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 2017

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 2017.

Copies of the Annual Report will be made available to view on the Company's website at www.waterintelligence.co.uk.

Results Highlights

· 2017 total revenue increased 45% to $17.6 million accelerating from 38% annual revenue growth reported for 2016

· American Leak Detection franchise system-wide sales of approximately $80m, a significant increase on 2016, and installed base of residential customers reaching approximately 200,000

· Growth, mostly organic, assisted by further development of insurance channel and through 2 franchise reacquisitions (Indianapolis and Northern Virginia), as well as, opening of corporate-owned Washington DC territory

· Business-to-business channels launched: Entered into first formal nationwide insurance agreement in February 2017, second formal agreement signed since period end in January 2018; first national pool partnership entered into in May 2017

· UK-based municipal business strong first full year after acquisition; cross-sales of solutions to ALD franchise business initiated unlocking further growth beyond residential and business-to-business offerings

· National Internet marketing program implemented with leading edge partner for advanced social media and analytics

· All major components of revenue grew strongly

o Revenues from royalty income from franchisee-executed sales increased 7% to $5.9 million

o Revenues from franchise-related activities (including parts and equipment sales, business-to-business sales) increased 111% to $3.7 million

o Revenues from U.S. corporate-executed sales increased 41% to $5.9 million

o Revenues from international corporate-operated locations increased by 206% to $2.1 million

· Profits before tax when adjusted for non-core costs increased 22% to $1.7 million

o Statutory profit before tax increased 48% to $1.1 million

· Adjusted EPS increased by 30% to 10.4 cents; (2016: 8.0 cents)

Post-period Highlights

· Very positive start to 2018 with revenues increasing 40% in first quarter

· Entered into second national insurance agreement

· UK-based municipal business growing; cross-sale to corporate-run ALD location in Sydney

· Formal partnerships entered into with Flo Technologies, Inc. and Tagasauris, Inc. to enhance technology offerings; each partner with proprietary artificial intelligence innovation to contribute to the "Smart Home" of the future

· Raised $5.75m in equity and a further $1.75m in credit availability in March 2018; elimination of net debt

· Three further franchise reacquisitions: Kentucky, Bakersfield, California and South Florida

Dr. Patrick DeSouza, Executive Chairman of Water Intelligence, commented: "Our 2017 performance and continued follow-through during Q1 2018 is a jumping-off point for the next stage of building a multinational growth company. All aspects of the business are delivering strong growth and we are achieving a significant increase in overall profitability despite investing to lay the foundations for sustaining future growth. We also have increased our capital base with institutional partners to fuel our trajectory. Not to be missed, we have extended our technology offerings through cutting-edge partnerships. With our existing and growing sales footprint, we can unlock value with both up-sales of new technology products and cross-sales between our ALD and WII operations. We are at the beginning of an exciting journey with our platform and confident that we can make a difference in solving infrastructure problems - residential, commercial and municipal - that cause water loss, our most precious resource."

Enquiries:

Chairman's Statement

Overview

We are pleased that once again we have delivered during 2017 on our stated objectives from these pages. We are energized that throughout the organization, both corporate and franchise, we are embracing the mission of building a world-class multinational growth-oriented company that provides minimally-invasive solutions to the global problem of water-loss from leakage. Compared with 2016, which was also a very good year, our performance was quite strong: Revenue grew 45%; profits before tax grew 48%; assisted by the US tax cut, profits grew 90%. For our shareholders, earnings per share grew 77%. As we described in our market update last month, Q1 2018 had a similar direction in terms of performance. Hence, we may look at 2017 as a jumping-off point in our journey of building a great company.

Our corporate strategy has been to establish a scalable operating platform that provides across business units a "One-Stop Shop" for customers wanting solutions to faulty water infrastructure whether residential, commercial, or municipal. Our two operating subsidiaries - American Leak Detection (ALD) and Water Intelligence International (WII) - performed well and provided complementary approaches for attacking the market. ALD has focused on residential and business-to-business customers through its franchise-operated and corporate-operated locations. ALD's installed base of customers, especially across the US, enables an opportunity for follow-through product sales. UK-based WII, meanwhile, has focused on international corporate expansion through an offering of municipal solutions that also can be sold by existing ALD locations. As a result, we are well on the way to creating a robust platform that can upsell and cross-sell solutions to our growing base of customers. With our platform, we are also able to help make markets for exciting technology products that are emerging. During Q1, we launched partnerships with Flo Technologies and Tagasauris to extend our offerings roadmap.

