Eastside Distilling, Inc.

Good day and welcome to the Eastside Distilling Report's fourth quarter and year-end 2020 financial results. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star then one. Please note that this event is being recorded. I would now like to turn the conference over to Amy Broussard, Corporate Affairs Director. Please go ahead.

Thank you so much. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the fourth quarter and year-end 2020. I'm Amy Broussard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued their fourth quarter and year-end 2020 financial results in a press release, and the company filed its 2020 Form 10-K. Joining us on today's call To discuss these results are Mr. Paul Block, the company's chairman and chief executive officer, and Mr. Jeffrey Gwynn, Eastside's chief financial officer. Following their remarks, we will open the call to your questions. Before we begin with prepared remarks, we submit for the record the following statement. Certain matters discussed on this conference call by the management of Eastside Distilling may be 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 that are generally preceded by words such as May, future, plan, or planned, will or should, expected, anticipated, 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 plan, success in integrating acquired entities and assets, ability to obtain capital, ability to invest, continue its going concerns, and all the risks and related information described from time to time in the company's filing 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, 2019, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Gwynn. Jeffrey, please proceed.

Thank you, Amy. I'm pleased to report we continue to make significant progress in improving the operating performance of Eastside during both the fourth quarter and the first few months of 2021. In February, we closed the Redneck Riviera Termination and Asset Sale Agreement. While we continued to manufacture some Redneck products in Q1 of this year, we are now wholly focused on those brands we own and our craft canning divisions. That transaction was one of the many steps we have taken to significantly improve our balance sheet and liquidity position. We have made progress across a number of fronts, which Paul will elaborate on shortly. However, first, let's review the fourth quarter and fiscal year-end results. Please note, we have presented Redneck Riviera as discontinued operations in our 10-K for FASB ASC 205-20. This should make comparing our reported results through 2021 much easier. Gross sales for the year ending December 31, 2020 increased 21% to $14.8 million from $12.2 million in the prior year. This was primarily due to the Zunia acquisition and an increase in sales at Kraft. Gross profit increased 12% to $4.6 million compared to $4.1 million in line with the increase in sales. Total operating expenses in 2020 declined 9.1% to $12.7 million from $14 million in the prior year. This reduction was due to lower compensation and benefits, reduced legal and professional fees, and lower rent and insurance expenses, partially offset by higher non-pass depreciation and amortization expenses. As we have stated over the prior two quarters, we have begun a restructuring of the company's operations that has led to significant reductions in overhead. You can see the beginnings of the impact of this destruction in this report. However, you should see more evidence of this as we get into our seasonally strongest part of the year. The net loss, including discontinued operations in 2020, was a loss of $9.9 million or a loss of $0.98 per share. This compares to a loss of $16.9 million or $1.82 a share in the prior year. In the fourth quarter, the company delivered 9,180 cases of spirits, excluding Redneck Riviera. Of that total, Portland Potato Vodka represented about 5,000 cases and continues to expand as we continue to expand the distribution of this brand outside of Oregon. The company shipped 2,553 cases and 1,171 cases of Azunia and Burnside, respectively, in the quarter. As you all are aware, a number of states, including California, reinstated a shutdown of on-premise dining, which affected Azunia and Birthright in the Quarter. On a consolidated basis, excluding Redneck, we generated $3.5 million in fourth quarter gross sales on a 20% increase over the same period in 2019. Gross profit grew significantly over the prior year to $1 million. The company generated a net loss per share of a loss of 24 cents compared to a loss in the prior year of 82 cents. During the fourth quarter, we wrote off $408,000 of brand-related assets and paid $425,000 in stock-based compensation. Adjusted EBITDA was $1.1 million lost for the quarter. That EBITDA number includes some one-time-in-nature items such as professional fees. Given the environment in our key markets during the quarter, we are pleased with this performance. Now, turning to the cash flow and the balance sheet, the company ended the year with $836,000 in cash and had $6.4 million outstanding under the Live Oak ABL facility. I'd like to draw your attention to the $15.4 million deferred consideration for the Zunia acquisition. In the first quarter of this year, we issued 1.2 million shares at a weighted average price of $4.67. This reduces that liability and the remaining purchase consideration will be determined shortly. The company will issue to intersect both shares and a three-year 6% subordinated note with a bullet maturity. As I suggested earlier, we've made meaningful progress on improving our balance sheet and liquidity in the first month of the year. Since the close of the redneck termination agreement, we have reduced our outstanding balance with LIVO to only 2.9 million dollars. We have also received full forgiveness on our $1.6 million in PPP loans in the first quarter. We have made good progress on refinancing all our maturities for 2021, and we'll have more to report there during our first quarter conference call in May. Before wrapping up my comments, I'd like to take a moment and update you on our restructuring action. As we've described in the prior two calls, we've been actively integrating three companies. Now that we're looking into 2021, we can see that we have made significant progress charting our course and have built a robust plan that, if executed, will keep the company on the path of growth and eventually profitability. This has included a complete transformation of large parts of the company internally. You should expect better results, a stronger balance sheet, and clear growth opportunities this year. We continue to reshape the company with our focus on building a professional platform, integrating systems and processes, a transformation that is touching all areas of the company. Now, I'd like to turn it over to Paul, who can share more of the exciting developments here at the company and then update you on our operating plans for 2021. Paul? All right.

