Burcon NutraScience Corp

TSX:BU

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's Fiscal Third Quarter 2023 Ended December 31, 2022. Joining us today are Kip Underwood, Burcon's Chief Executive Officer; 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 CEO of Burcon, Mr. Kip Underwood. Sir, please go ahead.

[Kip Underwood, executive]

Thank you, operator, and thank you, everyone, for joining us this afternoon. It's a pleasure to be speaking with everyone on my first quarterly conference call. Happy to be here. I'm excited to go through our strategic outlook, operational update and, in particular, the opportunity regarding Merit that we announced just last Wednesday. There are things you may have heard us talk about before, but I assure you that I wouldn't be saying it unless it is highly relevant to us today and for Burcon going forward.

And then there are things that come from my experience and from my strategic review of Burcon, which I believe could help the company succeed and become the company it has always aspired to be. I am optimistic about Burcon's future and even more convinced today that our innovative plant protein technologies will play a crucial role in the future success of the plant-based food revolution and improving the overall health of our planet. I'm excited to share my views and outlook for Burcon. I can see tremendous potential in this business, and it's our job to get us there.

Before I get into it, 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 my remarks 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, Kip. Earlier today, our financial results for the third 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 $161,000 in royalty revenues from Merit sales of pea and canola protein products, representing a 44% increase over the previous quarter. During this quarter, we reported a net loss of $16.3 million or $0.15 per basic and diluted share. This compares to a net loss of $1.5 million or $0.01 per basic and diluted share in the same year ago quarter. Net loss for the current quarter included impairment charges of $12.3 million related to our investment in Merits.

Merit recorded total sales of $3 million during the third quarter of fiscal 2023, including sales of co-products in addition to pea and canola protein sales, an increase of 146% over the same year ago quarter. With our 31.6% equity stake in Merit, we recorded $2.1 million as our share of loss in Merit for the quarter as compared to $1.2 million in the same quarter in fiscal 2022. The higher loss reflects Merit's stage of development as it continue to ramp up production and sales. Merit has incurred cumulative losses and cash flow deficiencies that have adversely impacted its financial situation and liquidity position. As disclosed in our previous news release, Merit began a process to identify a new strategic investor. To date, no funding has been received from a new investor. As a result, due to Merit's financial situation and liquidity position, Burcon performed an assessment of the recoverability of the investment and has recorded impairment charges of $12.3 million related to its investment and loan to Merit.

On the expense side, our gross research and development expenses this quarter did not change significantly after taking into account grants received from Protein Industries Canada this quarter and COVID-19 subsidies received in the same quarter last year. Gross intellectual property expenses totaled $217,000 for the third quarter as compared to $468,000 in the same quarter last year. The decrease is due to lower maintenance costs for our soy patent portfolio. As at December 31, 2022, our cash balances totaled $1.6 million. With the first tranche of the $10 million secured loan facility, our cash resources are expected to fund our operations to June 2023 and further to May 2024 if certain conditions are met for the second tranche of the loan facility. We have implemented certain cost-cutting measures to conserve our cash resources. 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 5 patent allowances during this quarter. Subsequent to the quarter end, Burcon received a key patent grant covering characteristics of our Peazazz pea protein. With that, I'd like to turn the call back over to our CEO, Kip Underwood. Kip?

[Kip Underwood, executive]

Thanks, Jade. My first initiative coming in as CEO was to do a strategic review of the business. From that, we identified 3 key focus areas for Burcon. We need to identify additional revenue streams, plain and simple; how do we leverage our assets and intellectual property to create additional revenue. We have the IP, we have the expertise and we have the capabilities.

Number two, we need to have a closer connection to customers and end markets. Right now, we are too far removed from the customer. We need to understand why customers choose our products, what do they like about them and where do we need to improve. I believe being closer to the customer can only benefit Burcon in the long run.

