Burcon NutraScience Corporation (NASDAQ:BUR)
F3Q 2014 Results Earnings Conference Call
February 13, 2014 05:00 PM ET
Johann Tergesen - President and COO
Jade Cheng - Chief Financial Officer
Spencer Churchill - Paradigm Capital
Good afternoon everyone and thank you for participating in today’s conference call to discuss Burcon NutraScience Corporation’s Third Fiscal Quarter of 2014, ended December 31, 2013.
Joining us today are Johann Tergesen, President and COO of Burcon; Jade Cheng, the company’s Chief Financial Officer; and Randy Willardsen, Burcon’s Senior Vice President of Process. Following their remarks, we will open up the call for your questions. 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 today’s call.
Before we begin, I would like to remind everyone that this call is being recorded and will be available for telephone and webcast replay through March 13, 2014, starting later this evening. Please see today’s press release or Investor Relations section of the company’s website for replay instructions.
Now, I would like to turn the call over to the President and COO of Burcon, Johann Tergesen. Sir, please go ahead.
Thank you, [Kaitia]. Good afternoon everyone thanks for joining us today. Our fiscal third quarter of 2014 represented continued progress in commercializing our unique plant protein extraction technologies. As reported at the end of the second fiscal quarter we believe that 2014 is the year Burcon emerges from its development stage and begins the commercial phase of its growth. The current interest being expressed by potential partners for our pea protein Peazazz and the follow on work that has improved have reconfirmed our believe that Peazazz will indeed be our next major protein to commercialize.
Additionally, subsequent to the end of the third quarter, we received exciting news on a key CLARISOY patent. But before I go into this further, I’d first like to turn the call over to our CFO, Jade Cheng, who will take us briefly through the financial details for the quarter. I’ll then return to talk further about our progress and market opportunities and trends and then we’ll open up the call to your questions.
Jade please go ahead.
Thank you. Johann. Earlier today our financial results for the quarter ended December 31, 2013 which is our fiscal third quarter of 2014 were issued in the news release and filed with SEDAR as well as posted through the Investor Relations section of our website.
Turning to our income statements. Revenues totaled $23,750 in the fiscal third quarter of 2014 as compared to $23,500 in the prior quarter and $6,800 in the same year ago quarter. These revenues were derived mainly from the diverse initial license fee payments from Archer Daniels Midland Company, or ADM for our soy based protein CLARISOY.
The net loss in the fiscal third quarter totaled $1.5 million or $0.05 per basic and diluted share. This compares to a net loss of $1.6 million or $0.06 per basic and diluted share in the prior quarter and a net loss of $1.8 million or $0.06 per basic and diluted share at the same year ago quarter.
Research and development expenses were at $588,000 in the fiscal third quarter, as compared to $589,000 in the previous quarter and $572,000 in the same year ago quarter. General and administrative expenses in the fiscal third quarter totaled $1.1 million same as the prior quarter and $1.2 million in the year ago quarter. The decrease from the year ago quarter was due mostly to an increase of about $126,000 and patent related expenses as well as an increase of $93,000 in Investor Relations activities during the quarter. This is offset by a decrease of $44,000 in staff cost at the corporate office and a decrease in stock-based compensation expenses of $270,000.
At December 31, 2013, our cash balances totaled $2.5 million as compared to $6.7 million as at March 31, 2013. We believe we have sufficient resources to fund our expected level of operations and working capital requirements until at least April 2014. This estimate does not take into account potential proceeds from outstanding convertible securities, royalty revenues from the sale of CLARISOY soy protein or the commercialization of Peazazz or proceeds from the recently announced rights offering.
With the successful completion of the rights offering we believe we will have sufficient resources to fund our expected level of operations and working capital requirements until at least March 2015.
I would like to refer you to our complete financial statements and a more detailed management discussion and analysis of our results that’s available in the Investor Relations section of our website at burcon.ca as well as on sedar.com.
Now, in terms of our patent portfolio. During the quarter Burcon received 7 U.S. patents brands with 2 for soy and 5 for canola. These new patents increased our IP portfolio to 257 issued patents in various countries, including 51 in the U.S. as well as more than 470 access patent applications including 85 additional U.S. patent applications.
Since inception, Burcon has extended approximately $10.2 million on patent legal fees and disbursements to strengthen our patent portfolio in various countries and file patent applications for new inventions. We will continue to pursue our patents strategies, aggressively seeking protections for new technologies as well as further protect our current technologies.
