Burcon NutraScience Corp

TSX:BU

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's fiscal 2025 first quarter results ended June 30, 2024. Joining us today are Kip Underwood, Burcon's Chief Executive Officer; and Robert Peets, the company's Chief Financial Officer. Following the remarks, we will open up the call for your questions. [Operator Instructions]



I will now turn the call over to the CEO of Burcon, Mr. Kip Underwood.

[Kip Underwood, executive]

Thank you, operator, and thank you, everyone, for joining us today. Fiscal 2025 first quarter marks the beginning of Burcon's journey towards becoming a market-leading plant protein innovation company. We are pleased to record commercial revenue from our hemp protein sales. This was a significant achievement as it marks the first direct commercial protein sale for Burcon and the world's first sale of hemp protein isolate.



In addition, during the quarter, we officially launched our canola protein, expanding our protein offerings to meet the market demand for better for you and better for the planet, specialty ingredients. With production capabilities established, we believe we are on the cusp of moving beyond a company that creates technology to one that derives profit from our innovation. We will review these milestones and update our commercial progress on today's call.



In regard to market demand, we are encouraged by the growing customer interest for our protein ingredients. Direct customer feedback for our proteins continue to be positive with over 50 prospective customers in various stages of product evaluation and trials. Our sales strategy targets innovative new consumer brands that are on the cutting edge of food trends. These brands' size and scale align perfectly with Burcon's current capabilities, enabling us to achieve [ speed ] to revenue, a key component to Burcon's success.



We have a sound strategy in place and continue to build out a robust customer sales funnel. We look forward to discussing in more detail, our strategy to capture a part of a multibillion-dollar total addressable market for Burcon's high-purity protein ingredients. We are off to a fantastic start to our fiscal year. Our top priority is to ramp commercial production to meet the growing customer demand for our proteins.



As of July 1, Robert Peets joined Burcon as its new Chief Financial Officer. As a seasoned financial and strategic executive, Rob has brought his extensive experience in capital markets to Burcon. We are excited to have him on board as Burcon transitions to a revenue-generating company.



With that, I'd like to turn the call over to our Chief Financial Officer, Rob Peets, to provide an overview of the financial results for Q1, after which, I will return to provide an outlook for our current fiscal year. We will open the call to questions following our remarks.



Rob, whenever you're ready.

[Robert Peets, executive]

Earlier today, our financial results for the quarter ended June 30, 2024, were issued in a news release and filed with SEDAR as well as posted to our Investor Relations section of our website. In the 3 months ended June 30, 2024, we recorded revenues of $237,000 as compared to 0 recorded in the year ago comparable quarter. Burcon reported a net loss of just under $1.9 million or $0.01 per basic share and diluted share for the first quarter of fiscal 2025 as compared to just over $1.9 million or $0.02 per basic and diluted share in the first quarter of the prior year.



Research and development expenditures in the first quarter of fiscal 2025 decreased by $253,000 over the first quarter of fiscal 2024. The decrease is driven by the receipt of $140,000 of government assistance from Protein Industries Canada, received in the current period as well as the intellectual property expenses, which decreased by $71,000.



Following our strategic patent portfolio review undertaken during the prior fiscal year, Burcon focused its intellectual property spend on patents that are essential to the strategic objectives and ceased maintenance payments on the non-core patents, resulting in a decrease in IP expenses.



G&A expenditures in the first quarter of fiscal 2025 increased by $267,000 over the previous year's comparable quarter. The increase is driven by a combination of increased stock-based compensation issued to an external consultant and an increase in investor relations costs as the company resumed its investor outreach activities.



These increases were partially offset by lower salaries and benefits expenditures at the same period, driven by lower stock-based compensation and staff changes. During the first quarter of fiscal 2025, Burcon recorded funding from Protein Industries Canada for about $400,000, which has been applied to reduce R&D expenses, G&A expenses, inventory and property and equipment.



As of June 30, 2024, the company had $2.2 million of cash plus access to up to $4 million of undrawn capacity on tranche 2 of the secured loan. In the prior year, Burcon received funding approval from PIC for the scale-up and commercialization of hemp seed and sunflower seed proteins. The $6.9 million project led by Burcon includes funding of $3 million from PIC.



If I may on a personal note, from my own point of view, I'm very excited about the opportunities which Burcon has currently underway and in development. The upcoming quarters hold incredible potential and I'm really happy to be part of all of it.



