Burcon NutraScience Corp 6-K, filed Jun 27, 2022
Burcon NutraScience Corp (BRCNF)
About this 6-K
Burcon NutraScience Corp filed this 6-K on June 27, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2022
Commission File Number: 001-35289
Burcon NutraScience Corporation
(Translation of registrant's name into English)
1946 West Broadway Vancouver, British Columbia, Canada V6J 1Z2
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
[ x ] Form 20-F [ ] Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
SUBMITTED HEREWITH
Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BURCON NUTRASCIENCE CORPORATION | ||
| (Registrant) | ||
| Date: June 27, 2022 | By: | /s/ Jade Cheng |
| Jade Cheng | ||
| Title: | Chief Financial Officer | |
BURCON NUTRASCIENCE CORPORATION
1946 West Broadway
Vancouver, B.C.
V6J 1Z2
CANADA
Telephone: (604) 733-0896
Facsimile: (604) 733-8821
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED MARCH 31, 2022
June 27, 2022
TABLE OF CONTENTS
PRELIMINARY NOTES
Effective Date of Information
All information in this Annual Information Form ("AIF") is as of March 31, 2022 unless otherwise indicated.
Forward Looking Statements
This AIF contains certain "forward-looking statements" and "forward-looking information" as defined under applicable Canadian and US securities laws (collectively, "forward-looking statements") which may include, but are not limited to, statements with respect to possible events, conditions, acquisitions, or results of operations that are based on assumptions about future conditions and courses of action and include future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection, and also include, but are not limited to, statements with respect to the future financial and operating performance of the Company. All statements, other than statements of historical fact, are forward-looking statements. When used in this AIF the words "estimate", "budget", "project", "believe", "anticipate", "intend", "expect", "plan", "projects", "predict", "may", "should", "will", or the negatives of these words or other variations thereof and comparable terminology or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved are intended to identify forward-looking statements. The forward-looking statements pertain to, among other things:
- continued development of the Company's products and business;
- the Company's growth strategy;
- production costs and pricing of CLARISOY® soy protein, Peazazz® and Peazac® pea proteins, Puratein®, Supertein® and Nutratein® canola proteins and pea protein and canola protein (Nutratein®) blends;
- marketing strategies for the Company's soy, pea, canola, flax, hemp and sunflower proteins as well as pea protein/canola protein blends;
- development of commercial applications for soy, pea, canola, flax, hemp and sunflower proteins as well as pea protein/canola protein blends;
- ability to produce proteins and protein isolates in commercial quantities with sufficient grade and quality at cost-effective prices;
- construction, commissioning and operation of production facilities;
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- relocation expansion of the Winnipeg Technical Centre;
- future protection of intellectual property and improvements to existing processes and products;
- regulatory approvals;
- input and other costs; and
- liquidity and working capital.
The forward-looking statements are based on a number of key expectations and assumptions made by management of the Company, including, but not limited to:
- the Company's ability to obtain required regulatory approvals;
- the Company's and its joint venture partners' ability to construct, commission and operate its production facility;
- the Company's or its licensing partners' ability to generate new sales;
- the Company's or its licensing partners' ability to produce, deliver and sell the expected product volumes at the expected prices;
- the Company's ability to control costs;
- the Company's ability to obtain and maintain intellectual property rights and trade secret protection;
- the Company's ability to identify a permanent chief executive officer;
- market acceptance and demand for the Company's or its licensing partners' products;
- the successful execution of the Company's business plan;
- achievement of current timetables for product development programs and sales;
- the availability and cost of labour and supplies;
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- the availability of additional capital; and
- general economic and financial market conditions.
Although the Company believes that the factors and assumptions used to develop the forward-looking statements are reasonable, undue reliance should not be placed on such forward-looking statements. The forward-looking statements reflect the Company's current views with respect to future events based on currently available information and are inherently subject to risks and uncertainties. Many factors, both known and unknown, could cause actual results, performance or achievements to be materially different from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this AIF, including, but not limited to:
- the condition of the global economy;
- market acceptance of the Company's products;
- changes in product pricing;
- changes in the Company's customers' requirements, the competitive environment and related market conditions;
- delays in the construction, commissioning and operation of production facilities;
- product development delays;
- changes in the availability or price of labour and supplies;
- the Company's ability to attract and retain business partners, suppliers, employees and customers;
- changing food or feed ingredient industry regulations;
- the regulatory regime;
- the Company's access to funding and its ability to provide the capital required for product development, operations and marketing efforts, and working capital requirements;
- the Company's ability to protect its intellectual property; and
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- risks and uncertainty related to and arising from the global COVID-19 pandemic.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Although the Company has attempted to identify important factors that could cause actual results to differ materially from forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated, described or intended. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect changes in assumptions or the occurrence of anticipated or unanticipated events, except as required by law.
The Company qualifies all the forward-looking statements contained in this AIF by the foregoing cautionary statements.
Material risk factors that could cause actual results to differ materially from the forward-looking information are contained under the heading "Risk Factors" beginning on page 51.
Currency
All dollar amounts in this AIF are expressed in Canadian dollars, unless otherwise indicated.
Glossary
Certain terms used herein are defined in the attached Glossary.
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CORPORATE STRUCTURE
Burcon NutraScience Corporation ("Burcon" or the "Company") was incorporated under the Business Corporations Act (Yukon) on November 3, 1998 under the name "Burcon Capital Corp." and extra-provincially registered in British Columbia on February 5, 1999. Burcon changed its name to "Burcon NutraScience Corporation" on October 18, 1999. On September 25, 2020, Burcon continued into British Columbia as a British Columbia company under the Business Corporations Act (British Columbia). The head office of Burcon is located at 1946 West Broadway, Vancouver, B.C., V6J 1Z2. The registered office of Burcon is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8.
INTERCORPORATE RELATIONSHIPS
Burcon owns 100% of the issued and outstanding shares of its subsidiary, Burcon NutraScience (MB) Corp. ("Burcon-MB") which was incorporated under the Corporations Act (Manitoba) on February 28, 1992 under the name B.M.W. Canola Inc. Its name was changed to Burcon NutraScience (MB) Corp. on May 30, 2000.
Burcon owns 100% of the issued and outstanding shares of its subsidiary, Burcon NutraScience Holdings Corp. ("Burcon Holdings") which was incorporated under the Canada Business Corporations Act on May 22, 2019. Burcon Holdings owns 31.6% of the issued and outstanding shares of Merit Functional Foods Corporation (formerly Burcon Functional Foods Corporation). On May 15, 2019, Burcon Functional Foods Corporation was incorporated under the Canada Business Corporations Act. Its name was changed to Merit Functional Foods Corporation on June 20, 2019.
GENERAL DEVELOPMENT OF THE BUSINESS
Burcon was formed in November 1998 as a venture capital pool corporation whose principal business was to identify and evaluate assets, properties or businesses for acquisition. On October 8, 1999 Burcon acquired Burcon-MB.
Since October 1999, Burcon has raised gross proceeds of approximately $107.7 million through the sale of equity securities on both a public and private basis, the exercise of stock options and share purchase warrants, through rights offerings to existing shareholders and issuance of convertible securities. The proceeds have been used, and will continue to be used, to fund research, development, regulatory recognition and commercialization of Burcon's patented and patent-pending protein extraction and purification technologies. Burcon's technologies not only enable the production of plant protein ingredients but also relate to applications of the proteins produced therefrom into products, including food and beverages.
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Burcon's common shares have been listed on the Toronto Stock Exchange (the "TSX") since June 2009 under the symbol "BU". Prior thereto, Burcon's common shares were listed on the TSX Venture Exchange (the "TSXV"). The Company's common shares were re-listed on The NASDAQ Capital Market ("NASDAQ Capital Market") under the symbol "BRCN" on May 25, 2021. The Company's common shares are also listed on the Frankfurt Stock Exchange under the symbol "BNE" and, with respect to the OTCQB Venture Market under the symbol "BUROF", from February 2020 to May 24, 2021.
On October 27, 2011, Burcon's common shares commenced trading on The NASDAQ Global Market ("NASDAQ Global Market") under the symbol "BUR". During 2017, the Company was unable to meet certain Nasdaq Stock Market LLC ("NASDAQ") listing rules which resulted in a suspension and ultimate delisting of Burcon's common shares in 2018. Although Burcon's common shares were re-listed The NASDAQ Capital Market ("NASDAQ Capital Market") on May 25, 2021 under the symbol "BRCN", the Company received a letter from the Listings Qualifications Department of NASDAQ on April 1, 2022 notifying the Company that it was not in compliance with Listing Rule 5550 (a)(2), which requires the listed securities of the Company to maintain a minimum bid price of US$1 per share. The Company had not met the requirement for a period of 30 consecutive business days prior to receipt of the NASDAQ letter. The Company has a compliance period of 180 calendar days or until September 28, 2022 , to regain compliance with NASDAQ's minimum bid price requirement. If at any time during the compliance period the Company's closing bid price is at least US$1 for a minimum of 10 consecutive business days, NASDAQ will provide Burcon with a written confirmation of compliance and the matter will be closed. In the event the Company does not regain compliance by September 28, 2022, the Company may be eligible for additional time to regain compliance or may face delisting. Burcon's management is reviewing various options available to the Company in order to regain compliance and continued listing on the Nasdaq Capital Market.
On November 13, 2018, Burcon announced that it entered into a loan agreement (the "Loan Agreement") pursuant to which Large Scale Investments Limited ("Large Scale"), at the time and currently a wholly-owned subsidiary of Firewood Elite Limited ("Firewood"), provided Burcon with an unsecured loan (the "Loan") of up to $1,000,000 (the "Initial Loan Amount") for a term of 180 days from the Loan Closing Date (defined below). Firewood is wholly-owned by Mr. Alan Chan, a director of Burcon.
On March 27, 2019, Burcon and Large Scale amended (the "Loan Amendment") the Loan Agreement, pursuant to which Large Scale agreed to increase the Initial Loan Amount to Burcon by $500,000 (together with the Initial Loan, the "Loan Amount").
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Burcon drew $500,000 of the Loan Amount as of December 5, 2018 (the "Loan Closing Date") and $500,000 on January 31, 2019. Burcon then drew $250,000 of the Loan Amount on each of March 29, 2019 and April 24, 2019, respectively. Large Scale was paid a $10,000 commitment fee, representing of 1% of the Initial Loan Amount on the Loan Closing Date and a further $5,000 on the additional $500,000 of principal amount made available under the Loan Amendment. The drawn portion of the Loan Amount bore interest at a rate of 18% per annum (the "Loan Principal Balance"). Up to $1,000,000 of the undrawn portions of the Loan Amount bore interest at a rate of 3% per annum (the "Undrawn Amount") and any Undrawn Amount exceeding $1,000,000 bore interest at a rate of 3% per annum from March 27, 2019 until the Loan Maturity Date.
The Loan Amendment also provided Large Scale with a right to offset any amounts due to it under a convertible note issued to Large Scale in 2016 (the "Note") (see "Material Contracts") against any obligations of Large Scale and/or its nominees to pay for subscription proceeds of any rights offering that Burcon may conduct.
In connection with the 2019 Rights Offering (as defined below), Large Scale exercised its right to offset the amounts due under the Loan against its obligations to pay for subscription proceeds under the offering. The offset was completed on June 25, 2019. The total amount offset under the Loan was $1,436,629. The remaining principal balance and accrued interest in the amount of $170,554 under the Loan was paid by Burcon in cash to Large Scale on June 28, 2019.
On May 23, 2019, Burcon announced that it would be offering rights (the "2019 Rights Offering") to holders of its common shares of record at the close of business on May 30, 2019 (the "2019 Record Date"). Pursuant to the 2019 Rights Offering, each holder of common shares on the 2019 Record Date received one transferable right for each common share held. Each right entitled a holder to purchase one common share at a price of $0.35 per share. Burcon announced on June 26, 2019 that it had completed the Rights Offering. The 2019 Rights Offering was fully subscribed and Burcon issued 44,083,203 common shares at a price of $0.35 per common share for aggregate gross proceeds to Burcon of $15,429,121. After the closing of the 2019 Rights Offering, Burcon had 88,166,406 common shares outstanding. From the gross proceeds of the 2019 Rights Offering, Burcon repaid the Principal Amount and accrued interest outstanding under the Note and the Loan Amount by way of offset as described above. Burcon used a portion of the remaining gross proceeds to make the Initial Capital Contribution and the Additional Capital Contribution under the Original Shareholders Agreement (as defined below).
On May 23, 2019, Burcon Holdings entered into a shareholders agreement (the "Original Shareholders Agreement") with RBT Holdco Ltd. ("RBT Holdco") and 10039406 Manitoba Ltd. ("Crew Holdco") (RBT Holdco and Crew Holdco together referred to as the "Other Shareholders") to become shareholders of Merit Functional Foods Corporation (formerly Burcon Functional Foods Corporation) ("Merit Foods"). Initially, Burcon Holdings held 40%, RBT Holdco held 40% and Crew Holdco held 20% of the issued and outstanding common shares of Merit Foods. The business of Merit Foods is the commercial production, sales, marketing and distribution worldwide of Burcon's pea protein, pulse protein and canola protein products. See "Material Contracts".
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On August 27, 2020, Burcon announced that Merit Foods received a $30 million investment (the "Investment") from a new equity partner, Bunge Limited. The Investment was completed by way of a subscription by Bunge for shares from treasury and the advancement of shareholder loans by Bunge. Concurrently with the Investment, Bunge purchased additional shares and debt from the Other Shareholders. As a result of the foregoing, Bunge initially owned a 25% equity interest in Merit Foods, Burcon owned a 33.33% equity interest in Merit Foods and the Other Shareholders owned, collectively, the remaining 41.67% equity interest in Merit Foods.
On August 27, 2020, Burcon Holdings entered into an amended and restated unanimous shareholders agreement (the "Amended and Restated Shareholders Agreement") with Bunge, the Other Shareholders, Tirem Holdings Limited Partnership and Burcon. Among other things, the Amended and Restated Shareholders Agreements sets out the respective rights and obligations of the shareholders of Merit Foods in respect of Merit Foods, the shares owned by the shareholders and the management and conduct of the business of Merit Foods, including matters requiring board of directors' approval or shareholder approval and the rights of the parties with respect to restrictions on transfers and transfers to third parties. On October 13, 2021, Bunge exercised its right to subscribe for additional common shares of Merit Foods for an aggregate subscription price of $4.95 million ("Bunge October 2021 Investment"). Following the Bunge October 2021 Investment, Bunge's ownership interest in Merit Foods increased to 28.91%. Burcon now owns a 31.6% equity interest in Merit Foods and the Other Shareholders now own, collectively, a 39.49% equity interest.
The Amended and Restated Shareholders Agreement amends and restates the Original Shareholders Agreement described above. See "Material Contracts".
On May 23, 2019, Burcon and its wholly-owned subsidiary, Burcon-MB entered into a license and production agreement with Merit Foods (the "Original Merit License Agreement"). Under the Original Merit License Agreement, Burcon granted an exclusive, royalty-bearing, worldwide license (the "Merit License") to Merit Foods to use and exploit Burcon's pea, pulse and canola protein technologies to make, have made, use and market and sell Burcon's pea, pulse and canola proteins (the "Merit Licensed Products"). See "Material Contracts".
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Concurrently with the signing of the Amended and Restated Shareholders Agreement, Burcon and Burcon-MB entered into an amended and restated license and production agreement (the "Amended and Restated License Agreement") on August 27, 2020. The Amended and Restated License Agreement amends and restates the Original Merit License Agreement. See "Material Contracts".
On February 9, 2021, Burcon announced that Merit Foods completed the first commercial production runs of Peazazz® and Peazac® pea proteins at its state-of-the-art plant protein production facility in Manitoba, Canada, dedicated to the production, under license, of Burcon's novel pea and canola protein ingredients. Construction of the facility was formally completed on December 31, 2020. On April 12, 2021, Burcon announced that Merit Foods achieved first commercial production of its novel lineup of Puratein® canola proteins. The facility was commissioned on December 31, 2021 and achieved the production output threshold as defined under the Amended and Restated License Agreement for the Flex Production Facility to have attained commissioned status.
On May 23, 2019, Burcon, Burcon-MB and Merit Foods entered into a services agreement (the "Services Agreement") pursuant to which Burcon and Burcon-MB will provide certain services (the "Services") to Merit Foods in support of Merit Foods' business. The Services will commence on July 3, 2019 and the agreement will have an initial term ending on June 30, 2022. Under the Services Agreement, Burcon and Burcon-MB will provide general management/administrative/technical services, research and analytical services and sample production services. The Services will be charged to Merit Foods based on rates set out in the Services Agreement.
On November 25, 2019 Burcon announced a non-brokered private placement of convertible debentures (the "Convertible Debentures") for an aggregate principal amount of up to $4 million and subsequently, on November 28, 2019, Burcon announced that the aggregate principal amount had increased from $4 million to $9.5 million (the "Convertible Debenture Offering").
Mr. Johann Tergesen, Burcon's former President and Chief Executive Officer, Mr. Peter Kappel and Dr. Lorne Tyrrell, insiders of Burcon, agreed to and subscribed for Convertible Debentures totaling $2 million in principal amount.
Each Convertible Debenture consisted of $1,000 principal amount, bore interest at a rate of 8.5% per annum, payable semi-annually in arrears, and was unsecured. The principal amount outstanding under the Convertible Debentures and all accrued and unpaid interest thereon were payable in cash thirty-six (36) months from the date of issuance of the Convertible Debentures. The Convertible Debentures were convertible at the option of the holder, in whole or in part, into Shares at the Conversion Price, which represents approximately a 30% premium to the volume weighted average trading price of the Shares on the TSX for the five days immediately preceding November 25, 2019.
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Burcon, had the right, at its sole discretion, to force the conversion of the Convertible Debentures if the Shares trade at or above $2.15 per share for a period of 14 consecutive trading days. The Convertible Debentures and the Shares issuable upon conversion of the Convertible Debentures were subject to a four month and one day statutory resale restriction pursuant to applicable Canadian securities laws.
Burcon paid a cash finder's fee in connection with the Convertible Debenture Offering to certain finders of $156,600, representing 4.5% of the gross proceeds received from certain investors introduced to Burcon by the finders.
The Offering closed on December 10, 2019. The issuance of Convertible Debentures to insiders under the Convertible Debenture Offering was considered a related party transaction under Multilateral Instrument 61-101. Burcon relied on exemptions from the formal valuation and minority shareholder approval requirements provided under sections 5.5(a) and 5.7(a) of Multilateral Instrument 61-101 on the basis that the participation in the Offering by insiders did not exceed 25% of Burcon's market capitalization.
On September 2, 2020, Burcon announced that between August 12, 2020 to August 31, 2020, Burcon's Common Shares traded at or above $2.15 on the TSX for fourteen consecutive days. As a result, the outstanding Convertible Debentures were converted, on September 8, 2020, into 7,424,274 Common Shares at a conversion price of $1.05 per Common Share, being a rate of 952.38 Common Shares for each $1,000 principal amount of the Convertible Debentures. An aggregate of 9,047,610 Common Shares were issued from the conversion of Convertible Debentures. Burcon paid an aggregate of $162,939 in interest to Convertible Debenture holders.
On January 24, 2020, Burcon announced that the Company, Société Des Produits Nestlé Sa ("Nestlé") and Merit Foods had entered into a joint development agreement to tailor Burcon and Merit Foods' novel plant-based proteins for use in Nestlé food and beverage applications. The aim of the joint development was to tailor the functionality of Burcon and Merit's plant-proteins, to be supplied from Merit Foods' production facility, for use by Nestlé in plant-based meat and dairy alternatives. During fiscal year 2021, Burcon conducted research work and provided Nestlé with various samples for testing and analysis. The research conducted by Burcon was successful in identifying processing techniques to modify and improve the functionality of Burcon's and Merit's plant-based protein and as such, Burcon's role in the joint development agreement with Nestlé ended in January 2021, while Merit Foods has continued to work with Nestlé for the supply of Merit Foods' plant protein products.
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On January 28, 2020, the Company announced that it had entered into an agreement with a syndicate of underwriters co-led by Canaccord Genuity Corp. and Beacon Securities Limited (the "Underwriters") pursuant to which the Underwriters agreed to purchase, on a bought deal basis pursuant to the filing of a short form prospectus, an aggregate of 6,452,000 units (the "Units") at a price of $1.55 per Unit (the "Offering Price") for aggregate gross proceeds to the Company of $10,000,000 (the "2020 Offering").
The Company granted the Underwriter an option (the "Over-Allotment Option"), to purchase up to an additional 967,800 Units at a price of $1.55 per Unit, exercisable at any time, for a period of 30 days after and including the Closing Date. The Over-Allotment Option was exercisable to acquire Units, Common Shares and/or Warrants (or any combination thereof) at the discretion of the Underwriter.
On February 19, 2020, the Company closed the 2020 Offering for gross proceeds of $11,500,690. The Underwriters purchased from the Company, on a bought deal basis, the Units at the Offering Price per Unit for gross proceeds of $10,000,600. The Underwriters also exercised the over-allotment option in full and purchased an additional 967,800 Units at a price of $1.55 for additional gross proceeds to the Company of $1,500,090.
Each Unit consisted of one common share of the Company (a "Common Share") and one-half of one Common Share purchase warrant (each whole Common Share purchase warrant, a "Warrant"). Each Warrant was exercisable to acquire one Common Share (a "Warrant Share") for a period of 24 months following the closing of the Offering (the "Closing") at an exercise price of $2.00 per Warrant Share.
The Units were offered by way of a short form prospectus filed in all provinces of Canada, except Prince Edward Island, Newfoundland and Labrador, and Quebec.
In connection with the 2020 Offering, Burcon paid the Underwriters a cash commission of $805,048, representing 7% of gross proceeds of the 2020 Offering and 519,386 Warrants (the "Underwriters' Warrants"), representing 7% of the number of Units sold in the 2020 Offering. Each Underwriters' Warrant was exercisable to acquire one Common Share (a "Underwriters' Warrant Share") for a period of 24 months following the Closing at an exercise price of $2.00 per Underwriters' Warrant Share. An aggregate of 2,599,004 Warrants and 207,754 Underwriters' Warrants were exercised. 1,318,650 Warrants and 311,632 Underwriters' Warrants expired on February 19, 2022.
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On May 4, 2020, Burcon announced that Merit Foods had secured a debt financing package of up to $85 million of capital from a syndicate of lenders including Export Development Canada ("EDC"), Farm Credit Canada ("FCC") and the Canadian Imperial Bank of Commerce. To facilitate the financing, Burcon provided a short-term letter of credit in the amount of $6.5 million in favor of EDC (the "Letter of Credit"), which was to remain in place until no later than September 30, 2020, and also provided a $4 million guarantee of Merit Foods' debt obligations (the "Guarantee"). The Other Shareholders also provided similar guarantees up to an aggregate maximum liability of $6 million. Burcon Holdings and the Other Shareholders also provided guarantees in the aggregate amount o $1,250,000 to CIBC, of which Burcon Holdings' proportionate share was $500,000. In connection with the Investment in August 2020, Burcon Holdings' guarantee amount was subsequently reduced to $416,625.
In connection with the Investment and following the deposit by Merit Foods of $10 million of the proceeds of the Investment into a designated account, EDC and FCC released the Guarantee. Burcon signed the released guarantees in favour of each of EDC and FCC on April 24, 2020, pursuant to which Burcon agreed to guarantee all the indebtedness, liabilities and obligations of Merit under the loan agreements between EDC, FCC and Merit Foods. The guarantees provided by the Other Shareholders in connection with the financing were also released. EDC also released and returned to Burcon the Letter of Credit described above.
In October 2021, the shareholders of the Other Shareholders (the "EDC Guarantors") provided guarantees in the aggregate amount of $10 million (the "EDC Guarantee") to EDC in order for Merit Foods to meet certain credit requirements required by EDC under the loan agreements with EDC. Burcon Holdings and the EDC Guarantors entered into a reciprocal indemnity agreement (the "EDC Indemnity Agreement"). Under the EDC Indemnity Agreement, if any EDC Guarantor (each, a "EDC Paying Guarantor") is required to make payment under the EDC Guarantee and any other EDC Guarantor and Burcon Holdings (each, a "EDC Contributing Guarantor") has not made a corresponding payment equal to its Contributive Share, such EDC Contributing Guarantor(s) shall pay the EDC Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the EDC Guarantee will have been borne by the EDC Guarantors in their respective Contributive Shares. Burcon Holdings' Contributive Share under the EDC Indemnity agreement was 44.44%. The obligations of Burcon Holdings and the EDC Guarantors would terminate upon the termination or release by EDC of the EDC Guarantors' obligations under the EDC Guarantee. Burcon's potential liability under the EDC Reciprocal Indemnity Agreement was approximately $4.44 million.
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In October 2021, as a result of the Bunge October 2021 Investment, the aggregate liability of the EDC Guarantors under the EDC Guarantee was reduced to $5.05 million, and Burcon's maximum liability under the EDC Indemnity Agreement was reduced to $2.24 million.
In January 2022, FCC agreed to provide Merit Foods with a further credit facility of $10 million. In connection with the amendment of the FCC and EDC loan agreements, the EDC Guarantors and Burcon Holdings entered into an amended and restated reciprocal indemnity agreement (the "Amended and Restated Indemnity Agreement") to reflect the reduction in the EDC Guarantee amount to $5.05 million.
In May 2022, Burcon Holdings, Bunge and the Other Shareholders advanced an aggregate $10 million loan ("May 2022 Shareholder Loan") to Merit Foods to address liquidity requirements of Merit Foods as it ramps up production and sales at its pea and canola protein production facility. Burcon Holdings' proportionate share of the May 2022 Shareholder Loan was $3.16 million. The May 2022 Shareholder Loan has a term of 15 years, will initially be non-interest-bearing and have terms similar to previously advanced shareholder loans. The May 2022 Shareholder Loan will be subordinated to any indebtedness owed by Merit Foods to each of its financial lenders, whether secured or unsecured. As a result of the of May 2022 Shareholder Loan, EDC released the EDC Guarantors from the EDC Guarantee. Under the terms of the Amended and Restated Indemnity Agreement, the obligations of Burcon Holdings and the EDC Guarantors terminated upon the release by EDC of the EDC Guarantee. See "Material Contracts".
On June 22, 2020, Burcon announced that Merit Foods has secured additional debt financing of $10 million in the form of a 10-year interest free loan from Agriculture and Agri-Food Canada. On July 28, 2020, Her Majesty the Queen in Right of Canada as represented by the Minister of Agriculture and Agri-Food (the "Minister"), Merit Foods, Merit Foods' subsidiary, 11410083 Canada Ltd., Burcon Holdings and the Other Shareholders entered into the Repayable Contribution Agreement For The AgriInnovate Program (the "AIP Agreement") pursuant to which the Minister provided a $10 million 10-year interest free loan (the "AIP Loan") to Merit Foods and 11410083 Canada Ltd. (the "Recipients") for the purpose of facilitating the commercialization of a patent protected, world-leading plant protein extraction process for purposes of supporting the growth of the pea, pulses and canola industries. The interest free loan, repayable over 10 years, was approved under the Agriculture and Agri-Food Canada's AgriInnovate Program. Burcon Holdings and each of the Other Shareholders have provided joint and several guarantees to secure the obligations of the Recipients under the AIP Loan. See "Material Contracts".
In August 2020, Burcon and ADM agreed to terminate the License and Production Agreement dated March 4, 2011 made among Burcon, Burcon-MB and ADM for CLARISOY® soy protein. See "Material Contracts". As part of the agreement to terminate the exclusive license, the CLARISOY® trademark reverted back to Burcon.
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In January 2022, Burcon announced that Mr. Johann Tergesen would be stepping down as President and Chief Executive Officer of the Company. After Mr. Tergesen's departure on February 28, 2022, Mr. Peter Kappel was appointed as interim Chief Executive Officer on March 1, 2022 while the Company, with the assistance of Kincannon & Reed, an executive search firm specialising in the food and agribusiness sectors, searched for a new chief executive officer. As of the date of this AIF, the search is still ongoing.
In April 2022, Burcon announced that it had received a co-investment from Proteins Industries Canada for the development of high-quality protein ingredients from sunflower seeds. Burcon is partnering with Pristine Gourmet, a processor of 100% pure Canadian non-GMO cold pressed virgin oils, to further develop Burcon's novel process for the production of sunflower protein ingredients under this $1 million project. The project intends to fine-tune and scale up an economical extraction and isolation process arising from the by-product (pressed cake) of sunflower oil production.
On June 20, 2022, Burcon and Large Scale entered into a loan agreement (the "2022 Loan Agreement") pursuant to which Large Scale will provide Burcon with a secured loan (the "2022 Large Scale Loan") of up to $10 million (the "Loan Amount"). Firewood is wholly-owned by Mr. Alan Chan, a director of Burcon. Upon the satisfaction of certain conditions with respect to each tranche, the Loan Amount will be available in two tranches of $5 million each. The first tranche, which is currently available to the Company, has a maturity date of July 1, 2024 and the second tranche will have maturity date that is 24 months from the closing date of such tranche (in each case, the "Maturity Date"). The Lender will be paid a commitment fee of 1% of the undrawn amount of the Loan Amount under each tranche on: (i) the closing date of such tranche and (ii) each annual anniversary of the closing date of such tranche. The drawn portion of the Loan Amount will bear interest at a rate of 8% per annum (the "Principal Balance"). Interest on the Principal Balance will accrue monthly, not in advance, and will be payable on the Maturity Date of the applicable tranche. See "Material Contracts".
The Company's fiscal year end is March 31. During fiscal years 2020 to 2022, Burcon raised or borrowed a total of approximately $42.3 million in capital as follows:
• In June 2019, Burcon completed the 2019 Rights Offering and raised gross proceeds of approximately $15.4 million as described above.
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• In December 2019, Burcon issued Convertible Debentures and raised gross proceeds of $9.5 million as described above.
• In February 2020, Burcon completed the 2020 Offering and raised gross proceeds of approximately $11.5 million as described above.
• In February 2020, Mr. Allan Yap, a former director and chief executive officer of Burcon, exercised warrants issued to him from a rights offering completed in 2018 to purchase 1,182,099 common shares of the Company for proceeds of approximately $532,000.
• During fiscal years 2020 and 2022, certain officers, directors and employees exercised options to purchase common shares of the Company for proceeds of approximately $171,000.
• During the fiscal years 2021 and 2022, holders of warrants from the 2020 Offering exercised warrants to purchase common shares of the Company for proceeds of $5.2 million.
The proceeds raised from the transactions described above have been used to:
• fund the activities associated with Burcon's obligations under the ADM License and Production Agreement for the commercialization of Burcon's CLARISOY® soy protein;
• supporting ADM in connection with its commercialization of CLARISOY® soy protein;
• fund the activities associated with identifying, negotiating terms and securing a strategic alliance for the commercialization of Burcon's pea and canola proteins;
• repay the Loan and the Note and the accrued interest thereon;
• pay the accrued interest due under the Convertible Debentures;
• fund the investment by Burcon in Merit Foods and Burcon's obligations under the Original Shareholders' Agreement and the Amended and Restated Shareholders' Agreement;
• fund the activities associated with Burcon's obligations under the Original Merit License Agreement and the Amended and Restated License Agreement, for the commercialization of Burcon's pea and canola proteins; and
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• fund the activities associated with Burcon's obligations under the joint development agreement with Nestlé.
Burcon has also used the proceeds raised and will continue to use the proceeds raised to:
• fund the activities associated with efforts relating to identifying a strategic partner for the commercialization of Burcon's other proteins, including sunflower;
• investigate the feasibility of relocating or expanding the Winnipeg Technical Centre;
• further develop Burcon's protein extraction and purification technologies and pursue new related products;
• pursue and develop new applications from the functional attributes of Burcon's proteins;
• fund Burcon's patent activities; and
• provide general working capital.
Pea
Pea protein is increasing in popularity as a plant-based protein ingredient which can be used in a wide variety of food products. One of the reasons is that pea protein is able to deliver functionality and protein nutrition to products without the issues of allergenicity and genetic modification that may be present with other proteins. Pea proteins currently available in the market are sold for use in a variety of food products including: meat alternatives; snacks and cereals; diet products (high protein foods); ready-to-mix and ready-to-drink beverages as well as in nutritional supplements such as meal replacement shakes.
On May 23, 2019, Burcon signed the Original Shareholders Agreement to form Merit Foods. The business of Merit Foods is the commercial production, sales, marketing and distribution worldwide of Burcon's pea protein, pulse protein and canola protein products. Concurrently with the signing of the Original Shareholders Agreement, Burcon and Burcon-MB entered into the Original Merit License Agreement pursuant to which Burcon and Burcon-MB have granted an exclusive, royalty-bearing, worldwide license to Merit Foods to use and exploit Burcon's pea, pulse and canola protein technologies to make, have made, use and market and sell Burcon's pea, pulse and canola proteins. As disclosed in "General Developments of the Business", the Original Shareholders Agreement and the Original Merit License Agreement were amended and restated on August 27, 2020. See "Material Contracts".
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On October 21, 2019, Burcon announced that it had received a GRAS (Generally Recognized As Safe) no-objection letter from the US Food and Drug Administration ("FDA") for its Peazazz® and Peazac® pea proteins. Burcon had successfully obtained self-affirmed GRAS status for its Peazazz® and Peazac® pea protein products and had made its submission to the FDA for GRAS notification on June 15, 2018. This "Letter of No Objection" is issued by the FDA, after an extensive review of all of the scientific data submitted by Burcon, to confirm that the FDA has no questions or concerns regarding the safety of Burcon's pea protein ingredients. Receipt of GRAS notification is a significant commercial milestone and is important for the acceptance and use of these proteins by global food and beverage companies.
On January 24, 2020, Burcon announced that Burcon, Merit Foods and Nestlé entered into a joint development agreement for the development and use of Burcon's novel protein ingredients, including pea and canola proteins, into Nestlé's food and beverage products. The agreement was designed to provide Nestlé with access to Burcon's unique expertise and a new range of high-quality plant-based protein ingredients. During fiscal year 2021, Burcon conducted research work for and provided Nestlé with various samples for testing and analysis. The research conducted by Burcon was successful in identifying processing techniques to modify and improve the functionality of Burcon's and Merit's plant-based protein and as such, Burcon's role in the joint development agreement with Nestlé ended in January 2021. Merit Foods' has continued to work with Nestlé for the supply of Merit Foods' plant protein products. Burcon will continue to provide technical assistance to Merit Foods in support of the relationship with Nestlé.
Construction of Merit Foods' 94,000 square foot production facility to produce high-quality pea and canola proteins was formally completed on December 31, 2020. Burcon announced on February 9, 2021 that Merit Foods had completed the first commercial production runs of its Peazazz® and Peazac® pea proteins. Subsequently on April 12, 2021, Burcon announced that Merit Foods had achieved first commercial production of its novel lineup of Puratein® canola proteins. On November 10, 2021, Burcon announced that Merit Foods was commercially ready to supply its best-in-class pea and canola proteins to leading food and beverage customers. Merit Foods' product portfolio currently consists of three product family offerings: pea protein, non-GMO canola protein, and MeritPro™, a unique lineup of nutritionally complete protein blends. Its entire portfolio aligns with a number of consumer label preferences, including allergen-free, gluten-free, non-dairy, non-GMO, and vegan.
Canola
Burcon's technologies allow it to extract and purify three types of canola proteins from canola meal, a co-product (together with canola oil) of the canola seed crushing industry. Burcon has branded these canola proteins under the trade names "Puratein®", "Supertein®" and "Nutratein®".
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Merit Foods has re-branded Burcon's Nutratein®, Puratein® and Supertein® canola protein ingredients as Puratein® C, Puratein® G and Puratein® HS, respectively. Merit Foods markets its novel lineup of Puratein® canola protein ingredients as having a neutral flavour profile that offers excellent solubility and stability across a range of pH levels. Merit Foods' facility is the first and only commercial-scale facility in the world capable of producing food-grade protein from canola, the world's second-largest oilseed crop.
Pea Protein/Canola Protein Blends
Burcon's pea protein products can be combined with Burcon's canola protein products to provide proprietary protein blend products with excellent functional attributes and added nutritional value. On their own, the individual pea and canola protein are limited in their content of certain essential amino acids. However, the amino acid profiles of the pea and canola protein products are complementary, that is, the canola proteins are rich in essential amino acids that are limited in the pea proteins and the pea proteins are rich in essential amino acids that are limiting in the canola protein. The resulting blends, marketed as Nutratein® blend products, are proprietary plant protein products providing improved protein nutrition.
On May 23, 2019, Burcon announced the development of the pea protein and canola protein blends Nutratein-PS® and Nutratein-TZ®. These blended products have exceptional functional characteristics and nutritional value. Nutratein-PS® is a blend of Peazazz® pea protein and Supertein® canola protein, having clean flavour and high solubility, intended for use in products such as dairy alternative beverages. Nutratein-TZ® is a blend of Peazac® pea protein and Puratein® canola protein, having functional properties that make it ideally suited for use in plant-based meat alternative products such as plant-based burgers or sausages.
As part of the Amended and Restated License Agreement, Merit Foods will be responsible for the production, marketing and sales of Burcon's pea, canola and its proprietary Nutratein® protein blends. Merit Foods has since re-branded Burcon's pea and canola protein blends as its lineup of unique MeritPro™ protein blends. Due to the particular needs of each application, Merit Foods is able to tailor the color, functionality and nutrition of its MeritPro™ blends based on the specific application. Burcon believes that the resulting blends all have levels of purity, taste, solubility and digestibility that exceed industry standards for plant-based proteins.
Soy
Soy protein isolate is used as a functional ingredient or fortifier in a wide variety of food products including meat alternatives, dairy alternatives, protein shakes, ready-to-drink beverages, protein cereal bars, soups and sauces, meats and meat alternatives, and breads and baked goods. In addition to enhancing the protein content of foods, soy protein isolates are used by food manufacturers for their functional applications. These applications include the ability to emulsify, whip, bind and add viscosity to foods. See "Description of the Business".
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Burcon has developed technologies to extract and purify soy protein from a variety of soy materials. These technologies encompass various processes to produce a soy protein which Burcon has branded as "CLARISOY®". A number of different processes are used to produce CLARISOY® soy protein specific for certain applications ranging from soluble and transparent beverages with a pH of 4.0 and below to neutral beverages with a pH of 7.0 or higher. CLARISOY® is specifically designed to enable beverage manufacturers to meet the demand for great-tasting, nutritionally enhanced beverages targeted to the ever-growing number of health and wellness minded consumers. Potential applications for CLARISOY® include: sports nutrition beverages, citrus-based drinks, fruit-flavoured beverages, lemonades, powdered beverage mixes and in numerous non-beverage plant-based applications.
On March 4, 2011, Burcon, Burcon-MB and ADM entered into the ADM License and Production Agreement for the worldwide, exclusive production, marketing and sale by ADM of soy protein products using Burcon's CLARISOY® soy protein technology. See "Material Contracts".
By June, 2012, ADM had constructed and was operating a commercial-scale production plant in Decatur, Illinois to produce CLARISOY® soy proteins. ADM conducted the first commercial sale of CLARISOY® soy protein by December 2012.
CLARISOY® is well-suited for adding protein, nutrition and functionality to everyday products; it excelled particularly in beverage applications due to its clean flavour and smooth mouthfeel. ADM's focus on dairy replacement using CLARISOY® not only provided a price-stable and sustainable ingredient for food and beverage manufacturers, but also addressed the large consumer base that is lactose intolerant or sensitive to dairy products.
On November 8, 2016, Burcon announced that ADM had successfully commissioned the first full-scale CLARISOY® production facility. While ADM continued to market and sell CLARISOY® soy protein into a number of different applications, ADM was unable to achieve meaningful sales of CLARISOY® soy protein.
Effective August 7, 2020, Burcon and ADM agreed to terminate the ADM License and Production Agreement. See "Material Contracts".
Despite the termination of the ADM License and Production Agreement, Burcon believes that there continues to be an opportunity for Burcon to commercialize its soy protein technologies by identifying and working with the appropriate strategic partner.
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Burcon is currently in discussions with one or more potential partner(s), to investigate the possibility of bringing CLARISOY® soy protein to market.
Sunflower
In April 2022, Burcon received a co-investment from Protein Industries Canada for the development of high-quality protein ingredient from sunflower seeds. The $1 million project will see Burcon partnering with a local processor of 100% pure Canadian non-GMO cold pressed virgin oils, to further develop Burcon's novel process for the production of sunflower protein ingredients.
Premium sunflower protein isolate, that contains greater than 90% protein purity and has exceptional taste and functionality, has the potential of setting a new benchmark in the growing plant-based ingredients market. Leveraging Burcon's core protein extraction and purification platform, the project intends to fine-tune and scale-up an economical extraction and isolation process arising from the by-product (pressed cake) of sunflower oil production.
Specialty Proteins and Phytochemical Extractions
Burcon's extraction and purification technologies can also be used to produce specialty proteins such as flax and hemp proteins. Burcon's core extraction and purification technology is versatile and can be adapted to process a range of oilseed and non-oilseed meals to produce high-value protein products for use in the food and beverage industries.
The demand for plant proteins in the protein market continues to grow and as such, Burcon believes that there may be niche market opportunities for its specialty protein ingredients. Burcon will continue to explore these opportunities as they arise.
In February 2018, Burcon applied for accreditation from Health Canada's Office of Controlled Substances to conduct research for the future commercial production of purified cannabinoid extracts. Burcon received its research license from Health Canada on July 17, 2019. Given its focus on other business initiatives, Burcon does not plan to conduct research in cannabinoid extracts in the near future and therefore, did not renew its license when it became due in 2021.
DESCRIPTION OF THE BUSINESS
The protein ingredient industry continues to experience rapid growth, with plant proteins in particular experiencing high demand. This increase in demand for plant proteins is fuelled in part by consumer perception of plant-based foods as healthier, consumer awareness of livestock's environmental impact, consumer concerns regarding animal welfare, scientific advances, changing demographics and recent public sentiments in light of the COVID-19 pandemic, as well as by the public's changing perception of the safety of animal-based products. External issues such as melamine tampering/contamination, mad cow disease, E. coli, swine flu, avian flu and the growing use of antibiotics in animal production, as well as demographic trends are all combining to produce significant demand for plant proteins.
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Two major attributes are relevant to the commercial value of protein as an ingredient: functional value and nutritional value.
Functional Value
Proteins possess a wide range of attributes essential to the structure and textural integrity of food products. These relevant properties include: solubility, viscosity, water-binding, gelation, cohesion, adhesion, elasticity, emulsification, foaming, whipping, fat-binding, film forming and flavour-enhancing qualities.
In weighing the commercial potential of any protein ingredient, its functional utility is, in some cases, more important than its nutritional value. For example, although the nutritional value of wheat protein is comparatively low, (the Protein Digestibility Corrected Amino Acid Score ("PDCAAS") of whole wheat is 0.40), only wheat protein-called gluten-will make a traditional loaf of bread. Thus, the functionality of wheat protein makes it a staple in the North American diet. At the top end of the functional scale, egg white protein will whip, coagulate, and form films. Such functional versatility makes egg white one of the most valuable food proteins. Certain of Burcon's proteins can be made to mimic many of egg's functions, and in certain instances can outperform egg.
Nutritional Value
Proteins are organic compounds made up of carbon, hydrogen, oxygen and nitrogen. It is the presence of the nitrogen that sets proteins apart from other nutrients. Nitrogen is essential to human life, but since we have no other source of nitrogen-unlike plants, we are unable to absorb it as a nutrient from the ground-one of the most important roles of dietary protein is to bring nitrogen into the body.
Proteins are made up of sub-units called amino acids. There are twenty dietary amino acids, typically subdivided into two categories: non-essential amino acids, which can be made within the body, and essential amino acids which must come from diet.
Amino acids supplied from dietary protein are needed for synthesis of body proteins in muscle, organs, bone and skin, and for synthesis of enzymes, certain hormones, antibodies and a host of bodily processes.
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The essential amino acids are lysine, methionine + cysteine, threonine, tryptophan, leucine, isoleucine, valine, phenylalanine, arginine and histidine (adults do not require a dietary supply of arginine).
