Burcon NutraScience Corporation (BRCN) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon everyone and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's Fiscal 2022 First Quarter Ended June 30, 2021. Joining us today are Johann Tergesen, President and CEO of Burcon; and Jade Cheng, the company's Chief Financial Officer. Following their remarks we will open up the call for your questions. Then before we conclude today's call, I will 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 President and CEO of Burcon, Mr. Johann Tergesen. Sir, please go ahead.
Johann Tergesen: Good afternoon, everyone. Thank you for joining us today for Burcon's fiscal 2022 first quarter, which ended June 30th, included some truly notable milestones beginning with Merit Functional Foods having completed the first end-to-end production runs of its novel lineup of Puratein canola protein ingredients at Merit's new state-of-the-art protein production facility in Winnipeg, which is now the first and only commercial scale facility in the world capable of producing food grade protein from canola. And I'm pleased to now add that that notable milestone was followed by Merit's fulfilling first commercial sales orders for its best-in-class pea and canola protein ingredients during the first quarter as well. There were a number of other developments that marked our fiscal 2022 first quarter. And before I talk about those developments, I'd like to first turn the call over to our Chief Financial Officer, Jade Cheng, who will briefly take us through the financial details for the quarter. Then I'll return to provide a business update of the quarter and discuss some of the opportunities that Burcon is currently pursuing. We will open up the call to questions following our remarks. Jade, please go ahead.
Jade Cheng: Thanks, Johann. Earlier today our financial results for fiscal 2022 first quarter were issued in a news release and filed with SEDAR and EDGAR as well as posted to the Investor Relations section of our website. Turning first to our income statement. During this quarter, we reported a net loss of $3.2 million or $0.03 per basic and diluted share with more than one half of our loss attributed to the equity pickup of Merit's loss. This compares to a net loss of $1.4 million or $0.01 per basic and diluted share in the same year ago quarter. Merit began fulfilling commercial sales orders of pea and canola protein products this quarter and Burcon recorded its first royalty revenues of $18,000 from Merit. Merit recorded total sales revenues of $1.2 million during this quarter representing sales of pea and canola protein products, as well as sales of commodity items and byproducts. Merit recorded a loss of $5.2 million for the quarter ended June 30, 2021 as compared to $955,000 in the same year ago quarter. Burcon recorded its share of Merit's loss of $1.7 million for the first quarter of fiscal 2022, which represents more than one half of our reported loss this quarter. The higher loss incurred by Merit reflects its planned operating costs during the startup process of the flex production facility. Gross research and development expenditures increased by $393,000 from $529,000 in the first quarter of fiscal 2021 to $921,000 in the current fiscal quarter. The higher R&D expenditures is due mainly to higher stock-based compensation expense, salary increases and scientific staff additions as well as certain pea and canola inventory that has been expensed as Merit is now able to produce its own samples to provide to its customers. During the quarter, we allocated $480,000 of R&D expenditures to deferred development costs. There was no significant change in the gross intellectual property expenses for the current fiscal quarter, as compared to the same year ago quarter. G&A expenses increased by $356,000 from $657,000 in the first quarter of fiscal 2021 to $1 million in the current fiscal quarter, of a one-half of the increase is due to higher investor relations expenses arising from NASDAQ fees and investor relations consulting fees with a balance to hire stock-based compensation expense and professional fees. As of June 30, 2021 our cash resources totaled $12.5 million, as compared to $14 million at March 31, 2021. I would like to refer you to our complete financial statements and management's discussion and analysis of our results that are available in the Investors section of our website, burcon.ca, as well as on sedar.com. Now, in terms of our patent portfolio, Burcon was granted two new patents during this quarter, covering our novel processes for the extraction and purification of pea protein and canola protein ingredients. Our patent portfolio now consists of 296 issued patents in various countries, including 73 in the U.S. and more than 210 active patent applications, including 34 additional U.S. patent applications. With that, I'd like to the call back over to our CEO and President, Johann Tergesen. Johann?