Now with that, I'd like to turn the call back to our COO and President, Johann Tergesen. Johann?
Thank you, Jade. As I noted at the beginning of today's call, our third quarter of fiscal 2014 marked continued progress towards commercializing our unique plant protein extraction technologies as well as further developing and protecting our unique and valuable intellectual property.
Our protein technologies represent the combination of more than 14 years and $50 million of research and development. Our work has been focused on developing a proprietary platform for protein extraction and purifications, in order to brief proteins with uniquely valuable functional and nutritional characteristics.
With our novel protein products, we believe we have effectively addressed the major issues limiting the broader use of plant proteins as ingredients in a wide array of foods, beverages and nutritional products. As the first plant based protein capable of offering both clarity and complete nutrition’s for low pH, neutral and neutral pH beverage systems. (Inaudible) soy protein is an amazing product which has been acknowledge through a number of industry awards.
In 2010 Archer Daniels Midland, ADM competed for the exclusive right to market, produce and sale CLARISOY and in early 2011 they won that right and entered into license and production agreement with Burcon on March 4, 2011. ADM first introduced CLARISOY 100 just three months later at the IFT Food Expo in 2011. IFT by the way is an acronym for the Institute of Food Technologists Annual Meeting in Food Expo, which is largest food ingredient show held annually in the United States. And then one year later ADM launched CLARISOY 150 at IFT in July 2012 and ADM continued with their CLARISOY developmental activities today.
In spite of ADM's continued development activities, there were minimum sales of CLARISOY in the most recently completed quarter. Similar to the previous quarters, this quarter's revenue earned is represented namely by the recognition of pre-production royalty payments previously received from ADM prior to their announcement of their first sales of CLARISOY.
Although there were minimal sales of CLARISOY in the quarter, we remain encouraged by the substantial inroads and pursuit of multiple applications, ADM has made for CLARISOY in the food and beverage market and we're excited about what calendar 2014 might entail.
As the license agreement with ADM anticipated and required, ADM has built and is operating an initial semi-works production plant for CLARISOY. We understand that ADM is using that facility to conduct market and development activities and will produce, market and sale CLARISOY products to both existing and new customers of theirs in a competitive manner.
As of today's date it has been just over 35 months, since we signed the license and production agreement with ADM. Overtime, we hope to learn more about the scope of ADM's roll out of CLARISOY. For now ADM's commercialization plan for CLARISOY including their entire planning strategy process remained completely confidential to ADM.
So, while we always endeavor to provide as much information and transparency to our investors as reasonably possible it would not be appropriate for us to speculate on ADM's activities around CLARISOY other than as I have already described. We will report on ADM's progress as and when ADM makes announcements and/or if they inform us of any material developments.
CLARISOY is a truly unique and valuable food ingredient in the global marketplace, a marketplace that is searching for products like CLARISOY. CLARISOY meets many of the demands and unmet needs of the global food and beverage companies including sustainability of supply, high quality and strong consumer value in the end product.
If you want to learn more about CLARISOY and how ADM is positioning CLARISOY within the global protein ingredient marketplace, I encourage you to take the time to read ADM’s website. One of the important benefits of ADM leading and funding 100% of the manufacturing commercial rollup for CLARISOY is that it has allowed our team at Burcon to focus on developing and commercializing other unique protein products, which our patented technology platform can produce and in particular our next important product rollout our Peazazz pea protein. I have to say that Peazazz is a truly great product, exceptional in so many ways. In fact, we now Peazazz as a multiple product offering. While it is derived from yellow field peas and hence has great nutritional value Peazazz has a uniquely clean flavor without the earthy taste or aroma like you find with the standard pea proteins that are currently on the market.
Further, Peazazz has exceptional solubility, making it extremely versatile. In contrast to the major animal based protein and plant based proteins, pea protein is also hypoallergenic meaning that it has extremely low allergenicity in human population. So between having no taste that can class with other flavors and its high visibility and nutritional value, Peazazz is ideal for incorporation at the numerous beverage applications as well in number of dairy alternative products, both beverage and non-beverage product alike. Peazazz getting in snacks, cereals, and diet products as well as fortify gluten-free vegetarian and vegan food products.
Beyond these great properties, Peazazz is more environmentally sustainable compared to other protein sources. This is because field pea plants have the unique ability to draw in nitrogen from the atmosphere and stored roots. This allows producers to use less fertilizer when replenishing the soil, making peas a desired and more sustainable crop.
