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Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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Equity Bottom-Up

<h2>KEY POINTS</h2>
<div></div>
<ul>
<li>Polar Power reported 2Q22 revenue of $4.3 million, down 11.8% Y/Y from $4.8 million in 2Q21. The company’s domestic sales are driven by its telecommunications clients, as its DC Generators support the rollout of 5G infrastructure throughout the US. Supply chain issues hindered the company’s manufacturing and delivery throughout the quarter. Twelve percent of expected shipments for the quarter have been delayed. Complete results can be accessed&nbsp;here.</li>
<li>At the end of 2Q22, Polar’s revenue backlog stood at $14.0 million (added $9.9 million in 2Q22), of which 52% and 45% were attributed to the US and international telecom clients, respectively, and 3% to other markets.</li>
<li>Gross profit increased by 9.7% Y/Y to $1.1 million (24.8% of revenue) compared with $1.0 million in 2Q21, primarily due to improved labor efficiency in manufacturing and utilization of inventory that was written off as obsolete inventory in 2020.</li>
<li>Operating expenses were on par with last year’s figure of $1.8 million. The increase in marketing and administration expenses was offset by the decrease in R&amp;D costs related to the US market as the company primarily focused on product design and customization for its international clients.</li>
<li>Net loss decreased by $0.13 million to $0.7 million from a net loss of $0.9 million in 2Q21. Basic &amp; Diluted EPS improved to -$0.06 from -$0.07 in 2Q21.</li>
<li>At the end of 2Q22, cash stood at $2.7 million, while debt outstanding was at $0.2 million. Polar has an option to avail of a $2.8 million revolving credit facility against its assets until September 2022, which it can further extend with the bank for an additional year. The company had working capital of $20.1 million.</li>
<li>Polar’s overseas telecom sales are rising. A South Pacific Islands telecommunications client ordered $6.2 million in DC power generators in 2Q22. These generators will provide grid backup and off-grid connectivity to remote communities. The order will be fulfilled by the year’s end.</li>
<li>Telecommunications customers constituted 99% of sales compared with 92% in 2Q21. The company intends to diversify away from the highly concentrated telecom industry and expand its presence in new markets that can utilize its DC power platform.</li>
<li>Increasing geopolitical concerns are prompting increased interest in DC power systems for robots and drones. In addition, the commercial and residential markets are compelled to pursue greater energy independence via higher energy efficiency and renewable energy, creating new opportunities for the company to explore.</li>
<li>Eighty-eight percent of 2Q22 revenues were generated from the company’s largest customer, a Tier-1 telecommunications wireless carrier in the US. Sales to international customers accounted for 2%. Ninety-four percent of the company’s accounts receivable were from the company’s largest customer, indicating the highly concentrated nature of the business.</li>
<li>As part of this diversification effort, Polar has been expanding the power range of its portfolio. In March 2022, it received EPA certification on its 4Y Toyota (non-diesel) engine project aimed at expanding the power range to 35 kW from the existing 10 kW on natural gas and LPG. This certification brings clean fuel (non-diesel) engines to the market with low maintenance and lower operating costs.</li>
<li>The company is focused on efficiently navigating the disruptions attributable to supply chain shortages, extended lead times, inflation, and labor shortages. To counter this, it will continue to implement automation, expand vertical manufacturing processes to reduce the number of outside processes, and source materials internationally.</li>
<li>Polar plans to complete the development of natural gas and propane-fueled CHP generators. However, no timetable for further launches has been provided by the management.</li>
<li>Our prior content on POLA can be accessed&nbsp;here.</li>
</ul>
<h2>EARNINGS SNAPSHOT</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/293/047/original/image_68385548871660937257755.png?1660937269" class="editor-image img-responsive" data-smartkarma-image-id="293047"></figure>
<h2>OUR PREVIOUS RESEARCH CONTENT</h2>
<h2>Initiation of Coverage Report</h2>
<p>01/29/21&nbsp;Powering Ahead with DC Solutions in 5G, Electric Vehicle Charging, and Nano/Microgrids</p>
<p>Extensive coverage on Polar Power Inc. assessing key opportunities, obstacles, technology, industry, risks, competition, financials, management profiles, etc.</p>
<h2>Update Note Summary</h2>
<p>08/25/21&nbsp;2Q21 Results: +330% Top-Line Growth Drives Gross Margin Expansion and EPS Improvement</p>
<p>Polar Power reported 2Q21 earnings results. The company delivered impressive top-line growth in the quarter, gross margin expansion, and EPS improvement. Revenue grew +330.5% Y/Y and +47.3% Q/Q to $4.8 million.</p>
<p>12/09/21&nbsp;3Q21 Results: +65.4% Revenue Growth and Overall Performance Improvement with Focus on Customer Diversification</p>
<p>Revenue grew 65.4% Y/Y to $4.1 million. Higher sales of DC power systems to Tier 1 US telecom customers in support of their 5G infrastructure buildout and recovery from the pandemic have propelled the growth.</p>
<p>04/11/22&nbsp;FY21 Results: Revenue Surges 87.1% Y/Y as 5G Interest Grows and POLA Penetrates More Markets to Leverage Its DC Technology</p>
