HLRTF: An intriguing development stage EV play
OTC:HLRTF
The electric vehicle market has grown from a fledgling industry representing less than 1% of total vehicles sold in North America in 2018 to nearly 5% of the same market in 2021. The growth of this market is only expected to accelerate further over the next decade as technologies mature, automakers shift their product mix to include a higher proportion of electric vehicles (EVs), consumer acceptance of EVs grows and regulations force increased adoption of EVs around the globe.
Depending upon the source, the global EV market is forecast to grow between 20% and 28% annually over the balance of the decade. However, one of the key factors that could limit the wider acceptance of EVs by consumers is the maximum range of most EVs on a single charge, which has remained stubbornly stuck between 200-300 miles or 322-482 km. In order to improve the real world range of EVs manufacturers are laser focused on every aspect of the automobile design to improve efficiency of the vehicles including aerodynamics, reducing rolling resistance of tires and seeking ways to reduce vehicle weight.
One critical component of the electric vehicle power system, known as a traction inverter, holds the potential to improve battery system efficiency meaning more of the stored power could be used to propel the vehicle. A more efficient power system could lead to smaller batteries and reduce overall vehicle weight. Traction inverters are undergoing a significant shift in the market from being based principally on integrated gate bipolar transistors (IGBT) to the next generation which is likely to be based on Silicon Carbide (SiC). As a result of the projected growth in demand for EVs in general and the need for more efficient power solutions, the market for silicon carbide (SiC) traction inverters is forecast to grow from roughly $660 million in 2021 to $5.8 billion in 2028.1
Hillcrest Energy Technologies (OTC:HLRTF) is a pre-product, development stage company seeking to address the issue of traction inverter inefficiency with a solution to improve the transfer of energy from the stored battery to the power system, reducing the cooling requirements of the system, allowing auto manufacturers to utilize smaller battery packs and ultimately, leading to improved operating range for vehicles.
Today, Hillcrest should be viewed as a development stage startup that is residing inside of a publicly traded entity. The company was formerly engaged in the oil exploration and production business which is not relevant to the future of the company except as a possible source of funding if the company can sell those assets. The company has stated that it plans to dispose of those assets (which are currently not operating) as soon as feasible. The company has reserved $296,000 to cover the cost of decommissioning its last two wells.
Hillcrest’s initial commercial product is expected to be a traction inverter or a software solution to be licensed to other inverter manufacturers for the electric vehicle market. We believe the company’s inverter could theoretically be available for vehicles in fiscal 2023 (2024 production year) if all of the company's milestones are achieved and significant additional financing is secured. As some OEMs are already announcing the inverter technologies that they will deploy for the 2025 production year (fiscal 2024), we think 2024 or beyond is likely to be the earliest date for significant production if every milestone is achieved.
The Role of Inverters
Inverters represent a broad category of devices that convert electricity from a Direct Current (DC) source to Alternating Current (AC) which can then be used to power the machinery of our lives.
Specifically, in the first market that Hillcrest is targeting, electric vehicles (EVs), the inverter sits in between the battery which provides DC power and the powertrain which requires AC power. DC powered motors are not a good alternative for EVs because it is a challenge to control acceleration and torque with DC power.
In the broadest sense, inverters use transistors to open and close rapidly to allow voltage to flow through either changed or unchanged. DC power is passed through an electronic switch (historically IGBT based but SiC based options may become the norm soon) which allows the direction of the current to be flipped. This continuous shifting from positive to negative produces Alternating Current (AC). Typically, this signal is filtered, so that usable AC power is passed on to the motor.
The “Weight”-ing Game
EV manufacturers are continuously looking for ways to eke out additional range with their existing powertrains and battery platforms. Tackling the balance between EV performance and operating range through increased efficiency (defined as the percentage of the battery’s DC power that is ultimately available as AC power for the motor) of the system’s traction inverters is a key focus of EV manufacturers right now.
To date the majority of inverters on the market have been insulated-gate bipolar transistors (IGBT) because of their speed, their relative efficiency and low price point. However, as auto manufacturers begin to shift to 800 volt (V) power systems in an effort to improve the range of their vehicles, speed up charging rates and improve overall performance of their powertrains, there is a need for more advanced inverters than those widely utilized in the market today.