When we officially launched Peazazz at last year’s IFT Expo, last July, it was an instant hit with expo attendees who sampled drinks four to five with Peazazz. The successful launch attracted a number of countries into this and potentially partnering with us in the production and distribution of Peazazz as well as companies interested in utilizing Peazazz in their products.
Later in August, we announced the commissioning and operations of the Peazazz semi-works plant and we've been shipping samples to the various selected companies under signed material transfer agreements. We are now exploring the most efficient way to bring our Peazazz pea protein to market.
Cheap among those options is the potential of partnering with an established food ingredient company. In that regard, we are in dialog with the select new companies who we think would make excellent partner and with whom we are exploring a variety of possible business structure, all with the goal of driving the greatest shareholder value.
Turning to our intellectual property, as Jade mentioned, we've been awarded seven new U.S. patents, strengthening our IP portfolio around our proprietary protein science. Key among these and subsequent to the end of the quarter Burcon received a notice of allowance from the United States Patents and Trademark Office for an important and commercially strategic clarified CLARISOY patent application containing numerous specific composition of matter claims that have been allowed.
Composition of matter claim patents are considered to be the most valuable type of patents because they cover any use of the claim matter regardless of the process by which it was produced or how it is being used. So unlike application or process patents where it can’t be more difficult to establish that an infringement has occurred and forcing composition of matter patents simply requires that the matter in question demonstrates the same beneficial characteristics of the matter that is patent protected.
For CLARISOY, these characteristics amongst others are its unique solubility and transparent solution and absence of case or smell. Our efforts to protect this valuable intellectual property will continue to be a major of our focus as well our pursuit of further protecting the science that makes our proteins already so exceptional.
In-all, it’s clear our market timing couldn’t be more ideal within a few publications featuring almost daily mentions of newly reformulated product launches that include protein or new processed food product that are essentially protein-based. According to market research firm Frost & Sullivan, the global protein ingredient market is expected to grow at a healthy 8% compounded annual growth rate, reaching U.S. $31.5 billion by 2018.
This protein ingredient industry growth and positive outlook is in turn being driven by the global health and wellness trend that continues to be strong, with consumer seeking out healthier products to match their active lifestyles.
Parents, athletes and an aging population are all demanding great tasty nutritional product that support their health and wellbeing. So one thing for sure, with these powerful market trends in health and wellness along with our accomplishments in the third fiscal quarter, we’re going to set on a strong course for the remainder the calendar year.
The numerous lucrative market opportunities we see ahead are supported by the award winning value proposition of our patented and proprietary protein technology which is yet further strengthened by the extraordinary quality of the potential customers and partners with whom we’re currently engaged. Between investments with CLARISOY and our Peazazz partnering discussions, we see 2014 coming into focus as the year of Burcon emergence from its development stage and beginning the commercial phase of its growth.
Now with that I’d like to open up the call to questions. Kathy, can you please provide the instructions?
Thank you, sir. (Operator Instructions). And our first question comes from the line of Spencer Churchill with Paradigm Capital. Please go ahead.
Spencer Churchill - Paradigm Capital
Hey, thanks and good evening. Just in terms of ADM and I appreciate there is not much you can say beyond the public ground but I mean have you seen any sort -- any more activity that is visible to you, outside of what they have told you in the market, have you seen CLARISOY being used in products in test markets or products pilot projects by them that could have been going on that perhaps -- they didn’t talk about publically but you’ve see in the market?
In factories, we haven’t, Spencer. We look Burcon’s in house business analysts that spend a lot of time actually looking at various products and trying to determine if in fact we could see the CLARISOYs in them. But unfortunately the answer is no, we do not and have not seen any products typically on the market with CLARISOY in it.
Now that said, it can be difficult to determine because the labeling is just going to say, our expectation is it will just soy protein isolate. It is not our expectation that it would be labeled -- any of these products would be labeled to say CLARISOY as an ingredient.
Spencer Churchill - Paradigm Capital
Right. So they will just use that as they are branding to their customers but their customers won’t use that as branding?
Yes, exactly that’s my expectation.
Spencer Churchill - Paradigm Capital
Okay. Then maybe on the Peazazz, have you been able to narrow down the list of potential partners in the little while? Is there any sort of time table you’re willing to give or perhaps talk about some of the remaining hurdles to overcome before you sort of -- before you do come (inaudible) somebody?