A diet deficient in one or more of the essential amino acids impairs growth in children, causes adults to lose muscle mass, and lowers the body's resistance to a variety of diseases. Extreme protein deficiency can be a cause of death. An adequate daily supply of high-quality protein is essential to optimal growth and health.
The nutritional supplements industry has seen rapid growth in the use of protein ingredients over the past ten years. Protein or nutrition bars, once consumed only by endurance athletes, are now widely available and protein-rich meal-replacement products and dietary supplements have become supermarket staples and are sold in large quantities through all the major multi-level marketing companies. Protein supplements are also increasingly and successfully being promoted to the expanding market of geriatric consumers. Potential nutritional applications for protein isolates include ready-to-drink and ready-to-mix beverages, nutrition bars, protein powders and any other concentrated protein supplement.
Pea
Field pea, or Pisum sativum in Latin, is part of the legume family and was one of the earliest cultivated food crops. A pea is most commonly the green or yellow small spherical seed inside a peapod that contains multiple peas. The pea plant is grown in cool-weather conditions in many parts of the world, including Canada, Europe and temperate regions of Asia.
Peas are consumed as a vegetable worldwide for their high nutritional value and health benefits, being high in protein, fibre, starch, vitamins and minerals. Peas are also not considered a major allergen. As part of the legume family, pea plants have the ability to lock in nitrogen from the atmosphere and store it in their root nodules. This nitrogen-fixation ability allows producers to use less fertilizer and replenish the soil with nitrogen, making peas a much desired sustainable crop.
Pea protein is increasing in popularity as a plant-based protein ingredient which can be used in a wide variety of food products. One of the reasons is that pea protein is able to deliver functionality and protein nutrition to products without the issues of allergenicity and genetic modification that may be present with other proteins. Pea proteins currently available in the market are sold for use in a variety of food products including: meat alternatives; snacks and cereals; diet products (high protein foods); ready-to-mix and ready-to-drink beverages as well as in nutritional supplements such as meal replacement shakes.
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Peazazz®
Peazazz® pea protein is a uniquely soluble, clean and neutral-tasting pea protein that is suitable for dairy alternative food and beverages. Burcon believes that Peazazz® is the purest pea protein on the market, has clean flavour characteristics and is well suited for use in plant-based milk, yogurt, ice cream as well as a variety of other healthy and great tasting food and beverage product applications. Its valuable nutritional and functional characteristics make Peazazz® an attractive product to companies looking for an alternative plant protein ingredient.
Burcon's Peazazz® pea protein can be produced from a non-GMO source and pea protein is not considered a major allergen. Consumers are increasingly looking for clean-label and "free-from" products. Burcon's Peazazz® pea protein is dairy-free, soy-free, gluten-free, allergen and GMO-free and does not require allergen labelling.
Burcon is not aware of any pea protein isolate in the market that is clean-tasting with superior solubility like Peazazz®. Burcon expects the introduction of Peazazz® pea protein to be able to gain a share of the pea protein market, as well as expand the pea protein market to include (what it previously could not) a broader range of product applications.
During fiscal 2014 to fiscal 2019, Burcon shipped samples of Peazazz® pea protein to various key potential multi-national production and/or distribution partners and undertook applications work in response to requests from certain potential commercialization partners. On May 23, 2019, Burcon announced that it had signed the Original Shareholders Agreement and the Original Merit License Agreement. As disclosed in "General Developments of the Business", the Original Shareholders Agreement and the Original Merit License Agreement were amended and restated on August 27, 2020. Also see "Material Contracts".
Peazac® and Peazac® 850
Peazac® pea protein is a co-product of the production of Peazazz® pea protein. Extracted pea proteins are fractionated under conditions that give rise to two product streams, which are separately further processed to provide Peazazz® and Peazac®. The properties of Peazac® differ from those of Peazazz®, including a lower protein content in Peazac®. Merit Foods has introduced a new version of Peazac®, which it has branded as Peazac® 850, targeted at formulators developing products with a creamier and smoother mouthfeel. Peazac® 850 has a protein content of 85% and has exceptional taste and functionality. Recommended food applications for the Peazac® line of pea proteins include plant-based meat alternative products, ready-to-mix powders, ready-to-mix beverages, dairy alternatives, nutrition bars, and applications requiring the most neutral flavour and moderate viscosity. Like Peazazz® pea protein, Peazac® pea protein is dairy-free, soy-free, gluten-free, GMO-free and does not require allergen labelling.
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Pea Protein Production
Current production of pea protein products in the market involves the use of either a dry fractionation process or a combination of both dry and aqueous fractionation processes. Mechanical separation from a dry fractionation process is used to produce pea protein flours and concentrates, which contain a lower protein content. An aqueous fractionation process is used to produce pea protein isolates with higher protein content ideal for use in human food and beverage applications. Current methods of production often result in a pea protein that retains its vegetable off-flavour, insoluble in solution and imparts undesirable color and aroma into food applications. Burcon has developed and filed applications to obtain patent protection for novel processes allowing for the production of uniquely soluble pea proteins with clean flavour characteristics suitable for various food and beverage applications.
Pursuant to the terms of the Amended and Restated License Agreement (see "Material Contracts"), Burcon has licensed its Peazazz® pea protein and its canola protein technologies to Merit Foods, on an exclusive basis, to use, market and sell the products that use the pea and canola technologies. Under the Amended and Restated Licence Agreement, Merit Foods is the primary party responsible for the commercialization efforts for Burcon's pea and canola protein products.
During the term of the license under the Amended and Restated License Agreement, Burcon will continue to refine its protein extraction and purification technologies for pea and canola proteins in its Winnipeg Technical Centre.
On May 4, 2020, Burcon announced that Merit Foods was expanding production capacity at its state-of-the-art protein production facility in Winnipeg, Manitoba. The construction of Merit Foods' 94,000 square foot state-of-the-art production facility to produce high-quality pea and canola proteins was completed on December 31, 2020. Burcon announced on February 9, 2021 that Merit Foods had completed the first commercial production runs of its Peazazz® and Peazac® pea proteins. The facility was commissioned on December 31, 2021 and achieved the production output threshold as defined under the Amended and Restated License Agreement for the Flex Production Facility to have attained commissioned status.
Canola
Canola is the North American name for the enhanced variation of rapeseed first developed and introduced in 1974 when a Canadian researcher bred a "double low" variety of rapeseed with reduced levels of the two negative elements naturally occurring in rapeseed: erucic acid and glucosinolates. This type of rapeseed is known in Europe and parts of Asia as rapeseed or oilseed rape and has become the world's second largest oilseed crop. The growth of rapeseed as an international crop can be attributed to three factors: the ability to grow rapeseed in temperate climates; favourable production costs; and a beneficial fatty acid profile for the oil, which is high in monounsaturates.
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Each canola plant produces yellow flowers which produce pods that are similar in shape to pea pods and about 1/5th the size. Within the pods are tiny round seeds that are crushed to obtain canola oil. After the oil is removed through processing at a canola crushing plant, the remainder of the seed (approximately 60% by weight) is canola meal. Canola meal is the raw material used to produce Puratein® canola protein, Supertein® canola protein and Nutratein® canola protein from Burcon's extraction technologies. Canola meal is comprised of approximately 35% protein. Canola meal is in abundant and relatively inexpensive supply and is sold almost exclusively as an animal feed ingredient; however, its protein value, even in feed applications, is limited by the presence of a large amount of fiber and other anti-nutritional factors naturally present in canola seed. Burcon's extraction process separates the protein from the fiber and from most of the naturally occurring anti-nutritional factors.
In the past, numerous attempts have been made at finding an economically viable method to extract canola protein from canola meal. There is a significant amount of scientific publications describing various methods to do so, most of which publications also underscore numerous reasons for the scientific interest in obtaining canola protein isolate, including, amongst others: a unique amino acid profile, rich in sulfur containing amino acids; an abundant source of protein; and two distinct protein fractions. However, none of the existing technologies described in the scientific literature is commercially applied at present. Major drawbacks of the existing technologies, which often use alkaline extraction followed by isoelectric precipitation, include the insufficient purity of the canola protein isolate, unacceptable colour and taste of the canola protein products as well as the resulting protein's limitations regarding functionality. Phenolics that are naturally present in canola oxidize readily in alkaline conditions causing dark coloration of the final protein product.
Burcon's canola protein extraction process does not use harsh chemicals but rather is based primarily on making use of physical separation and purification techniques. At the core of Burcon's canola protein production process is a micelle formation step, which separates the two naturally occurring proteins in canola: napin and cruciferin. Processing of these two fractions results in the cruciferin-rich canola protein isolate Puratein® canola protein and the napin-rich canola protein isolate Supertein® canola protein. Burcon has also developed Nutratein® canola protein, which consists of a blend of the two fractions. Merit Foods has re-branded Burcon's Nutratein®, Puratein® and Supertein® canola protein ingredients as Puratein® C, Puratein® G and Puratein® HS, respectively. On April 12, 2021, Burcon announced that Merit Foods had achieved first commercial production of its novel lineup of Puratein® canola proteins.
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Canola Protein
Potential nutritional applications for canola proteins include meat alternatives, egg alternatives, non-dairy frozen desserts, ready-to-mix beverages, whipped toppings and nutrition bars and any other concentrated protein supplement.
Based on the recommendations of the Joint Expert Consultation of the Food and Agricultural Organization ("FAO") and World Health Organization ("WHO") in 1989, the FDA and the FAO/WHO adopted in 1993 the PDCAAS as the preferred method for measuring the quality of a protein based on the amino acid requirements of humans. The PDCAAS method for evaluating protein quality is based on the needs of humans. The quality of a protein is based on the amino acid requirements of a 2 to 5 year old child, which is considered to be the most nutritionally demanding age group, other than infants. After adjusting for digestibility, the protein quality rankings of a specific protein evaluated under the PDCAAS method are compared to a standard amino acid profile with the highest possible score being a 1.0. A PDCAAS score of 1.0 means that, after digestion of the protein, it provides 100% or more of all the essential amino acids required. Proteins with a PDCAAS of 1.0 include egg and cow's milk.
The PDCAAS scoring system has since been updated by the FAO/WHO/United Nations University ("UNU") in 2002, altering the reference amount of specific amino acids and also dividing the requirement by age groups of children 1-2 years and 3-10 years. In the Report of a Joint FAO/WHO expert consultation on protein and amino acid requirements in human nutrition, the FAO/WHO/UNU came to the conclusion that previous reports considerably overestimated the protein requirements. Despite the foregoing, the FDA has neither formally adopted the updated levels recommended in the 2002 report nor advised food companies to use these updated levels when calculating PDCAAS values.
Based on the PDCAAS method, the PDCAAS scores for Burcon's canola proteins are as follows:
|
Canola Protein |
FAO/WHO 1989 mg/g protein (2-5 years old) |
FAO/WHO/UNU 2002 mg/g protein (3-10 years old) |
|
Puratein® |
0.60 |
0.72 |
|
Supertein® |
0.71 |
0.91 |
|
Nutratein® |
0.90 |
1.00 |
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Burcon's canola protein has a score in the range of 0.60 to 0.90 under the 1989 FAO/WHO pattern and a score in the range of 0.72 - 1.00 under the 2002 FAO/WHO/UNU pattern, suggesting that Burcon's canola protein is a good quality protein source.
Puratein® Canola Protein
Puratein® canola protein is a canola protein isolate comprised mainly of globulin proteins. The functional properties of Puratein® canola protein include emulsification, gel formation, thickening, formation of heat-stable foams, and water- and ingredient-binding. Applications for Puratein® canola protein include meat alternatives such as burgers and sausages and nutrition bars. Puratein® canola protein has a savoury flavour profile with no off-flavours. Merit Foods is marketing Burcon's Puratein® canola protein as Puratein® G canola protein.
Supertein® Canola Protein
Supertein® canola protein is a light coloured powder with a mild flavour. It is a highly soluble canola protein isolate, at over 90% protein purity, comprised principally of albumin proteins. The functional properties of Supertein® canola protein include high solubility across the pH range, good foaming and whipping capacity that exceeds the performance of egg albumen. Applications for Supertein® canola protein include non-dairy frozen desserts, egg alternative, plant-based marshmallows, plant-based ready-to-mix beverages, whipped toppings and plant based bars, among many others. Merits Foods is marketing Burcon's Supertein® canola protein as Puratein® HS canola protein.
The exceptional cysteine content of canola protein has long been of interest to nutritional scientists. A potential link between canola protein's high cysteine content and disease prevention has been reported in a study in the British Journal of Nutrition entitled "Rapeseed protein inhibits the initiation of insulin resistance by a high-saturated fat, high-sucrose diet in rats" by Mariotti F., Hermier D., Sarrat C., Magné J., Fénart E., Evrard J., et al 2008 Nov; 100(5):984-91. The study's aim was to determine whether rapeseed protein, described by the study's authors as "an emergent cysteine-rich protein" could inhibit the onset of the metabolic syndrome. The main finding of the study "is that rapeseed protein substituted for milk protein inhibited the onset of insulin resistance in rats fed the high-saturated fat, high-sucrose diet". The authors further noted that rapeseed protein mitigated certain factors associated with metabolic syndrome: "The study's result highlights the importance of the type of protein as a major component of diet quality, in terms of cardiovascular and diabetic risks." Supertein® canola protein is rich in sulfur-containing amino acids and particularly rich in cysteine. The typical cysteine content of Burcon's Supertein® canola protein is nearly double that of whey protein, which is recognized for its high cysteine content. The findings in the study reported in the British Journal of Nutrition suggest that Supertein® may have potential applications in the prevention of metabolic syndrome.
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Nutratein® Canola Protein
With purity levels at over 90% protein, Nutratein® canola protein is comprised of a mixture of globulin and albumin proteins. Nutratein® canola protein is a fine powder that has good solubility across a broad pH range. Nutratein® canola protein has an excellent amino acid profile and its PDCAAS score makes it an excellent choice for use in meat and egg alternatives, and other plant-based functional foods. Nutratein® canola protein benefits from having high cysteine content, one of the limiting amino acids, making Nutratein® a nutritional complement to amino acid profile of other plant proteins having a low or deficient cysteine content. Merit Foods is marketing Burcon's Nutratein® canola protein as Puratein® C canola protein.
Pea Protein/Canola Protein Blends
Burcon has developed proprietary blends of its pea protein products and canola protein products for applications where improved protein nutritional value is desired compared to the use of pea proteins alone or canola proteins alone. In addition to their nutritional value, these blend products, marketed by Merit Foods as its line of MeritPro™ blend products, have excellent functional attributes. The blends are proprietary plant protein products providing improved protein nutrition that may be used as a convenient alternative to both high protein nutrition animal protein products and soy protein products.
On May 23, 2019, Burcon announced the development of the pea protein and canola protein blends Nutratein-PS® and Nutratein-TZ®. These blended products have exceptional functional characteristics and nutritional value. Nutratein-PS® is a blend of Peazazz® pea protein and Supertein® canola protein, having clean flavour and high solubility, intended for use in products such as dairy alternative beverages. Nutratein-TZ® is a blend of Peazac® pea protein and Puratein® canola protein, having functional properties that make it ideally suited for use in plant-based meat alternative products such as plant-based burgers or sausages.
As part of the Amended and Restated License Agreement, Merit Foods is responsible for the production, marketing and sales of Burcon's pea, canola and its proprietary Nutratein® protein blends. Merit Foods has re-branded Burcon's pea and canola protein blends as its lineup of unique MeritPro™ protein blends. Due to the particular needs of each application, Merit Foods is able to tailor the colour, functionality and nutrition of its MeritPro™ blends based on the specific application. The resulting blends all have levels of purity, taste, solubility and digestibility that exceed industry standards for plant-based proteins.
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Soy
According to the Soyfoods Association of North America, the soybean was introduced to North America around the 1760s. Today, soybeans are the largest oilseed crop in the world with Brazil being the largest producer of this crop, followed by the United States, Argentina and China. Soybeans are similar in size and colour to peas and are primarily cultivated for their oil and protein. Soybeans are the largest single source of edible oil and accounted for approximately 59%‡ of the world's total oilseed production in 2019. In addition to being a source of oil and protein, soybean meal is used in animal feed for the production of meat and eggs. Soy flour is used in the commercial baking industry while soy hulls are processed to make breads, cereal and snacks.
Each soybean is comprised of approximately 40% protein, 35% carbohydrate (including fiber), 20% oil, and 5% ash.
Soy Protein
Commercially sold soy protein is available in predominantly three forms: soy flour, soy concentrates and soy protein isolates. After cracking and dehulling the soybean, soy processors roll them into flakes. Oil from the soybean flakes is removed and then the flakes are dried. The defatted flakes are then further processed into soy protein.
Soy protein isolate is the purest of the three forms of soy protein and contains over 90% protein, on a moisture free basis. Soy protein isolates are relatively neutral in flavour and odour and are used primarily by the food industry. Today, soy protein isolate is used in a variety of food applications, including as a protein replacement for dairy proteins in food or in products such as protein shakes, power bars, soups and sauces, meat alternatives, breads and baked goods. Soy protein isolates are desired by food manufacturers for their functional applications. These applications include the ability to emulsify, whip, bind and add viscosity to foods.
In addition to its functional attributes, soy protein isolate provides nutritional enhancement to foods. Soy protein contains all the essential amino acids required for human nutrition.
Numerous studies have been conducted on the health benefits of soy protein. In October 1999, the FDA approved a health claim for soy protein and its role in reducing the risk of coronary heart disease. In March 2015, after a meta-analysis of scientific studies, Health Canada's Food Directorate concluded that scientific evidence exists to support a health claim about soy protein and blood cholesterol lowering. The evidence supports a direction of effect towards a reduction in total and LDL cholesterol levels when soy protein is consumed.
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‡ Source: www.soystats.com
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The quest for healthier lifestyles has led consumers to search for healthier alternatives to animal protein. The FDA's and Health Canada's approval of a health claim for soy protein has fuelled soy protein's increasing popularity and general acceptance among consumers. These factors, along with the desire by consumers for food producers to find sustainable ways to produce food for humans, are expected to sustain market demand for soy protein isolates. Burcon intends to participate in this growing market through its CLARISOY® soy protein.
CLARISOY®
In November 2008, Burcon announced that it had developed a soy protein which it branded as CLARISOY®. Burcon has developed technologies to extract and purify soy protein from a variety of soy materials. These technologies encompass various processes to produce CLARISOY® soy protein. A number of different processes are used to produce CLARISOY® soy protein specific for certain applications ranging from soluble and transparent beverages with a pH of 4.0 and below to neutral beverages with a pH of 7.0 or higher. CLARISOY® is specifically designed to enable beverage manufacturers to meet the demand for great-tasting, nutritionally enhanced beverages targeted to the ever-growing number of health and wellness minded consumers.
Based on the PDCAAS method, Burcon's CLARISOY® soy protein has a score of 0.98 and 1.00 under the 1989 FAO/WHO pattern and the 2002 FAO/WHO/UNU pattern, respectively, suggesting that Burcon's CLARISOY® soy protein is a good quality protein source.
Soy Protein Production
Pursuant to the terms of the ADM License and Production ADM successfully commissioned the first full-scale CLARISOY® production facility in November 2016. Although ADM made efforts to market and sell CLARISOY® soy protein into a number of different markets and product applications, ADM was unable to achieve meaningful sales for CLARISOY® soy protein. Burcon and ADM agreed to terminate the ADM License and Production Agreement effective August 7, 2020. See "Material Contracts".
Burcon is investigating alternative paths to bring its soy protein technologies to the market. Soy protein is a complete plant-based protein ingredient that accounts for the largest share of the overall plant-based proteins market. Burcon intends to pursue all available opportunities to commercialize and monetize its soy protein intellectual property portfolio.
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Sunflower
Sunflower protein combines many beneficial attributes for human consumption: good digestibility index, good amino acid profile, free of priority allergens, good flavor, and good functionality. According to data from the US Department of Agriculture Foreign Agricultural Service (USDA FAS); World sunflower meal production has been recorded as 16.1 million tons in 2014/15 season and 18.2 million tons in 2016/17 season. Sunflower meal is rich in protein content (25-30%) and used mainly as nutritious animal feed. Unlocking the potential of protein present in sunflower meal for mainstream food ingredient applications means that Burcon could potentially be unlocking vast quantities of novel plant protein worldwide. Sunflower protein does not present any allergenicity issues, unlike other mainstream plant-based proteins like soya. Its clean taste and off-white color make it an ideal ingredient for food applications where other traditional plant-based proteins have to-date not been able to provide satisfying solutions.
Burcon's promising initial extraction trials have produced high purity sunflower protein isolates. The protein samples showed very favorable color and taste profiles, that could potentially make them ideal for meat alternative applications, along with beverages, dairy milk replacers, and other ready to use drinks.
Burcon recently received a co-investment from Proteins Industries Canada for the development of high-quality protein ingredients from sunflower seeds.
This project will see Burcon partnering with a local processor of 100% pure Canadian non-GMO cold pressed virgin oils, to further develop Burcon's novel process for the production of sunflower protein ingredients.
Hemp
One of Burcon's pipeline technologies involves the extraction and purification of protein from industrial hempseeds, which is currently being crushed for its high value hemp oil.
Burcon is able to adapt its processing technologies to extract and purify protein from hempseeds, producing a food-grade hemp protein isolate. Currently, Burcon has two granted patents for hemp protein and possesses the skill and know-how to produce a great tasting and functionally superior hemp protein isolate. Burcon continues to develop its hemp protein technologies with the objective of securing a strategic partnership to commercialize hemp protein isolates.
The global industrial hemp market is currently at US$5.3 billion and growing rapidly. This growth is driven in part by the increasing acceptance by consumers and the regulatory easing on hemp-related crops and retails products. Despite the rapid growth, the industrial hemp market is still in its nascent stages and supply of hempseed is limited to niche areas. Burcon expects that acreage allocated to hempseed production will continue to increase as consumers demand more plant-based products. Current suppliers of hemp protein are serving a niche market with hemp protein isolate product of approximately 70% protein content. Burcon can produce a greater than 90% hemp protein isolate, which Burcon believes is higher in purity and better tasting than any hemp protein product available on the market today.
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Factors that make the hemp opportunity compelling for Burcon to pursue include 1) current market demand outweighs availability of supply for hemp protein; 2) current market offerings of hemp protein are low in quality with strong off-flavour and off-colouring, limiting the use in food and beverage applications; and 3) Burcon can produce a high-quality hemp protein isolate that has exceptionally clean taste and excellent functionality.
Research and Development
Burcon has designed and built a semi-works production facility, complete with an analytical laboratory, for the development and production of proteins from various plant sources. The semi-works plant utilizes commercial-scale equipment and is capable of producing the tonnage amounts required by food and beverage makers looking to conduct full-scale market evaluations of Burcon's proteins in their consumer products. During fiscal 2021, the semi-works plant produced samples to support the commercialization of Burcon's pea and canola proteins by Merit Foods, as well as conduct work required to support Burcon's joint development agreement with Nestlé and Burcon's intellectual property portfolio. Burcon will continue to use the semi-works plant for the development of its proteins and produce samples for potential customer feedback.
Burcon has over 20 years of experience in developing high-quality vegetable protein ingredients and has successfully developed Peazazz®, Peazac® and Peazac® 850 pea proteins, three unique canola proteins, Supertein®, Puratein® and Nutratein® canola proteins and CLARISOY® soy protein. Burcon is currently developing other specialty proteins such as sunflower and hemp.
Objectives
For fiscal 2023, Burcon's main objective will be to further develop its pipeline of plant-based protein technologies to include other novel renewable plant sources. In particular, Burcon will focus on identifying and securing a strategic partner for its novel sunflower protein technology. In addition, Burcon will support Merit Foods in the optimization of Merit Foods' state-of-the-art pea and canola protein production facility which was formally commissioned in December 2021.
Burcon's activities will include:
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• advancing Burcon's pipeline of plant-based protein technologies by conducting research to develop and refine its extraction and purification processes for novel protein products;
• file patent applications to protect intellectual property arising from research and development of new protein technologies;
• identifying and securing a strategic partner with the goal of commercializing it novel sunflower protein technology;
• working with Merit Foods and Merit Foods' third-party suppliers to optimize Merit Foods' pea and canola production facility;
• conducting further research to develop additional applications for Peazazz® and Peazac® pea protein Supertein®, Puratein® and Nutratein® canola proteins and blends into food products;
• continuing to file patent applications to protect the Peazazz® pea protein extraction process as well as the composition of Peazazz® pea protein and applications for Peazazz® pea protein into food products; and
• support Merit Foods in pursuing regulatory approval of Burcon's Supertein®, Puratein® and Nutratein® canola proteins in Canada and Europe.
In addition, Burcon will also:
• explore and identify possible suitable locations for its expansion of its Winnipeg Technical Centre, which is expected to include an expanded footprint with increased commercial processing capacity as well as analytical and functional capabilities;
• continue to refine its protein extraction and purification technologies, develop new technologies and related products;
• further strengthen and expand its core intellectual property portfolio;
• explore opportunities for acquiring or licensing into Burcon, novel technologies that will complement or enhance Burcon's intellectual property portfolio and business initiatives;
• pursue product development agreements with major food, beverage and nutritional product companies to develop improved or novel applications for Burcon's other specialty proteins into their products; and
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• continue to engage in investor relation activities to support the expansion of Burcon's investor base, particularly from the US investment community, by raising awareness about Burcon through various media channels, analyst coverage and investor relations.
Intellectual Property
Patents
In October 1999, Burcon acquired the shares of Burcon-MB. At the time of the acquisition, Burcon-MB held patents and applications covering the protein micellar mass process for extracting and producing a canola protein isolate. Since the acquisition, Burcon has focused on developing its protein extraction and purification processes and seeking patent protection for its developments. Through Burcon-MB, Burcon has filed patent applications in various countries over its inventions. Burcon's patent applications can be grouped into three categories:
• applications to protect additional novel protein extraction and purification technologies;
• applications to protect the uses of Puratein®, Supertein® and Nutratein® canola proteins, CLARISOY® soy protein, Peazazz® pea protein, and other plant proteins, including sunflower proteins, for example, as functional food and beverage ingredients; and
• applications to protect the "signature characteristics" of Puratein®, Supertein® and Nutratein® canola proteins, CLARISOY® soy protein, Peazazz® and Peazac® pea proteins and other plant proteins, including sunflower proteins.
As of the date of this AIF, Burcon's patents and patent applications cover over 50 distinct inventions. Burcon has filed applications for most of its inventions internationally under the Patent Cooperation Treaty of the World Intellectual Property Organization. As at the date of this AIF, Burcon holds 327 issued patents in various countries, including patents covering composition of matter and a number of key processes and uses of Burcon's products as functional food and beverage ingredients, 72 of which have been issued in the U.S. Burcon holds patents or has filed patent applications in: Australia, Brazil, Canada, China, Hong Kong, India, Japan, the European Union, Mexico, New Zealand, Russia, South Africa, South Korea, Taiwan, Thailand and the United States. Burcon currently has over 180 patent applications that are being reviewed by the patent offices in various countries, 26 of which are U.S. patent applications.
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Granted U.S. Patents
Burcon holds 72 issued patents in the United States relating to soy protein, canola protein, flax protein and pulse (including pea) protein. Although the initial protein micellar mass canola protein isolate patents acquired from Burcon-MB expired in 2016 and 2017, Burcon holds patents covering improvements made by Burcon to the protein extraction and purification technologies. These new inventions include:
Soy
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processes to extract and purify soy protein from various soy material to produce soy protein products that are soluble in acidic medium and produces heat stable solutions suitable for protein fortification of sport drinks and other beverages;
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use of soy protein products in acidic beverages and other products;
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protection covering the composition and signature characteristics of Burcon's CLARISOY® soy protein;
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alternative processes for producing soy protein products;
Canola
• technologies for improving the quality of input meal prior to the purification and extraction process, to result in better protein quality and higher protein yield;
• process improvements to produce canola protein isolate efficiently and to obtain higher yields of canola protein isolate;
• processes for reducing phytic acid in the production of protein isolates from oilseed meals. Phytic acid is a naturally occurring anti-nutritional component found in oilseed meals such as canola meal and soybean meal;
• protection covering important processing conditions for producing Supertein® canola protein as well as for the preparation of a highly refined Supertein® canola protein and product characteristics;
• protection covering the composition of the dominant species of protein in Burcon's Puratein® canola protein. Puratein® is a cruciferin-rich canola protein isolate comprised principally of globulin proteins, allowing it to have unique functional qualities;
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• protection covering the process for producing Nutratein® canola protein;
• processes to improve the final colour profile of Puratein® canola protein and Supertein® canola protein;
• applications for the uses of canola protein as a functional food and beverage ingredient;
• the use of canola protein as a flavour enhancer in a food product;
• alternative processes for producing canola protein isolates;
• protection covering the process for producing protein isolates using mustard seed as a starting material;
Pea and other Pulses
• pulse (including pea) protein product having signature characteristics, including properties in low pH solution;
• protection covering the processes for producing pulse (including pea) protein products having reduced astringency in low pH solutions and signature characteristics of such products;
• alternative process for preparing pulse (including pea) protein products and signature characteristics of such products; and
Flax
• processes for the production of flax protein isolates with unique protein profiles.
Patent Strategy
Burcon believes that it has developed a dynamic patent portfolio by seeking protection for new technologies as well as further protecting current technologies. In addition, Burcon has filed patent applications to cover alternative extraction technologies, which, in Burcon's opinion, would not be commercially viable. Such filings have been made as part of Burcon's defensive strategy to gain as much protection in the protein extraction and purification space as possible. Burcon will continue its research and development to further refine its processes and make new discoveries. The Company will continue to file additional patent applications to protect these discoveries.
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As part of Burcon's annual review of its patent portfolio, Burcon may abandon certain non-core patents and patent applications which it deems to be non-essential or redundant for the purposes of achieving its strategic objectives by not paying annuities or maintenance payments when due.
Trade-marks
Burcon has obtained trade-mark registrations for "Nutratein", "Supertein", "Nutratein-PS", "Nutratein-TZ", "CLARISOY" in Canada, as well as "Puratein", "Peazazz", "Peazac" and the slogan "A New World in Protein" in Canada and the United States. Burcon has also made a trademark application for "CLARISOY" in the United States and obtained ownership for the "CLARISOY" trademark in Japan, following the termination of the ADM License and Production Agreement. See "Material Contracts".
On June 4, 2020, Burcon granted Merit Foods a royalty-free non-exclusive license (the "Original Trademark License Agreement") to certain Burcon trademarks registered by Burcon in association with the products under the Merit License as long as the Merit License is exclusive.
Effective August 27, 2020, Burcon and Merit Foods entered into the amended and restated trademark license agreement (the "Amended and Restated Trademark License Agreement"). The Amended and Restated Trademark License Agreement amends and restates the Original Trademark License Agreement. Under the Amended and Restated Trademark License Agreement, Burcon has granted Merit Foods an exclusive, worldwide, royalty-free and non-transferable license to use certain of the Burcon's trademarks in connection with certain goods and/or services as long as the Merit License is in effect unless terminated in accordance with the terms of the Amended and Restated Trademark License Agreement or by mutual agreement between the parties. Merit Foods granted Burcon a reciprocal license to use certain of Merit Foods' trademarks for certain goods and/or services under the Amended and Restated Trademark License Agreement on the same terms but for the license being non-exclusive.
Facilities
Burcon's head office is located at 1946 West Broadway, Vancouver, British Columbia, Canada in leased office space. Through Burcon-MB, Burcon leases the premises where the Winnipeg Technical Centre is located at market rental rates. These premises are located at 1388 Waller Avenue, Winnipeg, Manitoba, Canada. During the fiscal year, Burcon re-negotiated the lease to extend the term for a further year. The lease will expire on August 31, 2023. The premises include a 10,333 square foot facility in a light industrial park. Burcon owns the equipment in this facility which includes tanks of up to 20,000 litre capacity, membrane systems, centrifuges, filter presses, various dryers and laboratory analytical equipment. Burcon operates exclusively and independently within these facilities under the immediate direction of its management. Certain services such as laboratory testing and analysis which cannot be conducted internally are contracted out as necessary. With a view to support Burcon's growing team and research and development needs, Burcon will continue to explore the possibility of relocating the Winnipeg Technical Centre to a new location in Manitoba, Canada once the current lease at 1388 Waller Avenue expires. It is expected that the Winnipeg Technical Centre will include an expanded footprint with increased commercial processing capacity as well as analytical and functional capabilities.
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Personnel
As of March 31, 2022, Burcon-MB had 19 employees and/or contractors with varying degrees of technical expertise who perform the duties relating to the operation of the research laboratory and pilot plant in Winnipeg. Additionally, as of March 31, 2022, Burcon had 7 employees and/or contractors responsible for accounting, legal, administration, corporate development, investor and public relations, legal and research and development activities who were predominantly located at Burcon's head office in Vancouver.
Competitive Conditions
The protein ingredient market is a global industry dominated by a few relatively large participants. Burcon recognizes that the selective use of alliances and partnerships can lower certain risks and can be the fastest and most profitable approach to maximizing revenues and cash flow. With this understanding, Burcon welcomed the equity investment by Bunge Limited in Merit Foods in August 2020. See "Material Contracts".
Burcon recognizes that within the agriculture and agri-food industry, there are a number of large industry participants with significant resources that dominated the plant protein ingredient industry. Four major industry participants who sell plant protein ingredients to the food and beverage industries include Archer Daniels Midland Company ("ADM"), Cargill Inc. ("Cargill"), International Flavors and Fragrances ("IFF") and Ingredion Incorporated ("Ingredion"). Bunge Limited ("Bunge") has recently begun to enter the plant protein ingredient space with strategic acquisitions.
ADM is a public company with annual revenues of approximately US$85.2 billion (fiscal 2021). It is a multinational company that produces among other things, ethanol, high fructose corn syrup, soy flour, soy protein concentrate, soy protein isolate and other specialty ingredients. It is currently one of the world's largest processor of oilseed crops
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Cargill is the U.S.'s largest private company with annual revenues of US$134.4 billion (fiscal 2021). Cargill is an international producer, marketer, processor and distributor of agricultural, food, financial and industrial products and is one of the world's largest canola crushers.
IFF is a global producer and supplier of value-added ingredients for the flavours, fragrances and cosmetics industry. Headquartered in New York, IFF has been active with acquisitions in the last few years. In June 2019, Dow Chemical and DuPont, after merging for two years, completed its dissolution forming three companies: Dow, DuPont and Corteva. In December 2019, DuPont announced that its Nutrition and Biosciences ("N&B") business will be merging with International Flavors & Fragrances Inc. ("IFF")(NYSE: IFF)(Euronext Paris: IFF)(TASE: IFF) to form a global leader in high-value ingredients and solutions for global Food & Beverage, Home & Personal Care and Health & Wellness markets, with estimated 2020 pro forma revenue of $11 billion and EBITDA of $2.5 billion, excluding synergies. The new $45 billion company will be a major supplier of products including soy proteins, probiotics, enzymes and ingredients for creating scents and tastes for consumer products. The new company will continue to be called IFF and based in New York. The merger formally completed in February 2021.
Ingredion is a multinational ingredient supplier based out of Westchester, Illinois with annual revenues of US$6.9 billion (fiscal 2021). Ingredion specializes in sugar-reduction sweeteners, starches and plant-based ingredients, in particular, pea protein ingredients. In November 2020, Ingredion announced that it had agreed to acquire 100% ownership in Verdient Foods, a pea protein producer out of Vanscoy, Saskatchewan. Together with its pea facility in South Sioux City, Nebraska, Ingredion supplies pea protein isolates, concentrates, flours and pea-based starch and fibres.
Bunge is a public company listed on the NYSE exchange and headquartered in St. Louis, Missouri, with annual revenues of US$46 billion (2021). Bunge is world's largest oilseed processor with one of the largest canola origination footprint and multinational platforms in its portfolio. Lagging behind its competitors in plant-based protein offerings, Bunge made an investment into the plant-based protein space with strategic investments in Merit Foods and more recently, Australian Plant Proteins, which produces and supplies protein ingredients from pulses.
The pea protein industry outside of China is dominated by four major participants: Roquette Freres ("Roquette"), Cosucra Groupe Warcoing, Nutri-Pea Limited and Puris Foods. Based in France, Roquette is a private company which produces more than 700 by-products from the starch extracted from corn, wheat, potatoes and peas. It has grown to become the second largest producer of starch in Europe and fifth largest producer in the world. Roquette is currently the largest participant in the pea protein industry. In 2017, Roquette announced the construction of a $400 million pea protein facility in Portage la Prairie, Manitoba. Construction was stalled for most of 2018 to include expansion plans and the completion date was pushed back from 2019 to 2021. The near-$500 million pea protein facility, the largest in the world, was set to be commissioned in mid to late 2021 with an annual processing capacity of 125,000 tonnes of peas. With the combined capacity of Roquette's pea protein plant in Vic-Sur-Aisne, France, Roquette will become the largest pea protein producer in the world.
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Cosucra Groupe Warcoing is a Belgian group of independent companies dedicated to the development, production and promotion of natural ingredients from chicory and yellow pea. Cosucra's line of products includes pea protein isolate, pea fibre, pea hull fibre and pea native starch.
Puris Foods, formerly World Food Processing, is another participant in the pea protein industry. Puris has been processing pulse crops in Iowa, US, since 1985 and has recently expanded capacity to include downstream production of pea protein products. In January 2018, Cargill entered into a joint venture agreement with Puris, with an initial investment of $25 million to expand the capacity of Puris' Turtle Lake, Wisconsin production facility. In August 2019, Cargill invested an additional $75 million to more than double the capacity of Puris' existing 200,000 square-foot pea protein facility in Dawson, Minnesota. Puris Foods is the largest North American producer of pea protein.
Based in Manitoba, Canada, Nutri-Pea Limited is a privately-owned company specializing in the manufacture of food ingredients derived from Canadian yellow field peas. Nutri-Pea extracts fibre, starch and protein products from yellow field peas. In 2018, Nutri-Pea Limited was acquired by G.S. Dunn Limited, an Ontario-based supplier of dry milled mustard products.
Rising commodity prices have had a noticeable impact on the global aquaculture and livestock farming sectors in recent years, as through their direct impact on feed costs as well as on energy costs. These rising input prices have in turn been one of the factors that has increased the cost to produce animal proteins (egg protein products as well as the dairy proteins, casein and whey). Burcon anticipates that under commercial production levels, it will be able to produce its plant protein isolates at a cost level which will make them significantly competitive with animal proteins.
Burcon offers a value proposition for both the multibillion-dollar oilseed crushing industry which produces enormous volumes of canola meal, soybean meal and sunflower meal that currently sell as relatively low-margin animal feed. Burcon has the technology and know-how to add value to these oilseed meals by extracting unique and potentially valuable food proteins.
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For the branded consumer product companies and food ingredient companies, the value proposition comes from both the novel properties of Burcon's proteins as well as the inherent first-mover advantage. Exclusivity through patent protection and the first-mover advantage could add significant value to Burcon's opportunity in an industry where first-movers dominate, and market share changes slowly.
See also "Risk Factors".
Environmental, Social and Governance ("ESG") Matters
Burcon's extraction processes use no harsh chemicals and emit no noxious odours or significant waste products. Biodegradable, natural and/or recyclable input materials, end-products and by-products are used and, therefore, are expected to present no significant environmental risk. As such, Burcon does not foresee any financial and operational effects of environmental protection or requirements on the capital expenditures, earnings and the competitive position of Burcon in the current financial year or in the foreseeable future.
As part of Burcon's sustainability initiatives to reduce the environmental impact of food and agriculture through its plant-based protein technologies, management is actively investigating sustainability disclosure frameworks to which Burcon may utilize to identify and quantify its carbon footprint of its technologies and ongoing research and development. Identifying the sustainability issues pertinent to Burcon's operations and technologies is the first step in the process of reducing environmental emissions.
The Financial Stability Board established the Task Force on Climate-related Financial Disclosures ("TCFD") to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system's exposures to climate-related risks. The Canadian Securities Administrator ("CSA") proposes to implement new reporting requirements for issuers regarding climate change disclosure. The requirements are consistent with the recommendations established by the TCFD and will generally require governance disclosure, strategy disclosure, risk management disclosure and metrics and targets disclosure.
Based on Burcon's preliminary materiality assessment of its operations, Burcon has identified the following top five sustainability issues it believes are most material to its business and stakeholders:
1. Greenhouse gas emissions
2. Energy management
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3. Water and wastewater management
4. Product quality and safety
5. Employee health and safety
Burcon is in a unique position where it conducts research and development on a small pilot scale to develop technologies for the global commercialization of its novel protein ingredients. As such, Burcon does not believe it is exposed to environmental and climate-related issues on the same scale as major agricultural and ingredient processors. Nevertheless, Burcon believes it may be in the best interests of Burcon, its stakeholders and investors for the Company to identify and provide transparency around its sustainability initiatives to address the ESG issues most relevant to the Company.
With a goal to assess Burcon's carbon footprint, Burcon intends to further explore methods of data collection, where the Company can begin to quantify the top five environmental impacts listed above associated with all the stages of technology development - from conception to commercialization. Burcon expects that it may be required to engage a consultant with expertise on ESG matters to assist Burcon with this process. Burcon believes that a comprehensive ESG review and preparation of a report may require at least 12 months or more to complete.
Obtaining Regulatory Approval For Marketing Puratein®, Supertein® and Nutratein® Canola Proteins
Canola meal is currently used as a protein ingredient in dairy, beef, swine and poultry rations and is recognized for its consistent quality and value. Canola meal's nutritional value, even in animal feed applications, is limited by the presence of a large amount of fiber and other anti-nutritional factors such as glucosinolates. Glucosinolates are the sulphur compounds that give mustard its sharp taste. Analysis of Puratein® canola protein, Supertein® canola protein and Nutratein® canola protein conducted by independent testing laboratories has indicated very low levels of glucosinolates. Puratein®, Supertein® and Nutratein® canola proteins have numerous potential applications, primarily as a food ingredient and as a personal care product ingredient. See "Description of the Business".
As part of the Amended and Restated License Agreement, Merit Foods is responsible for the production, marketing and sales of Burcon's pea, canola and the proprietary Nutratein® protein blends. Merit Foods will be responsible for obtaining regulatory approval, if needed, in the geographical locations where it intends to market and sell Burcon's pea and canola products.
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United States
Puratein® and Supertein® Canola Proteins
During fiscal 2008, Burcon, in conjunction with ADM, pursued regulatory recognition for Puratein® canola protein and Supertein® canola protein.
A substance may be "generally recognized as safe" or "GRAS" as a food ingredient based on two principles: it is a prior sanctioned substance, meaning that it has been used in food before 1958; or it is determined to be GRAS by scientific experts based on scientific procedures. Accordingly, because canola meal (and canola protein contained therein) does not have a history of safe use in human foods, the determination that Puratein® canola protein and Supertein® canola protein are GRAS must be based on scientific procedures.
Scientific studies were conducted during fiscal 2008 and based on those studies, Burcon and ADM prepared a dossier of data that included scientific information about canola, how canola is grown, handled and processed, Burcon's protein extraction process and finally, the intended uses of the proteins in foods and beverages. A panel of qualified experts in the fields of food safety, toxicology, nutritional sciences, food allergies and pediatric nutrition reviewed the dossier to which it also had input and affirmed unanimously that the proteins are safe for their intended uses. In October 2008, Burcon's Puratein® canola protein and Supertein® canola protein achieved self-affirmed GRAS status.
Substances that are GRAS under conditions of their intended use are exempted from the usual Federal Food, Drug, and Cosmetic Act ("FFDCA") food additive tolerance requirements.
For a substance to be GRAS, the scientific data and information about the use of the substance must be widely known and there is a consensus among qualified experts that the data and information establish that the substance is safe under the conditions of its intended use.
When a use of a substance does not qualify for the GRAS exemption, then the substance is considered to be a food additive under the FFDCA. Use of the substance is subject to the premarket approval mandated by the FFDCA. For a food additive, privately held data and information about the use of a substance are sent by the proponent to the FDA, which evaluates the data and information to determine whether the data and information establishes that the substance is safe under the conditions of its intended use. If found unsafe, the FDA may take enforcement action to stop distribution of the food substance and foods containing it on the grounds that such foods are or contain an unlawful food additive.
