Burcon NutraScience Corp

TSX:BU

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's Fiscal Second Quarter 2023 ended September 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] Then 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 would like to turn the call over to the interim CEO of Burcon, Mr. Peter Kappel. Sir, please go ahead.

[Peter Kappel, executive]

Thank you, operator, and thank you for joining us this afternoon. First off, we were extremely pleased to announce this morning that Burcon has appointed Kip Underwood, a seasoned food and specialty protein industry executive, as its new Chief Executive Officer. Kip will be starting on the 21st of November, and we look forward to introducing him to all of you at our AGM 2 days later.

Kip is a proven leader with decades of specialty protein experience and an impressive track record of driving sustainable, profitable growth. Kip's consumer-centric mindset, go-to-market expertise and passion for building high-performance cultures makes him the ideal leader for Burcon's next growth chapter.

Burcon's Board is confident that his industry knowledge and collective skill set will ensure that the company succeeds in monetizing its IP, executing our strategic partnership initiatives and bringing to market Burcon's innovative protein technologies. Kip has agreed to join us as he recognized the potential of Burcon's technologies and is confident of driving the commercialization, which will ultimately drive enhanced value for our shareholders.

Kip began his career at the Solae company and held progressively more senior positions until he transitioned from Senior Sales Director for Europe into the role of Vice President, Specialty Protein businesses for DuPont Nutrition & Health. He held the position of NAFTA Regional President with DuPont from 2014-2017, where he was responsible for top line sales of $1.4 billion and approximately 250 employees. In that role, he achieved above-market growth every year in sectors, including baking, dairy, beverage, meat and supplement.

Kip has extensive experience leading business turnarounds from a multi-sales declines to year-over-year growth. In his latest role at Benson Hill as GM and VP of Sales, Kip led efforts to transform a start-up company to an established food ingredient business, including building a $100 million project funnel within the first 6 months of product launch. He holds an MBA from Saint Louis University and a Bachelor of Science in Chemical Engineering from the University of Missouri-Columbia.

Now back to the purpose of this call. Burcon's fiscal 2023 second quarter, which ended September 30, included a number of value-creating developments for both Burcon and its joint venture, Merit Functional Foods. Our second quarter saw our joint venture, Merit, continued to make significant progress in ramping up commercial production of its best-in-class pea and canola protein ingredients. It is very encouraging to see the resolution of past production issues, allowing Merit to reach higher production throughput and yields.

In addition to production improvements, Merit officially launched Peazazz C, its newest pea protein that offers superior taste and texture with low sodium content, as well as announced the development of a 100% protein-based methylcellulose replacement using one of Merit's original pea protein ingredients. I will update everyone in more detail of Merit's production progress and its recently launched innovations during today's call.

Similarly, Burcon has been making significant progress on its own developments and pursuing opportunities that add value to the company and its shareholders. In regards to our ongoing partnership discussions to bring one or more of Burcon's protein technologies to market, Burcon and its potential partners completed key due diligence items this past quarter in support of a determination on the feasibility of the project. We are very pleased with the results, and I will provide more color on it later in the call.

We also announced that we have successfully developed a novel process to produce high-purity sunflower protein isolates from sunflower meal. This is an entirely new process developed by our team in Winnipeg and something that we are quite proud of. I look forward to speaking more on this as it is a technology that has the potential to set a new benchmark for the next generation of high-quality, clean-label, plant-based protein ingredients.

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

Jade, please go ahead.

[Jade Cheng, executive]

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

Turning first to our income statement. During this quarter, we recorded $112,000 in royalty revenues from Merit sales of pea and canola protein products, representing a 24% increase over the previous quarter. During this quarter, we reported a net loss of $3.2 million or $0.03 per basic and diluted share. This compares to a net loss of $1.4 million or $0.01 per basic and diluted share in the same year ago quarter.

Just under 1/2 of this quarter's loss is related to our equity pickup of Merit's loss for the quarter. The increase of $1.8 million in the loss this period over the same period last year is due mainly to an increase of $1.2 million in our share of Merit's loss and $657,000 of pea and canola costs that were capitalized in the second quarter of last year.

