Water Intelligence
Annual Report 2016

Plain-text annual report

Water Intelligence plc Group Annual Report and Financial Statements for the Year Ended 31 December 2016 Company number 03923150  Group Annual Report and Financial Statements for the year ended 31 December 2016 Contents Page 2 Company Information 3 Chairman’s Statement 6 Strategic Report 10 Directors’ Report 14 Corporate Governance Statement 16 Statement of Directors’ Responsibilities 17 Independent Auditors’ report to the members of Water Intelligence plc 19 Consolidated Statement of Comprehensive Income 20 Consolidated Statement of Financial Position 21 Company Statement of Financial Position 22 Consolidated Statement of Changes in Equity 23 Company Statement of Changes in Equity 24 Consolidated Statement of Cash Flows 25 Company Statement of Cash Flows 26 Notes to the Financial Statements 59 Notice of Annual General Meeting Water Intelligence plc 1  Company Information Directors & Advisers Directors Executive Chairman Patrick DeSouza David Silverstone Executive Director Robert Mitchell Non-Executive Director Michael Reisman Non-Executive Director Non-Executive Director John Weigold Company Secretary and Registered Office Liam O’Donoghue 201 Temple Chambers 3-7 Temple Avenue London EC4Y 0DT Company number Registered in England and Wales number 03923150 Nominated adviser and broker finnCap Ltd Independent Auditor Registrar Bankers 60 New Broad Street London EC2M 1JJ Crowe Clark Whitehill LLP St Brides House 10 Salisbury Square London EC4Y 8EH Neville Registrars Limited Neville House 18 Laurel Lane Halesowen B63 3DA Barclays Bank PLC People’s United Bank 1 Churchill Place London E14 5HP 265 Church Street New Haven CT 06510 USA Water Intelligence plc 2  Chairman’s Statement Introduction As discussed in last year’s Chairman’s Statement, we are building a multinational growth-oriented company that provides minimally-invasive solutions to the worldwide problem of water-loss from leakage in pipes whether residential, commercial or municipal. Our ambitious plan is underway and, once again, we are pleased to report strong results for 2016 led by a 38% growth in sales. In fact, we stretched our sales targets during 2016 (leading to revised analyst estimates three times) combining both organic growth and growth through acquisition. In fact, during 2016 we successfully executed eight transactions: three corporate finance transactions to add wherewithal and five business acquisitions (3 in the US, 1 in the UK and 1 in Australia to add critical mass to the Group). We are pleased that the market showed confidence in our efforts with the share price building during the course of the year, including after an oversubscribed capital raise that was priced at a premium to the prevailing market price. Given our Q1 unaudited results, we anticipate that our momentum will continue during 2017, if not accelerate. Meeting Our Objectives In advancing our goal of developing a multinational growth-oriented company, we have focused on three objectives: strengthening our multinational execution, achieving growth and reinforcing our corporate finance capabilities to fuel the first two objectives. First, as always, we start with achieving the key components of our growth plan. We are committed to growing our core franchise business – American Leak Detection – that executes approximately $75 million in System-wide sales. From that expanding sales network, we look to selectively reacquire franchisees both to aggregate revenue and earnings directly onto the Water Intelligence accounts and to set-up regional corporate operations to help grow our franchise network further. As discussed in the Trading Results section below, we achieved this primary objective with royalty income from franchisee sales growing by 6.2% and with corporate store sales jumping by 61.3%. Moreover, with our 2016 acquisitions, we strengthened corporate execution capabilities in the Northeast and Midwest of the United States. Second, to better position ourselves for the multinational aspect of growth, we sought to expand existing corporate operations in the UK and Australia. We established a much stronger presence in the UK through the acquisition of NRW Utilities Ltd (“NRW”) in September 2016. NRW had previously served as our subcontractor for leak detection work for UK utilities such as Thames Water. NRW is fast growing. During the first seven months as part of the Group, NRW has contributed approximately $1 million of sales (during Q3/4 2016 and Q1 2017). Meanwhile, with respect to Australia, we acquired a former American Leak Detection franchisee in Sydney. Our new corporate location will be used not only to grow existing municipal and residential work in Sydney but also to support and grow American Leak Detection’s five other franchisees in Australia. Water loss is a big problem in Australia and we are excited about the opportunity to expand operations and perhaps sell additional franchises. In executing our Australia plan, we recognized one important collateral benefit of the NRW acquisition. NRW adds significant operational leadership for our worldwide efforts. Given NRW’s prior experience in Australia, we are confident about our plan’s long-run success. Third, in order to sustain our efforts to be a multinational growth company, we sought to improve the Company’s corporate and capital profile. We launched the 2016 plan in Q1 with a share reorganization to address legacy matters from when Water Intelligence first came to AIM through its reverse acquisition of Qonnectis Plc. Because of the share reorganization, we were able to eliminate unnecessary reserves and create the opportunity for dividends for our shareholder base in the future if deemed compatible with the yearly plan. After five acquisitions during 2016, we ended 2016 by supplementing our war chest with both equity and commercial bank financings to provide us with additional resources and relationships with which to accelerate our business plan in 2017 and beyond. During November, we raised approximately $1 million from investors on both sides of the Atlantic. During December, we refinanced our existing term loan reducing our yearly amortization for the next four years by approximately 30% thus freeing-up cash for reinvestment. We have also expanded our lines of credit at attractive interest rates including adding a new line of $1.5 million for further acquisitions. Our calibrated corporate finance efforts have put us on a stronger footing with minimum shareholder dilution. Importantly, Water Intelligence’s net debt reduced by approximately 25% from 2015 to $763,000. Water Intelligence plc 3  Chairman’s Statement continued Executing against these three objectives has enabled us to take a significant step forward in building a valuable company whose growth path is sustainable. As a result of our efforts, net asset value (equity attributable to shareholders) increased 34% from 2015 to $5.15 million. Trading Results As discussed in the Strategic Report, we displayed growth along every key indicator of the Company. During 2016, overall sales grew 38% to $12.18 million from $8.84 million. In fact, the rate of sales growth accelerated during 2016 as growth for 2015 was 23% over that of 2014. We believe that this trend of acceleration is continuing during Q1 2017. Within overall sales growth, franchise royalty growth remained steady at 6.2% reaching $5.54 million (2015: $5.22 million and 6% growth). We are pleased with this solid outcome given that royalty growth would have been higher had we not removed some royalty income from the pool by reacquiring some franchises. We will continue to build our American Leak Detection brand and System-wide sales through the development of national channels. Our insurance company partners continue to value our precision leak detection services across the US in an effort to minimize claims. During Q1 2017 we signed our first formal national contract with a major carrier. We are currently in the midst of its implementation. We look to gaining additional national accounts in insurance and property management. Moreover, with the addition of NRW’s professional expertise in municipal work, we are looking to taking advantage of trends in infrastructure spending across the US. Corporate-operated leak detection services during 2016 jumped to $4.22 million showing a 61.3% growth over 2015 results of $2.61 million. Such growth was achieved mostly organically from growing existing corporate stores and from 2016 acquisitions of franchise locations in South New Jersey, Cincinnati and Northwest Arkansas. 2015 franchise reacquisitions all showed strong organic sales growth during 2016: New York (120% growth to approximately $500,000), Miami (86% growth to approximately $1.19 million) and Detroit (40% growth to approximately $550,000). One additional indicator of our ability to add value over time when converting franchise operations to corporate operations is the contribution to profits from corporate-run operations (see Strategic Report). Profits from corporate stores increased 119% to $324,000 in 2016 from $148,000 in 2015. Much like we did with our 2015 reacquisitions, we are increasing spending for our 2016 reacquisitions to fuel long-run sustainable growth. As noted above, our September acquisition of NRW has shown promise and brings an additional professional dimension to our offerings, especially with respect to municipal work. For the 4 months of 2016 that it was part of the Group, NRW achieved approximately $550,000 of sales and $95,000 of profits. Its consistent growth has continued during Q1 2017. We are now exploring our next national sales channel bidding for municipal work and taking advantage of not only our franchisees’ existing distribution across the US but also NRW’s operational leadership. Finally, product and equipment sales also continued to grow. This indicator is important because it shows the commitment of our franchisees to invest in future growth. Product and equipment sales grew 14.1% to approximately $1.05 million. Overall, revenue from franchise related activities grew 79% to $1.73 million, due to the sales from the new Business to Business channel of $665,000 in addition to the increase in product and equipment sales. With respect to our profits performance, our strong rate of sales growth has required us to significantly increase our expense base so that our growth trajectory can be sustained over the long-run. However, because of the dual sources of our growth – organic and by acquisition – we need to make certain distinctions to present an accurate picture of our performance. For organic growth, as we unlock value from newly acquired corporate stores, we need to increase headcount, marketing and equipment expense ahead of realizing more sales. We remain confident, given market demand that profits will catch up. As noted above, our increased investments for corporate stores acquired during 2015 have produced increasing contribution to profits for 2016. These expenses are simply part of continuing activities. By contrast, for franchise reacquisition-related growth, certain significant transactional costs such as legal fees, while non-recurring, are treated as an operating expense under IFRS accounting. To get an accurate picture of operational profitability, we have Water Intelligence plc 4  Chairman’s Statement continued identified such expenses in the Strategic Report as “One-Time” costs where they relate to investment or capital reorganization. In this light, under IFRS, operating profits for 2016 declined to $929,720 from $1,090,216 during 2015. On the other hand, if one adds back $296,000 (2015: $11,000) of One-Time costs, operating profits from continuing activities would have been $1,225,720 for 2016 or 11.3% growth. Profits before tax declined in 2016 to $772,471 from $972,440 during 2015. When profits before tax is adjusted for One-Time Costs, then we achieved $1,068,471 during 2016 or a 8.6% improvement over Profits before tax adjusted in the same way of $983,440 during 2015. Outlook We are sticking to our “multinational growth” plan during 2017. As an operating matter, we are pleased with 38% sales growth for 2016 especially given our 2015 report of 23% sales growth. This pathway looks to be accelerating during Q1 2017. Our next milestone is to pass $20 million in sales and that marker is within sight. We are also delighted to have added the leadership of UK-based NRW to help manage global opportunities. Meanwhile, as a balance sheet matter, we are pleased to have reduced net debt by approximately 25% and to have increased net asset value by 34%. As we grow, we are mindful of the various investments that we continually need to make