During Q1 2018, we reached an important milestone in terms of capital formation. Armed with our strong 2017 operating fundamentals, and seeking to make good on our objective of building a multinational growth company, we increased our capital base by approximately $7.5 million. Given our growing royalty base of income, bank credit is an alternative to unnecessary equity dilution. For our capital-raise, we were able to lower the cost of capital for our shareholders through a mix of equity and increased availability from commercial banks. We raised approximately $5.75 million from institutional and retail investors in the US and Europe and $1.75 million in increased availability from our bank lines of credit.

We shall put the additional capital to work to scale our platform faster. We shall deploy resources based on three operating priorities derived from what we already know has worked well. Each of these three operating priorities is risk-adjusted because we are mindful, as always, of the importance of calibrating both revenue and profitability.

First, we plan to use our strong capital base to scale and integrate operations across our existing sales footprint in the US, UK, Australia and Canada. The addressable market is substantial and demand for our minimally-invasive solutions, especially from our insurance partners, is high. As a baseline, we can achieve significant growth by simply doing more of the same but at a faster pace, particularly as we now have two formal national insurance contracts in place and other informal national relationships that we can formalize. Our key investment for this priority is hiring, training, and deploying more technicians to meet high demand for our solutions.

Second, since our business solutions DNA always has been focused on the use of technology, especially acoustic and infrared, we will continue to enhance our technology profile through new product partnerships and investments in cutting-edge solutions for our customers. We seek to participate in the marketplace evolution of the smart home and will incorporate the latest advances in data science including artificial intelligence. Given our sizeable installed base of US residential customers for ALD solutions, our insurance channel and data scientists from our Yale-centered affiliate PlainSight Group, we are well-positioned to help shape the home services market of the future. Moreover, we also seek to contribute to the future of urban infrastructure. During 2018, we will also position ourselves to work with UK and US innovation partners to shape a dynamic global municipal market with new WII solutions.

Finally, we also plan judiciously to open locations in adjacent geographies: the EU, launching operations with support from our locations in the UK and Belgium, and Mexico, launching operations with support from our locations in Florida, Texas, and California. These growth objectives have a reduced risk profile relative to other locations because of our existing operational presence in adjacent territories. Our key investment with this priority is managing the start-up costs of a new country. To be sure, we will have opportunities to establish partnerships to extend our presence in Asia where the problems of poor water infrastructure and growing population need are acute. Given our experience as a franchisor, we have the option to sell master franchises in countries where we are not locating corporate-run operations. Our international expansion in the near-term enables us to support future master franchises in farther-away geographies. Such master franchises would generate significant upfront fees. With the operational leadership of our UK-based WII team, who have provided municipal solutions around the world, we are confident about our ability to execute this third priority. As identified below and in our Subsequent Events section of the Accounts, we are off to a good start in 2018 for deploying capital along the lines of each of the three priorities.

2017 Performance of the Water Intelligence Platform

Water Intelligence showed strong growth during 2017 reaching $17.6 million in sales, which represented approximately 45% growth year-over-year (2016: $12.2 million). In terms of understanding our ability to execute against the above three priorities, especially marketing technology products for the smart home, it is important to observe that our sales footprint to end-users is actually more substantial than the $17.6 million that appears in our accounts. Based on international accounting standards, we do not report total sales to end-users but rather royalty income from our franchise business because we charge our franchisees a percentage fee based on their gross sales. However, the purchasers of our solutions make no distinction between franchise and corporate-operated service vehicles. Hence, to the marketplace we are currently at approximately $90 million of total sales whether by franchisees or corporate-operated locations. By the end of 2018, we should exceed $100 million of total sales - an excellent base from which to upsell products and solutions.

In breaking down the $90 million of total sales, above $80 million of services are provided by our American Leak Detection franchise business. These franchise-operated sales are recorded as approximately $6 million royalty income as discussed below and provided in our Strategic Report herein. Our corporate operations, both US and International, are approximately $10 million in sales and growing fast as also discussed below and provided in our Strategic Report. Corporate operations include activities at both ALD and WII. These business units are now able, not only to grow organically, but also to unlock additional customer value by cross-selling solutions for residential, business-to-business and municipal customers. For example, during 2017 our newly established WII corporate operation was able to sell a sizeable municipal job in Miramar, Florida through our ALD location because of ALD's reputation with homeowners in Miramar for finding leaks. In similar fashion, we plan to leverage our ALD platform by up-selling products created by our technology partners to ALD's nationwide base of customers. Essentially, given our Water Intelligence "One-stop Shop," we see sales opportunities all along the water value chain from monitoring water flow for anomalies to pinpointing leaks to fixing leaks in a minimally invasive fashion. We also see adjacent solutions touching water chemistry and renewables as also demanded by our customer base.

