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.

Okay, thank you, Jeff, and thank you all for taking the time to join our call today. Well, it's been a short time since our last call. We do have some substantial progress to report, as Jeff mentioned. In the last call, I discussed each side distilling turnaround focus on fixing, building, and growing along with the five value creation initiatives of focus, efficiency, creative growth, brand differentiation, and product innovation. Today, I wanted to share the results we have achieved in Q1 relative to these areas of focus and initiatives specifically the key initiative of growth. From an operational perspective, we remain focused on improving operating income, reducing operating expense, and breaking even on an unlevered free cash flow basis. To this end, the consolidated Q1 results are an indication of our progress to date and the anticipated results forward. With that said, Overall company consolidated net sales were up 4%, gross profit up 25%, and OpEx down 17%. Now, please note that these consolidated gross profit increases are not adjusted for the one-time inventory increase Jeff mentioned that are captured at the adjusted EBITDA level. I wanted to share these numbers without the adjustment to highlight the underlying underlying trend from a management perspective. All key performance indicators are going in the right direction, but we realize we need to be better and go faster. The task now is to focus on execution with our new team and continue to drive profitable sales and reduce costs. As we continue to increase operating income and decrease operating expense, through sustainable underlying fundamentals and critical strategic pivots, the company will move faster toward our goal of break-even unlevered free cash flow. For the Spirits portfolio in Q1, we achieved the results we planned and anticipated, but the opportunity to be better and go faster still exists. For this first quarter, the Portland Potato Vodka brand revenue was up 5% year-on-year due to to change in the new Forte bottle and cork cap. We look forward to continue the brand momentum in Oregon and expanding Portland Potato Vodka to Washington and California in the coming months. The Burnside brand revenue was up 9% year on year due to increased distribution and focus on more premium offerings. We plan to continue our expansion to 10 states and maintain the brand growth throughout the year with focus on more premium product offerings. The Eastside branded portfolio is now in production and produced and shipped to the OLCC in the state of Oregon. We're a little bit behind on our planned launch date due to regulatory compliance completion, but now fully stocked in the OLCC and selling to the retail, the Eastside brand portfolio is ready to go. Repeat sales in the accounts we've secured have been steady and distribution gains are ongoing. On another point, the Eastside brand recently won a double gold medal for the American single malt and a gold medal for the Lions Riot to San Francisco Spirits competition. We've ordered gold medal stickers for these products so we can share our success with our loyal consumers. As Jeff mentioned, the Azunia brand revenue was down 30% for Q1 2021 due to slow on-premise sales and our intentional reduction of deep discounts. This trend has been anticipated as we manage COVID, reset Azunia pricing, and change trade channel practices. The plan forward is to leverage the unique premium batch produced organic product, focus up and down the street, and concentrate on the Western geography of the United States. We've eliminated historical, unprofitable, on-premise deep discounts, and we've also eliminated the broad approach to chain sales for Zunia across the country. You know, overall, I think the most important results for the Spirits portfolio in Q1 2021 is the gross margin improvement of 24 points. Spirit's division was at a 1% gross margin in 2020 and now has increased to 25% in Q1 2021. And this is a clear indication we're executing on what we attended. Now, again, these results are not adjusted for the one-time inventory increase. However, they do reflect the underlying progression against our overall goal to improve margin. Our spirit's plan forward is to focus on the five strategic pivots, is to focus on five strategic pivots that we continue to execute with a great sense of urgency. We're pivoting from a broad national approach to a concentrated geographic approach of five plus five, focusing on five primary states in the West and five secondary states in the West and East. We're pivoting from a sales team that sells one account at a time to a sales team that manages distributors statewide. The plan is now underway in an effort to engage our three tiered distributors as true partners to manage distribution, marketing, and price in a more profitable manner. We're pivoting from a focus on price discounts to drive distribution and sales to a focus on brand merchandising at the point of purchase to build awareness, trial and preference among our target audience. In the off-premise accounts, this means getting to the floor with displays, features, and consumer promotions. In the on-premise, this means conducting brand promotion nights that link to consumer and brand experiences. We're pivoting from a sales structure of 21% account managers to a sales structure of seven distributor managers. We have employed individual sales capability that understands building premium brands through merchandising and promotion. We've decreased our sales force from $3.6 million down to a cost of $1.2 million. Now, while the Right Sizing Initiative of our Spirit Salesforce Save Significant operating expense, it changes much more about hiring and deploying the right people to drive our strategy and accelerated base. In addition to our new SVP of Sales, Ray Wetzel, that I introduced and talked about in our last meeting, we recently recruited industry executive Eric Pascal, as our sales manager to lead our very important West region. Eric studied at West Point. He has a BA in marketing and an MBA in management. He's been classically trained at EJ Gallo and worked for Bacardi, Seagram, and Monroe. Now, in addition to Eric, we've also recently recruited Kyle Trost as sales manager to lead our Southwest region. Kyle has 14 years experience in wine and spirits, and key account management. Most recently, Kyle was recruited from Action Wine and Spirits, a boutique distributor serving Arizona and surrounding markets. We have retained and maintained our Eastside veteran, Ryan Meek, as sales manager for the very important Northwest region, and our Eastside veteran, Bill Griffin, as sales manager to lead the Southwest region. The eastern region of the U.S. will be a secondary focus for the time being, with the goal of maintaining sales and distribution. Overall, the team believes we can triple the SPIRITS revenue just in the western part of the country alone. Now, in addition to the focus on SPIRITS sales growth, we also are focusing on SPIRITS production optimization. on our list of things to do. We continue to focus on the line automation that will allow us to use our team more proficiently through multitasking near-term, contract packing mid-term, and full internal capacity utilization long-term. Eventually, we plan to fully integrate the craft and the spirits operation for optimal input. As you can see, we continue to build a professional team suitable of leading a $200 million national craft-inspired alcohol beverage company, not just a $20 million local craft distillery. Our spirits team will not only be capable of driving short-term business objectives and growth, but also be able to adapt to the infrastructure evolution as the enterprise scales and grows. I believe, and I think we all believe, we're clearly changing the game, we're doing more with less, and we're creating a unique position for the Spirits portfolio. Now, while the Spirits division is certainly an exciting part of the company, and we spend most of our time talking about Spirits, our craft canning division is the bread and butter of the company. Craft division reported the craft division sales were up a robust 31% for Q1 2021, first a year ago, demonstrating strong underlying demand for canning services and raw canning materials. However, gross profit was down 13% to the same period due to the changing customer base profile and variation in customer profitability. The craft business is anticipated to run at 85% and 90% of capacity as we begin to enter the peak summer months. The team has done a very good job of engaging new customers and expanding services to contiguous locations. So the operational challenge going forward is to manage the margin as the business unit grows and we bring new customers in and the mix changes. In addition to the organic growth for mobile canning, we're evaluating small, bolt-on opportunities for creative expansion. We've budgeted this incremental growth in our fiscal capital plan and have identified several interesting opportunities to date. The overall goal is to expand mobile geography and services, diversify a portion of the business to fixed locations, and expand into bottle manufacturing. Kraft continues to generate substantial cash for Eastside, and the plan is to increase the Kraft cash flow through acquisition and expansion. Turning back to the consolidated business, our immediate focus is to continue to achieve the 2021 goals we shared with you in our last call, and those were to grow sales 22%, grow gross profit 53%, and reduce our operating expense 23%. All ambitious goals for sure, but we have a solid Q1 in place and strong plans and programs to drive profitable growth the remainder of the year. And with our operational plan and strategic pivots in place, we continue to focus on the execution and acceleration. During the month of May, will be conducting a full forecast for 2021 to both record actual results year-to-date and to forecast anticipated results for the year to go. The May forecast exercise serves two purposes. One, to ensure we're on track to achieve the 2021 goals I just mentioned, and two, to set a benchmark for our three-year strategic growth plan that will begin this June. Now, once completed, this three-year strategic growth plan will serve as our investment thesis to guide our operations and capital structure and to serve as a foundation to market the company to the investing community. We continue to believe the company is undervalued with high potential for future accelerated growth. We believe we have created a unique position with high caliber talent to scale craft spirits in a category that tends to be local and artistic. As we continue to demonstrate results, we'll look to raise a small tranche of capital to fuel additional and creative growth. To this end, Jeff and I plan to initiate a strong external investor marketing campaign in the fall generate interest in each side and to share our plans for the expanded growth ahead. We thank you as always for your interest and support in Eastside Distilling and we'll now open the line for questions.