Johann Tergesen: Thanks Jade. As I mentioned at the beginning of today's call, the first quarter included some truly notable milestones. In April, we were pleased to announce that Burcon JV partner, Merit Functional Foods achieved first commercial production of its novel lineup of Puratein canola protein, making Merit’s new state-of-the-art plant-based protein production complex, the first and only commercial scale facility in the world capable of producing food grade protein from canola. We're equally thrilled to announce that during the quarter, Merit began to fulfill commercial sales orders to customers on three continents towards best-in-class pea and canola protein ingredients. This marks yet another significant milestone in Burcon’s development, as Merit is now the world's first and only supplier of these novel protein ingredients for the global food and beverage ingredient market. These developments constitute a true watershed moment for canola protein. We're thrilled that Merit is now introducing canola protein to the world, an entirely new class of plant-based proteins that offer high nutritional value, neutral flavor and valuable functional capabilities. As we discussed in our previous conference call, Merit is currently focused on a process of optimizing the processing conditions at its new state-of-the-art facility for the production of both its pea and canola protein and Burcon team members are directly involved in supporting there in this optimization process. We expect this process of refinement and process improvement to continue throughout Merit’s ramp up phase. And as Merit works to fine tune the production facility to maximize output and yield. It is appropriate to say that from a production and sales perspective, Merit is now out of the starting gate and we anticipate production levels and sales volumes will increase on a quarter-over-quarter basis going forward from here. Amongst all the exciting developments of the past quarter, including Merit’s first end-to-end canola protein production and then first protein product sales were most thrilled by the knowledge that Merit’s protein ingredients are just now starting to be formulated into consumer food and beverage products. And in fact, those consumer products are starting to appear on store shelves and those same products are now being purchased and taken home and enjoyed by consumers. Over the coming quarters, as Merit continues to ramp up and rollout their pea and canola protein ingredients, we’re excited to look forward to seeing more and more consumed products formulated with Merit’s best-in-class proteins, hitting store shelves. If I could be permitted in the side, I have to say that it's personally very gratifying or perhaps it'd be more accurate to say that it's very fulfilling to know that these unique and highly differentiated plant protein ingredients, which our team here at Burcon have developed over the past 21 years or so, are now ingredients in products on store shelves and in consumers' homes. When I think back on all the steps that were required to bring us to here from the early research, which itself followed some of the earlier work done by BMW canola, who we acquired over two decades ago to the years of work with numerous CPG companies and the invaluable feedback they provided, and also the years of work required to obtain regulatory approval from the USFDA, cross notification status for canola proteins, and then the establishments of the Merit JV and all the work involved with planning, designing, constructing, and commissioning Merit’s world-class production facility, it's pretty cool feeling to arrive at this inflection point. Something we discussed on Burcon’s last quarterly results call, which is worth noting again, is that we're very encouraged that Merit is working with so many food and beverage companies and so many of the largest food beverage companies in the world. Countering the obvious huge potential for revenue that can come from working with the biggest and best global CPG companies and food brands is the recognition that the sales cycle with these majors and super majors can be long, requiring anywhere from 12 to 18 months and frequently much more time than that. We've learned from experience that these majors product development timelines, which they rarely deviate from requires patience and persistence. And in short, it requires significant time as their professional procurement teams work through their quality assurance guidelines and the related contract and procedures, as well as the delivery scheduling, et cetera. In this context, it's useful to understand that some of the proteins produced at Merit’s new production facility have been supplied to numerous companies as part of those company’s quality assurance testing, which as I just described forms part of the typical procurement processes of branded product company. As I noted before, undertaking product reformulation or new product development, our disciplined and calculated activities are not taken lightly when important brands are involved. However, the upside to this often lengthy process is that securing supply contracts with these players, especially the majors and super majors can result in significant and long-term sales contracts, implying valuable and predictable recurring revenues for Merit going forward. We're confident that Merit’s pea and canola proteins are just the kind of disruptive protein ingredient solutions that the market is looking for right now, offering unmatched purity and exceptional taste as well as excellent solubility and functionality. In short, we are confident that the very modest sales by Merit in the past quarter are just beginning that will naturally build with time from our initial starting point this quarter to much larger future levels. In a recent interview, Mark Schneider, the CEO of Nestlé commented on speeding up their innovation process, where product development and Nestlé used to take anywhere from two to three years to go from concept to store shell. He explained that Nestlé is now actively working to speed up that development timeline in order to more quickly bring new innovative products to market. Based on food industry publications, there is evidence that in general, the plant-based food and beverage category is moving new product launches at a faster pace. At times, it feels like we’re seeing new product launches every day with companies reformulating existing products or introducing new ones to meet the changing consumer demands. As a result, we forecast that this market poll from consumers could speed up the process by which food and beverage companies will become active customers of Merit. During the quarter, we also announced that Merit was awarded additional funding in the form of a significant matching dollars grant from Protein Industries Canada. Protein Industries Canada is providing half of the $7.9 million investment into a four way project among Merit Functional Foods, TWC Nutrition, Daiya Foods and Grand River Foods who are partnering to utilize Merit Functional Foods pea canola and blended pea canola