Good afternoon, everyone, and thank you for participating in today's conference call to discuss Burcon NutraScience Corporation's fiscal 2022 second quarter ended September 30, 2021. Joining us today are Johann Tergesen, President and CEO of Burcon, and Jade Cheng, the company's Chief Financial Officer. Following their remarks, we will open up the call for your questions. Before we conclude today's call, I'll provide the company's safe harbor statement with important cautions regarding the forward-looking statements made during this call. Now I would like to turn the call over to the President and CEO of Burcon, Mr. Johann Tergesen. Sir, please go ahead.
Thank you, operator. Good afternoon, everyone. Thank you for joining us today. Burcon's fiscal 2022 second quarter, which ended September 30, included some notable advancements for Burcon as well as for our joint venture company, Merit Functional Foods. Focusing on Merit Functional Foods, we are encouraged by the steady progress achieved by Merit as they have worked to address the commissioning challenges they have experienced at their new pea and canola protein production facility, and we're pleased with their recent production improvements. In today's call, I will address and discuss the commissioning challenges Merit has experienced, and I look forward to also discussing Merit's expanding sales funnel for their best-in-class pea and canola protein ingredients. As we've previously disclosed, earlier this year, Merit completed the construction of, and the first end-to-end production runs of pea and canola protein ingredients at, its new state-of-the-art protein production facility in Winnipeg.
Since that time, and as is standard practice at any new food processing facility, Merit has been undergoing a commissioning process at its production plant, working through and resolving operational issues as they have arisen with the goal of optimizing production throughput and yield, and ultimately to achieve the nameplate capacity as per the originally engineered design of the production plant, which I will talk a little bit more about later in this call. Just last quarter, Merit fulfilled first commercial sales orders for its best-in-class pea and canola protein ingredients, and we are pleased to note that there are currently food and beverage products on store shelves today which incorporate Merit's novel pea and canola proteins.
Before I go into more details on Burcon's and Merit's recent progress, I'd first like to turn the call over to our Chief Financial Officer, Jade Cheng, who will take us through the financial details for the quarter. Then I'll return to provide a business update for the quarter and discuss some of the opportunities that Burcon is currently pursuing. We will open the call to questions following our remarks. Jade, please go ahead.
Thanks, Johann. Earlier today, our financial results for fiscal 2022 second quarter were issued in a news release and filed with SEDAR and EDGAR, as well as posted to the investor relations section of our website. Turning first to our income statement, during this quarter, we reported a net loss of CAD 1.4 million or CAD 0.01 per basic and diluted share. This compares to a net income of CAD 4.4 million or CAD 0.04 per basic and diluted share in the same year-ago quarter. In the second quarter of fiscal 2021, Burcon recorded a CAD 6.4 million gain on dilution of our investment in Merit after Bunge's investment in Merit. Merit continued to fulfill commercial sales orders this quarter, and Burcon recorded royalty revenues of CAD 32,000 from Merit on the sales of pea and canola protein products.
Merit recorded sales revenues of CAD 1.6 million for the quarter ended September 30, 2021, which included sales of commodity and co-products in addition to pea and canola protein products. Burcon recorded CAD 159,000 as a share of Merit's loss for the second quarter of fiscal 2022. Included in the share of Merit's loss is a recovery of CAD 656,000 to correct for a deferred tax adjustment related to the first quarter of fiscal 2022. After taking the adjustment into account, Burcon's share of Merit's loss is not significantly different from that in the same year-ago quarter. Merit's loss reflects its stage of development as it continued with its commissioning and optimization process at the Flex Production Facility.
Gross research and development expenditures increased by CAD 109 thousand in the second quarter over the same year-ago quarter. The increase is due mainly to scientific staff additions and salary increases. During the quarter, we allocated CAD 484 thousand of R&D expenditures to deferred development costs. Gross intellectual property expenses decreased by CAD 161 thousand in the second quarter over the same year-ago quarter. The decrease is due mostly to lower activity in the pea and canola patent portfolios. G&A expenses increased by CAD 100 thousand in the second quarter of fiscal 2022 as compared to the same quarter last year. The increase is due to increased salary costs from higher stock-based compensation expense and staff additions, increases in investor relations and insurance costs, offset by lower legal fees.