A GRAS designation typically exists in one of three forms:
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1. Self-affirmed. The manufacturer of the substance has performed all necessary research, including the formation of an expert panel to review safety concerns, and is prepared to use these findings to defend its product's GRAS status.
2. FDA-pending. The manufacturer has performed all the aforementioned due diligence, and submitted to the FDA for GRAS approval.
3. No comment. The FDA has reviewed a product's GRAS notification claim and responded with "no comment"; i.e., no further challenges on the product's GRAS status.
To enhance consumer acceptance of Puratein® canola protein and Supertein® canola protein, Burcon and ADM chose to pursue GRAS notification for Puratein® canola protein and Supertein® canola protein. GRAS notification is a voluntary procedure whereby a company informs the FDA of its determination that the use of a substance is GRAS.
During fiscal 2010, Burcon's scientists collaborated with ADM in the preparation and review of the manuscripts for the publication of the toxicology studies conducted in fiscal 2008 as part of the GRAS self-affirmation process. On August 20, 2009 and November 3, 2009, Burcon announced the publication of the Puratein® and Supertein® toxicology studies, respectively, in peer-reviewed journals. The publication of these scientific studies forms a significant part of the GRAS notification process.
On January 19, 2010, Burcon announced that it had filed a formal notification in accordance with the FDA proposed regulation 62FR 18938, having determined, based on a review of the data referenced in the notification, that Burcon's Puratein® canola protein and Supertein® canola protein are GRAS for their intended use as an ingredient in a variety of food and beverage applications and in addition, that both substances are exempt from premarket approval requirements of the Food, Drug and Cosmetic Act (the "GRAS Notification"). In response to comments from the FDA, Burcon modified and resubmitted the GRAS Notification in February 2010. In a letter dated April 1, 2010, the FDA formally acknowledged receipt of the GRAS Notification.
After the FDA acknowledges receipt of the GRAS notice, it then evaluates whether the submitted notice provides a sufficient basis for the GRAS determination and whether information in the notice or otherwise available to the FDA, raises issues that lead the FDA to question whether use of the substance is GRAS. Following the evaluation and within 180 days, the FDA responds in one of 3 ways:
1. the FDA does not question the basis for the notifier's GRAS determination;
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2. the FDA concludes that the notice does not provide a sufficient basis for a GRAS determination (for example, the notice does not include appropriate data and information, or because the available data and information raise questions about safety of the notified substance); or
3. the FDA has, at the notifier's request, ceased to evaluate the GRAS notice.
A substance is GRAS notified when, after reviewing the GRAS notification, the FDA responds with a no-objection letter if it is satisfied with the submission.
On August 30, 2010, Burcon announced that the FDA issued a no objection letter with respect to Puratein® and Supertein® canola protein. This response indicates that the FDA has no objection to the conclusion that Puratein® and Supertein® are Generally Recognized as Safe (GRAS) among qualified experts for use alone or together as an ingredient in dairy products, grain products, fruit and vegetable juices and beverages, salad dressings, meal replacements and nutritional bars.
On February 20, 2020, Burcon submitted a supplement to its GRAS Notification concerning Puratein® and Supertein® canola protein, which included a revised list of food and beverage categories in which the products may be used alone or together, namely baked goods and baking mixes; beverages and beverage bases; breakfast cereals; cheeses; coffee and tea; confections and frostings; dairy product analogs; egg products; fats and oils; fish products; frozen dairy desserts; fruit and water ices; gelatins, puddings and fillings; grain products and pastas; gravies and sauces; milk products; nut and nut products; plant protein products; processed fruits and fruit juices; processed vegetables and vegetable juices; snack foods; soft candy; and soups and soup mixes. On August 12, 2021 the FDA issued a letter indicating they had no questions at the time regarding Burcon's conclusion that Puratein® and Supertein® canola protein are GRAS under their intended conditions of use.
Nutratein® Canola Protein
Burcon's Nutratein® canola protein production process results in a canola protein isolate that is rich in both of the two major storage proteins found in canola: napin and cruciferin. Therefore, Nutratein® canola protein is a blended canola protein that consists of the napin-rich protein fraction (Supertein®) and the cruciferin-rich protein fraction (Puratein®) of canola.
The FDA has issued a no objection letter with respect to Puratein® and Supertein® canola proteins. This response indicates that the FDA has no objection to the conclusion that Puratein® and Supertein® are GRAS for their intended uses in human food.
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Burcon believes that, based on Puratein® and Supertein® being GRAS for their intended uses in human food, Nutratein® canola protein can also be affirmed as GRAS for its intended uses in human food applications.
Europe
Puratein®, Supertein®, and Nutratein® Canola Proteins
Where a new ingredient has not been used to a significant degree in human food in the EU market prior to May 1997, the ingredient is regarded as a novel food ingredient and would be regulated under the 2018 Regulation (EU) No 2015/2283 concerning Novel Foods and Novel Food Ingredients.
Under the 2018 Regulation (EU) No 2015/2283, the definition of a novel food includes a description of the following:
- food consisting of, isolated from or produced from plants or their parts, except when the food has a history of safe food use within the Union and is consisting of, isolated from or produced from a plant or a variety of the same species obtained by:
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traditional propagating practices which have been used for food production within the Union before 15 May 1997; or
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non-traditional propagating practices which have not been used for food production within the Union before 15 May 1997, where those practices do not give rise to significant changes in the composition or structure of the food affecting its nutritional value, metabolism or level of undesirable substances.
As part of the Merit License, Merit Foods will be responsible for obtaining regulatory approval in the European Union. Merit Foods believes that Puratein® canola protein can be considered as an approved Novel Food Ingredient in the European Union/United Kingdom, based on favorable reviews/decisions from the European Foods Safety Authority's ("EFSA") Scientific Opinion on the safety of rapeseed protein isolate as a Novel Food ingredient, the Food Safety Authority of Ireland's ("FSAI") Substantial Equivalence Opinion on rapeseed protein, and the European Commission's Regulation (EC) No 258/97 authorising the placing on the market of rapeseed protein as a novel food ingredient. Merit Foods has also been informed that the EU is now providing Generic authorisations of Novel Foods allowing a food business operator to place an authorised Novel Food on the European Union market if the authorised conditions of use, labelling requirements, and specifications are respected. Merit Foods believes that canola protein is similar to rapeseed proteins and therefore should be approved as a Novel Food Ingredient. Although Merit Foods believes that "rapeseed proteins" is similar to canola protein, there can be no assurance that the regulatory authorities will not require further submissions from Merit Foods to substantiate this claim.
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Canada
Puratein®, Supertein® & Nutratein® Canola Proteins
The manufacture and sale of Puratein®, Supertein® and Nutratein® canola proteins is subject to compliance with regulatory regimes in Canada that require a manufacturer to demonstrate a product's safety as a food.
These activities are governed by the federal Food and Drugs Act and Regulations, which are administered by the Food Directorate, Health Products and Food Branch of Health Canada, a Canadian government agency. The Food and Drug Regulations require a manufacturer to notify the Food Directorate in writing of its intention to sell or advertise for sale of a novel food.
In Canada, each of Puratein®, Supertein® and Nutratein® canola protein is considered a "novel food", meaning a food that does not have a history of safe use in humans or that has been manufactured by a process that has not been previously applied to it and which causes it to undergo a major change.
The regulatory pathway to product acceptance requires a submission of a Safety Assessment Data Package to Health Canada that includes details such as novel extraction process, nutritional, toxicology and allergenicity considerations. The package must also include specific information on the novel food's intended use and directions for its preparation, as well as the text of all labels to be used in connection with the novel food.
The steps toward obtaining approval as a novel food include the following:
• preliminary consultation and meetings with Health Canada officials to review the characteristics and make-up of the product and obtain guidance on the Safety Assessment Data Package;
• toxicology tests conducted by recognized research and testing facilities to provide evidence of the safety of the product;
• submission to Health Canada Food Directorate of a Novel Food Notification that includes a description of the product, its development and intended uses; details of the procedures for manufacturing; packaging and storing the product; information regarded expected levels of consumption; and results of the toxicology tests;
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• safety assessment of the novel food by the relevant bureau of the Food Directorate and presented to the Food Rulings Committee for consideration; and
• Health Canada issues a no objection letter to the sale of novel food product as human food in Canada as specified in the notification.
Review of the Novel Food Notification by Health Canada will determine whether the toxicology test information is sufficient to establish safety of the product or whether any additional testing is required.
In 2020, Merit Foods submitted a request to Health Canada to allow the sale of Supertein® (Merit Foods' Puratein® HS) a napin-rich canola protein isolate for use as a food ingredient to replace protein found in a wide variety of foods.
In order to determine whether this protein isolate could be sold in Canada as food, scientists at Health Canada with expertise in molecular biology, microbiology, toxicology, chemistry, allergies, and nutrition conducted a thorough analysis of the data and the protocols provided by Merit Foods to ensure the validity of the results. To ensure that Supertein® is safe for consumption, the scientists considered how the product was developed, its nutritional composition, whether it could be toxic or cause allergic reactions, and its predicted dietary exposure in the Canadian population.
Health Canada's assessment of Supertein® was conducted according to the "Guidelines for Safety Assessment of Novel Foods". Following this assessment, it was determined that Supertein® is safe for the general population. However, Health Canada noted that as canola belongs to the mustard family of plants, individuals with mustard allergies may react to proteins present in the product. For this reason, the Merit Foods must label Supertein® with a statement to the effect that the product "may not be suitable for people with mustard allergy." Health Canada recommends that people with mustard allergies should not consume canola protein.
Merit Foods has also made a Novel Foods submission to Health Canada for the approval of Puratein® and Nutratein® canola proteins as novel foods in Canada. However, there is no assurance that Health Canada will approve the products or will not require further testing.
Regulatory Approval For Pea Protein/Canola Protein (Nutratein®) Products
Burcon believes that specific regulatory approval for the Nutratein® blend products is not required in jurisdictions where the individual components of the blend have already received regulatory approval.
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Regulatory Approval For Marketing Peazazz® and Peazac®
Peas were one of the earliest cultivated food crops and have a long history of safe consumption in human foods. They are widely accepted and consumed as a vegetable in our daily diets. Although pea protein is a relatively new vegetable-based protein ingredient, it is commercially available and used by the food industry.
Despite peas and pea protein being widely accepted and consumed, Burcon has, in the process of discussions with potential strategic partners, been informed by certain major food and beverage manufacturers that they require all of their procured ingredients to be GRAS approved to ensure consistent quality and safety in their end products. On October 21, 2019, Burcon announced that it had received a GRAS (Generally Recognized As Safe) no-objection letter from the US Food and Drug Administration ("FDA") for its Peazazz® and Peazac® pea proteins. Burcon had successfully obtained self-affirmed GRAS status for its Peazazz® and Peazac® pea protein products and had made its submission to the FDA for GRAS notification on June 15, 2018. This "Letter of No Objection" is issued by the FDA, after an extensive review of all of the scientific data submitted by Burcon, to confirm that the FDA has no questions or concerns regarding the safety of Burcon's pea protein ingredients. Receipt of GRAS notification is a significant commercial milestone and is important for the acceptance and use of these proteins by global food and beverage companies.
As part of the Merit License and Production Agreement, Merit Foods is responsible for the production, marketing and sales of Burcon's pea, canola and the proprietary Nutratein® protein blends. Merit Foods will be responsible for obtaining regulatory approval, if needed, in the geographical locations where it intends to market and sell Burcon's pea and canola products.
Regulatory Approval For Marketing CLARISOY®
Food-grade soy protein isolate first became available on October 2, 1959 with the dedication of Central Soya's edible soy isolate, Promine D, production facility in Chicago. An edible soy isolate and edible spun soy fiber has also been available since 1960 from the Ralston Purina Company in St. Louis, where they had originally developed the technology. In 1987, Protein Technologies, Inc. ("PTI") became the world's leading maker of isolated soy protein and was subsequently acquired by DuPont.
Soy protein isolate is a highly refined or purified form of soy protein with a minimum protein content of 90% on a moisture-free basis. It is made from defatted soy flour, processed to provide a product which has had most of the non-protein components, fats and carbohydrates removed. Because of this, it has a neutral flavour and will cause less gas due to bacterial action.
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Soy protein isolates are mainly used to improve the texture of meat products, but are also used to increase protein content, enhance flavour, and as an emulsifier.
Pure soy protein isolate is used mainly by the food industry. It is sometimes available in health stores or in the pharmacy section of the supermarket. It is usually found combined with other food ingredients.
In 1995, the New England Journal of Medicine (Vol. 333, No. 5) published a report from the University of Kentucky entitled, "Meta-Analysis of the Effects of Soy Protein Intake on Serum Lipids." It was financed by the PTI division of DuPont, The Solae Company, St. Louis. This meta-analysis concluded that soy protein is correlated with significant decreases in serum cholesterol, Low Density Lipoprotein LDL (bad) cholesterol and triglyceride concentrations. However, High Density Lipoprotein HDL (good) cholesterol did not increase. Soy phytoestrogens (isoflavones: genistein and daidzein) adsorbed onto the soy protein were suggested as the agent reducing serum cholesterol levels. On the basis of this research, PTI, in 1998, filed a petition with FDA for a health claim that soy protein may reduce cholesterol and the risk of heart disease.
In October 1999, the FDA approved a health claim for soy protein and its role in reducing the risk of coronary heart disease. Food manufacturers may label foods containing soy protein by stating that "Diets low in saturated fat and cholesterol that include 25 grams of soy protein daily may reduce the risk of heart disease. One serving of (name of food) provides __ grams of soy protein." One serving (1 cup or 240 mL) of soy milk, for instance, contains 6 or 7 grams of soy protein.
In March 2015, after a meta-analysis of scientific studies, Health Canada's Food Directorate concluded that scientific evidence exists to support a health claim about soy protein and blood cholesterol lowering. The evidence supports a direction of effect towards a reduction in total and LDL cholesterol levels when soy protein is consumed. Foods containing soy protein may state on its label, "[Serving size] of (brand name) [name of food] supplies/provides X% of the daily amount of soy protein shown to help reduce/lower cholesterol." The daily amount referred to is 25 grams of soy protein. For example, "150g of tofu supplies 70% of the daily amount of soy protein shown to help lower cholesterol".
While soy proteins and soy protein isolates themselves have not been granted GRAS status by the FDA, they are widely used in food and nutritional applications including infant formula. As a result, Burcon does not anticipate any regulatory process for its CLARISOY® soy protein. However, there can be no assurance that the FDA will not require companies producing and selling soy protein isolates to meet additional regulatory requirements in the future.
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Risk Factors
Patents and Proprietary Rights
Burcon's success will depend, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of others or having others infringe on its rights. Burcon has filed applications for most of its inventions internationally under the Patent Cooperation Treaty of the World Intellectual Property Organization. As at the date of this AIF, Burcon has been granted a total of 327 patents in various countries including patents covering composition of matter and a number of key processes for producing and using Burcon's soy, pea, canola and flax protein products as functional food and beverage ingredients. Of those patents, 72 have been granted in the United States. Countries in which Burcon holds issued patents or has filed patent applications are: Australia, Brazil, Canada, China, Hong Kong, India, Japan, the European Union, Mexico, New Zealand, Russia, South Africa, South Korea and the United States. Currently, Burcon has over 180 patent applications that are being reviewed by the patent offices in those countries.
The patent positions of food processing and manufacturing businesses, including Burcon's, are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. For example, the coverage claimed in a patent application can be significantly reduced before a patent is issued. There can be no assurance that Burcon's pending patent applications will result in the issuance of patents, that Burcon will develop additional proprietary products that are patentable, that any patents issued to Burcon will provide it with adequate protection or any competitive advantages, that such patents will not be successfully challenged by any third parties or that the patents of others will not impede Burcon's ability to commercialize its technology. Furthermore, there can be no assurance that others will not independently develop products or technologies similar to Burcon's or, if patents are issued to Burcon, design around any patented products developed by Burcon.
Publication of discoveries in the scientific or patent literature often lag behind actual discoveries. As a consequence, Burcon cannot be certain that it was the first creator of inventions covered by issued patents or pending patent applications or that it was the first to file patent applications for such inventions. Moreover, Burcon might have to participate in interference proceedings declared by the United States Patent and Trademark Office or other proceedings outside the United States, including oppositions, to determine priority of invention or patentability. An unfavourable outcome in an interference or opposition proceeding could preclude Burcon from selling products using the technology or require Burcon to obtain license rights from prevailing third parties. There is no guarantee that any prevailing party would offer Burcon a license or that Burcon could acquire any license made available to it on commercially acceptable terms. There can be no assurance that the patents that Burcon has received or may be able to obtain in the future would be held valid or enforceable by a court or that a competitor's technology or product would be found to infringe such patents.
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Part of Burcon's intellectual property is in the form of trade secrets and know-how and may not be protected by patents. There can be no assurance that Burcon will be able to protect its trade secrets. To help protect Burcon's rights, Burcon requires its employees, consultants, advisors and collaborators to enter into confidentiality agreements. There can be no assurance that these agreements will provide meaningful protection for Burcon's trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.
Protection of Intellectual Property is Expensive
Burcon's future success and competitive position depends in part on its ability to obtain and maintain certain proprietary intellectual property rights used in its principal product candidates. Any such success may be achieved in part by prosecuting claims against others who it believes are infringing its rights and by defending claims of intellectual property infringement brought by its competitors and others. Burcon's involvement in any such intellectual property litigation could result in significant expense incurred by Burcon, adversely affecting the development of product candidates or sales of such challenged product or intellectual property and diversion of efforts of Burcon's technical and management personnel, whether or not such litigation is resolved in Burcon's favour. Some of Burcon's competitors may be able to sustain the costs of complex patent litigation more effectively than Burcon because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on Burcon's ability to continue its operations. In the event of an adverse outcome as a defendant in any such litigation, Burcon may, among other things, be required to:
• pay substantial damages;
• cease the development, manufacture, use or sale of product candidates or products that infringe upon the intellectual property of others;
• expend significant resources to design around a patent or to develop or acquire non-infringing intellectual property;
• discontinue processes incorporating infringing technology; or
• obtain licenses to the infringing intellectual property.
No assurance can be provided that Burcon would be successful in such development or in the acquisition of non-infringing technology or that such licenses for such infringing technology would be available upon reasonable terms, if at all. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could have a material adverse effect on Burcon's business and financial results. If Burcon does not obtain such licenses, it could encounter delays in the introduction of products or could find that the development, manufacture or sale of products requiring such licenses could be prohibited.
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Should third parties file patent applications, or be issued patents claiming technology also claimed by Burcon in pending applications, Burcon may be required to participate in interference proceedings with the United States Patent and Trademark Office, or other proceedings outside the United States, including oppositions, to determine priority of invention or patentability, which could result in substantial cost to Burcon even if the eventual outcome were favourable to Burcon.
The Timeline for Development and Commercialization of New Food Products Can Be Long
Burcon acquired the initial canola protein extraction technology through Burcon-MB in October 1999. Since then, it has conducted research and development on a number of plant proteins. On June 18, 2012, Burcon announced that ADM has begun commercial production of CLARISOY® soy protein. Although Burcon announced that ADM had successfully commissioned the first full-scale CLARISOY® production facility in November 2016, the parties agreed to terminate the ADM License and Production Agreement in August 2020. Burcon must secure a strategic partner for its soy proteins. If Burcon is unable to secure an alternative strategic partner for its soy proteins then the commercialization of its products may be delayed or unsuccessful. Burcon is investigating alternative paths to bring its soy protein technologies to market. Although Burcon is currently in discussions with potential partners to commercialize its soy proteins, there can be no assurance that a strategic partner will be found. On May 23, 2019, Burcon entered into the Original Shareholders' Agreement with the Other Shareholders to form Merit Foods to commercialize its pea and canola protein technologies. Although Merit Foods has completed the construction and commissioning of its first production facility, it has not begun to generate significant revenues from the sale of its products. There can be no assurance that any of Merit Foods' products will: obtain required regulatory approvals in countries where such approvals have yet to be sought; or be successfully marketed. For Burcon, there can be no assurance that the investment made in Merit Foods will be recouped through the royalties generated from sales of Merit Foods' products. With the exception of its canola and pea proteins, none of Burcon's other potential products are commercially available as a food ingredient for human consumption. The rising popularity of plant proteins has resulted in more companies entering the market to produce plant proteins that could compete with Burcon's proteins. Even if Burcon commercializes a product or products, its business strategy may not be successful.
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Burcon Has a History of Net Losses and Negative Operating Cash Flow and May Never Achieve Profitability
Burcon has accumulated net losses of approximately $109.2 million from its date of incorporation through March 31, 2022. Burcon reported minimal royalty revenue during fiscal 2013 to 2021 from the ADM License and Production Agreement before it was terminated in August 2020. Although Merit Foods has completed construction and commissioning of it first production facility and achieved first commercial production of its Puratein® canola proteins in April 2021, the magnitude of future royalty payments from Merit Foods cannot be ascertained at this time. In the absence of a definitive time for when sales of products will be significant, Burcon expects its accumulated net losses will increase as it continues to commercialize its products, its research and development and its product application trials. Burcon expects to continue to incur substantial losses for the foreseeable future. Burcon cannot predict if it will ever achieve profitability and, if it does, it may not be able to sustain or increase its profitability.
Burcon's ability to achieve and maintain profitability will depend on, among other things, the market's acceptance of any of its products that receive regulatory approval. The commercial success of any of Burcon's products will depend on whether:
• they receive public and industry acceptance as a food ingredient and dietary supplement; and
• they may be sold at competitive prices or are able to obtain sufficient royalty revenue from licensing which adequately exceeds Burcon's production (or business) costs.
Market Conditions
During fiscal year 2022, Burcon received proceeds from the exercise of warrants issued in connection with the 2020 Offering and stock option exercises by employees. In June 2022, Burcon entered into the 2022 Loan Agreement with Large Scale pursuant to which Large Scale will provide Burcon with a secured loan of up to $10 million which will be made available in two tranches. Given that the first tranche is currently available, Burcon has sufficient funds to operate until July 2023. Upon satisfaction of certain conditions, Burcon will be able to draw on the second tranche, giving Burcon sufficient funds to operate until February 2024. It may need to raise capital beyond this date in order to meet its business objectives. However, the inherent risk in investing in companies such as Burcon may make it difficult for the Company to obtain capital and financing for its operations. Market-wide retracement for the plant-based industry may negatively impact Burcon's access and ability to raise capital. There can be no assurance that additional financing will be available on acceptable terms, if at all.
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Financing Requirements
Since acquiring Burcon-MB on October 8, 1999, Burcon has raised gross proceeds of approximately $107.7 million from the sale or issuance of equity securities. Developing Burcon's products and conducting product application trials is capital intensive. As at the March 31, 2022 balance sheet date, Burcon had approximately $7.0 million in cash and cash equivalents. Management estimates that these cash resources together with the first tranche of the 2022 Large Scale Loan are sufficient to continue the current level of operations until July 2023. Upon satisfaction of certain conditions, Burcon will be able to draw on the second tranche, giving Burcon sufficient funds to operate until February 2024. Although Merit Foods has completed construction and commissioning of the production facility for Burcon's pea and canola proteins, it will be some time before Burcon receives significant royalty revenues from sales by Merit Foods of its pea and canola proteins. If Burcon does not receive sufficient royalties from Merit Foods under the Amended and Restated License Agreement, Burcon may need to raise additional capital to fund its objectives and operations beyond this date. Additional financing may not be available on acceptable terms, if at all. If Burcon raises funds by issuing more equity securities, holders of common shares will experience dilution. If Burcon is unable to raise additional funds when it needs them, it may be required to delay, reduce or eliminate some or all of its development programs and some or all of its product application trials. Burcon may also be forced to license technologies to others that it would prefer to develop internally.
Product and Market Related Risks
The long-term success of Puratein®, Supertein® and Nutratein® canola proteins, CLARISOY® soy protein and Peazazz® and Peazac® pea protein and Nutratein® pea protein/canola protein blend products hinges upon market acceptance by food and feed ingredient manufacturers and suppliers in numerous product applications. Although Merit Foods has commissioned its facility to commercialize Burcon's pea and canola proteins, the commercial products manufactured using Burcon's protein and extraction technologies must exhibit certain functional and nutritional characteristics to garner any market share in the industries that are targeted. There can be no assurance that Burcon's products will meet industry standards. Even though Puratein®, Supertein® and Nutratein® canola proteins, CLARISOY® soy protein and Peazazz® and Peazac® pea proteins and Nutratein® pea protein/canola protein blend products may be found to be functionally acceptable in product applications, there is no assurance that they will obtain market acceptance and within a reasonable time frame. Although Merit Foods has completed construction and commissioning of its first production facility for Burcon's pea and canola proteins, it may be some time before product sales of pea and canola protein will be significant. Until large quantities of products can be supplied, market acceptance of Puratein®, Supertein®, and Nutratein® canola proteins, and Peazazz® and Peazac® pea proteins and Nutratein® pea protein/canola protein blend products may be delayed.
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There are many large companies in the marketplace that manufacture and produce mature and well-known protein ingredients that have been used for many years. These companies also possess far greater financial, marketing and human resources than Burcon. Products such as dried egg white and soy protein isolate have been used in the food processing industry for years with successful results. These protein ingredients are proven to be functional, technologically sound, readily available and reliable. Burcon recognizes that it must devote resources and energy over a long period of time to develop these markets as they tend to be quite conservative. Food companies rely on taste, appearance and health appeal to sell their products and they are unlikely to accept even a lower priced product without comparable or superior functionality. Major companies in the food processing industry have invested hundreds of millions of dollars in brand and product development and will avoid ingredients or processes that may be of questionable or unproven benefit.
Consumer Acceptance
There is a continuing public issue regarding food products derived from genetically modified organisms ("GMOs"). Genetic modification, where a plant's genetic makeup is altered by insertion, deletion or reversal of genes, often from an entirely different organism, should not be confused with traditional plant breeding techniques which have been used for generations to selectively breed plants with desirable traits. In fact, canola is a variation of rapeseed developed by Canadian plant breeders using traditional techniques.
The GMO debate centres on the issue of whether food products derived from GMOs pose potential health risks to consumers and/or the environment. Burcon's processes for extracting a proteins from canola meal and soy are equally effective with starting materials from either GM or non-GM sources and can also utilize oilseed meals other than canola or soy. Therefore, if Burcon chooses to use starting materials from a GMO source, the resultant proteins may be less acceptable to some consumers.
Government Regulatory Approval
The approval, manufacture and sale of food ingredients in Canada, the United States and Europe, such as Burcon's products, are governed by regulatory regimes in those countries which require a manufacturer to be able to demonstrate a product's safety. In order to obtain approval to market a product, a manufacturer may be required to undertake controlled research and testing, which will be subject to government review and approval. There is a risk that government approval may not be received in a timely fashion or at all. See "Obtaining Regulatory Approval for Marketing Puratein®, Supertein® and Nutratein® Canola Proteins".
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Rapid Technological Change
The food processing industry is subject to rapid and substantial technological change. There can be no assurance that developments by others will not render Burcon's products or technology non-competitive or that Burcon will be able to keep pace with technological developments.
Significant Competition
Technological competition among food industry participants is intense and is expected to increase. Many competitors and potential competitors of Burcon have substantially greater product development capabilities and financial, scientific, marketing, and human resources than Burcon. The plant protein industry has experienced significant growth with increased participation by competitors wanting to seize the opportunity to capture market share. Other companies may succeed in developing products earlier than Burcon, obtaining regulatory approvals for such products more rapidly than Burcon or in developing products that are more effective than those proposed to be developed by Burcon. While Burcon will seek to expand its technological capabilities in order to remain competitive, there can be no assurance that research and development by others will not render Burcon's technology or products obsolete or non-competitive.
Lack of Commercial Manufacturing Experience
Burcon has not yet manufactured any products in substantial quantity. To be successful, Burcon's products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable cost. Although Burcon is in discussions with potential strategic partners to commercialize its soy and hemp protein technologies, there can be no assurance that a suitable partner will be found. Even though Merit Foods has completed construction and commissioning of a production facility for Burcon's pea and canola proteins, significant sales have not occurred as of the date of this AIF. Although the Other Shareholders and Bunge have experience in the protein production and sales industry, no assurance can be given that management of Merit Foods will be successful in producing and selling Burcon's pea and canola proteins.
Ability to Hire and Retain Key Personnel
Burcon is highly dependent on its senior management and scientific and technical personnel. The competition for qualified personnel in the food industry is intense, and Burcon relies heavily on its ability to attract and retain qualified managerial, scientific and technical personnel. In addition, Burcon's ability to manage growth effectively will require it to continue to implement and improve its management systems and to recruit and train new employees. Burcon believes that it has developed an employee compensation structure that is competitive with similar companies in the market. However, there can be no assurance that Burcon will be able to attract and retain skilled and experienced personnel.
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Reliance on Key Personnel
Burcon is dependent on certain members of its management and the loss of the services of one or more of these individuals could adversely affect the Company. After more than 23 years at Burcon, Mr. Johann Tergesen stepped down as President and Chief Executive Officer of Burcon at the end of February 2022. Mr. Kappel was appointed as Burcon's interim Chief Executive Officer on March 1, 2022. Although Burcon has engaged Kincannon & Reed to conduct an executive search, the search for a permanent chief executive officer is continuing. Neither Burcon nor Burcon-MB has purchased key man insurance on behalf of any member of Burcon's and/or Burcon-MB's senior management.
Product Liability
Food products involve an inherent risk of product liability claims and associated adverse publicity. There can be no assurance that Burcon and/or Merit Foods will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of Burcon's potential products.
Nasdaq Listing - Inability to Meet Listing Standards
Although Burcon's common shares were re-listed The NASDAQ Capital Market ("NASDAQ Capital Market") on May 25, 2021 under the symbol "BRCN", the Company received a letter from the Listings Qualifications Department of NASDAQ on April 1, 2022 notifying the Company that it was not in compliance with Listing Rule 5550 (a)(2), which requires the listed securities of the Company to maintain a minimum bid price of US$1 per share. The Company had not met the requirement for a period of 30 consecutive business days prior to receipt of the NASDAQ letter. The Company has a compliance period of 180 calendar days or until September 28, 2022 , to regain compliance with NASDAQ's minimum bid price requirement. If at any time during the compliance period the Company's closing bid price is at least US$1 for a minimum of 10 consecutive business days, NASDAQ will provide Burcon with a written confirmation of compliance and the matter will be closed. In the event the Company does not regain compliance by September 28, 2022, the Company may be eligible for additional time to regain compliance or may face delisting. Burcon's management is reviewing various options available to the Company in order to regain compliance and continued listing on the Nasdaq Capital Market.
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The delisting of Burcon's common shares from the Nasdaq Capital Market could negatively impact Burcon because it: (i) could reduce the liquidity, and possibly the market price, of our common shares; (ii) could reduce the number of US investors willing to hold or acquire our common shares, which could negatively impact Burcon's ability to raise equity financing; and (iii) would limit Burcon's ability to use certain types of a registration statements in the United States to offer and sell freely tradable securities, thereby preventing the Company from accessing the US public capital markets
COVID-19 - Pandemic Risk
The COVID-19 outbreak was declared as a pandemic by the World Health Organization on March 11, 2020. Globally, governments worldwide focused on containment of the outbreak and the prevention of further spread. Since the outbreak, global economies have been impacted as governments have imposed restrictions such as travel bans, self-imposed quarantines, social distancing and temporary closures of non-essential businesses. While economies began to slowly reopen in June 2020 after an initial lockdown, governments were required to reinstate lockdowns and closures when infection rates returned at the end of 2020 and early 2021. Since March 2021, the supply of vaccines has become more secure in Canada. Immunization rates are continuing to improve in Canada, the United States and many developed countries in world. However, the threat of the COVID-19 pandemic on the world economy is expected to remain until immunization rates in developing countries improve. The emergence of COVID variants continues to create uncertainty for economies worldwide. The duration and long-term effects of the COVID-19 pandemic is unknown at this time. Even though governments worldwide, including Canada, have implemented significant monetary and fiscal relief programs designed to stabilize their economies, it is too early to predict the efficacy of such programs at this time. Since March 2020, Burcon implemented measures to ensure the safety of work conditions for its staff at the Winnipeg Technical Centre and at its head office in Vancouver. Burcon's operations have not been significantly impacted by the COVID-19 pandemic. While the COVID-19 pandemic has caused certain disruptions and delay in and Merit Foods' business operations to-date, Burcon does not believe that such disruptions have caused any significant adverse effect on Merit Foods' business. However, it is not possible to predict how long the pandemic will continue to last and whether the financial and business conditions of Burcon and Merit Foods will be impacted in future periods.
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DIVIDEND RECORD AND POLICY
There are no restrictions that could prevent Burcon from paying dividends provided that Burcon has retained earnings from which such dividends can be paid. Burcon has not declared any dividends on its Common Shares. The Company's directors have determined that dividends will not be paid until a number of years after it receives revenues from the commercial production of its products, and will only be paid if the directors believe that to do so would be in the best interests of the Company and its shareholders.
DESCRIPTION OF CAPITAL STRUCTURE
The authorized share capital of Burcon consists of an unlimited number of Common Shares without par value. Each holder of Common Shares is entitled to one vote in respect of each Common Share held by such holder at meetings of shareholders. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary or any other distribution of its assets among its shareholders, the holders of Common shares will be entitled to receive the remaining property or assets of the Company available for distribution pro rata, in proportion to the number of Common Shares held. As at June 27, 2022, 108,728,742 Common Shares were issued and outstanding. In addition, the Company has 5,321,148 outstanding incentive options to purchase Common Shares and 118,000 restrictive share units redeemable into Common Shares as at June 27, 2022.
MARKET FOR SECURITIES
The Common Shares are listed and trade on the TSX under the symbol "BU" since June 18, 2009 and the NASDAQ Capital Market under the symbol "BRCN" since May 25, 2021. The following table sets forth, for the periods indicated, the reported high and low closing prices and total volume of trading of the Common Shares on the TSX (Canadian dollars):
|
|
TORONTO STOCK EXCHANGE§ |
||
|
Calendar Period |
High* (C$) |
Low* (C$) |
Total Volume |
|
April 2021 |
5.65 |
4.64 |
5,361,833 |
|
May 2021 |
4.87 |
3.8 |
4,906,573 |
|
June 2021 |
4.46 |
3.42 |
4,008,590 |
______________________________________
§ Source: money.tmx.com
* Includes intra-day highs and lows
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|
|
TORONTO STOCK EXCHANGE§ |
||
|
Calendar Period |
High* (C$) |
Low* (C$) |
Total Volume |
|
July 2021 |
3.76 |
2.87 |
3,422,381 |
|
August 2021 |
3.5 |
2.42 |
3,012,049 |
|
September 2021 |
3.09 |
1.95 |
3,924,274 |
|
October 2021 |
2.15 |
1.58 |
3,525,007 |
|
November 2021 |
1.99 |
1.41 |
2,507,952 |
|
December 202 |
1.78 |
1.30 |
3,131,497 |
|
January 2022 |
1.61 |
1.14 |
2,647,525 |
|
February 2022 |
1.48 |
1.02 |
2,017,409 |
|
March 2022 |
1.31 |
0.95 |
2,112,759 |
PRIOR SALES
| Number of Common Shares |
Issue/ Exercise/ Conversion Price |
Date Issued | Description of Issuance |
| 1,736 | $0.69 | April 12, 2021 | Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
| 5,000 | $2.00 | April 22, 2021 | Exercise of warrants issued under the 2020 Offering |
| 17,500 | $2.00 | April 26, 2021 | Exercise of warrants issued under the 2020 Offering |
| 4,000 | $0.69 | April 30, 2021 | Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
| 4,000 | $0.23 | April 30, 2021 | Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
| 6,000 | $2.00 | May 5, 2021 | Exercise of warrants issued under the 2020 Offering |
- 62 -
| Number of Common Shares |
Issue/ Exercise/ Conversion Price |
Date Issued | Description of Issuance |
|
8,000 |
$2.00 |
May 11, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
1,250 |
$2.00 |
May 21, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
1,050 |
$2.33 |
June 4 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
|
7,500 |
$2.00 |
June 7, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
500 |
$2.00 |
June 9, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
3,707 |
$0.23 |
July 21, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
|
100 |
$1.88 |
August 11, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
|
50,000 |
$2.00 |
August 13, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
3,024 |
$0.69 |
August 19, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
|
29,900 |
$1.88 |
September 3, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option Plan |
|
9,000 |
$2.00 |
September 7, 2021 |
Exercise of warrants issued under the 2020 Offering |
|
1,000 |
$2.00 |
September 10, 2021 |
Exercise of warrants issued under the 2020 Offering |
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| Number of Common Shares |
Issue/ Exercise/ Conversion Price |
Date Issued | Description of Issuance |
|
24,600 |
$0.23 |
September 10, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
19,650 |
$0.69 |
October 15, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
26,550 |
$0.23 |
October 15, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
1,800 |
$1.88 |
October 15, 2021 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
14,666 |
$0.69 |
January 25, 2022 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
36,666 |
$0.23 |
January 25, 2022 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
18,166 |
$0.23 |
February 22, 2022 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
|
2,000 |
$0.23 |
March 25, 2022 |
Exercise of options granted under the Company's Amended and Restated 2001 Share Option |
The following securities convertible into common shares were issued during the fiscal year ended March 31, 2022:
Options
|
Number of Options |
Exercise Price |
Date of Issue |
Description of Issuance |
|
88,000 |
$4.89 |
April 14, 2021 |
Options granted pursuant to the Company's Amended and Restated 2001 Share Option Plan. |
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|
Number of Options |
Exercise Price |
Date of Issue |
Description of Issuance |
|
50,000 |
$2.99 |
July 20, 2021 |
Options granted pursuant to the Company's Amended and Restated 2001 Share Option Plan. |
|
50,000 |
$1.90 |
November 10, 2021 |
Options granted pursuant to the Company's Amended and Restated 2001 Share Option Plan. |
|
1,057,000 |
$1.29 |
February 10, 2022 |
Options granted pursuant to the Company's Amended and Restated 2001 Share Option Plan. |
Restricted Share Units
|
Number of Restricted Stock Units |
Date of Issue |
Description of Issuance |
|
121,000 |
February 10, 2022 |
Restricted share units granted pursuant to the Company's Restricted Share Unit Plan |
DIRECTORS AND OFFICERS
Directors and Officers
The following chart sets out the name, province or state and country of residence of each director and officer of the Company, each such person's principal occupation during the past five years, the period of time each has served as a director or officer of the Company and the Common Shares beneficially owned or controlled by each of them as at June 27, 2022. A biography of each director and officer, which includes a five year history of employment, follows under "Biographies of Directors and Officers". The term of office of each director will expire at the conclusion of the Company's next annual meeting.
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|
Name, Position |
Principal Occupation |
Period as a |
Common |
Options |
|
Rosanna Chau, Director, |
Executive Director of ITC Properties Group Limited ("ITC Properties"); Director of certain subsidiaries of PT International Development Corporation Limited ("PT International") (formerly known as ITC Corporation Limited) (investment holding) until September 2019; Deputy Chairman and Executive Director of PT International until December 2017 |
Since November 3, 1998 |
850,022 |
235,844 |
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|
Name, Position |
Principal Occupation |
Period as a |
Common |
Options |
|
David Lorne John Tyrrell, Lead Director, Alberta, Canada |
Lead Director of Burcon since March 1, 2022, Chairman of the Board of Burcon from January 2019 until September 15, 2021; Director, Li Ka Shing Institute of Virology & Distinguished University Professor, University of Alberta since April 2010; Glaxo SmithKline Chair in Virology, Department of Medical Microbiology and Immunology, University of Alberta since 2004; Chief Scientific Officer of KMT Hepatech (biotechnology company in Edmonton) from 2004 to 2017; Professor of Medical Microbiology & Immunology, University of Alberta since 1982 |
Since December 1, 2009 |
959,819** |
300,844 |
|
Alan Chan, Director, Hong Kong, China |
Executive Director of ITC Properties Group Ltd. (property development and investment) since March 2010; Executive Director of PT International Development Corporation Ltd. (formerly ITC Corporation Limited) (investing holding) from March 2009 to March 2017; Executive director of Blue River Holdings Limited ("Blue River") (formerly PYI Corporation Limited) from November 2011 to July 2016; Non-executive director of Blue River from July 2016 to April 2017 |
Since April 20, 2010 |
22,866,574łł |
265,844 |
______________________________________
** 26,819 of these Shares are held by Kathleen Tyrrell (daughter) and 27,046 of these Shares are held by spouse, Lee Ann Tyrrell as at June 27, 2022.
łł Alan Chan's wholly-owned company, Firewood Elite Limited, held through its wholly-owned subsidiaries Large Scale Investments Limited and Great Intelligence Limited, 22,866,574 common shares of Burcon ("Common Shares"), representing 21.03% of the outstanding Common Shares of Burcon as at June 27, 2022.
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|
Name, Position |
Principal Occupation |
Period as a |
Common |
Options |
| J. Douglas Gilpin, Director, Alberta, Canada |
Consultant, providing corporate governance, corporate director and business advisory services; Retired KPMG from 1999-2020 | Since September 1, 2011 | NIL | 295,844 |
| Peter H. Kappel, Chairman of the Board of Burcon, Director & Interim Chief Executive Officer, British Columbia, Canada |
Corporate Director; Interim Chief Executive Officer from March 1, 2022 to present | Since January 28, 2016 | 952,206‡‡ | 332,502 |
______________________________________
‡‡84 of these Common Shares are held by Philip Kappel (son) and 296,495 of these Common Shares are held by Stefanie Kappel (spouse) as at June 27, 2022.
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|
Name, Position |
Principal Occupation |
Period as a |
Common |
Options |
|
Debora S. Fang, Director, London, United Kingdom |
Independent advisor, F&F Advisory from 2018 to present; VP, M&A, Unilever from 2013 to 2018 |
Since July 6, 2020 |
NIL |
130,000 |
|
Jeanne McCaherty, Director, Minnesota, United States of America |
Chief Executive Officer, Guardian Energy Management from 2016 to present; President, Kae Partners, LLC (2015 to present); Executive in Residence, Agspring - Leaworth, KS Private Equity Firm (2015 to 2016); Vice President, Regional Director of Texturizing Business Unit, Cargill, Inc. (2008 to 2015); prior thereto held various other executive management positions at Cargill Inc. |
Since July 8, 2021 |
NIL |
130,000 |
|
Alfred T. L. Lau, Director, British Columbia, Canada |
Director & Committee Member, WealthOne Bank of Canada ("WOBC") (2018 to present); Founder and Co-leader, Eastern Capital (2018 to present); Retired Partner, KPMG (1980 to 2017) |
Since September 15, 2021 |
NIL |
80,000 |
|
Jade Cheng, |
Chief Financial Officer and Treasurer of Burcon; Director and President of Burcon Group Limited from July 2007 to March 2022; Director and President of Regent Park Realty Inc. (real estate brokerage company) from May 1998 to September 2021 |
n/a |
455,362 |
497,727 |
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|
Name, Position |
Principal Occupation |
Period as a |
Common |
Options |
| Randy Willardsen, Senior Vice-President, Process, California, United States of America |
Senior Vice-President, Process of Burcon; President, Willardsen Consulting & Engineering, Inc. (agriculture and biotech industries consulting services) | n/a | 830,016 | 486,659 |
| Dorothy Law, Senior Vice-President, Legal, Corporate Secretary, British Columbia, Canada |
Senior Vice-President, Legal of Burcon since September 2009; Corporate Secretary of Burcon since September 2000; Director, Secretary and Corporate Counsel of Burcon Group Limited until March 2022 (investment company) | From December 1998 to April 2010 | 587,004 | 509,727 |
| Martin Schweizer, Vice-President, Technical Development, Manitoba, Canada |
Vice President, Technical Development of Burcon since September 2009 | n/a | 164,494 | 507,727 |
| TOTAL SECURITIES | 27,665,497 | 3,772,718 |
Committees
Burcon does not have an executive committee of its directors. Burcon has an audit committee, a corporate governance and nominating committee, a compensation committee and a strategic planning committee. The members of the audit committee consist of J. Douglas Gilpin, Alfred Lau and Lorne Tyrrell. The members of the corporate governance and nominating committee consist of Lorne Tyrrell, Debora Fang, Jeanne McCaherty and Alfred Lau. The members of the compensation committee consist of Debora Fang, Doug Gilpin and Jeanne McCaherty. The members of the strategic planning committee consist of Alan Chan, Debora Fang, Peter H. Kappel, Jeanne McCaherty and Lorne Tyrrell.