With that, I'd like to turn it back to you, Kip.

[Kip Underwood, executive]

There's definitely excitement among the team. We have made significant progress on our journey from an R&D company to a food technology company that is scaling and monetizing its innovations. We strongly believe we are at an inflection point after clearing a number of key milestones. Burcon is truly well positioned to capture a part of the growing multibillion-dollar protein ingredient market.



We are keenly focused on executing our capital-light strategy and in doing so in the last 12 months, we have established commercial production capabilities, successfully scaled up our proprietary hemp and canola proteins, achieved the first commercial sale of our hemp protein and most importantly, validated customer demand for our proteins that has exceeded our business plan expectations.



These are all foundational milestones that are expected to propel Burcon into the next phase of growth, technology scale-up and sales. Achieving commercial sales for hemp protein was a major milestone this quarter and is only the beginning of our sales ramp. We need to stack individual customer or brand wins into ongoing recurring sales, which we expect to do in the coming quarters. There is significant demand for our 95% hemp protein isolate.



Our initial production campaign successfully validated our hemp process and provided sufficient quantities to fill initial customer orders. Our goal is to ramp production to meet the growing customer demand and convert into recurring sales. Additional production campaigns are underway, and we expect to have sufficient commercial volumes to supply new purchase orders.



Similarly, we were successful in scaling up our canola protein technology. We pulled forward our launch and production time line for canola protein by 6 months due to strong demand from former and new prospective customers. We have received the written expressions of interest from customers indicating they would evaluate and/or purchase our canola protein again.



We believe that by accelerating our canola launch plans, we can bring our unique canola protein to market and quickly reach sales revenue. We recently completed our first commercial ramp, validating our end-to-end process and producing commercial quantities of canola proteins. Sales for canola protein are expected to begin late this year and increase in volume starting early in 2025.



Our proprietary technologies enable the production of high-quality best-in-class protein products suitable for the global food and beverage market. In terms of our sales strategy, our customer approach targets innovative new brands that are on the cutting edge of food trends. These brands' size and scale align perfectly with Burcon's current capabilities, enabling us to achieve speed to revenue.



A key advantage of working with innovative brands is that they are able to act fast, thereby shortening the 18-month product development cycle typically required for larger brands. These innovative new brands could include ready to mix and ready to drink beverages, [indiscernible] alternatives, protein bars and lifestyle food applications. For perspective, major multinational ingredient companies that have streamlined their production and sales, often retain a sales team that is dedicated to selling to entrepreneurial and [ fast moving ] customers. These types of customers are attractive to any business for the following reasons: they have the highest growth potential, they are fast movers with the shortest product development cycles, they are on the cutting edge of consumer products, they are generally early adopters, and they're the most profitable [indiscernible] supplier willing to pay a premium.



We expect to have customer wins targeting this category of food and beverage manufacturers. With over 50 prospective customers in various stages of product evaluations and trials, we believe we can convert a number of them into customers. We expect to drive sales of our hemp and canola proteins late 2024 and into 2025.



During the quarter, we also announced the completion of a contract research project for a food processing client. We are leveraging our processing expertise to engage the market, stay on top of the latest trends and build our partnership fund. We are seeing strong interest from the industry for further collaboration, while we ensure the effort remains complementary to our base business.



Switching over to capital markets. During the quarter, our shares began trading on the OTCQB Venture Market under the symbol BRCNF. We are pleased to trade our shares on the OTCQB, which improves access and liquidity for our investors.



In addition, Burcon has engaged external firms which support our institutional and retail investor outreach. We expect to continue our efforts to raise awareness so that more investors have the opportunity to be part of Burcon's success.



Building on our achievements in the past year, Burcon is in an excellent position to capitalize on the market opportunities ahead of us. We have best-in-class protein products, we have customer demand, and we have production capabilities. Those are all ingredients for success. Our team is committed to ramping up production, building a strong customer funnel and selling our proteins into the global food and beverage market.



With that, I would like to now open the call up to questions. Operator, can you please provide the appropriate instructions?

[Operator]

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer. [Operator Instructions]

Our first question comes from [ Dave Storms of Stonegate ].

[Unknown Analyst]

Just hoping to start with the profitability. I know last quarter it was mentioned that profitability was targeted for an early '26 timeframe. With canola again online about 6 months ahead of schedule, would it be reasonable to move that profitability time line up as well? Or are there other factors here that we should consider?

