493,000) (286,762)
-------------------------------------------- ------------ ------------
Total 2,357,488 1,754,350
-------------------------------------------- ------------ ------------
Assets Year ended Year ended
31 December 31 December
2019 2018
$ $
-------------------------------------------- ------------ ------------
Franchise royalty income 9,412,402 8,946,370
Franchise related activities 1,862,887 1,764,171
US corporate operated locations 11,772,004 7,648,032
International corporate operated locations 5,079,827 2,350,344
-------------------------------------------- ------------ ------------
Total 28,127,120 20,708,917
-------------------------------------------- ------------ ------------
Amortization Year ended Year ended
31 December 31 December
2019 2018
$ $
-------------------------------------------- ------------ ------------
US corporate operated locations 291,692 298,357
International corporate operated locations 27,350 28,844
-------------------------------------------- ------------ ------------
Total 319,042 327,201
-------------------------------------------- ------------ ------------
Depreciation Year Year
ended ended
31 31
December December
2019 2018
Note $ $
---------------------------------------------------------------------------------------------------- ---------- ---------
Franchise royalty income - -
Franchise related activities - -
US corporate operated locations 2 1,092,312 278,884
International corporate operated locations 176,151 77,013
---------------------------------------------------------------------------------------------------- ---------- ---------
Total 1,268,463 355,897
---------------------------------------------------------------------------------------------------- ---------- ---------
Finance Expense Year Year
ended ended
31 31
December December
2019 2018
$ $
---------------------------------------------------------------------------------------------------- ---------- ---------
US corporate operated locations 81,608 -
International corporate activities 995 40
Unallocated head office costs 317,638 235,916
Total 400,241 235,957
---------------------------------------------------------------------------------------------------- ---------- ---------
For the purpose of monitoring segmental performance, no
liabilities are reported to the Group's Chief Operating Decision
Maker.
Geographic Information
As noted herein, the Group has two wholly-owned subsidiaries -
ALD and WII. ALD has US franchise-operated and corporate-operated
locations and international franchises in Australia and Canada.
Meanwhile, WII has corporate-operated activities outside the US. We
may also regroup the same information into US and Outside the US to
capture the Group's effort to be multinational company. As
indicated herein, the Group has had strong balanced growth in the
US and abroad and across ALD and WII. Between 2019 and 2018,
Outside the US sales have grown 13% to $3.5 million (2018:$3.1
million). Sales in the US have grown 29% to $28.9 million (2018:
$22.4 million). The percentage of International sales to Total
sales has remained relatively constant at 11% (2018: 12%).
Total Revenue
Year ended 31 December 2019 Year ended 31 December 2018
US International Total US International Total
$ $ $ $ $ $
---------------------------------- ----------- -------------- ----------- ----------- -------------- -----------
Franchise royalty income 6,355,811 143,234 6,499,045 6,087,083 177,756 6,264,839
Franchise related activities 8,049,570 - 8,049,570 6,153,652 - 6,153,652
Corporate owned Stores 14,446,286 - 14,446,286 10,140,892 - 10,140,892
International corporate
activities - 3,369,034 3,369,034 - 2,907,268 2,907,268
---------------------------------- ----------- -------------- ----------- ----------- -------------- -----------
Total 28,851,667 3,512,268 32,363,935 22,381,627 3,085,024 25,466,651
5 Expenses by nature
The Group's operating profit has been arrived at after
charging:
Year ended Year ended
31 December 31 December
2019 2018
Note $ $
---------------------------------------- ----- ------------ ------------
Raw materials and consumables
used 820,885 661,264
Employee costs 6 12,965,317 9,579,521
Operating lease rentals 2 70,038 707,490
Depreciation charge 2 1,268,463 355,897
Amortization charge 319,042 327,201
Marketing costs 224,297 243,799
R & D 10,152 4,285
Foreign exchange (gain)/loss (34,805) 5,131
---------------------------------------- ----- ------------ ------------
Year ended Year ended
31 December 31 December
2019 2018
$ $
---------------------------------------- ----- ------------ ------------
Auditors remuneration
Fees payable to the Company's
auditor for audit of Parent Company
and Consolidated Financial Statements 51,000 41,545
---------------------------------------- ----- ------------ ------------
Fees payables to the Company's - -
auditor for other services (assurance
related services)
---------------------------------------- ----- ------------ ------------
The Group auditors are not the auditors of the US subsidiary
companies. The fees paid to the auditor of the US subsidiary
companies were $121,009 (2018: $100,910) for the audit of these
companies and $24,260 (2018: $48,582) for other services.
6 Employees and Directors
The Directors of the Company are considered to be the key
management of the business.
Year ended Year ended
31 December 31 December
2019 2018
$ $
-------------------------------------- ----------- -----------
Short-Term employee benefits
Directors fees, salaries and benefits 659,596 687,872
Wages and Salaries 11,392,014 8,203,268
Social Security Costs 736,748 583,729
Long-Term employee benefits
Share based payments 176,960 104,652
-------------------------------------- ----------- -----------
12,965,317 9,579,521
-------------------------------------- ----------- -----------
Information regarding Directors emoluments are as follows:
Year ended Year ended
31 December 31 December
2019 2018
$ $
---------------------------------------- ----------- -----------
Short-Term employee benefits
Directors' fees, salaries and benefits 659,596 687,872
Social Security Costs 20,034 17,892
679,630 705,764
---------------------------------------- ----------- -----------
The highest paid Director received emoluments of $537,380 (2018:
$501,872).
The average number of employees (including Directors) in the
Group during the year was:
Year ended Year ended
31 December 31 December
2019 2018
$ $
---------------------------------------- ----------- -----------
Directors (executive and non-executive) 5 5
Management 23 22
Field Services 132 106
Franchise Support 22 20
Administration 34 20
---------------------------------------- ----------- -----------
216 173
---------------------------------------- ----------- -----------
7 Share options
The Company grants share options at its discretion to Directors,
management and advisors. These are accounted for as equity settled
options. Should the options remain unexercised after a period of
ten years from the date of grant the options will expire unless an
extension is agreed to by the Board. Options are exercisable at a
price equal to the Company's quoted market price on the date of
grant or an exercise price to be determined by the Board.
Details for the share options and warrants granted, exercised,
lapsed and outstanding at the year-end are as follows:
Number
of share
Weighted
Weighted average
average exercise exercise
price ($) options price (GBP)
Number of share
options 2019 2019 2018 2018
-------------------------- ------------------------------- ------------------------ ---------- -------------------
Outstanding at beginning
of year 1,535,000 1.43 1,685,000 1.02
Granted during the year 525,000 6.08 160,000 3.36
Forfeited/lapsed during
the year (160,000) 1.40 - -
Exercised during the year (450,000) 1.21 (310,000) 0.86
-------------------------- ------------------------------- ------------------------ ---------- -------------------
Outstanding at end of
the year 1,450,000 3.01 1,535,000 1.43
-------------------------- ------------------------------- ------------------------ ---------- -------------------
Exercisable at end of
the year 765,000 1.52 1,375,000 1.08
-------------------------- ------------------------------- ------------------------ ---------- -------------------
Fair value of share options
During the year, the Group granted 525,000 Share Options to
certain Employees, with exercise prices ranging from of GBP3.48 to
GBP4.75 ($4.59 to $6.24).
