Burcon NutraScience Corp

TSX:BU

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's Fiscal Year 2024 Third Quarter Results ended December 31, 2023.

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 conference 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 today. We are excited to report that during fiscal 2024 third quarter and year-to-date, we showcase robust execution and value creation for Burcon, marked by the achievement of 3 key milestones.

First, we entered into a production agreement with our partner manufacturer, establishing commercial capability by integrating Burcon's proprietary process into their production facility. Second, we were able to validate the hemp protein process through water trials. Third, we have validated customer interest in both our hempseed isolate products as well as our pea and canola offerings. We will review these milestones in more detail on the call today.

We continue to see opportunities for Burcon's proteins in the market today. The growth of the plant-based beverage segment is strong with consumers demanding plant-based foods that they both enjoy and are planet friendly. Consumers are seeking better plant-based products that we believe will drive the need for new, improved plant-based protein offerings. We expect Burcon's new-to-the-world hempseed and sunflower proteins to meet this demand, and support the next generation of innovative food and beverage products.

We have made significant strides in the execution of our Burcon 2.0 business plan. We have validated potential customer demand with both former Merit customers and new prospects. We have established a supply chain capable of bringing our products to market, and we have reaffirmed the differentiation of our products compared to competitive alternatives.

Burcon is in an excellent position to accelerate our plan to bring our best-in-class protein ingredients to market. We firmly believe that 2024 will be a transformative year for Burcon, and I look forward to sharing Burcon's plan with you on the call today.

Before that, I'd first like to turn the call over to our Chief Financial Officer, Jade Cheng, to provide a brief overview of the financial results for the quarter. After which, I will return to provide my remarks and discuss our bullish business outlook for the fiscal year. 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 2024 were issued in the news release and filed with SEDAR as well as posted to the Investor Relations section of our website. We reported a net loss of $2 million or $0.02 per basic and diluted share for the current quarter, as compared to $16.3 million or $0.15 per basic and diluted share in the same year ago quarter. The decrease is due almost entirely to the impairment losses and share of loss in Merit recorded in the third quarter of last year.

Gross R&D expenditures went down by $200,000 from $1.2 million in the third quarter of last year to $1 million in the current quarter. The decrease is due to a reduction of intellectual property expenses as a result of Burcon's patent portfolio optimization efforts, as well as to lower stock-based compensation expense.

G&A expenses this quarter did not change significantly from the same year ago quarter. While there were reductions in expenses due to our cash conservation efforts such as Investor Relations, and costs related to the former U.S. listing. Professional fees increased due to consulting costs incurred for our strategic plan that have contributed to uncovering, additional value and identifying further opportunities for our technology.

At December 31, 2023, our cash resources were $675,000 compared to $1.5 million at March 31, 2023. During this quarter, Burcon met the conditions for the second tranche of the Large Scale loan facility. After December 31, Burcon drew down $1 million from the loan facility. We expect our current cash resources to fund our operations to April 2024, and further to January 2025, if the loan facility is fully drawn. These dates may potentially be extended if the company receives funding or generates revenues from other sources, including, but not limited to, hemp protein sales, government funding, pilot plant processing and scale-up validation services.

With that, I'd like to turn the call back over to our CEO, Kip Underwood. Kip?

[Kip Underwood, executive]

Thanks, Jade. We have made significant progress along all 3 of our strategic imperatives: identifying alternative revenue streams, getting closer to customers, and gaining influence over the manufacture of our products. We are focused on the execution of our strategic plan. Relative to the production of our ingredients, we cleared 2 important milestones during the quarter. As a result of strong customer demand, for our hempseed protein isolate, HPS Food & Ingredients and Burcon expedited our commercialization plans for hemp.

Burcon entered into a production agreement with its partner manufacturer to produce its hempseed protein. As part of our capital-light business model, we are leveraging the existing infrastructure of our contract manufacturer and integrating Burcon's proprietary processing equipment to build out the capability to produce Burcon's portfolio of high purity protein ingredients. Developing this supply chain capability was a key priority for us this quarter. Our team worked closely with our partner manufacturer to validate our hempseed protein process through water test runs. We are encouraged by the commercial progress made to date establishing commercial capability is critical to the execution of our Burcon 2.0 plan. It is a go-to-market plan that offers us both speed and optionality. Two things we must have in order to succeed, with the flexibility to produce various protein ingredients through our contract manufacturer, we have an opportunity to accelerate our Burcon 2.0 plan.

In regard to customer interest in sales, feedback for Burcon hempseed protein isolate continues to be positive. Following the successful launch of our hempseed protein isolate last summer, we have prioritized customer engagement, working closely with customers to provide technical support and now have developed a robust sales funnel. A handful of customers, we have completed their evaluation of our hempseed protein isolate are interested in moving forward with purchasing commercial quantities.

Our 95% hempseed protein isolate is neutral in flavor, off-white in color and has the nutrition and functional profile that makes it an ideal protein ingredient in various food and beverage applications. We expect our hempseed protein to be an ideal fit and lifestyle nutrition products such as ready-to-mix protein powders and protein nutrition bars. According to research and markets, the global hemp foods market is expected to double in the next 5 years. We anticipate our 95% hemp protein to be the main ingredient in a number of food applications, including dairy alternatives, ready-to-drink beverages, baked goods and many others.