in people and technology to reinforce our ability to execute and to sustain our growth trajectory. During Q1, we launched a new website for American Leak Detection that has state of the art social media content management and Internet lead generation. The web site will also link to our national accounts such as insurance companies. Our franchisees are really pleased. We will be rolling-out the Canada, Australia and UK versions during Q2 and Q3. Such investment will enhance our brand and our ability to communicate our value proposition. Over the longer run, we are beginning to see the renewables market as a natural extension for our range of water (potable and non-potable) solutions and customers, especially given the operational reach of NRW. Because of the opportunities for growth, we have decided that the time is not appropriate to issue a dividend even though we executed the share reorganization to give us the flexibility to do so. We should reinvest our resources in the near-term to create a much more valuable company for the shareholders. The market seems to agree. We are excited to seize the opportunities ahead with the strong alignment of board, corporate and franchise team members, shareholders and business partners. Dr. Patrick DeSouza Executive Chairman 15 May 2017 Water Intelligence plc 5  Strategic Report Business Review and Key Performance Indicators The Chairman’s Statement, on pages 3 to 5, provides an overview of the year and the outlook for the Water Intelligence plc and its subsidiaries, referred to as the Group. From a performance perspective the key features of 2016 were the continued growth strategy in the core business, investments and acquisitions that resulted in increased sales and corresponding costs across the Group, one-off expenditure and a marginally declining profit as acquisitions are integrated into the business and acquisition and investment costs are incurred. The financial position of the Group at the end of 2016 has strengthened with an increased net asset position reflecting the investments made, increased trading activity and growth. Net debt has reduced and there is a more simplified equity and reserves structure following the share reorganization in 2016. Six key performance indicators are used by the board to monitor the business: (i) growth in franchise royalty income, (ii) performance of Corporate-owned stores, (iii) growth from US franchise-related activities, (iv) growth from international corporate activities, (v) one-time 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. Franchise Royalty Income. (i) The continued growth of the core American Leak Detection (“ALD”) franchise business is important to the business strategy of Water Intelligence. Royalty income is a key indicator of the health of the franchise business because it is derived from ALD’s system-wide sales. As System-wide sales increase – currently approximately $75 million - 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 compared to 2015 grew despite 2016 reacquisitions which had the effect of reducing royalty income. The Group has 96 franchises at the end of 2016 which represents a decrease of 3 franchises (2015: 99). All three of the decreases were the subject of reacquisition. Growth in royalty income is as follows: Total USA International Total Group Royalty Income Profit/(loss) before tax (see note 4) Year ended 31 December 2016 $'000 5,312 231 5,543 1,219 Year ended 31 December 2015 $'000 4,994 227 5,221 1,186 Change % 6% 2% 6% 3% Corporate Owned Stores. (ii) Performance of the US corporate-run stores is an indication of the success of the Group’s strategy to selectively reacquire franchises and add critical mass of revenue and earnings to the Group accounts. The Group directly operates 10 territories, an increase of 4 territories (2015: 6). 2015 corporate store performance is as follows: Revenue Profit/(loss) before tax (see note 4) Year ended 31 December 2016 $'000 4,217 324 Year ended 31 December 2015 $'000 2,614 148 Change % 61% 119% Water Intelligence plc 6  Strategic Report continued Franchise-related Activities. (iii) 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. A new consideration, Business-to-Business channels such as insurance and property management represent national customers and are an indication that these customers consider ALD a nationwide system – an important aspect of competitive strategy. Finally, franchise sales are a reflection of the Group’s priority with respect to adding corporate stores. Revenue from Franchise-related Activities compared to 2015 as follows: Parts and equipment sales Business to Business sales Franchise sales Total Revenue from US Other Activities activities Profit/(loss) before tax (see note 4) Year ended 31 December 2016 $'000 1,050 665 17 1,732 227 Year ended 31 December 2015 $'000 920 - 49 969 126 Change % 14% 100% (65%) 79% 79% International Corporate Activities. (iv) The Group seeks to strengthen its multinational presence. With the establishment of Group corporate operations in the UK and Australia, revenue from UK and international corporate activities compared to 2015 as follows: NRW Sydney Water Intelligence International Total Revenue from UK and International Corporate Activities Profit/(loss) before tax (see note 4) Year ended 31 December 2016 $'000 540 43 101 684 139 Year ended 31 December 2015 $'000 - - 38 38 Change % 100% 100% 62% 1700% (70) 299% One-Time Costs. (v) During 2016, the Group has incurred what are considered to be one-off non-operational costs relating to the share reorganization and linked to the investments/acquisitions made for the future benefit of the business. Because transactions are part of the Group’s growth strategy (8 during 2016), understanding one-time costs as distinct from costs from continuing activities is important. In 2016, there were $296,000 of one-time costs. During 2015, there were $11,000 of one-time costs. Please see table below for details: Share reorganization and capital raising Investment in University of Chicago R&D Legal costs of acquisitions Imputed interest due to deferred acquisition payments Total Water Intelligence plc 7 Year ended 31 December 2016 $’000 79 25 151 41 296  Strategic Report continued Net Debt. (vi) Management of financial resources is important for making various decisions regarding the rate of growth as indicated in items (i) through (v). Net debt decreased to $763,000 at 31 December 2016, from $1,019,000 at 31 December 2015. Amounts owed under the term loan have been reduced based on its amortization schedule to $1,600,000. Group Line of credit for working capital Term loan Less: Cash Held in US Dollars Held in £ Sterling Held in AU Dollars Total Net Debt Year ended 31 December 2016 $'000 252 1,568 1,820 601 397 59 1,057 763 Year ended 31 December 2015 $'000 - 2,050 2,050 1,007 24 - 1,031 1,019 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 and the Company had no material foreign exchange transactional exposure at 31 December 2016. 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 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. Water Intelligence plc 8  Strategic Report continued By order of the Board Patrick DeSouza Executive Chairman 15 May 2017 Water Intelligence plc 9  Directors’ Report The Directors present their report on the affairs of Water Intelligence plc (the “Company”) and its subsidiaries, referred to as the Group, together with the audited Financial Statements and Independent Auditors’ report for the year ended 31 December 2016. 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 19 to 25. 94.4% of the Group's revenue in the year ended 31 December 2016 (2015: 99.6%) came from its wholly owned subsidiary American Leak Detection, Inc. (“ALD”), with the remaining 5.6% (2015: 0.4%) of revenue coming from its wholly-owned subsidiary Water Intelligence International Limited (“WII”), (formerly ALD International Limited). Going Concern The Directors have prepared a business plan and cash flow forecast for the period to May 2018. The forecast contains certain assumptions about the level of future sales and the level of margins achievable. These assumptions are the Directors’ best estimate of the future development of the business. The Directors acknowledge that the Group in the near-term is funded mainly on cash generation by its profitable 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. Research Design & Development Expenditure on research and development, all of which was undertaken by third parties not related to the Group, was $14,989 (2015: $13,878). The Group is committed to increasing its R&D budget to meet anticipated market demands. The Group also spent $25,000 during 2016 to access research on water problems at the University of Chicago. Dividends The Directors do not recommend the payment of a dividend (2015: $nil). Share Price On 31 December 2016, the closing market price of Water Intelligence plc ordinary shares was 0.95 pence. The highest and lowest prices of these shares during the year to 31 December 2016 were 0.98 pence and 0.51 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. Water Intelligence plc 10  Directors’ Report continued Financial Risk Management Financial risk management is outlined in the principal risks and uncertainties section of the strategic report on page 6. Subsequent Events On the 9 January 2017, the Group announced it had completed the final purchase of all remaining shares owned by certain former minority shareholders of ALD, pursuant to rights granted to the Minority Shareholders at the time of the acquisition of ALD by the Company. The Minority Shareholders exercised their rights to sell 99,936 Consideration Shares to the Company at a price of 75 pence per Consideration Share. On the 19 January 2017, the Group announced it had appointed John F. Weigold as Non-Executive Director. On the 6 February 2017, the Group announced it had signed and launched its first formal national contract with one of the top five insurance companies in the US to provide adjusters a trusted partner to pinpoint water leaks and minimize collateral damage claims from residences and businesses. On the 9 February 2017, the Group announced it had drawn down on its Acquisition Line of Credit (“ALOC”) from People’s Bank. The Company drew approximately $140,000 of the $1.5 million ALOC to pay partners of NRW Utilities Ltd. Under the terms of the ALOC, the Company’s payments will be interest only on the amount drawn until further draws are made. As a result, $1.36 million remained under the ALOC. On 1 May 2017, the Group drew $150,000 of its ALOC to pay amounts due with respect to the reacquisitions of Detroit (2015) and Cincinnati (2016). As a result, $1.21 million remained under the ALOC. On 8 May 2017, the Group announced the opening of a corporate-operation in Washington D.C. 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 David Silverstone Non-Executive Directors Stephen Leeb (Resigned 22 August 2016) Robert Mitchell Michael Reisman John Weigold (Appointed 19 January 2017) The biographical details of the Directors of the Company are set out on the Company’s website www.waterintelligence.co.uk Water Intelligence plc 11 Directors’ emoluments 2016 Executive Directors P DeSouza D Silverstone Non-Executive Directors S Leeb M Reisman R Mitchell Directors’ Report continued Salary, Fees & Bonus Benefits Redundancy $ 447,019 47,000 21,000 21,000 108,189 644,208 $ - - - - - - $ - - - - - - 2015 Salary, Fees & Bonus Benefits Redundancy Executive Directors P DeSouza D Silverstone Non-Executive Directors S Leeb M Reisman R Mitchell $ $ 367,107 105,353 37,383 - 20,853 20,853 41,451 - - - 555,617 37,383 $ - - - - - - Total $ 447,019 47,000 21,000 21,000 108,189 644,208 Total $ 404,490 105,353 20,853 20,853 41,451 593,000 Directors’ interests The Directors who held office at 31 December 2016 had the following direct interest in the ordinary shares of the Company, excluding the shares held by Plain Sight Systems, Inc.: Patrick DeSouza* Number of shares at 31 December 2016 2,842,110 % held at 31 December 2016 24.77% Michael Reisman* *Patrick DeSouza received 600,000 Partly Paid Shares during the year, these will not be admitted to trading or carry any economic rights until fully paid. 166,068 1.45% Stephen Leeb sold his 73,600 shares back to Water Intelligence plc; these are held in treasury. *Patrick DeSouza, Michael Reisman and Stephen Leeb 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 announced at the time of the Reverse Acquisition that the share option scheme issued to ALD employees was to be replaced. This action was completed in 2014. Details of the current scheme are set out in Note 7. Water Intelligence plc 12  Directors’ Report continued 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: Plain Sight Systems, Inc. Chase Nominees Limited George Yancopoulos Principal Nominees Limited Amati VCT BNY (OCS) Nominees Limited Hargreave Hale Nominees Limited Number of shares % held 21.18% 2,430,000 4.42% 507,150 4.11% 471,698 3.93% 451,490 3.65% 419,290 3.45% 395,370 3.10% 356,225 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. The 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 that director is aware, there is no relevant audit information of which the Company and the Group's auditor is unaware; and that director has taken all the steps that ought to have been taken as a director in order to be aware of any relevant audit information and to establish that the Company an d the Group's auditor is aware of that information. By order of the Board Patrick DeSouza Executive Chairman 15 May 2017 Water Intelligence plc 13  Corporate Governance continued 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 (formerly the Combined 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. As the business grows and becomes more complex it is anticipated that the Board will be added to. 