Water Intel. Regulatory News (WATR)

Water Intelligence plc (AIM: WATR.L)

("Water Intelligence", the "Group" or the "Company")

Results for the year ended 31 December 2012

Water Intelligence is a leading provider of smart water monitoring products and non-invasive leak detection and remediation services.

Highlights

·; Revenue Growth 6% to $6.74m; Growth in all business segments

·; Royalty Income component 5% to $4.35m (2011: $4.13m)

·; Operating profit of $762,093 (2011: $98,727)

·; Profit before tax of $530,515 (2011: loss $(197,043))

·; EPS 2.8 cents (2011 (4.8 cents))

·; Positive operating cash flow of $823,760 (2011: $653,231)

·; Positive start to 2013

Patrick DeSouza, Executive Chairman of Water Intelligence, comments:

"We are pleased with the growth of the business and strong profitability results. We are excited about the future and look forward to capturing a greater share of customer demand in this growing world-wide market for products and services that address water loss issues."

Chairman's Statement

Overview

During 2012 we followed a consistent course towards building sustainable shareholder value. Prudence was the watchword. As I indicated in the Outlook section to last year's Chairman's Statement, increasing profitability was the prerequisite so that we would not be held captive to market volatility. We would manage working capital expenses in a risk-adjusted way so that we could advance the Company from a position of strength. Our operating goal was to increase profitability while maintaining sales growth; we would do this by increasing the revenue yield on each dollar of incremental spend, not simply cutting costs. In this way, we could have the flexibility for the long-term to either reinvest the cushion of operating profits for faster growth or to provide dividends for shareholders.

I am pleased to report that we were successful in achieving this operating goal and today the Directors are more confident about proceeding in 2013 and 2014 from a position of operating strength. Operating profits for 2012 jumped to $762,093 from $98,727 in 2011. Profit before tax turned positive to $530,515 from a loss of ($197,043) in 2011. Earnings per share were 2.8 cents from a loss per share in 2011 of 4.8 cents. Operating cash flow in 2012 grew to $823,760 from $653,231 in 2011. Our operating success also translated into a stronger balance sheet. Net debt was steadily reduced to $2.54 million at 31 December 2012 from $2.83 million at 31 December 2011. In 2013, we have continued to reduce our debt through monthly repayments and in May 2013, the revolving credit facility was repaid. We are now in position to take advantage of a favourable interest rate environment and free-up additional cash for reinvestment in growth by looking into refinancing our credit facilities during 2013. And to reiterate, we achieved these profitability results while maintaining overall sales growth at 6% to $6.74 million.

Operations

Our focus on building from a position of operating strength has led us to prioritize our American Leak Detection ("ALD") business. In all key operational areas, ALD has continued to grow in terms of both revenue and earnings. We are investing in the growth of ALD by developing an insurance and loss adjuster sales channel that adds recurring revenue and leverages our competitive advantage of having an established nationwide brand. Meanwhile, UK water utilities continue to test Domestic Reporter and Commercial Reporter and we were pleased with $450,849 of Leakfrog sales during 2012. We recognize that the UK product business has proceeded more slowly than we would have hoped, but we chose not to sacrifice ALD growth to push the matter. Our choice of operating priorities for 2012 now provide us the flexibility to continue to add spend to our profitable ALD business and to revamp our UK product sales and marketing effort. In the latter case, our priority will be to adapt the UK products for the US market so that we are building onto a strong ALD distribution network.

American Leak Detection

Our franchise system continues to grow as public and private concern over water loss strengthens demand for our services. During March 2013, the US Environmental Protection Agency (EPA) expanded its Fifth Annual "Fix a Leak Week" to create Water Sense public-private partnerships in local communities across the U.S.. This would enable homeowners to appreciate how much water they were using and how to reduce inefficiencies. The EPA has communicated the stark reality that American families use approximately 300 gallons of water per day at home and that approximately 14% of usage is lost through leakage. The EPA's community focus is an ideal fit for our nation-wide franchise business given our capability to touch over 100,000 homes annually across the U.S. This residential focus is also interesting for the adaptability of our UK products. While our focus during 2012 has been on selling to UK water utilities, now that we have increased operating profits, we will begin to look for ways to adapt the UK products business for the US. Domestic Reporter is particularly attractive for the Water Sense program.