Thank you, Jeff. And thank you all for taking the time to join our earnings call this afternoon. I mean, each side is made different. Great progress since our last call, and I'm excited to share the details today. I have to say our biggest news to date is the addition of Liz Levy Navarro to the company's board of directors. Ms. Levy Navarro has been appointed as chair of the compensation committee and will also serve on the audit and nomination committee for the company. Ms. Levy Navarro is an experienced CEO, public and private company board director, and consumer product practice leader. And I have to say what's particularly relevant is Liz currently serves as the board director for Burke Beverages, one of the country's larger wine and spirits distributors. So in addition to her extensive board experience, Liz is very familiar with the alcohol beverage industry and three-tier distribution. So welcome aboard, Liz. What is also exciting is the progress Eastside is making to fix, build, and grow the overall Eastside company. We're one of the only publicly listed craft spirits companies in a category that is about to return to a 30% plus compounded annual growth rate. I can assure you that consumer demand for craft spirits is not diminished and continues to be as robust as ever. We anticipate the category will pick up speed as markets open up over the summer. We'll articulate today exactly how Eastside will capitalize on the category growth and how we will achieve our goals and objectives in 2021. First, before I did that, I wanted to report on the progress we're making to fix, build, and grow the overall industry. So, look first at what we're fixing and how we've progressed. Number one, we're fixing the balance sheet, liquidity, and overall debt structure. To this end, we've divested Redneck Riviera, as Jeff mentioned, which significantly decreases our secured debt, significantly decreases our illiquid working capital, and significantly increases our cash balance and overall liquidity. Again, as Jeff mentioned, we're progressing with a financial transaction that will allow us to potentially pay off our subordinated notes and add an additional $1 million of cash to the balance sheet. The next step is to build investment capital to fuel growth for all of our opportunities. Now, secondly, we're fixing the margin issue we have historically had within the spirits division. Last year, in 2020, our craft C&B division gross margin was 43%. However, the spirits division was only 23%, with the Zunia core product well below 20%. We're now repositioning and repricing all of our spirits brands, and we're now focusing on our highest margin brands, like the new Eastside brand with a 74% gross margin and our Portland Potato Vodka brand with a 44% gross margin. At the same time, we're working to improve Azunia and Burnside margins as well. The overall plan for 2021 is to increase the total spirits division margins from 23% gross margin in 2020 to 37% gross margin in 2021. And we are well on our way to accomplish this objective. And third, we're fixing the company systems and controls. With the addition of two seasoned CPAs, one as the controller and one as the VP of FP&A, the company has the benefit of deeper and faster fact-based data and to evaluate efficiencies and to plan for optimal sectors. Now, in addition to improving company controls, we're using these resources to fix our pricing, promotion, and discretionary spend systems, and to deploy resources against the highest ROI opportunities. So now, what are we building, and how have we progressed? First, we continue to build a professional platform with our most Important assets are people. I've mentioned the two new additions to our executive finance team to support our CFO, Jeff Gwynn, which is Tiffany Milton, our new CPA controller, and Amy Lancer, our new CPA FP&A leader. We're also fortunate to secure an exceptional executive to lead the craft C&D business, Michael Karstack. Michael Karstack. also overseeing all spirit supply chains and bringing best practice spirit supply chains and has created an overall operators center of excellence for ESOT. So in addition to craft CMB, Michael is busy helping us with all of our spirit supply. And by now, many of you know about our new chief branding officer, Janet Oak. You'll be seeing much of Janet's work as she launches the new ESOT brand, builds a new identity for the Eastside Company, and repositions Portland Potato Vodka, Burnside Whiskey, and Esunia Tequila. In a short period of time, Janet's efforts have contributed to explosive growth over her tenure and in the last few months. Just this week, we've recruited a world-class SVP of sale for the Spirits Division Ray Wessel. Ray is a seasoned beverage sales executive with experience at Diageo, Red Bull, and J. Lor. The addition of Ray brings Eastside a well-balanced sales leader that understands how to build brands through a profitable, focused, and strategic sales approach. Secondly, under building, we're focused on building the crafty and deepest. With Michael in place and up to speed, We're building a solid platform for Kraft C&D that has expansion opportunity. Michael is focused on the total alcohol beverage contract manufacturing category as our competitive set. And this means the size of the prize is significant. We can build a plan that offers high margin, high growth, and creative investment. The resources we invest in Kraft have and will offer a positive ROI, and a high conversion to free cash flow. For 2021, we have two to three opportunities ready to go pending investment capital allocation. And third, we're focused on building our Spirits brand portfolio. When we deliver our 2021 plan for the Eastside brand, we'll not only achieve a 74% gross margin as mentioned, but also over $600,000 in gross profit. And we will have created a valuable brand and a flagship for Eastside Distilling. Just this last week, we've shipped over 100 cases of our new Eastside Lion's Dry Whiskey to the distribution center in Oregon. So we're up and running and well on our way with the Eastside branded product. Now, in addition to the Eastside branded product, we're focused on Portland Potato Body. Currently, this brand is growing double digits. with a gross margin of 44%, as I mentioned. This brand merits focus and investment. Four times distilled in our new Forte cork bottle, the product is a hit with craft-oriented consumers, and we believe can be our first brand to hit $10 million in