During the second quarter of fiscal 2023, Merit recorded total sales of $2.4 million, including sales of co-products in addition to pea and canola protein sales, an increase of 48% as compared to $1.6 million in the second quarter of fiscal 2022. With our 31.6% equity stake in Merit, Burcon recorded $1.4 million as its share of loss in Merit Foods for the quarter as compared to $159,000 in the same quarter of fiscal 2022.

Included in the share of Merit's fiscal 2022 second quarter loss is a recovery of $656,000 to correct a deferred income tax adjustment related to the first quarter of fiscal 2022. Merit recorded a loss of $4.4 million for the quarter ended September 30, 2022, as compared to $477,000 in the same year ago quarter. Merit's loss reflects the stage of development as it continued to ramp up its production and sales. During this quarter, Merit shareholders advanced an aggregate of $3 million to Merit to address its liquidity requirements, with Burcon's share being $948,000.

On the expense side, our gross research and development expenses of $845,000 this quarter increased by $122,000 over the same year ago quarter, with the increase due mainly to the amortization of noncash deferred development costs.

Gross intellectual property expenses of $231,000 decreased by $121,000 over the same year ago quarter, due mainly to lower maintenance costs for the soy patent portfolio. G&A expenses this quarter did not change significantly over the same quarter of last year.

As at September 30, our cash balances totaled $1.1 million. As noted earlier, we advanced Merit's $948,000 during the quarter. During the second quarter, we drew down $2 million from the loan facility provided by our largest shareholder, Large Scale Investments. If the loan facility is fully drawn, our cash resources are expected to fund our operations to November 2023.

I would like to refer you to our complete financial statements and management's discussion and analysis that are available in the Investors section of our website at burcon.ca as well as on sedar.com.

In terms of our patent portfolio, Burcon received 4 patent grants and 4 patent allowances during this quarter, bringing our patent portfolio to 332 issued patents in various countries, including 72 in the U.S. We have, in addition, more than 170 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. During our fiscal second quarter, both Burcon and Merit made significant advances and announced developments that further create value in our respective product offerings. For Merit, we are now seeing consistent production of high-quality protein ingredients. And on the Burcon front, we continue to innovate through the development of next-generation premium protein ingredients and to work with others to bring those unique technologies to market.

Our joint venture, Merit Functional Foods, took significant steps this past quarter to improve and scale up its production throughput, quality and yield. Through continuous process improvements and fine-tuning, Merit has been achieving consistent production of high-quality protein products of its original design capabilities.

Almost all of Merit's early production issues have been resolved, and we are now seeing Merit's efforts and process optimization and modifications bearing fruit through increased production efficiency, continuous and consistent production and high-quality protein products being delivered to CPG companies. First-time quality of Merit's pea and canola protein ingredient has notably improved.

As Merit continues to ramp up, we expect Merit to be able to address any production bottlenecks and operational inefficiencies and achieve its nameplate capacity for Phase 1. Its Flex Protein Facility is heading in the right direction and on track to reach higher output capacities to meet sales demand.

Switching over to Merit sales. This past quarter, we saw Merit fulfilling new sales orders for both its original and new SKUs. Interest and demand remains strong for Merit's premium pea and canola protein ingredients. Merit continues to work with and support the quality assurance and safety requirements of important CPG customers as part of those customers' procurement process. We anticipate that as Merit achieves a state of continuous and consistent production, Merit will be in an excellent position to fulfill larger and repeat sales orders.

Burcon recorded $112,000 of royalty revenue this quarter, an improved but still modest 24% increase from last quarter. Although production issues have been largely resolved, we are likely in a lag period where Merit is actually converting prospects into sales contracts. We anticipate seeing larger quarter-over-quarter sales going forward.