We will now begin the question and answer session. To ask a question you may press star then one on your telephone keypad. If you are using a speakerphone please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Our first question is from Kelvin So with Wingshot Capital.

Please go ahead.

Hi there. Congratulations on the amazing quarter. I can see that the cost has came down and you guys are right on track. I just want to ask two questions. With the cash infusion of $3.3 million from the private placement, does that accelerate anything in the company, and what are some of the immediate opportunities we are going after?

And do you foresee us needing to raise more capital, be it from banks or other sources? Great.

This is Jeffrey. I'll take that question. Paul, if you want to jump in, you can jump in afterwards if Um, the 3.3 million actually was raised to, um, primarily to refinance on notes that were maturing, uh, here in the end of April. Um, and in may, and, um, those notes were about 2.3 million. And then we had, so we had an incremental $1 million that, that, that, you know, in addition to the, to the, um, the proceeds to refinancing those. But of that $1 million, we obviously paid some transaction costs that you'll see in the second quarter. So we didn't get the full benefit. We're not gonna get the full benefit of the, of the million, but we did add the liquidity balance sheet. Now to your, your second part of that question, as Paul alluded to the company has a tremendous number of opportunities to grow. And, um, even with our stock here, um, you know, we think there's an opportunity to possibly raise a little bit of capital. and fuel growth here as we go through the year. But as Paul mentioned, we're building a three-year plan, and we're going to be very thoughtful about coming to the investment committee and showing them how we're going to make any investment from external capital work for all of the investors in the company. We're not looking to do a very large dilutive capital raise. Paul?

All right, Geoff, anyway, I just want to check with you. From the 8K, I saw that there was a $2.2 million of other income this quarter. Could you share with us some color on this $2.2 million other income, and would it be one time or would it be recurring?

Yeah, if you go down into the press release, we break out. the flow through of some of the one-time items and down to adjusted EBITDA. And it's important to take a look at that. As I said in my prepared comments, we had a lot of one-time items. So we had a gain on forgiveness of the PPP loan. That's about 1.4 million. We had a gain from the termination of the license agreement with Redneck Riviera. That was about 2.8 million. And then we also sold some inventory associated with that transaction. That was about a million. And then we also, we talked about this, we've been working with Intercept to finalize the Zinnia earn out. Zinnia was, again, the tequila business we bought a couple of years ago and 18 months ago. And that revaluation at the end of the year and adjustment of the final earn out was another called three-quarters of a million dollars of a one-time item that went through the income statement. So you'll see those all in that bridge at the bottom of the press release.

All right. Thank you so much. I have one last question. I've been analyzing the canning landscape for a while, and I agree that there's a scope for growth. Are we looking to grow our canning operation by investing in more trucks for FY 2021? And is the market size big enough to double our current canning operation?

If yes, what are the steps we are pursuing to scale into that?

I can respond to that. This is Paul. Just to start with your last question, yeah, the market is – I think it's in the billions of dollars, the entire beverage manufacturing industry in the United States and contract packing, excuse me, is a significant size to that. So the size of the prize is enormous. The challenge is to strategically pick off a creative opportunity. As I mentioned in my prepared statements, we think that You know, there's not just opportunity in mobile. Mobile is good, and mobile can be expanded, and there's significant opportunity to expand there, and we will. But there's also opportunity, as I mentioned, in fixed locations. And when I say fixed locations, what do I mean? What's the difference? Well, with mobile canning, it's impossible to pasteurize products. because it's impossible to really put a pasteurizer on a truck. But if you have a fixed location, you can then get into pasteurization, and pasteurization is in high demand. And we would, as I mentioned on previous calls, with a $500,000 investment, possibly convert that into $3 million of incremental sales, and then obviously have the cash flow proportionate to the margin there. So that's number two. And then number three, as we get better at manufacturing bottles for spirits, there could be opportunity to actually do contract manufacturing in bottles as well as cans because we will then become more capable and more competent. And so what does that do for us? Well, It's great to expand canning and be focused, but it's also very good to be diversified so that if mobile canning is a little soft, your fixed locations may be up and pasteurization may be in demand. If canning in general is down a bit, bottles may be up. So we really are looking at this beyond just mobile trucks, and we're looking at it as more as a comprehensive alcohol beverage contract manufacturer.