<p>Revenue grew 87.1% Y/Y to $16.9 million in 2021 compared with $9.0 million in 2020. The company’s revenue backlog stood at $11.8 million, with 72% attributable to Tier 1 US telecom customers, 27% to advanced mobility applications, and 1% to other markets.</p>
<p>06/07/22&nbsp;1Q22 Results: Revenue Grows 12.7% Y/Y Amidst Interest in Overseas Market; Labor Efficiency Improves</p>
<p>Polar Power reported 1Q22 revenue of $3.7 million, up 12.7% Y/Y from $3.3 million in 1Q21. Gross profit increased to $0.9 million (24.4% of revenue) compared with -$0.06 million in 1Q21 due to increased DC power system shipments to Tier-1 telecom customers and improved labor efficiency manufacturing these systems.</p>
<h2>COMPANY OVERVIEW</h2>
<p>Polar Power, Inc. (POLA) designs, manufactures and sells direct current (DC) power systems, power generators, battery storage, renewable energy, and cooling systems for backup power and off-grid power generation applications, including telecom (the largest vertical at &gt;90% of sales), auxiliary power generation for military vehicles, power generation for autonomous vehicles, electric vehicle rapid charging, marine and RV, in addition to power for industrial and residential applications. Through its DC power systems, Polar provides energy service to applications that do not have access to the utility grid (prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (backup power applications).</p>
<h2>The Technology</h2>
<p>DC power offers unique advantages over alternating current (AC) power solutions. DC power is significantly more energy-efficient than AC power, and DC motors and appliances have higher efficiency and power-to-size characteristics. When AC power is converted to DC power, there is an inherent loss of 5% to 20%. DC power is naturally compatible with battery storage and renewable energy sources such as solar and wind. Solar PV is a DC energy supply, as are batteries, telecom radios, and LED lighting, making DC a more compatible interface. According to Frost &amp; Sullivan, the DC power systems market size is expected to reach&nbsp;$5.5 billion in 2025&nbsp;from $4.2 billion in 2019.</p>
<h2>End-Markets &amp; Applications</h2>
<p>The telecom sector dominates the company’s revenue. The primary exposure is US wireless telecommunications carriers, although the company has an international growth strategy.</p>
<p>Telecom:&nbsp;5G networks demand higher network reliability, which drives demand for backup generators. Polar’s backup power generators are available in various fuel types and are 40% more compact than equivalent AC generators. Polar works with all major carriers.&nbsp;Expert Market Research&nbsp;expects the global telecom power systems market to grow at a CAGR of 9.6% between 2022 and 2027.</p>
<p>Government/Military:&nbsp;The company serves the military market as a prime contractor with innovative products like UPS + Prime Power, battery systems, cogeneration, and series hybrid electric drives to fulfill customers’ requirements. The military has provided Polar with a strong R&amp;D platform and is expected to continue to do so in the future. Polar has partnered with large defense contractors that are strong R&amp;D contributors to develop future technologies and configurations of DC power systems that can be leveraged across all applications.</p>
<p>Marine:&nbsp;The company has supplied DC generators for hybrid electric drives in pleasure vessels for over 10 years. The marine market’s share in revenue increased to 6% in 2021 from 1% in 2020. The demand continues to increase because of customer preference for operational comfort and fuel savings. There are also restrictions on diesel and gasoline engines for vessel propulsion in sensitive waterways, leaving electric motors and batteries as the solution.</p>
<p>EV Charging:&nbsp;Polar’s DC power systems are configured for a rapid charge that can also be used for emergency roadside assistance applications and support charging stations located along remote stretches of the highway. As EV adoption reaches a critical mass, requirements for EV charging should proliferate. Polar chargers can run on natural gas or propane in weak or no-grid areas and enable peak shaving. The waste heat can also be used in CHP solutions, further increasing energy efficiency.</p>
<p>Nano/Microgrids:&nbsp;Distributed energy resources (DERs) are rapidly growing worldwide. A key component of such a system is a generator that easily integrates into renewable and energy storage resources. Polar’s DC technology platform offers distinct advantages in this area, including footprint, reliability, and efficiency. This is a natural application for Polar, and the company’s products have already been used in this market. However, Polar needs a more formalized go-to-market strategy and is exploring various options to leverage this immense commercial opportunity. Polar is also developing a 50kW and 200kW product to better compete in this market.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Shawn Severson, who is the writer of this report, covers the BioEconomy, Emerging Growth &amp; Special Situations, and ClimateTech &amp; Sustainable Investing sectors for WTR. Mr. Severson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS


Polar Power reported 2Q22 revenue of $4.3 million, down 11.8% Y/Y from $4.8 million in 2Q21. The company’s domestic sales are driven by its telecommunications clients, as its DC Generators support the rollout of 5G infrastructure throughout the US. Supply chain issues hindered the company’s manufacturing and delivery throughout the quarter. Twelve percent of expected shipments for the quarter have been delayed. Complete results can be accessed&nbsp;here.
