Good afternoon and welcome to the Eastside Distilling Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Heather Whyte with Eastside Distilling. Please go ahead.

Thank you. Good afternoon, everyone and thank you for joining us today to discuss Eastside Distilling's financial results for the second quarter 2022. I am Heather Whyte with Eastside Distilling and I will be your moderator for today's call. Joining us on today's call to discuss these results are Mr. Geoffrey Gwin, the Company's Interim Chief Executive Officer and Chief Financial Officer; Ms. Tiffany Milton, Eastside's Controller; and Mr. Bruce Wells [ph] Craft Controller. Following their remarks, we will open the call to your questions. Now before we begin with the prepared remarks, we submit for the record the following statements. Certain matters discussed on this conference call by the management of Eastside Distilling maybe forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Securities Exchange Act of 1934 as amended and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements. Such matters involve risks and uncertainties that may cause actual results to differ materially include, but are not limited to, the company's acceptance and the company's products in the market, success in obtaining new customers, success in product development, ability to execute the business model and strategic plans, success in integrating acquired entities and assets, ability to obtain capital, ability to continue its going concern and all the risks and related information described from time-to-time in the company's filings with the Securities and Exchange Commission, including the financial statements and related information pertaining to the company's annual report on Form 10-K for the year-ended December 31, 2021 filed with the Securities and Exchange Commission. Now with that said, I'd like to turn the call over to Geoffrey Gwin. Geoffrey, please proceed.

Thank you, Heather. And let me welcome you to all to our second quarter conference call. You should have had an opportunity to review our earnings press release and Tiffany Milton will take you through the performance of the company in a few minutes. I'd like to update you on our performance as well and some of our progress to date and the transformation of our businesses as we implement a three year strategic plan. Our spirits business had a good quarter, we executed some key strategic wholesale agreements and realized some gains on the sale of excess brown spirits that are not currently in our operational plan. Spirits gross margins in the quarter was 53%, which I think is a record for the company and is up from the 21% in the prior-year. Now breaking that down, year-to-date, we've achieved 32% gross margins in our spirits wholesale branded retail businesses and 53% in bulk spirits sales. And this margin improvement underscores some comments I think I've made in prior calls that we sit on very valuable aged whiskey inventory. This inventory is in very short supply, and has increased in value over the course of the pandemic. Now it's been critical for us to capture these expanded gross margins in our traditional branded spirits business. As we've said in the past, we will no longer sell the spirits at a loss to retailers, some distributors can enjoy disproportionate profits. Now let's take a look at the second quarter branded spirits results in volume, price and mix. Volume was a headwind. But most of our decline there was a result of lower sales in Azuñia through channels where we were losing money. Now adjusting for one-time sales of about 175 cases of Burnside to Taster's Club last year, volumes in…

Thank you, Geoff. And thank you all for joining our call today. Let's review the second quarter. On a consolidated basis. Our gross sales were over $5 million for the second quarter of '22 compared to $3.6 million for the second quarter of '21. Spirits sales were over $3.7 million for '22 compared to $1.5 million for '21 due to bulk spirits sales. Craft sales were $1.4 million for '22 and $2.1 million for '21, reflecting our continued offering of bundled packages at discounted prices. Due to competition which suppress sales in 2022, craft also faced challenges with insourcing and the continued effects of COVID in 2021. In addition, the ramp up of the printing business at craft was slower than expected, but July almost outpaced both May and June combined. We are still offering bundled services with a slight increase on price, but are now including our printed cans as part of that package. This was rolled out at the end of June, our consolidated gross profit increased to $1.5 million for Q2 '22 compared to $900,000 for Q2 '21. Again driven by the bulk spirits sales, but partially offset by craft. Our consolidated gross margins were 31% for '22, and 26% for 2021. Spirits margins were 53% for '22 and 21% for 2021. Due to the bulk spirit sales and craft head margins of negative 28% for 2022 and 30% for 2021. Not the way we wanted it to go. But craft margins reflect the package rates that we're offering to our customers that in Q1 and Q2, then include a price increase despite an increase in our costs, and they reflect the intangible costs of getting the printer into full operation. Our OpEx increased primarily at craft due to increased rent on our new Argyle in Spokane…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Kelvin Seetoh with Crater Lake. Please go ahead.