[Robert Peets, executive]

Yes. So, Dave, I will agree that there's certainly some items in flux as a result of that change in priority, but we are still forecasting middle to late '25, like calendar '25 fiscal '26 in terms of achieving profitability and that does remain our target to date.

[Unknown Analyst]

And then, Kip, just maybe turning to some of the logistics, as you're thinking of ramping commercial production, what are some major milestones or major [ lists ] that we should keep in mind as the year continues?

[Kip Underwood, executive]

Certainly, we speak to building the foundation, right? And that's really where our focus has been. So, I think moving forward, some of the key items or milestones we should look for is first, continual, successful, commercial production runs, right? Before we can sell the product, we have to make high-quality product, right? And that's where our focus is. And then subsequent to that, in the back half of calendar '24, hopefully we can see recurring sales.



I think it's important for people to recognize in this business, once we achieve a sale, once you have a sale into your product, that really moves to a recurring sale, because once you're inside a food product that any of us buy the grocery store, for example, you're there on an ongoing basis. So successful commercial production campaigns, 1 and then recurring sales 2.

[Unknown Analyst]

And then just with the launch of hemp and canola, seems to be going really well, can you just give us a little more color on what the uptake is like between those 2 product lines? And maybe just what the different end markets that those 2 product lines touch and what demand looks like there?

[Kip Underwood, executive]

Well, sure. So, I think the first piece around uptake is around speed to market, and we had 2 pretty innovative approaches of this for the industry. We actually went to market with hemp roughly, what, 9, 10 months ago now [ our partner on pilot scale ] material. That's pretty innovative for our market, and that allows us to move from commercial production to commercial sales quicker than you typically would. The same can be said for canola since we had former customers of canola from our -- the merit business, we had people who had already approved the product, right? They'll still have to go through an approval process again but it's much shorter. So, both in our selection of products and our approach, we're shortening the customer decision time line, which enables more speed to revenue.



That being said, we move forward. I would say we see these as roughly 50-50 in terms of their impact to our business. And the most important thing, though, is optionality. We're prepared to move that 50-50, 60-40, 40-60, depending upon what the market needs, right? So, I think we're prepared to go 50-50 on these, and then moving forward, if the market says, "Hey, we want canola sooner or more" then we will move that way and vice versa for hemp.

[Unknown Analyst]

And then just one more for me, if I could. Looking forward, does getting canola up on its feet early, give you the ability or desire to maybe move up some of the time lines for future projects? Or as you mentioned in the call, is the focus still just going to be really on getting hemp and canola ramped up?

[Kip Underwood, executive]

I think it gives us the opportunity to accelerate our plans. And there's really 2 things. One is optionality, right? We have 2 products out there that can do different things when it comes to applications, this is optionality. With that optionality gives you opportunity to go faster and also gives you a higher probability of success. So, I think on both avenues, we see this just as both, a greater [ assurity ] that we hit our plans and then also greater potential to exceed.

[Operator]

Your next question comes from Daniel Shahrabani of FARD Investments.

[Daniel Shahrabani, analyst]

I just want to ask you 2 questions. One question is looking back and one question is going forward. In terms of what's happening with Merit, I remember at the time, we were processing [ PE ] and getting some revenue from that. Is that -- I mean, obviously, it didn't reflect on this year's income, and I'm wondering, is that operation completely stopped? Or is it still ongoing? And then the question, looking forward, do you think that the cash drain, that the liquidity that you have right now, will that sustain you until 2026 as we were hoping originally? And if not, like what steps do you think we should take to improve the liquidity in order to continue operations?

[Kip Underwood, executive]

So first, I'll take the Merit question. So, the Merit business as it stands, ceased to operate in March of 2023, right, and has not operated since. Now that being said, the assets of the Merit business are still for sale. We are still in – I stay in contact with the receiver, he's managing the process and what we believe for the Merit assets, resolution to that situation is good for us. And it could be good for us in 3 different ways.



First is, if there's an opportunity for us to buy them at the right price that is better than our current model, we can take the advantage of that. Second, if somebody -- if another entity bought the assets, if they are still purpose-built for our process, we could further leverage our capital-light business model and contract manufacture in that facility. Or third, if somebody purchased the facility, did not want to run our product, maybe there's an opportunity for us to go in and buy some of the equipment we can use elsewhere. So regardless of how the Merit situation turns out, we see that as accretive to our overall plan. The key piece is we're not in control of the time line of the process though. So that's why we have our capital-light business model that we execute independently.