As of September 30, 2021, our cash resources totaled CAD 10.9 million as compared to CAD 14 million at March 31, 2021. I would like to refer you to our complete financial statements and management's discussion and analysis of our results that are available in the investor section of our website at burcon.ca, as well as on sedar.com. In terms of our patent portfolio, Burcon was granted 3 new patents during this quarter, covering novel processes for the extraction and purification of soy and non-soy oilseed protein ingredients and high purity proteins produced therefrom. Our patent portfolio now consists of 299 issued patents in various countries, including 73 in the U.S. and more than 210 active patent applications, including 35 additional U.S. patent applications.
With that, I'd like to turn the call back to our CEO and President, Johann Tergesen. Johann?
Thanks, Jade. As I mentioned at the beginning of today's call, the second quarter included some notable advancements for both Burcon and its joint venture, Merit Functional Foods. During the quarter, our joint venture, Merit Functional Foods, which is currently commissioning its new state-of-the-art protein production facility, achieved numerous significant steps towards optimizing the facility where it is now producing under license from Burcon, its best-in-class pea and canola protein ingredients. The commissioning process and the process of scaling up production capacity has required more effort and time than was anticipated. With that being said, production capability at Merit has been improving by the week, and the engineers, technicians, and management at Merit are largely now just fine-tuning the overall facility by individually fine-tuning the numerous unit process operations that together form the overall production capability.
A process not unlike how an orchestra conductor might direct the simultaneous performance of perhaps 100 professional musicians. Although not complete, many of the challenges that Merit had been experiencing in the implementation of Burcon's technology at the Winnipeg facility are largely behind them now. We believe Merit is in the final leg of the commissioning process, and we expect that soon Merit will be able to routinely produce on a 24/7 schedule its pea and canola proteins in order to fulfill ever larger existing and expected future customer orders. We are encouraged by Merit's recent production improvements for a second reason. Merit's pea and canola proteins are unique, and as such, this marks the first time these proteins have been produced at such a large commercial scale.
While the production team at Merit has been hard at work fine-tuning the facility and the production process, so too has Merit's production applications experts and Merit's sales team been working diligently with the proteins produced at the facility and with numerous CPG companies seeking to incorporate Merit's unique proteins into soon-to-be-launched new or reformulated consumer products. During the commissioning period, Merit has had modest commercial production, and as a result, sales of Merit's pea and canola protein ingredients to food and beverage manufacturers have been limited, albeit increasing quarter-over-quarter. For all intents and purposes, Merit's sales are just at the beginning now. During the majority of the second quarter, Merit was still working to resolve commissioning challenges, and as a result, Merit only posted modest sales revenue for the quarter, again, reflective of the minimal production, which was due to the ongoing plant commissioning challenges.
Late in the second quarter, by around mid-September, Merit's successful commissioning efforts resulted in significantly improved production capability, and Burcon expects Merit to now markedly increase their production and sales quarter-over-quarter from here. As Merit's production capabilities improve, we also anticipate that there will be more consumer food and beverage products using Merit's innovative pea and canola proteins being launched into the marketplace and enjoyed by consumers in the coming year. Near the end of September, I had the opportunity myself to tour Merit's new facility, and I have to say it really is an impressive complex.
It's 94,000 sq ft of modern, bright white production areas, laboratories, packaging, warehousing, and offices with seriously gleaming floors, high-tech processing equipment sourced from around the world, all of which is tied together with kilometers of stainless steel piping and wiring, incorporating hundreds of sensors and program logic controls, all of which is run from a central computer-driven control room. It's equally impressive to be there in person just to observe the overall flow of the operation and the larger processing facility, watching truckloads of peas or canola roll up to the plant, and then seeing those inputs processed and converted to the products and byproduct fractions, including starches, hulls, oil, meal, and of course, the pea proteins and canola proteins, which are bagged, palletized, and then rolled out.
By the way, Bird Construction, the general contractor responsible for overseeing the design and build out of Merit's facility, was recently recognized for their part in the successful completion of this first of its kind production plant. As Bird Construction was selected as the winner of the 2021 Groundbreaker Award in Project Excellence for Merit's pea and canola processing plant. In conjunction with Merit's team, Bird Construction was able to fast-track the project and successfully complete Merit's one of a kind protein facility within a record time frame of 14 months, and that within a backdrop of the global pandemic. Awards aside, we're pleased and proud to see Burcon's pea and canola protein extraction technologies now scaled up and implemented in Merit's impressive facility.