The fair value of options granted during the prior year has been
calculated using the Black Scholes model which has given rise to
fair values per share ranging from 78.21p to 109.69p. This is based
on risk-free rates of 0.84% and volatility of 59%.
The Black Scholes calculations for the options granted during
the year resulted in a charge of $176,960 (2018: $104,652) which
has been expensed in the year. As the options granted prior to 2016
had no vesting period, none of the charge expensed in 2018 related
to options granted prior to 2016.
The weighted average remaining contractual life of the share
options as at 31 December 2019 was 6.95 years (2018: 6.68
years).
Options arrangements that exist over the Company's shares at
year end and at the time of the report are detailed below:
At report Date of Exercise Exercise period
Grant date 2019 2018 Grant price From To
----------------- --------- --------- --------- ---------- -------- -----------------------------
ALDHC Plan (1) 142,500 142,500 317,500 01/12/2013 $1.14 01/12/2013 01/12/2023
2013 Directors
(2) 100,000 100,000 250,000 01/08/2013 $1.30 01/08/2013 01/08/2023
177,500
2015 Options
(3) 117,500 177,500 177,500 08/06/2015 $0.67 08/06/2015 08/06/2025
2016 Directors 13/06/201
(4) 100,000 100,000 200,000 13/06/2016 $1.26 6 13/06/2026
2016 Employee
(5) 70,000 95,000 220,000 19/12/2016 $1.24 19/12/2019 19/12/2026
2016 Employee
(5) 150,000 150,000 210,000 19/12/2016 $1.56 19/12/2019 19/12/2026
2018 Acquisition
(6) 135,000 135,000 135,000 06/03/2018 $3.15 06/03/2021 06/03/2028
2018 Acquisition
(7) 25,000 25,000 25,000 08/10/2018 $4.52 08/10/2021 08/10/2028
2019 Employee
(8) 475,000 475,000 - 04/04/2019 $6.24 04/04/2023 04/04/2029
2019 Acquisition
(9) 50,000 50,000 - 04/04/2019 $4.59 04/04/2023 04/04/2029
----------------- --------- --------- ---------
Total 1,425,000 1,450,000 1,535,000
All share options are equity settled on exercise. The amounts at
the Report Date reflect all share options that have been either
exercised or forfeited.
(1) Under ALDHC's 2006 Employee, Director and Consultant Stock
Plan ("ALDHC Option Plan"), certain directors and employees of ALD,
were granted options to acquire an aggregate of 738,750 shares New
Ordinary Shares with an exercise price of $1.14 per share.
(2) Each member of the Board received an option to purchase
50,000 New Ordinary Shares. The Director options have an exercise
price of $1.30 per share or 67% above the highest share price for
2013.
(3) On 5 June 2015, the Group granted 417,500 Share Options to
the Executive Chairman and David Silverstone, both directors of the
Company, and to certain Employees, all with an exercise price of
$0.67. 100,000 of these Share Options relate to the Executive
Chairman's compensation and an additional 50,000 of these Share
Options relate to the Executive Chairman's personnel guarantee of
the loan with Liberty Bank in 2014. 40,000 of these Share Options
relate to compensation payable to David Silverstone.
(4) On 13 June 2016, each member of the Board received an option
to purchase 50,000 New Ordinary Shares. The Director options have
an exercise price of $1.26 per share which is 5% higher than the
highest share price for 2015. These Options have a three-year
vesting requirement. On 13 June 2016, the Executive Chairman, a
director of the Company, was also granted 50,000 Share Options with
an exercise price of $0.92 related to the Executive Chairman's
personal guarantee of the loan with Liberty Bank in 2015.
(5) On 19 December 2016, certain employees were granted options
to purchase 220,000 New Ordinary Shares at a price of $1.24 and
210,000 New Ordinary Shares at a price of $1.56. These options have
a three-year vesting requirement.
(6) On 14 March 2018, certain vendors, retained as employees,
were granted an option to purchase 135,000 New Ordinary Shares at a
price of $3.15 pursuant to the acquisition of a franchise based in
Louisville, Kentucky. These options have a three-year vesting
requirement.
(7) On 8 October 2018, certain vendors, retained as employees,
were granted an option to purchase 25,000 New Ordinary Shares at a
price of $4.52 pursuant to the acquisition of the territories
around Portland, Oregon from a franchise. These options have a
three-year vesting requirement.
(8) On 4 April 2019, certain employees were granted options to
purchase 475,000 New Ordinary Shares at a price of $6.24. These
options have a four-year vesting requirement.
(9) On 4 April 2019, certain vendors, retained as employees,
were granted options to purchase 50,000 New Ordinary Shares at a
price of $4.59 pursuant to the acquisition of franchises acquired
in 2019. These options have a four-year vesting requirement.
Patrick DeSouza received (i) 600,000 Partly Paid Shares at an
exercise price of $1.07 during 2016, (ii) 750,000 Partly Paid
Shares at an exercise price of $2.71 in March 2018 and (iii)
850,000 Partly Paid Shares at an exercise price of $4.82, in May
2019 in connection with capital raising and bank financings. These
Partly Paid Shares carry voting rights but will not be admitted to
trading or carry any economic rights until fully paid.
8 Finance income
Year ended Year ended
31 December 31 December
2019 2018
$ $
Interest income 61,754 28,003
9 Finance expense
Year ended Year ended
31 December 31 December
2019 2018
$ $
Interest expense 400,241 235,957
10 Taxation
Year ended Year ended
31 December 31 December
2019 2018
Group $ $
Current tax:
Current tax on profits in the year 535,692 267,636
Prior year over provision - -
Total current tax 535,692 267,636
Deferred tax current year 126,369 200,988
Deferred tax prior year - -
Deferred tax (credit)/expense (note
20) 126,369 200,988
Income tax expense 662,061 468,624
The tax on the Group's loss before tax differs from the
theoretical amount that would arise using the weighted average tax
rate applicable to profits of the consolidated entities as
follows:
Profit before tax on ordinary activities 2,357,488 1,754,350
Tax calculated at domestic rate applicable
profits in respective countries
(2019: 31.6% versus 2018: 26.7%) 446,277 366,568
Tax effects of:
Non-deductible expenses 11,528 19,737
GILTI Inclusion 22,548
Other tax adjustments, reliefs and transfers 38,314 11,946
State taxes net of federal benefit 110,772 69,988
Adjustment in respect of prior year 30,586 (6,925)
Changes in rates 2,036 7,310
Taxation expense recognized in income
statement 662,061 468,624
The Group is subject to income taxes in multiple jurisdictions.
Significant judgment is required in determining the worldwide
provision for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain.
The Group recognises liabilities for anticipated tax audit issues
based on estimates of whether additional taxes will be due.