To meet the need for advanced inverters, manufacturers are moving toward both Silicon Carbide (SiC) and Gallium Nitride (GaN) based inverters that offer increased efficiency when compared to older IGBT technology. At this point SiC technology seems more mature than GaN and will likely be more widely adopted by manufacturers. SiC based inverters offer faster switching than existing platforms which means the unit can utilize smaller DC link capacitors which are costly and occupy a significant portion of a traction inverter’s footprint (and weight). DC link capacitors can represent up to 50% of the space in a traction inverter and up to 20% of the cost, so reducing their size is a great first step for auto manufacturers looking to reduce total weight of their vehicles. The relatively high price of the SiC based inverters has limited their adoption to only the highest end of the luxury EV market (think Tesla $TSLA) but the advent of many new designs and additional offerings from leading suppliers has led to falling prices and we anticipate much wider adoption over the next 3 years if the technology proves to be reliable.
The higher thermal conductivity (ability to conduct heat) of SiC relative to Silicon (Si) makes SiC a much better choice for high current and high voltage (800v) applications which will become increasingly popular with manufacturers over the next 3-5 years.
The global market for traction inverters in the EV market is surprisingly well-established at this point with a number of major auto suppliers and auto manufacturers dominating the market.
Obviously, these are well-established names in the auto industry with vast experience understanding the challenges of designing components to work reliably inside incredibly complex systems. There are also a number of emerging companies like GAN Systems and Nexperia working to build what, they believe, will be the next generation of traction inverters on platforms based on Gallium Nitride.
Finally, many EV manufacturers believe that to realize the peak efficiency of inverters, they need to control the inverter design process as part of the overall propulsion design and have either decided to, or are contemplating, bringing the inverter design in-house.
All of this is to say that the race to build a highly efficient traction inverter is heating up with everyone from large, established multinationals to small startups with little more than a design, racing to establish themselves in this market.
We do believe that the established players could be potential licensing partners based on our understanding of the technology to be deployed by Hillcrest. The exact model, pricing and profitability of this approach is unknown at this time.
Hillcrest has laid out a path to commercialization over the past 12 months and thus far, they have been fairly successful in meeting their initial goals as they attempt to transition from their former operations to a provider of green technologies.
ANIGO Acquisition
The transformation of Hillcrest Energy from a petroleum exploration company to a provider of technology solutions for the EV market began in April 2021 with the acquisition of ANIGO technologies and the naming of ANIGO’s founder, Ari Berger, as the Chief Technology Officer for Hillcrest. At the time of the acquisition, ANIGO was targeting a number of market opportunities related to machine control software but over the past 12 months as part of Hillcrest the focus has clearly shifted to traction inverters for the EV market.
The acquisition was funded with a combination of 6,000,000 shares of Hillcrest Energy Tech (less than 2% of the current outstanding share count) representing roughly $1.07 million of value at the time of the acquisition and roughly $159,000 in cash for a total purchase price of just under $1.23 million (USD).
Systematec Agreement
Shortly after the ANIGO acquisition in April 2021, Hillcrest entered into a “collaboration agreement” with Systematec GmbH, an engineering and component designer with strong ties to the German automobile manufacturing market.
Given Hillcrest's limited financial resources - roughly $2.95 mil USD at the end of 2021 - this is a major commitment of roughly $700,000 per year for 5 years. Systematec was also granted shares and warrants, which if exercised, would give them roughly a 1.5% stake in Hillcrest. This agreement though does, however, seem to be opening doors that would likely have been closed to the company without this relationship. The long-term impact on Hillcrest’s growth is yet to be determined.
Proof of Concept Announcement
In November 2021 Hillcrest announced initial results for their high efficiency inverter testing. This was a significant milestone for the company because previously all of their inverter designs had been theoretical. The results announced demonstrated that Hillcrest’s designs achieved the goals of lowering heat generated from switching losses, increased power density and ultimately, could lead to reduced cost, size and weight of next generation EV designs.
In testing reported by the company, they compared their Silicon Carbide (SiC) High Efficiency Inverter concept to a conventional Silicon Carbide inverter. The tests ranged from 470V to 870V (approaching the upper end of modern battery technology) and with frequencies from 10 kHz to 60 kHz. The company demonstrated its Proof of Concept had the ability to eliminate switching losses and increase switching frequencies. Normally, higher switching frequency would lead to higher temperatures in the chipset but Hillcrest claims to have achieved these results without an accompanying increase in temperatures.