Commissioning a dual process protein production facility such as Merit's is not without challenges and startup issues, and due in large part to the uniqueness of the plant's ability to flex between pea and canola protein production, Merit has experienced a longer than expected length of time to commission its facility. It may be helpful to provide some color on the commissioning challenges Merit has had to resolve these last few quarters. I won't go into detail as these are issues that have largely been resolved, but based on conversations I've recently had with some long-term investors, I feel it can help for many of you who are listening to understand the general nature of some of the issues that were encountered.
Some of those issues included, for example, well, what was perhaps the single most resource-consuming challenge, and that has been challenges with some of the highly specialized processing equipment installed at the plant, either not performing to the equipment suppliers' originally promised specifications or in some cases where the equipment has malfunctioned and required frequent and significant maintenance, significant both in terms of downtime and expense. It's important to note that much of this equipment comes from suppliers in the U.S. or the European Union, which given the ongoing global pandemic and transportation logistics, has made response times long and has caused further delay and hardship for Merit.
That segues into what likely amounts to the second biggest challenge to the timeliness of the commissioning process, which is general supply chain issues that have been apparently arisen also as part of or maybe you could say in large part due to the COVID pandemic. Supply chain issues have impacted the commissioning process in a number of ways. Just one example is delays in sourcing items as straightforward as stainless steel piping for use in fabricating piping changes or when Merit is working to implement layout modifications, et cetera. Another challenge which Merit has had to deal with has been the difficulty of not being able to have many expert engineers and/or equipment specialists in person at Merit's facility to assist in the commissioning process.
Travel restrictions and quarantine requirements, unfortunately, frequently meant that Merit could only obtain remote assistance for setting up and/or troubleshooting equipment, for example. All this to say that Merit has certainly experienced a challenging commissioning process, which has limited Merit's ability to produce product and fulfill orders. We remain confident, however, that Merit is on track to meet optimization targets and will transition to being fully operational in the near future. Moving to Merit's sales pipeline. We're encouraged by the interest being shown for Merit's proteins from food and beverage companies. Merit is working with literally hundreds of CPG companies on a broad array of product opportunities to incorporate Merit's highest purity pea and canola proteins into their plant-based food and beverage products. Merit's sales funnel is both robust and growing, with CPG companies at every stage of the ingredient procurement process.
Merit's protein sales increased by 76% during the quarter as compared to the previous quarter when Merit first began fulfilling commercial sales orders for its best-in-class pea and canola protein ingredients. As explained, Merit's production during the commissioning process has been limited, though, and as such, Merit's sales have also been limited. Despite the modest royalty revenues earned for this quarter, we are confident Merit is on track to significantly ramp up production and protein sales. Merit has hundreds of CPG companies at various stages in the product development and procurement lifecycle, which typically starts at bench-top analyses and applications testing and moves to professional taste testing panels and then consumer trials. Often only after many months of development work, in some cases can vary 18-24 months or longer, opportunities can finally reach the approval process and eventually progress to an ongoing sales contract.
There are a number of potential customers who have already completed the product development cycle and have a finalized product formulation who are either under contract or are now in discussions with Merit and expected to finalize sales contracts in the near future. Merit's sales pipeline and sales funnel are more mature and established than might be assumed, given that Merit was first founded as a joint venture only a little over two years ago in May 2019. As background, it's useful to understand that Merit effectively acquired, or perhaps you could say, inherited many of the customer relationships Burcon had been nurturing for years. Burcon had been working with and providing its canola and pea protein samples to a number of major and super major CPG companies for years before we formed the Merit Functional Foods joint venture.
For example, we announced a collaboration agreement with Nestlé in January 2020. You could assume, therefore, that Burcon must have been working with Nestlé for a long time before that announcement and well before Merit was even formed. In short, Merit has a developed and robust sales funnel of customers with whom it's currently working, and that includes companies from around the globe, including certain notable North American and European brands that are both in and developing meat alternatives and dairy alternative food and beverage products. Merit is also working with customers developing lifestyle nutrition products. Ready-to-mix powdered beverage applications is one example and a significant market opportunity for Merit's proteins, and one where the customers can adopt new protein ingredients relatively quickly. The robust sales funnel and strong interest is a testament to Merit's unique plant-based protein offerings.