[Daniel Shahrabani, analyst]

Okay. So, whatever happens, it's a bit of an upside, like any of those 3 options that you just said, either we get cashed out or we can buy the equipment, whatever happens for Merit now would just be an upside to the balance sheet and to operations?

[Kip Underwood, executive]

It'd be an upside to our potential plan. Yes. And then your second question about the balance sheet is -- so when we went through our last fund raise, [indiscernible] we have a fully funded business plan, and it's funded really through 3 ways, right? So first, we have the cash on hand that came from our last raise. Second, we have the -- what we call tranche to debt -- potential debt from one of our largest shareholders.



And three, we have ongoing sales, right? That sales revenue, we have a piece. And fourth, we have non-dilutive government funding from Protein Industries Canada. The combination of that future revenue, cash on hand, debt and non-dilutive government funding, gives us a balance sheet to fully fund to cash flow positive.

[Operator]

[Operator Instructions] With no further questions from the telephone lines, I will now hand over to Paul Lam for questions from the webcast.

[Paul Lam, executive]

Hi, everyone. We have one question from the webcast from Jason Desilva, a private investor. I think there's 2 parts to his question here. He read an article on CBSA and other countries regarding the dumping of Chinese [ P ] protein into North America. And even though companies in Canada offered a better product.



The first part of this question is, are Burcon's isolates much more expensive to produce than competitors? And then second part is, does the functionality, taste and texture still set Burcon apart? It's isolates, even though they are more expensive than the Chinese [indiscernible].

[Kip Underwood, executive]

So yes, the United States did go through a ruling that was really driven by the [indiscernible] industry that impacted the import cost of companies from importing from China; that has occurred. And that really has put players on a level playing field. From our perspective, it really has helped make the plant protein industry more dynamic, right?



So, when you're the newcomer like us, when there's dynamic action and there's more formulation change, there's more things happening in the marketplace, that helps us break into new products and new formats. So that's good for us, right, across the plant protein the industry. Relative to cost, that [ core piece ] was not so much that there's a distinct cost advantage from one player to another. It was around anticompetitive situation, if you go back and look at it.



Relative to our offerings, we still get nearly unanimous feedback across our plant proteins that they're best in class. And they're best-in-class really for 3 reasons, right? The 95% purity leads to better flavor and better color. The other piece of the puzzle, which you call functionality. How does it help a product feel in your mouth? How does it taste? What is the eating experience? We routinely get feedback from industry peers, potential prospective customers and other folks in the industry that our proteins truly are best-in-class in performance, which in the end, matters because that helps our customers deliver the end consumer a better [ eating ] experience.

[Paul Lam, executive]

Okay. There are no further questions from the webcast. I think that's all the time we have. Operator, could you please provide the closing remarks?

[Operator]

Ladies and gentlemen, I will now turn back over to Mr. Underwood for closing remarks.

[Kip Underwood, executive]

I would like to sincerely thank our team for their dedication and commitment. I would also like to thank our shareholders for their patience in us as we execute our strategy and become a market-leading plant protein innovation company.



Also, we look forward to speaking to everyone again a month from now at Burcon's AGM, where we will review Burcon's strategy and provide a business update and outlook for the company. Our AGM will be held on September 18 through a virtual webcast. We will speak to everyone again then. Thank you for your time today.

[Operator]

Thank you. Before we conclude today's call, I would 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, performance, prospects and opportunities to differ materially from those expressed or implied for such forward-looking statements.

Forward-looking statements or forward-looking information can be identified by words such as anticipate, intend, plan, goal, project, project, estimate, expect, believe, future, likely, can, may, should, could, will, potentially, and similar references to future periods. All statements other than statements of historical facts 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, adverse general economic market or business conditions, regulatory changes and other risks and factors details detailed here in and from time to time in the filings made by Burcon with security regulators and stock exchanges, included in the section entitled Risk Factors.



Burcon's actual information form filed with the Canadian Securities Administrators on www.sedar.com. Any forward-looking statements or information only speaks as of the date on which it was made 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 the assumptions inherent in the 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 would like to remind everyone that 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.