Number three. We need to have more influence over the manufacturing of our protein ingredients. Burcon's technologies are unique and unlike any processes used in industry today. Our team has the know-how to properly implement, fine-tune and optimize our processes to produce consistent, high-quality protein products.

In summary, we need to be more proactive. In the past, we have relied solely on others to bring our products to market. This has limited our growth, slowed our progress and inhibited us from reaching our potential.

Okay. So now we know what we need. Now how do we get there? In my first few days, several people mentioned that Burcon and Merit should become one company. This intuitively makes sense, but we had nothing to back it up. We explored the potential benefits of integrating Merit's business into Burcon. Upon completing the analysis, we identified 3 pillars that support this premise.

Number one. Merit has experienced strong business momentum over the past 6 months. Independent of Merit's cash concerns, Merit has experienced improved daily production performance and increased customer sales. Daily production rate, yield and product quality have all improved. Sales have increased month-on-month and quarter-on-quarter as compared to prior year. This past quarter, we recorded a 44% increase in royalty revenues arising from Merit's protein sales. This is the highest protein sales achieved by Merit to date. Continual feedback from customers is that Merit's proteins are best in class and differentiated from what's on the market today. These are all meaningful improvements by Merit, and we see the growth potential in Merit going forward.

The second pillar is faster growth via new markets. Right now, Merit is producing pea and canola proteins using Burcon's technology. Burcon's innovation portfolio is much broader than pea and canola. Integrating additional plant protein technologies in Merit's business could allow us to launch additional offerings and give us access to new markets and higher growth. Our latest innovation, sunflower protein, is a good example of what is possible. We can produce this offering at the Merit facility, enabling a quick commercial launch and gaining access to new markets.

The third pillar is really where Burcon can bring value to Merit's business and vice versa. Merit has made significant improvements. But with an integrated approach, we can further improve daily production consistency and overall efficiency. Operational and cost synergies, including eliminating redundancies, would immediately be accretive to bottom line performance. So business momentum, new proteins, new markets and operational synergies are why we believe that with Burcon's influence, Merit's business could thrive as an ingredient solutions provider and become a leader in the plant protein space.

Fast forward to today, cash flow concerns at Merit have led Burcon to engage in discussions with Merit's lenders. Our goal is to build upon the current business momentum and bringing Merit's business to profitability. We want to minimize any disruption from this process to Merit's business and customers. We are working on a long-term solution that includes a capital infusion to fund existing operational expenses and provide debottlenecking capital with the goal of bringing Merit's business to a cash flow positive state. We are in discussions with Burcon's largest shareholder, who has supported Burcon since day one, to help with this capital infusion. It is important to understand that Burcon's proposal to the lenders of Merit is not the only one on the table. There are other proposals for Merit from competing organizations, and Burcon's proposal may not succeed.

That said, we will continue to put our best foot forward and present to the lenders an offer that is both attractive and aligned with their mission and mandates to foster the growth of Canadian agriculture and food. We have been advised that the process and negotiations could take approximately 90 days to complete. We expect to have more meaningful updates as the process moves along, and we'll endeavor to be as transparent as we can without risking the overall opportunity. We believe we have a grounded solid plan for Merit's business to reach profitability.

I'm a realist, and we understand both what needs to be done and how to do it. Not everything has to go right for the plan to be successful. There are upsides, and then there are risks. We're taking a balanced approach. These challenges have presented us with an opportunity. Now is the time to [indiscernible]. If our plan is successful, Burcon could have, for the first time in its history, the chance to own its destiny. We could have the capability to develop, produce and directly bring to market our innovative products.

Some shareholders have asked us how this news about Merit affects our ongoing joint venture discussions with potential partners. We can say that our discussions have been progressing really well, particularly in the last 2 months. Leadership teams are aligned on the success criteria for the project and on the path forward. We've made a lot of progress this past quarter. We're just simply not at a point where we can announce anything yet, but we're getting there. Our plan for Merit is not mutually exclusive to our ongoing joint venture discussions and can actually be supportive of what we're trying to do. We'll have more clarity on our developments in the coming months, and we are encouraged by where things are and where things are headed.

