By Chris Berry

Introduction

After a recent slump, solar power has shown tremendous growth. Global photovoltaic (PV) capacity is 139 Gigawatts (GW) as of the end of 2013 and another 44.5 GW is forecast to be added in 2014. One GW is enough electricity to power between 750,000 and 1,000,000 US homes. The 44.5 GW mentioned above is almost a 21% increase y-o-y and equals the output of 10 nuclear reactors, according to Bloomberg. The chart below from the EPIA, shows the dramatic rise in PV capacity.

Overcapacity has resulted from government subsidies and has served to push panel prices down, helping to make solar more cost competitive with other fossil-fuel based sources of electricity. Dozens of panel makers still exist which implies further consolidation in the industry despite the projections mentioned above.

We are focused on finding value along supply chains across an entire industry and to that end the solar panel manufacturing business offers an interesting case study in finding value in a global “low growth” or “slow growth” environment. One of the key questions for market participants is “how will a panel manufacturer compete and thrive in a hyper competitive industry despite the rosy growth prospects?” Price declines and competition will hurt margins which in turn have the potential to impact investment returns.

The key is solar cell efficiency. Cell efficiency is defined as the ratio of energy output of the solar cell to input energy from the sun. In mathematical terms:

For utilities, commercial enterprises, or consumers to continue to adopt solar as a long-term source of electricity, it must be competitive with existing sources and over the longer-term, save money. One way to drive cost competitiveness is for panel manufacturers to focus on efficiencies in the panel production process. In conducting research for this case study, it became clear that cell efficiencies in solar panels can vary widely. There are several reasons for this. These include cell design, off-spec production, and impurities.

Offering a product which can monitor each step of the cell production process can help panel manufacturer’s margin expansion and drive closer to the overall levellized cost of electricity (LCOE). This is the “holy grail” in making solar power ubiquitous.

The LCOE is used as a tool used to define the relative cost of electricity generated from different sources regardless of project scale or timeframe. Another way to think about this is the total project cost divided by the energy generated.[1]

As believers in the need for ongoing disruption in industries in an era of excess labor and capital, the solar panel sector is not immune. Many panel manufacturers such as Yingli Solar (YGE:NYSE) realize this and utilize their own internal R&D centers to try and increase cell efficiency. Efficiencies can vary from 14% to 16% and higher for crystalline silicon cells, but this comes at a cost. Again, cost is key. The chart below from the National Renewable Energy Lab (NREL) shows a brief history of the drive to increase cell efficiency and the various solar technologies which I discuss further on in this case study.

As you can see, technology has taken the industry from lower left to upper right (higher efficiency).

Aurora Control Technologies (ACU:TSXV; AACTF:OTCBB) management has indicated that a .2% increase in cell efficiency can add $1M to a panel manufacturer’s bottom line profit (producing 15MW of cells). With over 550 panel “fab” lines in existence today, this can dramatically lower the payback period of the investment in products and increase the NPV. It aids in efficiency and gives a panel manufacturer an immediate “leg up” on its competitors.

ACU, based in Vancouver, BC, offers a solution which can help solar panel manufacturers survive and ostensibly grow margins in an increasingly tough, but growing, business. The key is their product offering which aims to increase a manufacturer’s ROI by monitoring cell efficiency during the cell manufacturing process rather than after the cell is produced. The remainder of this report serves as a case study in how ACU is attempting to disrupt the solar panel manufacturing sector to the benefit of all stakeholders.

Solar Manufacturing Backgrounder

I recently wrote a note on solar growth which you can read here. What is more important in this case study is a basic understanding of how solar powered electricity is created and the solar panel manufacturing process.

Solar cells used in photovoltaics can be grouped into two categories: crystalline silicon (c-Si) and thin film products. C-Si products currently comprise 85% of the overall market and are where ACU is focusing its efforts. C-Si production involves multiple processes for ingot, wafer, cell and module manufacturing and historically has yielded numerous products. One reason for this is that c-Si cells have demonstrated solid efficiencies (between 15–22 percent). Greater efficiencies can be had, but again, this is currently not commercially cost competitive. Each c-Si cell generates a small amount of electricity (up to 0.5V), so to achieve a significant amount of output power, a soldering process is undertaken to combine multiple cells. A schematic of the typical solar cell fabrication line is shown below.

