I earlier published an article about ACT Aurora Control Technologies for Seeking Alpha readers on February 24 this year. The article can be seen here.
This company is of interest because of its potential to disrupt the solar manufacturing industry and may be a strong long-term investment. Solar cell and panel manufacturers are plagued with gross inefficiencies, with too many low-quality solar cells being produced.
The group of engineers and scientists at ACT Aurora Control Technologies Corp. (OTCPK:AACTF); (ACU.V) - in collaboration with solar industry producers and the sector's top research associations - have developed patent-pending transformative inline measurement and control systems that appreciably increase the yields of high-profit-margin solar cells.
On April 14, I interviewed the executive chairman of Aurora, Michael Heaven. Following is the interview.
CB:Could you tell us about your background, and how you've come to start and to become the chairman of Aurora?
MH: Sure, Craig. I have spent over 20 years as an engineer and executive in process control and automation with Honeywell, Measurex & other companies. In every industry I have worked, inline measurement and control of manufacturing processes is standard operating practice. Processes run with what is called "3-4 sigma performance" as a minimum benchmark of quality -- that is, 99.3% or better of the products fall within the quality limits off the assembly line.
Measurement and quality control is so critical for most manufacturing processes that production lines do not operate without it. Major companies employ dedicated personnel to look after the measurement and quality control of manufacturing lines.
The solar industry -- born of a rapid initial growth where everything was consumed -- is devoid of in-line measurement, let alone control. Wafers go in, cells come out, and are graded into a number of bins, and performance of the fabrication lines is running well below 2 sigma, meaning one in 22 cells, or more, is defective. That number is just not acceptable! With the increased level of competition, it's time for the sector to come of age - to add inline process measurement and quality controls like other industries -- and the rewards will be stellar for the entire sector, and particularly for the cost of electrical generation.
With 60 cells in a module - that is, a solar panel -- and with thousands of modules in a solar farm, the opportunity for improvement is staggering. We see the opportunity to bring to the photovoltaic industry the first ever in-line measurement and control equipment as a disruptive opportunity we could not ignore. This has led to the formation of Aurora, to the invention and patenting of the products, through to today, and my having become executive chairman.
CB: That sounds great. So tell us more about the disruptive opportunity for the company in the solar sector.
MH: There are over 500 fabrication lines producing solar cells globally, billions of cells. Today, with grid parity being achieved - that is, with the cost of solar on a par with, or less than, other sources of electricity in many regions of the world -- at least 200 more are being added this year.
The disruptive opportunity is that Aurora's measurement and control equipment can bring much higher quality solar cells on a standard basis, thereby becoming essential to the new line of competitive advantage among solar cell manufacturers as they produce higher efficiency, more uniform cells and charge more for their modules.
This is exactly what happened first with Hanwa/Q Cells where we worked together to prove our measurements and are now measuring and sorting cells for yield improvement.
That is exactly what is happening with TetraSun - the subsidiary of First Solar (NASDAQ:FSLR) which is using Aurora inline measurement and control equipment -- as they strive to consistently produce cells that are 5% higher efficiency than those currently in the market. The 5% higher efficiency cells represent a very substantial advantage in the market.
So, as we become part of the new line of the competitive advantage, the existing fabrication lines must be either retrofit with our solutions or replace the lines at much higher cost. The disruptive opportunity for Aurora's expertise is to have our equipment specified on all the new solar cell production lines, and to offer the in-line measurement and control services to allow the existing lines to upgrade and compete.
The new fabrication line market represents approximately $100-million revenue potential annually for Aurora while the installed base represents an opportunity of approximately $250 million in equipment and $100M in continuing services.
CB: Please break that last part down again.
MH: The installed base of 500 operating fabrication lines globally represents an opportunity of approximately $250-million in equipment and at least $100M in continuing services to Aurora following the same business model as Measurex, which was sold to Honeywell in 1997 for $600M.
CB: Understood, so the $100-million annual opportunity is for the new lines being installed this year, and in ensuing years. The $250-million opportunity is for retrofitting already existing lines.