revenue. Now, for Azunia, it's important to increase our gross margin on Blanco Anejo and Reposado from below 20% to above 30%. The Azunia Black product, on the other hand, is a fantastic handcrafted tequila with a gross margin over 50% and will be the near-term focus in 2021. The tequila space is very competitive, but the category is growing rapidly. We need to get ourselves in a position of profitable growth with a concentrated geographic focus to win with tequila. We'll have more on our overall tequila plant at our next earnings call. And last but certainly not least, for the Burnside brand of whiskey products, we'll focus on black and blue labels. Standard Oaks, along with our head distiller, created a new black label that is a bourbon cast double barrel rye whiskey. It's just delicious. In addition, we'll be offering a barrel strength Buckman Reserve 10-year bourbon. The focus on the premium labels to shift our gross margins unburned side from 26% to over 30% and eventually over 40%. Now let's look at how we're going to grow in terms of our objectives and strategies. And with that, let's look at our revenue growth objective for 2021. For the overall company, our plan is to grow revenue plus 22% year on year. Now, this is without the Redneck Riviera brand. The spirits revenue portion of the 2021 growth plan is plus 30% year-on-year, which exceeds our craft spirits category growth forecast projection of 15%. The primary revenue drivers for this growth will be the New East Side brand, Portland Potato Vodka, and Azunia. Now, for the other division, the craft revenue portion of growth for the 2021 plan is 17% year-on-year, which is the beverage manufacturing category growth forecast that's projected at 8% to 9%. The primary revenue drivers for Kraft will be the two new truck lines added in late 2020 and the new customers that will onboard in Q1 and Q2. Looking to gross profit, our growth objective for 2021 is planned to be plus 53% year-on-year, again without Redneck Revere. The Spirit's gross profit plan for 2021 is plus 213% year-on-year, driven by the addition of the new high-margin Eastside-branded portfolio and our efforts to reduce deep price discounts across the board. The craft craft growth profit plan is plus 19%, which correlates to a 20% increase in revenue. And then looking at SG&A, our growth objective for 2021 is planned to be actually a decrease of 23% year-on-year. The SPIRIT SG&A plan for 2021 is planned to be down 31%, And that's driven by operational efficiency with the reduction of overhead and the reduction of exorbitant professional fees. And, of course, all the good work Michael's doing with his center of excellence and integrating spirit into the craft C&D business. And then the SP&A for craft for 2021 is flat year on year. So very compelling growth. The overall growth strategy to support this plan will be all about concentration of resources. For craft, we'll concentrate our efforts in Oregon, Washington, and Colorado. These three states equal 100% of the craft's gross profit. For spirit, we'll concentrate our efforts in five states, Washington, Oregon, California, Texas, and Colorado. And these five states equal 82% of the Spirit's gross profit. Now, in addition to the fixed build-grow action plan, I wanted to briefly share our five value pillars that will drive our strategic path forward and create extraordinary value for you, our shareholders. The first value creation pillar is focus. First locally, then concentrically to ensure we build a sustainable foundation for of our business and a consistent stream of earnings for our shareholders. We've learned that a solid, craft-oriented business is not built in a rapid national burst to gain distribution at any cost. So we'll focus on a core set of states and a core set of consumers as we concentrate our limited resources. The second value creation pillar is proficiency. combining the craft C&B division with the spirit supply chain to create an operational center of excellence. The competency of craft C&B operations can bring effective and efficient supply chain execution to the spirits division as we buy, make, and distribute. This not only works as we focused in 2021, but it also worked as we expand in 2022. In addition to our operations center of excellence, we've also created a combined planning center of excellence for finance, sales, and marketing spearheaded by our FD&ABP. This area of excellence is focused on forecasting, production planning, cash requirements, and inventory management. The third value creation pillar is accretive growth. It includes those initiatives that optimize our investment capital with the highest return, and cash flow. Kraft C&B is one of those opportunities, offering high margin, high growth, and high cash conversion. The second opportunity is with premium, high-margin spirits brands like the Eastside brand with a gross profit of 74% and Portland Potato Vodka with a gross profit of 44%. The fourth value creation pillar is brand differentiation. that will propel us to develop a unique identity for each of our brands. We seek to connect our brands with our consumers in an experiential manner. Janet Oak, our Chief Brand Officer, will be sending each of you our updated brand book for our Spirits portfolio that will highlight our progress in this area. I have to say this is one of the most exciting areas of progress we've made to date. And finally, the fifth value creation pillar is product innovation. We will consistently focus, improve, and or create products that offer farm-to-flask ingredients, handcrafted production, and a premium taste experience. Although unique brand identity for spirits is vital, corresponding unique premium product is equally as important. So in summary, we're fixing, we're building, and we're growing Eastside Distilling with focus, proficiency, accretive growth, brand differentiation, and product innovation. Our plan this year is clear. It's to achieve plus 22% revenue growth, plus 53% gross profit, and decrease SG&A 23%. We're very excited about the future, and we thank you for your time today, your interest, and your investment in Eastside. We'll now open up the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing keys. To withdraw your question, please press star then 2. Again, that is star then 1 to ask a question. And at this time, we will pause momentarily to assemble the roster. And our first question today will come from Harold Weber with Aegis Capital. Please go ahead.