As also set forth, in Note 20, at the balance sheet date, the
Group's UK trading operations had unused tax losses of GBP3,635,579
(2018: GBP4,276,906) available for offset against future profits.
GBP690,760 (2018:
GBP727,074) represents unrecognized deferred tax assets thereon
at 19%. The deferred tax asset has not been recognized due to
uncertainty over timing of utilization.
The effective rate for tax for 2019 is 31.6% (2018: 26.7%). It
is anticipated that the Group will use this effective tax rate of
31.6% going forward.
11 Earnings per share
The profit per share has been calculated using the profit for
the year and the weighted average number of ordinary shares
outstanding during the year, as follows:
Basic
Year ended Year ended
31 December
2018
31 December 2019 $
$
Profit for the year attributable to equity
holders of the Parent ($) 1,695,033 1,294,701
Weighted average number of ordinary shares 14,426,694 13,401,624
Diluted weighted average number of ordinary
shares 15,244,422 14,304,790
11
Profit per share (cents) 11.7 9.7
Diluted profit per share (cents) 11.1 9.1
12 Acquisitions
These can be summarised as follows:
On 5 February 2019, the Company announced a series of corporate
activity, including the acquisition of Ontario (Niagara) franchise,
expanding the Group's corporate presence into Canada and upstate
New York;
On 7 March 2019, the Company announced the acquisition of its
South Atlanta and Southern Georgia franchise. This territory will
be used to create a regional corporate presence to help accelerate
development of Southeastern franchises.
On 28 March 2019, the Company announced the acquisition of its
Orlando, Florida franchise. The acquisition enables the Group to
set up another regional office in Florida to support the growth of
the ALD business throughout the southeast United States.
On 13 June 2019, the Company announced the reacquisition of its
Tucson, Arizona franchise ("Tucson") within the Group's American
Leak Detection subsidiary ("ALD"). The demographics and economy of
Tucson are fast growing and a prime area for accelerated growth for
both the Group's American Leak Detection and Water Intelligence
International businesses. Water issues are proliferating throughout
the southwest of the United States.
On 8 July 2019, the Company acquired territory (Halton) from
ALD's Toronto franchise. The Toronto franchise will continue to
execute its franchise operation with its remaining territory. The
acquisition of territory provides ALD's new corporate location in
Ontario (reacquisition of Ontario franchise in February 2019) more
scope to grow.
Ontario Halton
Canada Atlanta Orlando Tucson Canada Adjust-ments Totals
$ $ $ $ $ $ $
Fair value of assets
and liabilities
acquired
Equipment 53,170 27,800 30,200 111,170
Vehicles 57,378 46,300 34,500 138,178
Other 136,465 136,465
Net assets acquired 247,013 74,100 64,700 385,813
Consideration
Cash 665,130 250,000 673,000 160,000 227,751 1,975,881
Note payable 76,000 125,000 471,698 540,000 32,968 1,245,666
Total consideration 741,130 375,000 1,144,698 700,000 227,751 32,968 3,221,547
Intangible assets
arising on acquisition
(see note 13) 494,117 375,000 1,070,598 635,300 227,751 32,968 2,835,734
The intangible assets arising on the above acquisitions of
$2,835,734 is included in additions to goodwill and indefinite life
intangible assets for owned & operated stores (see note
13).
Following acquisitions all Franchises are classed as one cash
generating unit therefore cannot separately disclose revenue and
profit for each individual franchise.
The amount of deferred consideration for 2019 acquisitions as
well as the remaining deferred consideration for acquisitions made
in 2015, 2016, 2017, 2018 and 2019 (after discounting anticipated
cash flows to evaluate the fair value), can be summarized as
follows:
Current Year ended Year ended
31 December 31 December
Year acquired 2019 2018
$ $
T&M Tech LLC (South Michigan franchise) 2015 75,473 74,282
Cincinnati 2016 56,604 55,712
Sydney 2016 55,631
Indianapolis 2017 102,073
Kentucky 2018 557,816 523,745
South Florida 2018 23,480 22,116
Portland 2018 615,476
Orlando 2019 471,698
Tucson 2019 92,434
Total current deferred consideration 1,277,505 1,449,035
Non-Current Year ended Year ended
31 December 31 December
Year 2019 2018
acquired $ $
T&M Tech LLC (South Michigan franchise) 2015 72,389
Cincinnati 2016 54,292
Kentucky 2018 560,313
South Florida 2018 168,834 192,313
Tucson 2019 387,364
Total non-current deferred consideration 556,198 879,307
13 Intangible assets
The calculation of amortization of intangible assets requires
the use of estimates and judgement, related to the expected useful
lives of the assets.
An impairment review is undertaken annually or whenever changes
in circumstances or events indicate that the carrying amount may
not be recovered.
Goodwill and other indefinite life intangible assets
Group Goodwill
Goodwill Owned & Operated on franchisor
Acquisitions stores activities Totals
$ $ $ $
Cost
At 1 January 2018 2,325,109 1,911,415 636,711 4,873,235
Additions (see
note 12) 220,025 2,742,936 - 2,962,961
At 31 December
2018 2,545,134 4,654,351 636,711 7,836,196
Additions (see
note 12) 494,117 2,341,617 - 2,835,734
At 31 December
2019 3,039,251 6,995,968 636,711 10,671,930
Impairment
At 1 January 2018 1,493,729 75,000 - 1,568,729
Impairment in year 12,500 - - 12,500
At 31 December
2018 1,506,229 75,000 - 1,581,229
Impairment in year - -
At 31 December
2019 1,506,229 75,000 - 1,581,229
Carrying amount
At 31 December
2018 1,038,905 4,579,351 636,711 6,254,967
At 31 December
2019 1,533,022 6,920,968 636,711 9,090,701
The increase in carrying value of Goodwill Acquisitions at 31
December 2019 relate to goodwill additions arising on the
acquisition outlined in Note 12 above during 2019.
Goodwill and indefinite life intangible assets on owned &
operated stores comprises legacy owned stores together with
additions arising from reacquisitions of franchise operations in
2015, 2016, 2017, 2018 and 2019. Details on additions in 2019 can
be found in note 12 above.
Goodwill on Franchisor Activities relates to the royalty income
franchise business.
Where appropriate consideration of separately identifiable
intangible assets has been considered in the evaluation of the fair
value of assets acquired and the determination of the fair value of
goodwill arising. For the acquisitions in 2019, 2018, 2017, 2016
and 2015 relating to the reacquisition of franchises, it is
considered that the value being attributed to the purchase
consideration relates to the synergies with surrounding franchises,
obtaining wider geographical coverage directly within the Group,
the focus to seize potential opportunity within their wider
business strategy for revenue and earnings growth and the ability
to expand new service offerings. Where appropriate consideration of
separate intangibles, such as covenants not to compete, are
evaluated.
There is no separately identified intangible considered to arise
from the customer list of the franchise reacquired given the terms
of the franchise agreement and on that these customers continue to
be customers of the Group's products and services before and after
the reacquisition.