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 David Silverstone, Executive Director, is Chairman of the Audit Committee. The other members of the Committee are Robert Mitchell 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 Robert Mitchell. 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. Water Intelligence plc 14  Corporate Governance continued 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. Water Intelligence plc 15  Statement of Directors’ Responsibilities 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 there extends the Financial Statements contained ongoing integrity the to of Water Intelligence plc 16  Independent Auditors’ report to the members of Water Intelligence plc We have audited the Group and Parent Company Financial Statements of Water Intelligence plc for the year ended 31 December 2016 (the “Financial Statements”), which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Cash Flows, together with the related notes, numbers 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company Financial Statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Group's members, as a body, in accordance with Part 3 of Chapter 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 Group's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully under ‘Statement of Directors’ Responsibilities’ on page 16, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB) Ethical Standards for auditors. Scope of the audit of the Financial Statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on Financial Statements In our opinion: – – – – the Financial Statements give a true and fair view of the state of the Group’s and the Parent Company’s affairs as at 31 December 2016 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 the 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. Water Intelligence plc 17  Independent Auditors’ report to the members of Water Intelligence plc continued 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 company and its environment obtained in the course of the audit, we have not identified material miss tatements 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. Nigel Bostock Senior Statutory Auditor For and on behalf of Crowe Clark Whitehill LLP Chartered Accountants Statutory Auditor St Brides House 10 Salisbury Square London EC4Y 8EH 15 May 2017 Water Intelligence plc 18  Consolidated Statement of Comprehensive Income for the year ended 31 December 2016 Revenue Cost of sales Gross profit Administrative expenses – Other Income – Share-based payments – Amortisation of intangibles – Other administrative costs Total administrative expenses Operating profit Finance income Finance expense Profit before tax Taxation expense Profit for the year Other Comprehensive Income Items that may be reclassified subsequently to profit & loss Exchange differences arising on translation of foreign operations Income attributable to Non-Controlling Interest Total comprehensive profit for the year Profit per share Basic Diluted Notes 4 Year ended 31 December 2016 $ Year ended 31 December 2015 $ 12,175,237 8,842,349 (1,667,004) 10,508,233 (799,441) 8,042,908 7 13 5 5 8 9 10 11 11 24,621 (37,459) (295,606) (9,267,496) 29,394 (35,232) (270,492) (6,676,362) (9,575,940) (6,952,692) 932,293 12,264 (172,086) 772,471 (294,098) 1,090,216 17,326 (135,102) 972,440 (391,687) 478,373 580,753 (116,548) (37,029) 6,296 - 368,121 543,724 Cents Cents 4.5 4.4 5.5 5.5 The results reflected above relate to continuing activities. The profit and other comprehensive profit for the prior year was wholly attributable to equity holders of the Parent Company, Water Intelligence plc. The accompanying notes on pages 26 to 58 are an integral part of these financial statements. Water Intelligence plc 19  Consolidated Statement of Financial Position as at 31 December 2016 Notes ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Trade and other receivables Current assets Inventories Trade and other receivables Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Equity attributable to holders of the parent Share capital Share premium Capital redemption reserve Merger reserve Share based payment reserve Other reserves Reverse acquisition reserve Retained earnings/ (loss) Equity attributable to Non-Controlling interest Non-controlling Interest Non-current liabilities Borrowings Deferred consideration Deferred tax liability Current liabilities Trade and other payables Borrowings Deferred consideration TOTAL EQUITY AND LIABILITIES 13 13 14 17 16 17 18 21 21 21 23 12 20 19 23 12 2016 $ 2015 $ 2,906,531 2,518,451 436,928 42,445 5,904,355 327,501 2,206,079 1,056,888 3,590,468 9,494,823 1,469,027 2,680,523 107,448 37,576 4,294,574 275,204 1,350,804 1,031,454 2,657,462 6,952,036 64,257 926,787 - 1,001,150 72,691 (264,643) (27,758,088) 31,108,642 5,150,796 12,733,307 4,829,377 6,517,644 8,501,150 35,232 (148,095) (27,758,088) (874,022) 3,836,505 93,704 - 1,327,593 612,225 305,081 2,244,899 950,725 492,453 562,246 2,005,424 9,494,823 1,459,027 277,208 64,449 1,800,684 663,616 591,450 59,781 1,314,847 6,952,036 These Financial Statements were approved and authorised for issue by the Board of Directors on 15 May 2017 and were signed on its behalf by: Patrick De Souza Executive Chairman The accompanying notes on pages 26 to 58 are an integral part of these financial statements. Water Intelligence plc 20  Company Statement of Financial Position as at 31 December 2016 ASSETS Non-current assets Investment in subsidiaries Current assets Trade and other receivables Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Equity attributable to holders of the parent Share capital Share premium Capital redemption reserve Merger reserve Share based payment reserve Other reserves Retained earnings/(losses) Current liabilities Trade and other payables TOTAL EQUITY AND LIABILITIES Notes 2016 $ 2015 $ 15 17 18 21 21 21 19 6,757,904 6,757,904 8,132,601 8,132,601 1,158,443 268,785 1,427,228 8,185,132 677,593 18,937 696,530 8,829,131 64,257 926,787 - 1,001,150 72,691 (1,919,342) 6,656,506 6,802,049 12,733,307 4,829,377 6,517,644 8,501,150 35,232 (514,331) (24,219,895) 7,882,484 1,383,083 1,383,083 946,647 946,647 8,185,132 8,829,131 The loss for the financial year dealt with in the financial statements of the parent Company was $621,594 (2015: profit $451,255). These Financial Statements were approved and authorised for issue by the Board of Directors on 15 May 2017 and were signed on its behalf by: Patrick De Souza Executive Chairman The accompanying notes on pages 26 to 58 are an integral part of these financial statements. Water Intelligence plc 21 Consolidated Statement of Changes in Equity for the year ended 31 December 2016 Share Capital $ Share Premium $ Shares to be issued $ Capital Redemption Reserve $ Reverse Acquisition Reserve $ Merger Reserve $ Share based payment reserve $ Other reserves $ Retained Profits/ (Losses) $ Total $ Non-controlling interest $ As at 1 January 2015 12,732,564 4,800,610 29,510 6,517,644 (27,758,088) 8,501,150 - (111,066) (1,454,775) 3,257,549 Issue of Ordinary Shares 743 28,767 (29,510) - Share-based payment expense - Profit for the year - Other comprehensive loss - - - - - - - - - - - - - - - - - - 35,232 - - 35,232 - - 580,753 580,753 - (37,029) - (37,029) - - - - As at 31 December 2016 12,733,307 4,829,377 As at 1 January 2016 12,733,307 4,829,377 Cancellation of deferred shares (12,679,741) - Cancellation of share premium Cancellation of capital redemption reserve - - Issue of capital reduction shares 7,500,000 Cancellation of capital reduction shares Issue of Ordinary Shares (7,500,000) (4,800,610) - - - - - - - - - - 6,517,644 (27,758,088) 8,501,150 35,232 (148,095) (874,022) 3,836,505 6,517,644 (27,758,088) 8,501,150 35,232 (148,095) (874,022) 3,836,505 - - (6,517,644) - - - - - - - - - - (7,500,000) - - - - - - - - - - - 12,679,741 4,800,610 6,517,644 - 7,500,000 - - - - - Total Equity $ 3,257,549 - 35,232 580,753 (37,029) 3,836,505 3,836,505 - - - - - 908,711 37,459 - - - - - - - - - - - - - - 10,691 898,020 - 908,711 - - - - - - Share-based payment expense - Equity contributions - Profit for the year - Other comprehensive loss - - - - - As at 31 December 2016 64,257 926,787 - - - - - - - - - - - - - - 37,459 - - 37,459 - - - - - - - 100,000 100,000 - - 484,669 484,669 (6,296) 478,373 - (116,548) - (116,548) - (116,548) - (27,758,088) 1,001,150 72,691 (264,643) 31,108,642 5,150,796 93,704 5,244,500 The accompanying notes on pages 26 to 58 are an integral part of these financial statements. Water Intelligence plc 22 Company Statement of Changes in Equity for the year ended 31 December 2016 Share Capital $ Share Premium $ Shares to be issued $ Capital Redemption Reserve $ Merger Reserve $ 12,732,564 4,800,610 29,510 6,517,644 8,501,150 743 28,767 (29,510) - - - - - - - - - - - Share based payment reserve $ - - 35,232 - - Other reserves $ Retained Profits/ (Losses) $ Total Equity $ (143,781) (24,671,150) 7,766,547 - - - - - - 35,232 451,255 451,255 (370,550) - (370,550) - - - - As at 1 January 2015 Issue of Ordinary Shares Share-based payment expense Profit for the year Other comprehensive loss As at 31 December 2016 12,733,307 4,829,377 As at 1 January 2016 12,733,307 4,829,377 Cancellation of deferred shares (12,679,741) - Cancellation of share premium account Cancellation of capital redemption reserve Issue of capital reduction shares Cancellation of capital reduction shares - - 7,500,000 (7,500,000) (4,800,610) - - - Issue of Ordinary Shares 10,691 898,020 Share-based payment expense Profit for the year Other comprehensive loss As at 31 December 2016 - - - - - - 64,257 926,787 6,517,644 8,501,150 35,232 (514,331) (24,219,895) 7,882,484 6,517,644 8,501,150 35,232 (514,331) (24,219,895) 7,882,484 - - (6,517,644) - - - - - - - - - - (7,500,000) - - - - - - - - - - - 37,459 - - - - - - - - - - 12,679,741 4,800,610 6,517,644 - 7,500,000 - - - - - - - 908,711 37,459 (621,594) (621,594) (1,405,011) - (1,405,011) 1,001,150 72,691 (1,919,342) 6,656,506 6,802,049 - - - - - - - - - - - - - - - The following describes the nature and purpose of each reserve within owners’ equity: Share capital Share premium Merger reserve Amount subscribed for share capital at nominal value. Amount subscribed for share capital in excess of nominal value. 