Burcon NutraScience Corp

TSX:BU

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's fiscal first quarter 2023 ended June 30, 2022. Joining us today are Peter Kappel, Interim CEO and Chairman of the Board; and Jade Cheng, the company's Chief Financial Officer.

[Operator Instructions] And before we conclude today's call, I'll provide the company's safe harbor statement with important cautions regarding the forward-looking statements made during this call.

Now I'd like to turn the call over to interim CEO of Burcon, Mr. Peter Kappel. Sir, please go ahead.

[Peter Kappel, executive]

Thank you, operator, and thanks to all of you listening for joining us this afternoon. Great to be speaking with everyone again so soon. Burcon's fiscal 2023 first quarter, which ended June 30, carried forward the momentum from the previous quarter in which Burcon and its joint venture, Merit Functional Foods, continued to make significant progress.

In regards to our joint venture, Merit continued to ramp up its production in sales as well as optimized a new process to produce a uniquely different pea protein ingredient. In addition, Merit announced the development of its 100% protein-based methylcellulose replacement that was successfully launched following quarter end. I will provide more color on both of these innovative developments during today's call.

On the Burcon front, we are making considerable progress towards the commercialization of our other plant-based protein technologies. During the quarter, we completed a number of critical due diligence items that were key to moving forward our strategic partnership projects. We are very pleased with the progress and are working diligently to reach a partnership agreement that will expedite bringing one or more of our additional protein technologies to market.

I'd first like to turn the call over to our Chief Financial Officer, Jade Cheng, to take us through the financial details of the quarter, after which, I will return to provide further detail on our developments during the quarter and discuss some of the opportunities that Burcon is currently pursuing. We will open the call to questions following our remarks.

Jade, please go ahead.

[Jade Cheng, executive]

Thanks, Peter. Earlier today our financial results for the first quarter of fiscal 2023 were issued in the news release and filed with SEDAR and EDGAR as well as posted to the Investor Relations section of our website.

Turning first to our income statement. During this quarter, we recorded $91,000 in royalty revenues from Merit sales of pea and canola protein products, representing a 17% increase over the previous quarter. During this quarter, we reported a net loss of $4 million or $0.04 per basic and diluted share. This compares to a net loss of $3.2 million or $0.03 per basic and diluted share in the same year ago quarter. One-half of the loss is related to our equity pickup of Merit's loss for this quarter.

The higher loss this period over the same period last year is due to an increase of $256,000 in our share of Merit's loss and $718,000 of pea and canola costs, which were capitalized in the first quarter of last year. Burcon recorded $2 million as our share of loss in Merit for our first fiscal quarter of 2023 as compared to $1.7 million in the same year ago quarter.

Merit recorded total sales of $2.3 million, including sales of co-products in addition to pea and canola protein sales and a loss of $6.3 million. Merit's loss for the quarter reflects the stage of development as it continued to ramp up its production and sales.

During this quarter, Merit's shareholders advanced an aggregate of $10 million to Merit to address its liquidity requirements, with Burcon's share being $3.16 million. On the expense side, our growth, research and development and intellectual property expenses did not change significantly this quarter over the same year ago quarter. G&A expenses decreased by $102,000 due mostly to the NASDAQ entry fee we incurred in the first quarter of last year.

As of June 30, 2022, our cash balances totaled $1.6 million. During this quarter, we entered into a loan agreement with our largest shareholder for a facility of up to $10 million, of which the first $5 million tranche was available as of June 30, 2022, but was not yet drawn. If the loan is fully drawn, our cash resources are expected to fund our operations to February 2024, putting Burcon in a strengthened financial position to focus on new joint venture opportunities and collaborations.

I would like to refer you to our complete financial statements and management's discussion and analysis that are available in the Investor Relations section of our website at burcon.ca as well as on sedar.com. In terms of our patent portfolio, Burcon received 9 patent grants and allowances during this quarter, bringing our patent portfolio to 330 issued patents in various countries, including 72 in the U.S. We have, in addition, more than 175 active patent applications, including 25 in the U.S.

With that, I'd like to turn the call back over to our Interim CEO and Chairman, Peter Kappel. Peter?

[Peter Kappel, executive]

Thanks, Jade. Our first fiscal quarter of Burcon activities made significant progress, which we believe could begin to be realized in the coming quarters, both in our initial technology to market through Merit and then the next technologies that will be commercialized.