Thin film solar cells typically use amorphous silicon (a-Si), cadmium telluride (CdTe), or copper indium (gallium) diselenide (CIS or CIGS)) in the manufacturing process. The cell efficiency with thin film is typically lower than with c-Si (around 5 to 12 percent) but is a potentially cheaper solution due to lower raw materials costs and larger surface area (also known as substrate size).

A detailed description of the c-Si production process from the ACU website:

“A c-Si cell manufacturing plant starts with a purified silicon wafer, doped with boron, as raw material. It takes each wafer through a processing sequence to create working solar cells.

The wafers are first passed through steps to remove surface and edge irregularities, clean the wafers and produce a uniform non-reflective texture on the surface. The surface of each wafer is then exposed to a phosphorous mist/gas and the wafers are heated in a furnace to cause the phosphorus atoms to be diffused into the crystalline silicon. This forms the solid-state chemistry in the wafer that allows it to generate electricity when exposed to light. A by-product of the diffusion process is the creation of a phospho-silicate glass (PSG) layer on the surface that must be removed in an etching bath. The next step is to create an antireflective coating on the wafers consisting of a transparent layer of Silicon Nitride or one of a number of compounds known as “Transparent Conductive Oxides”, which aid light capture by reducing reflections and quelling certain surface electrical activity. The final steps of the process is the printing process where electrode grids made from silver paste are screen printed onto the top of the cell and two contact strips are applied to the back of the wafer (a strip of silver and a layer of aluminum) to produce the back surface field. The printed wafer goes into a ~900ºC furnace to cause the printed layer to sink into the silicon wafer. A procedure to prevent short-circuiting of the cell (called “edge isolation”) will also be performed by one of a variety of methods by completion of this step. The finished cells are tested by exposing them to a bright light source and sorted into grades.”

The end result is a solar cell which is soldered into a panel and ultimately into an array. A crude demonstration of solar electricity generation is shown below:

ACU Background

Aurora Control Technologies Inc. was founded in 2009 and is based in North Vancouver, British Columbia, Canada. The mission of the company is to “develop, manufacture and market production measurement and control systems to the solar wafer, cell and panel manufacturing industry.” It is these products which ACU will sell to panel manufacturers to address the issue of cell efficiency. As I said above, slight increases in cell efficiency (roughly .2%) can yield significant savings to panel manufacturers (up to $1 million per fabrication line). With the typical solar panel manufacturer running multiple lines simultaneously, these savings can add up quickly and help increase margins in an increasingly fierce business and pricing environment.

Management Overview

ACU was founded by Michael Heaven (Chairman), Gordon Deans (CEO), and Steve Blaine all of whom have extensive backgrounds in process engineering and control and measurement systems. The template for ACU going forward can be traced to a company called Measurex which was acquired by Honeywell in 1997 for $600 million in cash. Measurex developed a unique in line processing technology to increase efficiencies in the paper and pulp industries. Michael Heaven has direct experience with Measurex having worked for the company as a Vice President of Engineering. Additionally, Gregory Ayres, COO of ACU served as an executive at Measurex for 12 years. Complete Management bios can be found in the Appendix.

ACU’s Products

A unique attribute of ACU’s offering is that it provides real-time measurement of cell manufacturing and allows a customer the ability to “fine tune” a cell manufacturing line on the go. This is in stark contrast to only gauging a cell’s efficiency during the post-production phase. If a cell’s efficiency is sub optimal, the cell can be wasted, harming profitability. ACU’s performance benchmarking will aid in minimizing waste.

ACU’s primary products are the Decima CD in line measurement system and the Aurora PMC production controller.