Hi, guys. How are you doing? Hey, Harold. One of the questions I had wanted to ask you was if you could give an idea of the – you know, the whole stable that we have, obviously you're going to focus on a number of them. And the other ones, I don't know exactly what it'll be. So I was hoping you could clarify that a little bit. And as far as how we're making out, rolling this stuff out on the East Coast.

Well, I guess I can take that, Harold. Thank you. Well, I mean, the one brand I didn't mention, and that's conspicuous, absent is Weiwei. It doesn't mean that we're not going to keep Weiwei, but that usage occasion in coffee liqueur or coffee rum is fairly minimal and small relative to some of the other bigger growth areas like whiskey and tequila and vodka and so on. So, yeah, we're going to focus on vodka, tequila, and whiskey. And those have been typically the three biggest growth categories in the three brands, Azunia Burnside and Portland Potato Vodka. And the reason I spoke more about concentration is because we have very limited resources. We're a small company. You know, we can dream about expansion, but we also have to maintain velocity per point of distribution. And that's been a significant... issue. And we've chased distribution with a lot of money, which caused significant cash earn and a high net operating loss. So that strategy didn't work. And now we're employing a strategy that's a bit more focused and concentrated that will get, gain, and keep distribution. And it will attempt to bring in loyal consumers and build relationships with them in a specific area before we move on. So that seems to be more in the West right now. We're not going to give up any distribution in the Midwest or East. That's going to be more of our venture area for the time being. So we'll continue to leverage our distributor relationships, our key account relationships, and we'll continue to look to gain distribution, but not in the same focused and rapid manner that we will in the West.

Okay. How is, what's the reception been on the new small batch Eastside products?

Well, as I said, we just got 100 cases of the new Eastside rye out. We're hoping to get you all samples of that at some point so you can try it. But anybody whose cases are sherry casks that's aged in 70-year-old sherry cask barrels, that will retail for $148. They just are overwhelmed with the product quality.

How much capability do we have of supplying?

Well, as I told you, we did have 8,000 barrels. Now we're down to 4,000 barrels. Some of the more aged whiskey is not as prevalent, but we have significant supply, 4,000 barrels, and a significant part of that is the aged whiskey. I don't have an exact...

No, I don't have an exact number, Paul. So the bottom line is that if we have plenty of demand, we can supply it. We can fulfill demand.

You got it. You got it. And the idea is it's limited edition now.

Yes.

And we're making one batch. But that doesn't mean we can't make another batch. And that doesn't mean as things grow, we can't make it a permanent product. That's what's in the back of our minds. So as you think about this business forward, You should think about a brand, and the products we're focused on are the three whiskeys, you know, the single malt, sherry cask, you know, the bourbon, and the rye. And those have the highest margins, and those are the products we, in the back of our head, would like to continue.

That's good. What I see on my end over here is a giant demand for that stuff, if we can get it out there. So as long as we can supply it, I think it will be very successful.

And we're not saying we won't go to specific areas in the east or the east coast or the midwest, but we just want to be focused.

Okay. And I'm assuming the same thing goes for the substantial rollout, sounds like, about the outright?

Yes. Well, the Portland potato vodka is, we have, if you recall, I mentioned that we had shipped the packaging into the Forte bottle, which is the same bottle as Bernstein. We put a cork on it because it had a screw top, and we just didn't feel the screw top reflected the high-quality distillation and, you know, ingredients that we put into PPV. And things have been, as I said, double-digit and really over 30%. You know, it doesn't stay that way every week, but the demand has been significant. And the more we focus on the craft nature of that product, the faster it grows. Now what Janet's done is she's come up with a whole identity, which you'll see when you get the brand book, around a breath of fresh air and around the coastal communities. So we'll be launching in California immediately as we speak into some of the surfing community's and building distribution there, testing our positioning, our pricing. We're also trying to, you know, improve margins on that brand. And as we see success, then we can roll.

And our next question will come from Ross Taylor with ARS Investment Partners. Please go ahead.