Let's begin with our joint venture, Merit Functional Foods. During the quarter, Merit continued to scale up production throughput capabilities, quality and yield for its unique pea and canola protein ingredients through continuous process improvements of its dual process production facility. The complexity of operating a dual process facility where Merit has switched between 2 entirely different starting agricultural crops and processes them into pure protein ingredients, requires careful management of control systems and process parameters that affect the overall outcome of the final product. Merit is continuing to fine-tune and optimize its process to further increase production efficiency.

In some cases, this requires that Merit undertook modifications that included piping changes and replacing pieces of equipment to resolve production issues. Merit is now on track to reach higher production and sales levels in future quarters with the goal of reaching continuous and consistent production.

During the quarter, Merit successfully optimized and implemented a new process developed by Burcon to produce Peazazz C, a uniquely different pea protein ingredient that combines some of the best attributes arising from Burcon's proprietary processing technologies, attributes such as exceptional taste, high solubility, low viscosity and functionality that allows for smooth, grid-free texture, even when used in high protein inclusion levels.

In addition to the common features of Burcon protein isolates listed above, Peazazz C has the ability to support low sodium claims and high-protein applications, a feature not offered by current pea proteins on the market. An additional benefit is that the production process involved is simpler, which has resulted in an improvement in production and yield.

Following successful commercial scale end-to-end runs, Merit launched Peazazz C subsequent to quarter end and has received very positive feedback from customers. Both we and Merit are optimistic that C will be able to win significant orders from customers looking for the next generation of pea protein ingredients with better taste and better functionality.

Segueing to Merit's sales. We continue to see interest in demand for Merit's innovative protein ingredients despite the modest sales we've seen so far. As a reminder, these are some of the factors that underlie our optimism on Merit's future sales. One, the market is currently undersupplied for pea proteins and Merit has available capacity to ramp up production and provide a superior product.

2, food formulators are looking for the next generation of protein ingredients that will help them create innovative new products that consumers will love. Merit's proteins with their exceptional taste and functionality address many of the formulation challenges today. And 3, canola protein is unique to Merit on the market.

Burcon reported $91,000 on royalty revenue this quarter, a modest 17% increase from the last quarter. Modest rise in revenue was also impacted by production restraints arising from Merit undergoing fine-tuning and optimization of its dual protein process as well as refining the new Peazazz C process. With this behind us, we anticipate larger quarter-over-quarter sales increases going forward.

Also subsequent to quarter end, Merit launched an innovative process that utilizes its Peazazz pea protein to provide a 100% protein-based clean-label solution to replace methylcellulose, a synthetic ingredient widely used in food to meet alternative applications that many CPG companies are desperate to replace.

Methylcellulose is used specifically for its gelling and binding functionality. Essentially it's the ingredient that keeps burgers and sausages from falling apart. There is a push amongst food formulators to clean up the ingredient list and replacing methylcellulose is a top priority. Merit's Peazazz pea protein when used in combination with an enzyme contributes a strong elastic gelling function that can mimic the texture of products containing methylcellulose.

With this new innovation, Merit is able to offer food formulators exactly what they've been searching for, a clean-label ingredient to replace methylcellulose while simultaneously boosting the protein content to the food application. This is a sizable opportunity for Merit and opens up an extremely new target application for Merit's proteins. We are very excited about the impact that this application could have on Merit sales.

Coming back to Burcon. Our discussions and due diligence process with potential partners to commercialize Burcon's other plant-based protein technologies are moving forward with pace and on track to meet scheduled milestones. During the quarter, our potential partners completed a number of critical due diligence items that included product testing, process and technology evaluation and market analysis, all of which helped support our strategic discussions with the goal to commercializing Burcon's protein technologies in partnership with an established food ingredients player. We are very encouraged by the positive feedback we've received on our innovative protein ingredients and firmly believe that Burcon's technologies are unique, valuable and fully scalable.

There are still a number of due diligence items we need to complete before we can reach a partnership agreement. But that said, our potential partners are motivated to partner with us and value the relationship we have established to date. We expect to build upon this momentum in the coming months and reach a point where both parties can decide on how to jointly move forward to bring to market Burcon's other new innovative protein technologies. We look forward to discussing more of this in future calls.

