Eastside Distilling, Inc.

Good evening, and welcome to the East Side Distilling Report's second 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 Paul Block.

Please go ahead. Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the second quarter of 2021. I'm Amy Broussard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued second 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 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 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 filings with the Securities and Exchange Commission, including the financial statements and related information pertaining to the company's annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Glynn. Jeffrey, please proceed.

Thank you, Amy, and good afternoon, and welcome to our second quarter earnings call. We reported on numbers after the close, and we have a lot to discuss. So I'd like to pick up with the theme that we've been discussing all year, and that is fix, build, and grow. While in late 2020 and early 2021, we were in the fix and build stage, in the second quarter, we were in the growth stage, albeit early, despite reporting results that I was lapping the beginning of the pandemic in 2020. As we reported in the first quarter, we closed the Redneck Riviera termination and asset purchase agreement, and Redneck has now been accounted for as a discontinued operation. For those details on that presentation, please refer to the 10Q. For the second quarter, we reported a revenue of $3.6 million, a decline from $3.8 reported in the same period in the prior year. Now, it's important to remember both our Portland potato vodka business and Kraft Canning had very strong performances in the early Q2 of last year. The beginning of the shutdown of the on-premise dining in the Pacific Northwest drove these businesses to great results last year. And notwithstanding this tough comparison, Spirits had a great quarter. Spirits had an increase in volume of 12% and a 17% increase in the revenue for the current quarter. During the quarter, we sold a total of 9,327 nine-liter equivalent cases compared to 8,299 in the prior year. This increase was driven by Azunia and Burnside. Burnside, in particular, reported strong volumes with an 18% increase in 9-liter volumes over the prior year. Remember, Burnside, unlike Azunia, performed well in 2020, so we are particularly excited about this strong performance in Q2. Our Eastside brands began their rollout in Q2, but that didn't have a significant impact on the volume in the quarter. Portland Potato Box was down 4% on volume still, a strong showing when considering it was up 20% last year in the second quarter. Azunia's volume performance was driven by the return to on-premise dining, and that was better than expected. Now, if you recall, we've been working to reposition Azunia and to improve the gross margins, and we are pleased with the results this quarter. In the second quarter last year, at the beginning of the pandemic, Kraft customers scrambled to source cans and secure every available canning line to move beer production through cans from kegs. And we were a key beneficiary of that trend last year. While Kraft continues to win new customers this year, that division saw sales 17% lower than last year as we lapped that tough comparison. Consolidated gross profit for the quarter was 1.1 million compared to 1.4 in the prior year's second quarter. And gross margins were largely impacted by supply chain pressures at Kraft Canning, while service margins were strong Our sales and consumables were significantly lower as well as the margins we captured there. Now, we have seen supply chain pressures in every segment of our business, not just craft. We responded with announced price increases and expect to capture margin in the back half of the year. Now, below the line, OPEX expenses continue to improve quarter over quarter. And this quarter, we saw a 22% reduction in SG&A. And these results flow through into an improvement in EBITDA, and we reported a loss of $1.1 million compared to a loss of $1.2 in the prior year's second quarter. But adjusting for restructuring charges, and those are one-time severance expenses, professional fees, and non-cash compensation, adjusted EBITDA was a loss of $706,000 for the quarter, a 26% improvement over the prior year's second quarter, and another sequential improvement from Q1 of this year. Now, let's turn to the cash flow and the balance sheet. We continue to improve our liquidity position, ending the quarter with $1.1 million in cash. In Q2, we refinanced $2.3 million in maturities with a new convertible note, and we finalized the Azunia earn-out at $15 million and moved the balance owed to Intersect, approximately half that amount to a long-term liability. This treatment lowered the dilution impact on our shareholders, and subsequent to the end of the quarter, We had 900,000 warrants funded adding an incremental 2.4 million of equity to the balance sheet. We are happy to report we are in the process of finalizing the amendment extending the liability of maturity out to mid-October, and we anticipate we will be refinancing that ABL facility with a similar facility in the near future. Now, all these actions on the balance sheet are designed to improve the liquidity position of the company, limiting dilution to shareholders, and most importantly, putting gas in the tank for growth. The company recently announced its three-year strategic plan and has already made key capital investments to drive the rapid growth of gross profit dollars, and Paul will talk about that shortly. But before we hand it over to Paul, I want to briefly address the balance of the year and our outlook. At the beginning of the year, if you recall, we had said we expected a strong year with revenue growth to be about 22% year-over-year. excluding Redneck Riviera. While sales on student spirits is on plan, we have work to do at Kraft. We have a close-the-gap plan in place at Kraft, and we'll see how we execute that plan. We do expect to be up in sales at the end of the year. Now, at the beginning of the year, we also said we had significant improvements. We thought we could see significant improvements in gross profit, up 50%, and better SG&A, down 23%. We are on track to deliver the SG&A improvements for the year, but the targeted gross margins will be harder to achieve this year. Gross margin performance will be driven by second-half performance of expanded distribution of spirits, Eastside's new products, price increases, and better performance at Kraft. And we do expect gross margin improvements of this magnitude, but they will take more time. With these results, while these results are important and reflect the improvements we are making, I believe the most important news to share are the details around the new strategic direction of the company. We have an outstanding management team, which is finally in place, and it has a plan in hand. That plan is designed to drive significant gains across all our financial metrics. And now with those details of the quarter out of the way, I will turn it over to Paul. Paul?