Water Intelligence : Annual Report and Accounts 2022

Water Intelligence plc

Group Annual Report and Financial Statements for the Year Ended 31 December 2022

Company number 03923150

Group Annual Report and Financial Statements

for the year ended 31 December 2022

Contents

Page

1. Company Information
2. Chairman's Statement

6 Strategic Report

13 Directors' Report

18 Corporate Governance Statement

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

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

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Company Information

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Chairman's Statement

Overview

Over the next decade, the water and wastewater industries will be transformed globally as a result of stresses produced by climate change and growing populations. Both the US and EU are committed to spending tens of billions annually to address problems of aging water and wastewater infrastructure. In the US, the Infrastructure Investment and Jobs Act signed in November 2022 authorizes USD$55 billion in spending on water initiatives over the next five years. The OECD estimates that the EU over the next decade will need additional spending of approximately €290 billion to meet water and sanitation needs under Directives covering Drinking Water and Urban Waste Water Treatment.

Water Intelligence is well-positioned to accelerate its growth trajectory to meet such market demand. Over the last decade, the Group has grown quickly by attacking two critical infrastructure problems occurring across the range of residential, commercial and municipal pipes: water loss from leakage and wastewater overflow. Our compounded annual growth from 2017 to 2022 has been 32% in terms of revenue and 37% in terms of statutory profit before taxes. And we have been able to achieve this record despite various challenges brought on by Covid and now macroeconomic volatility in a post-Covid world.

The opportunity ahead for Water Intelligence is particularly exciting for two reasons: First, our Group attacks these water infrastructure problems in a differentiated way by using proprietary technologies to provide solutions that are minimally-invasive - akin to precision medicine but for pipes as opposed to arteries. Second, the competitive landscape is largely fragmented, particularly on the residential side where we are strong and have the leading national brand in the US through our subsidiary American Leak Detection.

Our 2022 performance reaffirms our strong foundation and our growth plan. During 2022 Water Intelligence grew each of its operating businesses: American Leak Detection (ALD) and Water Intelligence International (WII). Broadly, we use the concept of network sales ("Network Sales") to illuminate our market capture. Network Sales measures total gross sales from all corporate operations and franchisees. For the end-user/ customer, there is no distinction between our franchise-delivered and corporate-delivered services because both operate under the same ALD brand with the same training and uniformed service and provide the same menu of solutions. However, as an accounting matter, while corporate gross sales are recorded directly by Water Intelligence, franchise gross sales are only reflected indirectly on Water Intelligence IFRS accounts as franchisee royalty income, understating the Group's actual market presence. For 2022, Network Sales grew by 11% to $165 million (2021: $149 million).

2022 Financial Performance and KPIs.

Our IFRS Accounts follow. Water Intelligence revenue increased 31% to $71.3 million (2021: $54.5 million). We then evaluate such progress on our growth plan through key performance indicators (KPIs) more fully reported in our Strategic Report as part of these Accounts. Four KPIs, identified below, reflect our execution through franchise-operated and corporate-operated locations.

Our franchise System sales continue to grow despite the number of reacquisitions of franchise locations during 2021. KPI #1 - ALD royalty income - is a proxy for System-wide franchise sales. Franchise royalty decreased 1% to $6.7 million (2021: $6.8 million). Had those same locations remained as franchises instead of being converted to corporate stores, royalty income would have grown by 8%. KPI #2 - Franchise- related Activity - measures Group support of franchise growth through the sale of equipment and additional territory and the development of channel sales such as insurance. Franchise-related Activity grew 9% to $10.6 million (2021: $9.8 million).

Our corporate operations also grew both in the US and internationally even after one adjusts for franchise reacquisitions. KPI #3 - US Corporate sales - grew 48% to $47.3 million (2021: $31.9 million). As noted above, some of the US corporate store growth resulted from franchise reacquisitions converting royalty income into direct revenue and profits from corporate operations. But even if we exclude those acquired locations in 2021 and 2022 and just consider "same store" corporate sales, same store locations

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Chairman's Statement

grew 26% to $35 million (2021: $27.8 million). Same store numbers, underscore a key driver of our

reacquisition strategy: corporate reacquisition provides the location with additional working capital from the Group's more substantial balance sheet, further accelerating growth. KPI #4 - International Corporate sales

• grew by 9% to $6.7 million (2021: $6.1 million). It should be noted that the Group is supporting international growth not only organically but also through acquisitions such as UK-basedWat-er-Save Limited in Q4 2021. Wat-er-Save enhances WII's ability in the UK to execute not only its current municipal work but also more residential and commercial work. It also prepares the way for an introduction into the UK market during 2024 of our ALD brand which is more focused on minimally-invasive residential solutions. WII, though smaller today than ALD in terms of sales, is leading the way in commercializing our waste water solutions technology which segment is expected to grow strongly.

The above component lines of Group sales growth have increased Group profits. To make a like for like comparison between 2022 and 2021 operating results, we must hold aside a one-time gain of $1.9 million during 2021. Holding that aside, earnings before interest, taxes and depreciation (EBITDA) grew 16% to $11.1 million (2021: $9.5 million). When EBITDA is also adjusted for non-cash expenses of share- based payments and non-core or one-time costs, EBITDA Adjusted increased by 20% to $12.4 million (2021: $10.3 million). Moreover, when profit before taxes (PBT) is adjusted for amortization, non-cashshare-based payments and non-core costs, PBTA grew 12.3% to $7.8 million (2021: $6.9 million).

As noted above, our business plan reflects not only current market capture but also seeks to better position the Group for future market capture through targeted investment, especially given the forecasted growth in the addressable market for the Group's solutions over the next decade. First, we have invested over $3 million in automating operations via Salesforce and associated applications. This set of applications, when fully implemented, will ensure that both franchise and corporate locations are able to schedule and dispatch trucks more efficiently both to provide the needed solution and then to also sell more follow-up solutions for other homeowner needs, thus enabling Water Intelligence to scale operations more quickly and capture more sales.

Second, to increase capture of market demand, we need to invest in hiring and training more technicians on our proprietary technologies. Our trained technicians are our most important assets. Each new technician requires training of up to eighteen months before that technician can reliably and comfortably deploy our proprietary leak detection solutions by himself. During the training period, the compensation expense for "technicians in training" is largely a drag. Though an expense today, like any asset, a fully trained technician will return significant incremental revenue and profits each year over a career life cycle. For 2022, we increased our investment in training headcount by approximately $1 million.

Our strong balance sheet with available cash and a comfortable debt repayment schedule supports our reinvestment to sustain our growth trajectory and to increase market share. At year-end 2022, cash stood at $23 million. Bank debt was approximately $17 million. Deferred payments from franchise reacquisitions were approximately $12 million. Notably, total bank debt and deferred payments from reacquisitions (approximately $29 million) are spread through 2027 with a blended fixed interest rate of approximately 4.9%. The amount of bank debt and deferred payments coming due in 2023 is approximately $9.2 million and well-covered by 2023 EBITDA which is anticipated to be above the $11.1 million generated in 2022 and the $23 million in cash on the balance sheet at year-end 2022. Hence we have cash resources available for further corporate development.

Direction

We believe that market demand for our services and products will continue to be strong despite various macroeconomic scenarios ranging from stagflation to recession driven by higher interest rates. Simply put, water and wastewater infrastructure continue to age, producing leaks and blockages that cannot be ignored. We have the asset base to deliver on our vision of a "one stop shop" for minimally invasive solutions to aging water and waste water infrastructure: a critical mass of approximately $165 million in Network Sales; more than 150 operating locations from which to scale; national business channels in the

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