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. Other reserves foreign exchange differences on re-translation. Retained profits/(losses) The accompanying notes on pages 26 to 58 are an integral part of these financial statements Cumulative net profits/(losses) recognised in the Financial Statements. Water Intelligence plc 23 Consolidated Statement of Cash Flows for the year ended 31 December 2016 Year ended 31 December Year ended 31 December 2015 2016 Net cash generated from operating activities Cash flows from investing activities Purchase of plant and equipment Acquisition of subsidiaries Reacquisition of franchises Interest received Net cash used in investing activities Cash flows from financing activities Issue of ordinary share capital Premium on issue of ordinary share capital Interest paid Proceeds from borrowings Repayment of borrowings Deferred financing costs Equity contributions – non-controlling interest Net cash generated by/ (used in) financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents at end of year Notes 24 $ $ 533,099 199,484 (347,660) (329,368) (449,094) 12,264 (66,244) - (240,000) 17,326 (1,113,858) (288,918) 10,691 898,020 (172,086) 276,468 (475,426) (31,473) 100,000 606,194 25,435 1,031,454 1,056,889 - - (135,102) - (500,024) - - (635,126) (724,560) 1,756,014 1,031,454 The accompanying notes on pages 26 to 58 are an integral part of these financial statements Water Intelligence plc 24 Company Statement of Cash Flows for the year ended 31 December 2016 Net cash (used by)/generated from operating activities Cash flows from financing activities Issue of ordinary share capital Premium on issue of ordinary share capital Net cash generated by financing activities Increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period Year ended 31 December 2016 $ (658,863) Year ended 31 December 2015 $ 1,608 Notes 24 10,691 898,020 908,711 249,848 18,937 268,785 - - - 1,608 17,329 18,937 The accompanying notes on pages 26 to 58 are an integral part of these financial statements. Water Intelligence plc 25  Notes to the Financial Statements General information 1 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 15 May 2017. Adoption of new and revised International Financial Reporting Standards 2 No new IFRS standards, amendments or interpretations became effective in 201 6 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 are undertaking an ongoing evaluation of the potential impact of IFRS9 in respect of the impact of the expected loss model on the impairment of receivables, IFRS15 in respect of the revenue recognition for service revenue and IFRS16 in respect of leases. Whilst this exercise is not concluded, the Directors do not presently anticipate that the adoption of these standards and interpretations 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. 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 May 2018. 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 entirely on cash generation by its profitable US-based franchise business, ALD. The Directors believe that the Water Intelligence plc 26  Notes to the Financial Statements 3 Significant accounting policies continued 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 operatio nal 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 i ts subsidiary undertakings made up to 31 December 2016. 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 o ne 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 recognise d directly in the income statement. The acquisition of ALDHC in 2011 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 2016 is $621,594 (2015: Profit of $451,255). The prior year profit after tax included a deferred tax adjustment of $837,271 related to the utilisation by ALDHC of tax losses generated by the parent company, which eliminates on consolidation. Excluding this, a loss before tax of $422,016 was included within the Consolidated Statement of Comprehensive Income. Inventories The inventories, consisting primarily of equipment, parts, and supplies, are recorded at the lower of cost (FIFO) or market value. 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. Water Intelligence plc 27  Notes to the Financial Statements continued Significant accounting policies continued 3 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 recov ered. Foreign currencies Functional and presentational currency (i) 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 2016 was £1 = US$1.2305 (2015: £1 = US$1.4804). The average exchange rate for the year 31 December 2016 were £1 = US$1.3562 (2015: £1 = US$1.3559). (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. (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) (b) assets and liabilities for each statement of financial position presented are translated at closing rate at the date of the statement; 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. Water Intelligence plc 28  Notes to the Financial Statements continued 3 Significant accounting policies continued 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. 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. 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. 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. 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. Water Intelligence plc 29  Notes to the Financial Statements continued 3 Significant accounting policies continued 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 th at occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. 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. 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 met hod. 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: Motor vehicles: Leasehold improvements: 5 to 7 years 5 years 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 the Consolidated Statement of Comprehensive Income and not subsequently reversed. immediately impairment recognised in is 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. Water Intelligence plc 30  Notes to the Financial Statements continued 3 Significant accounting policies continued Amortisation is computed using the straight-line method over the definite estimated useful lives of the assets as follows: Covenants not to compete Customer lists Trademarks Patents Product development Years 3 5 20 10 2 Any amortisation is included within administrative expenses in the statement of comprehensive income. 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 possib le 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 developm ent 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 i n providing products or services that is subject to risks and returns that are different from those of other business segments. A geographical segment is identified by reference to revenues from external customers (i) attributed to the entity's country of domicile and (ii) attributed to all foreign countries in total from which the entity derives revenues. If revenues from external customers attributed to an individual foreign country are material (more than 10%) those revenues are disclosed separately. Pension contributions There are no pension schemes in the Group. Water Intelligence plc 31  Notes to the Financial Statements continued 3 Significant accounting policies continued 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 and lenders 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 evaluati on of whether there is any indication of any impairment in investments, intangibles, goodwill or receivables and whether deferred tax assets should be recognized for tax losses. The estimates and assumptions that have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the fair value of assets arising on acquisition, 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. Segmental Information 4 In the opinion of the Directors, the operations of the Group currently comprise five operating segments, being (i) Franchise Royalty Income, (ii) Corporate Owned Stores, (iii) Franchise-related activities (including product and equipment sales and Business-to-Business sales), (iv) International corporate activities 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 201 6, 94.4% (2015: 99.6%) of its revenue came from American Leak Detection, which includes royalties from franchisees and corporate-operated stores, with the remaining 5.6% of revenue coming from its UK based wholly-owned ALD International Limited subsidiary (2015: 0.4%). No single customer accounts for more than 10% of the Group's total external revenue. Water Intelligence plc 32  Notes to the Financial Statements continued 4 Segmental Information continued The following is an analysis of the Group’s revenues and results from operations and assets by business segment. Revenue Franchise royalty income Corporate owned stores Franchise related activities International corporate activities Total Profit/(Loss) before tax Franchise royalty income Corporate owned stores Franchise related activities International corporate activities Unallocated head office costs One-Time cost Total Assets Franchise royalty income Corporate owned stores Franchise related activities International corporate activities Total Year ended Year ended 31 December 31 December 2016 $ 5,543,207 4,216,584 1,731,849 683,597 2015 $ 5,221,331 2,614,274 968,336 38,408 12,175,237 8,842,349 Year ended Year ended 31 December 31 December 2016 $ 1.219,247 324,423 226,934 139,004 (841,137) (296,000) 772,471 2015 $ 1,186,132 148,040 126,442 (69,807) (407,367) (11,000) 972,440 Year ended Year ended 31 December 31 December 2016 $ 6,814,156 2,186,759 327,502 166,406 2015 $ 7,868,133 791,928 (1,751,747) 43,722 9,494,823 6,952,036 Water Intelligence plc 33  Notes to the Financial Statements continued 4 Segmental Information continued Amortization Franchise royalty income International corporate activities Total Depreciation Franchise royalty income Corporate owned stores Franchise related activities International corporate activities Total Finance Expense International corporate activities Unallocated head office costs Total Year ended Year ended 31 December 31 December 2016 $ 268,358 27,248 295,606 2015 $ 270,492 - 270,492 Year ended 31 December 2016 Year ended 31 December 2015 $ 3,734 71,885 - 5,660 81,279 $ 21,221 - 14 420 21,655 Year ended 31 December 2016 $ Year ended 31 December 2015 $ 17,671 154,415 172,086 - 135,102 135,102 For the purpose of monitoring segmental performance, no liabilities are reported to the Group’s Chief Operating Decision Maker. Water Intelligence plc 34  Notes to the Financial Statements continued 4 Segmental Information continued Geographic Information The breakdown of segmental information into US and International begins to capture the Group’s effort to be multinational company. The acquisitions of NRW (UK) and the former franchisee in Sydney, Australia take a significant step in this direction. Total Revenue Year ended 31 December 2016 Year ended 31 December 2015 US International $ $ Total $ US International Total $ $ $ Franchise royalty income 5,312,542 230,665 5,543,207 4,993,714 227,616 5,221,330 Corporate owned Stores 4,216,584 Franchise related activities 1,731,849 - - 4,216,584 2,614,274 1,731,849 968,336 - 2,614,274 - 968,336 International corporate activities - 683,597 683,597 - 38,409 38,409 Total 11,260,975 914,262 12,175,237 8,576,324 266,025 8,842,349 5 Expenses by nature The Group’s operating profit has been arrived at after charging: Raw materials and consumables used Employee costs Operating lease rentals Depreciation charge Amortization charge Marketing costs R & D Foreign exchange (gain)/loss Auditors remuneration Fees payable to the Company’s auditor for audit of Parent Company and Consolidated Financial Statements Fees payables to the Company’s auditor for other services (assurance related services) Year ended 31 December 2016 $ 954,234 6,002,080 Year ended 31 December 2015 $ 793,369 3,902,956 Note 6 121,813 81,279 295,606 333,827 14,989 3,016 3,841 21,655 270,492 532,846 13,878 (226) Year ended 31 December 2016 $ Year ended 31 December 2015 $ 39,318 37,010 12,925 - The Group auditors are not the auditors of the US subsidiary companies. The fees paid to the auditor of the US subsidiary companies were $92,085 (2015: $88,012) for the audit of these companies and $nil (2015: $nil) for other services. Water Intelligence plc 35  Notes to the Financial Statements continued Employees and Directors 6 The Directors of the Company are considered to be the key management of th e business. Short-Term employee benefits Directors fees, salaries and benefits Wages and Salaries Social Security Costs Long-Term employee benefits Share based payments 6 Employees and Directors continued Information regarding Directors emoluments are as follows: Short-Term employee benefits Directors’ fees, salaries and benefits Social Security Costs Long-Term employee benefits Share based payments Year ended 31 December 2016 $ Year ended 31 December 2015 $ 644,208 4,943,189 377,224 593,000 3,039,404 235,320 37,459 35,232 6,002,080 3,902,956 Year ended 31 December 2016 $ Year ended 31 December 2015 $ 644,208 19,190 36,176 699,574 593,000 14,445 16,034 623,479 The highest paid Director received emoluments of $447,019 (2015: $404,490). The average number of employees (including Directors) in the Group during the year was: Directors (executive and non-executive) Management Field Services Franchise Support Administration Year ended 31 December 2016 $ Year ended 31 December 2015 $ 5 6 57 16 5 89 5 6 23 26 3 63 Water Intelligence plc 36  Notes to the Financial Statements continued 7 Share options The Group has a number of share options schemes as shown in the tables below. The Company grants share options at its discretion to Directors, management, advisors and lenders. These are accounted for as equity settled options. Share options are granted with vesting periods of between one and three years from the date of grant. 