The most significant gains versus existing technology were at the higher end of the switching frequency range (60kHz) which is a frequency where most traditional silicon semiconductors struggle with significant losses due to the time it takes for the switch to shift from off to on and back again. These losses exceed the benefits from high frequency switching so most existing inverters do not operate at these frequencies, however, that could theoretically change if systems utilized an approach like Hillcrest’s.
White Paper
In April 2022, Hillcrest released a white paper detailing the results of their internal testing of the Hillcrest High Efficiency inverter. The white paper can be downloaded for review at https://hillcrestenergy.tech/technology/.
We believe that the Hillcrest Inverter is a proprietary design using a mix of off the shelf components and custom components (inductors, capacitors, busbars, etc) to create what is known as a Zero Voltage Switching (ZVS) inverter. Zero Voltage Switching simply means that power is only switched on or off when the output voltage is zero volts.
Unlike hard switching conditions which result in voltage losses, ZVS or “soft switching” aims to eliminate switching losses, lower switching noise and electromagnetic interference. This is a concept that has been widely studied for decades and is not new in the field of traction inverters but the technology to deploy a soft switching system has lagged behind the theory. While we do not know all of the key components of the Hillcrest design, there have been a number of advances recently in the market for microcontrollers which makes them suitable for high frequency applications. The cost of these components has been a limiting factor in the past and finding reliable, cost efficient options will be a key consideration for Hillcrest as they move toward commercialization if they intend to manufacture the inverter themselves.
The white paper indicates that the company’s internal tests showed that the Hillcrest inverter substantially reduced switching losses. Historically, ZVS has not proved to be useful in traction inverters as limiting factors such as temperature and the narrow operating range of chipsets has made it less practical than other alternatives.
Hillcrest claims to have addressed these issues that have existed in the past through the creation of a unique software algorithm that can be implemented with fairly common microcontrollers. Disclosing advances such as the company's software algorithm is one of the challenges of trying to build a product inside of a public company as disclosure rules mean management has to be more vague than they might be if the company was privately held and simply raising venture capital.
Controlling the output voltage of ZVS in real-time has historically been a challenge and we assume OEMs and potential partners will seek to verify that Hillcrest has addressed this issue with their solution.
Summary of test results
It is worth noting that at present the majority of EV’s currently operate at 10 kHz or 20 kHz - local or highway driving - which represents 85% of drive time. Thus, the more significant gains reported in Hillcrest’s proof of concept, while impressive, occur at frequencies where power systems are not designed to operate today due to the higher switching losses that occur at higher frequencies. The company has demonstrated in a lab an ability to significantly reduce these losses. At this stage in the company’s development it is still too early to say how manufacturers may respond to the Hillcrest claims. In theory, inverter manufacturers could license the technology (or a competing soft switch solution) and incorporate it into existing designs; however, it’s not clear what higher switching frequencies may mean for reliability of the inverter in real world applications over many years of use.
In addition to the inverter efficiencies themselves, Hillcrest believes that the entire powertrain system can benefit from their ZVS system because the increased switching frequencies will improve the motor efficiency without a corresponding increase in semiconductor temperatures.
Hillcrest also believes that their approach will reduce what is known in the industry as dV/dT (change in voltage over change in time) which can lead to voltage spikes in a system and impact motor life and reliability. This is likely going to be a claim that will have to be proven through extensive real-world testing.
This raises the question: would the improved inverter and motor efficiency gained by deploying a Hillcrest system be sufficient for an EV OEM to redesign their powertrain? We believe that the long lead times required with any powertrain design mean that if manufacturers were to shift to operate at higher frequencies it will not be an immediate shift. Theoretically, if Hillcrest were to manufacture their own inverter it could be a replacement for existing designs and simply plug into existing platforms, but we think it is more probable that the company will look to license their technology to existing inverter manufacturers which may mean longer lead times between when agreements are announced and when actual revenues are recognized.
Additionally, the traction inverter is just one source of potential efficiency gains for EVs and OEMs are looking for the most cost effective ways to achieve improved efficiency. Traction inverter technologies are competing for mindshare of OEM engineers with efforts to reduce wind resistance, rolling resistance of tires and other design features.