All right, great. That's all for me on my end. Thank you.

The next question is from you. Excuse me. The next question is from Bjorn Ng with 10X Capital. Please go ahead.

Hey, Paul. Hey, Geoffrey. Good evening. Thanks for such a detailed turnaround business plan for Eastside. I think that you guys have got the right team to propel the Eastside brand forward and I'm excited to be a shareholder of Eastside. So I just got two questions here. As consumers of whiskey, tequila and other spirits, we do see branding and marketing playing an important role in creating a consumer mindset which translates to our ability to earn decent margins. Could you elaborate on the competitive advantage we currently have over our competitions, and how can we carve out a niche for ourselves?

Yes, well, Bjorn, that's a great question, and I would say probably the one single competitive advantage we have, which is a great one, is we have absolutely best-in-class products, whether it's As I said, the Eastside products just won some gold medals. Azunia is a phenomenal product. It's organic. It's batch-made, handmade, and everyone who tries it loves it. Burnside premium products, Goose Hollow, Buckman, and the new Burnside Black. So PPV, we were just talking about that the other day, four-time distilled potato vodka, very unique. So I would say our products are one of our most important differentiators. The second thing we're working on is our identity, because there's two things that make up a brand, product attributes and consumer values. So we're linking our brands to consumer values and experiences. For example, on Portland Potato Vodka, we've decided to link Portland Potato Vodka to the beach. and we're going to the beach communities. We're starting out with surfing and windsurfing. So, you know, that adds a differentiator of identity. For Burnside, you know, we're doing a more style-oriented approach, which is black and white. And, you know, we're looking at a new RTD for Burnside that's a black and gold can. So... It's as much as the product as it is the identity. I think the other one point of difference for us, not to go on too long, but is the fact that we are in between the local craft distiller that are small, very smart, but artistic, as I mentioned in my prepared comments, and we're below the big guys with a very smart, experienced team that's built brands, that knows how to sustain velocity, point of distribution and can really bring energy and oversight to our distribution network. So I think that's kind of unique, too. So I would say product for sure, identity we're building, and we've built this team to actually kind of be like a sleeper cell almost, you know, above the craft distilleries but below the big guys. So Very smart, very analytical, but extremely entrepreneurial. So I would say those are the three things. And the one thing that we do need, and we don't need a lot of it, we're not looking to create dilution, but we do need some capital. And, you know, we want to continue to demonstrate that we're performing, that we'll deliver results, we're consistent, what we say we'll do, and then be entrusted with some investment capital to get the company growing. You know, we don't want to be $20 million. We want to be $200. And it will take a little bit of extra capital, especially on the craft side, where we'll acquire small bolt-on operations. And the spirit side, we will invest in the branding. We're not looking to buy more brands per se. We've got plenty of opportunity within our current portfolio. So I hope that answers your question, and thank you for that.

All right, Paul, thanks a lot for the details. So I just got one question on the ready to drink cocktail. So I just heard you were sharing about the new Burnside Black and Gold RTD drink. So I'd just like to get your thoughts on what do you think on creating more canned RTD cocktails for the off-premise market? As we see that the on-premise market is still affected by COVID and more, we have actually witnessed the success of brands like Celsius Holdings and Monster Beverage, where they have different flavors for consumers to try out, which attracts more variety and customer curiosity for the brand. So do you see potential in the RTD segment and do we have plans to invest in it in that segment? Could you walk us through the revenue potential of this?