MH: Right, the $100-million would be annually as the additional lines are added, and then the installed base must improve their performance with Aurora's products and services to compete as new modules come up with much tighter performance, much tighter specifications and much higher output.
CB: How did the situation develop that solar manufacturers are producing solar cells with deficiencies? Has there been a flaw in the production process?
MH: So, the situation was really born out of the heady days of government subsidies and rapid deployment where anything you produced could be sold. Given the relatively low cost of the finished solar cell and the fact that the product was flying off the shelves as fast as it could be produced, there was little incentive to add process controls.
There's also the "baking cookies" attitude in the industry, that once you get the recipe right out of this clean-room fabrication line, the 'cookies' appear to come out the same, and the furnace suppliers will tell you, "well, yeah, everything's uniform coming out of the furnace." However, a very wide range in quality of cells is being produced, including the low-quality cells discussed earlier. Then, when subsidies waned and the market consolidated, the pressures increased on producers to reduce cost, and to produce more high-quality cells.
So, the first step for the industry was to focus on the significant labor component, and solar cell manufacturers moved the production to cheaper locations in terms of labor. And this has allowed the industry to get to break even operations.
To make profits now, the next step is to improve the top-grade yield on the lines, reduce costs by not producing a cell to completion that you know will not meet the specs and to thereby increase the performance specs of the module so that they can charge a premium. That's where we come in.
Source: Aurora Website
Could you provide an example of the cost savings for solar manufacturers who use Aurora's measurement and process control equipment? Do you have a feel for the Return on Investment (ROI) of Aurora's equipment?
MH: This is an excellent question, and there are several parts to the ROI. The simplest is to sort the cells directly after they come out of the furnace. And that step occurs very early in the process. By simply eliminating substandard cells, the line can save over $330K annually. Established manufacturers have from 10 - 50 production lines.
So, we get crystalline silicon wafers coming onto the assembly line. They get texturized, and they go into a furnace where the emitter is formed. If you can sort the cells coming out of the furnace - as the fabricator can do using Aurora's equipment -- and weed out the substandard cells, and not process them to the end of the line, you save all the costs downstream which include etching, coloring and the most expensive step of printing the cells with silver paste which represents 10% of the overall cell cost. Then you run them through testing and sort them into bins.
So the manufacturer saves all that cost by eliminating the cells that are substandard coming out of the furnace. Given that one out of 22 cells are out of spec after coming out of the furnace, there are millions of cells that should not be finished, and instead should be recycled or run back through the furnace again. This action alone has a payback of 6.4 months based on a $175,000 investment using Aurora's solution, and that's based on using the standard cost model for a fabrication line.
CB: That's excellent.
MH: Another element of the ROI is the fact that there's a sweet spot that produces the most efficient cell based on a measurement of "sheet resistance" after the furnace process.
Too low a "sheet resistance" means low efficiency, and if the "sheet resistance" is too high, there's poor contact between the metal emitters in the cell so that it cannot transfer power very well. With 60 cells in a module, or solar panel, and there are tens of thousands of modules in a solar farm, it scales incredibly. Just run the numbers on that, and you'll get something in the neighborhood of 250 to 500 megawatt-hours per year increase from a 10,000-module farm. And that can easily justify paying 5% or 10% more for the modules when you install them in the first place. The payback is really a function of how the modules perform over their lifetime in the farm.
Source: Aurora Website
And then the last part of the ROI is the necessary element in producing cells with game-changing efficiency improvements, such as the more than 20%-efficient TetraSun cells. How much is that worth in the market with an average efficiency of 15%-efficient modules? Average solar cells produce 200 to 230 watts peak compared to Tetrasun's modules at over 300 watts peak - that's a huge advantage, enough for a solar supplier to capture a significant portion of the Japanese rooftop market.
CB: Got it. What is the industry standard for acceptable product that comes out of the manufacturing plant, and how much do you bump it up?
MH: The industry doesn't know what the performance level is coming out of the furnace process because they only measure very infrequently with lab testing equipment, known as the "4-point probe." They have no idea the degree of variations in solar cell quality coming out of the furnace. Therein lies the problem, or in our case the opportunity.