The Decima CD (above) is installed throughout a cell production line at multiple points to monitor the production process and the Aurora PMC (below) serves as the control software which is networked to all Decima CDs.

Below is a schematic showing how ACU’s products would “fit” on a typical solar cell fabrication line.

The Decima CD is also scalable, so regardless of the size or number of fabrication lines, economics can be maintained and enhanced as the number of fabrication lines increases. While there are companies which measure certain aspects of the solar panel fabrication process, I was unable to find any direct competitors to ACU’s business model in my research for this case study. This first mover advantage can serve ACU well. As the company leverages the Decima CD technology, ACU can help a growing customer list increase its cell efficiencies, outmaneuvering their competition.

ACU has patents pending on their technology (PCT/CA2011/000508: “Non-Contact Measurement of Semiconductor Layer Doping Density” and PCT/CA2010/000772: “Process for Improving the Production of Photovoltaic Products”).

Partners

Perhaps the optimal strategy to sell your product is having customers demonstrate its efficacy to the marketplace rather than yourself. ACU has undertaken this strategy by aligning itself with top tier solar research facilities and solar cell manufacturers in various, and strategic parts of the world.

From a research perspective, in 2012 ACU partnered with the International Solar Energy Research Center Konstanz (ISC Konstanz) in Germany. This research center is ranked as one of the top research institutes globally for crystalline silicon solar cell research. The goal at the time was to validate ACU’s Decima CD technology as well as jointly research other potential end uses. Importantly, ACU retains full ownership and control of the information generated under the agreement. This relationship is significant for a number of reasons but the fact that both ISC Konstanz and ACU share the same goal of increasing cell efficiency is paramount among them.

In 2013, ACU negotiated agreements with SIBCO BV to develop, market and install ACU products in China and Jonas and Redmann LLC who agreed to integrate the Decima CD technology into their PV wafer and cell production value chains. Earlier this year, ACU shipped a Decima CD and Aurora PMC module to SIBCO for demonstration and product evaluation purposes by cell manufacturers in China.

Also in 2013 Hanwha Q Cells qualified ACU’s Decima CD for use in Q Cells solar cell manufacturing facilities. Hanwha Q Cells is a global leader in PV technology. The company also installed a Decima system in their production facility in Germany.

Momentum has continued into 2014 with ACU appointing Hauman Technologies Corporation, a supplier to major PV manufacturers, as its market partner for Taiwan. Founded in 1979, Hauman will introduce the Decima CD and Aurora PMC to selected lead users in the Taiwanese market for evaluation and then leverage these relationships to enhance more widespread adoption.

Also in February 2014 the Company received a purchase order from TetraSun, Inc. (acquired by First Solar (FSLR:NASDAQ) in 2013) for its Decima CD inline measurement system, with an option for follow-on orders. This is highly significant as First Solar is one of the largest PV panel producers in the world with a market capitalization of $6.55 billion. More significantly, FSLR is also among the leaders globally in cell efficiency with a goal of commercializing a cell at 20%, well above the typical 15% commercially prevalent today. FSLR has also committed to invest $100 million in the Japanese solar rooftop market – a key growth area. The plan is to utilize the Decima CD in commercial production of TetraSun’s products and generate cost savings and revenue increases by utilizing ACU’s technology.

ACU continues to enhance relationships like those mentioned above with profitability as the end goal. As we discuss below, this is already beginning to have an effect.

Potential and Economics

Though the solar panel manufacturing business has been around for decades, ACU appears to be entering the industry at a time when consolidation is likely amongst participants despite the clear positive growth trajectory. This is a fiercely competitive business with many participants. The NYSE Bloomberg Global Solar Energy Index has 128 constituents (though not all of these are panel manufacturers) and the Guggenheim Solar ETF (TAN:NYSE) (one of the most popular ETFs on the market) has 26 with a greater percentage of panel manufacturers included. Please see the Appendix for the constituents and performance.