Now to turn over to a development that didn't pan out the way we had hoped in our initial uplisting efforts, our NASDAQ listing. Burcon's share price weakness over the past 12 months, combined with volatile and challenging market conditions, resulted in Burcon receiving a letter from NASDAQ regarding minimum price bid deficiency. Burcon's share price fell below USD 1 for 30 consecutive days and did not meet the listing requirements of the NASDAQ Capital Markets.

We have a compliance period of 180 calendar days or until September 28, 2022, to regain compliance with NASDAQ's minimum bid price requirement. If our share price goes back above USD 1 for 10 consecutive trading days, we would become compliant again and NASDAQ would deem this matter concluded. If we do not achieve that dollar mark by September 28, 2022, we may be eligible for -- to apply for additional time to regain compliance.

We are evaluating all options available to Burcon and will consider a path forward regarding our NASDAQ listing that is best for Burcon and its shareholders. Regardless of our NASDAQ situation, Burcon has a long history as a TSX company, and we will continue to benefit from our TSX listing for many years to come.

Turning to the subject of finances. Burcon was very pleased to have secured a $10 million loan from its largest shareholder, who has been supporting Burcon from the very beginning. We are deeply grateful to our largest shareholder for stepping up and providing Burcon with the financial leeway to realize some of the major commercialization opportunities we are pursuing. The loan is available in 2 $5 million tranches, the first of which is now available to Burcon. If both tranches are fully drawn, this non-dilutive financing is expected to provide Burcon a cash runway to last us until February 2024.

Also during the quarter, Burcon provided $3.16 million of loan to Merit as part of a $10 million funding request that was fulfilled by shareholders in proportion to their Merit shareholding. Merit will use the funds to ramp up its production and support its ongoing operations.

Switching to our intellectual property portfolio. This was a particularly strong quarter for Burcon, receiving 9 patent grants and allowances in total, covering our unique and distinctive technologies for pulse, soy, other oilseed and the protein products produced from them. Burcon has been actively assessing its IP portfolio, bolstering where needed and trimming the patents or applications that provided minimal value.

We are pleased to see additional pulse patent applications being granted, which protects Merit's competitive edge in the marketplace as well as other oilseed protein applications being granted, which help support our ongoing partnership discussions. Our portfolio of patents totals 330 issued, 72 of which are U.S. patent grants with an additional 178 patent applications filed.

Just a quick update on our CEO search before we conclude the call. Burcon's Board continues to work closely with an executive search firm to identify and recruit a new CEO. It is imperative that we identify a suitable individual that is an excellent fit for the future of this company. In our last call, I explained that we had not achieved the result we wanted, but we are now engaged in the process with other candidates that have been identified.

As Chairman and interim CEO, I remain confident that we will recruit a new great candidate for the role. At the same time, our team at Burcon is laser-focused on executing on a number of opportunities that we currently are pursuing and bringing those developments to fruition. We are very much looking forward to the coming quarters with sales growing at Merit and the number of other opportunities for Burcon being realized. We are confident we can build shareholder value through new partnerships and collaborations as a means to monetize Burcon's alternative plant-based proven technologies.

And now with that, I'd like to open the call up to questions. Operator, can you please provide the appropriate instructions.

[Operator]

[Operator Instructions] The first question comes from Tania Armstrong-Whitworth with Canaccord Genuity.

[Tania Gonsalves, analyst]

Just one question for me. You've previously guided towards the Merit facility reaching full allocation of that Phase I capacity sometime in calendar 2023. Just given this kind of slower ramp pace, are you still expecting it to reach full allocation by this timeline? Or should we forecast some kind of delay?

[Peter Kappel, executive]

I don't think end of calendar 2023 is out of the question. They're obviously -- it ramps up slowly, but there is a lot of interest and the combination of ability to deliver large batches of the proper product will really enable the order book to get filled. And there's just real a lot of interest in the product. The product is really, really popular. And the question and the formulation potential is really, really good, high. And it's the question of them being able to deliver to people the way they want it to be consistent basis at scale, which is really the same. And the issues that are in the way of doing that lever successfully being resolved. So I can't say definitively, but I wouldn't rule it out at this point in time. In fact, there's a lot of things that could move that curve up coming forward. And that's why we mentioned the Peazazz C that's going to make quite an impact. There's other aspects about that, which are also positive, and we'll see how the methylcellulose replacement goes as well. Okay.