All they get at the end is the grading of each cell and putting each into separate bins after testing them. At that point the number of sorting bins clearly demonstrates how wide the cell variance is when it comes off the assembly line. We're seeing 60 to 120 bins at the end of the line, and that's far too wide of a range, especially with the dwindling market for low-grade cells. Our mission is to eliminate the bins for bad cells.
CB: Wow! With your technology, how many bins would you see instead?
MH: What we would expect to happen is that the number of bins that you would need at the end of the line would be reduced significantly, by 3 or 4 times, and you would have a higher overall efficiency achieved on the line.
Studies have shown that the tolerances on the modules vary significantly. If I were building a solar farm, I would find the highest efficiency modules I could buy and test every one of the modules to make sure they meet or exceed their published specs.
CB: Understood. When do you anticipate revenues to start ramping up for Aurora? When do you see a broad rollout for this technology to start to materially influence the majority of solar manufacturers?
MH: Aurora's revenue ramp started with the sale of our measurement and process control systems, the Decima equipment, to TetraSun two months ago in mid-February. Given that we meet our performance targets with that installation, they'll standardize on our solution as they build additional lines.
We have changed our sales model to more of a consultative selling approach, and we have produced a number of Decima measurement and control systems and are in the process of "benchmarking" a number of the larger producers of cells. In that process, we offer them a results guarantee, based on measurably improving cell performance against the benchmark, and we say we will be able to achieve this improvement in yield, this improvement in efficiency. If we exceed our production and performance promises, we have pricing locked in for measurement control services on subsequent lines.
Given the consolidation among solar manufacturers that has occurred, the orders can scale quite rapidly. Manufacturers today are typically operating tens of production lines - you know, 10-20-even 50 lines - and we can expect additional reference orders through the fall of this year, and into larger scale production in the first half of 2015.
Assuming we achieve our goal of becoming required equipment in all the new lines, consistently producing higher efficiency cells -- and we have a phenomenal first step with First Solar and their TetraSun subsidiary - manufacturers will need to wrap our Decima systems into all their installations as they struggle to stay competitive.
CB: OK, now, let's break that apart a little bit. Do you have a feel for when TetraSun will standardize the use of the Aurora Control measurement equipment?
MH: The agreement we have signed with them is basically a window for four years and they can acquire additional measurement and control products from us during that period. First Solar's plan is to build significant production capability using the crystalline silicon technology they acquired with TetraSun, and Aurora has the potential to become an integral part of their process as they build out and scale their lines.
CB: There's probably a near-term target here, Mike, regarding TetraSun's first uses of your equipment, right?
MH: We deliver the first products to TetraSun in early May for their factory acceptance tests and will be recognizing the revenue when we ship. We are mobilized and excited to be part of this revolutionary line commissioning!
The element of our revenue scaling is to be specified on all of First Solar's crystalline silicon lines, which, as long as we perform as expected, we will be part of that build out.
CB: Right. That's crucial. Between now and the end of the year, will there be other manufacturers that will be coming on line based on what you are doing now with the testing of boatloads of cells?
MH: Yes, we are in discussions with several manufacturers right now. Most importantly, we're also in the process of benchmarking the industry and understanding where it's at in terms of efficiency of solar cells coming off the assembly line - as compared to the potential that each manufacturer could achieve -- and using the benchmark to offer performance guarantees to the manufacturers who are looking to differentiate in the marketplace. We will aggressively pursue this benchmarking and performance guarantee strategy until we are rewarded with Aurora's first Master Purchase Agreement from a major player, which is what we expect to impact our production ramp-up in the first half of 2015.
CB: Do you expect a first Master Purchase Agreement this year?
MH: We are working toward a handful of orders over the next 6 months - and most would be with bigger, recognized solar cell manufacturers reflecting their growing understanding of the need for quality control in the industry. We are targeting a Master Purchase Agreement from one of these customers by the end of the year.
CB: Good. How is the company's cash position, and are you planning a financing near-term? At present, the company has 22.8 million shares outstanding, 28.5 million shares fully diluted.