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: Outstanding at beginning of year Granted during the year Forfeited/lapsed during the year Exercised during the year Outstanding at end of the year Exercisable at end of the year Number of share options 2016 1,152,000 730,000 (117,000) – 1,765,000 1,765,000 Weighted average exercise price ($) 2016 1.05 1.33 1.21 – Number of share options 2015 734,500 417,500 – – 1.12 1,152,000 Weighted average exercise price ($) 2015 1.26 0.67 – – 1.05 1.12 1,152,000 1.05 Fair value of share options During the year, the Group granted 730,000 Share Options to Directors and to certain Employees, with exercise prices ranging from of £0.62 to £1.25 ($0.92 to $1.56). The fair value of options granted during the 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 the year resulted in a charge of $37,459 (2015: $35,232) which has been expensed in the year. The weighted average remaining contractual life of the Share Options is 8.34 years (2015: 8.08 years). The following options arrangements exist over the Company’s shares: Exercise period To From Exercise price $1.18 12/09/2013 $1.14 01/12/2013 $1.30 01/08/2013 $0.67 08/06/2015 $1.29 13/06/2016 $0.92 13/06/2016 $1.24 19/12/2016 $1.56 19/12/2016 12/09/2016 01/12/2023 01/08/2023 08/06/2025 13/06/2026 13/06/2026 19/12/2026 19/12/2026 Scheme Third Party ALDHC Plan (1) Directors (2) 2015 Options (3) 2016 Directors (4) 2016 Directors (4) 2016 Employee (5) 2016 Employee (5) Total 2016 - 417,500 250,000 417,500 200,000 50,000 220,000 210,000 1,765,000 2015 67,000 417,500 250,000 417,500 - - - - 1,152,000 Date of Grant 12/09/2013 01/12/2013 01/08/2013 08/06/2015 13/06/2016 13/06/2016 19/12/2016 19/12/2016 All share options are equity settled on exercise. Water Intelligence plc 37  Notes to the Financial Statements continued 7 Share options continued (1) Under ALDHC’s 2006 Employee, Director and Consultant Stock Plan (“ALDHC Option Plan”), certain directors and employees of ALD, were granted options to acquire an aggregate of 738,750 shares in ALDHC with an exercise price of $1.14 per share. Of these grants, the Executive Chairman had been granted an option to purchase 250,000 shares. Following Admission, all options under the ALDHC Option Plan were to be cancelled or waived in return for the grant of options over New Ordinary Shares with the same economic value as existing options under the ALDHC Option Plan. The conversion to options over 417,500 New Ordinary Shares in respect of these options has been completed in 2013, the balance being attributable to leavers between 2010 and 2013 or options that have not been taken up. These Options have all vested in full. (2) In recognition of three years of deferred compensation and additional services rendered, each member of the board, after consultation with the NOMAD, received an option to purchase 50,000 New Ordinary Shares pursuant to the Option Plan in 2013. The Director options have an exercise price of $1.30 per share or 67% above the highest share price for 2013. These Options have all vested in full. (3) On 5 June 2015, the Group granted 417,500 Share Options to the Executive Chairman and David Silverstone, both directors of the Company, and to certain Employees, all with an exercise price of $0.67. 100,000 of these Share Options relate to the Executive Chairman’s compensation and an additional 50,000 of these Share Options relate to the Executive Chairman’s personnel guarantee of the loan with Liberty Bank in 2014. 40,000 of these Share Options relate to compensation payable to David Silverstone. (4) On 13 June 2016, each member of the board received an option to purchase 50,000 New Ordinary Shares. The Director options have an exercise price of $1.26 per share which is 5% higher than the highest share price for 2015. These Options have a three-year vesting requirement. Stephen Leeb’s 50,000 options lapsed on his resignation as a Director during 2016. On 13 June 2016, the Executive Chairman, a director of the Company, was also granted 50,000 Share Options with an exercise price of $0.92 related to the Executive Chairman’s personnel guarantee of the loan with Liberty Bank in 2015. (5) On 19 December 2016, certain employees were granted an option to purchase 220,000 New Ordinary Shares at a price of $1.24 and 210,000 New Ordinary Shares at a price of $1.56 based on 2016 performance and as an incentive for future performance. These options have a three-year vesting requirement. 8 Finance income Interest income 9 Finance expense Interest payable Bank loans Year ended 31 December 2016 Year ended 31 December 2015 $ 12,264 $ 17,326 Year ended 31 December 2016 Year ended 31 December 2015 $ 172,086 $ 135,102 Water Intelligence plc 38  Notes to the Financial Statements continued 10 Taxation Group Current tax: Current tax on profits in the year Prior year over provision Total current tax Deferred tax current year Deferred tax prior year Deferred tax expense/(credit) (note 21) Income tax expense Year ended 31 December 2016 Year ended 31 December 2015 $ $ 53,466 522,557 - - 53,467 522,557 240,632 (130,870) - - 240,632 294,098 (130,870) 391,687 The tax on the Group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Profit before tax on ordinary activities Tax calculated at domestic rate applicable profits in respective countries (2016: 35% versus 2015: 34%) Tax effects of: Non-deductible expenses State taxes net of federal benefit Adjustment in respect of prior year Deferred tax not recognised Adjust deferred tax rate to 35% Changes in rates Taxation expense recognised in income statement 772,471 972,440 270,365 330,630 56,891 33,962 (77,702) 11,156 35,614 (36,188) 294,098 54,235 82,534 - (75,712) - 391,687 The Group is subject to income taxes in two jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Gro up 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. The effective rate for tax for 2016 is 38% (2015: 40%). Water Intelligence plc 39  Notes to the Financial Statements continued 11 Earnings per share The profit per share has been calculated using the profit for the year and the weighted average number of ordinary shares outstanding during the year, as follows: Basic Profit for the year attributable to shareholders of the Company ($) Weighted average number of ordinary shares Diluted weighted average number of ordinary shares Profit per share (cents) Diluted profit per share (cents) 12 Acquisitions Year ended 31 December 2016 $ 478,373 Year ended 31 December 2015 $ 580,753 10,690,410 10,605,321 10,825,113 10,648,128 5.5 4.5 4.4 5.5 During 2016, the Group purchased franchisee operations in South New Jersey, Cincinnati, Ohio, Northwest Arkansas and Sydney, Australia, as well as, a municipal business in the UK - NRW Utilities Limited. As discussed in the Chairman’s Statement, these acquisitions not only are expected to contribute revenue and earnings but also strengthen the Group’s corporate execution capabilities in the US, UK and Australia. In the US and Australia such corporate presence supports the American Leak Detection franchise system. In the UK, the acquisition builds on the Group’s existing municipal business and provides operational leadership for the Group’s multinational objectives. These can be summarised as follows: New Jersey $ Ohio Arkansas $ $ NRW Australia $ $ Totals $ Fair value of assets and liabilities acquired Customer relationships (see note 13) Accounts receivable Equipment Cash Liabilities Net assets acquired - - - - 1,250 83,450 - - - - 1,250 83,450 - 132,857 - -- 173,319 21,516 15,427 57,866 17,658 - - - - - (201,558) 137,703 21,516 57,866 - - - - 132,857 173,319 179,509 - - 17,658 (201,558) - 301,785 Consideration 95,000 367,340 250,000 615,080 411,869 1,739,289 Goodwill on acquisition (see note 13) 93,750 283,890 228,484 477,377 354,003 1,437,504 Goodwill arising on New Jersey, Ohio and Arkansas of $606,124 is included additions to goodwill for owned & operated stores (see note 13). Goodwill arising on NRW and Australia of $831,380 is included in additions to goodwill for goodwill acquisitions (see note 13). Water Intelligence plc 40  Notes to the Financial Statements continued 12 Acquisitions continued On February 19, 2016 American Leak Detection reacquired the franchise territory located in Southern New Jersey for $95,000. On April 30, 2016 American Leak Detection reacquired the franchise territory located in Cincinnati, Ohio for total consideration of $400,000. As of May 2, 2017, ALD has paid $220,000 and has $180,000 in deferred payments remaining which are evenly divided into 3 installments of $60,000 to be paid over each of the next three years on May 1. On September 30, 2016 American Leak Detection reacquired the franchise territory located in Northwest Arkansas for a total $150,000 amounting to sixty percent (60%) of the equity value of the territory. As part of the agreement, ALD has the right to purchase the remaining forty percent (40%) for $100,000 once total sales pass $250,000 annually. On 1 September 2016 the Group acquired NRW Utilities Limited ('NRW'), a UK-based water services business for a total consideration of £575,173. The consideration is comprised of an initial payment of £275,173, which includes the repayment of a vendor loan amounting to £75,173. The initial payment is made at signing and draws on the Group's existing cash reserves. Additional payments amounting to £300,000 are to be made in 2017 and 2018. On 9 February 2017, the Group made an early payment of £110,000 reducing total deferred payments to £190,000. (See Subsequent Events) On 2 November 2016 the group acquired Advanced Leak Detection (ADV) and Australian Watermain (AWL), the latter pending a regulatory clearance that has subsequently been obtained. Both Australian Companies, located in Sydney, were owned by a former franchisee of American Leak Detection - a core business unit of Water Intelligence. The total consideration for the transaction was US$434,000. Of the total consideration, $105,409 is allocated at Closing, $102,470 is to be paid on the first anniversary of Closing and $226,065 is to be paid on the second anniversary of Closing. An adjustment in the Closing amount in favor of Water Intelligenc e shall be made depending on the amount of additional time needed for regulatory clearance for AWL. The amount of deferred consideration (after discounting anticipated cash flows to evaluate the fair value), can be summarized as follows: Current T&M Tech LLC (South Michigan Franchise) New Jersey Ohio Arkansas NRW Australia Total current deferred consideration Non-Current T&M Tech LLC (South Michigan Franchise) New Jersey Ohio Arkansas NRW Australia Total non-current deferred consideration Water Intelligence plc 41 Year ended 31 December 2016 $ 62,115 - 58,212 - 307,540 134,379 Year ended 31 December 2015 $ 59,781 - - - - - 562,246 59,781 Year ended 31 December 2016 $ 215,094 - 159,128 - 61,508 176,495 Year ended 31 December 2015 $ 277,208 - - - - - 612,225 277,208  Notes to the Financial Statements continued 13 Intangible assets Goodwill table Group Cost Goodwill Acquisitions $ Owned & Operated stores $ Franchisor activities $ Totals $ At 1 January 2015 1,493,729 239,500 636,711 2,369,940 Additions - 595,616 - 595,616 Reclassification (see below) - 72,200 - 72,200 At 31 December 2015 1,493,729 907,316 636,711 3,037,756 Additions (see note 12) 831,380 606,124 - 1,437,504 At 31 December 2016 2,325,109 1,513,440 636,711 4,475,260 Impairment At 1 January 2015 Impairment in year 1,493,729 75,000 - 1,568,729 - - - - At 31 December 2015 1,493,729 75,000 - 1,568,729 Impairment in year - - - - At 31 December 2016 1,493,729 75,000 - 1,568,729 Carrying amount At 31 December 2015 At 31 December 2016 - 832,316 636,711 1,469,027 831,380 1,438,440 636,711 2,906,531 The carrying value of Goodwill Acquisitions at 31 December 2016 relate to goodwill additions arising on the acquisition of NRW and Australia in 2016 (as detailed in note 12). Goodwill Owned & Operated stores comprises legacy owned stores together with additions arising from reacquisitions of franchise operations in 2015 and 2016. Additions in 2016 relate to New Jersey, Ohio and Arkansas (see note 12). Goodwill on Franchisor Activities relates to the royalty income franchise business. Where appropriate consideration of separately identifiable intangible assets have been considered in the evaluation of the fair value of assets acquired and the determination of the fair value of goodwill arising. For the acquisitions in 2016 and 2015 relating to the reacquisition of franchises, it is considered that the value being attributed to the purchase consideration relates to the synergies with surrounding franchises, obtaining wider geographical coverage directly within the Group, the focus to seize potential opportunity within their wider business strategy