First safe the merchant in the workhouse, but don't seduce him. What i mean by second fisit is that after you fought the beast of nox for the first time (if you win he goes to second phase which you need to flee), after that you will wonder around for a year (in story of course) then you go to the castle for the second time. Then meet the merchant in the furnace room, there you will meet corrupted version of him (this only happened if you don't seduce him). Then you can suck his cock which will trigger a stat check, fail it then you get the bad ending (cock TF).