Increasing scale at the sales level also has translated into an increased shareholder value at the bottom-line. As the business has begun to scale more profits fell to the bottom line during 2017. Profits before tax increased approximately 48% year over year, reaching $1.15 million (2016: $0.77 million). When adjusted to understand on-going operating performance (adjusting for amortization and non-core costs), profits before taxes adjusted grew approximately 22% to $1.7 million (2016: $1.4 million). As noted above, assisted by the US tax cut, profits grew 90% to $0.91 million (2016: $0.48 million). Earnings per share grew 77% to 8 cents per share. As a result of the on-going US tax cut, we should see greater profit yield on sales.

As noted above, increasing profitability as the business scales is a trend that continued during Q1. Sales growth in Q1 2018 when compared with Q1 2017 reached 40% at $5.3 million (Q1 2017: $3.8 million). Profits before tax meanwhile increased 50% to $0.6 million (Q1 2017: $0.4 million). Because of our priority as a growth-oriented company, we will be reinvesting some of those Q1 profits to push 2018 sales growth and market presence while still maintaining a healthy profit margin.

Performance of Business Units

Each of our operating units - ALD and WII - performed well. The Strategic Report and segmental information detailed in the Accounts provide details. Our franchise business, ALD, grew strongly. Royalty income grew approximately 7% to $5.9 million (2016: $5.5 million). Such growth remained consistent with historical growth despite the fact that the pool of royalty income was reduced as a result of franchise reacquisitions in Indianapolis and Washington D.C. Royalty growth translated into profits before tax for this segment growing by 17% to $1.4 million (2016: $1.2 million). Franchise-related activities, meanwhile, led by our business-to-business insurance channel and, including parts and equipment sales, also grew strongly doubling in sales to $3.6 million (2016: $1.7 million). Profits before tax in this segment grew strongly by 39% reaching $0.32 million (2016: $0.23 million).

Our corporate-run locations represent execution from both ALD (largely residential and commercial) and WII (largely municipal). ALD's US corporate-operated locations reached $5.9 million in sales growing 41% year over year (2016: $4.2 million). This segment showed a profit before tax margin on sales of 6% at $0.35 million. Profit margin in 2017 was down from 8% for 2016. ($0.32 million profits before tax on $4.2 million of sales). The reduction in margin was the result of increased spending on adding and training technicians to support 41% year over year top line growth.

WII's corporate-run locations are captured by segmental information on international corporate activities, which grew strongly. Revenue tripled year on year. (2017: $2.1 million vs. 2016: $0.7 million). Margins on 2017 international corporate sales were negative at $0.16 million. These resulted from accelerating investments to increase international corporate sales. Consistent with our priorities, the choice to accelerate international corporate sales was made to balance the critical mass of this business relative to our franchise business and US corporate-run locations. Our Franchise and US Corporate businesses achieved approximately $5.9 million in 2017 sales. As international corporate sales grow in terms of critical mass, WII should be better able to cross-sell municipal solutions to franchise and corporate-run locations which largely focus on residential and commercial as noted above.

In executing our growth plan, we are mindful of operating costs and strive to be efficient with our use of resources. Segmental information makes this clear. Unallocated head office costs and non-core costs were reduced by approximately 30% to $0.79 million in 2017 from $1.14 million in 2016.

Path Ahead

We do look at 2017 as a jumping off point. We made great strides in building a multinational growth platform that provides solutions to a big addressable worldwide market - water conservation. The concept of "platform" is especially relevant in that our installed base of approximately 200,000 residential, commercial and municipal customers across business units allows for opportunities to both cross-sell solutions and up-sell products and, as a result, continue to own the customer via a "One-stop Shop".