Hi, Geoffrey. Many thanks for your opening remarks. I'm just wanted to talk about that Craft Canning business. So I'm doing a sequential comparison here. So I think in this quarter, we are doing $1.4 million of revenue compared to $1.1 million, which was last quarter. So that's a good thing, right. But if you -- when we look at our gross profit, the loss of that should widen quite a bit, right. So I think usually companies do have positive gross profit margin, but for ours is negative. So can you talk a little bit more about this, since we are banking on Craft Canning to delivery turn around?

Sure, Kelvin, I'm happy to do that. So one of the things you have to keep in mind about this quarter is this is a transition quarter for the printing, business craft, as you know moved into a very large digital printing operation, and we had no revenue to speak up to start with when we turn on the printer. Remember, when you're operating, you have to hire people, put everything in place. So the first month or so of the quarter, we were really just starting the process of moving digital printing getting up and going. And so you're going to see sequential improvement, and you're going to see it basically, if you look at it monthly, each month we're improving on the printing results. So April, was a slower start, probably than we had hoped. And then May was a better opportunity for us to start to get the printer, operating introduced to more customers. And then June was the same sequential improvement. I can just tell you now, I mean, July is much better than June. And our goal is to continue to see improvements each month as they go through the balance of the year. As you see the printer ramp up to what we think it's capable of doing. You'll see the margins steadily improved. Now, that was the printing side of those. We also had the mobile business that started to shift into its busier season. And we had a lot of work to do there. One of the challenges that we're facing in craft is hiring people. I mean, like everybody else, the importance of super tight market for hiring people. And we've faced the challenges of getting the right people in the right job and keeping turnover of low. It's improved from last year, but we still came into the quarter with substantially fewer operators in mobile than we had in the year before.

Yes, got it. Thanks. Another question that has, and again, our adjusted EBITDA numbers, right, we are. I think having a trial status is key of losses. So I think there's a huge improvement from the last quarter, which is quite a while. If I do a bank the interest expense, I think we should be losing roughly $1.1 million right off cash required to stay quarter-over-quarter. So looking at our cash in the bank and some loans coming, it seems like we're in a fragile situation. How should investors think about our current balance sheet situation?

Right, I mean, you're, we -- every day the company manages the business to improve liquidity. And this is no different, this quarter and the next quarter. But I think what we've shown in two quarters now is that we are able to monetize assets and raise liquidity to the extent that we need to, so the example this quarter is we were able to monetize some brown spirits that was not currently in our growth plan. Last year, the company went through an exercise where we identified exactly what we needed, and put together a cost reduction plan for the Burnside business, and then identified a large number of the barrels that we didn't think that we were going to need, immediately or that we'd rather swap out and get a different age set up in our product plan. So the first quarter, we did some sales, as you saw here in the second quarter, we did some sales, I'll tell you, we've done a small amount in the third quarter. So we're going to manage our liquidity to get us to a point where the Craft side of the business has ramped up, is throwing off EBITDA, that's been the plan all along, I think we've talked about that for over a year now is that we see line of sight to a business that Craft is generating cash, and we see a line of sight to accompany a business at on the spirit side, that will consume less cash initially. And obviously, we had more capital, we could grow it faster. And then you're going to have a healthier business going forward. So that's the game plan, when it comes to the balance sheet, no, we have as you know a number of constituents that have invested in the company and book things they believe in the growth story here. And I believe there's an opportunity for us to continue to walk people through the growth opportunity that's ahead with both Craft and spirits. And the team is going to do the best we can to push up some of these maturities and get people focused on the longer-term. I mean, I think that's a key part, we had the same challenges last year in the prior-year. Now, obviously, the capital markets are different this year than we've had last in the prior-year. But I still see a lot of value here and growth opportunity in the company. And our goal is to get people to focus on that and continue to make improvements quarterly in the balance sheet.

Yes, thanks for the details. So I think just a follow-up on that, right. So previously, we have an existing loan in TQLA and a few days back was increased by half a million. So how should investors think about this amount in terms of its purpose right, because it's not big and not small as well. Is this like the kind of like final amount that you need to have to write through before get hit breakeven, because from my point of view is like, we can't be overloading our P&L with interest expenses is coming close to a million and we can't increase our share count perpetually.