An impairment review is undertaken annually or whenever changes
in circumstances or events indicate that the carrying amount may
not be recovered. For the purpose of impairment testing, goodwill
or indefinite life intangible assets are allocated to appropriate
cash generating units which can be summarised as follows:
Goodwill on Acquisitions are separately categorized as cash
generating units.
Goodwill or indefinite life intangible assets on owned &
operated stores are categorized as cash generating units that are
expected to benefit from the synergies of the combination.
Goodwill on Franchisor Activities is considered as one cash
generating unit by reference to revenues and activities derived
from the franchise royalty income and franchise related activities
segments (see note 4).
The cash generating units to which goodwill or indefinite life
intangible assets have been allocated are tested for impairment
annually. If the recoverable amount of the cash generating unit is
less than its carrying amount, the impairment loss is allocated
first to reduce the carrying amount of any goodwill allocated to
the unit and then to the other assets of the unit pro-rata on the
basis of the carrying amount of each asset in the unit. An
impairment loss recognised for goodwill is not recovered in a
subsequent period.
The key assumptions/inputs used for the impairment assessment
based on the forecast cash flow and revenues for 2019 were as
follows:
%
Discount rate 15
Short term revenue growth 5
Long term revenue growth 3.5
Tax rate 25
Discount rate sensitivity step 2
Perpetual growth rate sensitivity step 1
This has resulted in no material impairment charge being
required in 2019 (2018: $nil).
Based upon the sensitivity analysis had the estimated discount
rate used been 2% higher and the perpetual revenue growth rate used
been 1% lower in these calculations the Group would still not have
incurred any material impairment for any of the categories of
goodwill or indefinite life intangible assets.
13 Intangible assets continued
Other Intangible assets table
Enterprise
Product Covenants Customer Solution
development not to compete Lists Trademarks Patents Website Development Total
$ $ $ $ $ $ $ $
Cost
At 1 January
2018 164,880 290,000 350,357 5,293,817 23,692 90,000 107,000 6,319,746
Additions - - - - - 350,471 350,471
At 31
December
2018 164,880 290,000 350,357 5,293,817 23,692 90,000 457,471 6,670,217
Additions - 200,000 - - - - - 200,000
Disposals - - - - - - (355,471) (355,471)
At 31
December
2019 164,880 490,000 350,357 5,293,817 23,692 90,000 102,000 6,514,746
Accumulated
amortisation
At 1 January
2018 164,880 283,334 270,472 3,156,676 23,692 22,500 - 3,921,554
Amortisation
expense - 6,666 28,844 261,691 - 30,000 - 327,201
Exchange
differences - - (2,103) - - - - (2,103)
At 31
December
2018 164,880 290,000 297,213 3,418,367 23,692 52,500 - 4,246,652
Amortisation
expense - 27,350 261,691 - 30,000 - 319,041
Exchange
differences - - (779) - - - - (779)
At 31
December
2019 164,880 290,000 323,784 3,680,058 23,692 82,500 - 4,564,914
Carrying
amount
At 31
December
2018 - 53,144 1,875,450 - 37,500 457,471 2,423,565
At 31
December
2019 - 200,000 26,573 1,613,759 - 7,500 102,000 1,949,832
All intangible assets have been acquired by the Group.
The calculation of amortization of intangible assets requires
the use of estimates and judgement, related to the expected useful
lives of the assets.
An impairment review is undertaken annually or whenever changes
in circumstances or events indicate that the carrying amount may
not be recovered.
14 Property, plant and equipment
Right Right
Equipment Motor Leasehold Buildings of of
& displays Vehicles Improvements $ Use Vehicles Use Offices Total
$ $ $ $ $ $
Cost
At 1 January
2018 713,862 311,457 15,000 - - - 1,040,319
Acquired on
acquisition
of subsidiary 50,875 71,774 - - - - 122,649
Additions 666,251 542,711 - - - - 1,208,962
Exchange
differences (1,881) (8,382) - - - - (10,263)
Disposals (703) - - - - - (703)
At 31 December
2018 1,428,404 917,560 15,000 - - - 2,360,964
Acquired on
acquisition
of subsidiary 163,116 113,302 - 152,009 - - 428,426
Additions 488,163 513,283 68,672 - 357,458 533,652 1,961,228
IFRS 16
Adoption - - - - 1,092,582 1,323,060 2,415,643
Exchange
differences 4,682 1,848 - 1,382 - - 7,912
Disposals (107,805) (107,415) - - (55,786) (373,762) (644,768)
At 31 December
2019 1,976,560 1,438,578 83,672 153,391 1,394,255 1,482,950 6,529,404
Accumulated
depreciation
At 1 January
2018 201,242 75,936 682 - - - 277,860
Eliminated on
disposals (703) - - - - - (703)
Depreciation
expense 220,609 133,924 1,364 - - - 355,897
Exchange
differences (537) (4,079) - - - - (4,616)
----------- ------------- ------------
At 31 December
2018 420,611 205,781 2,046 - - - 628,437
Acquired on
acquisition
of subsidiary 109,945 55,924 - 27,116 - - 192,985
Eliminated on
disposals (35,915) (54,216) - - (55,786) (373,762) (519,679)
IFRS 16
Adoption - - - - 396,350 663,257 1,059,457
Depreciation
expense 325,759 269,482 5,942 10,947 284,712 371,621 1,268,463
Exchange
differences 955 495 - 9 - - 1,458
At 31 December
2019 821,355 477,466 7,988 38,072 625,276 661,116 2,631,272
Carrying
amount
At 31 December
2018 1,007,793 711,779 12,954 - - - 1,732,527
At 31 December
2019 1,155,204 961,112 75,684 115,319 768,978 821,835 3,898,132
The value of the assets charged as security for the bank debt is
$1,426,896 (2018: $1,234,492).
15 Investment in subsidiary undertakings
Subsidiary
Undertakings
Company $
Cost
At 31 December 2018 13,372,288
Exchange difference 235,012
At 31 December 2019 13,607,300
Impairment
At 31 December 2018 6,400,906
Exchange difference -
At 31 December 2019 6,400,906
Carrying amount
At 31 December 2018 6,971,382
At 31 December 2019 7,206,394
The Directors annually assess the carrying value of the
investment in the subsidiary and in their opinion no impairment
provision is currently necessary. See notes 12 and 13 for the
assumptions and sensitivities in assessing the carrying value of
the investment.
The net carrying amounts noted above relate to the US
incorporated subsidiaries. The subsidiary undertakings during the
year were as follows:
Interest
held
Registered office Country %
address of incorporation
Water Intelligence International 27-28 Eastcastle Street,
Limited* (leak detection London, United Kingdom, England
products and services) W1W 8DH and Wales 100%
Water Intelligence Australia 1 Farrer Place, Sydney,
Pty NSW 2000 Australia 100%
American Leak Detection 199 Whitney Avenue,
Holding Corp. (holding New Haven, Connecticut
company of ALD Inc.) * 06511 US US 100%
American Leak Detection, 199 Whitney Avenue,
Inc. (leak detection product New Haven, Connecticut
and services) 06511 US US 100%
8-4696 Bartlette Rd.