Thank you very much. Some of my questions were just answered, but I I wanted to admit I haven't had a chance to go through the K yet, but can you talk about the canning business as a separate business? What kind of revenues, what kind of operating margins, what kind of free cash flow it generates? It really looks to me like you've got two different arms to this company and that eventually the canning business offers some really interesting growth opportunities will become could become a sort of a bank to finance the expansion of the brand business. So I'd love to get a better understanding of the economics of the canning business.

Jeff, did you want to try that?

Sure. Thanks, Ross. Yeah, the canning business is a phenomenal business when you look at it on a cash flow return on capital basis. I mean, think about a business that has very little capex. It's got some working capital, but mainly it's in the form of building receivables, the seasonal business, although the seasonality arguably could be, you know, less so when you're completely running full out. We just got out of the weakest season of the year, so it wasn't really a big driver in the first quarter. But, I mean, Paul spoke to it in the script. I mean, we see strong gross margins above 40 when this thing's fully going. And we're already into the a season where we're picking up here where we have almost full utilization of the equipment, and we're going into the year with two more production packages than we had last year, two more lines. The craft canning business is misunderstood by the market, I think, because people think about co-packing, think about low margins, but we're serving a customer that is in desperate need of what we offer. I mean, think about a small brewery. who starts brewing in his backyard or his garage, and he makes a business out of it. And he gets to the point where he realizes that he has a route to market, he has a fan base, and all he's been using is the route to market through bars and on-premise and two kegs. And then he gets to a critical mass where he can start to can't. Well, his choices in canning are limited. He can't really deliver his product to a large co-packing facility to produce because he's not producing enough. You know, he can't afford a canning line. And so there's a space there on the smaller side where there's really outstanding margins, and that's where we're attacking. And the customer growth has been phenomenal this year. It was phenomenal last year. One of the things that we're going to do better this year is managing the life of that customer. I mean, Kraft literally had no salespeople, basically. And we can do a better job of growing with our customer, offering them more product, helping them along. And we've already started with some partnerships with some of our key customers. And you'll see that show up with Kraft's numbers. So we're excited about Kraft.

Can you talk about what is the revenue potential if you're running full out and what is the revenue add you would expect from a potential add from the two new lines you're bringing on? Are all lines graded equal?

It's a great question, but think about it, and we've spoke to some investors about this, you know, at the Roth conference, and I think we've talked about it in the past as well, is one of the ways that this business becomes more profitable is the efficiency. And imagine we're bringing production to the customer, right? So we're, you know, moving to the customer. And if we have a long route to the customer and then we, you know, service them, and then we come back, you know, we have to manage to turn around and do it again the next day to a new customer. And so part of the way that this business becomes more profitable is by efficiency, right, is by really doing a better job of planning position assets. So one of the strategies that we're employing this year is building around this hub and spoke system and moving assets around. I mentioned the partnerships in the last response to this. about some of our customers and being able to actually partner with people and move our assets further into the field so we don't have these tremendously long, unproductive transit times for the teams. But to answer your question specifically, no, they're not created differently. There are some investments we can make this year to dramatically grow that's not built into the plan or the numbers that Paul talked about, and that's something that we're opportunistically going to try to attack you know, and that's the incremental services that we could offer that have very high margins that the customers will find very important and attractive. And, you know, this business has a number of different directions we could grow. Volume, you know, price, mix, it's really a fabulous asset to own. And the team is outstanding.

Well, actually, I can answer that specifically. The current – well, I mean just in terms of your question about what is the output. The output of the assets that we currently have could do $15.6 million if they ran at 100% utilization every month of the year. But the issue with that is this year we're at $10.2 million because, as Jeff said, we're on a bell curve and we have these shoulder periods. And the thing that really restricts us is it's mobile. So, you know, it's got proximity constraints. But if this business were to operate at 100% utilization, it would deliver $15.6 million. So, you know, the thought is it's hard because you have to be able to expand these mobile trucks into different markets or take more market share in your current market. So... But the big opportunity, I think you hit it right on the head, is this is a gem. And we didn't really talk about the business model or the investment thesis overall. But if we had some time, and I won't take a lot of time on the call, maybe separately, I think the business model worked extremely well with Kraft. One, you mentioned one point. You know, it can really fuel free cash flow that can fund spirit and not create a big cash burnout. for the enterprise. And second, I think it looks different. It is different. You're absolutely right. But what if we start getting in the RTD market and we have a canned production division? And, you know, what if we do premium RTDs? And what if we did an organic Azunia margarita? I mean, it's already the sales team, but please get us that, you know? And we have a number of other ideas. So, I think as we look at the longer-term strategy, which we're going to be coming to you in the summer, a five-year view and a three-year plan, and how can we really rev up the engine here, we'll be looking at that, exactly what you said. What is the complementary compatibility of these two? Where do they diverge? Where do they merge? And how do we leverage them to accelerate growth?

Thank you. And a second question is, In the past, the bottling and production was, perhaps I'll say kindly, less than efficient. Where do we stand and what steps are we taking? What steps still need to be taken to get that to where you think that it's operating at full effective efficiency?