Yes, it's fair to say that it is definitely down to a small group, what I would describe as a very small select group. And the discussions that we are having in fact excellent discussions and face to face meetings, in fact I was in Winnipeg two weeks ago for a multiday session with one particular company. And as regards, when we could have a deal in place? That's always the hardest to commit to and it's a little bit of how long it'll be sustained. What I can tell you is that we are very encouraged by the depth of the works that we're doing with these companies. And my expectation is that it's 2014 as I guess what I'd be comfortable saying.
Spencer Churchill - Paradigm Capital
Okay, that's fair enough. And then in terms of the discussions, are they focusing -- have you been able to narrow the discussions as in terms of the business model, be it a JV, be t you do the manufacturing or they do the manufacturing, like have you gotten in your mind, have you gotten out more specific on how you see the partnership evolving?
Yes, and that's a great question. I'd favor the idea of a joint venture and partnership where it could even be a joint with respect to owning and operating a first commercial production plant. And so, that is something that we are in fact particularly having discussions about right down to discussions about possible location size and issues associated with staffing and operating the facility like that. That said, we are -- and remain open to a variety of structures that we go from licensing, exactly like we have with CLARISOY to even situations where maybe we would own a facility.
Spencer Churchill - Paradigm Capital
Okay great. And then maybe just a little bit on the composition of matter patents. Now that specific to CLARISOY, is there something that you are working on for Peazazz, do you have to go through the same to get to that same result and how long do you think it might take to get there?
Yes, we have similarly filed composition of matter claims patents over Peazazz. We have additional CLARISOY patents that we also have filed. The composition of matter claim patents for CLARISOY was one of the total of 18 patents originally, and I don’t even know what the number is now in turn.
So, we’re always filing more and more intellectual property over our proteins, over the processes, over the application. We’re so excited about that particular CLARISOY patent though because it has very important composition of matter claims as I alluded to in my discussion just before this very specifically over taste and over solubility and usability.
With respect to Peazazz, we would expect that that will likely take about as along, I think that would have been about five years from the date we filed it with respect to our CLARISOY patent. I think if we look across our entire portfolio of patents that has been granted, we are probably averaging closer to seven years. It takes time to prosecute these patents and to support them. So, I wouldn’t be surprised if Peazazz composition of matter claims patents could still be 18 months two years away or even longer.
Spencer Churchill - Paradigm Capital
Okay great. And obviously the composition matter affords ADM more protection against any infringement and I just thought I would ask -- was this something that might have been helpful and then back in terms of the commercialization efforts or is it just nice to have and it’s a defensibility issue going forward, but not something that unnecessarily would have prevented them from putting their foot on the paddle?
Well, you know that you could certainly speculate that. I mean it’s -- I think I can say that we would ultimately update ADM to make that call, but what I can tell you is it’s certainly an important patent and was one of the ones that we had already filed before we entered into the license agreement with ADM. So you could expect that as to whether or not it was included in the agreement.
Spencer Churchill - Paradigm Capital
Perfect. Great, that's all I have. Thanks guys.
Okay. Thanks Spencer.
Thank you. Our next question comes from line of Thomas [Keith] with Capital Strategies International. Please go ahead.
Hi Johann, this is Thomas Keith from Switzerland calling. And what is your estimate, your true estimate when will ADM start to produce CLARISOY on the large scale?
I have been -- again that's just like the question about when will we be in a partnership with Peazazz, it’s out of our control or what I can tell you is as of today’s date ADM has not given us notification that they intend to build the large scale plant. So, it really isn’t something that I can speculate on. We have to wait for them to provide us with that information.
What I can tell you is that just last week, or was is two weeks or three weeks, no just last week we put out our rights offering circular. In our rights offering circular we disclosed that under the license agreement ADM has until March 04, 2014, so just less than one month from now to provide us with written confirmation of their intentions or not to build a large scale plant and there are certain ramifications under the license and production agreement if they do not. And so that date is coming up very quickly, March 04, 2014, so basically little over three weeks from today.
Okay. What happen if -- what is the back-up? What happen if they don’t inform you or if they say we don’t, we didn’t build or we are not interested anymore to launch forth then you are open to negotiate with other companies?
Yes. In fact, Thomas if you bear with me, I happen to have the rights offering circular in front of me and I can essentially read what we say there. It says that ADM advices that in intent to increase its annual production capacity this new sub-license will continue in accordance with the terms and license agreement. If ADM advices that it does not intent to increase its annual production capacity and by the way there is a pre-determined minimum, Burcon will have the option to convert the exclusive license into a non-exclusive license. And there is actually -- and so of course we can go out and work with other potential partners, but there is actually a further issue, there are some other further issues in terms of how it would limit ADM’s actions at that point in time.