Through the date of this audit, we have continued to execute as we have in the past: Building on prior wins and remaining focused on our three operating priorities as outlined above. The Subsequent Events section of the Accounts provides a chronological recap. First, we grew our core business of ALD by executing for our existing insurance business channels and developing additional insurance company partners. We plan on adding national contracts during 2018 and 2019. Second, we added a layer of growth to ALD by cross-selling WII municipal solutions. We had wins across the US and even announced a major win in Sydney during Q1. Third, we continued to develop our technology profile with product partnerships announced with Flo Technologies and Tagasuaris, both of which incorporate artificial intelligence in their respective solutions. These partnerships build on our 2017 implementation of a new national Internet marketing technology. Finally, during Q1 we continued to execute our strategy of reacquiring franchisees in strategic geographies to accelerate ALD's growth. We strengthened our corporate presence in central California with the reacquisition of Bakersfield; we strengthened our corporate presence in the Midwest with the reacquisition of Louisville; and finally strengthened our presence in South Florida with a reacquisition that will lead to our corporate expansion into the Caribbean and Mexico - priority number three as stated above.

Our enhanced capital base enables us to accelerate our organic approach. To be sure, the organic approach has done well achieving 45% sales growth and 48% profits before taxes growth during 2017. We plan on leveraging our market-making presence across the United States with product partnerships and, perhaps, an acquisition that would supplement our "One-Stop Shop" business model. We believe this model to be highly scalable. In the 2016 Annual Report, we indicated that $20 million in sales was in sight. We finished 2017 at $17.6 million and significantly increased our level of profitability. We are confident on achieving the $20 million in sales level for Water Intelligence during this year and now set our sights on achieving the $25 million level in the near-term.

Dr. Patrick DeSouzaExecutive Chairman

16 May 2018

Business Review and Key Performance Indicators

The Chairman's Statement, on pages 3-6, 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 customers through the cross-sale of solutions across our business units and the up-sale of technology products to our installed base of customers.

The Water Intelligence platform has two wholly-owned subsidiaries: American Leak Detection (ALD) and Water Intelligence International (WII). These business units are distinguished, to some degree, by the amount of franchise-operated and corporate-operated business lines. 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 $80 million of System-wide sales to end-users that is expressed through royalty income from franchisees and direct sales from corporate operations. With its installed and growing base of residential customers, ALD can also distribute technology home services products to meet consumer demand.

WII, is our UK-based operation that the Group acquired in Q4 2016 to focus on municipal solutions given the world-wide problem of failing water infrastructure. WII is exclusively a corporate-run unit that will lead the Group's international expansion. WII has the capability to execute ALD service offerings and is currently doing so at our corporate-operated location in Sydney. WII also can cross-sell complementary municipal offerings to ALD.

The Group's strategy includes unlocking sales growth and shareholder value through acquisition including selectively converting franchises to corporate operated locations. In doing so, some amount of the $80 million in System-wide sales can be converted from royalty income to the Group's corporate P&L. As a byproduct of such acquisition-led growth, it is 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 nature of income from the franchise business, the Group is able to be efficient in its capital formation using both equity and debt. As a result, it is important that the Group manage to the right balance in allocating capital and to monitor net debt.

Six key performance indicators are used by the Board to monitor the above described business model: (i) growth in franchise royalty income, (ii) growth in franchise-related activities that include both the Group's business to business sales and sales of parts and equipment, (iii) growth in corporate-operated locations in the United States, (iv) growth in corporate activities located outside the United States, (v) non-core costs and (vi) net debt. These six indicators are reported to the board on a monthly basis and used to assist the board in the management of the business.

(i) Franchise Royalty Income. 

The continued growth of the core ALD franchise business is the foundation for the business strategy of the Group because of the recurring nature of its royalty stream. Royalty income is a key indicator of the health of the franchise business because it is derived from ALD's System-wide sales across the United States, Australia and Canada. As System-wide sales increase, the Board can decide whether to selectively reacquire franchises adding critical mass of revenue and earnings to the Group or to keep adding high margin royalty income. Royalty income in 2017 grew by 7% compared with 2016 despite 2017 reacquisitions which had the effect of reducing the eligible pool of royalty income. Moreover, profits before tax from this business line grew at a significantly higher pace at 17%. Such growth is attributable in part to the benefits arising from the Group's insurance channel. The Group has 89 franchises at the end of 2017, representing a decrease of 2 franchises (2016: 91) due to reacquisition as corporate-run locations

Growth in royalty income is as follows:

(ii) Franchise-related Activities. 