Canadian Leak Detection, Beamsville, Ontario
Inc. L0R 1B1 Canada 100%
Qonnectis Group Limited 27-28 Eastcastle Street, England
(dormant) London, United Kingdom, and Wales
W1W 8DH
NRW Utilities Limited (Dormant) 27-28 Eastcastle Street, England
London, United Kingdom, and Wales
W1W 8DH
* Subsidiaries owned directly by the Parent Company. These
subsidiaries - WII and ALDHC - represent the two principal business
lines of the Parent Company. Water Intelligence Australia and
American Leak Detection are also wholly-owned by the two principal
subsidiaries and indirectly owned by the Parent.
The Company's strategy involves acquisitions, especially of
franchisees. American Leak Detection has reacquired one franchise,
Bakersfield on 15 March 2018, by purchasing 100% upfront and at the
same time sold 40% of the franchise. American Leak Detection has an
unrestricted option to acquire the remaining 40% at a pre-set price
at any time in the future.
16 Inventories
Group
Year ended Year ended
31 December 31 December
2019 2018
$ $
Group Inventories 334,011 451,465
During the year ended 31 December 2019, an expense of $7,448,287
(2018: $5,446,010) was recognized in the Consolidated Statement of
Comprehensive Income, including business to business expenses of
$6,747,495 (2018: $4,806,466). There has been no write down of
inventories during 2019.
17 Trade and other receivables
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Trade notes receivable 605,234 618,005 - - -
All non-current receivables are due within five years from the
end of the reporting period.
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Trade receivables 2,796,536 2,209,382 - -
Prepayments 659,539 697,123 16,393 4,735
Due from Group undertakings - - 4,906,216 4,660,040
Accrued royalties receivable 584,876 520,478 - -
Trade notes receivable 223,706 191,988 - -
Other receivables 389,701 357,487 123,540
Due from related party 370,284 235,523 71,956 29,917
Current portion 5,024,642 4,211,982 4,994,565 4,818,232
Trade receivables disclosed above are classified as loans and
receivables and are therefore measured at amortised cost. The
Directors consider that the carrying amount of trade and other
receivables approximates their fair value.
Accrued royalties receivable are never reclassified to trade
receivables as, should any royalties be withheld or unpaid, the
Group has the right to take back the relevant franchise.
The average credit period taken on sales is 39 days (2018: 39
days).
The carrying amounts of the Group's trade and other receivables
are denominated in the following currencies:
Year ended Year ended
31 December 31 December
2019 2018
$ $
US Dollar 4,133,093 3,534,868
UK Pound 647,220 558,450
Australian Dollar 208,592 118,663
Canadian Dollar 35,735
5,024,641 4,211,981
The maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivable mentioned above. The
Group does not hold any collateral as security.
18 Cash and cash equivalents
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Cash at bank and in hand 5,280,808 5,016,406 195,750 48,164
19 Trade and other payables
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Trade payables 993,240 1,350,941 52,627 146,878
Accruals and other payables
(Note 2) 3,602,845 1,199,339 117,725 112,845
Due to Group undertakings - - -
4,596,085 2,550,280 170,353 259,723
Trade payables and accruals principally comprise amounts
outstanding for trade purchases and ongoing costs and are payable
within 3 months. The average credit period taken for trade
purchases is 16 days (2018:16 days ).
20 Deferred Tax
The analysis of deferred tax liabilities is as follows:
Group 2019 2018
$ $
Deferred tax (liability)/assets (588,684) (316,221)
The movement in deferred tax liabilities is as follows:
2019 Recognized Recognized
Opening in the income in Other Comprehensive Closing
balance statement Income balance
$ $ $ $
Temporary differences: - - - -
Net operating profit - - - -
(loss) (non-current)
Short term temporary
differences (316,221) (126,369) (146,094) (588,684)
(316,221) (126,369) (146,094) (588,684)
2018 Recognized Recognized
Opening in the income in Other Comprehensive Closing
balance statement Income balance
$ $ $ $
Temporary differences: - - - -
Net operating profit - - - -
(loss) (non-current)
Short term temporary
differences (115,233) (200,988) - -
(115,233) (200,988) - (316,221)
At the balance sheet date, the Group's UK trading subsidiaries
had unused tax losses (as reported on the Group's tax returns) of
GBP3,635,579 (2018: GBP4,276,906) available for offset against
future profits. GBP690,760 (2018: GBP727,074) represents
unrecognized deferred tax assets thereon at 19%. The deferred tax
asset has not been recognized due to uncertainty over timing of
utilization.
21 Share capital
The issued share capital in the year was as follows:
Group & Company
Shares held
Ordinary Shares in treasury
Number Number Total Number
At 31 December 2018 13,883,969 13,883,969
At 31 December 2019 14,702,371 145,000 14,847,371
.
Group & Company
Shares in
Share capital Share premium Treasury
$ $ $
At 31 December 2018 101,915 6,887,739
At 31 December 2019 114,440 9,717,349 (539,833)
On 10 May 2019, the Company announced a capital raise, pursuant
to which the Company sold 500,000 new Ordinary Shares to raise
GBP1.85 million and a subscription of 363,402 Ordinary Shares to
raise a total of approximately GBP1.3 million. In addition, Patrick
DeSouza, executive chairman of the Company, and persons closely
associated with him, to exercised 300,000 options over Ordinary
Shares and David Silverstone to exercised 50,000 options over
Ordinary Shares and sold these to incoming investors from the
Subscription at the Issue Price. Michael Reisman and Laura Hills
purchased 4,153 and 24,919 newly issued Ordinary Shares through the
Subscription. All of these shares were admitted to trading on AIM
on 17 May 2019. In addition, Patrick DeSouza received 850,000
Partly Paid Shares (being ordinary shares with voting rights and no
economic rights until fully paid) in exchange for increasing the
guarantee he is providing over the Company's bank facilities.
At various times during 2019 the Company bought 145,000 shares
into treasury at a purchase price range of 245p to 370p.
The Company bought another 25,000 shares into treasury on 5
January 2020 at a purchase price of 247p bringing the total number
of shares in treasury to 170,000.
Reverse acquisition reserve
The reverse acquisition reserve was created in accordance with
IFRS3 Business Combinations and relates to the reverse acquisition
of Qonnectis Plc by ALDHC in July 2010. Although these Consolidated
Financial Statements have been issued in the name of the legal
parent, the Company it represents in substance is a continuation of
the financial information of the legal subsidiary ALDHC. A reverse
acquisition reserve was created in 2010 to enable the presentation
of a consolidated statement of financial position which combines
the equity structure of the legal parent with the reserves of the
legal subsidiary. Qonnectis Plc was renamed Water Intelligence Plc
on completion of the reverse acquisition on 29 July 2010.