protein ingredients in new plant-based products. TWC Nutrition is one of Canada’s largest manufacturers of natural health products and nutrition supplements. They have foods is Canada’s preeminent dairy free alternative cheese producer and Grand River Foods produces quality plant-based products including meat alternative burgers, sausages, and meatballs. Protein Industries Canada supported project amounts to direct additional investment into Merit’s protein ingredient offerings. The goal of the innovation project is to develop and tailor Merit’s pea and canola protein ingredients for specific unique food, beverage and lifestyle nutrition product applications. The three Canadian project partner companies produce a broad collection of plant-based products that are better for you and better for the planet. We look forward to seeing products utilizing Merit’s protein ingredients from these three innovative companies in the near future. Turning to Burcon profit, during the quarter, we were pleased to announce that the company’s common shares were approved for dual listing on the NASDAQ stock exchange. Dual listing on the NASDAQ capital markets marks another milestone in Burcon’s development, which we believe provides access to a deeper pool of potential investors. As part of our decision to secure a U.S. dual listing, we intend to continue to focus effort on raising awareness about Burcon in both the U.S. and European investment communities, where we see evidence that investors are actively seeking unique investment opportunities, which are poised the benefit from the exclusive growth in global plant-based alternatives. Market insights commissioned by the TMX Group found that among institutional funds that include in ESG theme, U.S. and Europe account for the largest amount of capital invested in Canadian technology company. Adding to the numerous publications, which are bullish on the prospects for plant-based foods, Bloomberg Intelligence just published a comprehensive research report, projecting that global retail sales of plant-based food alternatives may reach US$162 billion by 2030, which they project would equate to at that time, 7.7% of the expected US$2.1 trillion global protein market from the current level of just $35.6 billion and nearly five-fold increase from today. We believe that Burcon as a global technology leader in the development of plant-based proteins for foods and beverages should be a compelling investment opportunity for many of these ESG and food revolution themed funds, and therefore our new NASDAQ dual listing, and our focus on U.S. and European investors should pay dividends in time. I’d like to also provide a brief update on our R&D pipeline and the opportunities and new partnerships we are currently pursuing. During the quarter, we continued our research activities at our Winnipeg Technical Centre, we also continue to advance discussions with a number of potential partners, all with the goal of commercializing Burcon’s other plant protein technologies. And by other, I mean, other than Burcon’s pea and canola protein technologies, which have been licensed to Merit. From our 20 plus year history, we have considerable experience with the partnering process and as such, we’ve come to recognize that there are certain necessary and sometimes time consuming activities that need to be completed, including market assessments, determining just how big is the potential prize for a new line of plant proteins, as well as product application considerations, which also impact the size of the opportunity. And of course, evaluation that the economics associated with site selection, as well as designing, building, commissioning and operating a commercial plant protein production facility. With that being said, some of our partnering discussions are progressing well. And we are encouraged by the fact that our counterparts are motivated and moving at pace. We have a number of opportunities in front of us for our team to introduce what we believe could be best-in-class protein ingredients that will set a new benchmark in the plant based protein ingredient market. To that end, and in order for us to be better equipped to capitalize on our opportunities, Burcon is moving forward with its plan new and expanded innovation center at Winnipeg. The new innovation center, which will be equipped with functionality and analytical laboratories is also planned to have semi work scale, commercial production capability. And as such, we’ll be able to produce representative commercial scale protein products using Burcon’s proprietary new processes. As a result, Burcon will have the capability to compress important market development, timelines and effectively seed the market by providing commercial quantities of its novel protein ingredients directly to customers to develop into new product formulations ahead of building a full commercial scale production plant. We look forward to providing additional updates on this important expansion initiative on future calls. Subsequent to quarter end, we were also pleased to announce the condition of Jeanne McCaherty to Burcon’s board of directors. Ms. McCaherty brings extensive senior management experience and deep knowledge of the global food ingredients industry to the Burcon board. Burcon has strong board of directors, which is engaged and committed to Burcon’s success. And we're fortunate to now also have Ms. McCaherty helping us capitalize on the massive opportunities arising from the plant-based food alternatives trends and guide Burcon through its next stage of growth. We're off to a strong start in our fiscal year with all signs pointing to a productive year ahead for Burcon and Merit Functional Foods as well. And we're confident we can continue to build shareholder value through new partnerships and collaborations as a means to monetize their Burcon’s alternative plant-based protein technologies. And now with that, I'd like to open up the call to questions. Operator, can you please provide the appropriate instructions?
Operator: The first question comes from Steve Hansen from Raymond James. Please go ahead.
Steve Hansen: Yes. Good afternoon guys. Johann, just curious, I know it's difficult to give precise guidance, but can you just give us a sense for the pace of ramp up through the next I guess really the back half of the year at the facility and just how that should translate into revenue progression at Burcon itself? I just was surprised a little bit by the revenue recognition relative to the Merit’s revenue figure cited in the release. And just want to get some context for that as well? Thanks.
Johann Tergesen: Thanks, Steve. Well, there's actually two parts to that. The first one, I'll jump to quickly as part of the revenue recognition part, I think you're referencing is that Merit, some of what is listed as Merit sales was them actually like literally trading, I think some peas and canola, et cetera. So that is definitely not a reference to protein sales by Merit. So, you can’t – from that number, you certainly can’t impute backwards, the royalty rate, I think that’s what your question was.