Ultimately, the publication of the white paper is a step in the right direction toward commercialization but there remain a number of significant technical and financial milestones that need to be achieved before the company will be able to manufacture a product at scale with the reliability and cost constraints required by auto OEMs or enter into revenue generating license agreements with existing inverter manufacturers.
Technical Team:
We believe that Hillcrest has established a fairly robust bench of technical expertise in a short time frame. The acquisition of Anigo in 2021 brought Mr. Ari Berger onboard as the company’s Chief Technology Officer. Mr. Berger brings over a decade of experience in motor control technologies, which is constantly evolving, to the company.
In addition in 2021, the company added Dr. Jalal Amini as their senior power electronics engineer. Dr. Amini’s expertise in power electronic devices, energy storage systems and motor drives adds years of experience to the technical team.
The company has also added a number of consultants and partnerships to bolster their on-staff team.
As noted previously, the company has entered into a collaboration agreement with Systematec out of Germany. As part of that agreement the founder and CEO of Systematec, Harald Hengstenberger, is working closely with the company on their products. Mr. Hengstenberger has over two decades of experience designing and testing hybrid and EV powertrains.
Most recently, the company added James Hamond as a technical consultant with years of experience designing embedded software, adaptive algorithms and working specifically on soft switching systems.
What’s Next:
The next steps for Hillcrest include the commissioning of a complete prototype of their inverter, which is likely to result in the first prototype delivered in Q3 2022. Hillcrest will then aim to deliver this prototype to prospective customers for their own testing in Q4 2022.
In 2023, the company hopes to complete a commercial independent test which will pave the road to commercial production. However, as you can see by that timeline, it means it would likely be 2024 or possibly 2025 before any meaningful revenues are recognized from the sale of the company’s inverter or license agreements.
Challenges:
Hillcrest faces a number of significant challenges over the next few years before they generate revenues from their new inverter business. As of 3/31/22 we believe the company has roughly $2.0 million of cash on the balance sheet. The company has no revenues from operations, while development costs continue to escalate which means the company is burning between around $250,000 per month or $700-$750,000 per quarter.
Obviously, the company will have to seek additional sources of funding through possible asset sales (the company still has a small non-producing oil field that may be sold but the proceeds of a prospective sale are unknown) and more likely additional equity raises in the very near future. It is difficult to estimate exactly how much funding will be needed because it depends on a number of factors but the dilution to existing shareholders would be significant.
Also, we believe that the company's inverter is built with a combination of components from other suppliers and custom made components. Hillcrest’s software for controlling the switches is clearly the secret sauce that makes their inverter unique. The company will be reliant on component suppliers and will have meaningful execution risk as they scale production of their own internal components if they elect to manufacture their own traction inverter.
Competition:
One of the most significant challenges facing the company is intense competition in this space. If Hillcrest intends to manufacture and market their own stand alone inverter they will be facing many well-financed companies with significant market share. While we think it is plausible that many of the current providers in the market could be partners with the company and potentially license their technology, it remains unclear how these firms will view a startup with limited financial resources.
In addition, there are at least a few startups with traction inverters that have made similar claims to those made by Hillcrest in terms of efficiency and Zero Voltage Switching going back to 2019.
Large auto suppliers have dominated this market for years and we believe the reliability and strength of their ties to OEMs will make it difficult for an upstart supplier to crack the market with a new standalone inverter. We believe it is possible that Hillcrest will attempt to partner with existing inverter suppliers by licensing their software to control switches in an effort to enhance the efficiency of the inverters sold by market leaders. While this would mean a smaller addressable market for Hillcrest, the theoretical profitability of the licensing model is significantly better than the prospects of building their own inverter.
The licensing model is significantly lower risk for potential partners because they can structure license agreements to be based on volume and would not require any upfront commitments, (ie, if OEMs decide to incorporate the Hillcrest technology, inverter suppliers could add it on and if the OEMs chose not to use the Hillcrest solution for whatever reason, there would be no risk for the supplier). It is far too early to say how this might play out and what it might mean for revenue and margins but it is worth remembering that many of the current competitors of Hillcrest are also potential partners to deploy Hillcrest’s technology.