Yes, that's a good point, we are facing higher cost of capital this quarter, and you can see it in the interest expense. I mean, it's a lot more, more significant than the prior-year quarter. And it's an issue that I think we have to focus on. I mean, when you look at the balance sheet today, I think we can see Craft get to a point where it's generating positive EBITDA at a faster rate than spirits is and basically, that balance sheet right there is unencumbered, other than what we have right now with FIB, First Interstate Bank. And so all that on Eastside then there's subsidiary down there will be probably have a higher debt capacity. So, one of the challenges to see if we can use the capacity there to ship and bounce the debt load at the Eastside, but in the long run, in the long run, companies don't arrive when investors throw out, when investors basically apply a super high cost of capital. I mean, that's a challenge that everybody's facing, I think right now and I'm expecting it to be somewhat transitory. I mean, we're not going to see long periods of time where our cost of capital is going to be this high. If we deliver the plan, Kelvin that we've talked about, repeatedly at Craft, and you see the growth there and you see the improvements in spirits. I believe that we're going to have opportunities to finance and grow the company going forward. Clearly TQLA has been an important component of constituents for the company. I mean when we purchased Azuñia shortly after that purchase TQLA helped us with financing for working capital, and they've done it periodically through the last couple of years, I think that's a testament to their interest in the company and their willingness to partner with us and see the company be successful. And so I'm hopeful that that will continue. And we'll find other partners that see the opportunity in the company, both spirits and Craft and we see a chance to really continue to invest and grow the company faster.

Yes, got it. Just one final last question from me, the way I look at it is that, Eastside has been incredibly blessed right to have shareholders like [indiscernible] like you mentioned about great staff as well, people need Amy, Bruce as well yourself. So I really do hope that we can turn this company around sooner, right, so that we can consolidate the market and start coking in some big wins. I was referencing, I was looking at some earnings calls of companies like MGM, many CEOs have been openly talking about how their company should be valued, and why they are buying back shares aggressively because they see a huge disconnect between what the company's worth to them and the public market value right now. So for us, I get that we are investing in growth and then paying down of debt eventually, could you walk with us, hypothetically speaking in your mind, why should the selling be worth substantially higher than what it is being traded right now?

Well, I mean this is a question that all I think investors have to think about and go through the process of making a determination with a company's worth. I mean, every day as you know, when the market determines and places that theoretical value on the company. And I would argue that value can change pretty substantially from time to time, just based on perceptions. I mean, look at the view of the market in today's lens looking down towards a potential recession versus what we were just seeing last year. So it changes, right. What I can tell you is that this company is unique. This is a public company, but it has two distinctly different businesses in very unique and attractive areas. And they all benefit from one thing, right, which is the development of Craft beverages. It's happening everywhere, we talked about it on a number of conference calls, you see it as you walk through the grocery aisle, talked about that at times, you see it when you move into Craft markets, when you go into liquor stores, and you see an incredible number of new brands that are developing. This is a place that we're attacking different ways. I mean, we've got the spirits brands on one hand that we build and produce and sell. And then on the other hand, we have a business ability to bid the offers Craft services to beverage manufacturers in the Pacific Northwest, and in Colorado. So I think this is a unique business. And you got to keep in mind last quarter, in the first quarter, we operated on the Craft side, one type of business, a mobile filling business. This quarter, in the second quarter, we launched two businesses printing and a co-packing business, I think…

Great answer, Geoff. Thanks so much.

Thanks, Kelvin.

Our next question is from Kelvin Seetoh [ph] with Slingshot Capital. Please go ahead.

Hey, Geoffrey, do you hear me?

Yes.

I was thinking about the gross margins on the Spirits site for the remainder of the year, assuming if we did not sell any excess barrels, what will our gross margins be and secondly, could you expand a little bit more on the distribution agreements we currently have?