Yeah, well, first, yes, there's tremendous potential in RTDs. We just did an audit in one store, and I think we had somewhere about 30 to 35 RTDs in the store. You know, we're looking at alcohol by volume and price points and product type. So the opportunity is enormous. People want convenience, they want flavor, they want colors, and they want it now. And they want a high alcohol content. So the market is ripe. It's very crowded though. Um, so when we come in, we have to be, as you asked your first question, very differentiated. And we think we can do that at the premium level with high quality product and, you know, maybe shooting for maybe a more expensive product, but a higher quality product. So giving value for that expense. Um, yeah, so we're looking at, uh, right now we've tested, uh, probably 10 different new products, three rows to the top in our first concept or sort flavored whiskey, Azunia flavored whiskey, just in a bottle in a seven 50 cherry flavored and, and, uh, and then the Marion Berry both tested very well. And then for RTDs, what really tested well was an Azunia organic margarita and a Burnside and Cola and a Burnside honey and lemonade. So, um, What do we think the revenue could be for RTD for Eastside? It could be fairly significant. I mean, you know, right now it's an extraordinary lucrative space. We just need to get out there and we need to differentiate. So I don't see any reason it can't be $10, $20, $30 million for Eastside, but that will require some investment in marketing and it will require us getting out there with a very unique product. And I think both the Azunia and the Burnside could be unique and could deliver on the product. And right now what we're doing is we've already concept tested, and they both tested very well in terms of purchase intent. Now we're building product, and we're evolving the business case scenario. So we'll have more to report back on that, but we're with you. We think that's very interesting. We just need to be careful. There's a lot of big players spending a lot of money. You know, we want to be methodical and we want to be fast. But as I keep saying, we want to be focused and deliberate.

All right. Thank you so much, Paul. I like how you are always so methodological in your answers. And I appreciate you and it's a lot of useful details. It's definitely a privilege to be your shareholder and we are supporting you all the way. Thanks a lot for the hard work and looking forward to chatting more with you and Joffrey. Well, thank you so much for your support.

The next question is from Kelvin Seto with GIM Partners. Please go ahead.

Hi, Paul. This is Kelvin calling from Singapore. We care a lot about return on invested capital and everything. Brand building is an absolute must. And I just want to say that you're kneeling on these two aspects. You have a strong game plan for this site and you're always honest, which makes you very different. We are blessed with someone of your caliber along with Joffrey and Janet to guide the company. So my first question is given that our Azuna sales were mostly affected because of on-premise dining was closed. And even right now, I think in quarter one, 2021, the number of cases that we have shipped out is still lower than quarter one. So how are we able to build a more resilient business around Azuna and lift sales during a difficult period like this? And I just wanted to know if e-commerce is also another possibility that you guys may be considering. Thank you.

Yes. Hey, Calvin. How are you doing? Two very good questions. You know, first on Azuna, I think Azuna, the way to think about it is going to be, we might have to take a step back before we take two or three steps forward. And what we're finding on Azunia is the brand has really been driven on price. And there's a lot of accounts that we've identified where we're actually providing deep discounts that are causing us to lose a profit and lose money per case. There was one account in Florida, where we were giving $117 discount per case and we were losing $70. So when we stop that discount, obviously the account may interrupt some business, but we're also stopping a loss of, you know, probably $15,000 on an annualized basis in just that one account. And we've identified a number of these accounts. So the first step is to really get our pricing and our price promotion strategy in place. And we're working on a pricing model, working with our distributors, and we're recalibrating our front line and our promotional prices. We're looking at distributor margins, and we're working with our distributors. And in fact, our distributors have been very supportive of us. You know, they've said, look, you guys have a lot of work to do there. We'll work with you. But a lot of the volume has been pushed out through low price points, which is the antithesis of the Azunia product. So what's the opportunity for Azunia? The opportunity is to really market a phenomenal product. And you don't do that by pricing it as the lowest tequila. You do it by pricing it as a tequila that deserves a price point for this batch-made, handcrafted, organic product that's some of the best-tasting tequila available. And then we need to get that message out, and we need to merchandise the brand at the point of purchase and get it off the shelf and get it in front of consumers. In the near term, we're going to be focusing on the Azunia Black, which has a frontline price gross margin of 60%. So that's not an issue. Great tasting product. It retails for $109 front line, and we can discount it down to below $100 and still have a great margin. So in the near term, it's to really focus on black. In the long term, in the midterm, it's to get the pricing right. And in the longer term, it's to reposition, repackage, and refocus the brand for more exponential growth. So in the near term, yeah, it's going to be tough to see a little bit of volume decrease on Azunia, but we're fixing it for long-term growth and for sustainable growth behind the great product. And then your second question on e-commerce is very salient. We're all over the e-commerce as much as we can be with our evolution because, you know, we're just now fixing so many things in the company, but e-commerce is for spirits is a great platform. So with Eastside brand, we're looking at whiskey clubs online. We're looking at selling the limited edition online. And for that matter, we're looking at trying to have all of our products available online through as many outlets as possible. So we really appreciate all your questions and all your support. And thanks for communicating with us, you know, on an ongoing basis.