ALD is well-positioned to take advantage of today's demand in the U.S. System-wide sales are above $50 million reflecting critical mass. Royalty income from system-wide sales grew by 5% to $4.35 million. ALD grew in all regions of the U.S. Our international territories, especially Australia, also experienced sales growth. During 2012 we began to focus budgetary spend on developing a nationwide sales channel with insurance companies and loss adjusters that leverages our ALD brand. Our most successful franchises already draw a significant part of their sales from insurance loss adjusters. We have stepped-up this effort in 2013 with the hire of a manager with significant experience in this area. In addition to growth via our franchise system, corporate store sales grew at 6% to $1.45 million. Importantly, we returned corporate stores to profitability at $65,000 or a 4.5% margin. We should note that while our UK product business has taken longer to develop, during 2012 we created a product in the U.S. - Leakfinder - that we have begun to sell to our franchisees at the end of 2012 to enhance their competitive advantage in pin-pointing leaks. While we do not intend to sell Leakfinder to third-parties, because of its success, there will be more products originated in the US for our franchisees and for both direct sales and distribution through our nationwide system.

Qonnectis

Our UK products business is housed in our wholly-owned subsidiary Qonnectis Networks Limited. In 2012 turnover increased to $450,849 from $252,903 in 2011. We have also taken action to reduce costs in the UK. Our product business losses were reduced to $125,746 from $218,491 in 2011. While this is a positive direction in balancing the books, the pace of the product business is an opportunity that we continue to assess. Water utilities continue to test our products gathering data with respect to various deployments. During the second half of 2013, we will consider various ways to maximise our position.

Outlook

We are fortunate that the addressable market for our products and services is world-wide and growing. Our company achieved its 2012 operating goal of increasing profitability while increasing sales. We plan to continue this direction for 2013 and we believe there is still room to improve our earnings margins given that PLC costs are still too high. We will continue to lower overheads and finance costs. As noted above, our stronger balance sheet will enable us to look into refinancing our credit facilities. We expect incremental sales growth from the development of our insurance channel, enabling growth to proceed while we are increasing profitability. Now that we have returned to profitability at our corporate stores, we can focus on opening new locations to further add to top-line growth.

All of the above lines of growth are achievable apart from the pace of our UK products business. We are encouraged with our anticipated sales of Leakfinder and believe that the strategy of developing products to complement our services business adds value to the company, whether we use them internally for a competitive edge or whether we sell them to third parties. We believe in the value proposition of Domestic Reporter and Commercial Reporter and look forward to revamping our sales approach for the second half of 2013 now that we have achieved a measure of operating strength. Increasing overall corporate profitability and growing our $50+ million franchise system will continue to dominate our mind-set. As we communicate this to the market, we believe that it will reflect well on shareholder value as growing royalty income differentiates us from various other companies.

Dr. Patrick DeSouza

Executive Chairman

27 June 2013

Consolidated Statement of Comprehensive Income for the year ended 31 December 2012

The results reflected above relate to continuing activities. The profit for the current and prior year and the total comprehensive profit for the current and total comprehensive loss for the prior year are wholly attributable to equity holders of the Parent Company, Water Intelligence plc.

Consolidated Statement of Financial Position as at 31 December 2012

Consolidated statement of changes in equity for the year ended 31 December 2012

* Prior year adjustment see note 4

The following describes the nature and purpose of each reserve within owners' equity:

Consolidated statement of cash flows for the year ended 31 December 2012

1. General information

The Group is a leading provider of water monitoring products, leak detection equipment and remediation services. The Group's strategy is to focus on providing a critical mass of water management products and services and to be a "one-stop" shop for leak alerts, precision, non-invasive leak detection and remediation.

The Company is a public limited company domiciled in the United Kingdom and incorporated under registered number 03923150 in England and Wales. The Company's registered office is Hexagon Business Centre, Hexagon House, Station Lane, Witney, Oxfordshire OX28 4BN.

The Company is listed on AIM of the London Stock Exchange. These Financial Statements were authorised for issue by the Board of Directors on 27 June 2013.