MH: We had $1.1 million cash in our most recent financial statement (Dec/13) and we have a burn rate of approximately $100k per month. Also, we have approximately $1.2 million worth of warrants that expire during the course of the summer. We are working very hard to get out material news that will see those warrants get exercised.
Also, we have a supportive shareholder base so accessing the public markets has not been an issue for ACT Aurora so far when necessary and we are considering the potential for strategic industry investors. Of course, we balance our financing needs with the dilution of our existing shareholders which we are very mindful of. Overall we run a very tight ship, minimize our burn rate and we are confident we will have access to the funds we need to achieve our business plan.
CB: So, in the next three to four months, a million dollars would be adequate to get you to the next level?
CB: Is Aurora developing additional process control technologies for the solar sector or other industries?
MH: Aurora's current products would be easily applied to other parts of the solar cell manufacturing process, and we're actively pursuing patents in that area for the solar cell manufacturing process. We've discovered some very interesting things that we can measure that I can't talk about yet, as we're in the process of protecting them.
We've looked at the application of our products for the next generation of solar cells, known as PERC cells -- which stands for Passivated Emitter and Rear Cell. And we can certainly apply our technology to thin film solar cells, which are sold to approximately 15% of the solar market. Obviously, since thin film is First Solar's main product line, and since we are suppliers to their TetraSun subsidiary, if we're successful on the first-line silicon initiative for them, it's quite logical to see us on their thin film lines.
To maintain the focus of our company, we really aren't looking outside the solar industry. We're laser-focused on the mainstream photovoltaic or PV industry - crystalline silicon solar cells -- not even thin film, because silicon solar cells represent 85% of the solar industry. It has a compelling need and exceptionally short payback for our products and services.
CB: Very interesting. In terms of the new technologies for solar, Mike, those would come after you have your main line well established, so let's say, another year or two before more technologies to follow. Is that correct?
MH: Yes. With TetraSun technology, and their target of 21%-efficiency cells, we are already working with a leader in the next-generation cells. All the players that are out there producing modules in the 14-16%-efficiency range are going to be looking at TetraSun's modules and thinking, we've got to re-tool those lines or invest in new fabrication lines with the new technology and who's on that line in terms of automation? Well, there's already an Aurora Control Solution after the furnace process.
CB: 'makes sense.
MH: The other key is this: Why waste all the money on all those downstream steps? If you can take the under-performing cells out of the line-up early, you haven't invested much. They can easily be brought back to become high-performance cells if caught early enough. So we feel we are currently in the most important spot in the manufacturing process.
CB: Does Aurora have competitors?
MH: Not really. At the key point, right after the furnace process, there really isn't an established player that has been able to demonstrate performance levels to compete with the off-line measurement. Off-line measurement, of course, is done very infrequently in the lab and misses the vast majority of the product being produced. Our equipment is non-contacting, and performance results are immediate, at the pace of the production line and at a speed suitable for sorting or closed-loop control of the furnace. The competition in this space where we are located is minimal.
You have a very fragile cell running on a belt, and you don't really want to pick it up with a handling device because it could break. So the best thing would be to just have the conveyor carrying the cell run underneath our measurement which is non-contacting and get the performance potential from it without touching the cell or slowing the line. That really is our competitive advantage - that we've figured out how to do that and that is what our patent is based on.
CB: Good. Understood. Can Aurora prevent being bought out prematurely?
MH: We have a proven product, which is well protected from an intellectual property perspective, and as we disrupt the industry and move into volume production, we do expect interest from a number of equipment furnace suppliers and automation suppliers servicing the industry, and especially given that our installation is located directly after the furnace process.
The most logical players would be the furnace suppliers that would be looking at Aurora. Our shareholder base between a small number of investors and management controls over 60% of the issued stock and has been very supportive. I expect that they would want to see a market value of 3 to 4 times, or significantly more than our current market cap before they would entertain a buyout proposition. We are taking the path of building a growth company that is a leader in a very lucrative field.
CB: I get it Mike. Thank you very much for the interview.
MH: My pleasure, Craig.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.