for revenue and earnings growth and the ability to expand new service offerings. Where appropriate consideration of separate intangibles such as covenants not to compete are evaluated. Water Intelligence plc 42  Notes to the Financial Statements continued 13 Intangible assets continued There is no separately identified intangible considered to arise from the customer list of the franchise reacquired given the terms of the franchise agreement and on that these customers continue to be customers of the Group’s products and services before and after the reacquisition. An impairment review is undertaken annually or whenever changes in circumstances or events indicate that the carrying amount may not be recovered. For the purpose of impairment testing, goodwill is allocated to appropriate cash generating units which can be summarised as follows: Goodwill Acquisitions – NRW and Australia - are separately categorized as cash generating units. Goodwill on Owned & Operated stores are categorized as cash generating units that are expected to benefit from the synergies of the combination. Goodwill on Franchisor Activities is considered as one cash generating unit by reference to revenues and activities derived from the franchise royalty income and franchise related activities segments (see note 4). The cash generating units to which goodwill 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. The key assumptions/inputs used for the impairment assessment based on the forecast cash flow and revenues for 2017 were as follows: Discount rate Short term revenue growth Long term revenue growth Tax rate Discount rate sensitivity step Perpetual growth rate sensitivity step % 15 5 3.5 35 2 1 This has resulted in no impairment charge being required in 2016 (2015: $nil). Based upon the sensitivity analysis had the estimated discount rate used been 2% higher and the perpetual revenue growth rate used been 1% lower in these calculations the Group would still not have incurred any material impairment for any of the categories of goodwill. Water Intelligence plc 43  Notes to the Financial Statements continued 13 Intangible assets continued Other Intangible assets table Product development Covenants not to compete Customer Lists Trademarks Patents Territory servicing rights $ $ $ $ $ $ Total $ 164,880 270,000 217,500 5,293,817 23,692 88,000 6,057,889 - 20,000 - - - - 20,000 Cost At 1 January 2015 Additions Reclassification - - - - - (88,000) (88,000) At 31 December 2015 164,880 290,000 217,500 5,293,817 23,692 - 5,989,889 Additions (see note 12) - - 132,857 - - - 132,857 Exchange differences - - - - - - - Reclassification - - - - - - - At 31 December 2016 164,880 290,000 350,357 5,293,817 23,692 - 6,122,746 Accumulated amortisation At 1 January 2015 164,880 270,000 217,500 2,371,602 23,692 Amortisation expense - - - 261,692 - 7,000 8,800 Reclassification - - - - - (15,800) 3,054,674 270,492 (15,800) At 31 December 2015 164,880 270,000 217,500 2,633,294 23,692 - 3,309,366 Amortisation expense - Exchange differences - 6,667 - 27,248 (677) - 261,691 - - - 295,606 - (677) At 31 December 2016 164,880 276,667 244,071 2,894,985 23,692 - 3,604,295 Carrying amount At 31 December 2015 - At 31 December 2016 - 20,000 13,333 - 2,660,523 - 106,286 2,398,832 - - - 2,680,523 2,518,451 All intangible assets have been acquired by the Group. Customer list additions relate to the acquisitions during the year of NRW, as detailed note 12. The brought forward items as at 1 January 2015 for Territory Servicing rights, arose from the reacquisition of the New York Franchise on 25 March 2015. This amount was reassessed in 2015 and as such, reclassified, at is net carrying value, as at 31 December 2015 as goodwill (see goodwill table above) for consistency in treatment with further such acquisitions that have arisen during 2015 and 2016. No adjustment was been made to amortisation up to this date on the basis of the amount being immaterial. Water Intelligence plc 44  Notes to the Financial Statements continued 14 Property, plant and equipment The calculation of amortization of intangible assets requires the use of estimates and judgement, related to the expected useful lives of the assets. An impairment review is undertaken annually or whenever changes in circumstances or events indicate that the carrying amount may not be recovered. Cost At 1 January 2015 Acquired on acquisition of subsidiary Additions Exchange differences Disposals At 31 December 2015 Acquired on acquisition of subsidiary Additions Exchange differences Disposals At 31 December 2016 Accumulated depreciation At 1 January 2015 Acquired on acquisition of subsidiary Eliminated on disposals Depreciation expense Exchange differences At 31 December 2015 Acquired on acquisition of subsidiary Eliminated on disposals Depreciation expense Exchange differences At 31 December 2016 Carrying amount At 31 December 2015 At 31 December 2016 68,564 347,939 (279) - Equipment & displays $ Motor Vehicles $ Leasehold Improvements $ 444,284 150,571 62,673 157,781 122,771 123,418 - 3,640 - (103) - - - (35,657) - Total $ 725,483 273,342 66,313 (103) (35,657) 248,535 123,418 1,029,378 657,425 47,693 254,096 20,871 93,843 - - (279) - - - - - 958,935 363,249 123,418 1,445,602 402,948 150,571 - 17,607 141,169 117,840 123,418 - (35,657) - 4,048 - (14) - - 571,112 2,839 - 62,587 (148) 227,400 123,418 2,807 - - - 18,692 - - (33) 667,535 268,411 (35,657) 21,655 (14) 921,930 5,646 - 81,279 (181) 636,390 248,866 123,418 1,008,674 86,313 322,545 21,135 - 114,383 - 107,448 436,928 The calculation of depreciation on property, plant and equipment requires the use of estimates and judgement, related to the expected useful lives of the assets. The depreciation expense in the year to 31 December 2016 is not material to the accounts, and therefore any change in estimate related to expected useful lives would not have a material effect on the Financial Statements. The value of the assets charged as security for the bank debt is $ 393,354 (2015: $105,802). Water Intelligence plc 45  Notes to the Financial Statements continued 15 Investment in subsidiary undertakings Company Cost At 31 December 2015 Exchange difference At 31 December 2016 Impairment At 31 December 2015 Exchange difference At 31 December 2016 Carrying amount At 31 December 2015 At 31 December 2016 Subsidiary Undertakings $ 14,533,507 (1,374,697) 13,158,810 6,400,906 - 6,400,906 8,132,601 6,757,904 The Directors annually assess the carrying value of the investment in the subsidiary and in their opinion no impairment provision is currently necessary. See notes 12 and 13 for the assumptions and sensitivities in assessing the carrying value of the investment. The net carrying amounts noted above relate to the US incorporated subsidiaries. The subsidiary undertakings during the year were as follows: Qonnectis Group Limited (holding company of ALD International Limited) * Water Intelligence International Limited (leak detection products and services) American Leak Detection Holding Corp. (holding company of ALD Inc.) * American Leak Detection, Inc. (leak detection product and services) NRW Utilities Limited Water Intelligence Australia Pty Registered office address 201 Temple Chambers 3-7 Temple Avenue, London, EC4Y 0DT 201 Temple Chambers 3-7 Temple Avenue, London, EC4Y 0DT 199 Whitney Avenue, New Haven, Connecticut 06511 U.S. 199 Whitney Avenue, New Haven, Connecticut 06511 U.S. 201 Temple Chambers 3-7 Temple Avenue, London, EC4Y 0DT 201 Temple Chambers 3-7 Temple Avenue, London, EC4Y 0DT * Subsidiaries owned directly by the Parent Company. Country of incorporation England and Wales England and Wales Interest held % 100% 100% US 100% US 100% England and Wales 100% Australia 100% 16 Inventories Group Inventories Group Year ended 31 December 2016 Year ended 31 December 2015 $ 327,501 $ 275,204 During the year ended 31 December 2016 an expense of $1,586,095 (2015: $793,369) was recognized in the Consolidated Statement of Comprehensive Income. There has been no write down of inventories during the year. Water Intelligence plc 46  Notes to the Financial Statements continued 17 Trade and other receivables Trade notes receivable Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ 42,445 $ 37,576 $ - - $ - All non-current receivables are due within five years from the end of the reporting period. Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ $ $ $ Trade receivables 879,820 357,557 - - Prepayments 494,713 256,143 27,840 74,096 Due from Group undertakings - - 1,092,595 496,988 Accrued royalties receivable 428,983 432,033 - - Trade notes receivable 122,197 82,240 - - Other receivables 164,644 111,524 38,008 106,509 Due from related party Current portion 115,722 111,307 - - 2,206,079 1,350,804 1,158,443 677,593 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 26 days (2015: 25 days). As at the 31 December 2015, trade receivables of $70,395 (2015: $41,171) 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 60-90 days 90+ days Average age (days) Year ended 31 December 2016 Year ended 31 December 2015 $ 27,404 42,991 70,395 92 $ 3,661 37,510 41,171 92 Water Intelligence plc 47  Notes to the Financial Statements continued 17 Trade and other receivables continued The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: US Dollar UK Pound Year ended 31 December 2016 Year ended 31 December 2015 $ $ 2,140,231 1,240,142 65,848 2,206,079 110,662 1,350,804 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. 18 Cash and cash equivalents Cash at bank and in hand 19 Trade and other payables Trade payables Accruals and other payables Due to Group undertakings Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ 1,056,888 $ 1,031,454 $ 268,785 18,937 $ Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ 494,263 456,462 - $ 227,033 436,583 $ 15,041 84,727 - 1,283,315 950,725 663,616 1,383,083 $ 9,796 55,885 880,966 946,647 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 tra de purchases is 16 days (2015: 16 days). Water Intelligence plc 48  Notes to the Financial Statements continued 20 Deferred Tax The analysis of deferred tax assets is as follows: Group Deferred tax (liability)/assets The movement in deferred tax assets is as follows: 2016 $ 2015 $ (305,081) (64,449) 2016 Temporary differences: Net operating profit (loss) (non-current) Opening balance $ - - Recognized in the income statement $ - - Closing balance $ - - Short term timing differences (64,449) (240,632) (305,081) - - - 2015 Temporary differences: Net operating profit (loss) (non-current) Short term timing differences Opening balance $ - - (195,319) (195,319) Recognized in the income statement $ - - 130,870 130,870 Closing balance $ - - (64,449) (64,449) At the balance sheet date, the Group’s UK trading subsidiaries had unused tax losses of £3,459,553 (2015 £3,459,553) available for offset against future profits. £590,866 (2015 £590,866) represents unrecognized deferred tax assets thereon at 17%. The deferred tax asset has not been recognized due to uncertainty over timing of utilization. Water Intelligence plc 49  Notes to the Financial Statements continued 21 Share capital The issued share capital in the year was as follows: Group & Company At 31 December 2015 At 31 December 2016 . Group & Company At 31 December 2015 At 31 December 2016 Ordinary Shares Number 10,617,650 11,473,833 Deferred Shares Number 808,450,760 - Share Capital $ 12,733,307 Share Premium $ 4,829,377 Capital Redemption $ 6,517,644 64,257 926,787 - Following a general meeting held on 29 March 2016, where shareholders voted to approve the matter, a share capital reorganisation was undertaken on 30 March 2016 pursuant to which every 230 ordinary shares of 1p each were consolidated into 1 ordinary share of £2.30 nominal value and then subdivided back into ordinary shares of 1p each. Undertaking this exercise enabled the Company to significantly decrease the number of persons on its shareholder register and reduce the associated costs and administrative burden of maintaining a large shareholder base with no material interest in the Company. The total number of shares in issue following completion of the share capital reorganisation was 10,617,720 ordinary shares of 1p each. On 20 April 2016, following approval by shareholders at the general meeting held on 29 March 2016 and the High Court of Justice of England and Wales, the Company undertook a capital reduction exercise pursuant to which:     the share premium account of the Company was cancelled; the capital redemption account of the Company was cancelled; the issued share capital of the Company was reduced by cancelling all the issued deferred shares; and the amount of US$7,500,000 standing to the credit of the merger reserve was capitalised and applied in paying up bonus shares which were then cancelled. Accordingly, for the purposes of the Company’s balance sheet, on 20 April 2016, the share premium account and capital redemption account were reduced to zero, the merger reserve was reduced by reduced by £8,084,507.60 US$7,500,000 and (US$12,679,741). the share capital of the Company was In total, this exercise generated US$31,497,995 to be credited against the negative distributable reserves of the Company thereby creating positive distributable reserve s. Having positive distributable reserves means that the Company will be able to pay dividends and buy back shares in the future should it be deemed desirable to do so. In November 2016, the Company issued new ordinary shares as part of a capital raise. Upon closing of the financing the number of ordinary shares outstanding was 11,473,833. Water Intelligence plc 50  Notes to the Financial Statements continued 22 Obligations under operating leases The future aggregate minimum lease payments under non-cancellable operating leases are set out below. 