All right. Paul, I like the exact steps you are taking. I think discounting is a dangerous downward spiral which tarnishes the brand. But now with proper pricing in place, I think Azuna will be perceived differently. And I just wanted to say that the amount of things that your team is executing in a single quarter, I think is just really amazing. My last question is this. When we acquired Azuna, I think the previous CEO, Steve, believed that this could be a brand that could do roughly $5 million of sales. or more in his previous acquisition call. However, I think it is important to recalibrate expectations. And I'm not holding you to it, but just out of curiosity, does it still hold true in your understanding of the brand? Or rather, could you speak about your belief about the Azunas' potential? Thanks so much.

Yes. Well, Jeff can chime in, too, separately. But I believe the brand has tremendous potential. And I believe it could be a five or a $10 million brand, but it needs to be properly positioned, marketed and priced. And then it can be a brand that can grow. When you try and grow a brand by reducing price, what happens is you get price sensitive consumers that bridge by and you don't create a loyal consumer base. So, Yes, I think maybe he was looking and didn't know the underlying fundamentals of Zunio when he was acquiring it. But we do need to change those fundamentals, and I think if they're changed, the brand can have tremendous opportunity and could be $5 million, absolutely.

I was just going to add one other thought about it. I think Azunia has a tremendous amount of opportunity. Paul mentioned, you know, we're focused on the black and if you've ever had a chance to taste it, it tastes more like a bourbon than it tastes like a tequila. It's pretty phenomenal. It's not a tequila that you approach and you put it in a category with all the other tequilas. This is a super premium product. And we, you know, we think that, you know, when people have a chance a chance to trial it, then there's really a huge amount of upside and you have the margin mix that Paul was referring to in the margins. But the point that I wanted to make is, I can actually think that all our brands are superstars. I mean, look at what happened to Portland potato box the last year, in a pandemic in Oregon, when for you know, salespeople that you know, we're on this brand, we're saying, Oh, it's tapped out, I can't go anymore. It's accelerated. There's a couple of, you know, Paul mentioned it in his script. He repositioned it with a couple of changes, and there's more to do there. And this brand has really accelerated, and as it spreads out of the region, I think it could be a super regional brand. And I think Burnside is also a brand that could be extraordinary, and it wasn't marketed well. I mean, if you think about the way that we approached it in the past with multiple colors, it was kind of hard to understand which one are you buying at what price. And we lost track of the fact this is a super premium bourbon brand. in one of the hottest millennial markets in North America, you know, Oregon and Portland. And, um, so I, I just think your comment, um, is, is, you know, pointed towards Zinnia, but frankly, all these brands could be very large at some point.

Well, to Jeff's point, um, what we promised is that we would be more quantitative and we brought in Janet Oak as our chief branding officer. And we tested Portland potato vodka in a new bottle. And the research said it would grow 30, the purchase intent was up 30%. And when we changed the market volume was up 20 to 30%. So we're taking fact-based research data, you know, and we're converting it into market and we're seeing the results. We have done no research on Azunia. We've just been trying to, you know, kind of fix the pricing and, and, you know, adjust our focus. So when we really get into the research and the methodology, I'm sure we'll find significant ways to create more upside, you know, kind of in vitro that we can take into the market. And so we're creating a methodology that works and we can, you know, we can replicate it. And what that allows us to do is not waste money. And that's the other thing we promised is we were going to test things, we were going to go out into the market and ensure that they work, then put some allocation of funds behind it instead of spend millions and millions of dollars and not be able to report back the results. I just wanted to throw that in too, but thanks. Thanks.

Thank you, Geoffrey and Paul, for sharing so many details about your brands. And I think our earnings call is one where it makes shareholders want to try our drinks. So that's really exciting. I'd just like to squeeze one more question, if I may, before I hop back to the call. CDC just announced that fully vaccinated people can remove masks in most places. So on a broader level, what does it mean for us in terms of how we can execute on our marketing or reactivating the demand from our customers. So that's my last question. Thank you so much.