US franchise-related activities provide supporting evidence for strength of the core ALD business. Parts and equipment sales are an indication of franchisee reinvestment in growth in their own 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 sales footprint - an important aspect of competitive strategy. Finally, sales of franchise units represent the decision to develop a new territory through a franchisee. This line item, correspondingly, is also a reflection of the Group's priority with respect to adding corporate-operated locations in order to develop a territory. Revenue from franchise-related activities more than doubled compared to 2016 largely because of the growth of the Group's business-to-business channels. Such sales growth was also reflected in growth of profits before tax. Profits before tax grew 39% compared with 2016. Performance from franchise-related activities are as follows:

As discussed in the Chairman's Statement, the growth in business-to-business sales captures the additional jobs provided to our franchise system sourced from formal, centralized national insurance contracts, as opposed to, typical insurance jobs that all of our franchisees originate at a local level through local marketing.

(iii) US Corporate-Operated Locations. 

Corporate-operated locations complement the franchise business with marketing and execution support in developing territories. Performance of the US corporate-operated locations is an indication of the success of the Group's strategy to both selectively reacquire ALD franchises and to open new locations to meet increasing demand for our minimally invasive leak detection and repair solutions. Corporate-operated locations supplement System-wide sales from franchisees and add a critical mass of revenue and profits to the Group accounts. The Group directly operates 11 territories, an increase of 2 territory (2016: 9). Sales growth from corporate-operated locations grew strongly both organically and from two reacquisitions when compared with 2016. Profits before taxes also grew despite increased investment for accelerated growth. 2017 corporate-operated performance is as follows:

(iv) International Corporate-Operated Locations. 

The Group seeks to strengthen its multinational presence through its UK-based WII subsidiary. During Q4 2016 the Group added to its operating assets in the UK by acquiring NRW Utilities Ltd. and in Australia by acquiring a former ALD franchisee located in Sydney. 2017 represents a full-year of activity. Sales growth tripled. Negative profits stem from the Group's decision to accelerate investment in its WII business to gain critical mass to develop focus on international expansion relative to franchise and US corporate segments which each are approaching $6 million in sales.

(v) Non-Core Costs. 

During 2017, the Group incurred what are considered to be non-core costs relating to (i) its share reorganization to address legacy structures originating prior to the formation of the Group and (ii) transactions executed for the future growth of the business. As discussed herein, understanding non-core costs as distinct from continuing costs enables the Board to evaluate choices made to accelerate operations and scale through acquisition. In 2017, there were $198,000 of non-core costs as compared to $296,000 in 2016. Please see table below for details:

(vi) Net Debt. 

Management of financial resources is important for making various decisions regarding the rate of 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 environment, the cost of capital with respect to bank debt is less expensive as compared with equity. Despite the growth of annual royalty income to approach $6 million the Board takes a conservative approach to capital formation. Net debt increased to $1,255,000 at 31 December 2017 from $763,000 at 31 December 2016. Amounts owed under the term loan have been reduced to $1.22 million based on its amortization schedule.

As set forth in the Subsequent Event section, during Q1 2018 the Group raised approximately $5.75 million through an equity issuance and increased its bank financing availability by $1.75 million. The equity issuance eliminated net debt. The increase in bank financing availability remained in keeping with the Group's strategy on efficient capital formation to preserve equity from unnecessary dilution.

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, 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.

Other Risks

There is a risk that existing and new customer relationships and R&D will not lead to the expected sales growth. The Group is reliant on a small number of skilled managers. Further, the Group is reliant on effective relationships with its franchisees, especially in the US.

By order of the Board

Patrick DeSouzaExecutive Chairman

16 May 2018

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 2017.

Principal Activities

The Group is the leading provider of 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 on pages 23 to 29.

2017 was marked by the further development of the Group's multinational presence, especially in the UK and Australia. 88.1% of the Group's revenue in the year ended 31 December 2017 (2016: 94.4%) came from its wholly owned subsidiary American Leak Detection, Inc. ("ALD"), with the remaining 11.9% (2016: 5.6%) of revenue coming from its wholly-owned subsidiary, Water Intelligence International Limited ("WII"). Of the 11.9% revenue coming from WII, 66.75% relates to WII's UK business and 33.25% relates to WII's Australian business.

Going Concern

The Directors have prepared a business plan and cash flow forecast for the period to April 2019. 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 generated by its profitable US-based franchise business, ALD. The Directors believe that 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. 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. As noted in the Subsequent Events section, the Group increased its capital base by approximately $7.5 million in Q1 2018 through an equity issuance and an increase in availability from its bank credit facilities.

Research Design & Development

Expenditure on research and development, all of which was undertaken by third parties not related to the Group, was $10,752 (2016: $14,989). The Group is committed to increasing its R&D budget to meet anticipated market demands.