Auto manufacturers are certainly interested in better performing inverters but they also demand flawless manufacturing, impeccable quality control, and reliability at a reasonable cost. When evaluating inverters from different suppliers auto manufacturers will clearly take into account the supplier’s financial strength (or lack thereof). This is clearly one of the biggest challenges for Hillcrest right now and something they will need to address in the next 3-4 months.
We expect the traction inverter market will likely continue to be dominated by large auto suppliers and increasingly by the auto manufacturers themselves as they develop their own technologies. However, we believe that there could be an opportunity for Hillcrest or other soft-switch software providers to partner with the leading players and deliver even greater efficiency to OEMs.
Momentum is Growing but Risks remain
The path to delivering a commercially viable traction inverter utilizing the company’s software has been moving at a good pace for most of the last twelve months. As a development stage company that is pre-revenue and pre-product, the company has had to dedicate significant time and resources to bringing in the talent necessary to support its growth. The cost structure of the company will continue to expand in the coming years as they approach commercial launch.
At the moment, we believe that it will require at least $10 million of additional financing to get Hillcrest to the commercial launch of their first product. At current prices, this would represent roughly additional dilution of 30-40% to existing shareholders. As with most early stage companies, even when sales of the commercial product commence, the company will not be cash flow positive for some time and thus, there would likely be additional capital raises needed beyond this point to sustain operations through to positive cash flow.
What to watch for in the next 12-18 months:
1) Steps to ensure financial stability - As mentioned above, the company will clearly have to secure new funding in the next 3-4 months. This may come in the form of asset sales or issuance of additional equity. Removing the immediate liquidity concern will be a meaningful step forward for the company. The possible dilution for existing equity holders will have to be monitored.
2) Capital structure reset - Hillcrest’s capital structure is a legacy of years of past business ventures. As of today, there are over 320 million shares outstanding, holders of the stock are almost exclusively retail investors and average daily trading volume is under 100,000 shares (USD value of average volume is under $10,000). We will look for the company to address their share count and possibly attract more institutional investors in 2023 and beyond.
3) The competitive landscape shakeout - The next 18 months should reveal a great deal about the winners and losers in the race to build the next generation of traction inverters. While many upstarts like Hillcrest are publishing data on their progress in building new inverters, we assume that the current market leaders - Continental, Toyota, Mitsubishi, Denso, Bosch, Hitachi, etc - are not resting on their laurels. We expect that in the coming quarters we will hear a great deal of news in the market for 800v SiC inverters as OEMs line up suppliers and we get a better sense of how the market leaders will defend their market share.
4) Actual commercial applications - Assuming that Hillcrest can address its liquidity issues and successfully navigate the wave of competitive product launches we will anxiously await the first announcements of commercial deployments of the Hillcrest inverter into a production vehicle. We anticipate that there will be a number of announcements about “OEM XYZ testing the Hillcrest Inverter” but it is a long way from an agreement to test a product and agreeing to power an EV line with a brand new product that has never been in production outside of a lab. Obviously, this will take the most time to achieve but if large scale commercial orders and/or a licensing commitment with actual financial commitments are signed, the company will be in a position to remain viable.
Conclusion:
Hillcrest has a very early stage design for a traction inverter using a mix of proven components and proprietary technology that addresses a growing market need.
The market opportunities that exist for inverters (in EVs and other markets) make this a company to watch. If this becomes a $5-$6 billion market by the end of the decade, capturing even a single digit market share could lead to significant revenues for Hillcrest. Given the significant lead times required by auto manufacturers when designing new components into their powertrains, we don’t expect meaningful revenue under the best case scenario until 2024 or more likely 2025. Additionally, the company will be competing for mind share with many large, profitable companies with significant expertise in engineering components for the EV market.
Clearly, the EV traction inverter market is the primary focus of Hillcrest, but there are additional opportunities to utilize the same Zero Voltage Switching principles including:
- Solar
- Charging systems
- High voltage systems (utility scale grid applications)
These opportunities are significant but it is far too early to project what the company’s odds of success in these markets will be.
Hillcrest is a highly speculative investment at this point but as milestones are achieved, if liquidity needs can be addressed and if manufacturers are willing to work with an upstart player, then it may be worth keeping on your radar.
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1. https://www.fortunebusinessinsights.com/sic-based-power-electronics-and-inverter-market-104880