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Aggregate Ownership of Securities
As at June 27, 2022, directors and officers of Burcon as a group, beneficially owned, directly or indirectly, 27,665,497 or 25.44% of the issued and outstanding Common Shares of the Company. As at June 27, 2022, directors and officers of Burcon and its subsidiaries held options to acquire an additional 3,772,718 Common Shares. Director and officers of Burcon do not hold any restricted share units.
Biographies of Directors and Officers
Rosanna Chau - Director
Ms. Chau is an executive director of ITC Properties Group Limited ("ITC Properties"). Ms. Chau has over 41 years of experience in international corporate management, strategic investments and finance. Throughout her career, she has served on the board of directors of twelve publicly-listed companies spanning multiple industries, including property, hotel, bio-tech, construction and building materials, pharmaceuticals, entertainment, and consumer electronic products, and geographical locations, including Hong Kong, Mainland China, Macau, the United States, Canada, Singapore, Australia and Europe. Ms. Chau holds a Bachelor's Degree in Commerce at the University of Alberta and a Master's Degree in Commerce at the University of New South Wales and has been awarded the Certificate in Traditional Chinese Medicine: A Way to Health at the Chinese University of Hong Kong. She has professional accounting qualifications and experience in different jurisdictions and is a fellow member of the Hong Kong Institute of Certified Public Accountants and the CPA Australia and a member of the Chartered Professional Accountants of British Columbia.
David Lorne John Tyrrell - Director
Dr. Lorne Tyrrell is a distinguished professor in the Department of Medical Microbiology and Immunology at the University of Alberta. Since 1986, he has focused his research on viral hepatitis. Supported by Canadian Institute of Health Research and Glaxo Canada, Dr. Tyrrell's work on the development of antiviral therapy resulted in the licensing of the first oral antiviral agent to treat chronic hepatitis B infection - lamivudine - in 1998. Dr. Tyrrell holds more than 60 international patents for his studies on viral hepatitis and other viral diseases. Dr. Tyrrell was Dean of the Faculty of Medicine and Dentistry from 1994 - 2004 at the University of Alberta and was the Chair of the Board of Directors of the Gairdner Foundation from 2009 - 2019. The Canada Gairdner International Awards recognizes excellence in medical science research globally. Dr. Tyrrell has received numerous prestigious awards including the Gold Medal of the Canadian Liver Foundation (2000), the FNG Starr Award of the Canadian Medical Association (2004), the Principal Award of the Manning Awards Foundation (2005) and the Queen Elizabeth II Diamond Jubilee Medal (2012). Dr. Tyrrell was appointed Officer of the Order of Canada in 2002. In April 2010, Dr. Tyrrell was appointed as the founding director of the Li Ka Shing Institute of Virology at the University of Alberta. On April 28, 2011, Dr. Tyrrell was inducted to the Canadian Medical Hall of Fame. In 2015, he was awarded the Canada Council for the Arts Killam Prize in Health Sciences. In 2021, he was awarded the Henry G. Friesen International Prize in Health Research and the 2022 Baruch S. Blumberg Prize from the Hepatitis B Foundation.
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Alan Chan - Director
Mr. Chan is an executive director of ITC Properties Group Limited ("ITC Properties"). At ITC Properties, Mr. Chan is involved with the investment and development of commercial, hospitality and residential projects. In addition, he is the lead in developing new policies for green and sustainable practices throughout the group. Prior to joining ITC Properties, Mr. Chan worked in the Investment Banking Division of Goldman Sachs Group with a focus on capital raising, mergers & acquisitions and strategic advisory for financial institutions in Greater China and Southeast Asia. Mr. Chan is a graduate of Duke University majoring in Political Science - International Relations and minoring in Philosophy and Economics.
J. Douglas Gilpin - Director
Douglas Gilpin, FCA, FCPA, ICD.D., retired from the partnership of KPMG LLP in 1999. In 2008, Mr. Gilpin received a Life Service Award from The Institute of Chartered Accountants of Alberta in recognition of 40 years experience in delivering professional services to business and the community. During his 18 years tenure as a partner in Advisory Services at KPMG he served as an audit engagement partner. He was a member of the KPMG's National Quality Assurance, the National Financial Institutions and Insurance Groups and he was the Quality Assurance Partner for the Edmonton office for 10 years. Mr. Gilpin has consulted on corporate governance, including compliance with the Sarbanes Oxley Act 404 and National Instrument 52-109 reporting for issuers listed on the Toronto Stock Exchange. Mr. Gilpin has served as a director of Canada Health Infoway ("CHI"), Afexa Life Sciences Inc., Alberta Innovates (formerly Alberta Innovates Technology Futures) ("AITF") and on the Board of the Health Quality Council of Alberta ("HQCA"). He was the chair of the governance committee and a member of the audit committee of CHI, and was the Chair of the audit committee for each of AITF and HQCA. He currently is a director and chair of the audit committee of The Institute of Health Economics. Mr. Gilpin is executive chair of The Inspections Group Inc., a privately owned company that performs safety code inspection services, building, plumbing and gas and electrical inspections in compliance with the Safe Codes Act of Alberta. Mr. Gilpin is a member of the Institute of Corporate Directors and received his ICD.D. designation from the Institute in 2011. Mr. Gilpin was elected as Fellow of the Institute of Chartered Accountants of Alberta in 2012.
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Peter H. Kappel - Chairman of the Board, Director and Interim Chief Executive Officer
Mr. Kappel is a former investment banker who now manages a private investment portfolio. A former chartered accountant with KPMG in Vancouver and Frankfurt, he made the transition to investment banking with JP Morgan (New York/Frankfurt) after business school. He also served in senior roles at Nomura, Dresdner Kleinwort Wasserstein, Calyon and DVB Bank in London. In the latter three, he was the Managing Director in charge of their respective European Securitisation businesses. He holds an MBA from the Institut Européen d'Administration des Affaires ("INSEAD"), a Bachelor of Arts (Honours) degree in Economics from the University of Victoria and received his Chartered Accountant designation through the Institute of Chartered Accountants of British Columbia.
Debora Fang - Director
Ms. Debora Fang has 20 years' experience in the Fast Moving Consumer Goods industry, across mergers and acquisitions, strategy, finance and marketing roles in Unilever (London, UK), Danone (Paris, France and Amsterdam, Netherlands), Kraft Foods (Sao Paulo, Brazil) and as a consultant for Bain & Company (Los Angeles, USA). While at Unilever as VP Mergers & Acquisitions, Ms. Fang was responsible for a range of acquisitions and disposals in the Foods, Ice cream and Tea categories, leading multidisciplinary teams and covering a global scope. She is now an independent advisor for Private Equity and strategic clients in the Foods and Beverage space as well as a private investor. Ms. Fang holds an MBA from the Kellogg Graduate School of Management at Northwestern University in Chicago, USA and a Bachelor of Arts in Business from the University of Sao Paulo, Brazil.
Jeanne McCaherty - Director
Ms. McCaherty is the Chief Executive Officer of Guardian Energy Management, an ethanol manufacturing company with production sites in Ohio, Minnesota and North Dakota. These corn dry milling sites produce ethanol, DDGS (distiller's dried grains with solubles) and corn oil. Prior to joining Guardian in 2016, Ms. McCaherty spent a year consulting in Private Equity in the areas of specialty grains and value-added ingredients. The majority of Ms. McCaherty's career was in various global management roles in Cargill, Inc. The most recent Cargill role was as the Regional Director of the Global Texturizing Business Unit. This business sourced raw materials, manufactured, and sold specialty food ingredients to Food companies around the world. Ms. McCaherty's R&D career culminated in the position of VP/Global Director of Food R&D. This role included functional leadership for the Basic and Applied R&D, Applications and Sensory groups for Cargill's Global Food Ingredients businesses. Ms. McCaherty currently serves as the Chair of the RF A (Renewable Fuels Association) and on the Board of Directors for RPMG (Renewable Products Marketing Group).
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Alfred T. L. Lau - Director
Mr. Lau is a Director of WealthOne Bank of Canada ("WOBC"), a Canadian Schedule I Bank. In addition, he is the founder and co-leader of a private equity firm with operations in Hong Kong and Beijing. Prior to his current role, Mr. Lau was a partner of KPMG with over 35 years of experience at key locations around the world, including Beijing, Vancouver and London. He has held senior positions within KPMG including co-leader of the audit practice in Beijing and co-leader of the China Practice in Canada. He was the Audit Engagement Partner for a number of multi-national Fortune 500 companies and listed companies on the TSX. Mr. Lau has been an independent member of the WOBC Board of Directors since 2018 and currently sits on the Audit and Credit Review Committees. Moreover, Mr. Lau is a former director and Chairman of the Audit Committee of SUCCESS, one of the largest non-profit organizations in Canada. He is fluent in Mandarin and Cantonese and has a solid understanding of the business and operating environment in Canada and China. He graduated from the University of British Columbia with a Bachelor of Commerce degree in 1980 and received his Chartered Accountant designation in 1982.
Jade Cheng - Chief Financial Officer and Treasurer
Ms. Cheng is a senior financial executive with over 25 years of experience. She has been with Burcon since inception and is responsible for its financial management, reporting and compliance. Prior to joining Burcon, Ms. Cheng held senior financial positions with a TSX-listed real estate development and ownership company and was a manager in Coopers & Lybrand's (now PricewaterhouseCoopers LLP) audit and assurance practice. Ms. Cheng holds a B.A. (Economics) and M.B.A. from the University of British Columbia and is a member of the Chartered Professional Accountants of British Columbia.
Randy Willardsen - Senior Vice-President, Process
Mr. Willardsen has over 32 years of experience in the fields of membrane filtration and food, dairy and biotechnology processes. Mr. Willardsen was the founder of Separation Technology, Inc., a leading supplier of membrane-based purification equipment and related services to the food industry with particular emphasis on dairy and beverage applications. Mr. Willardsen was also co-founder of both Inprotech Corporation, a supplier of high quality whey proteins to the U.S. market, and BioPlex Nutrition, a nutritional supplement company focused on formulated protein supplements. With BioPlex, he served as technical director, and oversaw manufacturing of all products until the company was sold in 1999. Most recently, Mr. Willardsen founded Gallo Protein, a partnership with Joseph Gallo Farms to produce highly purified whey protein isolates. Mr. Willardsen has worked with Burcon since April of 2001, and holds a Masters degree in Food Science and Nutrition from the University of Minnesota.
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Dorothy Law - Senior Vice-President, Legal and Corporate Secretary
Ms. Law was a director of Burcon from December 1998 to April 2010. Ms. Law joined the Burcon group of companies in August 1997 and acted as corporate counsel. Prior thereto, she was an associate at the law firm of Lang Michener LLP (now McMillan LLP), practising primarily in the areas of securities, corporate and commercial law. Ms. Law was called to the British Columbia Bar and admitted as a member of the Law Society of British Columbia in August 1996. Ms. Law holds a Bachelor of Laws degree and a Bachelor of Commerce degree from the University of British Columbia. Ms. Law was also admitted as a solicitor of the High Court of Hong Kong in May 1999. She is a non-practising member of the Law Society of Hong Kong.
Martin Schweizer - Vice President, Technical Development
Dr. Schweizer joined Burcon in May 2002 as a process-engineering specialist. He relocated from Nancy, France, where he earned his doctorate at the Institut National Polytechnique de Lorraine, with an emphasis on the enzymatic hydrolysis of rapeseed proteins. Prior to his Ph.D. work, Dr. Schweizer completed a chemical engineering degree (Dipl.-Ing) at the University of Karlsruhe, Germany, where he specialized in food process engineering and water technology. He has over 20 years of experience in research and development and his main expertise lies in the fractionation and purification of biochemical compounds using current state of the art technology such as membrane filtration, liquid chromatography and various extraction technologies, both aqueous and solvent based. Since January 2003, Dr. Schweizer has overseen Burcon's research and development efforts at its Winnipeg Technical Centre.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Other than as set out below, none of the directors or executive officers:
a) is, as at the date of the AIF, or was within 10 years before the date of the AIF, a director or chief executive officer or chief financial officer of any company (including Burcon) that:
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i) was the subject of an order (as defined in National Instrument 51-102F2) that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or
ii) was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer, or chief financial officer, and which resulted from an event that occurred while that person was acting in the capacity as a director, chief executive officer, or chief financial officer.
Except as set out below, none of the directors, executive officers or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company,
a) is at the date hereof, or has been within 10 years before the date of this AIF, a director or executive officer of any company (including Burcon) that while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;
b) has, within the 10 years before this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder;
c) has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or
d) has been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
Ms. Rosanna Chau was the Deputy Chairman and Executive Director of PT International (formerly ITC Corporation Limited ("ITC")), a company whose shares are listed on The Stock Exchange of Hong Kong Limited, up to December 28, 2017. On November 15, 2005 the Securities and Futures Commission (the "SFC") of Hong Kong criticized the board of directors of ITC for breaching Rule 21.3 of the Code on Takeovers and Mergers (the "Takeovers Code") in respect of the dealing in the securities of Hanny Holdings Limited by ITC during an offer period without the consent of the Executive Director of the Corporate Finance Division of the SFC. Rule 21.3 of the Takeovers Code restricts share dealings and transactions by an offeror and parties acting in concert with it during securities exchange offers. Hanny was involved in a securities exchange offer announced in April 2005. Since ITC held over 20% of the shares of Hanny, it was presumed to be acting in concert with Hanny under the Takeovers Code. Ms. Rosanna Chau was a director of ITC at that time.
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Conflicts of Interest
As of the date of this AIF, Mr. Alan Chan is the beneficial owner, and one of the directors of two shareholders of Burcon, Large Scale and Great Intelligence Limited, which together own approximately 22,866,574 common shares or 21.03% of the issued and outstanding common shares of Burcon. Ms. Rosanna Chau was a director of Large Scale and Great Intelligence Limited until December 14, 2021.
In connection with the Note, the Loan and the 2022 Large Scale Loan (the “Transactions”) as described in "General Development of the Business", Large Scale is a wholly-owned subsidiary of Firewood Elite Limited, a wholly-owned company of Mr. Alan Chan, who in turn is an insider and related party of Burcon.
The purpose and business reason for the Transactions were to raise funds so that Burcon could continue to meet its working capital requirements and use the funds for the purposes described above. The Purchase Agreement, the issuance of the Note, the Loan and the 2022 Loan Agreement were approved by the independent directors of the board of directors of Burcon, with Mr. Alan Chan and Ms. Rosanna Chau, abstaining from participating in the vote on the Purchase Agreement, the issuance of the Note and the Loan and Mr. Alan Chan abstaining from participating in the vote on the 2022 Loan Agreement.
Mr. Johann Tergesen (former President and Chief Executive Officer of Burcon), Mr. Peter Kappel and Dr. Lorne Tyrrell, insiders of Burcon, participated in the Convertible Debenture Offering in the principal amounts of $500,000, $1,000,000 and $500,000, respectively. The Convertible Debenture Offering was approved by the directors of the board of directors of Burcon, with Mr. Kappel and Dr. Tyrrell, abstaining from participating in the vote. An aggregate of $126,803 was paid to Mr. Kappel, Mr. Tergesen and Dr. Tyrrell as interest under the Convertible Debenture.
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The Company rented its head office premises from and shared certain office equipment with Burcon Group Limited ("Burcon Group") until April 23, 2020, after which, the property was sold to an unrelated third party. Jade Cheng and Dorothy Law, officers of the Company, were officers and directors of Burcon Group until March 31, 2022. Rosanna Chau, a director of Burcon, was a director of an indirect shareholder of Burcon Group until June 24, 2019. Ms. Chau, Ms. Cheng and Ms. Law do not have any shareholding interests in Burcon Group. During fiscal 2022, Burcon paid $0 (2021 - $4,584) to Burcon Group for the rental charges. In addition, administrative services are contracted with Regent Park Realty Inc. ("Regent Park"), a company that is controlled by an entity with common directors with the Company. For the year ended March 31, 2022, Burcon was charged $2,834 (2021 - $2,241) by Regent Park for these services. From April 1, 2021 to March 31, 2022, professional services provided by Burcon to Regent Park provided income to Burcon of $3,931 (2021 - $7,709). These transactions, occurring in the normal course of operations, are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Burcon has a Services Agreement with Merit Foods to provide technical, administrative and general management services, research and analytical services and sample production services based on rates set out in the Services Agreement. For the period March 31, 2022, Burcon charged $110,504 (2021 - $334,760) for services provided and $287 (2021 - $524,321) for samples sold to Merit Foods, of which $1,210 was included in amounts receivable at March 31, 2022 (March 31, 2021 - $66,709). See "Material Contracts".
NASDAQ Board Diversity Disclosure
NASDAQ's Board Diversity Rule was approved by the US Securities and Exchange Commission in August 2021. The rule requires companies to annually disclose board-level diversity statistics in the table below. As a foreign private issuer, Burcon complies with the rule given that it has at least two directors who have identified as "Diverse". Under the rule, Diverse means an individual who self-identifies as one or more of the following: Female, LGBTQ+, or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the Company's principal executive offices.
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|
Board Diversity Matrix (as of the date of the AIF) |
||||
|
Country of Principal Executive Offices |
Canada |
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|
Foreign Private Issuer |
Yes |
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Disclosure Prohibited under Home Country Law |
No |
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Total Number of Directors |
8 |
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|
|
Female |
Male |
Non- |
Did Not |
|
Part I: Gender Identity |
|
|||
|
Directors |
2 |
5 |
0 |
1 |
|
Part II: Demographic Background |
||||
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Underrepresented Individual in Home Country Jurisdiction |
0 |
|||
|
LGBTQ+ |
0 |
|||
|
Did Not Disclose Demographic Background |
1 |
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TRANSFER AGENTS AND REGISTRARS
The Company's transfer agent and registrar for its Common Shares is Computershare Investors Services Inc. at its principal transfer offices in Vancouver, British Columbia and Toronto, Ontario. In connection with the listing of the Company's Common Shares on the Nasdaq Capital Market, Computershare Trust Company, N.A. was appointed as co-agent in the United States.
MATERIAL CONTRACTS
Burcon is a party to the following material contracts, copies of which are available on SEDAR at www.sedar.com:
Loan Agreement with Large Scale Investments Limited
On June 20, 2022, Burcon and Large Scale entered into a loan agreement (the "2022 Loan Agreement")pursuant to which Large Scale will provide Burcon with a secured loan (the "2022 Large Scale Loan") of up to $10 million (the "Loan Amount"). Firewood is wholly-owned by Mr. Alan Chan, a director of Burcon. Upon the satisfaction of certain conditions with respect to each tranche, the Loan Amount will be available in two tranches of $5 million each. The first tranche, which is currently available to the Company, has a maturity date of July 1, 2024 and the second tranche will have maturity date that is 24 months from the closing date of such tranche (in each case, the "Maturity Date"). The Lender will be paid a commitment fee of 1% of the undrawn amount of the Loan Amount under each tranche on: (i) the closing date of such tranche and (ii) each annual anniversary of the closing date of such tranche. The drawn portion of the Loan Amount will bear interest at a rate of 8% per annum (the "Principal Balance"). Interest on the Principal Balance will accrue monthly, not in advance, and will be payable on the Maturity Date of the applicable tranche.
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Guarantees in connection with Agriculture and Agri-Food Canada loan to Merit Foods
On July 28, 2020, Her Majesty the Queen in Right of Canada as represented by the Minister of Agriculture and Agri-Food (the "Minister"), Merit Foods, Merit Foods' subsidiary, 11410083 Canada Ltd., Burcon Holdings and the Other Shareholders entered into the Repayable Contribution Agreement For The AgriInnovate Program (the "AIP Agreement") pursuant to which the Minister provided a $10 million 10-year interest free loan (the "AIP Loan") to Merit Foods and 11410083 Canada Ltd. (the "Recipients") for the purpose of facilitating the commercialization of a patent protected, world-leading plant protein extraction process for purposes of supporting the growth of the pea, pulses and canola industries. The interest free loan, repayable over 10 years, was approved under the Agriculture and Agri-Food Canada's AgriInnovate Program. Burcon Holdings and each of the Other Shareholders (each a "Guarantor" and together referred to as the "Guarantors") have provided guarantees to secure the obligations of the Recipients under the AIP Loan. Under the AIP Agreement, the Guarantors agreed to jointly and severally guarantee the performance of the obligations of the Recipients, including without limitation, the completion of the Project, administration of the AIP Agreement and the repayment of the funding provided by the Minister pursuant to the terms and conditions of AIP Agreement (the "Guarantee Obligations"). Burcon Holdings and the Other Shareholders entered into a Reciprocal Indemnity Agreement made as of July 23, 2020 (the "Indemnity Agreement") to set out the rights and obligations as between themselves in the event that any of them is called upon to make payment under any of the Guarantee Obligations in a manner that is disproportionate to their respective proportionate ownership interest in Merit Foods at the time the agreement was signed (referred to as their "Contributive Share").
Under the Indemnity Agreement, if any Guarantor (each, a "Paying Guarantor") is required to make payment under the Guarantee Obligations and any other Guarantor (each, a "Contributing Guarantor") has not made a corresponding payment equal to its Contributive Share, such Contributing Guarantor(s) shall pay the Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the Guarantee Obligations will have been borne by the Guarantors in their respective Contributive Share.
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Guarantees in connection with EDC and FCC financing of Merit Functional Foods Corporation
On April 24, 2020, Burcon signed a guarantee in favour of Export Development Canada ("EDC") for each of EDC's senior loan facility and subordinate loan facility and Farm Credit Canada ("FCC") to Merit Foods (the "Guarantees") pursuant to which Burcon agreed to guarantee all of the indebtedness, liabilities and obligations of Merit Foods under the loan agreements between EDC, FCC and Merit Foods. The aggregate maximum liability of Burcon under the Guarantees is limited to $4,000,000. The Guarantees contain provisions dealing with when Burcon's guarantee may be reduced in the event that Merit Foods is able to obtain certain other government sources of funding, subject to certain conditions being met.
In connection with the Investment and following the deposit by Merit Foods of $10 million of the proceeds of the Investment into a designated account, EDC and FCC released the Guarantees. See "General Development of the Business".
Reciprocal Indemnity for Guarantees in connection with EDC and FCC financing of Merit Functional Foods Corporation
In October 2021, the shareholders of the Other Shareholders (the "EDC Guarantors") provided guarantees in the aggregate amount of $10 million (the "EDC Guarantee") to EDC in order for Merit Foods to meet certain credit requirements required by EDC under the loan agreements with EDC. Burcon Holdings and the EDC Guarantors entered into a reciprocal indemnity agreement (the "EDC Indemnity Agreement"). Under the EDC Indemnity Agreement, if any EDC Guarantor (each, a "EDC Paying Guarantor") is required to make payment under the EDC Guarantee and any other EDC Guarantor and Burcon Holdings (each, a "EDC Contributing Guarantor") has not made a corresponding payment equal to its Contributive Share, such EDC Contributing Guarantor(s) shall pay the EDC Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the EDC Guarantee will have been borne by the EDC Guarantors in their respective Contributive Shares. Burcon Holdings' Contributive Share under the EDC Indemnity agreement was 44.44%. The obligations of Burcon Holdings and the EDC Guarantors would terminate upon the termination or release by EDC of the EDC Guarantors' obligations under the EDC Guarantee. Burcon's potential liability under the EDC Reciprocal Indemnity Agreement was approximately $4.44 million.
In October 2021, as a result of the Bunge October 2021 Investment (See "General Development of the Business"), the aggregate liability of the EDC Guarantors under the EDC Guarantee was reduced to $5.05 million, and Burcon's maximum liability under the EDC Indemnity Agreement was reduced to $2.24 million.
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In January 2022, FCC agreed to provide Merit Foods with a further credit facility of $10 million. In connection with the amendment of the FCC and EDC loan agreements, the EDC Guarantors and Burcon Holdings entered into an amended and restated reciprocal indemnity agreement (the "Amended and Restated Indemnity Agreement") to reflect the reduction in the EDC Guarantee amount to $5.05 million.
In May 2022, Burcon Holdings, Bunge and the Other Shareholders advanced an aggregate $10 million loan ("May 2022 Shareholder Loan") to Merit Foods to address liquidity requirements of Merit Foods as it ramps up production and sales at its pea and canola protein production facility. Burcon Holdings' proportionate share of the May 2022 Shareholder Loan was $3.16 million. The May 2022 Shareholder Loan has a term of 15 years, will initially be non-interest-bearing and have terms similar to previously advanced shareholder loans. The May 2022 Shareholder Loan will be subordinated to any indebtedness owed by Merit Foods to each of its financial lenders, whether secured or unsecured. As a result of the of May 2022 Shareholder Loan, EDC released the EDC Guarantors from the EDC Guarantee. Under the terms of the Amended and Restated Indemnity Agreement, the obligations of Burcon Holdings and the EDC Guarantors terminated upon the release by EDC of the EDC Guarantee.
Loan Agreement with Merit Functional Foods Corporation
On April 21, 2020 Burcon's wholly-owned subsidiary, Burcon NutraScience Holdings Corp. ("Burcon Holdings"), entered into a loan agreement (the "Loan Agreement") with Merit Foods pursuant to Burcon Holdings agreed to obtain a letter of credit ("LC") from HSBC Bank Canada in the amount of $6,500,000 with EDC as beneficiary. In connection with the loan facilities from EDC by Merit Foods (see "General Development of the Business" above), Merit Foods must fulfill various obligations including, without limitation, establishment and maintenance of a cost overrun account in a prescribed amount in connection with the costs related to the construction of the Flex Production Facility. $6,500,000 of this amount is permitted to be funded by way of letter of credit. To assist Merit Foods to fulfill this obligation, Burcon Holdings, through Burcon, obtained the LC from HSBC Bank Canada ("HSBC") which is secured by a cash deposit of the same amount with HSBC. The Loan Agreement was entered into by Burcon Holdings and Merit Foods to evidence the loan in the amount of $6,500,000 (the "Loan"). Under the terms of the Loan Agreement, Merit Foods acknowledges and agrees that it is indebted to Burcon Holdings for the Loan from the Advance Date and obligated to pay interest on the Loan. The term (the "Term") of the Loan and the commitment by Burcon Holdings to maintain the LC will terminate no later than September 30, 2020, unless extended by mutual agreement in writing between Burcon Holdings and Merit Foods. The principal amount of the Loan will bear interest at 5% per annum, compounded annually, and is payable by Merit Foods by way of a lump sum balloon payment at the end of the Term.
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Under terms of the Loan Agreement, Burcon Holdings has the option to contribute the amount of Loan as a capital contribution to Merit Foods in certain circumstances including if the other shareholders of Merit Foods are unable to deliver a letter of credit in favour of EDC for their entire pro rata share of the LC amount by September 30, 2020. The Loan Agreement contains provisions dealing with the calculation of change of shareholding interest of Burcon Holdings and the other shareholders of Merit Foods in such circumstance.
If EDC draws on the LC prior to September 30, 2020 and each of the other shareholders of Merit Foods are unable to reimburse Burcon Holdings for such other shareholder's entire pro rata share of the amount of such draw within the time period set out in the Loan Agreement, then the draw amount will be deemed a capital contribution by Burcon Holdings and Burcon Holdings' shareholding interest in Merit Foods will be increased. The Loan Agreement contains provisions dealing with the calculation of change of shareholding interest of Burcon Holdings and the other shareholders of Merit Foods in such circumstance.
In connection with the Investment and following the deposit by Merit Foods of $10 million of the proceeds of the Investment into a designated account, EDC also released and returned the LC to Burcon. See "General Development of the Business".
Merit Functional Foods Corporation - Unanimous Shareholders Agreement
On May 23, 2019, Burcon's wholly-owned subsidiary, Burcon NutraScience Holdings Corp., entered into a shareholders agreement (the "Original Shareholders Agreement") with RBT Holdco Ltd. ("RBT Holdco") and 10039406 Manitoba Ltd. ("Crew Holdco") (RBT Holdco and Crew Holdco together referred to as the "Other Shareholders") to become shareholders of Merit Functional Foods Corporation (formerly Burcon Functional Foods Corporation) ("Merit Foods"). Initially, Burcon Holdings held 40%, RBT Holdco held 40% and Crew Holdco held 20% of the issued and outstanding common shares of Merit Foods. Ryan Bracken and Barry Tomiski each hold a 50% interest in RBT Holdco. Crew Holdco is wholly-owned by Shaun Crew. The business of Merit Foods is the commercial production, sales, marketing and distribution worldwide of Burcon's pea protein, pulse protein and canola protein products. Pursuant to the Shareholders Agreement, the parties agreed that on or before July 2, 2019, Burcon Holdings and the Other Shareholders would make a capital contribution to Merit Foods by way of shareholder loans and/or subscription of shares in the aggregate of $10,000,000. Burcon Holdings agreed to make a capital contribution of $4,000,000 to Merit Foods (less certain deductions for certain expenses), while RBT Holdco and Crew Holdco agreed to contribute $4,000,000 and $2,000,000, respectively (each an "Initial Capital Contribution"). In the event that any of Burcon Holdings, RBT Holdco or Crew Holdco failed to contribute its respective Initial Capital Contribution on or before July 2, 2019, then the Shareholders Agreement would automatically terminate.
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Provided that the Shareholders Agreement had not been previously terminated, the parties agreed to make further contributions to Merit Foods on or before September 3, 2019 in the aggregate amount of $10,000,000. Burcon Holdings agreed to contribute a further $4,000,000 to Merit Foods, while RBT Holdco and Crew Holdco agreed to contribute $4,000,000 and $2,000,000, respectively (each an "Additional Capital Contribution"). In the event that any of Burcon Holdings, RBT Holdco or Crew Holdco failed to contribute its respective Additional Capital Contribution (a "Capital Deficiency"), any shareholder under the Shareholders Agreement that has contributed its full proportionate share of the Additional Capital Contribution may make a further capital contribution in the amount of the Capital Deficiency and the proportionate ownership of each shareholder will be adjusted accordingly. If Burcon Holdings only contributed its Initial Capital Contribution and not the Additional Capital Contribution while the remaining shareholders contribute their Initial Capital Contribution, Additional Capital Contribution and any Capital Deficiency, Burcon Holdings' ownership interest in Merit Foods would have been reduced to 20%.
On August 27, 2020, Burcon announced that Merit Foods received a $30 million investment (the "Investment") from a new equity partner, Bunge Limited. The Investment was completed by way of a subscription by Bunge for shares from treasury and the advancement of shareholder loans by Bunge. Concurrently with the Investment, Bunge purchased additional shares and debt from the Other Shareholders. As a result of the foregoing, Bunge initially owned a 25% equity interest in Merit Foods, Burcon owned a 33.33% equity interest in Merit Foods and the Other Shareholders owned, collectively, the remaining 41.67% equity interest in Merit Foods.
On August 27, 2020, Burcon Holdings entered into an amended and restated unanimous shareholders agreement (the "Amended and Restated Shareholders Agreement") with Bunge, the Other Shareholders, Tirem Holdings Limited Partnership and Burcon. Among other things, the Amended and Restated Shareholders Agreements sets out the respective rights and obligations of the shareholders of Merit Foods in respect of Merit Foods, the shares owned by the shareholders and the management and conduct of the business of Merit Foods, including matters requiring board of directors' approval or shareholder approval and the rights of the parties with respect to restrictions on transfers and transfers to third parties. On October 13, 2021, Bunge exercised its right to subscribe for additional common shares of Merit Foods for an aggregate subscription price of $4.95 million ("Bunge October 2021 Investment"). Following the Bunge October 2021 Investment, Bunge's ownership interest in Merit Foods increased to 28.91%. Burcon now owns a 31.6% equity interest in Merit Foods and the Other Shareholders now own, collectively, a 39.49% equity interest.
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The Amended and Restated Shareholders Agreement amends and restates the Original Shareholders Agreement.
Under the Amended and Restated Shareholders Agreement, Bunge has the right to acquire the balance of the Merit Foods shares owned by the Other Shareholders through a call option (the "Call Option"). The Amended and Restated Shareholders Agreement sets out the terms and conditions of the Call Option, including the circumstances under which the Call Option will vest and become exercisable. The principal intended trigger for the vesting of the Call Option is based on the completion, commissioning and demonstrated growth of Merit Foods' canola and pea protein production facility in Winnipeg, Manitoba. If and when Bunge exercises the Call Option to acquire the Merit Foods shares owned by the Other Shareholders, Burcon Holdings then has the right, but not the obligation, to sell all, but not less than all, of its interest in Merit Foods to Bunge at the equivalent valuation.
If Bunge exercises its Call Option to buy out the Other Shareholders, and thereby acquires majority ownership of Merit Foods, certain terms of the Amended and Restated Shareholders Agreement will come into effect, which changes are designed to align the interests of Bunge and Burcon. Such terms include, among other matters, that on the closing of the Call Option, Bunge will provide financing to Merit Foods on terms that are materially similar to those of Merit's existing third party financing arrangements. Merit Foods will use the proceeds from the financing to repay existing third party financing arrangements. Future financings will be provided to Merit Foods by Bunge from time to time, provided that the terms are no less favorable to Merit Foods than what could be obtained in a comparable arm's length transaction. Bunge has agreed that, for so long as it is a direct or indirect shareholder of Merit Foods and for a period of eighteen (18) months after the date on which it ceases to be a direct or indirect shareholder of Merit Foods, it will not produce and sell pea and canola proteins exceeding certain specified purity thresholds set out in the Amended and Restated Shareholders Agreement.
Merit Functional Foods Corporation - License and Production Agreement
On May 23, 2019, Burcon and its wholly-owned subsidiary, Burcon NutraScience (MB) Corp. entered into entered into a license and production agreement with Merit Foods (the "Original Merit License Agreement"). Under the Merit License Agreement, Burcon has granted an exclusive, royalty-bearing, worldwide license (the "Merit License") to Merit Foods to use and exploit Burcon's pea, pulse and canola protein technologies to make, have made, use and market and sell Burcon's pea, pulse and canola proteins (the "Merit Licensed Products").
Merit Foods has agreed to develop, build and commission an initial production facility in the Province of Manitoba within a specified amount of time to manufacture the Merit Licensed Products (the "Flex Production Facility"). Merit Foods will also, within a time specified under the License Agreement, provide written notice (the "Notice") to Burcon to advise whether it will or will not increase its annual production capacity of the Products to develop, build and commission a full commercial scale production facility ("Full-Commercial Production Facility"). The License Agreement provides Burcon with the right to convert the exclusive license to a non-exclusive license under certain conditions.
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In consideration of the Merit License, Merit Foods will pay to Burcon running royalties based on the net revenue (as defined in the Merit License and Production Agreement) in relation to the sale of the Products which fall within the scope of the Burcon Technology. Once a sale in the Flex Production Facility occurs, Merit Foods will pay to Burcon royalties based on a percentage of net revenue from the sale of Products. If Merit Foods expands production to the Full-Commercial Production Facility the royalty rate will be reduced to a lower percentage rate. The royalty rate may also be reduced if the exclusive license is converted to a non-exclusive license or if a certain Burcon patent does not grant within a specified time.
Burcon and Burcon-MB entered into an amended and restated license and production agreement (the "Amended and Restated License Agreement") on August 27, 2020. The Amended and Restated License Agreement amends and restates the Original Merit License Agreement.
Under the Amended and Restated License Agreement the parties have agreed among other things, that if Bunge exercises its Call Option to buyout the Other Shareholders under the Amended and Restated Shareholders Agreement, Merit Foods will have an option to convert (the "Conversion") the license granted under the Amended License Agreement into an exclusive, royalty-bearing, worldwide license to Merit Foods over Burcon's pea, pulse and canola protein technologies for $67.5 million, which represents an amount estimated to be the discounted future royalties that would otherwise be payable to Burcon over the life of the license agreement.
The Amended and Restated License Agreement modifies certain conditions under which Burcon may convert the exclusive license granted to Merit to a non-exclusive license. In one instance, if Merit Foods produces a certain amount of products that are not products licensed by Burcon, Burcon has the right to convert the exclusive license to a non-exclusive license. In such circumstance, Merit Foods may elect to retain exclusivity by paying royalties based on the net revenues derived from the sale of such other products. If the exclusive license is converted to a non-exclusive license, Burcon will be entitled to make, have made, use, market and sell Merit Licensed Products on a non-exclusive basis and to grant any such rights to any other person unless Merit Foods exercise the Conversion option. Merit Foods will grant to Burcon an irrevocable, non-exclusive, royalty bearing license, with a right to sublicense, to use certain intellectual property developed by Merit Foods ("Merit Foods Improvements") to make, have made, use, market or sell the Products worldwide. If the license is converted to a non-exclusive license and Burcon chooses to use the Merit Foods Improvements, the aggregate royalties payable by Burcon to Merit Foods in any year will not exceed the aggregate royalties payable by Merit Foods to Burcon in the same year.
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As long as the Merit License is exclusive and until the Conversion, Burcon will be responsible for filing, prosecution and maintenance of Burcon patent rights in certain countries. Upon the Conversion, Merit Foods will assume all the responsibilities and costs relating to filing, prosecution and maintenance of Burcon patent rights. While the Merit License is exclusive, Merit Foods shall have the right to defend any action in which the validity of any Burcon patent right is raised in any jurisdiction. If Merit Foods does not exercise such right, Burcon shall have the right but not the obligation to assume such defence.
Subject to the early termination provisions contained in the Amended and Restated License Agreement and Merit Foods' Conversion option, the obligation to pay royalties under the Amended and Restated License Agreement will terminate on the later has a term of the greater of twenty years from July 2, 2019 and the last to expire of Burcon patents that are being used to produce products under the Amended and Restated License Agreement. Since July 2, 2019, Burcon has filed additional patent applications to seek important commercial protection for the Products. Merit Foods has elected to include these applications to the License and, if granted could lengthen the royalty term under the Amended and Restated License Agreement to at least the year 2043.
Services Agreement with Merit Functional Foods Corporation
On May 23, 2019, Burcon, Burcon-MB and Merit Foods entered into a services agreement (the "Services Agreement") pursuant to which Burcon and Burcon-MB will provide certain services (the "Services") to Merit Foods in support of Merit Foods' business. The Services will commence on July 3, 2019 and the agreement will have an initial term ending on June 30, 2022. Under the Services Agreement, Burcon and Burcon-MB will provide general management/administrative/technical services, research and analytical services and sample production services. The Services will be charged to Merit Foods based on rates set out in the Services Agreement.
Loan Agreement with Large Scale Investments Limited
On November 13, 2018, Burcon announced that it entered into a loan agreement (the "Loan Agreement") pursuant to which Large Scale, at the time and currently a wholly-owned subsidiary of Firewood, provided Burcon with an unsecured loan (the "Loan") of up to $1,000,000 (the "Initial Loan Amount") for a term of 180 days from December 5, 2018.
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On March 27, 2019, Burcon and Large Scale amended (the "Loan Amendment") the Loan Agreement, pursuant to which Large Scale agreed to increase the Initial Loan Amount to Burcon by $500,000 (together with the Initial Loan, the "Loan Amount"). See "General Development of the Business".
Convertible Note Purchase Agreement with Large Scale Investments Limited
On April 7, 2016, Burcon announced that it had entered into the Purchase Agreement with Large Scale Investments Limited (the "Lender"), a wholly-owned subsidiary of PT International, pursuant to which it will issue the Note for the Principal Amount. On May 21, 2019, the Company announced that Burcon and Large Scale amended the Note (the "Amendment") to extend the maturity date of the Note from May 11, 2019 to June 21, 2019.
Under the Note, Large Scale could convert the Principal Amount in whole or in part into common shares in the capital of Burcon at any time commencing on or after July 1, 2016 and up to and including the Maturity Date. When issued, the conversion price of the Note was $4.01 per common share, which represented a premium of approximately 24% over the volume weighted average trading price of the common shares on the TSX for the 5 trading days immediately before April 7, 2016 (the "Conversion Price"). Burcon also had the right, before the Maturity Date, upon written notice to the Lender of not less than thirty (30) days, to prepay in cash all or any portion of the Principal Amount by paying to the Lender an amount equal to the Principal Amount to be prepaid multiplied by 110%. At any time on or after July 1, 2016 and up to the end of such 30-day notice period, Large Scale had the right to convert the Principal Amount in full or in part, into common shares at the Conversion Price. The Note was and any common shares issued upon the conversion of the Note would have be subject to a four month hold period under applicable Canadian securities laws. Upon completion of the 2018 Rights Offering (as defined below), the Conversion Price of the Note was adjusted effective immediately after the 2018 Record Date (as defined below). After the adjustment, the Conversion Price was reduced to $3.94 per common share.
Funding by Large Scale and the issuance of the Note occurred on May 12, 2016. The Note bore interest at a rate of 8% per annum, calculated daily, compounded monthly. Interest accrued on the Principal Amount and was payable on the earlier of June 21, 2019, the occurrence of an event of default as set out in the Note, or voluntary prepayment by Burcon (the "Maturity Date").
The Amendment also provided Large Scale with a right to offset any amounts due to it under the Note against any obligations of Large Scale to pay for subscription proceeds of any rights offering that Burcon may conduct. See "General Development of the Business".
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License and Production Agreement with Archer Daniels Midland Company
On March 4, 2011, Burcon and Burcon's wholly-owned subsidiary, Burcon NutraScience (MB) Corp. (together referred to for this section only, as "Burcon") entered into a license and production agreement (the "ADM License and Production Agreement") with ADM. Pursuant to the ADM License and Production Agreement, Burcon granted ADM an exclusive, royalty-bearing, worldwide license (the "License") to use and exploit Burcon's soy protein technology solely to make, have made, use, market and sell soy protein products (the "Soy Products") that use, incorporate or are derived from any Burcon technology. ADM agreed to use reasonable commercial efforts to design, build and commission an initial production facility (the "Semi-works Production Facility") within a specified amount of time after it receives permit approval from the US Environmental Protection Agency ("EPA Approval Date") to manufacture the Soy Products. ADM also agreed, within a time specified under the ADM License and Production Agreement, to provide written notice to Burcon to advise whether it would increase its annual production capacity of the Products beyond the capacity of the Semi-works Production Facility ("Full Commercial Production"). The License and Production Agreement provided each party the right to convert the exclusive license to a non-exclusive license under certain conditions.
In consideration of the License, ADM agreed to pay Burcon running royalties based on the net revenue (as defined in the License and Production Agreement) in relation to the sale of the Soy Products which fell within the scope of the Burcon Technology. ADM agreed to pay quarterly royalties (the "Pre-production Royalty") to Burcon from the EPA Approval Date until the first bona fide arms' length sale of Products manufactured in the Semi-works Production Facility. Once such sale in the Semi-works Production Facility occurs, ADM agreed to pay to Burcon royalties based on a percentage of net revenue from the sale of Products (the "Semi-works Production Royalty"). If ADM expanded production to Full Commercial Production the royalty rate would be reduced to a lower percentage rate (the "Full Commercial Production Royalty"). The Full Commercial Production Royalty rate would be further reduced if ADM expanded production and sale into certain geographic regions or if ADM achieved a pre-defined further expanded level of production capacity. The Semi-works Production Royalty and the Full Commercial Production Royalty rates may have also been reduced if the exclusive license was converted to a non-exclusive license or if certain Burcon patents did not grant within a specified time.
If the exclusive license was converted to a non-exclusive license, Burcon would be entitled to make, have made, use, market and sell the Soy Products on a non-exclusive basis and to grant any such rights to any other person. ADM would grant to Burcon an irrevocable, non-exclusive, royalty bearing license, with a right to sublicense, to use ADM Improvements (as defined in the License and Production Agreement) to make, have made, use, market or sell the Soy Products worldwide. If the license was converted to a non-exclusive license and Burcon chose to use ADM improvements, the aggregate royalties payable by Burcon to ADM in any year would not exceed the aggregate royalties payable by ADM to Burcon in the same year.
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Under the ADM License and Production Agreement, Burcon was responsible for filing, prosecution and maintenance of Burcon patent rights in certain countries. Burcon was also responsible for defending any action in which the validity of any Burcon patent right was raised in any jurisdiction.