Dividends

The Directors do not recommend the payment of a dividend (2016: $nil).

Share Price

On 31 December 2017, the closing market price of Water Intelligence plc ordinary shares was 162.5 pence. The highest and lowest prices of these shares during the year to 31 December 2017 were 162.5 pence and 95.0 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 in the Outlook section of the Chairman's Statement on page 5.

Financial Risk Management

Financial risk management is outlined in the principal risks and uncertainties section of the Strategic Report on page 10.

Subsequent Events

On the 4 January 2018, the Company announced the signing and launch of the Company's second formal national contract with one of the top 5 insurance companies in the US. The agreement extends the Group's formal business-to-business channel. 

On the 10 January 2018, the Group announced two strategic partnerships to extend its technology/innovation profile. ALD is partnering with Flo Technologies, Inc, to provide nation-wide distribution and service capabilities for Flo's smart home water security and conservation system. The Group is partnering with Tagasauris, Inc. to develop new products for both video marketing and e-commerce. Both Flo Technologies and Tagasauris use artificial intelligence as part of their respective product functionality.

On the 11 January 2018, David Silverstone exercised a portion of his options holdings to subscribe for a total of 10,000 ordinary shares of 1p each at an exercise price of $0.67 per ordinary share. Subsequently, David Silverstone sold the 10,000 ordinary shares at a price of $2.65.

On the 26 February 2018, the Group announced a contract between WII's Sydney, Australia, corporate location and Hunter Water Corporation, a state-owned water company. This strategic contract enables WII to support ALD's Australian franchisees with additional municipal opportunities.

On 7 March 2018, the Group announced that it had strengthened its capital base in order to support its growth plans. First, it raised approximately $5.75 million through the issue of an aggregate of 2,171,320 new ordinary shares in a placing and subscription. Such equity issuance was oversubscribed. Second, the Group increased its working capital line with People's Bank by $1.75 million.

On 7 March 2018, the Group announced that it had made certain board changes to strengthen its execution capabilities. David Silverstone moved from executive director to non-executive director. John Weigold moved from non-executive director to executive director. Laura Hills was appointed as Non-Executive Director of the Company. Robert Mitchell resigned from the board to take an operating role to launch a renewables line of business for the Group.

On the 7 March 2018, the Group continued its growth strategy of selectively reacquiring some of its ALD franchises. It announced the reacquisition of its Louisville, Kentucky, franchise. Louisville, a strongly performing operation, is situated adjacent to the Indianapolis and Cincinnati corporate locations in the central Midwest of the United States. Together these locations form a strategic set of corporate resources to execute sales and support growth of franchisees throughout the Midwest. This cluster of corporate operated locations also better enables the Company to execute the launch of operations in Chicago during 2018.

On 15 March 2018, the Group announced the acquisition of its Bakersfield, California, franchise. The Group plans to expand operations in this territory rapidly given the size of the opportunity and importance of water to this leading center for agriculture in the US.

On 15 May 2018, the Group announced the acquisition of its South Florida franchise. The Group plans to expand operations in this territory rapidly given the strength of its existing corporate operations immediately to the north in Ft. Lauderdale / Miami. The Group plans to launch international expansion efforts to the Caribbean and Mexico from its expanded Miami operation.

The provisional fair values of the acquisitions subsequent to year end are detailed below:

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 (Appointed 19 January 2017, Non-Executive Director until 7 March 2018)

Non-Executive Directors

Michael Reisman

Laura Hills (Appointed 6 February 2018)

David Silverstone (Executive Director until 7 September 2017)

Robert Mitchell (Resigned 6 February 2018)

The biographical details of the Directors of the Company are set out on the Company's website www.waterintelligence.co.uk 

Directors' emoluments

Directors' interests

The Directors who held office at 31 December 2017 and subsequent to year end had the following direct interest in the ordinary shares of the Company at 31 December 2017 and at the date of this report, excluding the shares held by Plain Sight Systems, Inc.:

*Included in the total above, Patrick DeSouza received (i) 600,000 Partly Paid Shares during 2016 and (ii) 750,000 in March 2018. 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

In order 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:

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 Clark Whitehill 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 each director is aware, there is no relevant audit information of which the Company and the Group's auditor is unaware; and

· each 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 DeSouzaExecutive Chairman

 16 May 2018

The Board is committed to proper standards of Corporate Governance, managing the Group in an efficient, effective, entrepreneurial and ethical manner for the benefit of shareholders over the longer term.