I joined Burcon because I believe in the future of plant-based foods and how it can better our health and the health of our planet. Understanding the challenges we face today and the significant opportunities we have going forward, we are motivated to push ahead and capitalize on opportunities to bring more value to the company and to our shareholders. So I would ask that you'd be patient with us a little longer while we navigate through this. There's a lot of work to be done, but I am optimistic that we can come out ahead.

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

[Operator]

[Operator Instructions] The first question comes from [ Bruce Lazenby ], a private investor.

[Unknown Shareholder]

Kip, welcome to the team. I think many of us have been looking for somebody with your background for a while because we believe that the opportunity is bigger than we're capitalizing on. In fact, I think today, the market cap closed about $40 million, which is probably a fraction of your patent portfolio, which would normally make you a takeout target if it wasn't for, I think, some of the investors that you've already got. A couple of questions. How much of a surprise was the $16 million? Because that kind of wasn't on my radar. I wasn't expecting that big a loss?

[Kip Underwood, executive]

Thanks, Bruce. I think, a little bit of a surprise given the impairment, which drove a large piece of that, right? And I think in the end, the combination of the decline of Merit's business and its cash flow situation caused us to make the conservative call and complete the impairment work, which in the end is what drove almost the entire loss.

[Unknown Shareholder]

Okay. The cash flow, obviously, a big concern. You're looking at current cash availability to June of '23, which is just around the corner. And so my question is, based on what you know now, what's the likelihood that you're going to make the May 2024 requirements?

[Kip Underwood, executive]

Well, I think what we can say, Bruce, is that we recognize that in the near future, we're going to need to go through a funding round. And I think the Letter to Shareholders and today's work on the Merit opportunity are an example of one route to a potential funding round. We'll continue to work down [ those paths ] and ensure that we have the cash to enable our forward business plan.

[Unknown Shareholder]

Are you thinking debt or equity?

[Kip Underwood, executive]

I think all options right now are on the table.

[Unknown Shareholder]

Okay. I love your clarity around the 3 priorities. Revenue -- new revenue streams, I think, are really interesting. I think the company dabbled with some licensing arrangements in the past that didn't go well. Is that one of the options you're considering? Because that would seem to be probably -- the Merit route is interesting, but, man, it's slow, and ramping up new JVs like that is really slow. Are some licensing agreements, licensing out your patent IP to some of the bigger players, is that one of the things you're contemplating?

[Kip Underwood, executive]

Yes, Bruce, I think licensing always has to be a part of our plan. It just cannot be all of our plan. So yes.

[Operator]

[Operator Instructions] The next question comes from [ Johan Ferguson ], a private investor.

[Unknown Shareholder]

Kip, it's [ Johan Ferguson ]. I have a question. I spoke to a number of fellow shareholders since last Wednesday since Burcon put out that most recent news release. And one of my questions is pretty simple, which is the news release alluded to, and you mentioned again in the call today, that you're not the only bid with respect to Merit and in discussions with Merit's lenders. But my question is just simply, if it is a competing bid that ultimately does something with Merit and that entity chooses to produce Burcon's proteins, I assume that the license agreement still stands and that, that party has to pay royalties to Burcon on its go-forward. Is that correct?

[Kip Underwood, executive]

We do believe the license agreement will continue to go forward if somebody else purchases the asset and uses it to make the same products. And either way, we believe that the license agreement will allow us to enter into further dialogue should somebody else win the competition, and we'll use that dialogue to see how we might be able to cooperate in the future.

[Operator]

We will now take questions from the webcast. And I would like to hand the call over to Mr. Paul Lam to guide us through.