Yes, we're well on our way. I mean, the first thing we did was... take out all of the Redneck River area inventory that we had. We had bottles. We had barrels. We had a lot of space that wasn't really utilized. So we're going to cut our footprint more than in half, number one. We're going to be, as I said, it's buy, make, and distribute. So we're concentrating our buying and our sourcing into one area because there's obviously more efficiency and scale. And we're putting more policies in place, three-bit systems, and more things that will create lower costs on the purchasing side of raw material. And then in the manufacturing side, we're going to be actually closing down the Milwaukee facility eventually. Is it in three months, four months? and we're going to integrate it with craft, and craft can actually start to become a contract manufacturer for bottling spirit, which is in high demand. So, you know, we can fill out our capacity and utilize our full capacity if we need be, which, you know, will drive down, you know, fixed overhead allocation. So I'd say to give you, you know, I think we're, like, maybe 50%, 60% where we want to be once we close Milwaukee and we automate the bottling line, we'll be pretty close to 100% where we want to be. And, you know, there was a big discussion on outsourcing. Personally, I think we have a lot more flexibility if we want to be innovators and we want to be fast to market and we want to be creative by producing our own product. We just have to be efficient. So I'd say we're 60%, 70%, and maybe by the next earnings call we'll have some more news.

Wow, well, that's a pretty exciting progress. Thank you very much. You guys are doing – it's been, I know, a hard road, but, you know, you've earned any accolades you get for it.

Well, thank you so much. We're working for you guys. So, you know, you provide the capital, we get the return. Thanks. Thanks, Ross.

And our next question will come from Matt Campbell with Lorde Capital. Please go ahead.

Hi. Hey, gentlemen. I just want to kind of support what the previous questioner said. You guys are doing a really good job of streamlining, right-sizing the balance sheet, streamlining the business, focusing on the profitable business opportunities that And, you know, really bringing on very, very complimentary people. It's great to see bringing on people that have phenomenal industry experience as well as this new board member. I just want to congratulate you guys on a lot of heavy lifting and really excited about what you guys are doing because I'm starting to see a real turn here. I'm excited. So keep up the great work.

Thanks, Matt. And I know you were – when we talked before, you were interested in, you know, sales leadership. So we've checked that box, and we're really – that's going to be – I don't think we realize how that can accelerate overall growth.

No, I'd say you guys are doing all the right things. And, again, really excited to see that we've done a good job of, you know, taking – Redneck was exciting to look at, but it wasn't profitable for investors. And by getting that off of our business and by focusing and streamlining and, you know, cutting the balance sheet debt, you know, so much, it's exciting to see where we're going. So, you know, I applaud what you're doing and, you know, keep your heads down and good things will come.

Thanks, Matt. Hey, just as a quick follow-up to that, for the investors that are on the call, the 10K that we're releasing has a tremendous amount of detail in it. I mean, the manager team has gone to great lengths to try to exhaustively give you information to help you follow this transformation, and it's hard to see. Midway in, I think it's page 50 or so, you'll see we pulled out the redneck Riviera income statement and balance sheet, and you can literally see for yourself how, you know, effectively unprofitable it was, but the other aspect about it was how much capital this thing used. And so I think it's important for you to take some time and think about that and think about how the company's going to operate without that. You know, the other thing that I did want to call out is we did say that we've made sequential improvement in the company's performance, and it's hard to see that in our weakest quarter in draft. It's hard to see that, you know, at year end when we have a lot of, What I like to think of is one-time items. While we've reported a negative EBITDA number of 1.1 million, which seems like it's worse sequentially, it's actually not that far off in the sense that we had a number of professional fees. We had fees around closing the redneck deal. We also cleaned up inventory at year end. As you can imagine, exiting a number of SKUs, preparing for all these new products. We did quite a bit there. There was some compensation adjustments, also some settlements that we took care of to get things cleaned up from the balance sheet, and a TTB item, which is a subsequent event, I believe. That total there is over $650,000 that I would consider would be reoccurring necessarily in expenses. So the company is starting to reflect the performance in all the work that's been done over the last year and over into the fall. And as I said in my script, when volume picks up in this company with the new product, higher margin dollars there, and craft really starting to run, you're going to see really improved performance and it's going to be easier to see.

And our next question will come from Ross Taylor with ARS Investment Partners. Please go ahead.

I thought I... break mine into two pieces, not one. Thank you, Jeff. You actually just answered a number of the questions I wanted to ask about the nature of the one-time items and the like, and kind of give us an idea of what run rate could be. We can figure it out. It sounds like if we back stuff out, that's in the case. Also, will you walk us through what brought you to the idea of coming out with this kind of premium prestige brand? And you talked about very high margins. Are those margins sustainable if you decide to make this an ongoing product or how much of the margin is because you basically have some really valuable brown liquor in barrels places that's just not being kept on the books at anywhere near what it actually is worth when you mix it and bottle it. And how much is because you can get out there and you're selling at radically different price points.