What's encouraging is that we are seeing the sales orders come in for both Merit's original Peazazz and Peazac pea proteins, Puratein line of canola proteins as well as Merit's newly launched Peazazz C pea protein. Each of Merit's proteins have unique attributes that are ideally suited for different applications. And as such, we are seeing Merit selling its proteins for formulating into a variety of food and beverage product applications.

We touched on this during our last call. During the quarter, Merit officially launched its newest Peazazz C pea protein ingredient, a uniquely different pea protein ingredient that combines some of the best attributes arising from Burcon's proprietary processing technologies, attributes such as superior taste and grit-free texture, a unique combination of high solubility and low viscosity that enables that creamy texture found in dairy alternative beverages as well as low sodium content, a feature exclusive to the Peazazz C process, which provides Merit with a distinctive competitive advantage over other pea proteins on the market today.

Feedback from customers has been positive, and we believe that Peazazz C has the potential to replace other pea proteins on the market and gain a foothold in the booming plant-based protein ingredient market.

During the quarter, Merit also launched an innovative process that utilized its original Peazazz pea protein to provide a 100% protein-based, clean-label solution to replace methylcellulose, synthetic ingredient widely used in the food and meat alternative applications that many CPG companies are desperate to replace. Factors such as taste and texture falling short of consumer expectations as well as an ingredient that's filled with questionable and hard-to-pronounce ingredients have been preventing consumers from repeat purchases.

Meat alternative brands are now actively reformulating their product offerings in order to meet consumer expectations. Improving formulations will require innovative ingredients that won't negatively affect the consumer sensory experience, and Merit has those products.

Merit has developed an innovation that can effectively replace methylcellulose in the formulation and thereby supporting a clean ingredient label while, at the same time, boosting a product's protein nutritional profile, which is a welcome bonus in any meat alternative product. Merit's Peazazz pea protein, when used in combination with an enzyme, produces a strong elastic gelling function that can mimic the texture of products containing methylcellulose.

Together, both recent innovations by Merit and Peazazz C pea protein and methylcellulose replacement are expected to add significant value and be accretive to existing protein sales. We are very encouraged in both Merit's innovative capabilities to create value in the growing specialty ingredient marketplace. New applications development using Merit's protein ingredients further supports Merit as a premier plant-based protein ingredient solutions provider.

Merit's premium pea and canola protein ingredients, in particular, its newest Peazazz C pea protein, are well positioned to target the global dairy alternatives market, which is projected to reach USD 44.8 billion by the end of 2027, and which is growing at a rate over 10% every year. The main contributor to growth of dairy alternatives is the increasing demand for plant-based beverages, which presents as an excellent opportunity for Merit to gain market share. Merit believes that its proteins have, and I quote, the "right to win" in the ready-to-drink beverage category.

Just last week, Merit showcased 2 of its newest product concepts at the SupplySide West trade expo in Las Vegas. Merit sampled a ready-to-drink plant-based milk featuring its newly launched Peazazz C pea protein, a differentiated ingredient that enables smooth, grit-free texture without any chalkiness. What often happens with plant-based beverages is sedimentation at the bottom. However, when using Peazazz C, its unique combination of high solubility and low viscosity provides a premium texture that is traditionally associated with real dairy milk.

In addition to a plant-based milk, Merit sampled the first great-tasting, high-protein, fortified vegan chocolate compound, an inclusion in the form of a salted caramel protein energy bites made with a blend of Peazazz pea protein and non-GMO Puratein C canola protein. These energy bites feature protein-fortified vegan dark chocolate coating and inclusions and provide 20 gram of protein per serving.

This particular blend of pea and canola protein provides protein nutrition that has a PDCAAS value of 1, complete protein nutrition score that is equivalent to that of dairy and beef. Not only is the product concept high in protein nutrition, but the protein solubility allows for the bar formulation to stay moist for longer periods of its shelf life, a feature that food formulators value in minimizing food waste.

Peazazz C pea protein and Merit's protein blend used in high-protein fortified chocolate compounds are already being sold into the CPG branded products. We are pleased to see the positive feedback on Merit's protein application concepts and are excited to see more consumer products using Merit's protein ingredients being launched in the global marketplace.