Below are some select recent financial metrics from the NYSE Bloomberg Global Solar Index demonstrating improving economics with respect to margins and returns from 2012 looking forward:

The gradual improvements we see here bode well for the industry, but for this improvement to be sustainable, efficiency gains are paramount and this is the niche ACU aims to fill. More evidence is shown below with historic and forecast PV manufacturer revenue growth:

ACU aims to sell their products and services to multiple cell manufacturers for use on multiple fabrication lines within each company. It is not at all rare for a cell manufacturer to be running up to 10 lines or more at any given time and ACU will offer a solution for each line, negotiating a master purchase agreement to achieve this. With approximately over 550 cell fabrication lines in existence today with more planned, ACU is poised to grow along with the overall market.

Prices for ACU’s services are to be negotiated, but with Bloomberg recently reporting that solar capital expenditures will reach $3 billion in 2014, there appears to be ample opportunity for ACU. ACU will offer a solution which is a minimal cost relative to larger capital expenses with a fast payback (perhaps one year depending upon the size of the cell fabrication line).

Based on the partnerships discussed above, ACU has already started to record revenues. Thus far in 2014, ACU recorded a sale of US $98,000 to TetraSun for a Decima CD system and recorded a sale of US $54,000 to a company in Taiwan for a Decima CD system. These are small but significant steps towards profitability.

SWOT Analysis

Though a SWOT analysis for any early stage company is presumably slanted towards the weaknesses or threats, a balanced appraisal of both the pros and cons is necessary. Realizing and critiquing the opportunities and the company management’s ability to capitalize on them is vital.

Strengths – As costs to produce PV cells continue to fall, solar energy should continue to become a growing percentage of the overall electricity demand “pie”.

ACU’s technology and how they plan to apply it is unique within the PV industry. This “first mover” advantage should help ACU as it ramps up its sales.

The ability to use Measurex as a model for growth, not to mention ACU Management’s direct experience with the growth and eventual sale of Measurex to Honeywell, is a valuable guide.

ACU has a sound capital structure with no debt and a low share count – crucial for an early stage company.

The business model is scalable as technology can be deployed across multiple cell fabrication lines simultaneously.

Weaknesses – There is a lack of liquidity in the stock with the 30 day average daily volume (ADV) at 12,115 (Source: Bloomberg July 29, 2014). This lack of liquidity could prevent all but those with a long investment horizon from owning the stock.

The “risk off” mentality could be detrimental to micro cap companies like ACU as investors favor larger cap names or other asset classes.

Opportunities – The size of addressable market (projected at over $30 billion in PV manufacturer revenue in 2014) is growing at solid compound annual growth rates.

ACU’s background in real-time process technology and intellectual capital allow for first mover advantage.

Threats – Should government subsidies evaporate, the “shine” could be taken off of solar as an electricity source.

Fast growing markets attract attention and competitors. Research & development in the solar cell sector could render ACU’s technology obsolete, though it would take time for existing supply chains to be deconstructed and new ones emerge.

As ACU is thought of as a micro cap stock, funding may be difficult to negotiate going forward.

Scalability is crucial and ACU must manage capital appropriately to have the intellectual capital (sales force) in place to achieve the economies of scale anticipated.

Conclusion

Solar energy is a multi-billion dollar business with many moving parts along its value chain. The mandate from governments and demand from consumers for a diversified and cleaner energy infrastructure is clear and ACU aims to join this chain and grow within it. As the market grows and competition remains fierce, efficiency in panel production will be the “name of the game” and ACU aims to be the answer to the industry going forward. As the company continues to build and leverage global relationships backed by a disruptive technology, the potential exists for ACU to become an indispensable part of the solar power supply chain.

Appendix

Management Bios

Gordon Deans – CEO - Gordon Deans is Aurora’s President & CEO. He serves on the Board of Directors, and he is also a co-founder of ACT Aurora Control Technologies Corporation Inc.