Actually, Paul, let me take a stab at this. Paul really answers this question better than I could. but I secretly love to, you know, jump in there with my thoughts on how this product came to being. And I think it's a great, you know, segue into how this company is changing. And that is early on when Paul joined the company, both he and I went out to Portland. We spent time with the team. We were all over the business. And Paul took a question and answer period in the barrel room. If you've ever been to visit us, We had barrels everywhere. You know, barrels have just been sitting there for seemingly forever in Milwaukee. And after that time, you know, we went through and we were working with the production staff and we started tasting some of the one-off products that had been there for a while and just, you know, had been forgotten, literally forgotten by the company. And the reason why they were forgotten is because the company spent so much time trying to keep redneck going at the velocity across the entire company. And they were trying to, you know, figure out what's happening with Azunia and why the market looked like this. And, you know, so what was fascinating is literally under our noses were gyms. And you start tasting these things and you realize this stuff is, as Paul said, delicious. It's incredible. And then you begin to realize, wait a second, Eastside builds amazing products. But as we all know, the investor community fairly enough thinks of Eastside as something that's bumbling along here for the past few years. And it became clear, at least to me, that this was an opportunity for us to really show the market that we have the ability, we have the people, we have the assets, and we have the knowledge to really build phenomenal products. And I think it's been great having Paul join, and with his experience and spirit, the team that he's built, they begin to kind of open the rest of the team's eyes to what we have and what our path to success could be. So it's a great story, and I think you'll really appreciate it when you actually taste it. Paul?

Yeah, I mean, I'm not going to repeat it all, but it really gets exciting because Jeff's right. It was basically a tactical response to a problem because we had all these barrels and all these bottles, And we said, well, how are we going to move them out, you know, fast enough? And we said, well, we've got to create a new brand. And that led, you know, sometimes the biggest setbacks lead to the biggest breakthroughs, and that led to the biggest aha, which was we need to rebrand our company. And we were always apologetic about Portland and our origin. Everyone's like, oh, Portland sucks. And then we found out Portland is powerful in the craft business. It's like a god. And so wait until you see our new website. Wait until you see the new brand book. And, you know, give me a ring because it is so different. You won't even recognize the company or these brands. And so what the Eastside brand did was inspire us to look at the business model differently and what we were doing and actually how powerful it is because we're not distillers. But you know what we're doing that's just phenomenal? is we're buying great products. We're getting great barrels. We're aging and blending the product to perfection. And that allows much more scale than a traditional craft company. So I'm not going to go into all that now, but Jeff's absolutely right. We went from tactical, let's get the barrels and bottles out, to a strategic platform of branding, to an aha of a business model that we can grow because craft is usually very local, right? They have tasting rooms. They have a little distillery. But just imagine if you can bring farm-to-flask ingredients that are local and indigenous with big national brands. So you don't give up the artisanal. You don't give up batch-produced. You don't give up craft. But you could do it with a national brand. Nobody's done any of it. So, you know, this is for another day, but we really could enter into a proprietary space that is between a Diageo, you know, whoever else, I mean, Bacardi, all those guys that are doing stuff on big scales, and the little small craft distilleries and go in between and push out geographically to Harold's point. But, you know, that might involve a little more investment capital, but... This thing has really inspired us to a whole new level, actually.

And that would be capital that would either be coming on success or could be funded depending on how the canning business plays out. I do want to say, I have one more question, but I do want to say I'm from Seattle and Portland does suck, but California sucks more. So the last question I would ask, speaking of California, is tequila. Tequila. And kind of walk us through the agave market. Things have gotten kind of crazy, it seems like, in there. A lot of agricultural costs in Mexico seem to have shot through the roof. I saw even this last month, in March, I guess, avocado prices nearly doubled coming out of Mexico and the like. So, you know, that's obviously been an impact, I would think, in that business, particularly agave. when you have brands that service low and high-end agave costs seem to have gone up a lot. Can you walk us through that and let us know kind of what the game plan is going forward?

Yeah.

Well, I don't know. Jeff, do you want to start? Yeah, I'll start with the agave, and then Paul can really talk about the other piece of the problem. I mean, it really is our product costs too much as it's structured now, and we don't sell it right. And Paul can really answer the don't sell it right question much better than I can. But that's one of the things we're working on immediately is understanding and charting a path forward where we can get the margins right in the business. Now, you know, you can do that a number of ways. You can do that by raising revenues, right, raising the price point, and you can do that by pushing out expenses. And we're going to attack both sides of the problem, and we're going to, you know, figure it out. I still think... I still think, and I think everybody in the company thinks that's looked at it, this is an outstanding opportunity. And it gets to the core of what Eastside's turning the page and doing, which is making great products. Our partners down there are phenomenal at what they do. They really are. If you've tasted the Azunia Black, which competes right up there with Don Julio, highest, you know, skew, I mean, it is literally better than better than Don Julio in my opinion. I mean, it's a tequila if you haven't tasted it. It almost tastes like a bourbon. And the problem is we haven't been able to get people to taste it and we haven't got it taken into the market in the right way. But on the cost side, our team's working on lowering the cost and not relying on agave moving down. All tequila companies have this challenge. We have it. specifically with our partners, because the tequila that we're using is super premium agave. It's a seven-year agave. It's aged in black. It's extraordinary, and it serves a super premium market. And here's a teaser, probably part of Paul's response as well. We don't treat it that way when we get it in our hands, right? We don't take it to the market with the same, you know, focus of what we have in hand and we've been selling it, uh, as a well drink.