May be what would be the best is for me to say that from a 30,000 foot view what I could explain is that it was very significant decision for ADM, because if ADM doesn’t provide the letter it very significantly impact their ability to commercialize CLARISOY going forward.
Okay, good. Okay, good. Thank you.
Thank you. (Operator Instructions). And our next question comes from the line of Morris (inaudible), private investor. Please go ahead.
Hi. It’s Morris [Pusey], hi Johann.
Hey I’m actually waiting in line and promise pretty much ask the question I wanted to, but slightly different I could use your rights are often secure. And so, I am going to ask on what the sort of prevailing attitude of the Burcon Board and management towards the ADM contract for CLARISOY is? And just how you’re feeling in terms of the confidence level of sort of calling them out on this, I know they have been a good partner in many ways and required partner in other ways, but it sounds like you’re very confident with CLARISOY, I agree with you everything I see out in the media is that you’re at the right place at the right time with both Peazazz and CLARISOY.
Is there a general -- can you elaborate on sort of the attitude of the company towards the CLARISOY contract with ADM? I don’t know if that’s something that you are willing to talk about this point, but I am kind of curious because I think you’ve done a wonderful job of building the patent portfolio, I think it’s valuable, I think you’ve got the right products for the right market, And just wondering how aggressive sort of attitude is towards ADM in terms of pushing them to get the volume sales going?
Right. I mean I think I would respond by saying that Burcon management and the Board of Directors have been pleased with the agreement that we put in place with ADM. We think it has a very good structure and a fair sharing risk and awards. And ADM has done what they were required to do under the license and production agreement, building semi-work plant and go to market and develop up the opportunity.
And at this point in time, we are sitting and expecting to receive letter this from ADM. So, in that sense I guess I’d say that the Burcon’s Board of Directors fully supports what ADM has done today.
Okay. Would that be a news releasable event and would we learn about that once ADM and Burcon give us a hint around as much both good one?
Yes. And there is no decision on Burcon’s part, I mean ADM has to provide the letter. And so, absolutely my expectation is that it will be, I mean if it’s material for the company and therefore would have to be disclosed.
And by the way I’ve mentioned this a number of time previously about the license and production agreement with between Burcon and ADM is available on SEDAR. Certain items have been redirected including their royalty rates and a few things like the specific production capacities of the semi-works plant and future plants. But if you go online and read, it actually describes the ADM commitment letter or this letter will talk about the March 4th and it stipulates, you can read it online that the letter has to include the size of the plant and et cetera et cetera.
Okay. That's great. And by the way I just wanted to say the rights offering I think that's a small way to finance the company through this period, it gives all the shareholders a chance to avoid dilution, so my thumbs up on that.
Same to you thanks. Bye, bye.
Thank you. At this time this concludes our question-and-answer session. I would like to turn the call back over to Mr. Tergesen. Sir please proceed.
Thank you, [Sasha]. I’d like to thank the continued support of our staff, partners and shareholders and we look forward to speaking to you on the next call. Thank you very much.
Before we conclude today’s call I’d like to take a moment to read company’s Safe Harbor statement. All statements made by management during this call that are not based on historical facts are forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 under provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.
Such forward-looking statements include but are not limited to those made by Mr. Tergesen, Mr. Cheng and others regarding CLARISOY’s or Peazazz’s commercial success or plans for commercial success, expectations for ADM’s production or commercial utilization plans, the company’s ability to maintain sufficient resources to fund its operations and working capital requirements and the company’s ability to develop and protect its intellectual property. While management has based any forward-looking statements made during this call on current expectations and information on which such expectations are based may change, such forward-looking statements are or forward-looking information involve risks, uncertainties and other factors that could cause actual results, performance, prospects and opportunities to differ materially from those expressed or implied by such 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 marketing activities, adverse general economic, market or business conditions, regulatory changes and other risks and factors detailed herein and from time to time in filings made by Burcon with securities regulators and stock exchanges included in the section entitled Risk Factors in Burcon’s annual information form dated June 25, 2013.
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 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 undue reliance should not be put on such. You are urged to carefully review and consider any various disclosures in the company's Annual Information Reform for the year ended March 31, 2013, as well as any other public filings made with SEDAR since this date.
Finally, I would like to remind everyone this call is being recorded and will be available for telephone replay through March 13, 2014 starting later this evening. Please see today's press release or the company's Investor Relations section on the website for replay dialing-in instructions.
Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.
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