The two most recent Merit-related Protein Industries Canada announcements outline co-development projects that cover dairy alternatives, meat alternatives, including a plant-based Wagyu beef, as well as lifestyle nutrition products, further evidencing the broad applicability and appeal of Merit's unique plant-based proteins. Given the implied magnitude of demand from even just the top prospects in Merit's sales pipeline, demand could easily exceed the potential production capacity of phase one of Merit's production facility. In short, Merit could find that it has to address the question of the phase two expansion in the relatively near future.
Merit's pea and canola proteins offer unparalleled purity and exceptionally clean and neutral taste compared to what's currently available on the market, providing Merit with a competitive advantage, which we and Merit expect will drive that sales growth. Merit's production improvements this quarter, together with its solid sales pipeline, supports the outlook for Merit as a premier plant-based protein supplier in a growing alternative proteins market. As we've recently announced, Merit is now fine-tuning the implementation of Burcon's technologies, and as such, we expect Merit will soon be transitioning to full production of its best-in-class pea and canola proteins. Switching back to Burcon, this quarter we advanced our discussions, planning, and negotiations with a number of third parties towards potential partnership opportunities where we believe we can quickly and economically bring Burcon's other plant-based protein technologies to market.
Discussions included potential new joint ventures and production facilities to commercially produce Burcon's novel protein ingredients. As mentioned on previous investor calls, a potential development as part of the partnership structure could include Burcon's plan for a new and expanded innovation center, where it would serve as a very small-scale commercial production plant to produce and sell directly to the market Burcon's novel protein ingredients. We continue to work with a third-party engineering firm to identify, select, and design a new innovation center in Winnipeg, Manitoba. There are a few locations that could be suitable for our new facility. However, we will continue to investigate and shortlist possible sites in conjunction with our partnership discussions. We're comfortable with the progress we've made in terms of our partnering discussions.
We understand how valuable our technologies are, and we will work for a partnership that makes the most sense to Burcon and its shareholders. The goal of a joint venture partnership is to capitalize on the growing trend towards plant-based eating by rapidly bringing to market new and innovative protein ingredients that provide superior taste, function, and nutrition for food and beverage applications. Just this past year alone, Good Food Institute and Plant Based Foods Association reported that plant-based food sales grew by 27% to reach $7 billion in market value. Also earlier this year, Boston Consulting Group published a report on the growth in alternative proteins and projected it will grow year-over-year at a compound rate of 14% to reach $290 billion by the year 2035.
Clearly, this trend is not going away, and Burcon is in excellent position with its patent portfolio know-how to capitalize on this massive shift in consumer eating habits. During the quarter, we were also pleased to announce that Peter Kappel has been appointed as chairman of Burcon's board, and we were similarly pleased to have announced the additions of Jeanne McCaherty and Alfred Lau to Burcon's board of directors. Burcon's current eight-member board of directors is an exceptional group of individuals who collectively bring a wealth of experience and insight to Burcon's business opportunities and who are engaged and committed to Burcon's success. We look forward to the continued guidance and support from our board as Burcon transitions to a revenue-generating company and pursues additional strategic partnerships. We are encouraged by the accomplishments of Merit's operations team during this past quarter.
Merit made significant advancements in its commissioning process and is now poised to ramp up production and sales. Merit's sales funnel continues to grow. As we noted, Merit is now working with hundreds of CPG companies, bringing forward a variety of meat alternatives, dairy alternatives, and lifestyle nutrition products where Merit's highest purity non-GMO pea and canola protein ingredients excel. Burcon continues to work towards securing new partnerships and collaborations as a means to monetize Burcon's alternative plant-based protein technologies. We look forward to updating everyone again on our next call. Now with that, I'd like to open the call up to questions. Operator, can you please provide the appropriate instructions?
Certainly. We'll now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. Our first question is from Doug Cooper with Beacon Securities. Please go ahead.
Hi. Good afternoon, Johann. I guess my first question, just maybe can you clarify the press release you put out, I guess, a couple of days ago, Burcon JV, Merit facility is commercially ready. I'm not quite sure. Does that jive with what you were saying? You said it would be sort of shortly. That press release from the other day seemed to imply that it's fully commissioned and ready to go. Is that not the case?