Steve Hansen: Correct. Yes. Thanks.
Johann Tergesen: But in terms of – but in terms of let’s call the minimum level of sales, I think the really big in point to make here is, is that that’s absolutely not a function of a lack of demand from CPG companies. It’s really just a function of Merit working through, what really are normal course commissioning process, issues and procedures, they are as we noted in the last call as well, which by the way, was only, I guess, about six, seven weeks ago as year end. We noted then that Merit has really being commissioning two plants, because the plant that they’ve built has the ability to produce protein from canola and from field peas, and they are enormously different products. I mean, one is an oilseed, and one is a pulse that’s predominantly starch. But in short, this is what I would say, Steve, is that like, we have no doubt the demand is there for Merit’s best-in-class pea and canola proteins. There is like ample evidence of the opportunity from these proteins. And when Merit’s gets it absolutely beautiful high-tech facility that they built when they get it humming and they will Merit will be able to deliver on the demand that’s out there. And then at that point, I’ll leave it to you to draw your own conclusion as to what they will then do in regards to expansion, et cetera. But yes, it’s as simple as that the minimal sales was really a function of the fact that, that they’ve been full-out involved in the commissioning process, all to do with tuning the plant and getting it worked out for all sorts of issues, which really amount to, as I noted earlier, sort of normal course process that they’ve been going through.
Steve Hansen: No, that’s helpful. And I can appreciate how complicated that must be, that commissioning process. Maybe just the follow-up I made then on that is just from a market development standpoint, because pea – the pea market is more developed than perhaps the canola side. Does it stand to reason that Merit would prefer to ramp or is more likely to ramp the pea side of the business more quickly and earlier? Or how do we think about that relative to the canola opportunity, which might be higher value?
Johann Tergesen: Yes, that’s an awesome question, by the way. And it’s something that has been legitimately discussed and discussed a lot, and not just from a perspective you were asking, but also from the perspective that canola protein, like Merit is the only company producing canola protein, especially with such unique canola proteins. And there’s the obvious opportunity of having an industry that they completely control and such a significant potential for making money. And so how do they make decisions about which to go after? The very short answer is that Merit’s team, as you've heard me say before, the co-CEOs and the management team there are super capable entrepreneurs and operators. And I know that they will ultimately pick the path that is, they will exploit the opportunity to its fullest advantage is what I would say. There is, as you noted probably an easier way into the pea protein market because it's established. But on the other hand, there's applications for canola proteins that are super exciting that pea protein can go after. So one example is if you look at some of the social media posts that Merit has done on LinkedIn, et cetera, you'll see a reference. I mentioned this previously, you'll see a reference to using Puratein G which is the low molecular weight protein that's in, sorry, it's the high molecular protein that's in canola, for a methylcellulose replacement. And that's a huge potential application. And it would compel – I mean, we compel Merit to really pursue that one, right. So – but really fundamentally, as I said, there's great operators in charge of Merit and they will drive forward with the best mix of protein opportunities in terms of profit and long-term potential.
Steve Hansen: Okay, great. Just one last one, if I may on is just on the innovation center. I'm just trying to get a sense for what you think the key milestones to be achieved out of that. I know you described in your earlier remarks, the benefits that the innovation center would have. But just from a commercialization standpoint and a revenue standpoint, how do you think about the hurdles necessary to justify the investments and ultimately and generate return relative to what you're pursuing? Thanks.
Johann Tergesen: Yes. Awesome. Awesome question. So what I say is this is that as I mentioned earlier, we've learned from experience how to go through this process. Part of it, by the way is this is where Merit's at right now. And we know that with the biggest company, the majors and super majors, you have to provide them like large quantities of product. And so part of the process of our new innovation center is that we are going to add a semi works production capability. So we'll be able to actually produce some of the additional novel proteins that we're bringing forward at a fairly large deal, at a commercial scale, albeit still a tiny fraction of what Merit has built. For the purpose of doing those critical market development activities, so that we can speed up that timeline. That's really what's important. Maybe I would add. This is that, we've been talking about the fact that we're in discussions and advancing opportunities with various potential partners to do additional JVs. And this facility would add the ability for those partnerships to be able to drive demand ahead of bringing a large scale facility online. So it really is very much about shortening the timeline to eventually having a another full scale commercial facility producing additional proteins.
Steve Hansen: That’s great. Thank you.
Johann Tergesen: Thank you.
Operator: Thank you everyone. That's all the time, we have for questions today. At this time this concludes our question-and-answer session. I'd like to turn the call back over to Mr. Tergesen. Sir, please proceed.
Johann Tergesen: Thank you very much operator. Thank you everyone for joining on the call and we look forward to updating you in 90 days from now.
Jade Cheng: Thank you.
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 fact included in 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 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 late this evening. Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.