22 Right of use liability
Year ended Year ended
31 December 31 December
2019 2018
$ $
Lease liabilities in statement of
financial position
Amounts due within one year 587,674 -
Amount due after more than one year 1,116,132
1,703,806 -
Amount recognized in the statement of
comprehensive income
Interest on leasehold liabilities 88,189 -
Amount recognized in the statement
of
cash flows
Repayment of lease liabilities 723,812 -
23 Financial instruments
The Group has exposure to the following key risks related to
financial instruments:
i. Market risk (including foreign currency risk management)
ii. Interest rate risk
iii. Credit risk
iv. Liquidity risk
This note presents information about the Group's exposure to
each of the above risks, the Group's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. Further quantitative disclosures are
included throughout these consolidated Financial Statements.
The Directors determine, as required, the degree to which it is
appropriate to use financial instruments or other hedging contracts
or techniques to mitigate risk. The main risk affecting such
instruments is foreign currency risk which is discussed below.
Throughout the year ending 31 December 2019 no trading in financial
instruments was undertaken (2018: none) and the Group did not have
any derivative or hedging instruments.
The Group uses financial instruments including cash, loans and
finance leases, as well as trade receivables and payables that
arise directly from operations.
Due to the simple nature of these financial instruments, there
is no material difference between book and fair values. Discounting
would not give a material difference to the results of the Group
and the Directors believe that there are no material sensitivities
that require additional disclosure.
Fair value of financial assets and financial liabilities
The estimated difference between the carrying amount and the
fair values of the Group's financial assets and financial
liabilities is not considered material.
Credit risk
The Group's principal financial assets are bank balances, cash,
cash equivalents, trade and other receivables. The Group's credit
risk is primarily attributable to its trade receivables and cash
and cash equivalents. Receivables are regularly monitored and
assessed for recoverability. The Group has no significant
concentration of credit risk as exposure is spread over a number of
customers. As at 31 December 2019, 70.72% was held with one
counterparty with a credit rating of Aaa and a further 13.32% was
held with another counterparty with a credit rating of A1.
The Group applies the IFRS 9 simplified approach to measuring
expected credit losses which uses a lifetime expected loss
allowance for all trade receivables. To measure the expected credit
losses, trade receivables have been grouped based on the shared
credit risk characteristics and the days past due. The expected
loss rates are based on the historic payment profiles of sales and
the credit losses experienced within this period. The historical
loss rates are adjusted to reflect current and forward-looking
information.
As the Group does not hold any collateral, the maximum exposure
to credit risk is represented by the carrying amount of the
financial assets as at the end of each reporting period.
As at 31 December 2019, trade receivables of $460,716 (2018:
$470,976) were past due but not impaired. These relate to a number
of customers for whom there is no history of default. The ageing
analysis of these trade receivables is as follows:
Ageing of past due but not impaired receivables
Year ended Year ended
31 December 31 December
2019 2018
$ $
60-90 days 129,287 109,963
90+ days 331,429 364,013
460,716 470,976
Average age (days) 95 96
The Group believes that no impairment allowance is necessary in
respect of trade receivables that are past due but not impaired.
This is based on the Group's good historic track record of
collection for all such receivables.
Credit risk management
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Group. The Group seeks to limit credit risk on liquid funds through
trading only with counterparties that are banks with high credit
ratings assigned by international credit rating agencies.
Exposure to credit risk
The carrying amount of financial assets represents the maximum
credit exposure. The exposure to credit risk at the year-end was in
respect of the past due receivables that have not been impaired are
disclosed in note 17.
Categories of financial instruments
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Loans and receivables - - - -
Cash and cash equivalents 5,280,808 5,106,406 195,750 48,164
Trade and other receivables
- current 5,024,641 4,211,982 4,994,565 4,818,232
Trade and other receivables
- non-current 605,234 618,605 - -
Financial Liabilities measured
at amortised cost
Trade and other payables 4,596,085 2,550,283 170,353 259,724
Borrowings - current 1,163,055 989,736 - -
Borrowings - non-current 2,321,400 1,448,303 - -
Deferred consideration - current 1,277,505 1,449,035 - -
Deferred consideration - non-current 556,198 879,307 - -
23 Borrowings
Bank Debt
The Group has a commercial banking relationship with People's
United Bank ("People's"). The relationship involves three
facilities: (i) term loan that was a refinancing of a previous term
loan with a different bank (2016 Term Loan); (ii) a working capital
line of credit (WC Line) and (iii) an acquisition line of credit,
primarily for franchise reacquisitions (ALOC 1 Line).
2016 Term Loan. The 2016 Term Loan was initiated on December 5,
2016 and is a four-year term loan amortizing through 2020. The
principal amount outstanding at 31 December 2019 was $603,366
(2018: $838,196). Annual interest on the loan is fixed for the term
at 4.78% and requires instalments of principal and interest
amounting to $36,716 to be paid per month. People's requires
PlainSight Systems (PSS), among others, to guarantee the loan.
WC Line . The WC Line was initiated on 5 December 2016 with
$500,000 availability. The WC Line supports various short-term
needs of the Group from support for our business-to-business
insurance channel to fleet and inventory management. On March 6,
2018, to support the Group's growth, People's increased the WC Line
from $500,000 to $2,000,000 with a maturity date of December 2019.
The maturity date was extended to December 2020. The WC Line bears
interest at LIBOR plus 3.00%. At 31 December 2018, the interest
rate was 5.38%. The balance outstanding at 31 December 2019 was
$228,133 (2018: $228,133). The WC Line is secured by substantially
all of the assets of the Group and guarantees from other related
parties including PSS.
ALOC 1 . ALOC 1 supports the Group's growth strategy primarily
with respect to franchise reacquisitions. ALOC 1 was initiated on 5
December 2016 with $1,500,000 of availability. ALOC 1 has annual
draw periods that are interest only and convert into a four-year
term loan at the end of the draw period. Upon
conversion, the term loan would bear interest at a rate per
annum equal to 3.00% in excess of People's four-year cost of funds
interest rate. The line of credit is secured by substantially all
of the assets of the Group and the guarantee of other related
parties including PSS.
In December 2017, the first draw period of ALOC 1 ended.
$584,750 was converted into ALOC 1's first. term loan in accordance
with the bank agreement (ALOC 1T1). ALOC 1T1 requires monthly
amortization of $13,585 and carries an interest rate of 5.40% (as
of 31 December 2017). The balance outstanding as of 31 December
2019 was $319,024 (2018: $460,974). The maturity date of ALOC 1T1
is 1 December 2021.
In December 2018, the second draw period of ALOC 1 ended.
$926,472 was converted into ALOC 1's second term loan in accordance
with the bank agreement (ALOC 1T2). ALOC 1T2 requires monthly
amortization of $21,884 and carries an interest rate of 6.24% (as
of 31 December 2018). The balance outstanding as of 31 December
2019 was $716,353 (2018: $926,472). The maturity date of ALOC 1T2
is 1 December 2022.