Thanks for the question, Doug. By the way, a lot of people have asked that question, so it's definitely a good one to start with. Really fundamentally, the explanation goes like this, is that, Merit put out a news release saying that their facility is commercially ready and commissioning complete. From our perspective, we believe that our shareholders view commissioning as being a point in time when the plant is at its nameplate capacity. Although Merit has made great strides, and we're really excited with the advancements that they've made recently in production improvements, et cetera, we're not at nameplate capacity. Really, Burcon's news release was just clarifying that although we are equally excited along with the Merit guys. You know, their release, you can read it very positively. They're excited.
They're excited about the improvements that they've made and the fact that they can commercially produce large volumes of product for their customers right now. As I said, you know, we needed to clarify from where we viewed our shareholder base's understanding positioned to be.
Okay. Just setting maybe expectations for 2022, calendar 2022. Is this something we should expect them to exit calendar 2022, I would suspect, fully utilized, but how long will it realistically take them to get there, in your opinion?
Yeah, that's another great question. Here's an interesting thing. What I'll say is that we, as we've said on the call already, expect Merit to ramp sales from here. There really has, you know, been very minimal sales to date, but there's huge interest. We know that the products, the protein products that they're able to produce are, you know, the highest purity, and they're what people want. We expect sales to there'll be sales in the quarter that we're in right now, albeit probably, again, somewhat modest because of the fact that we are already halfway through the quarter, and Merit's just announcing essentially being there. And then building in Q1, Q2, and going forward in terms of 2022.
I would say that by, you know, Q3 of 2022, calendar 2022, Merit should be, I would expect, at full, let's call it revenue and production. I would also add that it may seem funny considering the, you know, the challenge that they've had with commissioning and the fact that we're at, you know, the starting point of sales. I would not be surprised if you see some discussion about an expansion between now and then, because as they ramp, we recognize that the plant does have a limited production capacity. This plant is big in Burcon's perspective, in our world, considering where we've come from.
Really, in the larger scheme of things, for companies, you know, the size of, say, Bunge, or any of the major agribusiness companies in the world, and that's what Merit is. It's an ingredient supplier in that industry. It's still very small. You know, one of Burcon's key board members likes to refer to it as a demonstration plant.
Can you give us some idea? You said, you mentioned there's products out there that have, you know, for lack of a better word, Merit inside. Can you give us an idea what segment of the market are they in, sort of called fake dairy or fake meat or give us an idea where it is?
Yeah, I don't like using the word fake. I prefer dairy alternative.
Okay.
Yes, there are. What comes to mind right now, there's some excellent dairy alternative products, some non-dairy ice cream available in the U.S. that's incorporating Merit's canola protein, which is doubly exciting for us for the reason that we keep saying it over and over again, which is, you know, Merit is the only company in the world commercially capable of producing food-grade canola protein. The opportunity and potential for canola protein on a long-term basis is massive. It's absolutely huge. I would argue that Merit could be the second-largest plant-based protein company in the world, second only to IFF, is the current leader, that's who has the former Solae soy protein business. You know, given time on the strength of both canola and pea, but specifically canola.
My final question, just, can you comment on Merit's balance sheet? I'm assuming they're gonna be cash flow negative for a bit here further. Is there gonna be any need for capital call from its partners such as yourself or Bunge?
No, that's actually another great question. In the financial statements that we just issued today, we noted that Merit did need cash and raised CAD 5 million, which actually came from Bunge through Bunge's special preemptive right, which was disclosed in our unanimous shareholders' agreement. As a result, Burcon is now at 31.6% ownership of Merit. Bunge, I think, is now just shy of 29%. With that CAD 5 million, my expectation is that Merit will lever that with additional debt financing. Bunge actually has this special preemptive right, which they negotiated in the entry into Merit. I think it was actually a very smart strategy on Bunge's part.
Bunge is obviously a super capable agribusiness company. By the way, if you look at their share price, you'll see they're trading at, like, a ten-year high today. When they originally invested, they basically said, Hey, if Merit finds itself needing additional capital before the time when Merit has gotten to a cash flow breakeven or cash flow positive, then we have a special right to invest. They exercised that right. It is my expectation, as I said, that the next additional funding will come from debt funding. I would expect that we'll make an announcement on that shortly.