During the quarter, Burcon advanced approximately $950,000 to Merit as part of Burcon's proportionate share of an aggregate $3 million financing provided by all shareholders of Merit in proportion to their equity interest in Merit. The Merit cash call addresses anticipated liquidity requirements in Merit as it continues to ramp up production and sales.

On the Burcon front, we further advanced partnership discussions to bring one or more Burcon protein technologies to market. During the quarter, we achieved a number of scheduled milestones in our due diligence processes, which included the completion of process and product validation, market and competitive analysis and project economics. Our team of scientists and engineers at Burcon's Winnipeg Technical Center worked diligently to support the ongoing due diligence process and were instrumental among other tasks in the technology validation and pilot scale production process.

The results of the due diligence process have been very promising, and these results further support the view that Burcon is able to develop protein technologies that are scalable and economical for the global food and beverage market. There are, however, further due diligence items to complete in order for the project to move forward to the next phase.

Burcon and its potential partners are motivated to move forward with these projects and believe in the value proposition of Burcon's technologies in the global food ingredient marketplace. We are very excited with the progress that we are making and are optimistic that we can secure another joint venture in the near term.

Also during the quarter, Burcon announced that it has successfully developed an innovative process to extract and purify sunflower protein from sunflower meal, which is a low-value byproduct from production of sunflower oil. Sunflower is the world's third largest oilseed crop. After the seeds are crushed, the leftover meal is normally fed to livestock to develop animal protein. However, Burcon's latest innovation allows for high-purity, food-grade plant protein to be efficiently upcycled directly from the meal, making it a highly sustainable food-grade protein ingredient.

Sunflower proteins currently on the market consist of concentrates in the range of 50% to 60% protein content. While Burcon's new sunflower protein isolates are greater than 90% pure protein, neutral in taste and color and are particularly label-friendly due to its low allergenicity. These unique and potentially valuable functional characteristics make them ideal for use in a variety of valuable food applications, in particular, those featuring delicate flavors.

In addition, sunflower protein has a nutritional profile similar to that of canola, which is currently being sold into CPG brands through Merit. Our high-purity sunflower protein could be the best protein ingredient that Burcon has developed to date and sets a new benchmark for the next generation of clean-label protein ingredients. We firmly believe that our sunflower protein isolate has significant commercial value and are in the process of exploring various opportunities to bring this unique protein ingredient to market.

As part of our R&D process, Burcon continues to strengthen and bolster its intellectual property portfolio by filing for protection of our unique inventions. During the quarter, we added 4 issued patents and 4 patent allowances covering the processes to produce protein from soy, pulse and other nonsoy oilseeds. One of the patent allowances, which will soon be granted its U.S. patent, provides protection over the process to produce protein from sunflower seeds. The receipt of this patent is timely as it will support Burcon's discussion with potential partners and customers to commercialize its novel sunflower protein ingredient.

Burcon continues to actively assess its IP portfolio, cutting costs where the patents or applications provide minimal potential value. Our portfolio of patents totals 332 issued, 72 for which are U.S. patents, with an additional 170 patent applications filed.

In September, Burcon announced the resignation of its auditors, PricewaterhouseCoopers, which came as a surprise to us given that PwC had been our auditors for the past 21 years. PwC confirmed that there were no reportable events, disagreements or unresolved issues that led to their resignation. We understand that this is purely a business issue by PwC based on Burcon's profitability to them and risk profile as a client. We accepted that decision. However, we strongly disagree with the timing of resignation, which caused Burcon significant inconvenience, disruption and additional expense given that our annual shareholder meeting date had already been set. Moreover, PwC's sudden resignation left us with institution time to engage a successor auditor firm.

As a result, Burcon postponed its AGM and immediately began discussions with potential successor auditor firms. Subsequent to quarter end, Burcon announced that it has nominated KPMG, one of the 4 big multinational audit tax and advisory services firms, as Burcon's successor auditor to be voted upon at the upcoming AGM, which will be held virtually on November 23, 2022.