Royalties payable under the License would have terminated on the later of the date of expiry of the last to expire of the Burcon Patent Rights (as defined in the License and Production Agreement) and twenty years from March 4, 2011. Since March 4, 2011, Burcon filed additional patent applications to seek important commercial protection for the production and use of CLARISOY®. ADM elected to include these applications to the License and, if granted could have lengthened the royalty term under the License and Production Agreement to at least the year 2035.
On August 7, 2020, Burcon and ADM entered into an agreement to terminate the ADM License and Production Agreement dated March 4, 2011 made among Burcon, Burcon-MB and ADM for CLARISOY® soy protein. As part of the agreement to terminate the exclusive license, the CLARISOY® trademark reverted back to Burcon upon payment by Burcon of a certain percentage of the aggregate direct third party costs paid by ADM in connection with the marketing, trademark prosecution, and trademark maintenance of the CLARISOY® trademarks.
INTERESTS OF EXPERTS
The Company's independent auditors are PricewaterhouseCoopers LLP, Chartered Professional Accountants, who have prepared an independent auditor's report dated June 27, 2022 in respect of the Company's consolidated financial statements as at March 31, 2022 and March 31, 2021 and for each of the three years ended March 31, 2022. PricewaterhouseCoopers LLP has advised that they are independent with respect to the Company within the meaning of the Chartered Professional Accountants of British Columbia code of Professional Conduct and with respect to the Company in compliance with PCAOB Rule 3520, Auditor Independence.
AUDIT COMMITTEE AND DISCLOSURE UNDER
NATIONAL INSTRUMENT 52-110
Under National Instrument 52-110 ("NI 52-110"), Burcon is required to disclose in its AIF certain information concerning the composition of its audit committee and its auditor. The audit committee carries out the various responsibilities set forth in its charter, a copy of which is attached to this AIF as Schedule "A".
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Composition of the Audit Committee
The audit committee of Burcon is comprised of J. Douglas Gilpin, Alfred Lau and Lorne Tyrrell. Mr. Gilpin is the chair of the audit committee. All members of the audit committee are financially literate. Under NI 52-110, an individual is "financially literate" if he has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by Burcon's financial statements. The Board has determined that each audit committee member has past employment experience in finance or accounting, requisite professional certification in accounting, or comparable experience or background that results in his or her financial sophistication. Mr. Gilpin was an audit engagement partner in Advisory Services at KPMG LLP (chartered accountants) for 18 years until 1999. Mr. Lau was a partner of KPMG with over 35 years of experience at key locations around the world, including Beijing, Vancouver and London. He has held senior positions within KPMG including co-leader of the audit practice in Beijing and co-leader of the China Practice in Canada. He was the Audit Engagement Partner for a number of multi-national Fortune 500 companies and listed companies on the TSX. Dr. Tyrrell has served on the audit committee of the Institute of Health Economics (Alberta). He was also the Dean of the Faculty of Medicine and Dentistry of the University of Alberta from 1994 to 2004, during which time he was responsible for managing a budget of over $300 million. When Dr. Tyrrell retired from his position, the Faculty reported no debt or deficit. A member of the audit committee is "independent" if the member has no direct or indirect material relationship with Burcon, which could, in the view of Burcon's board of directors, reasonably interfere with the exercise of a member's independent judgement. The Board has determined that each of the audit committee members is independent, as that term is defined by NI-52-110 and in accordance with applicable Nasdaq rules and under Rule 10A-3 under the United States Securities Exchange Act of 1934. The Board has determined that Mr. J. Douglas Gilpin, FCPA, FCA, CA and ICD.D, is an "audit committee financial expert" as such term is defined in applicable United States securities laws.
Audit Committee Oversight
During the most recently completed financial year, all recommendations of the audit committee with respect to financial reporting and to nomination or compensation of Burcon's external auditor were adopted by the board of directors.
Pre-Approval Policies and Procedures
The charter of the audit committee requires pre-approval of non-audit services provided by the external auditor of Burcon. The auditor was engaged to provide certain tax return review services during the years ended March 31, 2022 and 2021. These services were pre-approved by the audit committee.
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External Auditor Service Fees
Fees billed by Burcon's external auditor for professional services relating to the last two fiscal years are outlined in the following table.
|
Nature of Services |
Fees billed by auditor for |
Fees billed by auditor for |
|
Audit Fees1 |
$240,000 |
$81,500 |
|
Audit-Related Fees2 |
$118,352 |
$50,000 |
|
Tax Fees3 |
$8,871 |
$7,384 |
|
All Other Fees4 |
$nil |
$nil |
|
Total |
$367,223 |
$138,884 |
Notes:
(1) "Audit Fees" include the aggregate fees billed by Pricewaterhouse Coopers LLP ("PwC") relating to the respective fiscal year. Included in Fiscal 2022's Audit Fees are $85,000 for the audit of the Company's internal controls for the year ended March 31, 2022.
(2) "Audit-Related Fees" include the aggregate fees billed for the respective fiscal year for assurance and related services by PwC that are not reported under "Audit Fees". Of the $118,352 incurred in Fiscal 2022, $80,852 related to the quarterly reviews of each of the Company's interim financial statements and $17,500 for services rendered in connection with the Company's filing of the registration statement with the SEC for the U.S. listing and $20,000 for services rendered in connection with preparations for a proposed financing, including draft documents, that did not proceed.
(3) "Tax Fees" include the aggregate fees billed for the respective fiscal year for professional services rendered by PwC for tax compliance and tax advice.
(4) "All Other Fees" include the aggregate fees billed for the respective fiscal year for products and services provided by PwC, other than the services reported under "Audit Fees", "Audit-Related Fees" and "Tax Fees".
ADDITIONAL INFORMATION
Additional information relating to Burcon can be found on the Company's website at www.burcon.ca and the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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Additional information, including directors' and officers' remuneration and indebtedness, principal holders of Burcon's securities and securities authorized for issuance under equity compensation plans, is contained in Burcon's Management Proxy Circular dated July 28, 2021 for its most recent annual meeting of shareholders that involved the election of directors.
Additional financial information is provided in Burcon's financial statements and MD&A for its most recently completed financial year ended March 31, 2022.
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GLOSSARY
In this AIF, the following terms have the meanings set forth herein:
|
10039406 Manitoba Ltd. |
one of the Other Shareholders and is a wholly-owned company of Shaun Crew and his family |
|
ADM |
Archer-Daniels-Midland Company |
|
ADM License and Production Agreement |
the license and production agreement dated March 4, 2011 made among Burcon, Burcon-MB and ADM |
|
Affiliate |
has the meaning set out in the Canada Business Corporations Act |
|
albumin |
refers generally to any protein with water solubility, which is moderately soluble in concentrated salt solutions, and experiences heat coagulation (protein denaturation). Substances containing albumin, such as egg white, are called albuminoids |
|
Amended and Restated License Agreement |
the amended and restated license and production agreement dated August 27, 2020 made among Burcon, Burcon-MB and Merit Foods |
|
Amended and Restated Shareholders Agreement |
the amended and restated shareholders agreement dated August 27, 2020 among Burcon Holdings, RBT Holdco Ltd., 10039406 Manitoba Ltd., Bunge and Tirem Holdings Limited |
|
BMW |
B.M.W. Canola Inc. |
|
Board |
the Board of Directors of the Company |
|
Bunge |
Bunge Limited |
|
Burcon or Company |
Burcon NutraScience Corporation |
|
Burcon Holdings |
Burcon NutraScience Holdings Corp. |
|
Burcon-MB |
Burcon Nutrascience (MB) Corp. (formerly B.M.W. Canola Inc.) |
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|
CLARISOY® |
the trade-marked brand name for Burcon's soy protein |
|
Common Share or Shares |
a common share in the capital of the Company |
|
EDC |
Export Development Canada |
|
erucic acid |
fatty acids contained in canola, but not considered essential for human growth |
|
FAO |
the Food and Agricultural Organization |
|
FCC |
Farm Credit Canada |
|
FDA |
the United States Food and Drug Administration |
|
Firewood |
Firewood Elite Limited, a company wholly-owned by Alan Chan, a director of Burcon |
|
globulin |
this generic term encompasses a heterogeneous series of families of proteins, with larger molecules and less soluble in pure water than albumin. Globular proteins, or spheroproteins are one of the two main protein classes, comprising "globe"-like proteins that are more or less soluble in aqueous solutions (where they form colloidal solutions) |
|
glucosinolates |
the sulphur compounds that give mustards their sharp taste |
|
GM |
genetically modified |
|
GMO |
genetically modified organism |
|
GRAS |
generally recognized as safe |
|
ITC |
ITC Corporation Limited (now PT International Development Corporation Limited) |
|
Large Scale |
Large Scale Investments Limited |
|
LC |
letter of credit from HSBC Bank Canada in the amount of $6.5 million with EDC as beneificiary |
|
Merit Foods |
Merit Functional Foods Corporation (formerly Burcon Functional Foods Corporation) |
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| MeritPro™ | the trade-marked brand name of Merit Foods' pea and canola protein blends |
| NASDAQ | Nasdaq Stock Market LLC |
| NASDAQ Global Market | The NASDAQ Global Market |
| NASDAQ Capital Market | The NASDAQ Capital Market |
| Nestlé | Société des Produits Nestlé, SA |
| Nutratein® | the trade-marked brand name for Burcon's blended cruciferin-rich and napin-rich canola proteins |
| Nutratein-PS® | the trade-marked brand name for Burcon's blend of Peazazz® pea protein and Supertein® canola protein |
| Nutratein-TZ® | the trade-marked brand name for Burcon's blend of Peazac® pea protein and Puratein® canola protein |
| Other Shareholders | RBT Holdco Ltd. and 10039406 Manitoba Ltd. |
| Original Merit License Agreement |
the license and production agreement dated May 23, 2019 made among Burcon, Burcon-MB and Merit Foods |
| Original Shareholders Agreement |
the shareholders agreement dated May 23, 2019 among Burcon Holdings, RBT Holdco Ltd. and 10039406 Manitoba Ltd. |
| PDCAAS | protein digestibility corrected amino acid score |
| Peazac® | the trade-marked brand name for one of Burcon's pea protein |
| Peazazz® | the trade-marked brand name for Burcon's pea protein |
| PT International | PT International Development Corporation Limited (formerly ITC Corporation Limited) |
| Puratein® | the trade-marked brand name for Burcon's cruciferin-rich canola protein |
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| Puratein® C | Merit Foods' rebranded product name for Burcon's Nutratein® canola protein |
| Puratein® G | Merit Foods' rebranded product name for Burcon's Puratein® canola protein |
| Puratein® HS | Merit Foods' rebranded product name for Burcon's Supertein® canola protein |
| RBT Holdco Ltd. | one of the Other Shareholders and is a company beneficially owned equally by Ryan Bracken and Barry Tomiski and their respective family |
| Supertein® | the trade-marked brand name for Burcon's napin-rich canola protein |
| TSX | Toronto Stock Exchange |
| TSXV | TSX Venture Exchange |
| US or United States | the United States of America |
| Winnipeg Technical Centre | the premises where Burcon's research laboratory and pilot plant operations are located |
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SCHEDULE "A"
AUDIT COMMITTEE CHARTER
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BURCON NUTRASCIENCE CORPORATION
("Burcon" or the "Corporation")
AUDIT COMMITTEE CHARTER
Purpose
The purpose of the audit committee (the "Committee") is to oversee the accounting and financial reporting process of Burcon and the audits of its financial statements, and thereby assist the board of directors of Burcon (the "Board") in monitoring (1) the integrity of the financial statements of Burcon, (2) compliance by Burcon with legal, statutory and regulatory requirements related to financial reporting, (3) the appointment, compensation, retention and oversight of Burcon's external auditors, (4) the performance of Burcon's internal controls and financial reporting process; and (5) oversight of risk management.
Composition
1. There will be at least three members of the Committee.
2. All members of the Committee shall be independent directors in accordance with all applicable corporate and securities laws and stock exchange listing standards. The chairman of the Board shall be an ex-officio member of the Committee.
3. All members of the Committee must be financially literate, i.e. have the ability to read and understand a set of financial statements, including the Corporation's balance sheet, income statement, and cash flow statement, that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by Burcon's financial statements. At least one member shall be a financial expert as defined by applicable corporate and securities laws and stock exchange listing standards.
4. None of the members of the Committee may have participated in the preparation of the financial statements of the Corporation or any current subsidiary of the Corporation at any time during the past three years.
5. Any member may be removed or replaced at any time by the Board and will cease to be a member upon ceasing to be a director of the Corporation. The board may fill vacancies on the Committee by election from among its number. If and when a vacancy exists on the Committee, the remaining members may exercise all its powers so long as a quorum remains in office. Subject to the above, each member will hold office until the close of the next annual meeting of shareholders of the Corporation or until the member resigns or is replaced, whichever occurs first.
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6. The Board may from time to time designate one of the members of the Committee to be the Chair of the Committee.
7. The members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board may from time to time determine.
Duties of the Chair of the Committee
8. The Chair of the Committee will provide overall leadership to facilitate the effective functioning of the Committee, including:
a. overseeing the structure, composition, membership and activities delegated to the Committee;
b. chairing each meeting of the Committee and encouraging free and open discussion at meetings of the Committee;
c. scheduling and setting the agenda for Committee meetings with input from other Committee members, the Chair of the Board and management as appropriate;
d. facilitating the timely, accurate and proper flow of information to and from the Committee;
e. arranging for management, internal and, when applicable, external auditors or other advisors to attend and present at Committee meetings as appropriate;
f. arranging sufficient time during Committee meetings to fully discuss agenda items;
g. encouraging Committee members to ask questions and express viewpoints during meetings;
h. leading the Committee in its self-assessment process; and
i. taking all other reasonable steps to ensure that the responsibilities and duties of the Committee, as outlined in this Charter, are well understood by the members of the Committee and executed as effectively as possible.
9. Foster ethical and responsible decision making by the Committee and its individual members.
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10. Encourage the Committee to meet in separate, regularly scheduled, non-management, in-camera sessions.
11. Following each meeting of the Committee, report in writing or orally to the Board on the activities, findings, action items and any recommendations of the Committee.
12. Carry out such other duties as may reasonably be requested by the Board.
Meetings
13. The Committee will hold at least four meetings annually and any other meetings as required to fulfill its responsibilities. Meetings may be called by the Committee Chair or a Committee member, the Chair of the Board, external auditors, Chief Financial Officer or the Chief Executive Officer.
14. The Secretary of the Corporation shall act as secretary for meetings of the Committee. The Secretary in conjunction with the Chair of the Committee shall draw up the agenda, which will be circulated, in advance to the members of the Committee with the materials for the meeting. The Secretary will be responsible for taking, keeping and distributing the Committee's meeting minutes.
15. Meetings will be chaired by the Chair of the Committee, or if the Chair is absent, by a member chosen by the Committee from among themselves.
16. A member or members of the Committee may participate in a meeting of the Committee by means of such telephonic, electronic or other communication facilities that would permit all persons participating in the meeting to communicate adequately with each other, and a member participating in such a meeting by any such means is deemed to be present at that meeting.
17. The Committee may conduct an in-camera session at the end of Committee meeting without management present.
18. All directors who are not members of the Committee will be given notice of every meeting of the Committee and will be allowed to attend as observers. The Committee may invite such officers and employees of the Corporation as it may see fit from time to time to attend meetings of the Committee and assist in the discussion and consideration of the duties of the Committee.
19. A majority of the members of the Committee constitutes a quorum.
20. All decisions made by the Committee may be made at a Committee meeting by a majority of the members present or evidenced in writing and signed by all Committee members, which will be fully effective as if it had been made or passed at a Committee meeting.
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21. The minutes of all meetings of the Committee will be provided to the Board. The Chair of the Committee will provide a report, which may be oral or in writing, on the Committee's activities to the Board at the next regularly scheduled meeting of the Board following each Committee meeting.
Duties and Responsibilities
The Committee will be responsible for overseeing management to ensure the integrity, accuracy and reliability of the Corporation's financial information. The Committee will discharge this responsibility by:
22. Financial Reporting and Disclosure
a. reviewing and approving interim financial statements of Burcon and management's discussion and analysis related thereto, and all interim profit or loss press releases before they are publicly disclosed;
b. reviewing and recommending for Board approval annual financial statements of Burcon including notes to the financial statements and management's discussion and analysis related thereto and all annual profit or loss press releases; and
c. ensuring that adequate procedures are in place for the review of public disclosure of financial information extracted or derived from financial statements of Burcon, other than the public disclosure referred to in section 21 (a) and 21 (b), and periodically reviewing and updating such procedures.
23. Compliance and Whistleblower Complaints
a. ensuring compliance by Burcon with tax and financial reporting rules as issues arise;
b. establishing procedures for the receipt, retention and treatment of complaints received by Burcon regarding accounting, internal accounting controls, or auditing matters; and
c. establishing procedures for the confidential, anonymous submission by employees of Burcon of concerns regarding questionable accounting, internal accounting controls or auditing matters .
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24. Internal Control
a. monitoring the system of internal accounting controls and ensuring that management establishes and maintains adequate and effective internal control systems and processes, including systems and processes that are designed to detect and prevent fraud; and
b. reviewing the results of management's annual testing of internal accounting controls over financial reporting, including disclosures.
25. Risk Management
a. reviewing with management major financial risks and exposures of Burcon and the steps management has taken to monitor and mitigate such risks and exposures; and
b. assessing risk areas and policies to manage risk.
26. External Auditors
a. reviewing and approving the annual audit scope and the annual audit plan proposed by the auditors;
b. overseeing the work of the external auditors of Burcon engaged for the purpose of preparing or issuing an audit report or related work;
c. reviewing carefully and acting on all internal control points communicated by the auditors in correspondence with management and the audit committee in accordance with the external auditors' communication standards;
d. ensuring that the external auditors of Burcon report directly to the Committee throughout the term of their appointment in accordance with the communication standards of the external auditors;
e. ensuring that the external auditors of Burcon provide a formal written statement delineating all relationships between the external auditor and Burcon, actively engaging in a dialogue with the external auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the external auditor and for taking, or recommending that the full board of directors of Burcon take, appropriate action to oversee the independence of the external auditor.
f. resolving disagreements between management and the external auditor regarding financial reporting and disclosures, including compliance with the audit engagement letter approved by the Committee;
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g. pre-approving all non-audit services to be provided to Burcon or subsidiaries of Burcon by the external auditor of Burcon;
h. evaluating the performance of the external auditor and recommending to the Board the external auditor to be nominated for the purpose of preparing or issuing an auditor's report (or any related work), as well as determining the compensation to be paid to the external auditor; and
i. reviewing and approving the hiring policies of Burcon regarding partners, employees and former partners and employees of the present and former auditor of Burcon.
27. Seek information from the Corporation or independent advisors
The Committee has the power to conduct or authorize investigations into any matters within its scope of responsibilities, with full access to its auditors and its legal advisors and to all books, records, facilities and personnel of Burcon. The Committee will have the authority to seek any information that it requires from any officer or employee of the Corporation. The Committee has the authority to retain and approve the fees and other retention terms of legal and other advisors ("Advisors"), as it deems necessary for the fulfillment of its responsibilities. The Corporation must provide for appropriate funding, as determined by the Committee, for payment of reasonable compensation to an Advisor retained by the Committee. Prior to appointing an Advisor, the Corporation will take into consideration the following factors:
a. the provision of other services to the Corporation by the person that employs the Advisor;
b. the amount of fees received by the Corporation by the person that employs the Advisor, as a percentage of the total revenue of the person that employs the Advisor;
c. the policies and procedures of the person that employs the Advisor that are designed to prevent conflicts of interest;
d. any business or personal relationship of the Advisor with a member of the Committee;
e. any stock of the Corporation owned by the Advisor; and
f. any business or personal relationship of the Advisor or person employing the Advisor with an executive officer of the Corporation.
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28. Other
The Committee will
a. perform an annual review of this Committee charter, taking into account all legislative and regulatory requirements applicable to the Committee, with any recommended changes being forwarded to the Board for approval; and
b. perform a biennial evaluation of its performance, having regard to the issues reviewed during the preceding two years.
The Corporation will
a. provide appropriate funding, as determined by the Committee, for the compensation to the Corporation's external auditors engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation and ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
29. Currency of the Committee Charter
This charter was last revised and approved by the Board on February 10, 2022.
Burcon NutraScience Corporation
Consolidated Financial Statements
March 31, 2022, 2021 and 2020
(In Canadian dollars)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual Filings and Rules 13a-15(f) under the U.S. Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As of March 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework (2013). Based on this assessment, our management concluded that, as of March 31, 2022, our internal control over financial reporting was not effective based on those criteria because a material weakness in internal control over financial reporting existed as of that date, as described below. The Company did not design and operate controls with sufficient precision over the share of loss in Merit Foods. The Company's controls related to the review of its share of loss were not designed or operated at a level of precision to allow the Company to prevent or detect potential material misstatements in a timely manner. The Company will implement remediation measures improving the review of the share of loss in Merit Foods by implementing additional controls at a greater level of precision.
The material weakness did not result in any identified material misstatements to the consolidated financial statements and there were no changes to previously released financial results.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Burcon Nutrascience Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Burcon Nutrascience Corporation and its subsidiaries (together, the Company) as of March 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, of changes in shareholders' equity and of cash flows for each of the three years in the period ended March 31, 2022, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and its financial performance and its cash flows for each of the three years in the period ended March 31, 2022 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to the design and operation of controls with sufficient precision over the share of loss in Merit Functional Foods Corporation.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management's Report on Internal Control over Financial Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806
"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of objective evidence of impairment of the investment in Merit Functional Foods Corporation
As described in Notes 2 and 7 to the consolidated financial statements, the Company has an investment in Merit Functional Foods Corporation (Merit), which is accounted for under the equity method of accounting. Under the equity method of accounting, investments are recorded at historical cost as an asset and adjusted for dividends received, capital contributions, other transactions that result in changes in ownership interest held by the Company, and the Company's share of Merit's earnings or losses, which is recorded as a component of loss and comprehensive loss for the year. Management considers whether there is any objective evidence that its investment is impaired. Objective evidence that the investment is impaired includes observable data about one or more of the following events; (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit will enter bankruptcy or other financial reorganisation; or (v) the disappearance of an active market for the investment because of financial difficulties of Merit. Objective evidence of impairment also includes information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. When such objective evidence of impairment exists, the carrying amount of the investment is tested for impairment by comparing the recoverable amount of the investment with its carrying amount. As at March 31, 2022, the Company's investment in Merit amounted to $13.4 million and management concluded that there was no objective evidence of impairment.
The principal considerations for our determination that performing procedures relating to the assessment of objective evidence of impairment of the investment in Merit is a critical audit matter are (i) the judgment required by management when assessing whether there was objective evidence of impairment that would require a formal impairment test to be performed; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate audit evidence related to management's assessment of objective evidence of impairment.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's assessment of objective evidence of impairment of the investment in Merit. These procedures also included, among others, evaluating the reasonableness of management's assessment of objective evidence of impairment for the investment in Merit, which includes observable data about one or more of the following events: (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit will enter bankruptcy or financial reorganisation; (v) the disappearance of an active market for the investment because of financial difficulties of Merit; or (vi) information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost by considering (i) current financial position of Merit; (ii) relevant agreements between Merit and its lenders; (iii) third-party investment in Merit during the years and (iv) evidence obtained in other areas of the audit.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants
Vancouver, Canada
June 27, 2022
We have served as the Company's auditor since 2001.
BURCON NUTRASCIENCE CORPORATION
Consolidated Balance Sheets
As at March 31, 2022 and March 31, 2021
(In Canadian dollars)
| March 31, 2022 $ |
March 31, 2021 $ |
|||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents | 7,000,824 | 13,972,659 | ||||
| Restricted cash (note 5) | 122,707 | - | ||||
| Amounts receivable (notes 7 and 13) | 200,342 | 338,715 | ||||
| Inventory | - | 132,473 | ||||
| Prepaid expenses | 291,621 | 154,757 | ||||
| 7,615,494 | 14,598,604 | |||||
| Property and equipment (note 4) | 859,386 | 1,005,760 | ||||
| Deferred development costs - net of accumulated amortization of $105,375 (2021 - $nil) (note 6) | 6,217,153 | 4,463,748 | ||||
| Investment in and loan to Merit Functional Foods Corporation (note 7) | 13,402,774 | 16,401,703 | ||||
| Goodwill | 1,254,930 | 1,254,930 | ||||
| 29,349,737 | 37,724,745 | |||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities (note 13) | 906,651 | 1,418,049 | ||||
| Lease liability | 14,397 | 28,431 | ||||
| Deferred revenue (note 5) | 122,707 | - | ||||
| 1,043,755 | 1,446,480 | |||||
| Lease liability | 58,742 | 5,266 | ||||
| 1,102,497 | 1,451,746 | |||||
| SHAREHOLDERS' EQUITY (note 9) | ||||||
| Capital stock | 114,566,577 | 114,106,836 | ||||
| Contributed surplus | 15,863,592 | 14,058,654 | ||||
| Options | 7,041,049 | 6,490,537 | ||||
| Restricted share units | 12,078 | - | ||||
| Warrants | - | 594,621 | ||||
| Deficit | (109,236,056 | ) | (98,977,649 | ) | ||
| 28,247,240 | 36,272,999 | |||||
| 29,349,737 | 37,724,745 |
Subsequent events (note 19)
Approved by the Board of Directors
| “Douglas Gilpin” | “D. Lorne Tyrrell” | |
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars)
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| REVENUE | |||||||||
| Royalty income (note 7 and 1(b)) | 171,471 | 8,646 | 31,134 | ||||||
| Research income (note 5) | - | 250,000 | - | ||||||
| 171,471 | 258,646 | 31,134 | |||||||
| EXPENSES | |||||||||
| Research and development (note 10) | 1,845,599 | 414,005 | 721,851 | ||||||
| Intellectual property | 1,447,847 | 785,957 | 846,137 | ||||||
| General and administrative (note 11) | 4,275,603 | 3,654,142 | 2,186,273 | ||||||
| 7,569,049 | 4,854,104 | 3,754,261 | |||||||
| LOSS FROM OPERATIONS | (7,397,578 | ) | (4,595,458 | ) | (3,723,127 | ) | |||
| INTEREST AND OTHER INCOME (notes 7 and 13) | 434,496 | 446,765 | 247,918 | ||||||
| MANAGEMENT FEE INCOME (notes 7 and 13) | 114,435 | 342,469 | 364,210 | ||||||
| GAIN ON DILUTION OF INVESTMENT IN MERIT FUNCTIONAL FOODS CORPORATION (note 7) | 961,164 | 6,384,942 | - | ||||||
| SHARE OF LOSS IN MERIT FUNCTIONAL FOODS CORPORATION (note 7) | (4,294,789 | ) | (2,421,459 | ) | (939,806 | ) | |||
| INTEREST AND OTHER EXPENSE (notes 7 and 8) | (72,527 | ) | (770,404 | ) | (589,277 | ) | |||
| FOREIGN EXCHANGE (LOSS) GAIN | (3,608 | ) | (4,347 | ) | 2,153 | ||||
| LOSS ON DISPOSAL OF EQUIPMENT | - | - | (949 | ) | |||||
| CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY (note 8) | - | - | 5,384 | ||||||
| LOSS AND COMPREHENSIVE LOSS FOR THE YEAR | (10,258,407 | ) | (617,492 | ) | (4,633,494 | ) | |||
| BASIC AND DILUTED LOSS PER SHARE (note 12) | (0.09 | ) | (0.01 | ) | (0.06 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars, except share amounts)
| Number of fully paid common shares |
Capital stock $ |
Contributed surplus $ |
Options $ |
Warrants $ |
Restricted share units $ |
Convertible debentures $ |
Deficit $ |
Total shareholders' equity $ |
|||||||||||||||||||
| Balance - March 31, 2019 | 43,941,536 | 73,361,133 | 9,001,467 | 9,184,852 | 199,117 | - | - | (93,726,663 | ) | (1,980,094 | ) | ||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | (4,633,494 | ) | (4,633,494 | ) | ||||||||||||||||
| Convertible debentures | - | - | - | - | - | - | 2,762,927 | - | 2,762,927 | ||||||||||||||||||
| Shares issued | 51,503,003 | 25,149,059 | - | - | - | - | - | - | 25,149,059 | ||||||||||||||||||
| Options exercised | 173,000 | 118,350 | - | (47,279 | ) | - | - | - | - | 71,071 | |||||||||||||||||
| Options forfeited | - | - | 29,394 | (29,394 | ) | - | - | - | - | - | |||||||||||||||||
| Warrants exercised | 1,182,099 | 816,482 | - | - | (284,538 | ) | - | - | - | 531,944 | |||||||||||||||||
| Warrants issued | - | - | - | - | 2,030,058 | - | - | - | 2,030,058 | ||||||||||||||||||
| Warrant adjustment | - | - | - | - | 85,421 | - | - | - | 85,421 | ||||||||||||||||||
| Share issue costs | - | (1,398,921 | ) | - | - | - | - | - | - | (1,398,921 | ) | ||||||||||||||||
| Warrant issue costs | - | - | - | - | (237,890 | ) | - | - | - | (237,890 | ) | ||||||||||||||||
| Stock-based compensation | - | - | - | 565,642 | - | - | - | - | 565,642 | ||||||||||||||||||
| Balance - March 31, 2020 | 96,799,638 | 98,046,103 | 9,030,861 | 9,673,821 | 1,792,168 | - | 2,762,927 | (98,360,157 | ) | 22,945,723 | |||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | (617,492 | ) | (617,492 | ) | ||||||||||||||||
| Conversion of convertible debentures | 9,047,601 | 9,809,012 | - | - | - | - | (2,762,927 | ) | - | 7,046,085 | |||||||||||||||||
| Options exercised | 90,884 | 72,735 | - | (33,635 | ) | - | - | - | - | 39,100 | |||||||||||||||||
| Options expired | - | - | 5,027,793 | (5,027,793 | ) | - | - | - | - | - | |||||||||||||||||
| Warrants exercised | 2,493,254 | 6,183,270 | - | - | (1,196,762 | ) | - | - | - | 4,986,508 | |||||||||||||||||
| Share issue costs | - | (4,284 | ) | - | - | - | - | - | - | (4,284 | ) | ||||||||||||||||
| Warrant issue costs | - | - | - | - | (785 | ) | - | - | - | (785 | ) | ||||||||||||||||
| Stock-based compensation expense | - | - | - | 1,878,144 | - | - | - | - | 1,878,144 | ||||||||||||||||||
| Balance - March 31, 2021 | 108,431,377 | 114,106,836 | 14,058,654 | 6,490,537 | 594,621 | - | - | (98,977,649 | ) | 36,272,999 | |||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | (10,258,407 | ) | (10,258,407 | ) | ||||||||||||||||
| Options exercised | 191,615 | 197,481 | - | (136,957 | ) | - | - | - | - | 60,524 | |||||||||||||||||
| Options expired | - | - | 505,947 | (505,947 | ) | - | - | - | - | - | |||||||||||||||||
| Options forfeited | - | - | 755,130 | (755,130 | ) | - | - | - | - | - | |||||||||||||||||
| RSUs granted | - | - | - | - | - | 12,078 | - | - | 12,078 | ||||||||||||||||||
| Warrants exercised | 105,750 | 262,260 | - | - | (50,760 | ) | - | - | - | 211,500 | |||||||||||||||||
| Warrants expired | - | - | 543,861 | - | (543,861 | ) | - | - | - | - | |||||||||||||||||
| Stock-based compensation expense | - | - | - | 1,948,546 | - | - | - | - | 1,948,546 | ||||||||||||||||||
| Balance - March 31, 2022 | 108,728,742 | 114,566,577 | 15,863,592 | 7,041,049 | - | 12,078 | - | (109,236,056 | ) | 28,247,240 |
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Cash Flows
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars)
| |
2022 $ |
2021 $ |
2020 $ |
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Loss for the year | (10,258,407 | ) | (617,492 | ) | (4,633,494 | ) | |||
| Items not affecting cash | |||||||||
| Amortization of property and equipment | 156,036 | 123,234 | 37,290 | ||||||
| Amortization of deferred development costs | 105,375 | - | - | ||||||
| Inventory expensed as research and development costs | 132,186 | - | - | ||||||
| Unrealized foreign exchange loss (gain) | 548 | 4,474 | (1,798 | ) | |||||
| Interest accretion | (343,503 | ) | (307,875 | ) | (144,343 | ) | |||
| Finance income | (798 | ) | (6,144 | ) | - | ||||
| Interest and other expense | 72,527 | 770,403 | 589,277 | ||||||
| Change in fair value of derivative liability | - | - | (5,384 | ) | |||||
| Loss on disposal of equipment | - | - | 949 | ||||||
| Financing expense | - | - | 85,420 | ||||||
| Gain on dilution of investment in Merit Functional Foods Corporation | (961,164 | ) | (6,384,942 | ) | - | ||||
| Share of loss in Merit Functional Foods Corporation | 4,294,789 | 2,421,459 | 939,806 | ||||||
| Stock-based compensation expense | 1,435,678 | 1,646,615 | 514,983 | ||||||
| (5,366,733 | ) | (2,350,268 | ) | (2,617,294 | ) | ||||
| Changes in non-cash working capital items | |||||||||
| Amounts receivable | 138,373 | (6,467 | ) | (205,643 | ) | ||||
| Inventory | 287 | (331 | ) | (132,142 | ) | ||||
| Prepaid expenses | (139,620 | ) | 137,279 | 18,719 | |||||
| Accounts payable and accrued liabilities | (509,071 | ) | 190,487 | 39,806 | |||||
| Deferred revenue | - | (275,578 | ) | 275,578 | |||||
| (5,876,764 | ) | (2,304,878 | ) | (2,620,976 | ) | ||||
| Interest received | (36,741 | ) | (155,973 | ) | (79,812 | ) | |||
| Interest paid | - | (572,097 | ) | (672,195 | ) | ||||
| Net cash used in operating activities | (5,913,505 | ) | (3,032,948 | ) | (3,372,983 | ) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Interest received | 36,741 | 155,973 | 79,812 | ||||||
| Investment in Merit Functional Foods Corporation | - | - | (13,000,000 | ) | |||||
| Development costs deferred | (1,217,089 | ) | (1,978,217 | ) | (1,467,076 | ) | |||
| Acquisition of property and equipment | (51,512 | ) | (894,529 | ) | (101,187 | ) | |||
| (1,231,860 | ) | (2,716,773 | ) | (14,488,451 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Issue of capital stock | 272,024 | 5,025,608 | 25,752,074 | ||||||
| Issue costs | - | (239,589 | ) | (1,381,417 | ) | ||||
| Issue of warrants | - | - | 1,780,752 | ||||||
| Issue of convertible debentures | - | - | 9,500,000 | ||||||
| Short-term loan | - | - | 250,000 | ||||||
| Repayment of convertible note | - | - | (2,000,000 | ) | |||||
| Repayment of short-term loan | - | - | (1,500,000 | ) | |||||
| Lease liability | - | (90,153 | ) | - | |||||
| Lease payments | (97,946 | ) | - | - | |||||
| 174,078 | 4,695,866 | 32,401,409 | |||||||
| FOREIGN EXCHANGE (LOSS) GAIN ON CASH AND CASH EQUIVALENTS | (548 | ) | (4,474 | ) | 1,798 | ||||
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (6,971,835 | ) | (1,058,329 | ) | 14,541,773 | ||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | 13,972,659 | 15,030,988 | 489,215 | ||||||
| CASH AND CASH EQUIVALENTS - END OF YEAR | 7,000,824 | 13,972,659 | 15,030,988 |
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
1. Nature of operations
Burcon NutraScience Corporation ("Burcon" or the "Company") is headquartered in Vancouver, British Columbia, Canada.
Burcon is a research and development company that has developed plant protein extraction and purification technology in the field of functional, renewable plant proteins. The Company has an extensive portfolio of composition, application and process patents covering novel plant-based proteins derived from pea, canola, soy, hemp, sunflower seed and more.
a) Pea and canola proteins
Burcon has developed novel pea proteins that it has branded Peazazz® and Peazac® and three canola protein products, Puratein®, Supertein® and Nutratein®.
In May 2019, Burcon and two other entities formed Merit Functional Foods Corporation ("Merit Foods"). Merit Foods has completed the construction of and has commissioned a 94,000 square foot commercial protein production facility in Manitoba, Canada to produce, under license, Burcon's pea and canola protein products. See note 7 for further details.
b) CLARISOY®
Burcon had a license and production agreement (the "Soy Agreement") with Archer Daniels Midland Company ("ADM") to license its CLARISOY® technology to ADM on an exclusive basis to produce, market and sell CLARISOY® soy protein worldwide. On August 7, 2020, Burcon and ADM agreed to terminate the Soy Agreement. As part of the agreement to terminate the exclusive license, the CLARISOY trademark reverted back to Burcon.
2. Significant accounting policies
Basis of presentation
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations issued by the IFRS Interpretations Committee ("IFRIC").
The Company has consistently applied the same accounting policies throughout all periods presented. Certain comparatives have been restated to conform with this year's presentation. The board of directors approved these consolidated financial statements on June 24, 2022.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Principles of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries, Burcon NutraScience (MB) Corp. ("Burcon-MB") and Burcon NutraScience Holdings Corp. ("Burcon Holdings"). A subsidiary is an entity in which the Company has control, directly or indirectly. Under IFRS 10, an investor controls an investee if and only if the investor has power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. All material intercompany transactions and balances have been eliminated on consolidation.
Details of the Company's subsidiaries at March 31, 2022 are as follows:
| Place of incorporation |
Interest % |
Principal activity | ||||
| Burcon NutraScience (MB) Corp. | Manitoba, Canada | 100 | Research and development | |||
| Burcon NutraScience Holdings Corp. | Canada | 100 | Investment holding |
Investment in Associates
An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy of the investee without the power to control or jointly control those policies.
The Company has an investment in Merit Functional Foods Corporation which is accounted for under the equity method of accounting. Under the equity method of accounting, investments are recorded at historical cost as an asset and adjusted for dividends received, capital contributions, other transactions that result in changes in ownership interest held by the Company, and the Company’s share of Merit Foods’ earnings or losses, which is recorded as a component of Loss and Comprehensive Loss for the year. When the Company’s share of losses of an associate exceeds the Company’s interest in the associate, which includes any long-term interests that, in substance, form part of the Company’s net investment in the associate, the Company discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.
Management considers whether there is any objective evidence of impairment as a result of one or more of the following events, which include (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit Foods a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit Foods will enter bankruptcy or other financial reorganization; or (v) the disappearance of an active market for the net investment because of financial difficulties of Merit Foods to determine whether it is necessary to test the Company's investment in Merit Foods for impairment. Objective evidence of impairment also includes information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. When such objective evidence of impairment exists, the carrying amount of the investment is tested for impairment by comparing the recoverable amount of the investment with its carrying amount. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Revenue recognition
The Company recognizes revenue when the amount of revenue can be reliably measured, and it is probable that future economic benefits will flow to the Company. The Company may earn revenues from licensing agreements under which third parties are granted rights to use the Company's technologies.
If the substantive rights to the technologies are retained by the Company, or the Company has remaining performance obligations under the licensing agreements, and as such not all of the risks and rewards have been transferred to the licensee, the Company recognizes amounts received or receivable as royalties when earned on an accrual basis.
At the point when all of the risks and rewards associated with the use of the technologies have, in substance, been relinquished under the licensing agreements, the Company recognizes the fair value of future payments expected to be received as proceeds from the sale of the technologies in the consolidated statements of operations and comprehensive loss, once the expected future payments can be reliably measured.
Upfront payments and similar non-refundable payments received under these agreements are initially recognized as deferred revenue. Subsequently, if the Company recognizes royalty revenue, the amounts deferred are recognized as revenue on a straight-line basis over the estimated period royalties are expected to be earned commencing in the period royalties are first recognized as revenue. Otherwise, the deferred amounts are recognized as sale proceeds at the date of sale of the technologies.
License agreements may consist of multiple elements and provide for varying consideration terms, such as upfront payments and milestone or similar payments. Revenue arrangements with multiple elements are reviewed in order to determine whether the multiple elements can be divided into separate units of accounting. If separable, the consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Otherwise, the applicable revenue recognition criteria are applied to the revenue arrangement as a single unit.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Government assistance
The Company carries out research and development in Canada that is eligible for Scientific Research and Experimental Development ("SR&ED") Investment Tax Credits ("ITC") at both the federal and provincial level. The Company has recognized the refundable portion of ITC at the provincial level but has not recognized the benefits of ITC at the federal level because realization of these benefits is not probable at this time. The Company's determination of ITC involves uncertainty with respect to management's interpretation of complex tax regulations. The ITC claims are subject to review and acceptance by the Canada Revenue Agency prior to collection.
Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related costs are recognized in the statement of profit or loss in the period in which they become receivable.
Accounting estimates and judgements
The preparation of consolidated financial statements in accordance with IFRS requires management to apply judgment in applying accounting policies. The judgments that have the most significant effect on the amounts recognized in the consolidated financial statements are outlined below. In addition, IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the reported amount of revenue and expenses during the reporting period, and disclosures made in the accompanying notes to the consolidated financial statements. Outlined below are the assumptions and other sources of estimation uncertainty as at March 31, 2022 that have a risk of resulting in material adjustments to the carrying amounts of assets and liabilities within the next year.
a) Areas of judgement
Assessment of indicators of impairment of the Investment in Merit Functional Foods Corporation
Judgment is required in assessing whether there is objective evidence of impairment of its investment in Merit Foods. The information management considered included whether there was evidence of significant financial difficulty, breach of contract, the granting of concessions, probable bankruptcy or financial reorganization or the disappearance of an active market for the investment in Merit Foods. Management also considered whether there was information about changes with an adverse effect that has taken place in technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. Management also considered the investment of Bunge Limited in fiscal 2022 and the resulting dilution gain. As a result, at March 31, 2022 management concluded that there was no objective evidence of impairment related to its investment in Merit Foods.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Assessment of indicators of impairment of long-lived assets including property and equipment and deferred development costs
Judgment is required in assessing whether there are indicators of impairment of long-lived assets. Management considers both internal and external information to determine whether there is an indicator of impairment and, accordingly, whether impairment testing is required. The information management considered included plant-based protein market information, the Company's market capitalization, Bunge's investment in Merit, internal financial models and actual results. As a result, at March 31, 2022 management concluded that there were no impairment indicators related to its long-lived assets.
Commencement of amortization of deferred development costs
On July 1, 2019, the Company commenced deferring development costs related to its pea and canola technologies. Judgement is required to assess when amortization of deferred development costs commences. Management considered whether there was sufficient evidence to conclude that the Merit production facility was capable of operating in the manner intended by management. Based on the Merit production facility's output, management concluded that the facility was effectively commissioned on December 31, 2021. As a result, the Company ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized over estimated useful life of 15 years.
b) Sources of estimation uncertainty
Expected credit losses on Merit Foods loan receivable
The Company estimates the expected credit losses on Merit Foods' loan receivable based on management's best estimate of the lifetime expected credit loss calculated based on probability of default, loss given default, and outstanding balance of the loan. At March 31, 2022, the total lifetime expected credit loss on the Merit Foods loan receivable was estimated to be $83,000.
Goodwill impairment assessment
The Company determines the recoverable amount of its cash generating unit when performing its annual impairment test for goodwill. In determining the recoverable amount, the Company considers its market capitalization, any recent investments in Merit Foods by third parties, and internal projected cash flows. The estimate of recoverable amount is based on management's best estimates of what an independent market participant would consider appropriate. At March 31, 2022, the recoverable amount of the Burcon cash generating unit exceeded the carrying amount, and therefore no impairment charge has been recognized.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit with banks and highly liquid short-term interest bearing securities with maturities at the date of purchase of three months or less.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when rights to receive cash flows from assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Company classifies its financial instruments in one of the following categories: amortized cost, fair value through profit or loss, and fair value through other comprehensive income.
Derivatives are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statements of operations and comprehensive loss. Gains and losses arising from changes in fair value are presented in the consolidated statements of operations and comprehensive loss, through profit or loss, in the period in which they arise.
Financial assets carried at amortized cost, which include loans and receivables initially recognized at the amount expected to be received, less a provision for the expected credit loss. Subsequently, financial assets carried at amortized cost are measured at amortized cost using the effective interest method less a provision for the expected credit loss. The Company classifies its cash and cash equivalents and amounts receivable as financial assets carried at amortized cost.