If Merit attains that additional debt funding, I think that will be sufficient funding to carry us through to be cash flow positive. It's possible that they might still need additional equity on top of that, but I would guess that that would be a question that would come more like about next April or May.
Can you comment, was the Bunge investment of a similar valuation from their initial investment, or was it?
No, it is a special preemptive right where they actually get it at a lower valuation. If you can picture the negotiation as very straightforward, Bunge was basically saying, If we have to put further money in, then that's an indication that maybe we've paid a premium on the initial money. No, it was actually at a lower amount. It's disclosed in the financial statements. You can read it there. They put CAD 5 million in.
Great. That's it for me.
Yeah.
Thanks, Johann.
Yeah. Thanks, Doug.
Once again, if you have a question, please press star then one. Our next question is from Tania Gonsalves with Canaccord Genuity. Please go ahead.
Hi, Johann. Just a couple from me here. I know you're kind of limited in what you can say about Merit. But if you could stratify the pipeline that you talked about a little bit more, how many of or what proportion of those deals in the pipeline do you think are kind of smaller, quicker closed deals? And what proportion are the large deals that may take up to 24 months to kind of diligence and close?
Thanks, Tania. Again, it's a great question, and unfortunately, my answer is gonna be, yeah, most of that information I couldn't disclose. But what I can say is that there are absolutely very significant deals that Merit is working towards. I obviously can't name names of companies, but I can say that there's North American companies and European companies, there's products in dairy alternatives and meat alternatives, everything that you would expect. And then, yes, the biggest opportunities are the ones where the companies who Merit is dealing with have the most stringent procurement processes and take the most disciplined attitude towards, you know, the negotiating and contract process. It is expected to take time.
What I laid out just a moment ago in terms of expectations on sales growth was actually taking all that into account. You know, Merit has some existing customers. There's definitely customers that they are working with that have the ability or are in a position to make much quicker decisions. For example, if you look at things like lifestyle nutrition products, which are, you know, ready to mix and products like that, it's easier for them to make a reformulation than it is if you're talking about one of the largest food and beverage companies in the world, and they have a product that might be, you know, maybe even a billion-dollar brand product, in which case it's a much more calculated process that they go through.
On the other hand, the very lengthy procurement processes, it's a double-edged sword because once you get established into a company like that, then there's an expectation of very long-term recurring revenue that, you'll be the ingredient supplier to them, you know, forever until there's some reason why, there's some other ingredient that would potentially replace you. There's both aspects. Merit, I think, has an excellent team in terms of sales and the sales of specialty protein ingredients like this requires also, you know, innovation scientists behind them. Merit has an excellent team there as well. If you look on their website, you see individuals like Jeff Casper, et cetera. They are working through that process with, as I mentioned earlier, literally hundreds of companies.
A small couple handfuls of companies who they're dealing with, the expectation on what those companies would order in the first year alone would actually exceed the production capacity of Merit, even at full nameplate capacity. That's why I can say that even though they are still working through the sales process, many of these companies, they can and are already looking forward and thinking about production capacity expansion and how they would accomplish phase two and how it might be a little bit different than what we originally envisioned just in terms of what we've learned in the process of commissioning phase one.
Excellent. Thanks for that color. You kind of led into my next question. Now that the facility is kind of at a scale where they're happy with it and were able to put out that press release that it's fully commissioned, are they looking to build out the sales team any more?
I'll leave that to Merit. I will say that there are, among other things, other opportunities for Merit to sell product, including, I apologize for mentioning their name so many times, but Bunge, of course, also would have significant potential to sell the product, to be a distributor of the product. I know that Merit also has been working with and talking to some other companies that could be distributors. Yeah, there's definitely ways that they can expand upon their sales capability. Again, you know, I'll leave it for Merit to maybe make some statements about that.
Okay. Just lastly here, Merit reported revenue of CAD 1.6 million. Your royalties were significantly lower than this, obviously. If I guess you back calculate based on kind of a single digit assumed royalty rate, you get to a lower or revenue number for Merit. I'm wondering what portion of that CAD 1.6 million does not generate any royalty income for you, and what kind of products is it selling? Is it just the commodity-based products that aren't generating royalties for you?
Yeah. It's basically a combination of some of the by-products, like the starches and oils and things that they sell, some of the things they even sell off for animal feed. In addition to that, it could have been Merit selling some of the peas that they had previously contracted. You know, it could essentially be some commodities that they were trading.
Okay, perfect. That's all for me. Thank you, Johann.
Thanks, Tania.
Our next question is from Chris Bosca, a private investor. Please go ahead.
Hi, guys. Thanks for taking the questions and congrats on the recent news and progress. Most of my questions have been answered, but two questions relating to supply and demand. On the supply side, there was some commentary on your February call, I think it was your Q3 call, with respect to capacity for the phase one. At that time, you were generally disclosing that it was in excess of the original planned 20,000 tons. This summer, there was a Merit executive on an industry webcast who had shared that the commercial plant's phase one capacity is 30,000 tons. Can you confirm that that's the existing capacity for phase one?
Thanks, Chris. What I would say is that when we very first formed the joint venture, Merit Functional Foods, we and the team at Merit, Ryan and Barry, were very vocal, very public about the capacities of the plant. At the time, we were saying, you know, 20,000 metric tons of field peas is what we were saying was the proxy for the size of the plant. Subsequent to that, the team at Merit, the management team at Merit had said, Hey, listen, guys, it doesn't serve us to announce to the world what the capacity of the plant is, et cetera. It doesn't help us.
We're really just providing information to our competitors, and it's not in our best interest. I know even setting that aside, though, Burcon did make a statement in, I believe it was May of 2020, where we said that, on the completion of the syndicated loan that came from Export Development Canada, Farm Credit Canada, that we talked about expansion, that actually allowed for expansion. Specifically, what that actually did was allow for expansion of canola protein production. And so what I can say is this, that, Merit has actually taken steps, including even recent steps, to expand their capability by modifying equipment or we're in the process of swapping in and out some equipment.
I won't speak to exactly what the expected stated capacity is. I can say that it's a moving target where Merit has every intention of selling as much protein as they can, that their production capability will be focused more often than not on actually being able to produce product the most efficiently, meaning the most economically and at the best quality and the most consistent quality. I know that from the investors' world, they would love to hear, you know, specific numbers and be able to therefore, you know, do DCF analyses. We can't disclose that. We can only disclose what Merit is saying. I do know the reference that you are referring to where I can't remember who it was.
I wanna say it was Dan Kraft or someone who disclosed the 30,000 tons. All I can say is that Merit has built the facility that they built with expansion in mind. When I was touring the facility in September, and as I said earlier, it really is a beautiful facility. One of the things that they showed me while I was there was here's the you know the hole in the floor between the second and the first floor and the crane that's already been installed for lifting in additional equipment for expanding capacity at the right time. You know, they will make as much of it as they can.
I’ll also, Chris, say again what I said, which is that, you know, a member of our board, Jeanne McCaherty, who actually comes from Cargill, who comes from this world, she, not jokingly, refers to Merit’s existing facility as a demonstration plant. A great value that Merit can bring right now is just, you know, lining up the facility as they have it, and selling that product because it’s entirely possible that maybe a future expansion won’t even be at that location. Maybe, you know, like, as you know, as we’ve said publicly, there is a structure in place whereby Bunge has the potential to buy out our partners, Ryan, Barry, and Sean. Maybe the future plant we’ll be talking about will be built in Australia or something. All of those are good permutations.
What I can say, and I think the most important thing to understand is Merit is producing product better, you know, great product that has huge potential, and we look forward to, in the coming quarters, to being able to, you know, disclose what Merit accomplishes in terms of ramp and sales, et cetera.
Got it. That's helpful. On the demand side, you know, you've talked about it most of the call, which it's going in the right direction, which is nice to hear. To be a little bit more specific, if possible, it was disclosed that or reported that Merit had roughly 240 NDAs earlier this year. Can you comment if the number of overall NDAs has risen or declined since and maybe give any metrics around that if possible?
I mean, I liked it when Merit said that publicly because then it's something I could say publicly. I can say that it has risen substantially and significantly from that. I think is what I can safely say. There's a ton of interest from companies. You know, some of them are the biggest food and beverage companies in the world. Some of them are smaller companies. They're all good. They're all great opportunities on a longer-term basis, because as I said, I've said a few times, you know, Merit's goal is to sell lots of protein. All of the customers, all of the potential customers are great customers.