Yes, so I mean that gross margin in Spirits really speaks to both the opportunity and the challenge of the company. So I'm going to answer the question a couple of ways. The first way is that we said in the conference call, when you look at the Spirits margins this quarter, versus the prior-quarter last year, I mean we're talking about 52% versus 21% right, huge, huge difference. Now bulk Spirits around 62% right and our existing businesses are much lower. If we don't do bulk sales, which I just already told you that we did, send them in the third quarter, we'd be much lower than the 52%. But what I will tell you that in every product line that we're in, we've worked to improve gross profit dollars and gross profit margin. We've done it by raising price, we've done it by lowering costs, right, and we've done it by trying to improve velocity. Now, I talked about a volume price mix on all my comments. And we really have to, we struggle with some volume. And you see it in the year-over-year comps on the brands and the details that we've given, but I think it's important for people to understand that when you have a business that seemingly was burning cash, and just we're just racing for growth and under fire management, and we're trying to transition to a profitable growth, we had to back out of unprofitable sales and spirits. I mean, we don't have the money to invest in something where we buy $1 of tequila, and we ended up getting $0.80 back. I mean, that's just not going to work for a company like ours anymore. So we have changed the game plan. And we're going for big opportunities. I mean, we said on the call, we've announced that we're in a test with Clubcorp and we've had other significant opportunities. If we land some of these things, if we continue to drive, the volume price mix. In this in the third and fourth quarter, you're going to see margins continue to improve in spirits. And I think we're going to be in a better place year-over-year. Now I'm sure Amy's on the phone, she probably can respond as well, we've got a lot of work to do on the back half of the year to get ourselves to a point where we're achieving our plan. And that's a function of a weaker consumer than we had at the first half of the year. So we will be taking temporary price reductions here and there. Strategically when we think there's an opportunity to take some share and improve our market position in some of our brands and some markets, but our goal is to see spirit sales outside of bulk improving through the back half of the year.

Right. Can you talk a bit more about the current distribution agreements we have or we have one in the quarter?

Right, right, right. So Clubcorp is a test as I talked about, these are new customers. We've got some opportunities with Kroger in Washington. There a number of things, the companies changed its strategy, as we talked about and partnering with larger distributors like RNDC. We've spent some time working with other resource groups in Southern California that help us reignite growth sales in Azuñia. I know I think these have been all good investments. We're going to have to see how they develop from here. I mean, one of the things in spirit that you have to remember is, you can open a door, right. And we've seen this in the past, you can be highly successful opening the door to a point of distribution, and you get your product on the shelf. But what you have to do is you have to get customers to taste it, to try it, to connect with it, and come back and buy more, right. And that's one of the things that is the holy grail, I think in spirits go-to-market is what we call velocity. And the best part about the story at Eastside is our products are better than the others on the shelf. I mean, let's just go through it. Our Tequila is outstanding. The black taste more like a bourbon to me and is outstanding Tequila. It is I would argue one of the best two areas you can find. And at the price point, it's a bargain. Our vodka is outstanding as well. It's not crappy GNS. It's made into something you can drink. This is true potato. Portland based water ethanol, I mean, vodka that I think is super in the marketplace, and it's priced competitively. The Burnside product line is outstanding as well, I mean, I've said this repeatedly Buckman line is a better Bourbon than I've tasted anywhere else in the United States. And I personally can't get enough of it, I can't, whenever I'm in market and buying stuff, I'm looking to get as much of it as I can take off the shelf. First thing, get in my bag, and get it home. I think we have outstanding products. And I think at the end of the day, those are going to be the things that drive the bigger opportunities. When people like Clubcorp and others start to taste it when they start to realize, hey, we can deliver an outstanding product at a better price point, a true craft spirit, then you're going to start to see more of these types of wins, right. And I'm hopeful we'll see some more in the year.

Great. It sounds like we're expanding to many places, do we have the team in place to ensure that we can deliver the goods and not face supply shortages? Like no, previously, we didn't have enough glass? So could we execute and expand production to meet the potential sales?

Yes, yes. I mean, we're -- the supply chain is a challenge that we all face. I mean, every company faces this we face on the spirit side or face on the craft side, it is clearly the biggest issue. Now, I think with gas prices coming back down here, we're going to have some relief on the diesel logistics front. But I'm pretty confident we're in a position where we can continue to prove and drive our cars lower relative to the revenue moves. And so I think our gross margins will expand over time. As I said, the more important thing is to drive velocity repeat sales in the quarter, and turnover working capital. So I think we has what we need there. But as excited, as stated earlier at the beginning of the question. And so the biggest issue that we have to deal with near term is people. I don't think the broader public understand the challenges of what's ahead of us. And I'm not just talking about our company, I'm talking about other markets, other industries. When you have full unemployment -- sorry, full employment, right. And you're still dealing with stimulus, it's lingering, and this -- the challenges of how that starts to manifest itself and having to pay ever higher labor rates to fill gaps in your business. We find that as a problem, and we're seeing it on both sides of the business. And I don't think this is going to resolve itself in a quarter. So that's the biggest challenge on the supply chain it is just handling our labor costs.