Other financial liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, other financial liabilities are measured at amortized cost using the effective interest method.
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows:
Financial assets carried at amortized cost: the impairment loss is the difference between the carrying value of the asset and the amortized cost of the financial asset, less the expected credit loss. The carrying amount of the asset is reduced by this amount which is recognized in the consolidated statements of operations and comprehensive loss, through profit or loss. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the expected credit loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Transaction costs of an equity transaction are accounted for as a deduction from equity to the extent that they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. Qualifying transaction costs incurred prior to the Company's year-end in anticipation of an issuance of equity instruments subsequent to the Company's year-end are deferred on the consolidated balance sheets until the equity instruments are issued.
Property and equipment
Property and equipment are recorded at cost less accumulated amortization. The Company provides for amortization at the following annual rates:
| Equipment | 20% declining balance |
| Computer equipment | 30% declining balance |
| Leasehold improvements | Straight-line over lease term |
| Right-of-use assets | Straight-line over lease term |
Inventories
Inventories are recorded at the lower of cost and net realizable value.
Research and development costs
Research costs are expensed in the year incurred. Development costs are also expensed in the year incurred unless the related process is clearly defined and the costs attributable thereto can be reliably measured; the technical feasibility of the process has been established so that it will be available for use or sale; management has indicated its intention to produce and market, or use, the process; an ability to use or sell the process exists; the process will generate probable future economic benefits; and adequate resources exist, or are expected to be available, to complete the development and to use or sell the process. The residual value and useful life are reviewed at each reporting date. Where an indicator of impairment exists the deferred development costs are subject to impairment testing as described in "Impairment of long-lived assets" below.
Impairment of long-lived assets
The Company tests property and equipment and development costs for impairment whenever events or circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Intangible assets that are not being amortized are tested annually for impairment and also if the Company identifies indicators of impairment. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). The evaluation is based on the higher of the asset's fair value less costs of disposal and its value in use, which is the present value of future cash flows expected to be derived from the asset in its current state. An impairment loss is recognized in the period it is determined to the extent that the carrying value exceeds the higher of fair value less costs to sell and value in use of the asset or group of assets.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Goodwill
Goodwill represents the excess at the date of acquisition of the cost of the acquired business over the fair values attributed to the underlying net tangible assets and the identifiable intangible assets. Goodwill is not amortized.
On at least an annual basis, or when circumstances indicate the carrying value of goodwill may not be recoverable, the Company subjects goodwill to an impairment test. For impairment testing purposes, the carrying value of goodwill is allocated to the group of assets that realize the benefits of the acquisition. The impairment assessment is performed by comparing the carrying value of the group of assets, including the allocated carrying value of goodwill, to the higher of its fair value less costs to sell and its value in use, which is the present value of future cash flows expected to be derived from the group of assets in their current state. If the carrying amount of the group of assets exceeds the recoverable amount, an impairment loss is charged to operations in the period such impairment is identified, allocated first to reducing the carrying amount of the goodwill allocated to the group, and then to the other assets of the group.
Income taxes
The Company uses the balance sheet liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Deferred income tax assets and liabilities are recognized in the current year for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes. Deferred income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized only to the extent they are considered probable to be realized.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Stock-based compensation
Stock-based compensation expense relates to stock options as well as equity settled restricted share units ("RSUs"). The compensation cost is measured at the fair value of the equity instrument granted at the date of grant and is expensed to operations over the award's vesting period. When stock options are exercised, capital stock is credited by the sum of the consideration paid and by the related portion previously recorded in options. Upon vesting of equity settled RSUs, the related amount recorded as RSUs is reclassified into capital stock. Additional information related to the stock option plan and the assumptions used in the Black-Scholes option pricing model are provided in note 9(c).
Earnings (loss) per share
Basic loss per share is computed by dividing the net loss for the year available to common shareholders by the weighted average number of common shares outstanding during the year. The Company applies the treasury stock method to calculate diluted loss per share. Diluted loss per share excludes all dilutive potential common shares if their effect is anti-dilutive.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements of each consolidated entity are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). These consolidated financial statements are presented in Canadian dollars, which is the Company's and its subsidiaries' functional currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in currencies other than an operation's functional currency are recognized in the consolidated statements of operations and comprehensive loss.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Newly adopted accounting standards and amendments
IFRS 16 - Leases
Effective April 1, 2019, the Company adopted IFRS 16 - Leases, which requires, among other things, to recognize leases traditionally recorded as operating leases in the same manner as a financing lease.
The Company had a short-term lease in fiscal 2020 which was included as part of rent expense under general and administrative expenses (note 11). During fiscal 2021, the Company entered into a long-term lease, which was accounted for in accordance with IFRS 16.
Accounting standard and amendments issued and not yet adopted
Amendments to IAS 1 - Classification of Liabilities as Current or Non-Current
The amendment clarifies the classification requirements to determine if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing or recognition. The amendment is effective for annual reporting periods beginning on or after January 1, 2023 and is to be applied retrospectively, with earlier application permitted. The Company does not expect the new standard will have a significant impact on the consolidated financial statements.
3. COVID-19
The COVID-19 outbreak was declared as a pandemic by the World Health Organization on March 11, 2020. Since the outbreak, global economies have been impacted as governments have imposed restrictions such as travel bans, self-imposed quarantines, social distancing and temporary closures of non-essential businesses. Since March 2021, the supply of vaccines has become more secure and immunization rates are continuing to improve in Canada, the United States and many developed countries in the world. However, the emergence of COVID variants continues to create uncertainty for economies worldwide. The duration and long-term effects of the pandemic are unknown at this time.
Burcon's operations have not been materially impacted by the COVID-19 pandemic. Since March 2020, Burcon has implemented measures to ensure the safety of work conditions for its staff at the Winnipeg Technical Centre and at its head office in Vancouver. Burcon's COVID-19 protocols continue to evolve in response to government health and safety guidelines. While the COVID-19 pandemic has caused certain disruptions and delays in Merit Foods' business operations, including the commissioning process of Merit Foods' Flex Production Facility, it is not possible to predict how long the pandemic will continue to last and whether the financial and business conditions of Burcon and Merit Foods will be impacted in future periods.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Governments worldwide, including Canada, have implemented significant monetary and fiscal relief programs designed to stabilize their economies. Burcon has received Canadian government assistance through the CEWS and CERS programs. See notes 10 and 11 for details.
4. Property and equipment
Additions to property and equipment have been reduced by a cash grant received from the government of Manitoba of $nil (2021 - $50,000).
5. Deferred Revenue
Protein Industries Canada
In March 2022, Burcon entered into a collaborative agreement with Protein Industries Canada ("PIC") for the development of protein ingredients from sunflower seeds. PIC is an industry-led, not-for-profit organization committed to positioning Canada as a global source of high-quality plant protein ingredients. It is one of Canada's five innovation superclusters, which are government-initiated efforts to significantly boost Canada's job market, GDP, research and innovations.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Burcon will partner with Pristine Gourmet, a processor of Canadian non-GMO cold pressed virgin oils, to further develop Burcon's novel process for the production of sunflower protein ingredients. In March 2022, PIC provided Burcon an upfront payment of $122,707. The advanced payment is based on projected eligible and direct expenses from the start of the project until September 30, 2022. At March 31, 2022, Burcon has recorded the advance payment of $122,707 (2021 - $nil) in restricted cash and deferred revenue.
Nestle
In January 2020, Burcon, Société Des Produits Nestlé ("Nestlé ") and Merit Foods entered into a joint development agreement (the "JDA") to tailor Burcon and Merit's plant-based proteins for use in Nestlé food and beverage applications. The JDA covered ongoing innovation and the future supply of Burcon and Merit's plant-based proteins from the Flex Production Facility. The partnership was intended to combine Nestlé's expertise in the development, production and commercialization of plant-based foods and beverages with Burcon's proprietary plant protein extraction and purification technology, while leveraging Merit Foods' plant protein production capabilities. During the year ended March 31, 2021, Burcon conducted research work and provided various samples to Nestlé for testing and analysis. The research conducted by Burcon was successful in identifying processing techniques to modify and improve the functionality of Burcon's and Merit's plant-based proteins and as such, Burcon's role in the JDA ended in January 2021, Merit has continued to work with Nestlé for the supply of Merit Foods' plant protein products. During the year ended March 31, 2021, Burcon recorded $250,000 that was received in fiscal 2020 from Nestlé as research income.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
6. Deferred development costs
On July 1, 2019, the Company commenced deferring development costs related to its pea and canola technologies. The Company ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized over the useful life of 15 years.
| $ | |||
| Cost at March 31, 2021 | 4,463,748 | ||
| Additions | 1,858,780 | ||
| Cost at March 31, 2022 | 6,322,528 | ||
| Amortization and impairment at March 31, 2021 | - | ||
| Amortization | 105,375 | ||
| Amortization and impairment at March 31, 2022 | 105,375 | ||
| Net book value at March 31, 2022 | 6,217,153 | ||
| Cost at March 31, 2020 | 1,554,584 | ||
| Additions | 2,909,164 | ||
| Cost at March 31, 2021 | 4,463,748 | ||
| Amortization and impairment at March 31, 2020 | - | ||
| Amortization | - | ||
| Amortization and impairment at March 31, 2021 | - | ||
| Net book value at March 31, 2021 | 4,463,748 |
7. Investment in and loan to Merit Functional Foods Corporation
On May 23, 2019, Burcon NutraScience Holdings Corp. ("Burcon Holdings") entered into a shareholders' agreement (the "Shareholders' Agreement") with two other entities (the "Partners") to become shareholders of Merit Foods, to build and own a commercial production facility (the "Flex Production Facility") in Manitoba, Canada to produce, sell, market and distribute Burcon's Peazazz® and Peazac® pea proteins, Burcon's Puratein®, Supertein® and Nutratein® canola proteins, as well as Burcon's pea and canola protein blends that it has branded Nutratein-PS® and Nutratein-TZ®. The construction of the Flex Production Facility was completed by December 31, 2020.
On inception, Burcon Holdings held 40% of the issued and outstanding shares of Merit Foods, and the two other parties held 40% and 20%, respectively. Each shareholder made its respective capital loan advances in June, September, December 2019 and February 2020 by way of shareholder loans totalling $32.5 million (the "Merit Shareholder Loans").
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
On August 27, 2020, Bunge Limited ("Bunge") made an investment of $30 million into Merit Foods. In addition to purchasing equity directly from Merit Foods, Bunge purchased additional shares and debt from the other shareholders of Merit Foods. As a result of these transactions, Bunge became a 25% shareholder in Merit Foods and Burcon's ownership interest in Merit Foods decreased to 33.3%. As a result of the dilution of Burcon's ownership interest in Merit Foods, Burcon recorded a dilution gain of $6,384,942 in fiscal 2021.
In October 2021, Bunge exercised its right to subscribe for additional common shares of Merit Foods for an aggregate subscription price of $4.95 million. Following the investment by Bunge in Merit Foods in October 2021, Bunge's interest in Merit Foods increased from 25.0% to 28.9% and Burcon's interest in Merit Foods decreased from 33.3% to 31.6%. As a result of the dilution in Burcon's ownership interest in Merit Foods, Burcon recorded a dilution gain of $961,164 in fiscal 2022.
Merit completed the commissioning process on December 31, 2021. In addition, the pea and canola protein technology that is currently under license with Merit Foods was capable of operating in the manner intended by management with the commissioning of the Flex Production Facility, Burcon ceased capitalization of costs to deferred development and commenced amortization of deferred development costs on January 1, 2022. Merit commenced the amortization of the facility on January 1, 2022.
Under the amended license and production agreement (the "Amended License Agreement"), Burcon receives running royalties on the net revenue (as defined in the Amended License Agreement) from sales of pea and canola products (the "Licensed Products") by Merit Foods. Burcon is responsible for technology transfer to Merit Foods, and has been providing assistance, under a services agreement (the "Services Agreement"), to support design, construction and commissioning of the commercial protein production facility, as well as providing other services and sample production services.
As of March 31, 2022, Burcon Holdings has made capital loan advances of $13.0 million to Merit Foods in the form of shareholder loans.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
| Investment in Share capital $ |
Capital Contribution $ |
Loan receivable $ |
Total net investment $ |
|||||||||
| At inception | 1 | - | 11,000,000 | 11,000,001 | ||||||||
| Modification to loan terms | - | 8,871,512 | (8,871,512 | ) | - | |||||||
| Capital loan advance | - | 1,613,002 | 386,998 | 2,000,000 | ||||||||
| Share of loss in Merit Foods | - | (939,806 | ) | - | (939,806 | ) | ||||||
| Interest accretion | - | - | 144,343 | 144,343 | ||||||||
| Net investment in Merit Foods, March 31, 2020 | 1 | 9,544,708 | 2,659,829 | 12,204,538 | ||||||||
| Share of loss in Merit Foods | - | (2,421,459 | ) | - | (2,421,459 | ) | ||||||
| Dilution gain of investment in Merit Foods | - | 6,384,942 | - | 6,384,942 | ||||||||
| Interest accretion | - | - | 307,875 | 307,875 | ||||||||
| Expected credit loss provision | - | - | (74,193 | ) | (74,193 | ) | ||||||
| Net Investment in Merit Foods, March 31, 2021 | 1 | 13,508,191 | 2,893,511 | 16,401,703 | ||||||||
| Share of loss in Merit Foods | - | (4,294,789 | ) | - | (4,294,789 | ) | ||||||
| Dilution gain of investment in Merit Foods | - | 961,164 | - | 961,164 | ||||||||
| Interest accretion | - | - | 343,503 | 343,503 | ||||||||
| Expected credit loss provision | - | - | (8,807 | ) | (8,807 | ) | ||||||
| Net Investment in Merit Foods, March 31, 2022 | 1 | 10,174,566 | 3,228,207 | 13,402,774 |
From inception to December 2019, the Merit Shareholder Loans were recorded as loan receivable. In December 2019, the terms of the Merit Shareholder Loans were finalized. The loans are non-interest bearing, unsecured, subordinated to Merit Foods' other secured and unsecured debts, have a term of 15 years, and may be repaid by Merit Foods, without penalty or bonus, on a pro-rata basis based on the proportionate share of each shareholder's loan outstanding in relation to the other shareholders of Merit Foods applied to the outstanding principal amounts. As a result, Burcon recalculated the fair value at that date, resulting in a reduction of the fair value of the loan receivable that was transferred to a capital contribution account. Notional interest is accruing on the loan receivable at 11% per annum, which is considered to be the market rate of interest. For the year ended March 31, 2022, the Company recorded interest accretion of $343,503 (2021 - $307,875; 2020 - $144,343). During the year ended March 31, 2021, an expected credit loss provision of $74,193 was recognized in relation to the loan receivable and included in interest and other expense on the consolidated statement of operations and comprehensive loss. During the year ended March 31, 2022, an additional credit loss provision of $8,807 was recognized by the Company.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Subsequent to March 31, 2022, the Company made an additional capital loan advance of $3.16 million to Merit Foods in the form of a shareholder loan with the same terms as the previous capital loan advances.
During fiscal 2021, Merit Foods secured a debt financing package of up to $85 million of capital from a syndicate of lenders including Export Development Canada ("EDC"), Farm Credit Canada ("FCC") and the Canadian Imperial Bank of Commerce ("CIBC"). The Partners and Burcon Holdings were required to pledge their shares in Merit Foods as security under the loan facilities from EDC. Bunge also pledged its shares as security under the EDC loan facilities after its investment in Merit Foods. In connection with the loan facilities from EDC, Merit Foods had to fulfill various obligations, including the establishment and maintenance of a cost overrun account in a prescribed amount in connection with the costs related to construction of the Flex Production Facility. $6.5 million of this amount was permitted to be funded by way of a letter of credit ("LC"). To assist Merit Foods to fulfill this obligation, Burcon Holdings obtained a LC from HSBC Bank Canada ("HSBC") in April 2020, which was secured by a term deposit with HSBC in the same amount. As part of the investment by Bunge into Merit Foods, the LC was released on August 28, 2020.
In connection with the LC, Burcon Holdings entered into a short-term loan agreement (the "Merit Loan Agreement") with Merit Foods in the amount of $6.5 million (the "Merit Loan"). The Merit Loan bore interest at 5% per annum, compounded annually, payable by way of a lump sum balloon payment at the end of the term. Concurrent with the termination of the LC on August 28, 2020, the Merit Loan Agreement was also terminated on the same date. For the year ended March 31, 2022, Burcon recorded interest income of $nil (2021 - $120,205; 2020 - $nil) related to the Merit Loan. Burcon Holdings and the Partners provided guarantees in the aggregate amount of $1.25 million to CIBC, of which Burcon Holdings' proportionate share was $500,000. In connection with Bunge's investment into Merit Foods in August 2020, Burcon Holdings' amount was reduced to $416,625.
During fiscal 2021, Merit Foods secured additional debt financing of $10 million in the form of a 10-year interest-free loan from Agriculture and Agri-Food Canada (the "AIP Loan"). Burcon Holdings and the Partners provided a guarantee for the AIP Loan (the "AIP Guarantee"). The obligations of the AIP Guarantee are joint and several. However, Burcon Holdings and the Partners (the "AIP Guarantors") entered into a reciprocal indemnity agreement (the "Indemnity Agreement'). Under the Indemnity Agreement, if any AIP Guarantor (each, a "Paying Guarantor") is required to make payment under the AIP Guarantee and any other AIP Guarantor (each, a "Contributing Guarantor") has not made a corresponding payment equal to its share based on its shareholdings in Merit Foods ("Contributive Share"), such Contributing Guarantor(s) shall pay the Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the AIP Guarantee will have been borne by the AIP Guarantors in their original respective shareholding percentage in Merit Foods.
During fiscal 2021, Merit Foods secured a total of $99.2 million financing package from the Government of Canada that included the financing noted above from EDC, FCC, AIP and Protein Industries Canada ("PIC"). In addition to the co-investment received by Merit Foods from PIC, a further co-investment by PIC to Merit Foods ("PIC 2") was announced in May 2021 to develop new plant-based products. The project has a total investment of $7.9 million, with PIC funding one-half of the total investment into the project.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
During fiscal 2022, Merit Foods and three of its partners received a further co-investment from PIC for the development and distribution of a line of meat alternatives to pork and Wagyu beef, which will be sold under two of its partners' branded products. The new line of meat alternatives is expected to be distributed throughout Europe, Asia and North America. The project has a total investment of $7.6 million, with PIC funding one-half of the total investment into the project. Also during fiscal 2022, Merit Foods obtained additional financing of $10.0 million from the FCC.
During fiscal 2022, the shareholders of the Partners (the "EDC Guarantors") provided guarantees of $10 million (the "EDC Guarantee") to EDC in order for Merit Foods to meet certain credit requirements required by EDC under the loan agreements with EDC. Burcon Holdings and the EDC Guarantors entered into a reciprocal indemnity agreement (the "EDC Indemnity Agreement"). Under the EDC Indemnity Agreement, if any EDC Guarantor (each, a "EDC Paying Guarantor") is required to make payment under the EDC Guarantee and any other EDC Guarantor and Burcon Holdings (each, a "EDC Contributing Guarantor") has not made a corresponding payment equal to its Contributive Share, such EDC Contributing Guarantor(s) shall pay the EDC Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the EDC Guarantee will have been borne by the EDC Guarantors in their respective Contributive Shares. Burcon's Contributive Share under the EDC Indemnity Agreement is 44.44%. As a result of Bunge’s investment in October 2021, the aggregate liability of the EDC Guarantors under the EDC Guarantee was reduced to $5.05 million, and Burcon’s maximum liability under the EDC Indemnity Agreement has been reduced to $2.24 million. Subsequent to March 31, 2022, as a result of the $10 million cash injection by the shareholders of Merit Foods, the EDC released the personal guarantees provided by the EDC Guarantors. As a result, the EDC Indemnity Agreement was also released.
During the year ended March 31, 2022, Burcon recorded royalty revenues of $171,471 (2021 - $nil; 2020 - $nil) from Merit's sales of the Licensed Products, of which $124,359 was included in amounts receivable as at March 31, 2022 (2021 - $nil; 2020 - $nil).
For the year ended March 31, 2022, included in management fee income is $110,504 (2021 - $334,760; 2020 - $350,014) for services provided and $287 (2021 - $524,321; 2020 - $114,766) of samples sold to Merit Foods, of which $1,210 was included in amounts receivable at March 31, 2022 (2021 - $66,709; 2020 - $110,594).
Merit Foods also provides certain consulting services to Burcon. For the year ended March 31, 2022, Burcon recorded professional fee expense of $9,415 (2021 - $10,720; 2020 - $nil), of which $nil was included in accounts payable and accrued liabilities as at March 31, 2022 (2021 - $nil; 2020 - $nil).
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Summary financial position for Merit Foods as at March 31, 2022 and 2021
| As at March 31, 2022 |
As at March 31, 2021 |
|||||
| $ | $ | |||||
| Current assets | 8,772,383 | 16,125,384 | ||||
| Non-current assets | 132,469,291 | 124,970,303 | ||||
| Current liabilities | 6,026,955 | 9,303,585 | ||||
| Non-current liabilities | 103,910,943 | 93,642,063 |
Summary financial results for Merit Foods
| Year ended March 31, 2022 |
Year ended March 31, 2021 |
Period ended March 31, 20201 |
|||||||
| $ | $ | $ | |||||||
| Total revenue | 6,284,174 | 396,093 | - | ||||||
| Loss for the period | (13,271,029 | ) | (6,837,195 | ) | (2,349,515 | ) |
| 1Merit Foods was incorporated on May 15, 2019. As a result, information in this table represents certain financial information of Merit Foods from the date of its incorporation to March 31, 2020. |
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
8. Convertible debentures, convertible note, and short-term loan
Convertible debentures
On December 10, 2019, the Company issued convertible debentures (the "Debentures") through a non-brokered private placement for an aggregate principal amount of $9.5 million. Certain directors and an officer of the Company subscribed for Debentures totalling $2 million in principal amount. Each Debenture consisted of $1,000 principal amount, bore interest at a rate of 8.5% per annum, payable semi-annually in arrears and was unsecured.
The Debentures were convertible at the option of the holder, in whole or in part, into common shares of the Company at a conversion price of $1.05 per share. During the year ended March 31, 2021, the holders of the Debentures converted principal amount of $1,704,500 for the issuance of 1,623,327 common shares of the Company.
Burcon had the right, at its sole discretion, to force the conversion of the Debentures if the shares traded at or above $2.15 for a period of 14 consecutive trading days. The Company determined it had met this condition between August 12 to August 31, 2020 and issued a notice to the holders of the Debentures for conversion of the Debentures to common shares on September 8, 2020. As a result of the conversion of $7,795,500 of outstanding principal amount of the Debentures, an aggregate of 7,424,274 common shares were issued to the holders of the Debentures.
For the year ended March 31, 2022, the Company recorded interest expense of $nil (2021 - $637,522; 2020 - $nil).
Convertible note
The Company had a convertible note (the "Note") with Large Scale Investments Limited ("Large Scale'), a wholly owned subsidiary of Firewood Elite Limited ("Firewood"), for the principal amount of $2.0 million (the "Principal Amount"). The Note bore interest at 8% per annum, compounded monthly. Firewood, a related party of Burcon that has significant influence over the Company, is wholly owned by Mr. Alan Chan, a director of the Company.
On May 21, 2019, the Company and Large Scale amended (the "Amendment") the Note's Maturity Date to June 21, 2019, as well as providing Large Scale with the right to offset any amounts due to it under the Note against any obligations of Large Scale to pay for subscription proceeds of any rights offering that Burcon may conduct. In connection with the 2019 Rights Offering (note 9(a)), Large Scale exercised its right to offset the amounts due under the Note against its obligations to pay for subscription proceeds under the 2019 Rights Offering. The offset was completed on June 25, 2019. The total amount offset under the Note included the principal amount and accrued interest of $2,565,022.
The conversion option was recorded as a derivative liability. Under the terms of the Note, there are certain conditions where the conversion price may be adjusted. Therefore, in accordance with IFRS, an obligation to issue shares for a price that is not fixed must be classified as a derivative liability and measured at fair value, with changes recognized in change in fair value of conversion option in the consolidated statement of operations and comprehensive loss.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
The conversion and prepayment options were recorded as a net derivative liability and measured at fair value, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss. The fair value of the conversion and prepayment options was estimated based on a methodology for pricing convertible bonds using the Partial Differential Equation Method, with the following initial assumptions: expected volatility of 63%; expected dividend per share of $nil; risk-free rate of 0.60%, entity-specific credit spread, and expected life of 3 years. The assumptions as at March 31, 2019 were as follows: expected volatility of 99%, expected dividend per share of $nil; risk-free rate of 1.63%, initial entity-specific credit spread adjusted by the movement in the option adjusted spread of the Canada High Yield Index, and expected life of 1.1 years. The initial fair value of the net derivative liability was estimated as $189,705 as at the issue date of the Note. As at March 31, 2019, the fair value of the net derivative liability was estimated to be $5,384. Upon the offset by Large Scale of its obligations to pay for subscription proceeds under the 2019 Rights Offering, the net derivative liability was expensed during fiscal 2020 as financing expense.
Short-term loan
During the year ended March 31, 2020, the Company had a short-term loan with Large Scale to provide Burcon with an unsecured loan for up to $1.5 million (the "Loan"). The Loan bore interest at 18% per annum on the amount drawn, and 3% per annum on the undrawn portion. The Loan provided the Lender with the right to offset any amount due to it under the Note against any obligations of the Lender to pay for subscription proceeds of any rights offering that Burcon may conduct. In connection with the 2019 Rights Offering (note 9(a)), Large Scale exercised its right to offset the amounts due under the Loan against its obligations to pay for subscription proceeds under the 2019 Rights Offering. The offset was completed on June 25, 2019 for $1,436,629 against the principal amount. The balance of the principal amount of $63,371 and accrued interest of $107,173 was repaid to Large Scale in cash on June 28, 2019.
9. Shareholders' equity
a) Capital stock
Authorized
Unlimited number of common shares without par value
2020 Equity Offering
On February 19, 2020, the Company completed a bought deal equity offering of 7,419,800 units (the "Units") at a price of $1.55 per Unit for aggregate gross proceeds to the Company of $11.5 million (the "Offering") and net proceeds of $10.3 million.
Each Unit consisted of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a "Warrant"). Each Warrant was exercisable to acquire one common share until February 19, 2022 at an exercise price of $2.00 per Warrant Share. In addition to a cash commission, the agents received compensation options (Agents' Warrants) entitling the agents to purchase up to 519,386 common shares. Each Agent's Warrant was exercisable to acquire one common share of the Company at an exercise price of $2.00 per share until February 19, 2022. During the year ended March 31, 2022, warrants were exercised for 105,750 common shares (2021 - 2,493,254; 2020 - $nil), providing proceeds of $211,500 (2021 - $4,986,508; 2020 - $nil). A total of 1,630,282 Warrants and Agents' Warrants expired unexercised on February 19, 2022.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
2019 Rights Offering
On June 25, 2019, the Company completed a rights offering (the "2019 Rights Offering") for 44,083,203 common shares at $0.35 per common share for gross proceeds of $15,429,121, and net proceeds of $15,284,430. Burcon issued to each shareholder as of the record date of May 30, 2019 one transferrable right (the "2019 Rights") for each common share held by such shareholder. Every 2019 Right entitled the holder thereof to purchase one common share in the Company at a price of $0.35 per common share.
The Company's directors, officers and persons controlling over 10% of the common shares of the Company agreed to exercise at least all of the 2019 Rights they were issued in connection with the 2019 Rights Offering for 14,306,740 common shares, representing 32.5% of the 2019 Rights Offering.
Of the net proceeds of the 2019 Rights Offering, $2,565,022 were used to repay the Note and accrued interest to Large Scale (note 8) and $1,607,183 were used to repay the Loan and accrued interest to Large Scale (note 8).
c) Contributed surplus
Contributed surplus comprises the value ascribed to expired warrants and options and forfeited vested options, previously categorized in either warrants or options, as applicable, within shareholders' equity.
d) Options
The Company has a stock option plan in which all directors, officers, employees and consultants of the Company and its subsidiaries are eligible to participate.
At March 31, 2022, 5,324,481 (March 31, 2021 - 4,949,106) options to purchase common stock are outstanding from the stock option plan. These options, when vested under the terms of the plan, are exercisable at prices ranging between $0.23 and $4.89 per common share. An additional 5,548,393 (2021 - 5,894,031) options may be granted in future years under this plan. Unless otherwise determined by the board of directors, the options have a term of up to 10 years from the date of grant. The vesting terms are determined at the discretion of the board of directors at the time of grant. All grants are recognized using graded vesting, with each vesting tranche being valued separately, and the fair value of each tranche recognized over its respective vesting period.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
| 2022 | 2021 | ||||||||||||
| Number of options |
Weighted average exercise price $ |
Number of options |
Weighted average exercise price $ |
||||||||||
| Outstanding - Beginning of year | 4,949,106 | 2.63 | 4,507,606 | 3.32 | |||||||||
| Granted | 1,245,000 | 1.64 | 1,253,000 | 3.95 | |||||||||
| Exercised | (264,299 | ) | 0.74 | (94,000 | ) | 0.56 | |||||||
| Forfeited | (505,326 | ) | 3.10 | - | - | ||||||||
| Expired | (100,000 | ) | 7.54 | (717,500 | ) | 9.51 | |||||||
| Outstanding - End of year | 5,324,481 | 2.36 | 4,949,106 | 2.63 | |||||||||
The following table summarizes information about stock options outstanding and exercisable at March 31, 2022:
| Options outstanding | Options exercisable | |||||||||||||||
| Range of exercise prices $ |
Number outstanding at March 31, 2022 |
Weighted average remaining contractual life (years) |
Weighted average exercise price $ |
Number exercisable at March 31, 2022 |
Weighted average exercise price $ |
|||||||||||
| 0.23 - 0.69 | 630,334 | 6.50 | 0.39 | 630,334 | 0.39 | |||||||||||
| 1.29 - 2.99 | 3,388,314 | 5.39 | 2.05 | 2,634,644 | 2.24 | |||||||||||
| 4.01 - 4.89 | 1,305,833 | 5.13 | 4.10 | 790,158 | 4.06 | |||||||||||
| 5,324,481 | 5.46 | 2.36 | 4,055,136 | 2.31 | ||||||||||||
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
The fair value of each option is estimated as at the date of grant or other measurement date using the Black-Scholes option pricing model and the following weighted average assumptions:
| 2022 | 2021 | 2020 | |||||||
| Dividend yield | 0.0% | 0.0% | 0.0% | ||||||
| Expected volatility | 81.9% | 78.5% | 75.1% | ||||||
| Risk-free interest rate | 1.7% | 0.5% | 1.3% | ||||||
| Expected forfeitures | 6.6% | 7.2% | 7.7% | ||||||
| Expected average option term (years) | 5.8 | 6.7 | 7.9 |
The expected volatility and expected forfeitures are based on historical volatility and forfeitures. The risk-free rate of return is the yield on a zero-coupon Canadian treasury bill of a term consistent with the expected average option term. The expected average option term is the average expected period to exercise, based on the historical activity patterns for each individually vesting tranche.
The weighted average fair value of the options granted during the year ended March 31, 2022 was $1.13 (2021 - $2.73; 2020 - $1.36) per option.
Included in research and development expenses is $403,695 (2021 - $7,706; 2020 - $16,757) (note 10) and in general and administrative expenses (salaries and benefits) is $1,031,983 (2021 - $1,550,828; 2020 - $469,472) (note 11) of stock-based compensation. Included in deferred development costs is $524,947 (2021 - $319,610; 2020 - $50,660) of stock-based compensation.
e) Restricted Share Units ("RSU") Plan
At the annual general meeting held in September 2021, the shareholders of the Company approved a new RSU plan in which all directors, officers, employees and consultants of the Company and its subsidiaries are eligible to participate. Each RSU is intended to be redeemable for one common share of the Company but, at the election of the Company, may be redeemed for cash in the amount equal to the market value of the Company's shares on vesting date, or a common share acquired by the Company on a public exchange. The RSUs must be redeemed no later than December 31st of the third year after the date of grant. The vesting terms are determined at the discretion of the board of directors at the time of grant. The fair value of the grants is determined on the date of grant and is recognized using graded vesting, with each vesting tranche being valued separately, and the fair value of each tranche recognized over its respective vesting period. During the year, 121,000 RSUs were granted to employees with a grant date fair value of $1.35 which vest over three years. As at March 31, 2022, 118,000 RSUs were outstanding.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
10. Research and development
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Salaries and benefits (note 9) | 2,418,468 | 1,602,709 | 1,317,920 | ||||||
| Laboratory operation | 325,973 | 305,135 | 290,336 | ||||||
| Amortization of property and equipment | 236,021 | 225,180 | 72,187 | ||||||
| Rent | 139,862 | 108,346 | 87,720 | ||||||
| Inventory written off to research and development | 132,186 | - | - | ||||||
| Amortization of deferred development costs | 105,375 | - | - | ||||||
| Analyses and testing | 74,983 | 62,874 | 55,740 | ||||||
| Travel and meals | - | - | 16,554 | ||||||
| Gross research and development expenses | 3,432,868 | 2,304,244 | 1,840,457 | ||||||
| Allocated to deferred development costs | (1,587,269 | ) | (1,163,856 | ) | (655,132 | ) | |||
| Allocated to inventory production | - | (726,383 | ) | (463,474 | ) | ||||
| Net research and development expenses | 1,845,599 | 414,005 | 721,851 |
For the year ended March 31, 2022, total research and development expenses have been reduced by COVID-19 subsidies of $225,309 (2021 - $115,013; 2020 - $nil) from the Canada Emergency Wage Subsidy ("CEWS") and Canada Emergency Rent Subsidy programs ("CERS), as well as Manitoba government training grant of $nil (2021 - $45,099; 2020 - $21,529). The CEWS and CERS programs were terminated in October 2021.
As Merit Foods began producing its own samples after completion of the Flex Production Facility to provide to its customers, Merit Foods no longer required Burcon to supply samples. As a result, Burcon wrote off its pea and canola inventory on-hand during the year ended March 31, 2022.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
11. General and administrative
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Salaries and benefits (note 9) | 2,493,640 | 2,635,873 | 1,350,824 | ||||||
| Professional fees | 714,661 | 465,226 | 274,356 | ||||||
| Investor relations | 499,086 | 247,735 | 131,646 | ||||||
| Office supplies and services (note 13) | 351,893 | 170,494 | 165,050 | ||||||
| Transfer agent and filing fees | 91,856 | 57,030 | 27,289 | ||||||
| Financing expense (notes 7 and 13) | 40,952 | 23,790 | 88,920 | ||||||
| Travel and meals | 40,504 | 248 | 66,225 | ||||||
| Amortization | 36,700 | 47,474 | 1,949 | ||||||
| Other | 6,311 | 6,272 | 3,788 | ||||||
| Rent | - | - | 76,226 | ||||||
| 4,275,603 | 3,654,142 | 2,186,273 |
For the year ended March 31, 2022, salaries and benefits have been reduced by $114,864 (2021 - $145,765; 2020 - $nil) from COVID-19 subsidies received from the CEWS program.
12. Basic and diluted loss per share
The following table sets forth the computation of basic and diluted loss per share:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Loss for the year, being loss attributable to common shareholders - basic and diluted | (10,258,407 | ) | (617,492 | ) | (4,633,494 | ) | |||
| Shares | Shares | Shares | |||||||
| Weighted average common shares - basic and diluted | 108,588,454 | 102,890,726 | 78,935,751 | ||||||
| Basic and diluted loss per share | (0.09 | ) | (0.01 | ) | (0.06 | ) |
For the years ended March 31, 2022, 2021 and 2020, the Company excluded all potential common share equivalents from the diluted loss per share calculation as they were anti-dilutive.
13. Related party transactions
Burcon engaged Burcon Group Limited, a company that is related by virtue of common officers up to March 31, 2022, for the office space rental to April 2020. For the year ended March 31, 2022, the Company made payments of $nil (2021 - $4,584; 2020 - $75,006).
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Burcon had the following transactions with Regent Park Realty Inc., a company that is controlled by an entity with common directors (and also with common officers prior to September 1, 2021) with the Company. One of these directors also has indirect significant influence over the Company:
● For the year ended March 31, 2022, included in general and administrative expenses (management fees) is $2,834 (2021 - $2,241; 2020 - $1,181) for administrative services provided to the Company. At March 31, 2022, $522 (March 31, 2021 - $75; March 31, 2020 - $11) of this amount is included in accounts payable and accrued liabilities. For the year ended March 31, 2022, included in interest and other income is $3,931 (2021 - $7,709; 2020 - $14,197) for legal and accounting services provided by the Company. At March 31, 2022, $nil (March 31, 2021 - $437; March 31, 2020 - $1,785) of this amount is included in amounts receivable.
Burcon had the Loan (note 8) and Note (note 8) with Large Scale, a company wholly owned by Firewood. For the year ended March 31, 2022, included in interest expense is $nil (2021 - $nil; 2020 - $56,502) related to the Note and $nil (2021 - $nil; 2020 - $60,756) related to the Loan.
Upon completion of the 2019 Rights Offering, the exercise price for the share purchase warrants issued to Dr. Yap, the Company's former Chief Executive Officer, was adjusted from $0.69 per share to $0.45 per share. The Company recorded $85,420 as financing expense during fiscal 2020.
Burcon has a services agreement (the "Services Agreement") with Merit Foods to provide technical, administrative and general management services, research and analytical services and sample production services based on rates set out in the Services Agreement. Merit Foods also provides certain technical and consulting services to Burcon. See note 7 for details.
In connection with the LC, Burcon Holdings entered into the Merit Loan Agreement with Merit Foods in the amount of $6.5 million. During the year ended March 31, 2022, Burcon recorded interest income of $nil (2021 - $120,205; 2020 - $nil) related to the Merit Loan, of which $nil was included in amounts receivable as at March 31, 2022 (2021 - $nil).
Certain directors and an officer subscribed for $2.0 million of the Debentures. During the year ended March 31, 2022, the Company made total convertible debenture interest payments of $nil (2021 - $126,803; 2020 - $nil) to these directors and officer.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
14. Key management compensation
Key management includes the Company's CEO and CFO. Remuneration of directors and key management personnel comprises:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Short-term benefits | 726,158 | 721,137 | 570,271 | ||||||
| Option-based awards | 758,013 | 1,445,132 | 395,586 | ||||||
| 1,484,171 | 2,166,269 | 965,857 |
Short-term benefits comprise salaries, director fees and employment benefits.
Option-based awards represent the cost of the group of senior management and directors' participation in the incentive stock option plan. The costs are measured by the fair value of instruments granted, accounted for in accordance with IFRS 2, Share-based Payment. For details of these plans refer to note 9 to these consolidated financial statements.
15. Income taxes
The recovery of income taxes differs from the amount obtained by applying the statutory Canadian federal and provincial income tax rates to loss for the years as follows:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Recovery of income taxes based on the combined statutory income tax rate of 27.0% (2021 - 27.0%; 2020 - 27.0%) | (2,819,000 | ) | (167,000 | ) | (1,251,000 | ) | |||
| Changes in unrecognized deferred tax assets | 2,520,000 | (414,000 | ) | 1,384,000 | |||||
| Financing costs | - | (1,000 | ) | (316,000 | ) | ||||
| Non-deductible items and tax adjustments | 299,000 | 582,000 | 183,000 | ||||||
| Recovery of income taxes | - | - | - |
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
As at March 31, 2022 the Company has non-capital losses of approximately $70,041,000 (2021 - $62,755,000; 2020 - $58,032,000) available to reduce taxable income in future years. These losses expire as follows:
| $ | ||
| 2026 | 800,000 | |
| 2027 | 1,124,000 | |
| 2028 | 1,344,000 | |
| 2029 | 1,596,000 | |
| 2030 | 2,691,000 | |
| 2031 | 4,358,000 | |
| 2032 | 5,327,000 | |
| 2033 | 4,606,000 | |
| 2034 | 5,507,000 | |
| 2035 | 5,623,000 | |
| 2036 | 4,895,000 | |
| 2037 | 4,612,000 | |
| 2038 | 5,303,000 | |
| 2039 | 5,215,000 | |
| 2040 | 4,472,000 | |
| 2041 | 5,715,000 | |
| 2042 | 6,853,000 | |
| 70,041,000 |
In addition, the Company has SR&ED expenditures of approximately $15,348,000 available to carry forward indefinitely. ITCs of $4,577,000 may be used to offset deferred income taxes otherwise payable and expiring between 2023 and 2042. For the year ended March 31, 2022, included in interest and other income is $26,990 (2021 - $nil; 2020 - $18,655) of refundable ITCs, of which $26,990 is included in amounts receivable at March 31, 2022 (2021 - $nil; 2020 - $18,655). The tax effects of temporary differences that give rise to deferred income tax assets are as follows:
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
| 2022 $ |
2021 $ |
|||||
| Deferred income tax assets (liability) | ||||||
| SR&ED expenditures | 4,132,000 | 4,073,000 | ||||
| Losses from operations carried forward | 18,910,000 | 16,943,000 | ||||
| Investment in Merit Foods | (59,000 | ) | (918,000 | ) | ||
| Deferred development costs | (1,294,000 | ) | (962,000 | ) | ||
| Financing costs | 167,000 | 245,000 | ||||
| Property and equipment | 298,000 | 245,000 | ||||
| Right-of-Use assets/liability | (14,000 | ) | (5,000 | ) | ||
| Unrecognized deferred income tax assets | 22,140,000 | 19,621,000 |
Management believes the realization of income tax benefits related to these losses and other potential deferred income tax assets is uncertain at this time and cannot be viewed as probable. Accordingly, the Company has not recognized these deferred income tax assets.
16. Financial instruments
Credit risk
The financial instruments that expose the Company to a concentration of credit risk are cash and cash equivalents, amounts receivable and capital loan receivable from Merit Foods. The Company's cash and cash equivalents may comprise interest-bearing savings instruments with Canadian chartered banks. The Company limits its exposure to credit loss by placing its cash and cash equivalents with two Canadian chartered banks.
The capital loan receivable at March 31, 2022 with a carrying value of $3,228,207 from Merit Foods is non-interest bearing, unsecured, subordinated to Merit Foods' other secured and unsecured debts, and has a term of 15 years. An expected credit loss provision of $74,193 was recorded during fiscal 2021 in relation to the loan receivable from Merit Foods. An additional provision of $8,807 was recorded during fiscal 2022, resulting in a total expected credit loss provision of $83,000. The insignificant change in the expected credit loss was as a result of insignificant changes in the expected probability of default and loss given default percentage at March 31, 2022.
Interest rate risk
All of the Company's financial instruments are non-interest bearing except for cash and cash equivalents that earn interest at variable market rates, short-term deposits that earn interest at fixed interest rates, and the Merit Loan that bore interest at a fixed interest rate. Burcon's cash and cash equivalents are held at two Canadian chartered banks to maximize interest and to diversify risk. For the year ended March 31, 2022, the weighted average interest rate earned on the Company's cash and cash equivalents was 0.42% per annum (2021 - 0.36% per annum; 2020 - 1.92% per annum). The impact of a 1% strengthening or weakening of interest rates on the Company's cash and cash equivalents at March 31, 2022 is estimated to be a $70,000 increase or decrease in interest income per year.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
Liquidity risk
The Company manages liquidity risk through the management of its capital structure (note 17). It also manages liquidity risk by monitoring actual and forecasted cash flows taking into account current and planned operations. The Company's estimated minimum contractual undiscounted cash flow requirement for its financial liabilities at March 31, 2022 is $906,651, all of which is within the next 12 months.
Fair value
The fair value of the Company's short-term financial assets and financial liabilities, including cash and cash equivalents, restricted cash, amounts receivable, accounts payable and accrued liabilities approximates their carrying values due to the short-term maturities of these financial instruments.
The fair value of the loan to Merit Foods is a level 3 fair value and was estimated based on the loan discounted at the market rate.