[Tania Gonsalves, analyst]

Perfect. And then just quickly on your R&D expenses as well. Just given how you account for those expenses, we have seen a meaningful pickup in the last couple of quarters. Is it safe to say that this is kind of the run rate going forward?

[Peter Kappel, executive]

Yes, it's not a bad -- in that order in that order, okay? Yes.

I mean I do hope that we will be getting some savings on the patent side. We're going through a very detailed process of analyzing the expected return of each of those patents and which ones can be phased out sooner and substantial savings should be able to be reached through that. So -- but in general, that's the expenditures are along those lines.

[Operator]

Paul Lam. Your line is open.

[Paul Lam, executive]

Thanks, operator. Peter, we have a few questions from the webcast. First question, we have from [ Jay Steven ], private investor. In the event that Burcon does not meet the NASDAQ's criterion of holding $1 for 10 consecutive days and additional time is not granted, i1s Burcon prepared to initiate a reverse split?

[Peter Kappel, executive]

Well, I can't say that at the moment. Obviously, we're looking at it, and we're getting some feedback from investors as to whether that would be a net positive or negative on the whole situation. But we've still got 1.5 months to get there. We'll see how that works out. But obviously, we're looking at everything and what the implications would be.

[Paul Lam, executive]

Okay. Next question, we have from [ Paul Brunette ] Private Investor. Why are we still registered on NASDAQ, no interest and they're costly, no volume?

[Peter Kappel, executive]

It's one of the considerations that will be taking into account. Thank you.

[Paul Lam, executive]

Next question we have from [ John Vasallo ]. The question is -- private investor. His question is, given the current burn rate, how long until Burcon runs out of cash?

[Peter Kappel, executive]

As stated before, with the facility that we received from our largest shareholder, we anticipate that, that will take us through to February 2024.

[Paul Lam, executive]

Okay. Also another question from [ John Vasallo ]. When Merit is at max capacity, will Burcon and Merit be cash flow positive?

[Peter Kappel, executive]

Yes.

[Paul Lam, executive]

Okay. And then last question we have from [ Michael McCallahan ], private investor. You mentioned that a popular product currently on store shelves in the U.S. are dairy creamers, but that the rollout was slower than expected. Can you comment on what has been causing the delay?

[Peter Kappel, executive]

I'm thinking different things. I think the rollout of protein sales has been slower than expected for Merit. I don't believe that the rollout of that particular product has been slower than expected. That product was just mentioned just an example, but with no comment as to the rollout of the product itself.

[Paul Lam, executive]

Okay. I think that's all we have for questions.

[Operator]

Thank you, everyone. That's all the time we have for questions today. At this time, this concludes our question-and-answer session. I would like now to turn the call back over to Mr. Kappel. Sir, please proceed.

[Peter Kappel, executive]

Thanks, operator. I'd like to thank the continued support of our staff, partners and shareholders, and I look forward to being a participant and not the host of the next call. Thank you very much.

[Operator]

Before we conclude today's call, I'd like to take a moment to read the company's safe harbor statement. This call contains forward-looking statements or forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements or forward-looking information involve risks, uncertainties and other factors that could cause actual results, performances, prospects and opportunities to differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements or forward-looking information can be identified by words such as anticipate, intend, plan, goal, project, estimate, expect, believe, future, likely, may, should, could, will and similar references to future periods. All statements other than statements of historical fact included during this call are forward-looking statements. There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements or information.

Important factors that could cause actual results to differ materially from Burcon's plans and expectations include the actual results of business negotiations, marketing activities and first general economic, market or business conditions, regulatory changes and other risks and factors detailed herein and from time to time in the filings made by Burcon with the security regulators and stock exchanges, including in the section entitled Risk Factors in Burcon's annual information form filed with the Canadian Securities Administrators on www.sedar.com. Any forward-looking statement or information only speaks as of the date of which it was made of and except as may be required by applicable security laws. Burcon disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Although Burcon believes that assumptions inherent in the future -- forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance. And accordingly, investors should not rely on such statements.

Finally, I'd like to remind everyone this call is being recorded, and the webcast will be available for replay on the company's website starting later this evening. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.