[Paul Lam, executive]

Kip, we have a couple of questions coming in from the webcast. This one comes from a private investor, not -- didn't disclose name. Can you explain the impact, if any, to minority shareholders as part of the strategic plan? I am assuming this shareholder is referring to shareholders of Burcon.

[Kip Underwood, executive]

Well, if we assume shareholders of Burcon, we would hope that if we execute upon our strategy, that we will have improved financial performance and that the value of the company will be representative of that. So our hope would be that it's positive to shareholders.

[Paul Lam, executive]

Okay. The next question we have, from Jamie Switzer from Canaccord Genuity. If you are not successful in merging with Merit, are you still confident you can make this a success?

[Kip Underwood, executive]

Thank you, Jamie. It's certainly something we have talked about as well, and I think that is also why one of our strategic thrust really is multiple independent revenue sources. So certainly, the Merit opportunity that's presented is pretty unique. It can be pretty impactful to Burcon. In addition, beyond that, though, we will still have the licensing opportunity for canola and pea should somebody else purchase the facility. And we do still have our other ongoing work with strategic partners where that work is really independent of the Merit opportunity and has actually progressed fairly well the last couple of months. We're just not quite at that place where we can speak about them publicly. So I think in short, yes, I think we can be successful if the Merit opportunity does not play out like we think, and we are planning to make sure that happens.

[Paul Lam, executive]

And then I think there's one more comment/question coming from [ Daniela Gadadi ], a private shareholder. She says -- this is a comment, not a question. Both in the letter as well as here, Kip did not say what it is he wants Burcon to do with Merit. And maybe if we can provide a little bit more color on that part?

[Kip Underwood, executive]

Well, I think -- again, we go back to the analysis that we completed and where if Merit is integrated into Burcon, how could that help both entities. And I think if we go back, there's 3 pieces to that. Again, first, we maintain Merit's current business momentum, both internally with production performance and externally with customers. We could put the 2 together or work together. We can bring new products to market. Burcon's innovation portfolio is much broader than just the pea and canola that Merit produces today. And the last piece of the puzzle, the third pillar, really is if we work day-to-day together, hip to hip on the shop floor, we can improve daily production performance, data yield, data throughput, which all those cost benefits drop to the bottom line immediately. So that's the 3 primary areas we see as benefits of integrating the Merit business into Burcon.

[Paul Lam, executive]

Okay. And a follow-up question from [ Daniela Gadadi ] regarding the expanding revenue from resources. "Proteins purified from different sources, how do they differ in the way they could be employed? I keep reading all our tasteless and soluble and so on."

[Kip Underwood, executive]

So if we take a step back and look at the plant protein universe, all proteins have different strengths and different weaknesses, and each of those strengths and weaknesses are required in different food forms. So the types of proteins you need to make a plant-based burger, the types of proteins you need to make a plant-based coffee creamer or the types of proteins you need to produce a nutritional beverage are all different. And if the plant-based food market grows and new offerings come to the table, we believe that food formulators will need new proteins with different characteristics than the ones used today. And that's one of the areas where Burcon's technology is so exciting because we're one of the very few companies out there that are bringing new plant proteins to market, particularly ones like canola and sunflower. And we believe those will enable food companies, food formulators and food companies to do things in the future that they cannot do today.

[Paul Lam, executive]

Okay. Thank you. That's all for the questions from the webcast. Operator, can you give the appropriate instructions?

[Operator]

Absolutely. So that's all the time that we have for questions today. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Underwood for any closing remarks. Please go ahead.

[Kip Underwood, executive]

Thank you, Charlize. I would like to sincerely thank our team for their work and continued belief in Burcon's vision. I certainly appreciate the support [ and volume ] we have from every Burcon member. I just want to say that we really appreciate the continued support from our Board, our partners and most importantly, our shareholders. I look forward to our next call with more exciting developments to report. Thank you for your time today.

[Operator]

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 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 risk factors is 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 speaks 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 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.