Yes, well, you're right. I think New York is going to open up entirely this summer, and I think the whole country is going to be following. So what that makes possible is people will be gathering at parties and entertaining more people. They've been kind of drinking alone. I know I have. But, you know, there's no opportunity to socialize. So the social setting will increase exponentially, and people will be enjoying others' company. And, of course, there's nothing, you know, what's among millennials especially is the cocktail culture has just been on fire. So young people will be organizing and partying and socializing and as will all ages and demographics. So I think that will reset the playing field for us. Of course, on-premise will start to come alive again, and that will be helpful for us because that's really, as I said in my prepared statement, where we can link the brand experience with the consumer experience. And we're going to do it very differently than we did it before. We're not just going to go in and price low to get in the well and chain accounts. that doesn't do a lot for us. It's great to get on the menu, but it's really great to interact with a consumer while they're with their friend, while they're drinking your product, and while you're promoting your brand. So that's going to give us a great vehicle to do the experiential marketing that I've been talking about. That's the place where it can happen. And we're going to be focused and we're going to be pivoting to on-premise promotions not deep discounts to get in the well.

Thanks so much. I can't wait to journey with all of you and thank you for providing your leadership. We do appreciate your efforts every quarter. Thank you so much.

Again, if you have a question, please press star then one. The next question is from Ross Taylor with ARS Investment Partners. Please go ahead.

Thank you. Most of my questions have been answered, but I do have something I'd like to further explore. It strikes me when I'm listening to you talk that the idea of the experience, the high quality of the alcohol and the like, it strikes me as social media and influencers and the like are going to be influential or even key in driving this. I look at the space and I noticed the other day there was a sale of an Irish or a couple weeks ago, an Irish whiskey brand sponsored or founded by a WWE personality. So I'm seeing this, what's our social influencer, social media strategy, and how are we going to get people to basically force multiply the east side opportunity? Because I find the hardest thing with alcohol is that the more expensive it gets, the harder it is to buy it without some reference point as to the quality that you're getting and someone telling you that you respect is necessarily good.

Or I think that's a great question. And I, you know, we've, you know, our team, all of us combined have had experience with that before. You know, we've been so focused on blocking and tackling that we really need to get to the fun part, which is the marketing and merchandising and tie ins with celebrities. So The opportunities are probably as many as we'd like. We've had a number of calls from agents wanting to align their celebrities with our brands. We also have probably a number of opportunities for product placement. And we've also honestly and intentionally underutilized our social media until we can really get our positioning and our focus and our marketing right. So I think the opportunity is wide open. Our strategy is all about guerrilla marketing and all about influencing the influencers, to your point. So we understand that. We haven't done it really to date because, you know, unfortunately I've spent most of my day working on cost of goods as standard for the May forecast and working on a lot of the price modeling. So when we get a lot of the fundamentals finished, which we're really, I think, like one or two months away, we are really going to be able to turn all of our attention to what we have done in the past and what we've done that's been successful, which is influencing influences, which means finding people who have a high influence among others. We're constantly looking for people on social media that have 50, 100,000 followers. But I think we can do a much better job. Not that we're not doing the job. It's just we're not focused on it for the time being. But we can bring in celebrities. We can get product placements. We can increase social media. And that's going to be a big discussion at our June strategy session, which we're having a couple weeks from now, where we'll bring the entire executive team together. We'll plan out the rest of this year, and we'll plan out the next three years. And I think now it's time to kind of turn the conversation there. I wish I had more to tell you, but honestly, we've been doing a lot of fixing. I'm feeling really good, like Jeff said, about the fixing part. And now we're ready to start to build. So you'll see more there, and we'll report later.

more on that area for you going forward okay uh the second question i have is you've mentioned the potential or possibility for a capital raise it would strike me as obviously given the size of the company and the uniquely undervalued nature of the equity that any raise you do would be best done if it was done as a private placement and perhaps to a strategic player someone in the space or someone who has a real influence or interest in what you're doing So I'd love to hear you assure me that you're not going to actually get on the road and try to market and try to find people to raise. I don't know how many millions of dollars you want to raise, but rather if you do need to raise capital, when you do need to raise it, go to a small handful of people who have deeper pockets and perhaps strategic who might actually pay you a premium rather than a discount for it. Because I feel having waited for a while for this to work, and I think I'm not alone, I hate the thought that we're going to be sitting here handcuffed to another three, six months waiting out of the fear that you're going to drop a secondary into the marketplace.