According to the research firm, Mintel, hemp is a hero ingredient that consumers seek out for its nutritional and sustainability value. 32% of U.S. consumers are interested in hemp as an alternative to dairy protein. We expect our 95% hempseed protein to potentially capture a sizable market share of this growing hemp foods market. Commercial production for hemp protein is expected to start this quarter. We intend on fulfilling customer demand for our hemp protein as well as bringing to market our other commercially proven protein ingredients such pea and canola.

The third key milestone achieved in the quarter was the validation of demand for our pea and canola products from former Merit customers. We have conducted conversations with many former Merit customers as well as new prospective buyers. The overall interest in our pea and canola products has surpassed all our expectations with nearly 100% expressing interest in evaluating and/or purchasing products produced with Burcon's pea and canola technologies. In fact, many companies are having difficulty identifying replacement ingredients with equal performance in their end consumer food products. We are excited to receive this level of direct customer feedback and are actively exploring how to meet a portion of this demand.

To support our balance sheet, we were pleased to announce that we have entered into an agreement with Burcon's largest shareholder, to access the second $5 million tranche of a $10 million loan. Subsequent to the quarter end, we drew down the $1 million of the second $5 million tranche. [ For second ] additional non-dilutive funding, Burcon and its consortium partners have been working closely with Protein Industries Canada to secure co-investment on a $7 million project aimed to commercialize Burcon hemp and sunflower proteins. We are working through the final stage of the funding process and expect to get approval for this co-investment from Protein Industries Canada in the coming weeks.

Collectively, the second tranche loan, non-dilutive government funding and anticipated hemp sales revenue this year are expected to extend Burcon's cash runway well into 2025.

We firmly believe that 2024 will be a transformative year for Burcon. Looking ahead, we have a real opportunity to accelerate our Burcon 2.0 business plan, to launch and sell multiple protein products in parallel. Our focus this year is to commercially produce and sell our hempseed protein isolate to fulfill the growing customer demand. HPS and Burcon continue to work with customers to incorporate our 95% hempseed protein isolate into product formulations. We expect hemp sales to begin in the coming months as we scale up commercial production. As well, we expect to launch additional proteins later this year, which could include Burcon's sunflower and pea proteins through our partner manufacturing.

With an established supply chain, we believe we can bring to market our next generation of high purity premium protein ingredients. The milestones we cleared this quarter all point back to our 3 strategic imperatives for Burcon 2.0, which are to identify additional sources of revenue, get closer to customers and have more influence over the manufacture of Burcon's protein. We continue to adhere to our overarching strategic goals and execute against them with the vision of becoming a market-leading protein ingredient company.

We took significant steps this quarter to solidify our commercial production capabilities, building out our supply chain via a capital-wide approach is the cornerstone of our Burcon 2.0 strategy. The market feedback has been nothing short of encouraging. There is real demand for Burcon proteins, and now we have the capabilities to fulfill that demand. Our team is focused on bringing our proteins to global market, where we believe our products will thrive and capture a part of the growing multibillion-dollar addressable market. We are more optimistic than ever and look forward to updating everyone on our commercial progress on the next call.

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

[Operator]

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

[Daniel Shahrabani, analyst]

Kip, it seem that you really developed the mechanism to show real progress going forward. And I'd like to ask you two quick questions. When do you believe it to be realistic that we can monetize on all these great successes that you're having now to see, in your opinion, when you feel there'll be a nice cash flow coming from operations, you think it's going to be end of 2024, sooner?

And also, the second question is, any updates on the sale of Merit? Like it was such an exciting period where we were going to make a bid for the plant, and this is supposed to be last March, and so far, we haven't heard very much. So do you have any updates? And what would be the best scenario for Burcon?

[Kip Underwood, executive]

Thank you, Daniel, for both questions. So let me tackle the first of, I think, top of mind for everyone, when does Burcon begin to see revenue and when can we achieve cash flow positive? So what we can say is, we are laying the groundwork. Key to us becoming cash flow positive really is the establishing of supply team which we spoke to, the understanding of downstream demand from our customers, which we have validated and now it's up to us to produce, launch and sell those products to the market. So with those efforts, we should see revenue inside 2024 for our hemp protein product.

Relative to Merit, the first thing I'll say about Merit is, anything that happens with the Merit assets is additive to our Burcon 2.0 plan. Our capital-light model does not need, does not include any financial benefit from the Merit assets. What is also true is the Merit assets are still for sale. And we believe there's a variety of ways that Burcon can play a role with those because in the end, we know those market demand, we know the price differentiated, and we know the facility was purpose-built for Burcon's technology.