Under the AIM listing rules, the Company is not obliged to implement the provisions of the UK Governance Code. However, the Company is committed to considering, where appropriate, the principles of good governance contained in the UK Governance Code for a company of its size and nature.

The Company has established an audit committee, 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, and a remuneration committee, responsible for reviewing the performance of the executive director(s) and determining the level of remuneration and basis of service agreement(s). The Remuneration Committee also determines the payment of any bonuses to the executive director(s) and the grant of options.

Takeovers and Mergers

The Company is subject to The City Code on Takeovers and Mergers.

Board

The Company is run by the Board of Directors, which comprises two executive and three non-executive directors.

The Board meets regularly and is responsible for the Group's corporate strategy, monitoring financial performance, approval of capital expenditure, treasury and risk management policies. Board papers are sent out to all directors in advance of each Board meeting including management accounts and accompanying reports from those responsible.

Non-executive directors are able to contact the Executive Directors at any time for further information.

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 members of the Committee are David Silverstone and John Weigold. 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 Laura Hills. 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.

Internal Control

The Board is responsible for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve the business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The system of internal financial control comprises those controls established to provide reasonable assurance of: The safeguarding of assets against unauthorised use or disposal; and

· The maintenance of proper accounting records and the reliability of financial information used within the business and for publication

The key procedures of internal financial control of the Group are as follows:

· The Board reviews and approves budgets and monitors performance against those budgets on a monthly basis. Variances are fully investigated

· The Group has clearly defined reporting and authorisation procedures relating to the key financial areas

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.

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

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 2017, which comprise:

· the Group statement of comprehensive income for the year ended 31 December 2017;

· the Group and parent company statements of financial position as at 31 December 2017;

· 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 2017 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 $90,000, 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 $3,600. 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.

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 set out on page 18, 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 Clark Whitehill LLP

Statutory Auditor

St Brides House

10 Salisbury Square

London

EC4Y 8EH

16 May 2018

The results reflected above relate to continuing activities.

The accompanying notes on pages 30 to 63 are an integral part of these financial statements.

The financial statements of Water Intelligence plc, company number 03923150, were approved by the board of Directors and authorised for issue on the 16 May 2018. They were signed on its behalf by:

Patrick De SouzaExecutive Chairman

The accompanying notes on pages 30 to 63 are an integral part of these financial statements.

The loss for the financial year in the financial statements of the parent Company was $601,301 (2016: costs $621,594), which related entirely to Plc costs. Following the fundraising in March 2018, there is no longer a balance of Shares held in treasury.

The financial statements of Water Intelligence plc, company number 03923150, were approved by the board of Directors and authorised for issue on the 16 May 2018. They were signed on its behalf by:

Patrick De SouzaExecutive Chairman 

The accompanying notes on pages 30 to 63 are an integral part of these financial statements.

 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 on pages 30 to 63 are an integral part of these financial statements.

The accompanying notes on pages 30 to 63 are an integral part of these financial statements

The accompanying notes on pages 30 to 63 are an integral part of these 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 solutions (services and products) for residential, commercial and municipal customers.

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 201 Temple Chambers, 3-7 Temple Avenue, EC4Y 0DT.

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 May 2018.

2 Adoption of new and revised International Financial Reporting Standards

No new IFRS standards, amendments or interpretations became effective in 2017 which had a material effect on these Financial Statements.

At the date of approval of these Financial Statements, the Directors have considered IFRS Standards and Interpretations, which have not been applied in these Financial Statements, were in issue but not yet effective. The Group has not early adopted these amended standards and interpretations. The Directors have completed their evaluation of the impact of IFRS9 in respect of the impact of the expected loss model on the impairment of receivables, and IFRS15 in respect of the revenue recognition for service revenue. The review for IFRS 15 included consideration of each of the business lines and the relevant contracts with customers. The Directors have concluded that the adoption of these standards and interpretations from 1 January 2018 does not have a material impact on the Group's Financial Statements. The Directors are currently evaluating the impact of IFRS16 in respect of leases, to be adopted from 1 January 2019, and whilst this exercise is not concluded, the Directors do not presently anticipate that the adoption of this standard and interpretation will have a material impact on the Group's Financial Statements in the periods of initial application.

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.

3 Significant accounting policies continued

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 April 2019. The forecast contains certain assumptions about the level of future sales and the level of margins achievable. As noted in the Subsequent Events section, the Group increased its capital base by approximately $7.5 million in Q1 2018 through an equity issuance and an increase in availability from its bank credit facilities.