The carrying values and fair values of financial instruments, by class, are as follows as at March 31, 2022 and 2021:
| As at March 31, 2022 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | $ | $ | $ | $ | ||||||||
| Cash and cash equivalents | - | 7,000,824 | - | 7,000,824 | ||||||||
| Restricted cash | - | 122,707 | - | 122,707 | ||||||||
| Amounts receivable Loan to Merit Foods |
- - |
200,342 3,228,207 |
- - |
200,342 3,311,207 |
||||||||
| Total | - | 10,552,080 | - | 10,635,080 | ||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 906,651 | 906,651 | ||||||||
| Deferred revenue | - | - | 122,707 | 122,707 | ||||||||
| Total | - | - | 1,029,358 | 1,029,358 |
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
| As at March 31, 2021 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | $ | $ | $ | $ | ||||||||
| Cash and cash equivalents | - | 13,972,659 | - | 13,972,659 | ||||||||
| Amounts receivable | - | 338,715 | - | 338,715 | ||||||||
| Loan to Merit Foods | - | 2,893,511 | - | 2,967,704 | ||||||||
| Total | - | 17,204,885 | - | 17,279,078 | ||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 1,418,049 | 1,418,049 | ||||||||
| Total | - | - | 1,418,049 | 1,418,049 | ||||||||
Currency risk
The Company has not hedged its exposure to currency fluctuations. As at March 31, 2022 and 2021, the Company is exposed to currency risk through the following assets and liabilities denominated in U.S. dollars:
| March 31, 2022 |
March 31, 2021 |
|||||
| U.S. Dollars | ||||||
| Cash and cash equivalents | $ | 69,402 | $ | 27,752 | ||
| Amounts receivable | - | 1,851 | ||||
| Accounts payable and accrued liabilities | (5,504 | ) | - | |||
| Net exposure | $ | 63,898 | $ | 29,603 | ||
| Canadian dollar equivalent | $ | 79,847 | $ | 37,226 |
Based on the above net exposure at March 31, 2022, a 10% appreciation or depreciation of the U.S. dollar against the Canadian dollar would have resulted in a decrease/increase of approximately $6,000 (2021 - $3,000) in the Company's loss from operations.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
17. Capital disclosures
The Company considers its capital to be its shareholders' equity.
The Company manages its capital structure to have sufficient resources available to meet day-to-day operating requirements, continue as a going concern and fund its research and development program. The Company is dependent on non-operating sources of cash, primarily from issuing equity and debt, to fund its operations and research development programs. The Company monitors its capital and the expected cash flows required to achieve its business objectives to determine its future financing needs. It seeks additional capital when deemed appropriate, but there is no assurance that it will be able to secure the necessary capital when required.
The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the year ended March 31, 2022.
18. Segment information
The Company operates in a single reportable operating segment and geographic location involving the development of plant-based proteins. All non-current assets are located in Canada.
All revenues are generated in Canada, Switzerland, and the USA. For the year ended March 31, 2022, revenues of $171,471 (2021 - $nil; 2020 - $nil) were generated in Canada, $nil (2021 - $250,000; 2020 - $nil) were generated in Switzerland, and $nil (2021 - $8,646; 2020 - $31,134) were generated in the U.S.
19. Subsequent events
Subsequent to March 31, 2022:
a) The Company made an additional capital loan advance to Merit Functional Foods for $3,159,558 (note 7).
b) As a result of the $10 million cash injection by the shareholders of Merit Foods, EDC released the personal guarantees provided by the EDC Guarantors. As a result, the EDC Reciprocal Indemnity Agreement was also released (note 7).
c) Burcon entered into a loan agreement with Large Scale for a secured loan (the “Secured Loan”) of up to $10 million (the “Loan Amount”). The Secured Loan will be made available to Burcon in two $5 million tranches, upon satisfaction of certain conditions with respect to each tranche. The first tranche, which is currently available, has a maturity date of July 1, 2024 and the second tranche will have a maturity date that is 24 months from the closing date of such tranche. The drawn portion of the Loan Amount will bear interest at a rate of 8% per annum (the “Principal Balance”) and is secured by all the assets of Burcon. Interest on the Loan Amount will accrue monthly, not in advance, and will be payable on the maturity date of the applicable tranche. Burcon will pay a 1% commitment fee of the undrawn amount of the Loan Amount under each tranche on: (i) the closing date of such tranche and (ii) each annual anniversary of the closing date of such tranche.
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020
(In Canadian dollars)
d) Burcon received a letter from the Listings Qualification Department of the Nasdaq Stock Market LLC ("Nasdaq") notifying the Company that it has not met the listing rule that requires the listed securities of the Company to maintain a minimum bid price of US$1 per share for a period of 30 consecutive business days. The Nasdaq notification letter does not result in the immediate delisting of the Company's common shares, and the shares will continue to trade uninterrupted. The Company has a compliance period of 180 calendar days, or until September 28, 2022, to regain compliance with Nasdaq's minimum bid price requirement. If at any time during the compliance period the Company's closing bid price is at least US$1 for a minimum of 10 consecutive business days, it will be notified by Nasdaq that compliance has been met. In the event the Company does not regain compliance by September 28, 2022, the Company may be eligible for additional time to regain compliance. Burcon's management is reviewing various options available to the Company in order to regain compliance with Nasdaq's listing rules.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
(All amounts following are expressed in Canadian dollars unless otherwise indicated.)
This Management's Discussion and Analysis ("MD&A") has been prepared as at June 27, 2022 to provide a meaningful understanding of Burcon NutraScience Corporation's ("Burcon" or the "Company") operations, performance, and financial condition for the year ended March 31, 2022. The following information should be read in conjunction with the Company's audited consolidated financial statements and related notes, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations issued by the IFRS Interpretations Committee ("IFRS IC"). Additional information relating to Burcon, including the Company's Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
This MD&A contains certain "forward-looking statements" and "forward-looking information" as defined under applicable Canadian and U.S. securities laws (collectively, "forward-looking statements"), which may include, but are not limited to, statements with respect to possible events, conditions, acquisitions, or results of operations that are based on assumptions about future conditions and courses of action and include future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection, and also include, but are not limited to, statements with respect to the future financial and operating performance of the Company. All statements, other than statements of historical fact, are forward-looking statements. When used in this MD&A the words "estimate", "budget", "project", "believe", "anticipate", "intend", "expect", "plan", "projects", "predict", "may", "should", "will", or the negatives of these words or other variations thereof and comparable terminology or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved are intended to identify forward-looking statements. The forward-looking statements pertain to, among other things:
- continued development of the Company's products and business;
- the Company's growth strategy;
- production costs and pricing of CLARISOY® soy protein, Peazazz® and Peazac® pea proteins, Puratein®, Supertein® and Nutratein® canola proteins and pea protein and canola protein (Nutratein®) blends;
- marketing strategies for the Company's soy, pea, canola, flax, hemp and sunflower proteins as well as pea protein / canola protein blends;
- development of commercial applications for soy, pea, canola, flax, hemp and sunflower proteins as well as pea protein / canola protein blends;
- ability to produce proteins and protein isolates in commercial quantities with sufficient grade and quality at cost-effective prices;
- construction, commissioning and operation of production facilities;
- relocation expansion of the Winnipeg Technical Centre;
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
- future protection of intellectual property and improvements to existing processes and products;
- regulatory approvals;
- input and other costs; and
- liquidity and working capital.
The forward-looking statements are based on a number of key expectations and assumptions made by management of the Company, including, but not limited to:
- the Company's ability to obtain required regulatory approvals;
- the Company and its joint venture partners' ability to commission and operate its production facility;
- the Company's or its licensing partners' ability to generate new sales;
- the Company's or its licensing partners' ability to produce, deliver and sell the expected product volumes at the expected prices;
- the Company's ability to control costs;
- the Company's ability to obtain and maintain intellectual property rights and trade secret protection;
- the Company's ability to identify a permanent chief executive officer;
- market acceptance and demand for the Company's or its licensing partners' products;
- the successful execution of the Company's business plan;
- achievement of current timetables for product development programs and sales;
- the availability and cost of labour and supplies;
- the availability of additional capital; and
- general economic and financial market conditions.
Although the Company believes that the factors and assumptions used to develop the forward-looking statements are reasonable, undue reliance should not be placed on such forward-looking statements. The forward-looking statements reflect the Company's current views with respect to future events based on currently available information and are inherently subject to risks and uncertainties. Many factors, both known and unknown, could cause actual results, performance or achievements to be materially different from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this MD&A, including, but not limited to:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
- the condition of the global economy;
- market acceptance of the Company's products;
- changes in product pricing;
- changes in the Company's customers' requirements, the competitive environment and related market conditions;
- delays in the construction, commissioning and operation of production facilities;
- product development delays;
- changes in the availability or price of labour and supplies;
- the Company's ability to attract and retain business partners, suppliers, employees and customers;
- changing food or feed ingredient industry regulations;
- the regulatory regime;
- the Company's access to funding and its ability to provide the capital required for product development, operations and marketing efforts, and working capital requirements; and
- the Company's ability to protect its intellectual property; and
- disruption, delays, risks and uncertainty related to and arising from the global COVID-19 pandemic.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Although the Company has attempted to identify important factors that could cause actual results to differ materially from forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated, described or intended. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect changes in assumptions or the occurrence of anticipated or unanticipated events, except as required by law.
The Company qualifies all the forward-looking statements contained in this MD&A by the foregoing cautionary statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
OVERVIEW OF THE COMPANY AND ITS BUSINESS
Burcon is a global technology leader in the development of plant-based proteins, having developed an extensive portfolio of composition, application, and process patents covering novel plant-based proteins derived from pea, canola, soy, hemp, sunflower seed and more. In 2019, Merit Functional Foods Corporation ("Merit Foods") was established by Burcon and three veteran food industry executives. Merit Foods has built a commercial production facility in Manitoba, Canada where it is producing, under license, Burcon's novel pea and canola protein ingredients. Our environmentally friendly and sustainable technologies have been developed at our own research facility led by our team of highly specialized scientists and engineers. Our patent portfolio currently consists of 327 issued patents worldwide, including 72 issued U.S. patents, and in excess of 180 additional patent applications, 26 of which are U.S. patent applications.
CONTINUATION UNDER THE BUSINESS CORPORATIONS ACT (BRITISH COLUMBIA)
Burcon was incorporated under the Business Corporation Act (Yukon) (the "YBCA") on November 3, 1998, and extra-provincially registered in British Columbia on February 5, 1999. The Board of Directors determined that it would be more expedient and cost effective to have the Company continue into the Province of British Columbia pursuant to the Business Corporation Act (British Columbia), as amended (the "BCA"). The shareholders of the Company approved the continuance at the 2020 annual general meeting ("AGM"). A summary comparison of the provisions of the BCA and the YBCA that pertain to the rights of the shareholders has been provided in the 2020 management proxy circular, which is available at www.sedar.com.
MERIT FUNCTIONAL FOODS CORPORATION
In May 2019, Burcon, through its newly formed wholly-owned subsidiary, Burcon NutraScience Holdings Corp. ("Burcon Holdings"), entered into a shareholders' agreement (the "Shareholders Agreement") with RBT Holdco Ltd. ("RBT Holdco") and 10039406 Manitoba Ltd. ("Crew Holdco") (RBT Holdco and Crew Holdco together referred to as the "Partners") to become shareholders of Merit Functional Foods Corporation ("Merit Foods"). The business of Merit Foods is the commercial production, sales, marketing and distribution worldwide of Burcon's pea protein, pulse protein and canola protein products. Merit Foods has completed the construction of an initial protein production facility (the "Flex Production Facility") in Winnipeg, Manitoba.
On inception, Burcon Holdings held 40%, RBT Holdco held 40% and Crew Holdco held 20% of the issued and outstanding shares of Merit Foods.
Burcon has a license and production agreement (the "License Agreement') with Merit Foods to license the technology required to produce, market and sell Burcon's pulse protein ingredients, including Peazazz® and Peazac® pea proteins and Burcon's canola proteins, Supertein®, Puratein® and Nutratein® (collectively the "Products"). Under the terms of the License Agreement, Merit Foods has the exclusive rights over Burcon's pulse proteins (including pea) and canola protein technologies across all geographic regions and all product uses (the "License"). Burcon will receive running royalties on the net revenue (as defined in the License Agreement) from the sales of the Products by Merit Foods.
On August 27, 2020, Bunge Limited ("Bunge") made an investment of $30 million into Merit Foods. In addition to purchasing equity directly from Merit Foods, Bunge purchased additional shares and debt from the Partners. Bunge is a world leader in sourcing, processing and supplying oilseed and grain products and ingredients. As a result of these transactions, Bunge became a 25% shareholder in Merit Foods and Burcon's ownership interest in Merit Foods decreased to 33.3%. As a result of the dilution in Burcon's ownership interest in Merit Foods, Burcon recorded a dilution gain of $6,384,942.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
As part of the Bunge transaction, Burcon and the Partners amended the License Agreement (the "Amended License Agreement") and Burcon, Bunge and the Partners also amended the Shareholders Agreement (the "Amended Shareholders Agreement"). Under the Amended License Agreement and Amended Shareholders Agreement, Burcon, Bunge and the Partners have agreed to certain contractual rights, including a right, but not an obligation, of Burcon, in certain circumstances, to participate in a sale of all, but not less than all, of its shares in Merit Foods, and that in certain circumstances, Merit Foods will have the right to buy out from Burcon the Amended License Agreement for $67.5 million, which represents the discounted future royalties over the life of the Amended License Agreement.
From June 2019 to December 31, 2019, Burcon Holdings and the Partners made capital loan advances to Merit Foods in the aggregate of $27.5 million. Burcon Holdings and the Partners made further loan advances of $5.0 million to Merit Foods in February 2020 (the total capital loan advances together referred to as the "Merit Shareholder Loans").
From inception to March 31, 2022, Burcon Holdings has made capital loan advances of $13.0 million to Merit Foods in the form of shareholder loans.
(in thousands of dollars):
| Capital Contribution |
Loan receivable |
Total net investment |
|||||||
| From inception to December 31, 2019 | - | 11,000 | 11,000 | ||||||
| Modification to loan terms | 8,872 | (8,872 | ) | - | |||||
| Capital loan advance | 1,613 | 387 | 2,000 | ||||||
| Share of loss in Merit Foods | (940 | ) | - | (940 | ) | ||||
| Interest accretion | - | 145 | 145 | ||||||
| Net Investment in Merit Foods, March 31, 2020 | 9,545 | 2,660 | 12,205 | ||||||
| Share of loss in Merit Foods | (2,422 | ) | - | (2,422 | ) | ||||
| Gain on dilution of investment in Merit Foods | 6,385 | - | 6,385 | ||||||
| Interest accretion | - | 308 | 308 | ||||||
| Expected credit loss provision | - | (74 | ) | (74 | ) | ||||
| Net Investment in Merit Foods, March 31, 2021 | 13,508 | 2,894 | 16,402 | ||||||
| Share of loss in Merit Foods | (4,295 | ) | - | (4,295 | ) | ||||
| Gain on dilution of investment in Merit Foods | 961 | - | 961 | ||||||
| Interest accretion | - | 344 | 344 | ||||||
| Expected credit loss provision | - | (9 | ) | (9 | ) | ||||
| Net Investment in Merit Foods, March 31, 2022 | 10,174 | 3,229 | 13,403 |
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
On inception, the Merit Shareholder Loans were recorded as a loan receivable. In December 2019, the terms of the Merit Shareholder Loans were finalized. The loans are non-interest bearing, unsecured, subordinated to Merit Foods' other secured and unsecured debts, have a term of 15 years, and may be repaid by Merit Foods, without penalty or bonus, on a pro-rata basis based on the proportionate share of each shareholder's loan outstanding in relation to the other shareholders of Merit Foods applied to the outstanding principal amounts. As a result, Burcon recalculated the fair value at this date, resulting in a reduction of the fair value that was transferred to a capital contribution account. Notional interest is accruing on the loan receivable at 11% per annum, which is considered to be the market rate of interest. For the year March 31, 2022, Burcon recorded interest accretion of $343,503 (2021 - $307,875, 2020 - $144,343). During the year ended March 31, 2021, an expected credit loss provision of $74,193 was recognized in relation to the loan receivable and included in interest and other expense on the consolidated statement of operations and comprehensive loss. During the year ended March 31, 2022, an additional credit loss provision of $8,807 was recorded.
In May 2022, Burcon Holdings, Bunge and the Partners advanced an aggregate $10 million loan (the "May 2022 Shareholder Loans") to Merit Foods to address liquidity requirements of Merit Foods as it ramps up its production and sales at the Flex Production Facility. Burcon Holdings' proportion of the May 2022 Shareholder Loans was $3.16 million. The May 2022 Shareholder Loans have a term of 15 years and other terms that are similar to the Merit Shareholder Loans.
Construction of Phase 1 of its 94,000 square foot Flex Production Facility was formally completed on December 31, 2020. Unique in its design and structured for rapid expansion, the Flex Production Facility has been engineered and constructed to be able to process both non-GMO canola and yellow field peas, giving it the ability produce Merit's lineup of Puratein® canola proteins, its Peazazz® and Peazac® pea proteins, and its MeritPro™ protein blends. In February and April 2021, Merit Foods achieved the first commercial production runs of Peazazz® and Peazac® pea proteins and canola proteins, respectively. Merit Foods is now the first and only commercial-scale facility in the world capable of producing food-grade protein from canola, the world's second largest oilseed crop. Merit Foods continued its commissioning process throughout 2021 and Burcon's technical team was actively involved in supporting Merit Foods in the process. Burcon considers Merit Foods to have completed the commissioning process as at December 31, 2021. Since then, Merit Foods has been and will continue to optimize and fine tune the production facility to maximize output and yield and Burcon will continue to support its optimization process, as needed.
As the pea and canola protein technology that is currently under license with Merit Foods is now capable of operating in the manner intended by management with the commissioning of the Flex Production Facility as at December 31, 2021, Burcon accordingly ceased capitalization of costs to deferred development and commenced amortization from January 1, 2022. See further details in Research and Development and Intellectual Property expenses below.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
For the year ended March 31, 2022, Burcon recorded royalty revenues of $171,471 (2021 - $nil, 2020 - $nil) from Merit Foods' sales of the Products.
Burcon has provided assistance, under a services agreement, to support the design, construction and commissioning of the commercial protein production facility, as well as providing other services and sample production services. For the year ended March 31, 2022, included in management fee income is $110,504 (2021 - $334,760, 2020 - $350,014) for services provided and $287 (2021 - $524,321, 2020 - $114,766) for samples sold to Merit Foods. Services revenues decreased in fiscal 2022 over the prior years as Burcon ceased charging for its technical assistance in May 2021 to support Merit Foods' commissioning process. Samples sold to Merit Foods also decreased over the prior years as Merit Foods was able to produce its own samples from the Flex Production Facility after its construction completion on December 31, 2020.
In January 2020, Merit Foods announced it had received a co-investment from Protein Industries Canada ("PIC") to help facilitate the rapid growth of Merit Foods. PIC is an industry-led, not-for-profit organization committed to positioning Canada as a global source of high-quality plant protein ingredients. It is one of Canada's five innovation superclusters, which are government-initiated efforts to significantly boost Canada's job market, GDP, research and innovations.
In May 2020, Merit Foods secured a debt financing package of up to $85 million of capital from a syndicate of lenders including Export Development Canada ("EDC"), Farm Credit Canada ("FCC") and the Canadian Imperial Bank of Commerce ("CIBC"). The Partners, Burcon Holdings and Bunge have pledged their shares in Merit Foods as security under the loan facilities from EDC and FCC. In connection with the loan facilities from EDC, Merit Foods must fulfill various obligations, including the establishment and maintenance of a cost overrun account in a prescribed amount in connection with the costs related to the construction of the Flex Production Facility. Of the prescribed amount, $6.5 million was permitted to be funded by way of a letter of credit ("LC"). To assist Merit Foods in fulfilling this obligation, Burcon Holdings obtained an LC from HSBC Bank Canada ("HSBC") in April 2020, which was secured by a term deposit with HSBC in the same amount. As part of the investment by Bunge into Merit Foods, the LC was released on August 28, 2020.
In connection with the LC, Burcon Holdings entered into a short-term loan agreement (the "Merit Loan Agreement") with Merit Foods in the amount of $6.5 million (the "Merit Loan"). The Merit Loan bore interest at 5% per annum, compounded annually, payable by way of a lump sum balloon payment at the end of the term. As the LC was terminated on August 28, 2020, the Merit Loan Agreement was also terminated on the same date. For the year ended March 31, 2022, Burcon recorded interest income of $nil (2021 - $120,205, 2020 - $nil) related to the Merit Loan, of which $nil was outstanding as at March 31, 2022 (March 31, 2021 and 2020 - $nil).
Burcon provided a guarantee to EDC and FCC in connection with the $85 million financing package (the "Guarantees"), pursuant to which Burcon agreed to guarantee all of the indebtedness, liabilities and obligations to Merit Foods under the loan agreements between EDC, FCC and Merit Foods. The aggregate maximum liability of Burcon under the Guarantees was limited to $4.0 million. As part of the investment by Bunge into Merit Foods, EDC and FCC released the Guarantees on August 28, 2020
Burcon Holdings and the Partners provided guarantees in the aggregate amount of $1.25 million to CIBC ("CIBC Guarantee"), of which Burcon Holdings' proportionate share was $500,000. In connection with Bunge's investment into Merit Foods in August 2020, Burcon Holdings' amount was reduced to $416,625.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
During fiscal 2021, Merit Foods secured additional financing of $10 million in the form of a 10-year interest-free loan from Agriculture and Agri-Food Canada's Agrilnnovate Program ("AIP"). In total, Merit had secured a total of $99.2 million financing package from the Government of Canada that includes the financing noted above from EDC, FCC, AIP and PIC. Burcon Holdings and the Partners have provided a guarantee for the AIP Loan (the "AIP Guarantee"). The obligations of the AIP Guarantee are joint and several. However, Burcon Holdings and the Partners (the "AIP Guarantors") have entered into a reciprocal indemnity agreement (the "Indemnity Agreement'). Under the Indemnity Agreement, if any AIP Guarantor (each, a "Paying Guarantor") is required to make payment under the AIP Guarantee and any other AIP Guarantor (each, a "Contributing Guarantor") has not made a corresponding payment equal to its share based on its shareholdings in Merit Foods ("Contributive Share"), such Contributing Guarantor(s) shall pay the Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the AIP Guarantee will have been borne by the AIP Guarantors in their respective shareholding percentage in Merit Foods.
In addition to the co-investment Merit Foods received in January 2020 from PIC, a further co-investment was provided by PIC in May 2021 to develop new plant-based products that may include meat and dairy alternatives, ready-to-drink beverages, supplement powders and other plant-based applications for the global food and beverage market. The project has a total investment of $7.9 million, with PIC providing one-half of the total investment into the project. During the last quarter of fiscal 2022, Merit and three industry partners received a further co-investment from PIC for the development and distribution of a line of meat alternatives to pork and Wagyu beef, which will be sold under two of its industry partners' branded products. The new line of meat alternatives is expected to be distributed throughout Europe, Asia and North America. The project has a total investment of $7.6 million, with PIC funding one-half of the total investment into the project.
During fiscal 2022, the shareholders of the Partners (the "EDC Guarantors") provided guarantees of $10 million (the "EDC Guarantee") to EDC in order for Merit Foods to meet certain credit requirements required by EDC under the loan agreements with EDC. Burcon Holdings and the EDC Guarantors entered into a reciprocal indemnity agreement (the "EDC Indemnity Agreement"). Under the EDC Indemnity Agreement, if any EDC Guarantor (each, a "EDC Paying Guarantor") is required to make payment under the EDC Guarantee and any other EDC Guarantor and Burcon Holdings (each, a "EDC Contributing Guarantor") has not made a corresponding payment equal to its Contributive Share, such EDC Contributing Guarantor(s) shall pay the EDC Paying Guarantor such amounts so that, after payment, all obligations and liabilities under the EDC Guarantee will have been borne by the EDC Guarantors in their respective Contributive Shares. Burcon Holdings' Contributive Share under the EDC Indemnity agreement is 44.44%. The obligations of Burcon Holdings and the EDC Guarantors shall terminate upon the termination or release by EDC of the EDC Guarantors' obligations under the EDC Guarantee.
In October 2021, Bunge exercised its right to subscribe for additional common shares of Merit Foods for an aggregate subscription price of $4.95 million. As a result of this investment, the aggregate liability of the EDC Guarantors under the EDC Guarantee was reduced to $5.05 million, and Burcon's maximum liability under the EDC Indemnity Agreement has been reduced to $2.24 million. Following the additional capital loan advances totalling $10.0 million made by the shareholders of Merit Foods in May 2022, EDC released the EDC Guarantors of the EDC Guarantee and the obligations of Burcon Holdings under the EDC Indemnity Agreement were also released.
During the last quarter of fiscal 2022, Merit Foods obtained additional financing of $10.0 million from FCC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
As at March 31, 2022 and the date of this MD&A, Burcon had a 31.6% ownership interest in Merit Foods. There is no contingent issuance of securities by the equity investee that might significantly affect Burcon's share of profit or loss. The following is the summarized financial information of the investee:
Summary financial information of Merit Foods
(in thousands of dollars)
| March 31, 2022 | March 31, 2021 | |||||
| Total assets | 141,242 | 141,096 | ||||
| Total liabilities | 109,938 | 102,946 |
| Year ended March 31, 2022 |
Year ended March 31, 2021 |
Period ended March 31, 20201 |
|||||||
| Total revenue | 6,284 | 396 | - | ||||||
| Loss and comprehensive loss for the year / period | (13,271 | ) | (6,837 | ) | (2,350 | ) |
Merit Foods formally completed construction of the Flex Production Facility by December 31, 2020 and completed the commissioning process during calendar 2021. To-date, it has not recorded significant revenues from sales. Losses incurred from inception to-date relate to operating costs incurred during the construction and commissioning periods. Merit Foods continues to optimize the Flex Production Facility while it ramps up production and sales.
NESTLE COLLABORATION
In January 2020, Burcon, Société Des Produits Nestlé ("Nestlé") and Merit Foods entered into a joint development agreement (the "JDA") to tailor Burcon and Merit's plant-based proteins for use in Nestlé food and beverage applications. The JDA covered ongoing innovation and the future supply of Burcon and Merit's plant-based proteins from the Flex Production Facility. The partnership was intended to combine Nestlé's expertise in the development, production and commercialization of plant-based foods and beverages with Burcon's proprietary plant protein extraction and purification technology, while leveraging Merit Foods' plant protein production capabilities. The aim of the joint development was to tailor the functionality of Burcon and Merit's plant proteins, to be supplied from Merit's Flex Production Facility, for use by Nestlé in plant-based meat and dairy alternatives. During fiscal 2021, the Winnipeg Technical Centre ("WTC") conducted research work and provided Nestlé with various samples for testing and analysis. The research conducted by Burcon was successful in identifying processing techniques to modify and improve the functionality of Burcon's and Merit's plant-based protein and as such, Burcon's role in the joint development agreement with Nestlé ended in January 2021, while Merit Foods has continued to work with Nestlé for the supply of Merit Foods' plant protein products. During fiscal 2021, Burcon recorded $250,000 as other income from payment that was received from Nestlé in fiscal 2020.
1 Merit Foods was incorporated on May 15, 2019. As a result, information in this table represents certain financial information of Merit foods from the date of its incorporation to March 31, 2020.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
WINNIPEG TECHNICAL CENTRE
During fiscal 2020 and 2021, the WTC worked to support Merit Foods in completing its construction and the start of its commissioning process of the Flex Production Facility and also produced samples for Merit Foods to provide to its potential customers for evaluation.
During fiscal 2021, Burcon expanded the WTC's production capacity and further expanded its research and development capacity through the lease of a satellite laboratory space. The WTC also expanded its scientific and technical team with the addition of two new research scientists. Burcon's team of scientists and engineers continued development work on our pipeline of technologies for alternative plant-based proteins.
For most of fiscal 2022, the WTC focused on supporting Merit Foods in its commissioning of the Flex Production Facility. In addition, Burcon's team of scientists and engineers continued research and development work on our pipeline of technologies for alternative plant-based proteins to explore potential new commercial and patenting opportunities. The WTC made progress on existing technologies by further innovating with pea and canola and also with new plant-based protein sources, with the goal of entering into additional partnerships as a means to bring additional plant-based protein ingredients to market. Burcon's extraction and purification technologies are versatile and may be adapted to process a range of oilseed and non-oilseed meals to produce specialty proteins, such as flax, hemp and sunflower. The demand for plant-based proteins continues to grow and Burcon believes there may be niche market opportunities for its specialty protein ingredients.
Burcon has been investigating options, including engaging a third-party engineering firm, to potentially replace the existing WTC with an expanded innovation centre to provide additional research and development bandwidth to pursue its product opportunity pipeline.
STRATEGIC PARTNERSHIPS AND COLLABORATIONS
Burcon has been in discussions and negotiations with potential partners on additional plant-based protein opportunities. Due diligence and negotiations in potential strategic partnerships are progressing well, with various parties moving forward with pace. Burcon will continue to work towards reaching an agreement to bring our protein technologies to market.
In addition to strategic partnerships, Burcon is collaborating with food processors to explore opportunities to leverage Burcon's core protein extraction and purification platform for use in upcycled protein production arising from under-utilized crops or by-products that are otherwise disposed as waste products or sold as animal feed.
NASDAQ LISTING
Burcon's shares were listed on the OTCQB Venture Market under the symbol "BUROF". On May 25, 2021, trading of Burcon's shares on the Nasdaq commenced under the symbol "BRCN".
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
In April 2022, Burcon received a letter from the Listings Qualification Department of the Nasdaq Stock Market LLC ("Nasdaq") notifying the Company that it has not met the listing rule that requires the listed securities of the Company to maintain a minimum bid price of US$1 per share for a period of 30 consecutive business days. The Nasdaq notification letter does not result in the immediate delisting of the Company's common shares, and the shares will continue to trade uninterrupted. The Company has a compliance period of 180 calendar days, or until September 28, 2022, to regain compliance with Nasdaq's minimum bid price requirement. If at any time during the compliance period the Company's closing bid price is at least US$1 for a minimum of 10 consecutive business days, it will be notified by Nasdaq that compliance has been met. In the event the Company does not regain compliance by September 28, 2022, the Company may be eligible for additional time to regain compliance. Burcon's management is reviewing various options available to the Company in order to regain compliance with Nasdaq's listing rules.
Due to a decrease in the Company’s stock price, the Company is no longer eligible to file its annual report on Form 40-F with the SEC pursuant to the U.S.-Canada Multijurisdictional Disclosure System ("MJDS"). MJDS allowed the Company to largely satisfy its SEC reporting obligations with its Canadian disclosure documents. The Company will be filing its annual report with the SEC on Form 20-F which is a form reserved for foreign private issuers. The loss of the ability to use MJDS may result in an increase in public reporting compliance costs for the Company.
PROTEIN INDUSTRIES CANADA
In March 2022, Burcon entered into a collaborative agreement with PIC for the development of high-quality protein ingredients from sunflower seeds. Burcon is partnering with Pristine Gourmet, a processor of 100% pure Canadian non-GMO cold pressed virgin oils, to develop Burcon's novel process for the production of sunflower protein ingredients. Premium sunflower protein isolate that contains greater than 90% protein purity, with exceptional taste and functionality, has the potential of setting a new benchmark in the growing plant-based ingredients market. The project intends to fine-tune and scale up an economical extraction and isolation process from the by-product (pressed cake) of sunflower oil production. As at March 31, 2022, PIC has advanced $122,707 to Burcon which has been recorded as restricted cash and deferred revenue.
CEO TRANSITION
In January 2022, Burcon announced that Johann Tergesen would be stepping down as President and Chief Executive Officer ("CEO"), effective March 1, 2022. To ensure an orderly transition, he will continue in an ongoing capacity as an advisor to the Company and Burcon's board of directors. Mr. Peter H. Kappel, Chairman of Burcon's board of directors, has assumed the role of Interim CEO on March 1, 2022 until a successor is appointed.
The Company engaged Kincannon & Reed, an executive search firm specializing in the food and agribusiness sectors, to assist in recruiting a new CEO. Burcon's board of directors has been working closely with Kincannon & Reed and has shortlisted a few select individuals, all of whom are seasoned professional within the specialty food ingredient space. As at the date of this MD&A, a successor has not yet been appointed.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
NEW DIRECTOR APPOINTMENTS AND BOARD CHANGE
In July 2019, Burcon appointed Mr. Calvin Chi Leung Ng as a director of its board. Mr. Ng is a director of Large Scale and Great Intelligence. Mr. Ng is the group legal counsel for ITC Properties Limited, a real estate property development and investment company. Mr. Ng has over 20 years' experience of advising on and executing corporate and commercial transactions in law firms and private sectors.
In July 2020, Burcon appointed Ms. Debora Fang as a director to its board of directors. Ms. Fang has 20 years of experience in the consumer goods industry, across mergers and acquisitions, strategy, and marketing roles for Unilever (London, UK), Danone (Paris, France and Amsterdam, Netherlands), Kraft Foods (Sao Paulo, Brazil) and as a consultant for Bain & Company (Los Angeles, USA). She is now an independent advisor for private equity and strategic clients in the food arena as well as a private investor.
On July 8, 2021, Burcon appointed Ms. Jeanne McCaherty as a director to its board of directors. Ms. McCaherty is the CEO of Guardian Energy Management, an ethanol manufacturing company. Prior to joining Guardian Energy, the majority of Ms. McCaherty career was in various global management roles at Cargill, Inc., one of the world's largest agrifood and food ingredient companies. Ms McCaherty was the Regional Director of Cargill's Global Texturing Business Unit, which sourced raw materials, manufactured, and sold specialty food ingredients to food companies around the world. Ms. McCaherty also held the position of VP/Global Director of Food R&D at Cargill, which included functional leadership for the Basic and Applied R&D, Applications and Sensory groups at Cargill's Global Food Ingredients businesses.
On September 15, 2021, Burcon appointed Mr. Alfred Lau as a director to its board of directors. Mr. Lau has been a director of WealthOne Bank of Canada, a Canadian Schedule I Bank, since 2018 and is currently a member of the Audit and the Credit Review Committees. In addition, he is the founder and co-leader of a private equity firm with operations in Hong Kong and Beijing. Prior to his current roles, Mr. Lau was a partner of KPMG with over 35 years of experience, having held senior positions including co-leader of the audit practice in Beijing and co-leader of the China Practice in Canada. He was the Audit Engagement Partner for a number of multi-national Fortune 500 companies and listed companies on the TSX. Mr. Lau is a former director and Chairman of the Audit Committee of SUCCESS, one of the largest non-profit organizations in Canada.
Mr. David Ju and Mr. Calvin Ng did not stand for re-election at the annual general meeting held in September 2021.
In September 2021, Mr. Peter H. Kappel was appointed chairman of Burcon's board of directors, succeeding Dr. D. Lorne Tyrrell.
CONVERTIBLE DEBENTURES
On December 10, 2019, the Company issued convertible debentures (the "Debentures") through a non-brokered private placement for an aggregate principal amount of $9.5 million. Certain directors and an officer of the Company subscribed for Debentures totaling $2 million in principal amount. Each Debenture consisted of $1,000 principal amount, bore interest at a rate of 8.5% per annum, payable semi-annually in arrears and was unsecured. The principal amount outstanding under the Debentures and all accrued and unpaid interest thereon were to be payable in cash on December 10, 2022. The Company incurred issue costs of $228,432, of which $156,600 were finder's fees at 4.5% of the gross proceeds received from investors introduced to the Company by the finders.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
The Debentures were convertible at the option of the holder, in whole or in part, into common shares of the Company at a conversion price of $1.05 per share. During the year ended March 31, 2021, the holders of the Debentures converted principal amounts of $1,704,500 for the issuance of 1,623,327 common shares of the Company.
Burcon had the right, at its sole discretion, to force the conversion of the Debentures if the shares traded at or above $2.15 for a period of 14 consecutive trading days. The Company determined it had met this condition between August 12 and August 31, 2020 and issued a notice to the holders of the Debentures for conversion of the Debentures to common shares on September 8, 2020. As a result of the conversion of $7,795,500 of outstanding principal amount of the Debentures, an aggregate of 7,424,274 common shares were issued to the holders of the Debentures.
The Debentures were a level 3 financial liability with an embedded conversion feature. As a result, the debt and equity components were bifurcated and the instrument valued to par at the issuance date. The value assigned to the liability at December 10, 2019 was the present value of the contractually determined stream of future cash flows discounted at 24%, being the rate estimated to be equivalent to that which the market would apply to an instrument with comparable credit status and provide substantially the same cash flows, on the same terms, but without the conversion option. From the date of issuance, the liability component was accreted up to its principal value using the effective interest method, with the charge recorded in the consolidated statement of operations and comprehensive income or loss. The initial fair value of the debt as at December 10, 2019 was estimated to be $6,508,641. The residual amount of $2,762,927 was recognized within equity as the value of the conversion option. For the year ended March 31, 2022, the Company recorded interest expense of $nil (2021 - $637,522, 2020 - $nil) related to the Debentures.
The Company utilized a portion of the net proceeds from the Debentures to make further capital loan advances to Merit Foods of $3.0 million in December 2019 and $2.0 million in February 2020.
2020 EQUITY OFFERING
On February 19, 2020, the Company completed a bought deal equity offering of 7,419,800 units (the "Units") at a price of $1.55 per Unit for aggregate gross proceeds to the Company of $11.5 million (the "Offering") and net proceeds of $10.3 million.
Each Unit consisted of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a "Warrant"). Each Warrant is exercisable to acquire one common share until February 19, 2022 at an exercise price of $2.00 per common share. In addition to a 7% cash commission, the agents received compensation options (Agents' Warrants) entitling the agents to purchase up to 519,386 common shares. Each Agent's Warrant is exercisable to acquire one common share of the Company at an exercise price of $2.00 per share until February 19, 2022. The fair value of the Warrants and Agents' Warrants were estimated at $1,780,752 and $249,305, respectively, using the Black-Scholes pricing model and has been included in Warrants. In addition to the Agents' Warrants, the Company incurred total issue costs of $1.2 million related to the Offering.
During the year ended March 31, 2022, Warrants and Agents' Warrants were exercised for 105,750 common shares (2021 - 2,493,254, 2020 - nil), providing proceeds of $211,500 (2021 - $4,986,508, 2020 - $nil). On February 19, 2022, a total of $1,630,282 Warrants and Agents' Warrants expired unexercised.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
The Company has used the proceeds from its financing activities and will continue to use the proceeds to fund activities associated with identifying a strategic partner for commercialization of Burcon's other proteins, including sunflower; further develop Burcon's protein extraction and purification technologies and pursue new related products; developing new applications from the functional attributes of Burcon's proteins; fund Burcon's patent activities; and provide general working capital.
RIGHTS OFFERINGS
2019 Rights Offering
On June 25, 2019, the Company completed a rights offering (the "2019 Rights Offering") for 44,083,203 common shares at $0.35 per common share for gross proceeds of $15,429,121 and net proceeds of $15.3 million. Burcon issued to each shareholder as of the record date of May 30, 2019 one transferrable right (the "2019 Rights") for each common share held by such shareholder. Every 2019 Right entitled the holder thereof to purchase one common share in the Company at a price of $0.35 per common share.
The Company's directors, officers and persons controlling over 10% of the common shares of the Company, (collectively, the "Insiders") agreed to exercise at least all of the 2019 Rights they were issued in connection with the 2019 Rights Offering for 14,306,740 common shares, representing 32.5% of the 2019 Rights Offering.
Of the net proceeds of the 2019 Rights Offering, $2,565,022 was used to repay the Note (see below) and accrued interest to Large Scale and $1,607,183 was used to repay the Loan (see below) and accrued interest to Large Scale. Burcon also utilized some of the net proceeds to make its capital loan advances to Merit Foods.
2018 Rights Offering
On February 13, 2018, the Company completed a rights offering (the "2018 Rights Offering") for 6,114,361 common shares at $0.57 per common share for gross proceeds of $3,485,186, and net proceeds of $3.4 million. As consideration for providing a standby guarantee to purchase such common shares that were available to be purchased that would have resulted in a minimum of 4,728,397 common shares being issued under the 2018 Rights Offering, Dr. Allan Yap ("Dr. Yap"), the Company's former Chairman and Chief Executive Officer, received share purchase warrants ("Standby Warrants") to acquire up to 1,182,099 common shares at an exercise price of $0.69 per common share that were exercisable up to February 13, 2020. Pursuant to the terms of the Standby Warrants, the exercise price was adjusted upon completion of the 2019 Rights Offering from $0.69 per share to $0.45 per share. Burcon recorded a warrant valuation adjustment of $85,421 during fiscal 2020. The Standby Warrants were fully exercised during fiscal 2020.
CONVERTIBLE NOTE
The Company had a convertible note (the "Note") with Large Scale Investments Limited ("Large Scale'), a wholly owned subsidiary of Firewood Elite Limited ("Firewood"), for the principal amount of $2.0 million (the "Principal Amount"). Firewood, through its shareholdings in Large Scale and Great Intelligence Limited ("Great Intelligence"), has significant influence over the Company, and is wholly owned by Mr. Alan Chan, a director of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
The Note bore interest at 8% per annum, compounded monthly, with the Principal Amount and accrued interest repayable on the earlier of May 12, 2019, the occurrence of an event of default as set out in the Note (the "Maturity Date"), or voluntary prepayment by the Company. Large Scale could convert the Principal Amount in whole or in part at $3.94 per share into common shares of the Company. Burcon had the right, before the Maturity Date, upon written notice to Large Scale of not less than thirty days, to prepay in cash all or any portion of the Principal Amount by paying to Large Scale an amount equal to the Principal Amount to be prepaid multiplied by 110%. The payment of the Principal Amount and all accrued and unpaid interest thereon would be subordinated in right of payment to any amount owing in respect of secured indebtedness of the Company.
On May 21, 2019, the Company and Large Scale amended (the "Amendment") the Note's Maturity Date to June 21, 2019 and also provided Large Scale with the right to offset any amounts due to it under the Note against any obligations of Large Scale to pay for subscription proceeds of any rights offering that Burcon may conduct. In connection with the 2019 Rights Offering, Large Scale exercised its right to offset the amounts due under the Note against its obligations to pay for subscription proceeds under the 2019 Rights Offering. The offset was completed on June 25, 2019. The total amount offset under the Note included the principal amount and accrued interest of $2,565,022.
The conversion option was recorded as a derivative liability. Under the terms of the Note, there are certain conditions where the conversion price may be adjusted. Therefore, in accordance with International Financial Reporting Standards ("IFRS"), an obligation to issue shares for a price that is not fixed must be classified as a derivative liability and measured at fair value, with changes recognized in change in fair value of conversion option in the consolidated statement of operations and comprehensive loss.
The conversion and prepayment options were recorded as a net derivative liability and measured at fair value, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss. The fair value of the conversion and prepayment options was estimated based on a methodology for pricing convertible bonds using the Partial Differential Equation Method, with the following initial assumptions: expected volatility of 63%; expected dividend per share of nil; risk-free rate of 0.60%, entity-specific credit spread, and expected life of 3 years. Upon the offset by Large Scale of its obligations to pay for subscription proceeds under the 2019 Rights Offering, the net derivative liability of $5,384 was expensed as financing expense during fiscal 2020.
SHORT-TERM LOAN
On November 13, 2018, the Company entered into a loan agreement with Large Scale to provide Burcon with an unsecured loan for up to $1.0 million (the "Loan"), which was amended in March 2019 (the "Loan Amendment") to increase the principal amount available to $1.5 million, as well as providing the Lender with the right to offset any amount due to it under the Note against any obligations of the Lender to pay for subscription proceeds of any rights offering that Burcon may conduct.
The Loan bore interest at 18% per annum on the amount drawn, and 3% per annum on the undrawn portion. The amounts drawn on the Short-term Loan and the accrued interest was payable on the earlier of June 3, 2019, the occurrence of an event of default as set out in the Loan, or voluntary prepayment by the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
In connection with the 2019 Rights Offering, Large Scale exercised its right to offset the amounts due under the Short-term Loan against its obligations to pay for subscription proceeds under the 2019 Rights Offering. The offset was completed on June 25, 2019 for $1,436,629 against the principal amount. The balance of the principal amount of $63,371and accrued interest of $107,173 was repaid to Large Scale in cash on June 28, 2019.