2016 No later than one year Later than one year, and not later than five years Total 2015 No later than one year Later than one year, and not later than five years Total Land & Buildings $ 136,256 73,459 209,715 Land & Buildings $ - - - Other $ 105,220 Total $ 241,476 229,392 334,612 302,851 544,327 Other $ 48,990 Total $ 48,990 154,548 203,538 154,548 203,538 The operating lease commitments above apply to the Group; the Company has no operating leases. All leases relate to vehicles. 23 Financial instruments Market risk (including foreign currency risk management) Interest rate risk The Group has exposure to the following key risks related to financial instruments: i. ii. iii. Credit risk iv. Liquidity risk This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated Financial Statements. The Directors determine, as required, the degree to which it is appropriate to use financial instruments or other hedging contracts or techniques to mitigate risk. The main risk affecting such instruments is foreign currency risk which is discussed below. Throughout the year ending 31 December 2016 no trading in financial instruments was undertaken (2015: none) and the Group did not have any derivative or hedging instruments. The Group uses financial instruments including cash, loans and finance leases, as well as trade receivables and payables that arise directly from operations. Due to the simple nature of these financial instruments, there is no material difference between book and fair values, discounting would not give a material difference to the results of the Group and the Directors believe that there are no material sensitivities that require additional disclosure. Fair value of financial assets and financial liabilities The estimated difference between the carrying amount and the fair values of the Group’s financial assets and financial liabilities is not considered material. Credit risk The Group’s principal financial assets are bank balances, cash, trade and other receivables. The Group’s credit risk is primarily attributable to its trade receivables. Receivables are regularly monitored and assessed for recoverability. The Group has no significant concentrati on of credit risk as exposure is spread over a number of customers. Water Intelligence plc 51  Notes to the Financial Statements continued 23 Financial instruments continued Credit risk management Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group. The Group seeks to limit credit risk on liquid funds through trading only with counterparties that are banks with high credit ratings assigned by international credit rating agencies. Disclosures related to credit risk associated with trade receivables is presented in Note 17. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The exposure to credit risk at the year-end was in respect of the past due receivables that have not been impaired are disclosed in note 17. Categories of financial instruments Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ - $ - $ - $ - 1,056,888 1,031,454 268,785 18,937 Loans and receivables Cash and cash equivalents Trade and other receivables – current 2,206,079 1,350,804 1,158,443 526,084 Trade and other receivables – non-current Financial Liabilities measured at amortised cost Trade and other payables Borrowings – current Borrowings – non-current Deferred consideration – current Deferred consideration – non-current Borrowings Bank Loan -- 42,445 37,576 - - - 950,725 663,616 1,383,083 946,647 -- 492,453 591,450 - 1,327,593 - 562,246 59,781 1,459,027 612,225 277,208 - - - - - - - - - The Group had a commercial banking relationship with Liberty Bank (“Liberty”). During 2014 the loan was refinanced and the term of the loan was reset for 5 years to 2019. The principal amount outstanding at 5 December 2016 was $1,574,801. As of 5 December 2016, interest on the loan was 5.75% annually, with monthly installments of principal and interest amounting to $52,959 per month. On December 5, 2016, the Group replaced Liberty with People’s United Bank (“People’s”) and closed on a new term loan with People’s. The note refinanced the outstanding note from Liberty Bank and reset the term for 4 years to 2020. The principal amount outstanding at 31 December 2016 is $1,600,000. Annual interest on the loan is fixed for the term at 4.78% and requires installments of principal and interest amounting to $36,716 to be paid per month beginning on 1 January 2017. People’s Bank also requires PSS, among others, to guarantee the loan. Current Non-Current Financial Instruments Term loan Total Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ 492,453 492,453 $ 591,450 591,450 $ 1,075,593 1,075,593 $ 1,459,027 1,459,027 Water Intelligence plc 52  Notes to the Financial Statements continued 23 Financial instruments continued During 2016, the Company drew on a $250,000 line of credit available from Liberty Bank. This amount was refinanced under the People’s transaction (2015: $nil). Capital risk management In managing its capital, the Group’s primary objective is to maintain a sufficient funding base to enable working capital, research and development commitments and strategic investment needs to be met and therefore to safeguard the Group’s ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders. In making decisions to adjust its capital structure to achieve these aims, through new share issues, the Group considers not only its short-term position but also its long term operational and strategic objectives. The capital structure of the Group currently consists of cash and cash equivalents, medium term borrowings and equity comprising issued capital, reserves and retained earnings. The Group is not subject to any externally imposed capital requirements. Significant accounting policies Details of the significant accounting policies including the criteria for recognition, the basis of measurement and the bases for recognition of income and expense for each class of financial asset, financial liability and equity instrument are disclosed in Note 3. Foreign currency risk management The Group undertakes transactions denominated in foreign currencies (other than the functional currency of the Company and its UK operations, being £ Sterling), with exposure to exchange rate fluctuations. These transactions predominately relate to royalties receivable in the US denominated in currencies other than US$ being Canadian Dollars, Australian Dollars and Euro; royalties from such sources in 2016 were $230,666 (2015: $309,215). No foreign exchange contracts were in place at 31 December 2016 (2015: Nil). The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities were: Group Company Year ended 31 December 2016 Year ended 31 December 2015 Year ended 31 December 2016 Year ended 31 December 2015 $ $ $ $ 828,291 110,647 1,427,228 696,530 264,242 87,071 1,383,083 946,647 Assets Sterling Liabilities Sterling As shown above, at 31 December 2016 the Group had Sterling denominated monetary net assets of $564,049 (2015: $23,576). If Sterling weakens by 10% against the US dollar, this would decrease assets by $56,405 (2015: $2,142) with a corresponding impact on reported losses. Interest rate risk management The Group is potentially exposed to interest rate risk because the Group borrows and deposits funds at both fixed and floating interest rates. However, at the year end, the borrowings are only subject to fixed rates. Interest rate sensitivity analysis The losses recorded by both the Group and the Company for the year ended 31 December 2016 would not materially change if market interest rates had been 1% higher/lower throughout 201 6 and all other variables were held constant. Water Intelligence plc 53  Notes to the Financial Statements continued 23 Financial instruments continued Liquidity risk management Ultimate responsibility for liquidity management rests with management. The Group’s practice is to regularly review cash needs and to place excess funds on fixed term deposits for periods not exceeding one month. The Group manages liquidity risk by maintaining adequate banking facilities and by continuously monitoring forecast and actual cash flows. The Directors have prepared a business plan and cash flow forecast for the period to 30 June 2017. The forecast contains certain assumptions about the level of future sales and the level of margins achievable. These assumptions are the Directors’ best estimate of the future development of the business. The Directors acknowledge that the Group in the near-term trading is reliant on cash generation from its predominantly US-based royalty income. The following tables detail the Group’s remaining contractual maturity for its non -derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest due repayment dates. The table shows principal cash flows. Group 2016 Fixed interest rate instruments principal Other financial liabilities 2015 Fixed interest rate instruments principal 0-6 months $ 215,244 - 6-12 months $ 215,244 - >12 months $ Total $ 1,389,558 - 1,820,046 - 295,725 295,725 1,459,027 2,050,477 Other financial liabilities 723,397 - 277,208 1,000,605 The Company has no non-derivative financial liabilities. Derivatives The Group and Company have no derivative financial instruments. Fair values The Directors consider that the carrying amounts of financial assets and financial liabilities approximate their fair values. Water Intelligence plc 54  Notes to the Financial Statements continued 24 Notes to the statement of cash flows Cash flows from operating activities Group Operating Profit Adjustments for: Depreciation of plant and equipment Amortisation of intangible assets Share based payments Operating cash flows before movements in working capital Increase in inventories Increase in trade and other receivables (Decrease) in trade and other payables Cash generated by operations Income taxes Year ended Year ended 31 December 31 December 2016 2015 $ $ 932,293 1,090,216 81,098 294,930 37,459 1,345,780 (52,298) (686,825) (20,092) 586,565 (53,466) 21,744 270,492 35,232 1,417, 684 (69,727) (518,033) (107,883) 722,041 (522,557) Net cash generated from operating activities 533,099 199,484 Cash flows from operating activities Company (Loss)/Profit for the year Adjustments for: Share based payment expense Operating cash flows before movements in working capital Increase in trade and other receivables Increase/(Decrease) in trade and other payables Cash (used by)/generated from operations Income taxes Net cash (used by/generated from operating activities 25 Contingent liabilities The Directors are not aware of any material contingent liabilities. Year ended Year ended 31 December 31 December 2016 2015 $ $ (621,594) 451,255 37,459 35,232 (584,135) (480,850) 406,122 (658,863) - (658,863) 486,487 (262,822) (222,057) 1,608 - 1,608 Water Intelligence plc 55  Notes to the Financial Statements continued Related party transactions 26 Plain Sight Systems (“PSS”) was a former owner of ALDHC and ALD until the reverse merger in 2010 that created Water Intelligence. PSS is now an affiliate of Water Intelligence and hence is a related party. PSS provides a technology license to Water Intelligence and ALD on terms favourable to Water Intelligence and ALD. The license is royalty-free for the first $5 million of sales for products developed with PSS technology. During the normal course of operations there are inter -Group transactions among PSS, Water Intelligence plc, ALD and ALDHC. There are also inter-Group transactions among the Group’s subsidiaries. The financial results of these related party transactions are reviewed by an independent director of Water Intelligence plc, the parent of ALDHC