Right, right. Thanks, Geoff, for the detailed answers. I want to ask a little bit more questions on our digital printer business. Could you share with us what's the current utilization rate? Are we able to raise prices along with inflation and historic increase of services?

Yes. So we are -- you can't -- it's not a linear thing. I mean, every day is a different, utilization rate, right. I mean, some days it's higher, some days its lower. But the sequence, the trend is improving over the course of each week and month. We track this thing daily, we track cans printed, cans sold, cash received. I mean this is a -- that important for us to monitor it and to develop it. Now we have the capability to print all types of things, right, we can do 12 ounces, 16 ounces and 12 ounces a week. And so we can change the mix. And as we change the mix, we can improve margins based on what the opportunities are. So the utilization might not necessarily always be going directly up week-after-week, if we're shifting to a higher mix product opportunity, then you could see yourself actually print less, but make more money and generate more revenue. And then we also have the challenges of change overs and issues around that we're moving to skis. We have one printer, that we talked about the fact that we want to have two printers, and grow the business and scale the company. So but I'm pleased with how we're doing. I mean, you're talking about, we're -- I think we're number five had either number four machine or number five in North America. So we've learned a lot in the last couple of months. Our partners have been very helpful and have worked with us to help us improve utilization. And we think there's going to be more improvement in that then as we get to the quarter here. But I can't give you a number. But I think we have plenty of room to improve. If you want to put us in the below 40% utilization at this point where we are today, we probably somewhere in the 30s.

Right, right. This feels good. Last question for me equal to back out the Craft Canning business separate from the printing business. Is Craft Canning actually having a positive gross profit margin right now?

Craft Canning the mobile business has changed pretty significantly year-over-year. So the margins in that business, I want to caution you can make a direct comparison. And you can say hey, are we doing positive margins, which we are, but the business has changed. So let's think about this for a second. If we are canning for a customer. And in the prior year, we are canning for a customer and buying cans and selling them to them. But we didn't decorate the can. This year, we're canning for our customers. But we are also looking to replace ourselves as just buying and selling the can. And now we're printing the can for them. Now that's a big differentiator, so we might have been in position last year where we are buying a can sell it to them. So we didn't take care of the decoration this year. We're doing the same thing, but we're adding the decoration. In some cases, we didn't buy the can from last year, and we're looking to buy the can for them. So the business profile has changed the craft. And as we move into digital can printing, our customer base changes as well. We talked about this. I mean, we're no longer just supporting the craft beverage space, we're starting to see a broader array of customers. We talked about this deal that we did in the quarter where we took over assets from approached beverage on the CVD water companies that's bringing a large amount of their Portland based business to us. And that's completely different than beer. I mean, that's going to have a different demand profile than we have in the beers database, which has a seasonal peak usually in the summer. So we -- there's a lot happening at craft, the margins aren't where we want them to be. We have a lot of areas that we have to improve on the mobile canning side. But I think what's going to happen is when you look at the business in the future, the co-packing opportunity that we launched through the approach acquisition of their facility, and the digital can printing is going to make mobile a tiny in comparison, it's going to be a smaller part of a bigger and bigger organization.

Right. Thank you, Geoff. I hope to speak to you in next quarter.

Yes, great.

This concludes our question-and-answer session. I would like to turn the conference back over to Geoffrey Gwin for any closing remarks.

Yes, I just want to thank everybody for joining the call. I'm really excited about the transitions that we're seeing in premise that's not easy. I mean, I think you can see it in our craft numbers, how hard it is. And we have a lot of work to do in spirits as well as based on the consumer and what we facing in the back half of the year. But the exciting part, and we didn't spend enough time on it, but I'll just mention it now is that our team is also improving. And we have added Bruce Wells as I mentioned, who is our controller now at Craft. Tiffany has joined us from last year and we're talking about really a pretty significant transformational change that we've seen in spirits. Amy Lancer has stepped up and done a fabulous job in building out the go-to-market strategy there, and we have more investments to make on both sides of the business and approach that the assets that we purchase from approach our new facility there and also on the spirit side. So I'm excited about the opportunity and I'm really excited about the team. And I think as we go into the third quarter we're going to see more improvements and looking forward to report that improvement to you as we get into that fall. Right. So with that I'll end the call. And thank you again for the time today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.