Eastside Distilling, Inc.

Good afternoon and welcome to the Eastside Distilling first quarter 2021 financial results conference call. All participants will be in 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 star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, 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 first quarter 2021. I'm Amy Broussard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued first quarter 2021 financial results in a press release. 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 statements. 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 and are generally preceded by the 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 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 31st, 2020, 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, and good afternoon, and welcome to our first quarter earnings call. We achieved a number of milestones in the first quarter, all of which were key in our business transformation plan. As we reported in our fourth quarter call, in Q1, we closed the Redneck Riviera termination, an asset purchase agreement, we received forgiveness for the two PPP loans, and finalized the Zunia purchase consideration. These events all had an impact on both the income statement and the balance sheet, which I will detail in a moment. It's important to remember Q1 is typically one of our slowest quarters of the year, and this year in particular we expected it to be slow coming out of the pandemic with Oregon and California still largely shut down. Notwithstanding this, we had a good quarter in both spirits and craft canning. We made more transformational changes to our cost structure in Q1, which will benefit us as we see volumes in our business pick up and develop as we go through the year. The company is evolving and continues to make progress reducing its cash burn rate. Now let's look at the numbers. Note we are presenting the numbers with Redneck Riviera pulled out as a discontinued operation to make the results year over year more comparable. Consolidated gross sales for the first quarter increased 4% to 3.2 million compared to 3.1 million for the same period in 2020. Spirit sales were down. 21% in the quarter when we compared to the prior year before the COVID pandemic, largely due to lower Azunia volumes. Craft Canning had another strong quarter with sales growing 31%. During the quarter, we sold a total of 8,900 of nine liter equivalent cases compared to 9,700 in the prior year. Portland potato vodka sales were higher year over year while Azunia cases were lower. Burnside's gross revenue dollars were higher on summer K sales as we began to reposition the brand. The pandemic continued to negatively affect on-premise sales in the quarter. We have purposely pulled back from unprofitable Zuni sales activities in Q1, which also affected K sales in the quarter. Gross profit dollars improved in the quarter to $749,000, up from $725,000 last year. And gross margin calculated off net revenue was 24% for the quarter, flat with the prior year. However, we did take an inventory adjustment in the quarter of $164,000, which reduced gross margins. Excluding this adjustment, we would have seen a nice improvement in margins to nearly 30%. It's important to note this improvement was despite the fact we had not shipped any of the new Eastside products into distribution in the quarter. Below the gross profit line, you can see much of the improvement Paul and I have been talking about over the last two conference calls. Operating expenses in the quarter were $622,000 lower than the prior year. However, this includes $277,000 in professional fees incurred in the quarter that were one time in nature. Excluding those expenses, the improvement was nearly $900,000 of expense reduction in the quarter. We reported a gain from a number of one-time items, as I mentioned before, such as the Redneck Riviera inventory, the termination fee, the PPP forgiveness, and a purchase price adjustment for Xenia. In total, those items helped to drive net income to $3.7 million, which is 33 cents a share or 31 cents a share on a fully diluted basis. EBITDA for Q1 was 4.1 million compared to a loss of 2.6 million in the same period last year. However, adjusting this number for one-time gains, the non-recurring professional expenses, stock compensation, and the inventory adjustment I mentioned earlier, adjusted EBITDA was a loss of 1.2 million in Q1. Now, turning to the balance sheet, we are making progress, and you'll see even more progress in our second quarter report. See, we have lowered our working capital investment with a reduction in inventories, notwithstanding a meaningful decline in payables. The Azunia purchase agreement has been moved to long-term debt, and we've issued 682,000 shares of stock and notes with a face value of $7.8 million to intersect. The notes bear interest at 6% with a bullet maturity in three years. Subsequent to the close of the quarter, we issued the last tranche of shares of and had 12.3 million shares outstanding as of today. In addition, in April, we refinanced the maturing $2.3 million in notes with proceeds from private notes placed with Bigger Capital Fund, LP, and District 2 Capital Fund. That transaction also increased cash from the balance sheet. As I explained on our last call, we continue to restructure the business to lower our break-even and cash burn rate. In the current quarter, we have already taken incremental restructuring actions to align our investments to improve SPIRITS performance, and we've made incremental investments in sales and operational planning. These investments have been in people and process, and we are immediately seeing returns from these investments and can see both SPIRITS and CRAFT canning margins improvements coming in the quarters ahead. Finally, we have made improvements in process and controls to ensure we are accurately capturing and reporting results on a timely basis. I am pleased with the progress to date and believe we are on plan to deliver a much stronger company. The management team is entirely new here, from the CEO, the chief branding officer, head of craft scanning, and head of sales, all new individuals. And with the exception of myself, everyone has a long skill set in spirits and consumer products manufacturing. It took time. It took an investment. and it took your patience, but the team is in place, so now you can expect some results going forward. Now with the details of the quarter out of the way, I'll turn it over to Paul.