Given that, we believe there's a range of ways that we could participate and have a financial benefit from that arrangement. On one end of the spectrum would be to run, buy or own in some form or fashion. We could partially own, we could license the technology to somebody else and they can run and pull a royalty stream out or we could actually if somebody else bought the facility to repurpose, we could actually contract manufacture inside the facility, that's purpose-built for our products. So we see a continuum of opportunity with the Merit facility. We see it is all additive to our current plan and our capital-light plan is truly independent of that, right? So we execute our plan and with the receiver drive the Merit time line and then when that situation resolves itself, we will be ready [indiscernible] the outcome.

[Operator]

The next question comes from [ Bruce Lazenby ], private investor.

[Unknown Attendee]

Yes. Kip, I'd like the 2 points you just covered, but maybe a little bit more directly. Can you give us some ballpark? I know forward-looking is always a challenge, but everybody does it. Are we talking in 2024, possible tens of thousands of revenue, hundreds of thousands, millions? And the second question goes back to the Merit thing. It's been a while, I mean, I'm familiar with receiverships, they take a while. But is this about to resolved? Or is this going to be in limbo for another several quarters?

[Kip Underwood, executive]

Well, I'll tackle the second one first. We're not in a position to predict what the receiver is going to do or not do, right? It's certainly, you're right, it will be a year as of early March when the assets went to receivership. So what we can do is what we can control, which is, say, close to the receiver and dialogue, understand the process, and then have and be ready, have plans ready to act regardless of how it turns up. And that's the part we can control, and that's our focus, right?

Relative to cash flow and revenue, I think what we can say is, we're very excited about our hempseed protein launch. We're excited to move into production and sales. And those sales, I think, inside of '24 will be significant relative to Burcon's annual spend.

[Operator]

[Operator Instructions] I will now hand the Q&A session over to Paul Lam, Director of Investor Relations for questions from the webcast. Please go ahead, Paul.

[Paul Lam, executive]

Thank you, operator. We have a few questions from the webcast. I'd like to start with Joe Sawyer, private investor. Where will Burcon produce the pea and canola to meet your stated demand? Kip mentioned that the current level of demand for pea and canola has far exceeded expectations. Is the demand equal to that of the former Merit facility?

[Kip Underwood, executive]

Joe, thanks for the question. What we can say about our supply chain is we've built out a supply chain that allows us to produce to meet our forward financial plan. And establish those in the marketplace. That's the piece we can speak to beyond getting into [indiscernible] overall capacity pieces. So we -- the supply chain we see and the demand we see both enable the full execution of our current financial plan.

[Paul Lam, executive]

Okay. Next, we have several questions from David Getchen, but I will summarize. I believe some of them have been answered already, but there is one. David is interested in understanding if there has been any discussions along the licensing of Burcon's technology?

[Kip Underwood, executive]

Thank you for the question. And I think those are always ongoing conversations, right? So for us, if we go back to our Burcon 2.0 plan, the key -- one of the keys is the optionality. And how do we monetize our intellectual property and provide a return to our shareholders. In any of our technologies, we always have, do we build, do partner, do we license, do we sell? And we are always in discussions and evaluation for all 4 of those. One of the keys to a Burcon 2.0 plan is to get our products into market under our control to establish their value, to establish the market and establish the financial opportunity. In doing so, not only do we get to a place where we have our own revenue and profit, but we also put ourselves in a much better position to license or sell the technology potentially in the future. Thank you for the question.

[Paul Lam, executive]

Okay. And next question we have from private investor. Do you need additional capital to build out your partner-manufacturers facility in order to produce pea and canola proteins? If so, how much additional capital is needed?

[Kip Underwood, executive]

We do not need any additional capital to execute our capital-light business model based on the current plan. So we have the capability, the capital, the capacity in line to produce. Certainly, if there's opportunity to accelerate or move faster or sell more or generate a higher overall revenue and profit, we would evaluate that. But this time, no additional capital to execute our plan.

[Paul Lam, executive]

Okay. Joe, so you actually came back with a follow-up question. He wasn't too clear on how Burcon would meet the demand to actually produce pea and canola. Where would there be a facility to meet the demand?

[Kip Underwood, executive]

Thanks, Joe, let me clarify then. So the supply chain we have put together through our partner manufacturer has the capability to produce our portfolios that include pea, canola, hemp and sunflower. In addition, it has the capacity to meet our forward business plan. So we have capability and capacity to meet our forward business plan as it sits today.

[Paul Lam, executive]

Joe, I think that answered your question. I am not seeing any additional questions. I think maybe I'll give it a few seconds to see if any other questions come up. I think we're good. Operator, can you provide the...

[Operator]

At this time, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Underwood for any closing remarks. Please go ahead.

[Kip Underwood, executive]

Thanks, operator. First, I would like to thank our team for their efforts over the past quarter and their commitment to Burcon and Burcon's vision. I would also like to personally thank all of our shareholders for their patience and understanding as we execute our Burcon 2.0 plan, which in the end will allow us to capitalize on the next wave of plant-based food growth. Thanks again for your time today. Goodbye all.

[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, 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 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 information -- forward-looking statements or information only speak as of the date on which it was made and expect as may be required by applicable securities law, Burcon disclaims any intent or obligation to update any forward-looking statements, 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.