At the end of 2Q22, Polar’s revenue backlog stood at $14.0 million (added $9.9 million in 2Q22), of which 52% and 45% were attributed to the US and international telecom clients, respectively, and 3% to other markets.
Gross profit increased by 9.7% Y/Y to $1.1 million (24.8% of revenue) compared with $1.0 million in 2Q21, primarily due to improved labor efficiency in manufacturing and utilization of inventory that was written off as obsolete inventory in 2020.
Operating expenses were on par with last year’s figure of $1.8 million. The increase in marketing and administration expenses was offset by the decrease in R&amp;D costs related to the US market as the company primarily focused on product design and customization for its international clients.
Net loss decreased by $0.13 million to $0.7 million from a net loss of $0.9 million in 2Q21. Basic &amp; Diluted EPS improved to -$0.06 from -$0.07 in 2Q21.
At the end of 2Q22, cash stood at $2.7 million, while debt outstanding was at $0.2 million. Polar has an option to avail of a $2.8 million revolving credit facility against its assets until September 2022, which it can further extend with the bank for an additional year. The company had working capital of $20.1 million.
Polar’s overseas telecom sales are rising. A South Pacific Islands telecommunications client ordered $6.2 million in DC power generators in 2Q22. These generators will provide grid backup and off-grid connectivity to remote communities. The order will be fulfilled by the year’s end.
Telecommunications customers constituted 99% of sales compared with 92% in 2Q21. The company intends to diversify away from the highly concentrated telecom industry and expand its presence in new markets that can utilize its DC power platform.
Increasing geopolitical concerns are prompting increased interest in DC power systems for robots and drones. In addition, the commercial and residential markets are compelled to pursue greater energy independence via higher energy efficiency and renewable energy, creating new opportunities for the company to explore.
Eighty-eight percent of 2Q22 revenues were generated from the company’s largest customer, a Tier-1 telecommunications wireless carrier in the US. Sales to international customers accounted for 2%. Ninety-four percent of the company’s accounts receivable were from the company’s largest customer, indicating the highly concentrated nature of the business.
As part of this diversification effort, Polar has been expanding the power range of its portfolio. In March 2022, it received EPA certification on its 4Y Toyota (non-diesel) engine project aimed at expanding the power range to 35 kW from the existing 10 kW on natural gas and LPG. This certification brings clean fuel (non-diesel) engines to the market with low maintenance and lower operating costs.
The company is focused on efficiently navigating the disruptions attributable to supply chain shortages, extended lead times, inflation, and labor shortages. To counter this, it will continue to implement automation, expand vertical manufacturing processes to reduce the number of outside processes, and source materials internationally.
Polar plans to complete the development of natural gas and propane-fueled CHP generators. However, no timetable for further launches has been provided by the management.
Our prior content on POLA can be accessed&nbsp;here.

EARNINGS SNAPSHOT

OUR PREVIOUS RESEARCH CONTENT
Initiation of Coverage Report
01/29/21&nbsp;Powering Ahead with DC Solutions in 5G, Electric Vehicle Charging, and Nano/Microgrids
Extensive coverage on Polar Power Inc. assessing key opportunities, obstacles, technology, industry, risks, competition, financials, management profiles, etc.
Update Note Summary
08/25/21&nbsp;2Q21 Results: +330% Top-Line Growth Drives Gross Margin Expansion and EPS Improvement
Polar Power reported 2Q21 earnings results. The company delivered impressive top-line growth in the quarter, gross margin expansion, and EPS improvement. Revenue grew +330.5% Y/Y and +47.3% Q/Q to $4.8 million.
12/09/21&nbsp;3Q21 Results: +65.4% Revenue Growth and Overall Performance Improvement with Focus on Customer Diversification
Revenue grew 65.4% Y/Y to $4.1 million. Higher sales of DC power systems to Tier 1 US telecom customers in support of their 5G infrastructure buildout and recovery from the pandemic have propelled the growth.