and ALD. One set of inter-Group transactions surrounds its banking facilities. The Group had a commercial banking relationship with Liberty Bank (“Liberty”). The term of the loan was reset for 5 years to 2019. The principal amount outstanding at 5 December 2016 was $1,574,801. Interest on the loan was 5.75% annually, with monthly instalments of principal and interest amounting to $52,959 per month. Liberty required guarantees from Plain Sight among others. On December 5, 2016, the Group replaced Liberty Bank with People’s United Bank (“People’s”) and closed on a new term loan with People’s. The People’s loan refinanced the outstanding note from Liberty Bank and reset the term of the loan for 4 years to 2020. The principal amount outstanding at 31 December 2016 is $1,600,000. Annual interest on the loan is fixed for the term at 4.78% and requires installments of principal and interest amounting to $36,716 to be paid per month beginning on 1 January 2017. People’s Bank also requires PSS, among others, to guarantee the loan. For the PSS’s on-going guarantee, ALD pays 0.75% per annum based on the outstanding balance of the loan calculated at the end of each month. PSS owes a receivable to ALD. Interest charged on the PSS receivable will match the interest rate charged by the bank. The monthly charge for the PSS guarantee would not change and would be offset against amounts owed by PSS. The charge will be eliminated should the guarantee no longer be required by Liberty Bank. Interest income related to the PSS receivable amounted to $7,378 and $6,239 for the years ending 31 December 2016 and 31 December 2015, respectively. The guarantee fee expense for the PSS guarantee amounted to $13,296 and $16,922 for the years ended 31 December 2016 and 31 December 2015, respectively. The related receivable/prepaid balance remaining for PSS was $115,722 and $111,307 at 31 December 2016 and 2015, respectively. Water Intelligence plc 56  Notes to the Financial Statements continued 26 Related party transactions continued During the year, the Company had the following transactions with its subsidiary companies: Water Intelligence International Limited Balance at 31 December 2015 Net loans to subsidiary VAT transferred under group registration Other expenses recharged and exchange differences Balance at 31 December 2016 NRW Utilities Limited Balance at 31 December 2015 Net loans to subsidiary Other expenses recharged and exchange differences Balance at 31 December 2016 ALDHC Balance at 31 December 2015 Loans to WI Other expenses recharged and exchange differences Balance at 31 December 2016 ALD Inc. Balance at 31 December 2015 Loans to WI Other expenses recharged and exchange differences Balance at 31 December 2016 27 Subsequent events $ 496,988 498,665 55,484 (155,581) 895,556 $ 202,053 (5,014) 197,039 $ (923,590) (259,813) 276,817 (906,586) $ (126,729) (255,016) 5,016 (376,729) On the 9 January 2017, the Group announced it had completed the final purchase of all remaining shares owned by certain former minority shareholders of ALD, pursuant to rights granted to the Minority Shareholders at the time of the acquisition of ALD by the Company. The Minority Shareholders exercised their rights to sell 99,936 Consideration Shares to the Company at a price of 75 pence per Consideration Share. On the 19 January 2017, the Group announced it had appointed John F. Weigold as Non-Executive Director. On the 6 February 2017, the Group announced it had signed and launched its first formal national contract with one of the top five insurance companies in the US to provide adjusters a trusted partner to pinpoint water leaks and minimize collateral damage claims from residences and businesses. On the 9 February 2017, the Group announced it had drawn down on its Acquisition Line of Credit (“ALOC”) from People’s Bank. The Company drew approximately $140,000 of the $1.5 million ALOC to pay partners of NRW Utilities Ltd. Under the terms of the ALOC, the Company’s payments will be interest only on the amount drawn until further draws are made. As a result, $1.36 million remained under the ALOC. Water Intelligence plc 57  Notes to the Financial Statements continued 27 Subsequent events continued On 1 May 2017, the Group drew $150,000 of its ALOC to pay amounts due with respect to the reacquisitions of Detroit (2015) and Cincinnati (2016). As a result, $1.21 million remained under the ALOC. On 8 May 2017, the Group announced the opening of a corporate-operation in Washington D.C. Control 28 The Company is under the control of its shareholders and not any one party. The shareholdings of the directors and entities in which they are related are as outlined within the Director’s Report. Water Intelligence plc 58 Notice of Annual General Meeting Water Intelligence plc (the “Company”) NOTICE OF ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING (“AGM”) of the Company will be held at: 201 Temple Chambers, 3-7 Temple Avenue, London, EC4Y 0DT at 11 a.m. on 20 June 2017. The AGM will be held in order to consider and if thought fit, pass resolutions 1 to 6 below as ordinary resolutions and resolutions 7 and 8 below as special resolutions. Ordinary Resolutions 1. 2. 3. 4. 5. 6. THAT the Company’s annual accounts for the financial year ended 31st December 2016, together with the last directors’ report and the auditor’s report on those accounts and the directors’ report, be received and adopted. To reappoint Crowe Clark Whitehill LLP as the Company's auditors to hold office from the conclusion of this meeting until the conclusion of the next meeting at which accounts are laid before the Company. To authorise the directors to agree the remuneration of the auditors. To re-appoint as a director John F Weigold who was appointed by the board on 19 January 2017. To re-appoint as a director Patrick DeSouza who retires by rotation in accordance with the Articles of Association. THAT, in substitution for any existing and unexercised authorities, the directors be and they are hereby generally and unconditionally authorised for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all the powers of the Company to allot equity securities (as defined in section 560(1) of the Act) provided that this authority shall be limited to the allotment of equity securities to any person or persons up to an aggregate nominal amount of £40,000. The authorities conferred by this resolution shall expire at the conclusion of the next annual general meeting of the Company (unless previously renewed, varied or revoked by the Company in a general meeting), provided that the Company may before such expiry make an offer or agreement which would or might require shares to be allotted or rights to subscribe for or convert securities into shares be granted after such expiry and the directors may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of such offer or agreement notwithstanding that the authority conferred hereby has expired. Special Resolutions 7. THAT, subject to and conditional upon the passing of Resolution 6, in substitution for any existing and unexercised authorities, the directors be and they are hereby empowered pursuant to section 570 of the Act to allot equity securities wholly for cash, within the meaning of section 560(1) of the Act, pursuant to the general authority conferred by Resolution 6 above as if section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to: a. the allotment of equity securities in connection with a rights issue, open offer or other offer of securities in favour of the holders of Ordinary Shares in the Company on the register of members at such record dates as the directors may determine and other persons entitled to participate therein where the equity securities respectively attributable to the interests of the ordinary shareholders are proportionate (as nearly as may be) to Water Intelligence plc 59 Notice of Annual General Meeting the respective numbers of ordinary shares in the Company held or deemed to be held by them on any such record dates (which shall include the allotment of equity securities to any underwriter in respect of such issue or offer), subject to such exclusions or other arrangements as the directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems arising under the laws of any overseas territory or the requirements of any regulatory body or stock exchange or by virtue of shares being represented by depositary receipts or any other matter whatever; and b. the allotment of equity securities (otherwise than in sub-paragraph a. above) to any person or persons up to an aggregate nominal amount of £30,000, provided that the authorities conferred by this resolution shall expire at the conclusion of the next annual general meeting of the Company (unless previously renewed, varied or revoked by the Company), save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such offer or agreement notwithstanding that the power conferred hereby has expired and that all previous authorities under section 570 of the Act be and they are hereby revoked (and in this resolution the expression “equity securities” and references to the “allotment of equity securities” shall bear the same respective meanings as in section 560 of the Act). 8. THAT, the Company be generally and unconditionally authorised to make market purchases (as defined in the Act) of ordinary shares on such terms and in such manner as the directors may from time to time determine, provided that: (a) the maximum number of ordinary shares authorised to be purchased shall be 2,000,000; (b) the minimum price which may be paid for an ordinary share is 1p; (c) (d) (e) (f) the maximum price which may be paid for an ordinary share is an amount equal to 105 per cent of the average of the middle market quotations for an ordinary share (as derived from the Daily Official List) for the five business days immediately preceding the date on which the ordinary share is contracted to be purchased; the minimum and maximum prices per ordinary share referred to in sub- paragraphs (b) and (c) of this resolution are in each case exclusive of any expenses payable by the Company; the authority conferred by this resolution shall expire at the conclusion of the next annual general meeting of the Company unless such authority is varied, revoked or renewed prior to such time by the Company in general meeting by special resolution; and the Company may make a contract to purchase ordinary shares under the authority conferred by this resolution prior to the expiry of such authority which will or may be completed wholly or partly after the expiration of such authority. BY ORDER OF THE BOARD Patrick DeSouza, Executive Chairman For and on behalf of Water Intelligence plc Dated: 15 May 2017 Registered Office: 201 Temple Chambers, 3-7 Temple Avenue, London, EC4Y 0DT Water Intelligence plc 60 Notice of Annual General Meeting Notes: 1. Shareholders entitled to attend and vote at the AGM (“Shareholders”) may appoint a proxy or proxies to attend and speak and, on a poll, vote on their behalf. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form enclosed. A proxy need not be a member of the Company. A Shareholder may appoint more than one proxy in relation to the AGM provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that Shareholder. Investors who hold their shares through a nominee may wish to attend the AGM as a proxy, or to arrange for someone else to do so for them, in which case they should discuss this with their nominee or stockbroker. Shareholders are invited to complete and return the enclosed proxy form. To appoint more than one proxy you may photocopy the proxy form. Completion of the proxy form will not prevent a Shareholder from attending and voting at the AGM if subsequently he/she finds they are able to do so. To be valid, completed proxy forms must be received at the offices of the Company’s registrars, Neville Registrars, Neville House, 18 Laurel Lane, Halesowen B63 3DA, United Kingdom by not later than 11 a.m. on 16 June 2017 (being 48 hours prior to the time fixed for the AGM, excluding weekends and public holidays) or, in the case of an adjournment, as at 48 hours prior to the time of the adjourned AGM (weekends and public holidays excluded). 2. 3. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. The Company, pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, specifies that only those holders of ordinary shares in the capital of the Company registered in the register of members of the Company at 6 p.m. on 16 June 2017 or, in the case of an adjournment, as at 48 hours prior to the time of the adjourned AGM (weekends and public holidays excluded). Water Intelligence plc 61 

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