So this is true sipping tequila that you've been basically has been marketed as just, you know, someplace in the lower end of the shelf.

Right. Yeah. There's a couple of issues, but I was in the coffee business and, uh, you know, coffee's up there with pork belly and orange juice, like in that, remember that Trading Places movie? But agave nectar, agave should be right there with it because, you know, as supply increases, you know, then cost comes down and demand decreases, price comes down and supply decreases and price goes back up. So the agave market to me looks like the coffee feed market. But So that's number one. So there's a lot of fluctuation in the cost of agave. The second issue is just that we have an ultra-premium product. It's not an issue. It's really unbelievable. I mean, I haven't, you know, it's been COVID, so I've been a little restricted. But anybody I ever talk to who's tasted Azunia is just like, oh, man, this is great. But we're not marketing Agave. that product. We're basically putting it in the well and trying to, you know, price promote it and sell it. And so, you know, we're making these depressed margins. So what we have to figure out is how do we make a better margin? And that's really a positioning, a branding, and a marketing challenge. And we were on the phone with the sales force the other day and we were thinking of ideas. You know, we have this really cool agave syrup And somehow, you know, you've got to start bundling things or packaging things or offering different products in a way that allows you to drive your margin up and to present the product in a different way. Look, tequila is all about, you know, it's a different usage occasion, a different mindset, right? If you're sipping bourbon by the fireplace, that's very different if you're doing shots of tequila at the bar. And so we have to capture... you know, a specific identity that resonates with consumers and tie in that premium product in a way that can command a higher price. There's the gold. I mean, on the manufacturing side, it is what it is. You know, Nectar's going to go up and down and we're going to squeeze them as hard as we can and find ways to be more efficient and effective. And we will. But we also have to look at the branding and the packaging and and start enjoying some of the explosive growth.

It sounds like, you know, social media is going to have a big role to play in this place where you can get it out in front of people who might be, you know, influencers who can bring people to the brand. I would agree the hardest thing about spending big money for liquors, if you don't like it, you know, you're, into it for a lot. And so obviously it seems that that would help a great deal is getting people, getting things out there where you get effectively free marketing or nearly free marketing by getting it in front of people. If it's that good, I think that, you know, perhaps once things start to open up in COVID, you can take it around to places in La La Land and find people who might actually drink it, like it, and say they like it.

That's correct. And one thing that I think will resonate with all the investors, been around a lot longer than I have, is one of the reasons that I've been told that we acquired Azunia and Azunia was happy to come to Eastside was to piggyback on the back of Redneck Riviera. Well, if you think about it, Redneck's strategy was that national burst into off-premise chain accounts that are very expensive and very competitive. And Azunia wanted to piggyback on that, and they have to a certain extent, but except on-premise. So they've been going to on-premise change in the well that are very competitive and very expensive. So that's why I said in my script, you know, our strategy is up and down the street, which is trade jargon for local liquor stores and local on-premise accounts. There's an extraordinary amount of revenue there for the takings. So it's not that we're going to cut off our nose here. I mean, you know, there's revenue for us. It's just how we want to achieve it. And my message is and the strategy we're going to employ is spending our dollars that bring us the return. So just to get a product into an account at a low price is not sustainable. You know, I've been in marketing for 40 years. Price. If you're going to compete on price, then you better be the lowest. I mean, that's what they teach at Northwestern Business School. There's differentiation and then there's price advantage. So if you're really going to compete on price, then you need to be the lowest priced product and just increase volume and go through scale and efficiency. But that's not who we are. So we really need to think about You know, up and down the street, concentration of effort, and the brand will grow. Tequila is on fire. We just need to be relevant, and we need to have the right margins, and then we can invest.

Well, I will say my parting comment would be it's refreshing to see, you're right, this company has kind of almost been like a blind man wandering around in a room, a dark room, and he's bumping every wall it seems and knocking over every chair. But it seems at this point we might actually finally have taken off the blindfold and started to run this business like it's actually a real professional company. So I appreciate that effort.

Thanks, Ross. We're excited about the year.

And this will conclude the question and answer session. I'd like to turn the conference over to Mr. Block for any closing remarks.

Well, I'd just like to say thank you, and now it's time for us to get back to work and deliver results. So cheers to everyone. Appreciate you joining, and thank you for your interest. And we can continue the conversation at another time. So cheers.

The conference is now concluded. Thank you for attending today's presentation. We now disconnect your lines at this time.