04/11/22&nbsp;FY21 Results: Revenue Surges 87.1% Y/Y as 5G Interest Grows and POLA Penetrates More Markets to Leverage Its DC Technology
Revenue grew 87.1% Y/Y to $16.9 million in 2021 compared with $9.0 million in 2020. The company’s revenue backlog stood at $11.8 million, with 72% attributable to Tier 1 US telecom customers, 27% to advanced mobility applications, and 1% to other markets.
06/07/22&nbsp;1Q22 Results: Revenue Grows 12.7% Y/Y Amidst Interest in Overseas Market; Labor Efficiency Improves
Polar Power reported 1Q22 revenue of $3.7 million, up 12.7% Y/Y from $3.3 million in 1Q21. Gross profit increased to $0.9 million (24.4% of revenue) compared with -$0.06 million in 1Q21 due to increased DC power system shipments to Tier-1 telecom customers and improved labor efficiency manufacturing these systems.
COMPANY OVERVIEW
Polar Power, Inc. (POLA) designs, manufactures and sells direct current (DC) power systems, power generators, battery storage, renewable energy, and cooling systems for backup power and off-grid power generation applications, including telecom (the largest vertical at &gt;90% of sales), auxiliary power generation for military vehicles, power generation for autonomous vehicles, electric vehicle rapid charging, marine and RV, in addition to power for industrial and residential applications. Through its DC power systems, Polar provides energy service to applications that do not have access to the utility grid (prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (backup power applications).
The Technology
DC power offers unique advantages over alternating current (AC) power solutions. DC power is significantly more energy-efficient than AC power, and DC motors and appliances have higher efficiency and power-to-size characteristics. When AC power is converted to DC power, there is an inherent loss of 5% to 20%. DC power is naturally compatible with battery storage and renewable energy sources such as solar and wind. Solar PV is a DC energy supply, as are batteries, telecom radios, and LED lighting, making DC a more compatible interface. According to Frost &amp; Sullivan, the DC power systems market size is expected to reach&nbsp;$5.5 billion in 2025&nbsp;from $4.2 billion in 2019.
End-Markets &amp; Applications
The telecom sector dominates the company’s revenue. The primary exposure is US wireless telecommunications carriers, although the company has an international growth strategy.
Telecom:&nbsp;5G networks demand higher network reliability, which drives demand for backup generators. Polar’s backup power generators are available in various fuel types and are 40% more compact than equivalent AC generators. Polar works with all major carriers.&nbsp;Expert Market Research&nbsp;expects the global telecom power systems market to grow at a CAGR of 9.6% between 2022 and 2027.
Government/Military:&nbsp;The company serves the military market as a prime contractor with innovative products like UPS + Prime Power, battery systems, cogeneration, and series hybrid electric drives to fulfill customers’ requirements. The military has provided Polar with a strong R&amp;D platform and is expected to continue to do so in the future. Polar has partnered with large defense contractors that are strong R&amp;D contributors to develop future technologies and configurations of DC power systems that can be leveraged across all applications.
Marine:&nbsp;The company has supplied DC generators for hybrid electric drives in pleasure vessels for over 10 years. The marine market’s share in revenue increased to 6% in 2021 from 1% in 2020. The demand continues to increase because of customer preference for operational comfort and fuel savings. There are also restrictions on diesel and gasoline engines for vessel propulsion in sensitive waterways, leaving electric motors and batteries as the solution.
EV Charging:&nbsp;Polar’s DC power systems are configured for a rapid charge that can also be used for emergency roadside assistance applications and support charging stations located along remote stretches of the highway. As EV adoption reaches a critical mass, requirements for EV charging should proliferate. Polar chargers can run on natural gas or propane in weak or no-grid areas and enable peak shaving. The waste heat can also be used in CHP solutions, further increasing energy efficiency.
Nano/Microgrids:&nbsp;Distributed energy resources (DERs) are rapidly growing worldwide. A key component of such a system is a generator that easily integrates into renewable and energy storage resources. Polar’s DC technology platform offers distinct advantages in this area, including footprint, reliability, and efficiency. This is a natural application for Polar, and the company’s products have already been used in this market. However, Polar needs a more formalized go-to-market strategy and is exploring various options to leverage this immense commercial opportunity. Polar is also developing a 50kW and 200kW product to better compete in this market.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Shawn Severson, who is the writer of this report, covers the BioEconomy, Emerging Growth &amp; Special Situations, and ClimateTech &amp; Sustainable Investing sectors for WTR. Mr. Severson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

2Q22 Results: Revenue Down 11.8% Y/Y; Gross Margins Improve 4.8% Y/Y; Overseas Interest Rises