2. 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 and the Chairman's Statement.

The Directors have prepared a business plan and cash flow forecast for the period to June 2014. The forecast contains certain assumptions about the level of future sales and the level of gross 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 entirely on cash generation by its profitable US-based franchise business, ALD. The achievement of a successful product development and subsequent sales initiative will require additional working capital finance to be put in place. The Directors believe that the funding will be able to be made available on a case by case basis such that the Group will have adequate cash resources.

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 2012. 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 Company (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 prior year acquisition of ALDHC was, under IFRS3, accounted for as a reverse acquisition. The assets and liabilities revalued at their fair value on acquisition therefore related to the Company. A reverse acquisition reserve was 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.

3. Segment information

In the opinion of the Directors, the operations of the Group currently comprise four operating segments, being the franchises, corporate owned stores, other activities including product and equipment sales and head office costs.

The Group mainly operates in the US, with operations in the UK and certain other countries. In 2012 89% (2011 96%) of its revenue came from the US based operations, the remaining 11% (2011 4%) of its revenue came from either UK or overseas based operations.

No single customer accounts for more than 10% of the Group's total external revenue.

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 separated into three segments:

- Franchisor royalties revenue less US head office costs

- Corporate-operated stores revenues less direct stores costs

- Other activities including product and equipment sales

Items that do not fall into the three segments have been categorised as unallocated head office costs.

The following is an analysis of the Group's revenues and results from operations and assets by business segment:

For the purpose of monitoring segmental performance, no liabilities are reported to the Group's Chief Operating Decision Maker.

Geographic information

Total revenue

Total revenue from activities by geographical area is detailed below:

Revenue from franchisor activities by geographical area is detailed below.

4. Prior year adjustment

On 29 July 2010 the controlling interest in the parent Company was exchanged for 91.57% of the issued share capital of ALDHC a Company registered in the United States of America, under the rules of a reverse acquisition and prescribed by IFRS 3 Business Combinations. On 27 August 2010 the Company acquired the remaining issued share capital of ALDHC as part of the same transaction.

Under IFRS3, and for accounting purposes, the subsidiary ALDHC (the legal parent) has been deemed to have acquired the parent, Water Intelligence plc (formerly Qonnectis plc). The net assets of Water Intelligence plc have been recognised at their pre-acquisition carrying amounts and the goodwill arising has been recognised.

The net assets of the acquired company and the goodwill were as follows:

The fair value of assets and liabilities as of 29 July 2010 arising from the acquisition are as follows:

The Board previously erroneously recognised and supported the non-impairment of goodwill of $1,493,729, arising on the reverse acquisition as it was believed to be assessed as part of the cash generating unit of the US Business (American Leak Detection Holding Corp and its trading subsidiary American Leak Detection Inc). In this year the Board has reviewed this transaction and recognised that the goodwill arose on the UK business (principally Water Intelligence Plc (then Qonnectis Plc) and its wholly owned trading subsidiary Qonnectis Networks Limited), which was recognised in 2010 as having no ongoing value. Accordingly, the goodwill arising on the reverse acquisition should have been impaired in the statement of comprehensive income at the time in which it arose, as no lasting economic benefits could be attributed to the goodwill. This position is supported by the above net liabilities in 2010 together with the fact that the UK business was loss making and had negligible trading activity at the time at which the reverse acquisition arose. A prior year adjustment has been made to amend this error and reflect that a charge for the impairment of this goodwill of $1,493,729 should have been made in the consolidated income statement for the year ended 31 December 2010. This would have resulted in an amended basic and diluted loss per share for the year ended 31 December 2010 of 59.6 cents, previously reported as basic and diluted loss per share of 21.9 cents.

5. Taxation

The Group is subject to income taxes in two jurisdictions. Significant judgement 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. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

6. Earnings per share

The profit/(loss) per share has been calculated using the loss for the year and the weighted average number of ordinary shares outstanding during the year, as follows:

The diluted loss per share for 2011 is the same as the basic loss per share as the conversion of share options decreases the basis loss per share, thus being anti-dilutive.