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 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.

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 2017. 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 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 2017 is $601,301 (2015: $621,594).

Inventories

The inventories, consisting primarily of equipment, parts, and supplies, are recorded at the lower of cost (FIFO) or market value.

3 Significant accounting policies continued

Provisions

A provision shall be recognised only in the event that certain criteria are met, these being:

· An obligation has arisen as a result of the Group or Company's past activities;

· A cash outflow will be required to settle the obligation; and

· A reliable estimate can be made of the obligation.

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 ("the functional currency") which is considered by the Directors to be Pounds Sterling (£) for the Parent Company and US Dollars ($) for ALDHC. The Financial Statements have been presented in US Dollars which represents the dominant economic environment in which the Group operates and is the functional currency of the Group. The effective exchange rate at 31 December 2017 was £1 = US$1.2491 (2016: £1 = US$1.2305). The average exchange rate for the year 31 December 2017 were £1 = US$1.2880 (2016: £1 = US$1.3562).

(ii) 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.

3 Significant accounting policies continued

(iii) 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 equity.

Leases

Assets held under finance leases are initially recognised as assets at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lesser is included in the consolidated statements of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Company's general policy on borrowing costs.

Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Revenue recognition

Revenue is recognised at the fair value of the consideration received or receivable. Specific policies set forth below reflect the nature of the business line.

Franchise royalty income

In particular, the Group receives royalties from franchisees in various percentages of their gross monthly sales. Royalties are paid monthly and recognised under the accrual method of accounting.

Franchise related activities

Service revenue is recognised when the services are rendered and complete. This also applies to services rendered by any Business to Business channel.

Advance collections from franchise sales are included in deferred income until all requirements are performed.

3 Significant accounting policies continued

US Corporate operated locations

Sales of other goods and products, in particular corporate run stores, are sold by the Group are recognised at fair value of the consideration received or receivable following delivery of the goods or services.

International corporate activities

For the majority of customers, revenue is recognised as invoiced, as the work is completed in the same reporting period. For one customer, where the work is performed in the reporting period prior to invoicing, revenue is recognised on an accruals basis in the reporting period in which the work is performed.

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. The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment.

Cash and cash equivalents

Cash and cash equivalent 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

Financial assets are assessed for indicators of impairment at each year end. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

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 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. 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 definite estimated useful lives of the assets as follows:

Covenants not to compete 3

Customer lists 5

Trademarks 20

Patents 10

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 recognised 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, carrying value of the goodwill, the carrying value of the other intangibles, the carrying value of the investments, and the deferred taxation provision. 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 and Business-to-Business sales), (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. In 2017, 88.1% (2016: 94.4%) of its revenue came from ALD, which includes royalties from franchisees and corporate-operated locations, with the remainder coming from WII which is comprised of a UK-based municipal business 7.9% (2016: 5.6%), and an Australian business - 4%.

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.

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 U.S. franchises and corporate operated locations and international franchises that are located in Australia and Canada. Meanwhile, WII has corporate operated activities outside the U.S. We may also regroup the same information into US and Outside the US to capture the Group's effort to be multinational company. As shown below, the biggest change between 2017 and 2016 has been the growth of International/Outside the US to $2.3 million from $914,262.

Total Revenue

5 Expenses by nature

The Group's operating profit has been arrived at after charging:

The Group auditors are not the auditors of the US subsidiary companies. The fees paid to the auditor of the US subsidiary companies were $125,445 (2016: $92,085) for the audit of these companies and $nil (2016: $nil) for other services.

6 Employees and Directors

The Directors of the Company are considered to be the key management of the business.

Information regarding Directors emoluments are as follows:

The highest paid Director received emoluments of $450,000 (2016: $447,019).

The average number of employees (including Directors) in the Group during the year was:

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:

Fair value of share options

During the year, the Group did not grant any options.

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 0.2528p to 0.3194p. This is based on risk-free rates ranging from 0.239% to 0.369% and volatility ranging from 62% to 69%.

The Black Scholes calculations for the options granted during 2016 and 2017 resulted in a charge of $62,397 (2016: $37,459) which has been expensed in the year. As the options granted prior to 2016 had no vesting period, none of the charge expensed in 2017 related to options granted prior to 2016.

The weighted average remaining contractual life of the share options is 7.33 years (2016: 8.34 years). Options arrangements that exist over the Company's shares at year end and at the date of the report are detailed below: