- Burcon NutraScience says it plans to submit a formal offer for plant protein processor Merit Functional Foods, which went into receivership on March 1.
- Burcon, which developed the protein extraction technology utilized by Merit, owns a 31.6% share in the distressed company.
- It is now in talks with receiver PriceWaterhouseCoopers and believes it is “in a unique position to bring Merit’s business to profitability.”
Founded in 2019, Merit Functional Foods produces high-purity pea and canola proteins from a plant in Winnipeg, Canada. The plant deploys Burcon’s patented mechanical processes, which it claims enable formulators to include higher levels of plant protein isolates in challenging applications such as low pH beverages without negatively impacting flavor or texture.
While the proteins “have been formulated into countless products globally,” said Merit co-CEO Ryan Bracken in LinkedIn post last week, Merit “couldn’t quite get to the level of cashflow needed to operate the business profitably, quick enough.”
Burcon is the leading shareholder in Merit with a 31.6% stake, while Bunge acquired a 25% stake for C $30 million in mid-2020. At around the same time, the Canadian government invested almost C$100 million ($72m), including C$9.2 million ($6.7m) from Protein Industries Canada and C$90 million ($65m) in debt financing.
‘Cumulative losses and cash flow deficiencies’
Merit generated revenues of C$3million ($2.2m) in the third quarter of fiscal 2023 (ending December 31, 2022), up 146% year-on-year, and had started work on a new line of plant-based seafood alternative products.
However, it had also “incurred cumulative losses and cash flow deficiencies that have adversely impacted its financial situation and liquidity position,” said Burcon, which itself posted a net loss of C$16.3 million ($11.8m) in the quarter.
In a letter to shareholders penned February 8, Burcon CEO Kip Underwood said: “We have real concerns about Merit’s financial situation and viability.”
On February 24, federal lending agencies Export Development Canada and Farm Credit Canada filed for the receivership order. According to a March 6 report from receiver PricewaterhouseCoopers, Merit owed these lenders $58.6 million ($42.4m) and $36.5 million ($26.4m)respectively, with an additional C$5 million ($3.6m) owed to the Canadian Imperial Bank of Commerce.
‘Merit’s business is a strong strategic fit for Burcon’
In a statement issued March 3, Underwood said he was in discussions with the receiver and believed Burcon was “in a unique position to bring Merit’s business to profitability.”
He added: “Burcon has the process engineering expertise to improve bottom line performance through production efficiency gains. Moreover, by leveraging Burcon’s innovation portfolio to launch new plant proteins beyond pea and canola, Burcon can access new markets achieving faster growth. These compelling business synergies are why Burcon continues to work towards capitalizing on this significant opportunity.”
“Merit’s business is a strong strategic fit for Burcon by providing additional revenue sources, better connection to customers and markets, and direct influence over the manufacture of Burcon’s protein ingredients.”
Merit co-CEO: ‘We started up prior to understanding the full impact of what Covid could do to our business plan’
In his LinkedIn post, Merit Functional Foods co-CEO Ryan Bracken blamed a range of factors for the company’s financial woes, from higher raw materials costs and rising interest rates to the “risk appetite from lenders and/or investors drying up.”
He also highlighted “commissioning of a novel product taking 12X longer than promised” and noted that “customers’ R&D labs were shuttered and new product development came to a standstill globally” during the pandemic.
According to PriceWaterhouseCoopers, Merit’s assets total C$137.6 million ($99.7m), with the bulk tied up in property and equipment.
One industry source told AFN that he wasn’t surprised by the news, although Merit’s products were strong: “Merit uses an expensive and sophisticated new process developed by Burcon using membrane filtration that’s different to some other players.
“Even if it’s a superior product, the price has to be right and if you’re only going after super premium applications, that’s a niche market.”
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