KPMG is also the auditor of our partner, Merit Functional Foods, where Burcon holds a 31.6% equity interest. We expect that this will contribute to efficiencies going forward. We are very much looking forward to working with KPMG for the coming year.

Burcon has also announced that it was delisting from the NASDAQ Capital Market. As previously announced, Burcon received a letter from NASDAQ regarding minimum price bid deficiency and had been given until September 28 to achieve a share price in excess of USD 1 for at least 10 consecutive trading days in order to become compliant again. Burcon management believed that it would not regain compliance by September 28, and that a share price consolidation was of no benefit to the company.

After reviewing the probability of Burcon regaining compliance and the associated cost benefits to Burcon delisting, our Board determined that it was in the overall best interest of the company to delist its common shares from NASDAQ. As a result of the delisting, the company will avoid numerous ongoing costs, including annual fees, legal fees and audit costs. Burcon continues to be listed on the TSX, one of the world's preeminent stock exchanges, and will continue to benefit from our TSX listing for many years to come.

There were positives and negatives this past quarter, but we remain very bullish on the outlook for Burcon and its partners. Merit is trending in the right direction and providing its stakeholders the confidence that it can succeed. CPG companies are actively reformulating their product offerings to provide consumers with greater value in terms of nutrition and experience, which is a sizable opportunity for Merit.

Burcon is developing new technologies and capitalizing on additional opportunities, which may soon be realized. We are very excited for what's to come and are confident that we can increase shareholder value and achieve higher valuations through careful execution of our strategic vision.

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

[Operator]

[Operator Instructions] The next question comes from Daniel Shahrabani with Fard Investments.

[Daniel Shahrabani, analyst]

I just want to say thank you for the update. I would just like to get your opinion more on the severe decline in cash from $7 million to $1 million. Are we okay that we will have enough funds even if you had the line of credit until November 2023? Do you think that will be a sufficient time for us to deal with any other kind of contingencies?

[Peter Kappel, executive]

Okay. Thanks for the question. Well, we are obviously concerned that there's obviously a lot more -- we've contributed cash to Merit. They are having a cash burn. That burn is going down. It's getting much better. We've put -- raised the issue, potential going concern issues in the quarterly statements because of that issue of will we get to the end of November, which would be a year from now, in order to do that, and there are some issues related to that.

However, we believe that the situation will be bearing fruit and will -- is in the process of turning around. And we think we'll be close. Obviously, I'm not going to deny that the situation and the way it's dragged out has caused the requirement for more cash resources to be contributed, okay? But we believe that the evidence will be there to show that they have turned the corner, and we expect that to be quite positive for the company on those prospects, both us and Merit.

[Daniel Shahrabani, analyst]

Well, thank you for your candid answer. And hopefully, as you say, that the ramp-up will happen sooner, and hopefully, there'll be more liquidity by the time we reach a year from now. But thank you for your candid answer.

[Peter Kappel, executive]

Thank you. I mean we are exploring various alternatives and some of those may turn out. And yes, we're actively monitoring it and we're working on it, and we will see where we get, okay?

[Operator]

[Operator Instructions] As there are no further questions, at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Kappel. Sir, please proceed.

[Peter Kappel, executive]

Thank you very much, operator. Again, I'd like to thank the continued support of our staff, partners and shareholders. And I must say that I really look forward to the next call where my participation will be as a listener, not as a speaker. And I'm really glad that we've got Kip on board, and I think you will find his comments to be a lot better than mine going forward.

So thanks a lot. We appreciate our investors. We fully understand that the situation has been a little bit protracted, but we're quite optimistic that the situation has turned around. And I think with Kip on board, you'll really see a difference. So thanks again. Operator?

[Operator]

Thank you very much. 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, 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 for 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 detailed herein and from time to time in the filings made by Burcon with securities 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 speak as of the date on which it was made, and except as may be required by applicable securities 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'd 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.