Prior to founding Aurora, Gordon held leadership positions at a number of high-technology organizations. At Adept Technology, Inc. (ADEP: NASDAQ), a company specializing in advanced industrial robotics, he was an executive officer of the company, serving as corporate Vice President of Business Development and General Manager of its Canadian subsidiary. At Norsat International Inc. (NII:TSX, NSATF:NASDAQ), a company providing ground station equipment for satellite communications, he was an executive officer of the company, responsible for business development and sales and marketing for their commercial technology products. Gordon also spent 17 years with Nortel Networks and Bell-Northern Research in a number of increasingly responsible positions in research & development, product marketing, and business development.

Mr. Deans holds a Master of Engineering degree from Carleton University and a Bachelor of Science in Electrical Engineering from Queen's University. He is a member of the Institute of Electrical and Electronic Engineers and is a Registered Professional Engineer in the Province of British Columbia, Canada.

Grant Smith – CFO - Grant Smith is Aurora's Chief Financial Officer.

Mr. Smith is the senior partner with Clearline, a firm of chartered accountants with offices in Vancouver, North Vancouver and White Rock. Mr. Smith serves as the CFO for Canadian TSX Venture companies with operations in Canada, the USA and Mexico. Mr. Smith worked at PWC prior to taking his roll with clearline and has spent many years in the mineral sector. His experience also includes extensive experience in both private client services and the not-for-profit sector. Mr. Smith is also actively serving his community where supports the arts and the social services by acting on various boards.

Greg Ayres – COO - Greg Ayres is Aurora's Chief Operating Officer. Prior to joining Aurora, Mr. Ayres held leadership positions at a number of high-technology organizations in industrial automation, cloud services and SaaS. In addition, he has served as a member of the Board of Directors for Pavilion Technologies Inc., a real time performance management, advanced process control and environmental compliance software solutions provider for process manufacturers (Austin, TX) and for YesVideo Inc., a cloud-based digital imaging company that provides systems, software, and online tools to index, organize, archive and share media content in real time (Santa Clara, CA).

Greg served 4 years as an executive at Honeywell Industrial Automation (NYSE: HON), serving as VP and GM of the Honeywell Industrial Pulp and Paper Automation Group and VP and GM of the Honeywell Industrial Metals Industry Group. He also served 12 years as an executive of Measurex Systems Inc., a company providing industrial measurement, automation, and information management systems to process industries, where he was responsible for the sales, software integration, and services associated with process control and information systems.

Following Honeywell, Greg was instrumental in the creation of YesVideo, where he served as Chief Operating Officer and built world-class, highly automated production and cloud hosting systems in the US, Canada, Japan, Europe, Australia, and India. At YesVideo, he developed efficient channels to consumers through partnerships with Costco, Wal-Mart, Sam’s Club, Walgreens, CVS, Rite-Aid, Sony, JVC, Kodak, and FujiFilm. Prior to YesVideo,In his early career, Greg served as an engineer at Procter and Gamble (NYSE: PG) where he implemented capital improvement projects in P&G manufacturing plants.

Greg holds a BS degree in Chemical Engineering from the University of Minnesota and successfully completed the Program for Management Development (PMD) at Harvard Business School.

Board of Directors

Gordon Deans – CEO

Grant McDonald - Grant Macdonald serves as the Chair of the Audit Committee on the Company's Board of Directors.

Grant is a graduate of the University of British Columbia Law School and from 1959 to 1982 practiced law in the Province of British Columbia, engaged primarily in the fields of criminal law and civil litigation.

After leaving the practice of law, Mr. Macdonald entered the sphere of private business, acquiring and operating several retail operations and acquiring and redeveloping historic real estate properties. In 1983 Mr. Macdonald entered the investment business by joining Continental Carlisle Douglas (later Continental Securities) where he served in various executive capacities until 1989 when the firm merged with Yorkton Securities. Subsequently Mr. Macdonald was employed by and served in various executive positions with Yorkton Securities Ltd., Brink Hudson & Lefever Ltd and Canaccord Capital Corporation. He was Senior Vice President of Canaccord Capital from November 1998 until March 2005. In 1993 Mr. Macdonald created a venture capital firm, D. Grant Macdonald Capital Corp., of which he has been President and Chief Executive Officer until the present time. Mr. Macdonald was a member of and the Chairman of Hybridge Investment Management Inc., a Portfolio Management firm, from June 1997 until November 2006. In the area of public markets, Mr. Macdonald was a Director of TSX-V listed Zecotek Medical Systems Inc. and its predecessor companies from 1998 until May 2006, President from September 2001 until January 2006 and Chief Financial Officer from January 2006 until June 2006.