SECURED LOAN FACILITY
In June 2022, Burcon entered into a loan agreement with Large Scale for a secured loan (the "Secured Loan") of up to $10 million (the "Loan Amount") that will be made available to Burcon in two tranches of $5 million each upon satisfaction of certain conditions with respect to each tranche. The first tranche, which is available to Burcon as of the date of this MD&A, has a maturity date of July 1, 2024 and the second tranche will have a maturity date that is 24 months from the closing date of such tranche (in each case, the "Maturity Date"). The drawn portion of the Loan Amount will bear interest at 8% per annum payable on the Maturity Date of each tranche and is secured by all assets of Burcon. Burcon will pay a commitment fee of 1% of the undrawn amount of the Loan Amount under each tranche on (i) the closing date of such tranche and (ii) each annual anniversary of the closing date of each tranche.
The proceeds of the Secured Loan will be used to continue Burcon's joint venture operations, commercialization efforts, partnership discussions, continued research and development of Burcon's protein extraction and purification platform, further strengthening of Burcon's intellectual property portfolio and for other general corporate purposes.
CLARISOY®
Burcon had a license and production agreement with Archer Daniels Midland Company ("ADM") to license its CLARISOY® technology to ADM on an exclusive basis to produce market and sell CLARISOY® soy protein worldwide. Although ADM made substantial efforts to market and sell CLARISOY® soy protein into a number of different markets and product applications, ADM was unable to make meaningful sales for CLARISOY®. Burcon and ADM agreed to terminate the Soy Agreement, effective August 7, 2020. As part of the agreement to terminate the exclusive license, the CLARISOY trademark reverted back to Burcon on the effective date.
Burcon did not receive significant royalty revenues from ADM's sales of CLARISOY®. For the year ended March 31, 2022, Burcon recorded royalty revenues of $nil (2021 - $8,646, 2020 - $31,134).
Burcon is investigating alternative paths to bring its soy protein technologies to the market and is currently in discussions with potential partners that include soy protein producers and consumer product companies that could benefit from a partnership with Burcon to commercialize its soy protein technologies. Burcon intends to pursue all available opportunities to commercialize and monetize its soy protein intellectual property portfolio.
INTELLECTUAL PROPERTY
Burcon's patent strategy is to seek protection for new technologies as well as further protecting current technologies. Over the years, Burcon has filed patent applications in various countries over its inventions. Burcon's patent applications can be grouped into three categories:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
- Applications to protect additional novel protein extraction and purification technologies;
- Applications to protect the uses of Puratein®, Supertein®, Nutratein® canola proteins, CLARISOY® soy protein, Peazazz® and Peazac® pea proteins, and other plant proteins, for example, as functional food and beverage ingredients; and
- Applications to protect the "signature characteristics" of Puratein®, Supertein®, Nutratein® canola proteins, CLARISOY® soy protein, Peazazz® and Peazac® pea proteins, and other plant proteins.
Burcon continued the maintenance and prosecution of its patent applications during the year ended March 31, 2022. In January 2022, Burcon announced that it has filed five additional U.S. patent applications covering technologies for the production of sunflower seed protein and pulse proteins. These patent filings cover the technologies for producing protein ingredients from sunflower seed and pulses, and the unique protein ingredients produced from these technologies.
Burcon currently holds 72 U.S. issued patents over its canola, soy, pulse (including pea) and flax protein processing technologies and canola and soy protein isolate applications, as well as canola, pea and soy patents covering composition of matter. In addition, Burcon has a further 26 patent applications currently filed with the U.S. Patent and Trademark Office.
As of the date of this MD&A, Burcon's patents and patent applications cover over 50 distinct inventions. Burcon has also filed applications for most of its inventions internationally under the Patent Cooperation Treaty of the World Intellectual Property Organization. Together with patents issued in other countries, Burcon now holds a total of 327 issued patents covering inventions that include the 72 granted U.S. patents. Currently, Burcon has over 180 additional patent applications that are being reviewed by the respective patent offices in various countries.
RESTRICTED SHARE UNIT ("RSU") PLAN
At the annual meeting held in September 2021, the shareholders of the Company approved a new RSU plan in which all directors, officers, employees and consultants of the Company and its subsidiaries are eligible to participate. Each RSU is redeemable for one common share of the Company but, at the election of the Company, may be redeemed for cash in the amount equal to the market value of the Company's shares on vesting date, or a common share acquired by the Company on a public exchange. The RSUs must be redeemed no later than December 31st of the third year after the date of grant. The vesting terms are determined at the discretion of the board of directors at the time of grant. The fair value of the grants is determined on the date of grant and are recognized using graded vesting, with each vesting tranche being valued separately, and the fair value of each tranche recognized over its respective vesting period. During the year ended March 31, 2022, 121,000 RSUs were granted and 3,000 were forfeited. Burcon has recorded stock-based compensation expense of approximately $12,000 during the year ended March 31, 2022.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") MATTERS
Burcon's extraction processes use no harsh chemicals and emit no noxious odours or significant waste products. Biodegradable, natural and/or recyclable input materials, end-products and by-products are used and, therefore, are expected to present no significant environmental risk. As such, Burcon does not foresee any financial and operational effects of environmental protection or requirements on the capital expenditures, earnings and the competitive position of Burcon in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
As part of Burcon's sustainability initiatives to reduce the environmental impact of food and agriculture through its plant-based protein technologies, management is actively investigating sustainability disclosure frameworks to which Burcon may utilize to identify and quantify its carbon footprint of its technologies and ongoing research and development. Identifying the sustainability issues pertinent to Burcon's operations and technologies is the first step in the process of reducing environmental emissions.
The Financial Stability Board established the Task Force on Climate-related Financial Disclosures ("TCFD") to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system's exposures to climate-related risks. The Canadian Securities Administrator ("CSA") proposes to implement new reporting requirements for issuers regarding climate change disclosure. The requirements are consistent with the recommendations established by the TCFD and will generally require governance disclosure, strategy disclosure, risk management disclosure and metrics and targets disclosure.
Based on Burcon's preliminary materiality assessment of its operations, Burcon has identified the following top five sustainability issues it believes are the most material to its business and stakeholders:
1. Greenhouse gas emissions
2. Energy management
3. Water and wastewater management
4. Product quality and safety
5. Employee health and safety
Burcon is in a unique position where it conducts research and development on a small pilot scale to develop technologies for the global commercialization of its novel protein ingredients. As such, Burcon does not believe it is exposed to environmental and climate-related issues on the same scale as major agricultural and ingredient processors. Nevertheless, Burcon believes it may be in the best interests of Burcon, its stakeholders and investors for the Company to identify and provide transparency around its sustainability initiatives to address the ESG issues most relevant to the Company.
With a goal to assess Burcon's carbon footprint, Burcon intends to further explore methods of data collection, where the Company can begin to quantify the top five environmental impacts listed above associated with all the stages of technology development - from conception to commercialization. Burcon expects that it may be required to engage a consultant with expertise on ESG matters to assist Burcon with this process. Burcon believes that a comprehensive ESG review and preparation of a report may require at least 12 months or more to complete.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
SUMMARY OF OPERATING RESULTS
Years ended March 31 (in thousands of dollars, except share and per-share amounts)
| 2022 | 2021 | 2020 | |||||||
| Royalty and research income | 171 | 259 | 31 | ||||||
| Loss for the year | (10,258 | ) | (618 | ) | (4,634 | ) | |||
| Basic and diluted loss per share | (0.09 | ) | (0.01 | ) | (0.06 | ) | |||
| Total assets | 29,350 | 37,725 | 31,269 | ||||||
| Total long-term liabilities | 59 | 5 | 6,731 | ||||||
| Weighted average shares outstanding (thousands) | 108,588 | 102,891 | 78,936 |
RESULTS OF OPERATIONS
As at March 31, 2022, Burcon has not yet generated any significant revenues from its technology. During fiscal 2022, Burcon recorded $171,000 royalty revenues from Merit Foods and during fiscal 2021, Burcon recorded $250,000 in research income from its joint collaboration agreement with Nestlé. For the year ended March 31, 2022, the Company recorded a loss of $10,258,407 (2021 - $617,492, 2020- $4,633,494) or $0.09 per share (2021 - $0.01 per share, 2020 - $0.06 per share). Loss from operations for the year ended March 31, 2022 was $7,397,578 (2021 - $4,595,458, 2020 - $3,723,127).
During the year ended March 31, 2022, Burcon recorded $4,294,789 (2021 - $2,421,459, 2020 - $939,806) as its share of loss in Merit Foods. As a result of Bunge's investment in Merit Foods during fiscal 2022, Burcon's interest in Merit Foods decreased from 33.3% to 31.6% and Burcon recorded a gain of $961,164 on the dilution of its investment in Merit Foods. On Bunge's initial investment in Merit Foods during fiscal 2021, Burcon's interest in Merit Foods decreased from 40.0% to 33.3% and Burcon recorded a gain on dilution of $6,384,942 of its investment in Merit Foods.
The following provides a comparative analysis of significant changes in major expenditures items.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Research and development expenses
Components of research and development ("R&D") expenditures are as follows:
(in thousands of dollars)
| Year ended March 31, | |||||||||
| 2022 | 2021 | 2020 | |||||||
| Salaries and benefits | 2,418 | 1,603 | 1,318 | ||||||
| Laboratory operation | 326 | 305 | 290 | ||||||
| Amortization of property and equipment | 236 | 225 | 72 | ||||||
| Rent | 140 | 108 | 88 | ||||||
| Inventory written off to research and development | 132 | - | - | ||||||
| Amortization of deferred development costs | 105 | - | - | ||||||
| Analyses and testing | 75 | 63 | 56 | ||||||
| Travel and meals | - | - | 17 | ||||||
| Gross research and development expenses | 3,432 | 2,304 | 1,841 | ||||||
| Allocated to deferred development costs | (1,587 | ) | (1,164 | ) | (655 | ) | |||
| Allocated to inventory production | - | (726 | ) | (464 | ) | ||||
| Net research and development expenses | 1,845 | 414 | 722 | ||||||
Effective July 1, 2019, the Company determined that it had met all the criteria of deferring development costs ("DDC") with respect to its pea and canola proteins and has been deferring its expenditures relating to pea and canola to deferred development costs. For the year ended March 31, 2022, Burcon deferred $1,587,000 (2021 - $1,164,000, 2020 - $861,000) of R&D costs related to its pea and canola technology. As noted in the Merit Foods section, the pea and canola protein technology that is currently under license with Merit Foods was capable of operating in the manner intended by management with the commissioning of the Flex Production Facility as at December 31, 2021. Accordingly, Burcon ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized on a straight-line basis over estimated useful life of 15 years. During the year ended March 31, 2022, Burcon recorded amortization of deferred development costs of $105,000 (2021 and 2020 - $nil).
Burcon has received government assistance through the Canada Emergency Wage Subsidy ("CEWS") and the Canada Emergency Rent Subsidy ("CERS") programs. R&D expenditures have been reduced by $225,000 (2021 - $115,000, 2020 - $nil) received from the CEWS and CERS programs, as well as a Manitoba government training grant of $nil (2021 - $45,000, 2020 - $22,000).
While the Flex Production Facility was under construction, Burcon produced inventory saleable to Merit Foods to provide to its potential customers for product evaluation. During the year ended March 31, 2022, $nil (2021 - $726,000, 2020 - $464,000) of R&D costs were allocated to inventory production. As Merit Foods began producing and supplying its own samples after completion of the Flex Production facility, Merit Foods no longer required Burcon to supply samples. As a result, Burcon wrote off its pea and canola inventory on-hand of $132,000 during the first quarter of fiscal 2022.
Before government assistance and the cost deferral, inventory written off and allocation to inventory production, total R&D costs during fiscal 2022 increased by approximately $1,061,000 over fiscal 2021 and by $601,000 in fiscal 2021 over fiscal 2020. Of the increases, $540,000 and $231,000 were attributed to increases in stock-based compensation expense in the respective years. The balance of the increase is due primarily to salary increases, research staff additions and an increase in amortization expense from equipment additions.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Intellectual property expenses
(in thousands of dollars)
| Year ended March 31, | |||||||||
| 2022 | 2021 | 2020 | |||||||
| Patent fees and expenses | 2,045 | 1,859 | 1,534 | ||||||
| Trademark | 5 | - | 6 | ||||||
| Allocated to deferred development costs | (602 | ) | (1,073 | ) | (694 | ) | |||
| 1,448 | 786 | 846 | |||||||
As noted above, the Company began deferring costs related to its pea and canola technology in the second quarter of fiscal 2020, including related patent fees and expenses. During the year ended March 31, 2022, Burcon deferred approximately $602,000 (2021 - $1,073,000, 2020 - $694,000) of patent fees and expenses for its pea and canola patent portfolio to deferred development costs. Before the cost deferral, patent fees and expenses increased during fiscal 2022 over fiscal 2021 by approximately $186,000 and by $325,000 in fiscal 2021 over fiscal 2020, due mostly to higher maintenance fees during fiscal 2022 and higher patenting activities in the pea and canola portfolios during fiscal 2022.
Burcon's patent strategy is to seek protection for new technologies as well as further protecting current technologies. Over the years, Burcon believes it has developed a dynamic and extensive patent portfolio and has filed patent applications in various countries over its inventions. From inception, Burcon has expended $23.7 million on patent legal fees and disbursements to strengthen its patent portfolio in various countries and file patent applications for new inventions.
General and administrative ("G&A") expenses
(in thousands of dollars)
| Year ended March 31, | |||||||||
| 2022 | 2021 | 2020 | |||||||
| Salaries and benefits | 2,494 | 2,636 | 1,351 | ||||||
| Professional fees | 715 | 465 | 274 | ||||||
| Investor relations | 499 | 248 | 132 | ||||||
| Office supplies and services | 352 | 171 | 165 | ||||||
| Transfer agent and filing fees | 92 | 57 | 27 | ||||||
| Financing expense | 41 | 24 | 89 | ||||||
| Travel and meals | 40 | - | 66 | ||||||
| Amortization | 37 | 47 | 2 | ||||||
| Other | 6 | 6 | 80 | ||||||
| 4,276 | 3,654 | 2,186 | |||||||
Salaries and benefits
Included in salaries and benefits for the year ended March 31, 2022 is stock-based compensation expense of $1,093,000 (2021 - $1,551,000, 2020 - $470,000). The higher stock-based compensation expense incurred during fiscal 2021 is due to higher fair values of options granted and an increase in the number of options granted to directors and employees over fiscal 2020.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
The Company received government assistance of $115,000 (2021 - $146,000, 2020 - $nil) through the Canada Emergency Wage Subsidy ("CEWS") program, which has been applied against salaries and benefits expense. Before CEWS, the increase in the cash portion of salaries and benefits of $285,000 in fiscal 2022 over fiscal 2021 is due mainly to staff additions, including a senior management member in late fiscal 2021, and to salary increases. The increase of $350,000 in fiscal 2021 over fiscal 2020 is due to bonuses of $130,000 approved during the first quarter, and salary increases effective at the beginning of fiscal 2021, and staff additions. Directors' fees also increased by approximately $55,000 for the year ended March 31, 2021, due to more meetings held in fiscal 2021, as well as addition of a director in July 2020 and in July 2019.
Professional fees
Professional fees increased in fiscal 2022 over fiscal 2021 by $249,000. The increase is mainly attributed to higher audit and review fees of $231,000 due to the Nasdaq listing, including an audit requirement of the Company's internal controls. The increase is also attributed to recruiting fees of $118,000 for the search for a new CEO and a manager, offset by lower legal fees of $150,000 due to the negotiations and agreements related to the Bunge investment into Merit Foods during fiscal 2021, agreements affected by Merit's EDC and FCC loans. Legal fees in fiscal 2021 over fiscal 2020 increased for the same reason, offset by legal fees incurred in fiscal 2020 for the Nestle agreement. Audit fees in fiscal 2021 increased by $52,000 over fiscal 2020, due to additional work required as a result of Burcon's Nasdaq listing.
Investor relations
Investor relations expenses increased in fiscal 2022 over fiscal 2021 by $251,000. The increase is attributed to $169,000 incurred for the Nasdaq entry fee and annual fee, $93,000 for a U.S. investor relations consultant who was appointed in the last quarter of fiscal 2021. The increase of $116,000 in fiscal 2021 over fiscal 2020 is due to expenses incurred for investor communication and messaging, virtual AGM held in fiscal 2021 and U.S. investor relations consulting services, as well as annual fees incurred for the OTCQB listing. The increase was offset by travel expenses that decreased due to the pandemic.
LIQUIDITY AND FINANCIAL POSITION
At March 31, 2022, the Company had cash and cash equivalents of $7.0 million. As noted above, Burcon has entered into an agreement with Large Scale for the Facility of $10 million. As noted above, Burcon made a capital loan advance of $3.16 million to Merit Foods in May 2022. Assuming Burcon Holdings is not required to make payment under the AIP Guarantee or CIBC Guarantee, and together with available proceeds under the first tranche of the Loan, management estimates the cash resources to be sufficient to fund operations to July 2023, and to February 2024 if conditions are satisfied under the second tranche of the Secured Loan. Although Merit Foods has completed construction and commissioning of the Flex Production Facility, the magnitude of future royalty payments from Merit Foods cannot be ascertained at this time. In the absence of a definitive time for when sales of products will be significant, Burcon may require additional capital beyond these dates to meet its business objectives. There can be no assurance that additional financing will be available on acceptable terms.
Net cash used in operations during the year ended March 31, 2022 was $5,887,000, as compared to $3,033,000 last year. The decrease in net cash used in operations of $2,854,000 is mainly due to increase of $1,090,000 in G&A expenses, increases of $749,000 in R&D expenditures and $662,000 in IP expenditures, decrease in research income of $250,000 and management fee income and interest and other income of $271,000, offset by a decrease in interest paid of $572,000, increase in royalty income of $163,000, and changes in non-cash working capital items of $555,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
At March 31, 2022, Burcon had working capital of $6.6 million (March 31, 2021 - $13.2 million, March 31, 2020 - $14.5 million). As at March 31, 2022, Burcon was not committed to significant capital expenditures. Burcon may incur up to $260,000 in additional capital expenditures to replace and acquire equipment items. Burcon expects to expend $1.9 million in patent expenditures for fiscal 2023. With the termination of the ADM license and production agreement, Burcon has abandoned certain non-core patents in its soy patent portfolio but the abandonment of the non-core patents does not affect the strength of the patent portfolio.
FINANCIAL INSTRUMENTS
The Company's financial instruments are cash and cash equivalents, amounts receivable, loan to Merit Foods, and accounts payable and accrued liabilities.
Credit risk
The financial instruments that expose the Company to a concentration of credit risk are cash and cash equivalents, amounts receivable and loan to Merit Foods. The Company's cash and cash equivalents may comprise interest-bearing savings instruments with Canadian chartered banks. The Company limits its exposure to credit loss by placing its cash and cash equivalents with two Canadian chartered banks.
An increase in the expected credit loss provision of $8,807 (2021 - $74,193, 2020 - $nil) has been recognized in relation to the loan receivable and included in interest and other expense on the consolidated statement of operations and comprehensive loss.
Interest rate risk
All of the Company's financial instruments are non-interest bearing except for cash and cash equivalents that earn interest at variable market rates, and the loan to Merit Foods that bore interest at a fixed interest rate. Burcon's cash and cash equivalents are held at two Canadian chartered banks to maximize interest and to diversify risk. For the year ended March 31, 2022, the weighted average interest rate earned on the Company's cash and cash equivalents was 0.42% per annum (2021 - 0.36% per annum, 2020 - 1.92% per annum). The impact of a 1% strengthening or weakening of interest rates on the Company's cash and cash equivalents at March 31, 2022 is estimated to be a $70,000 increase or decrease in interest income per year.
Liquidity risk
The Company manages liquidity risk through the management of its capital structure. The Company also manages liquidity risk by monitoring actual and forecasted cash flows taking into account current and planned operations. The Company's estimated minimum contractual undiscounted cash flow requirement for its financial liabilities at March 31, 2022 is $907,000, all of which is due within the next 12 months.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Fair value
The fair value of the Company's short-term financial assets and financial liabilities, including cash and cash equivalents, restricted cash, amounts receivable, accounts payable and accrued liabilities and accrued interest, approximates their carrying values due to the short-term maturities of these financial instruments.
The fair value of the loan to Merit Foods is a level 3 fair value and was determined using a discount rate of 11%. The discount rate used is considered the market rate of interest.
The carrying values and fair values of financial instruments, by class, are as follows as at March 31, 2021 and March 31, 2020:
(in thousands of dollars)
| As at March 31, 2022 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | ||||||||||||
| Cash and cash equivalents | - | 7,001 | - | 7,001 | ||||||||
| Restricted cash | - | 123 | - | 123 | ||||||||
| Amounts receivable | - | 200 | - | 200 | ||||||||
| Loan to Merit Functional Foods Corp. | - | 3,228 | - | 3,311 | ||||||||
| Total | - | 10,552 | - | 10,635 | ||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 906 | 906 | ||||||||
| Deferred revenue | - | - | 123 | 123 | ||||||||
| Total | - | - | 1,029 | 1,029 | ||||||||
| As at March 31, 2021 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | ||||||||||||
| Cash and cash equivalents | - | 13,972 | - | 13,972 | ||||||||
| Amounts receivable | - | 339 | - | 339 | ||||||||
| Loan to Merit Functional Foods Corp. | - | 2,894 | - | 2,968 | ||||||||
| Total | - | 17,205 | - | 17,279 | ||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 1,418 | 1,418 | ||||||||
| Total | - | - | 1,418 | 1,418 |
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Currency risk
The Company has hedged certain of its liabilities from currency fluctuations. As at March 31, 2021 and March 31, 2020, the Company is exposed to currency risk through the following assets and liabilities denominated in U.S. dollars:
| March 31, 2022 | March 31, 2021 | |||||
| U.S. Dollars (in thousands) | ||||||
| Cash and cash equivalents | 69 | 28 | ||||
| Amounts receivable | - | 2 | ||||
| Accounts payable and accrued liabilities | (5 | ) | - | |||
| Net exposure | 64 | 30 | ||||
| Canadian dollar equivalents (in thousands) | 80 | 37 |
Based on the above net exposure at March 31, 2022, a 10% appreciation or depreciation of the U.S. dollar against the Canadian dollar would have resulted in a decrease/increase of approximately $6,000 (March 31, 221 - $3,000) in the Company's loss from operations.
OUTSTANDING SHARE DATA
As at March 31, 2022, Burcon had 108,728,742 common shares outstanding, 5,324,481 stock options outstanding exercisable at a weighted average exercise price of $2.36 per share, and 118,000 restricted share units. As at the date of this MD&A, Burcon has 108,728,742 common shares outstanding, 5,321,148 stock options outstanding exercisable at a weighted average price of $2.36 per share, and 118,000 restricted share units.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
QUARTERLY FINANCIAL DATA
(Derived from unaudited interim financial statements. All figures in thousands of dollars, except per-share amounts)
| Three months ended | ||||||||||||
| March 31, | December 31, | September 30, | June 30, | |||||||||
| 2022 | 2021 | 2021 | 2021 | |||||||||
| Revenue | 77 | 44 | 32 | 18 | ||||||||
| Interest and other income | 123 | 99 | 104 | 108 | ||||||||
| Management fee income | 3 | 25 | 25 | 62 | ||||||||
| Gain on dilution of investment in Merit Foods | - | 961 | - | - | ||||||||
| Loss for the period | (4,216 | ) | (1,507 | ) | (1,353 | ) | (3,182 | ) | ||||
| Basic and diluted loss per share | (0.04 | ) | (0.01 | ) | (0.01 | ) | (0.03 | ) | ||||
| Three months ended | ||||||||||||
| March 31, | December 31, | September 30, | June 30, | |||||||||
| 2021 | 2020 | 2020 | 2020 | |||||||||
| Revenue | 250 | - | - | 9 | ||||||||
| Interest and other income | (47 | ) | 126 | 219 | 149 | |||||||
| Management fee income | 134 | 45 | 54 | 109 | ||||||||
| Gain on dilution of investment in Merit Foods | - | - | 6,385 | - | ||||||||
| (Loss) income for the period | (2,508 | ) | (1,086 | ) | 4,377 | (1,401 | ) | |||||
| Basic and diluted (loss) income per share | (0.02 | ) | (0.01 | ) | 0.04 | (0.01 | ) | |||||
As noted earlier, Burcon recognized a dilution gain of $961,000 in the third quarter of fiscal 2022 and $6.4 million in the second quarter of fiscal 2021 in its investment in Merit Foods after Bunge's investments.
RELATED PARTY TRANSACTIONS
Burcon engaged Burcon Group Limited, a company that is related by virtue of common officers, for office space rental to April 2020. For the year ended March 31, 2022, the Company made payments of $nil (2021 - $4,584, 2020 - $75,006).
Burcon had the following transactions with Regent Park Realty Inc., a company that is controlled by an entity with common directors (and also with common officers prior to September 1, 2021) with the Company. One of these directors also has indirect significant influence over the Company.
- For the year ended March 31, 2022, included in general and administrative expenses (management fees) is $2,834 (2021 - $2,241, 2020 - $1,181) for administrative services provided to the Company. At March 31, 2022, $522 (March 31, 2021 - $75, March 31, 2020 - $11) of this amount is included in accounts payable and accrued liabilities. For the year ended March 31, 2022, included in interest and other income is $3,931 (2021 - $7,709, 2020 - $14,197) for legal and accounting services provided by the Company. At March 31, 2022, $nil (March 31, 2021 - $437, March 31, 2020 - $1,785) of this amount is included in amounts receivable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Burcon has a Services Agreement with Merit Foods to provide technical, administrative and general management services, research and analytical services and sample production services based on rates set out in the Services Agreement. For the year ended March 31, 2022, included in management fee income is $110,504 (2021 - $334,760, 2020 - $350,014) for services provided and $287 (2021 - $524,321, 2020 - $114,766) for samples sold to Merit Foods, of which $1,210 was included in amounts receivable at March 31, 2022 (March 31, 2021 - $66,709, March 31, 2020 - $110,594).
Merit Foods also provided certain technical and consulting services to Burcon. For the year ended March 31, 2022, Burcon recorded professional fee expense of $9,415 (2021 - $10,720, 2020 - $nil), of which $nil was outstanding as at March 31, 2022 (March 31, 2021 - $nil, March 31, 2020 - $nil).
In connection with the LC, Burcon Holdings entered into the Merit Loan Agreement with Merit Foods in the amount of $6.5 million. During the year ended March 31, 2022, Burcon recorded interest income of $nil (2021 - $120,205, 2020 - $nil) related to the Merit Loan, of which $nil was included in amounts receivable as at March 31, 2022 (March 31, 2021 - $nil, March 31, 2020 - $nil).
Certain directors and an officer subscribed for $2.0 million of the Debentures. During the year ended March 31, 2022, the Company made total convertible debenture interest payments of $nil (2021 - $126,803, 2020 - $nil) to these directors and officer.
Burcon had the Loan and Note with Large Scale, a company wholly owned by Firewood. For the year ended March 31, 2022, included in interest expense is $nil (2021 - $nil, 2020 - $56,502) related to the Note and $nil (2021 - $nil, 2020 - $60,756) related to the Loan.
Upon completion of the 2019 Rights Offering, the exercise price for the share purchase warrants issued to Dr. Yap, the Company's former Chief Executive Officer, was adjusted from $0.69 per share to $0.45 per share. The Company recorded $85,420 as financing expense during fiscal 2020. During the year ended March 31, 2020, Dr. Yap exercised the warrants for 1,182,099 common shares.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB and interpretations issued by the IFRS IC.
The preparation of consolidated financial statements in accordance with IFRS requires management to apply judgment in applying accounting policies. The judgments that have the most significant effect on the amounts recognized in the consolidated financial statements are outlined below. In addition, IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the reported amount of revenue and expenses during the reporting period, and disclosures made in the accompanying notes to the consolidated financial statements. Outlined below are the assumptions and other sources of estimation uncertainty as at March 31, 2022 that have a risk of resulting in material adjustments to the carrying amounts of assets and liabilities within the next year.
a) Areas of judgement
Assessment of indicators of impairment of the Investment in Merit Functional Foods Corporation
Judgment is required in assessing whether there is objective evidence of impairment of its investment in Merit Foods. The information management considered included whether there was evidence of significant financial difficulty, breach of contract, the granting of concessions, probable bankruptcy or financial reorganization or the disappearance of an active market for the investment in Merit Foods. Management also considered whether there was information about changes with an adverse effect that has taken place in technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. Management also considered the investment of Bunge Limited in fiscal 2022 and the resulting dilution gain. As a result, at March 31, 2022 management concluded that there were no impairment indicators related to its investment in Merit Foods.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Assessment of indicators of impairment of long-lived assets including property and equipment and deferred development costs
Judgment is required in assessing whether there are indicators of impairment of long-lived assets. Management considers both internal and external information to determine whether there is an indicator of impairment and, accordingly, whether impairment testing is required. The information management considered included plant-based protein market information, the Company's market capitalization, Bunge's investment in Merit, internal financial models and actual results. As a result, at March 31, 2022 management concluded that there were no impairment indicators related to its long-lived assets.
Commencement of amortization of deferred development costs
On July 1, 2019, the Company commenced deferring development costs related to its pea and canola technologies. Judgement is required to assess when amortization of deferred development costs commences. Management considered whether there was sufficient evidence to conclude that the Merit production facility was capable of operating in the manner intended by management. Based on the Merit production facility's output, management concluded that the facility was effectively commissioned on December 31, 2021. As a result, the Company ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized over estimated useful life of 15 years.
b) Sources of estimation uncertainty
Expected credit losses on Merit Foods loan receivable
The Company estimates the expected credit losses on Merit Foods' loan receivable based on management's best estimate of the lifetime expected credit loss calculated based on probability of default, loss given default, and outstanding balance of the loan. At March 31, 2022, the total lifetime expected credit loss on the Merit Foods loan receivable was estimated to be $83,000.
Goodwill impairment assessment
The Company determines the recoverable amount of its cash generating unit when performing its annual impairment test for goodwill. In determining the recoverable amount, the Company considers its market capitalization, any recent investments in Merit Foods by third parties, and internal projected cash flows. The estimate of recoverable amount is based on management's best estimates of what an independent market participant would consider appropriate. At March 31, 2022, the recoverable amount of the Burcon cash generating unit exceeded the carrying amount, and therefore no impairment charge has been recognized.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
NEWLY ADOPTED ACCOUNTING STANDARDS
Effective April 1, 2019, the Company adopted IFRS 16, - Leases, which requires, among other things, leases to recognize leases traditionally recorded as operating leases in the same manner as a financing lease.
The Company had a short-term lease in fiscal 2020 which was included as part of rent expense under general and administrative expenses. During fiscal 2021, the Company entered into a long-term lease, which was accounted for in accordance with IFRS 16.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
Amendments to IAS 1 - Classification of Liabilities as Current or Non-Current
The amendment clarifies the classification requirements to determine if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing or recognition. The amendment is effective for annual reporting periods beginning on or after January 1, 2023 and is to be applied retrospectively, with earlier application permitted. The Company does not expect the new standard will have a significant impact on the consolidated financial statements.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual Filings and Rules 13a-15(f) under the U.S. Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As of March 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework (2013). Based on this assessment, our management concluded that, as of March 31, 2022, our internal control over financial reporting was not effective based on those criteria because a material weakness in internal control over financial reporting existed as of that date, as described below. The Company did not design and operate controls with sufficient precision over the share of loss in Merit Foods. The Company's controls related to the review of its share of loss were not designed or operated at a level of precision to allow the Company to prevent or detect potential material misstatements in a timely manner. The Company will implement remediation measures improving the review of the share of loss in Merit Foods by implementing additional controls at a greater level of precision.
The material weakness did not result in any identified material misstatements to the consolidated financial statements and there were no changes to previously released financial results.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit in accordance with National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102") and under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified by NI 51-102 and the Canadian Securities Administrators and the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under NI 51-102 and the Exchange Act is accumulated and communicated by management, including the Interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109") and Rule 13a-15(b) under the Exchange Act, our management, including our Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Based on the evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, our disclosure controls and procedures are not effective at a reasonable assurance level due to the material weakness described in Management’s Report on Internal Control over Financial Reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management, including the Interim Chief Executive Officer and Chief Financial Officer, has reviewed the Company’s internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in NI 52-109 and Rule 13a-15(f) under the Exchange Act), other than to address the material weakness described in Management’s Report on Internal Control over Financial Reporting, during the year ended March 31, 2022.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that can significantly affect its financial condition and future operations. Key risks factors are outlined below. In addition, a detailed explanation of the risk factors which we face is provided in our AIF for the year ended March 31, 2022 under the section titled "Risk Factors", which is incorporated by reference herein. The AIF is available at www.sedar.com.
Patents and proprietary rights - Burcon's success will depend, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of others or having others infringe on its rights. Burcon has filed applications for most of its inventions internationally under the Patent Cooperation Treaty of the World Intellectual Property Organization. As at the date of this MD&A, Burcon has been granted a total of 327 patents in various countries covering a number of key processes and uses of Burcon's soy, pea, canola and flax protein products as functional food and beverage ingredients. Of those patents, 72 have been granted in the United States. Although Burcon expends significant resources and efforts to patent its discoveries and innovations, there can be no assurance that our patent applications will result in the issuance of patents, or any patents issued to Burcon will provide it with adequate protection or any competitive advantages, or that such patents will not be successfully challenged by third parties. Burcon cannot be assured that competitors will not independently develop products similar to the Company's products or manufacture products designed to circumvent the exclusive patent rights granted to the Company. Further, Burcon may need to incur significant expenditures in prosecuting claims against others whom it believes are infringing on its rights and by defending claims of intellectual property infringement brought by its competitors and others.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Development and commercialization - Although Merit Foods has completed construction of and commissioned the Flex Production Facility to commercialize Burcon's pea and canola proteins, it has not begun to generate significant revenues from the sale of the Products. There can be no assurance that any of Merit Foods' products will obtain regulatory approvals in countries where such approvals have yet to be sought, or be successfully marketed. For Burcon, there can be no assurance that the investment made in Merit Foods will be recouped through the royalties generated from sales of Merit Foods' products. The long-term success of Puratein®, Supertein® and Nutratein® canola proteins, and Peazazz® and Peazac® pea protein and Nutratein® pea protein/canola protein blend products hinges upon market acceptance by food and feed ingredient manufacturers and suppliers in numerous product applications. Even though Puratein®, Supertein® and Nutratein® canola proteins, and Peazazz® and Peazac® pea proteins and Nutratein® pea protein/canola protein blend products may be found to be functionally acceptable in product applications, there is no assurance that they will obtain market acceptance and within a reasonable time frame. The majority of food or feed ingredient manufacturers require a substantial testing phase and demonstration of consistent delivery and production capabilities for commercialization. Until large batches of products can be supplied, market acceptance of Puratein®, Supertein®, and Nutratein® canola proteins, and Peazazz® and Peazac® pea proteins and Nutratein® pea protein/canola protein blend products may be delayed. Although Merit Foods has completed construction of and commissioned the Flex Production Facility for Burcon's pea and canola proteins, it may be some time before product sales of pea and canola proteins will be significant.
With the termination of the Soy Agreement with ADM, Burcon must secure a strategic partner for its soy protein isolates. If Burcon is unable to secure an alternative strategic partner for its soy protein isolates, then the commercialization of its products may be delayed or unsuccessful. Burcon is investigating alternative paths to bring its soy protein technologies to market. Although Burcon is in discussions with a potential partner to commercialize its soy protein, there can be no assurance that a strategic partner will be found.
With the exception its canola and pea proteins, none of Burcon's other potential products are commercially available as a food ingredient for human consumption. The rising popularity of plant proteins has resulted in significant growth with increased participation by competitors entering the market to produce plant proteins. Many competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing, and human resources than Burcon. These competitors may succeed in developing products earlier than Burcon, obtaining regulatory approvals for such products more rapidly than Burcon or in development products that are more effective than those proposed to be developed by Burcon.
History of operating losses and financing requirements- Burcon has accumulated net losses of approximately $109 million from its date of incorporation through March 31, 2022. While the construction and commissioning of Merit Foods' Flex Production Facility has been completed, the magnitude of future royalty payments from Merit Foods cannot be ascertained at this time. In the absence of a definitive time when sales of products will be significant, Burcon expects its accumulated losses to increase as it continues to commercialize its products, its research and development and its product application trials. Burcon cannot predict if it will ever achieve profitability and, if it does, it may not be able to sustain or increase its profitability. The commercial success of any of Burcon's products will depend on whether they receive public and industry acceptance as a food ingredient and dietary supplement, and whether they may be sold at competitive prices or are able to obtain sufficient royalty revenue from licensing, which adequately exceeds Burcon's business costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
Developing Burcon's products and conducting product application trials is capital intensive. Since acquiring its subsidiary in October 1999, Burcon has raised gross proceeds of $107.7 million from the sale or issuance of equity securities and $9.5 million from the issuance of convertible debentures. As at March 31, 2022, Burcon had $7.0 million in cash and cash equivalents. With the first tranche of the Secured Loan, Burcon believes that it has sufficient capital to fund the current level of operations through July 2023, and to February 2024 if the conditions are satisfied for the second tranche of the Secured Loan. Burcon may need to raise additional capital on acceptable terms in order for the Company to meet its business objectives and fund its operations.
Nasdaq Listing - Inability to Meet Listing Standards
As noted above, the Company received a letter from the Listings and Qualifications Department that it was not in compliance with the listing rule to maintain a minimum bid price of US$1 per share. The Company has a compliance period of 180 calendar days or until September 30, 2022, to regain compliance with Nasdaq's minimum bid price requirement. In the event the Company does not regain compliance by September 28, 2022, the Company may be eligible for additional time to regain compliance or may face delisting. Burcon's management is reviewing various options available to the Company in order to regain compliance and continued listing on the Nasdaq Capital Market.
The delisting of Burcon's common shares from the Nasdaq Capital Market could negatively impact Burcon because it: (i) could reduce the liquidity, and possibly the market price, of our common shares; (ii) could reduce the number of US investors willing to hold or acquire our common shares, which could negatively impact Burcon's ability to raise equity financing; and (iii) would limit Burcon's ability to use certain types of registration statements in the United States to offer and sell freely tradable securities, thereby preventing the Company from accessing the US public capital markets.
COVID-19 - Pandemic Risk
The COVID-19 outbreak was declared as a pandemic by the World Health Organization on March 11, 2020. Since the outbreak, global economies have been impacted as governments have imposed restrictions such as travel bans, self-imposed quarantines, social distancing and temporary closures of non-essential businesses. Since March 2021, the supply of vaccines has become more secure in Canada and immunization rates are continuing to improve in Canada, the United States and may developed countries in the world. However, the emergence of COVID variants continues to create uncertainty for economies worldwide. The duration and long-term effects of the pandemic is unknown at this time.
Even though governments worldwide, including Canada, have implemented significant monetary and fiscal relief programs designed to stabilize their economies, it is too early to predict the efficacy of such programs at this time. Burcon has received Canadian government assistance through the CEWS and CERS programs up to October 2021 when these programs were terminated and only businesses who continue to be most severely impacted will qualify for new subsidy programs. See R&D and G&A expenses sections above.
Burcon's operations have not been materially impacted by the COVID-19 pandemic. Since March 2020, Burcon has implemented measures to ensure the safety of work conditions for its staff at the Winnipeg Technical Centre and at its head office in Vancouver. Burcon's COVID-19 protocols continue to evolve in response to government health and safety guidance. While the COVID-19 pandemic has caused certain disruptions and delays in Merit Foods' business operations, including the commissioning process of the Flex Production Facility. It is not possible to predict how long the pandemic will continue to last and whether the financial and business conditions of Burcon and Merit Foods will be further impacted in future periods.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
OUTLOOK
For the coming year, Burcon's main objective will be to further develop its pipeline of plant-based protein technologies to include other novel renewable plant sources. In particular, Burcon will focus on identifying and securing a strategic partner for its novel sunflower protein technology. In addition, Burcon will continue to support Merit Foods in its optimization of the Flex Production Facility, which was commissioned in December 2021. Burcon's activities will include:
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advancing Burcon's pipeline of plant-based protein technologies by conducting research to develop and refine its extraction and purification processes for novel protein products;
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filing patent applications to protect intellectual property arising from research and development of new protein technologies;
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identifying and securing a strategic partner with the goal of commercializing its novel sunflower protein technology;
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working with Merit Foods to optimize Merit Foods' Flex Production Facility;
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conducting further research to develop additional applications for Peazazz® and Peazac® pea proteins, as well as Supertein®, Puratein® and Nutratein® canola proteins and blends into food products; and
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continuing to file patent applications to protect the Peazazz® pea protein extraction process as well as the composition of Peazazz® pea protein and applications for Peazazz® pea protein into food products.
In addition, Burcon will also:
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explore and identify possible suitable locations for its expansion of its Winnipeg Technical Centre, which is expected to include an expanded footprint with increased commercial processing capacity as well as analytical and functional capabilities;
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continue to refine its protein extraction and purification technologies, develop new technologies and related products;
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further strengthen and expand its intellectual property portfolio;
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explore opportunities for acquiring or licensing into Burcon, novel technologies that will complement or enhance Burcon's intellectual property portfolio and business initiatives;
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended March 31, 2022, 2021 and 2020
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pursue product development agreements with major food, beverage, and nutritional product companies to develop improved or novel applications for Burcon's other specialty proteins into their products; and
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continue to engage in investor relations activities to support the expansion of Burcon's investor base, particularly from the U.S. investment community, by raising awareness about Burcon through various media channels, analyst coverage and investor relations.
Form 52-109F1
Certification of annual filings - full certificate
I, Peter H. Kappel, the Interim Chief Executive Officer of Burcon NutraScience Corporation, certify the following:
1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the "annual filings") of Burcon NutraScience Corporation (the "issuer") for the financial year ended March 31, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.
4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the financial year end
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is Internal Control - Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR - material weakness relating to design: The issuer has disclosed in its annual MD&A for each material weakness relating to design existing at the financial year end
(a) A description of the material weakness;
(b) The impact of the material weakness on the issuer's financial reporting and its ICFR; and
(c) The issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 N/A
6. Evaluation: The issuer's other certifying officer(s) and I have
(a) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and
(b) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's ICFR at the financial year end and the issuer has disclosed in its annual MD&A
(i) our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and
(ii) for each material weakness relating to operation existing at the financial year end
(A) a description of the material weakness;
(B) the impact of the material weakness on the issuer's financial reporting and its ICFR; and
(C) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer's ICFR that occurred during the period beginning on January 1, 2022 and ended on March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
8. Reporting to the issuer's auditors and board of directors or audit committee: The issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer's auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer's ICFR.
Date: June 27, 2022
| "Peter H. Kappel" |
||
| Peter H. Kappel Interim Chief Executive Officer |
Form 52-109F1
Certification of annual filings - full certificate
I, Jade Cheng, the Chief Financial Officer of Burcon NutraScience Corporation, certify the following:
1. Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the "annual filings") of Burcon NutraScience Corporation (the "issuer") for the financial year ended March 31, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.
4. Responsibility: The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer(s) and I have, as at the financial year end
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.
5.1 Control framework: The control framework the issuer's other certifying officer(s) and I used to design the issuer's ICFR is Internal Control - Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR - material weakness relating to design: The issuer has disclosed in its annual MD&A for each material weakness relating to design existing at the financial year end
(a) A description of the material weakness;
(b) The impact of the material weakness on the issuer's financial reporting and its ICFR; and
(c) The issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 N/A
6. Evaluation: The issuer's other certifying officer(s) and I have
(a) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and
(b) evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's ICFR at the financial year end and the issuer has disclosed in its annual MD&A
(i) our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and
(ii) for each material weakness relating to operation existing at the financial year end
(A) a description of the material weakness;
(B) the impact of the material weakness on the issuer's financial reporting and its ICFR; and
(C) the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness.
7. Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer's ICFR that occurred during the period beginning on January 1, 2022 and ended on March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
8. Reporting to the issuer's auditors and board of directors or audit committee: The issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of ICFR, to the issuer's auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer's ICFR.
Date: June 27, 2022
| "Jade Cheng" |
||
|
Jade Cheng Chief Financial Officer |