In May 2019, the draw period for ALOC 1 ended. $1,854,936 was
converted into a third term loan bank agreement (ALOC 1T3). ALOC
1T3 requires monthly amortization of $35,524 and carries an
interest rate of 5.57% (as of 31 December 2019). The balance
outstanding as of 31 December 2019 was $1,662,660 (2018: $nil) The
maturity date of ALOC 1T3 is 5 May 2024.
In connection with the People's banking facilities, the Group is
required to comply with certain financial and non-financial
covenants to be performed on a consolidated basis. These covenants
include (i) a debt service coverage ratio to be tested quarterly
and (ii) a minimal semi-annual increase in capital funds to be
tested semi-annually. The Group was in compliance with those
requirements at 31 December 2019.
Current Non-Current
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
Financial Instruments $ $ $ $
2016 Term loan 465,664 408,989 137,702 429,207
Working Capital Line of
Credit 228,133 228,133
Acquisition Line of Credit 713,685 352,614 1,984,351 1,034,832
* ALOC1T1, converted into term loan 149,220 141,910 169,804 319,064
* ALOC1T2, converted into term loan 223,585 210,704 492,768 715,768
* ALOC1T3, converted into term loan 340,880 1,321,780
Less: Loan Closing Costs (16,294) - (28,787) (15,736)
Total 1,163,055 989,736 2,321,400 1,448,303
Capital risk management
In managing its capital, the Group's primary objective is to
maintain a sufficient funding base to enable working capital,
research and development commitments and strategic investment needs
to be met and therefore to safeguard the Group's ability to
continue as a going concern in order to provide returns to
shareholders and benefits to other stakeholders. In making
decisions to adjust its capital structure to achieve these aims,
through new share issues, the Group considers not only its
short-term position but also its long term operational and
strategic objectives.
The capital structure of the Group currently consists of cash
and cash equivalents, short and medium term borrowings and equity
comprising issued capital, reserves and retained earnings. Other
than with respect to Bank Debt, the Group is not subject to any
externally imposed capital requirements.
Significant accounting policies
Details of the significant accounting policies including the
criteria for recognition, the basis of measurement and the bases
for recognition of income and expense for each class of financial
asset, financial liability and equity instrument are disclosed in
Note 3.
Foreign currency risk management
The Group undertakes transactions denominated in foreign
currencies (other than the functional currency of the Company and
its UK operations, being GBP Sterling), with exposure to exchange
rate fluctuations. These transactions predominately relate to
royalties receivable in the US denominated in currencies other than
US$ being Canadian Dollars, Australian Dollars and Euro; royalties
from such outside US sources in 2019 were $143,234 (2018:
$177,756). No foreign exchange contracts were in place at 31
December 2019 (2018: Nil).
The carrying amount of the Group's foreign currency denominated
monetary assets and monetary liabilities were:
Group Company
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2019 2018 2019 2018
$ $ $ $
Assets
Sterling, Australian
and Canadian Dollars 1,546,648 945,987 5,190,315 4,866,396
Liabilities
Sterling, Australian
and Canadian Dollars 604,422 529,081 170,353 259,724
As shown above, at 31 December 2019 the Group had Sterling
denominated monetary net assets of $633,132 (2018: $416,006). If
Sterling weakens by 10% against the US dollar, this would decrease
net assets by $63,313 (2018: $41,601) with a corresponding impact
on reported losses. Changes in exchange rate movements resulted in
a loss from exchange differences on a translation of foreign
exchange of $163,838 in 2018 (2018: loss of $439,573), resulting
primarily from the share issuance during the year in Pound Sterling
and subsequent intercompany transfer accounted in US Dollars.
Interest rate risk management
The Group is potentially exposed to interest rate risk because
the Group borrows and deposits funds at both fixed and floating
interest rates. However, at the year end, the borrowings are only
subject to fixed rates. The fixed rate borrowings at the year end
are $3,301,402 (2018:$1,615,579).
Interest rate sensitivity analysis
The losses recorded by both the Group and the Company for the
year ended 31 December 2019 would not materially change if market
interest rates had been 1% higher/lower throughout 2019 and all
other variables were held constant.
Liquidity risk management
Ultimate responsibility for liquidity management rests with
management. The Group's practice is to regularly review cash needs
and to place excess funds on fixed term deposits for periods not
exceeding one month. The Group manages liquidity risk by
maintaining adequate banking facilities and by continuously
monitoring forecast and actual cash flows.
The Directors have prepared a business plan and cash flow
forecast for the period to 30 April 2021. The forecast contains
certain assumptions about the level of future sales and the level
of margins achievable. These assumptions are the Directors' best
estimate of the future development of the business. The Directors
acknowledge that the Group in the near-term trading is primarily
reliant on cash generation from its predominantly US-based royalty
income.
The following tables detail the Group's remaining contractual
maturity for its non-derivative financial liabilities with agreed
repayment periods. The tables have been drawn up based on the
undiscounted cash flows of financial liabilities based on the
earliest due repayment dates. The table shows principal cash
flows.
0-6 months 6-12 months >12 months Total
Group $ $ $ $
2019
Payables 2,892,280 - - 2,892,280
Lease liabilities 327,253 260,420 1,116,132 1,703,805
Borrowings 563,143 599,912 2,321,400 3,484,455
Deferred consideration 1,214,019 63,486 556,198 1,833,703
0-6 months 6-12 months >12 months Total
Group $ $ $ $
2018
Payables 2,550,283 - - 2,550,283
Borrowings 272,182 717,554 1,448,303 2,438,039
Deferred consideration 764,396 684,639 879,307 2,328,342
Interest expected to be paid on liabilities are shown in the
table below
0-6 months 6-12 months >12 months Total
Group $ $ $ $
2019
Payables - - - -
Lease liabilities 39,262 32,344 76,603 148,209
Borrowings 92,289 76,521 204,952 373,763
Deferred consideration 83,521 12,581 56,451 152,553
The Company has no non-derivative financial liabilities.
Derivatives
The Group and Company have no derivative financial instruments
.
Fair values
The Directors consider that the carrying amounts of financial
assets and financial liabilities approximate their fair values.
Reconciliation of liabilities arising from financing
activities
The changes in the Group's liabilities arising from financing
activities can be classified as follows:
Long-term Short-term Lease Liabilities Total
borrowings borrowings
$ $ $ $
At 1 January 2019 1,448,303 989,736 - 2,438,039
Cash flows
* Repayment (808,520) - (635,623) (1,444,141)
* Proceeds 1,854,936 - - 1,854,936
Non-cash
* Acquisition - - 2,339,428 2,339,428
- - - -
* Fair value
* Reclassification (173,319) 173,319 -
As at 31 December
2019 2,321,400 1,163,055 1,703,805 5,188,261
Long-term Short-term Lease Liabilities Total
borrowings borrowings
$ $ $ $
At 1 January 2018 1,635,311 394,525 - 2,029,836
Cash flows
* Repayment (518,270) - - (518,270)
* Proceeds 926,472 - - 926,472
Non-cash
- - - -
* Acquisition
- - - -
* Fair value
* Reclassification (595,211) 595,211 - -
As at 31 December
2018 1,448,303 989,736 - 2,438,039
24 Fair value measurement
The following table provides the fair value measurement
hierarchy for assets measured at fair value
Fair value measurement using
Quoted
process Significant Significant
in active observable unobservable
markets inputs inputs
Total (Level (Level 2) (Level 3)
1)
Assets measured at
fair value Date of valuation $000 $000 $000 $000
Listed equity investments
EAI investment 1,932 1,932 - -
To estimate fair value, the lower end of the bid-offer spread as
at 31 December 2019 was used to calculate the value of the holding.