I'll jump in on that one, Ross. I appreciate that. And we're all, you know, shareholders along with you guys. And the last thing we want to do is do something that's destructive for people's confidence and our, you know, intention to build shoulder value. I mean, at the end of the day is really what we're thinking every day is how do we move the stock up? How do we move the stock up for existing investors? You know, and I think the bigger capital transaction with district two is an example that, I mean, it was an example of taking advantage of, um, the place in the capital structure where we could, you know, maximize, um, you know, the, the, you know, the fact that we had paid down a lot of senior debt, you know, offer an option. and value the option and raise some cash without having to do a very dilutive transaction or refinance a couple million dollars of notes, right? So I think that's what we're thinking, just to try to find the best foot forward. Now, having said that, I think it is important for us to go out and talk to people. And I'll tell you why. And you know this, and you've been on a number of the calls, is that you know, the company has transitioned so significantly from what it was before to what it is today. If I were to describe, you know, we can walk through the income statement and you can see transformation everywhere. The balance sheet transformation everywhere. Inside the company itself, the entire executive team, as I said in my script, is completely new. The ideas are new. Some of the products, while they haven't changed, the way that we're going to market is new. So I think there's something that has to we have to do a, you know, a pretty good job of walking people through what the plan is, be very transparent about the plan, the plan this year, the plan for the three-year growth plan that Paul's referred to, and how we get there. And, you know, one investor at a time, get people, you know, confident that we can, you know, be good stewards of their resources and I think it's important that we build that. I get inundated with calls from people wanting us to hire an investor relations group and go out and drive the stock up. I think the more effective way to do it is to bring you guys along and have everybody who's interested in the company learn about how we're going to make the $200 million company. That's going to take a number of conversations and it's going to take some creativity and it's going to take investors part too. They have to to believe in this, and we have to see people start to value the company that way, more so than a discount to what a liquidation value is, which is where it feels like we are here. I think your points were taken, and we have a lot of work ahead of us, and we're going to be awesome and on track here this summer once we get through the annual meeting and head down that road of growing the company.

yeah well i i would say that i the the steps you've taken so far have been fantastic i don't think they've been really recognized by the market i would agree you're trading under liquidation value at this point in time and i think that the idea of getting in front of people and honestly just kind of pushing it through proof and execution is a very valuable one and i do think that part of the problem has always been that people have been waiting around thinking that they're going to get a chance to buy you cheaper in size. And therefore they step off and kind of just wait because their assumption has been, you're going to need to do a deal. You, what you did with the refi was fantastic. And I think it lays a template for what you could be doing going forward and just keep pushing that way, you know, execute operationally and, and honestly build the brand awareness as they're talking about and, Yeah, I think you could find inside your holder base people who might be willing to provide capital if you needed it, particularly given your demonstrated ability now to generate returns on what you invest.

Well, thank you, Ross.

If I could just chime in on that. Sure. Just to really say I agree with you. We're going to focus on results because at the end of the day, results will drive value and value will drive the share price up. we're going to be patient. We get calls every day, you know, not that we've got a lot of shares on the shelf, but we had even a few to discount shares to, you know, to do overnights. We've resisted all of that. And plus that's our strategy is what you're articulating is to, is to be oriented towards a premium price and be focused with our investors as opposed to seek a discount just to get cash in and be broad in our approach. So, I think we're aligned with you on that. We'll seek your guidance, and we're happy to work with our current investor group. All we want to do is deliver results, prove that we can do more, and get some investment to do more. Because I think a little bit, I think we're demonstrating we can take a little bit and go a long way.

I would agree, sir. And I think that that's where I would argue is make sure that you don't sell yourself short. I think you have proven all of that. It's just a matter of getting the market to recognize, getting your investors to recognize that. And I'm confident that the team you have in place will get there. And hopefully, I think there's a lot of things here that should stick in fairly rapidly. I think the pace of change should accelerate from here. And as it does, I think that, you know, we should change a year from now. I think we're going to be looking hopefully at a very different environment, very different stock price and very different opportunities for the company.

We agree. We appreciate your support, Ross.

Thanks. This concludes our question and answer session. I would like to turn the conference back over to Paul Block for any closing remarks.

Well, I'd just like to thank everybody for joining today. Thank you for your interest and all the good questions and Jeff and I and the team are going to go back to work, and as you said, keep accelerating forward. Again, appreciate your confidence, and thank you for joining the call. Have a great evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.