Okay. Thanks again.
Yeah, thanks, Chris.
Once again, if you have a question, please press star then one. I will now pass the call over to Paul Lam, who has some questions from webcast viewers.
Hi, Johann. We have a couple questions from the webcast participants. First one is the partnership with Nestlé still a viable avenue for profit?
As we have disclosed already that the collaboration work that Burcon specifically did with Nestlé was successful and essentially has been migrated or graduated to where they are you know one of the companies that's in that sales funnel with Merit and you know working towards what we expect will be a very significant product and hopefully a very long and ongoing relationship between Merit and Nestlé.
Okay. Thank you.
Paul, do you mind.
Yeah.
Reading who the questions are coming from? I think.
Oh, yeah.
That would be consistent with what we've been doing.
Okay. The next question comes from JS. Is the existing brick-and-mortar Merit facility capable of accommodating production expansion, or are we looking for a newly built facility?
Yeah, no, the existing facility absolutely was built specifically with the intention of expansion. In fact, the facility as built and already paid for, the building is effectively twice as large as it needs to be for the processing capacity that has been installed in it. So the expectation is that the first expansion, what has been heretofore referred to as phase two, would be effectively a doubling, largely by going into the existing facility. There would be a required addition to the building to accommodate a second spray dryer tower, but for all intents and purposes, it's there.
That infrastructure that's been put into the building, or into that site, includes the power, the amount of power that they would need even for the phase three expansion, which would be adding another building on the same site, is already there and in place and paid for. Similarly, in terms of, you know, the water that's brought to the location, the sewer, and access and connection to the City of Winnipeg wastewater treatment, it's all been already built and in place, in contemplation of expanding through to phase two and phase three. Yeah, no, absolutely. It's built and designed to be able to be expanded at a point in future when Merit makes that decision.
Okay, thank you for clarifying that. Our next question comes from Robert Mermelstein. He asked, Can you provide an indication of the approximate quantity or value of backlog due to the indicated delay in commissioning at the Merit plant? I think this person is referring to the backlog of the sales pipeline.
Yep, understood. Unfortunately, the short answer is no. Burcon certainly cannot and is really not intending to get into details of Merit's sales to that extent. Again, as I've said on a couple of previous calls, Merit is a private company. Burcon is a joint venture partner in a private company. We can really only provide information on backward-looking. We can report their sales as they happen by quarter, but we have no projections or any other specific detail other than what Merit has provided us in terms of their financial statements on a quarterly basis.
Okay, thank you. I think that's it for webcast questions. Operator, back to you.
Thank you. As there are no further questions, this concludes the question and answer session. I would like to thank you for participating and hand the call back over to Mr. Tergesen. Mr. Tergesen, please proceed.
Thanks, operator. I'd like to thank the continued support of our staff, partners, and shareholders, and we look forward to speaking with you on the next call. Thank you very much. Operator?
Thank you. Before we conclude today's call, I would like to take a moment to read the company's safe harbor statement. This call contains forward-looking statements or forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements or forward-looking information involves risks, uncertainties, and other factors that could cause actual results, performances, prospects, and opportunities to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements or forward-looking information can be identified by words such as anticipate, intend, plan, goal, project, estimate, expect, believe, future, likely, may, should, could, will, and similar references to future periods. All statements other than statements of historical facts included during this call are forward-looking statements.
There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements or information. Important factors that could cause actual results to differ materially from Burcon's plans and expectations include the actual results of business negotiations, marketing activities, adverse general economic market or business conditions, regulatory changes, and other risks and factors detailed herein, and from time to time in the filings made by Burcon with securities regulators and stock exchanges, including in the section entitled Risk Factors in Burcon's annual information form filed with the Canadian Securities Administrators on www.sedar.com. Any forward-looking statement or information only speaks as of the date on which it was made.
Except as may be required by applicable securities laws, Burcon disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Although Burcon believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance, and accordingly, investors should not rely on such statements. Finally, I would like to remind everyone that this call is being recorded and the webcast will be available for replay on the company's website starting later this evening. Thank you, ladies and gentlemen, for joining us today for our presentation. You may disconnect.