There is an active market for the Group's liquid equity
investment.
25 Contingent liabilities
The Directors are not aware of any material contingent
liabilities.
26 Related party transactions
PSS was a former owner of ALDHC and ALD until the reverse merger
in 2010 that created Water Intelligence. PSS is now an affiliate of
Water Intelligence and hence is a related party to the Company. PSS
provides a technology license to Water Intelligence and ALD on
terms favourable to Water Intelligence and ALD. The license is
royalty-free for the first $5 million of sales for products
developed with PSS technology. PSS also guarantees the bank debt of
Water Intelligence as described below.
During the normal course of operations, there are intercompany
transactions among PSS, Water Intelligence plc, ALDHC and ALD. In
previous years, PSS charged administrative fees to the Company to
cover activities taken on behalf of company business, including
research. The financial results of these related party transactions
are reviewed by an independent director of Water Intelligence plc,
the parent of ALDHC and ALD.
As described in Note 7, the Company's parent (and the Company as
co-borrower) have different credit facilities with Peoples. For the
PSS guarantee, ALD pays 0.75% per annum based on the outstanding
balance of the loan calculated at the end of each month. Interest
charged on the PSS receivable will match the interest rate charged
by the bank. The monthly charge for the PSS guarantee would not
change and would be offset against amounts owed by PSS. The charge
will be eliminated should the guarantee no longer be required by
the bank. Interest income related to the PSS receivable amounted to
$15,185 and $13,686 for the years December 31, 2019 and 2018,
respectively. The guarantee fee expense for the PSS guarantee
amounted to $24,126 and $16,877 for the years ended December 31,
2019 and 2018, respectively. During 2019 the Company paid expenses
on behalf of PSS in the amount of $101,662. The related
receivable/prepaid balance remaining is $298,327 and $205,606 at
December 31, 2019 and 2018, respectively.
During the year, the Company had the following transactions with
its subsidiary companies:
Water Intelligence International Limited $
Balance at 31 December 2018 2,522,800
Net loans to subsidiary -
Other expenses recharged and exchange differences 248,282
Balance at 31 December 2019 2,771,082
ALDHC $
Balance at 31 December 2018 -
Loans prepaid by WI capital raise -
Balance at 31 December 2019 -
ALD Inc. $
Balance at 31 December 2018 2,137,240
Loans repaid by WI capital raise (2,155,035)
Loans to WI 850,000
Other expenses recharged and exchange differences 1,302,929
Balance at 31 December 2019 2,135,134
27 Subsequent events
On 15 June 2020, the Group announced that it has launched an
implementation of Salesforce.com's customer relationship management
software across its ALD corporate and franchise operations. The
implementation will enable ALD to automate its entire workflow from
customer leads to service dispatch of technicians anywhere in the
US to customer reporting upon job completion to invoicing. The
implementation will produce much greater efficiencies and
capability to execute on a faster rate of growth. ALD's franchise
System will share in the licensing and implementation
investment.
On 1 June 2020, the Group completed the reacquisition of its San
Jose, California franchise territory. San Jose is a strategic
reacquisition because of its location in Silicon Valley. The Group
plans to use this corporate base to advance its innovation roadmap
and R&D. The reacquisition also enables the Group to add
further scale to Water Intelligence financially and operationally.
The purchase price was approximately $1.05 million. 2019 sales for
San Jose franchise location were approximately $0.7 million and
pre-tax profits were approximately $0.2 million. The reacquisition
also reinforces growth in the Bay Area with its multimillion dollar
franchises in the San Francisco and Berkeley territories.
On 30 April 2020, the Group completed the reacquisition of its
Minneapolis, Minnesota franchise. Minneapolis is a significant
reacquisition that enables the Group to add further scale to Water
Intelligence. Franchise reacquisitions in strategic locations
facilitate the Group's ability to grow regional geographies faster
through more centralized marketing and management. Operationally,
the reacquisition of Minneapolis creates a corporate base in the
Upper Midwest region of the United States. During 2019, the Group
executed several significant municipal contracts in the Upper
Midwest.
The provisional fair values of the acquisitions subsequent to
year end are detailed below:
Minneapolis San Jose Total
--------------------------------------
$ $ $
-------------------------------------- ------------ ---------- ----------
Fair value of assets and liabilities
acquired
Equipment 64,730 69,397 132,127
Vehicles 40,922 - 40,922
Other 10,990 16,000 26,990
Net assets acquired 116,642 85,397 200,039
-------------------------------------- ------------ ---------- ----------
Consideration
Cash 329,670 380,000 707,670
Deferred consideration - discounted
to present value 983,012 667,000 1,650,012
-------------------------------------- ------------ ---------- ----------
Total consideration 1,312,682 1,047,000 2,357,682
-------------------------------------- ------------ ---------- ----------
Intangible asset arising on
acquisition 1,196,040 961,603 2,157,643
-------------------------------------- ------------ ---------- ----------
During 2019, a claim was brought against the Company by a former
franchise owner which was settled subsequent to the end of the year
in February 2020. The parties agreed to an adjustment to the
original purchase price for the reacquisition for the franchise. In
addition, among other items, the former franchise owner agreed to a
covenant not to compete and an extension of confidentiality over
intangible assets of the Company in perpetuity. As such, the
Company accrued the settlement as of December 31, 2019 totalling a
net amount of $200,000 and recorded a covenant not to compete asset
in connection with the accrual. The covenant not to compete
commences in February 2020 for a period of one year from that
date.
PPP Program - The Paycheck Protection Program is bringing much
needed relief to business owners affected by the coronavirus. Not
only does this loan program provide funding to help cover payroll
and other expenses, but if used for qualifying purposes, part or
all of the loan can be forgiven. The company applied for and
received funding ($1,869,800) under this program in April 2020.
COVID-19 - The company has reviewed all applicable
Shelter-in-Place Orders and have determined that our operations
qualify as essential/critical infrastructure and that we are able
to continue to operate under those Orders. Our service technicians
are essential to the minimum basic operations of our business. All
non-essential personnel have been notified to work remotely until
further notice. Employees who are critical to the minimum basic
operations of the business have been instructed to comply with
social distancing rules/requirements in their jurisdictions, as
well as other safety and health precautions.
28 Control
The Company is under the control of its shareholders and not any
one party. The shareholdings of the directors and entities in which
they are related are as outlined within the Director's Report.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SFLEEMESSESM
(END) Dow Jones Newswires
June 17, 2020 02:00 ET (06:00 GMT)
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