Michael Heaven – Executive Chairman of the Board - Mike Heaven chairs the Board of Directors and Aurora’s Advisory Committee. He is also a co-founder of the company.

Mike has had over 20 years experience in the development and application of measurement and control technology to a variety of industries. He has published extensively in the field of industrial measurement and process control and holds eleven patents in this area. His extensive in-depth experience in this field is particularly pertinent to the role Aurora is playing in the solar energy industry.

As General Manager for PT Papertech Inc. from 2003 to 2008, Mr. Heaven drove the development and delivery of innovative machine vision systems for in-line process monitoring and optimization in paper, tissue and steelmaking. Prior to Papertech, he was Chief Operating Officer of Norsat International Inc. (TSX: NII, NASDAQ: NSATF), a company providing ground station equipment for satellite communications. Before Norsat, Mike spent 13 years with Honeywell in various senior engineering and marketing roles. Prior to Honeywell, he spent five years in the steel industry, responsible for Dofasco's Hot Strip Flatness and Profile Control program.

Mr. Heaven holds a Bachelor of Science degree in Electrical Engineering from McMaster University and is a registered Professional Engineer in the Provinces of British Columbia and Ontario, Canada. He also holds an MBA from Queen's University.

Thomas Schmidt - Mr. Thomas Schmidt has comprehensive experience in the setup, management and reorganization of companies active in the fields of solar technology and plant engineering. He has broad-based technical experience in the field of plant engineering and construction of media supply and disposal facilities for the semiconductor and biotechnology sectors as well as for photovoltaic systems. Mr. Schmidt has been the Managing Director of TST-Consultants GMBH, Potsdam and Brehna since July 2008, a globally active consulting and service company for the industrial production of photovoltaic systems. The company’s focus is work on wafer, solar cell and thin-film module manufacturing. Before that Thomas was Operations Director at CSG Solar AG in Thalheim from October 2007 to June 2008. Prior to CSG, from 2004 to 2007 Mr. Schmidt was the Chief Operations Officer at Q.Cells AG/SE, one of the largest solar cell manufacturers worldwide. Mr. Schmidt is a voluntary board member of the Berlin-Brandenburg Solar Region Network and serves as spokesman and board chairman of the PVExperts association.

David Toyoda - David Toyoda is an associate at Boughton Law Corporation, and serves on Aurora’s Board of Directors.

David graduated from the University of British Columbia with a Bachelor of Law degree and a Bachelor of Commerce degree (Honours). He was called to the Bar in 1993. Mr. Toyoda practices in the corporate and securities law area, focusing on companies that list on Canadian stock exchanges. Mr. Toyoda teaches in the areas of corporate governance and public financing at Simon Fraser University, Faculty of Business Administration and the TSX Venture Exchange. He has also coordinated courses for the Continuing Legal Education Society of British Columbia. He is the Past Chair of the Securities Law Subsection of the Canadian Bar Association (B.C. Branch) and was a member of the Securities Law Advisory Committee for the B.C. Securities Commission.

Top Ten Global PV Cell Producers in 2013

Constituents of Guggenheim Solar ETF and 1 Year Performance

World Solar Radiation Map

Swanson’s Law – Price of PV Modules Falls 20% for Every Doubling of Shipped Volume

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[1] A Manual for the Economic Evaluation of Energy Efficient and Renewable Energy Technologies; Thomas Holt, Walter Short, & Dan Packey; NREL/TP-462-5173; March 1995.