7. Goodwill

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 is allocated to each of the three cash generating units expected to benefit from the synergies of the combination, the Group goodwill, corporate owned and operated stores and franchisor activities. The cash generating units to which goodwill has 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. As noted in note 5, prior year adjustment, the Group goodwill has been written off at the time of the reverse acquisition.

Calculation of the corporate owned and operated stores and the franchisor activities cash generating unit's recoverable amount requires the use of estimates, with regards to forecast cash flows and discount rates.

The assumptions used for the corporate owned and operated stores are based on the forecast cash flows for 2013 and that cash flows thereafter are assumed to increase by 2% per annum and a discount rate of 10% has been used to value the future cash flows. A terminal value has been estimated after 5 years of discounted cash flows. This has resulted in no impairment charge being required in 2012 (2011: $75,000).

The assumptions used for the franchisor activities are based on the forecast cash flows for 2013 and that cash flows thereafter are assumed to increase by 2% per annum and a discount rate of 10% has been used to value the future cash flows. A terminal value has been estimated after 5 years of discounted cash flows. This has resulted in no impairment charge being required in 2012 or in prior years.

Had the estimated cost of capital used in determining the discount rate used in these calculations been 5% higher than management's estimates, the Group would still not have incurred any impairment for either the corporate owned and operated stores or the franchisor activities.

Had the estimated revenues used in these calculations been 5% lower than management's estimates, the Group would still not have incurred any impairment for either the corporate owned and operated stores or the franchisor activities.

8. Trade and other receivables

All non-current receivables are due within five years from the end of the reporting period.

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.

The average credit period taken on sales is 38 days (2011: 39 days).

As at the 31 December 2012, trade receivables of $36,270 (2011: $19,328) 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

The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:

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.

9. Borrowings

Bank Loan

On 16 July 2010 ALDHC drew down a six-year term loan at an initial rate of 8% per annum of US$4.0 million from the Bank of Southern Connecticut.

The Bank Loan is repayable in full on or before 16 July 2016 with monthly repayments of principal and interest at 8% per annum until the principal balance is reduced to US$2.0 million when the interest rate becomes 2% above "Wall Street Journal Prime" adjusted annually. At that point, the Group has the option of pre-payment without penalty.

The Bank Loan is secured by substantially all of the assets of ALDHC and its principal operating subsidiary ALD and guaranteed by PSS plus one significant shareholder, being the Executive Chairman.

On 25 July 2012, the ALDH entered into a $250,000 revolving line of credit agreement (Revolver) with the Bank of Southern Connecticut. The line bears interest at a rate equal to the greater of 5.25% per annum, or the Wall Street Journal Prime Rate (as defined) plus 2.75% (6.0% at December 31, 2012). Commencing August 1, 2012, the ALDH began making monthly interest only payments and will be required to pay the entire principal balance and all accrued and unpaid interest in full on June 30, 2013. The Revolver is secured by substantially all of the assets of the Group. At December 31, 2012, $248,548 was outstanding. The full amount was repaid on 24 April 2013 and the Revolver was drawn down on 21 June 2013.

Promissory Notes

In addition to the Bank Loan, there is a Promissory Note in place at 31 December 2011 to finance the acquisition of trade assets. The Promissory was repaid in full on 29 March 2012.

10. Trade and other payables

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 71 days (2011: 41 days).

The Directors consider that the carrying amount of trade payables approximates to their fair value.

11. Status of financial information

The financial information set out above does not comprise the Company's statutory accounts for the periods ended 31 December 2012 or 31 December 2011. Statutory accounts for 31 December 2011 have been delivered to the Registrar of Companies and those for 31 December 2012 will be delivered in due course. The auditors have reported on those accounts; their report was unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis of matter without qualifying their report and did not contain statements under section 498(2) or (3) of the Companies Act 2006 in respect of the accounts for 2012 or for 2011.

12. Publication of announcement and the report and accounts

A copy of this announcement will be available at the Company's registered office (Hexagon Business Centre, Hexagon House, Station Lane, Witney, Oxfordshire OX28 4BN) 14 days from the date of this announcement and on its website - www.waterintelligence.co.uk.

This announcement is not being sent to shareholders. The Annual Report will be posted to shareholders in the near future and will be made available on the website.