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?

Thank you, Jeffrey, and good afternoon, everyone. As we conclude the second quarter in the first half of 2021, I believe we have about 90% of the company turned around behind us, as Jeff had mentioned. But turning the ship has been particularly difficult at Eastside due to the lack of liquidity, high cash burn rate, competing interests, and the wrong people in the wrong place. While we still have a few things to fix and build, we're ready to shift our focus to growth. I do have a few Q2 results that I'd like to mention that we are particularly proud of. The first one is achieving a current cash balance of $1 million as of June 2021. Actually, for the team, this is a significant accomplishment in part due to good operational management, but really it's due to the extraordinary efforts of our CFO, Jeffrey Gwynn, along with the unwavering support of Bigger and District 2 capital funds. The second improvement we're very proud of, and that we reported in our Q2 and a half results, is improving the current ratio from December 2020, which was at 41%, to June 2021 at 128%, which is an extremely significant improvement. Big change for us. The reason for this ratio improvement is the substantial reduction of recurrent liabilities via the settlement of the Azunia earn-out, the restructuring of the notes payable, and the reduction of the LIVO credit facility. Again, recognizing the great effort of our CFO Jeff and our stakeholders. The third area that we're proud of is increasing stockholders' equity from December 2020, which was a negative $1.1 million, to June 2021, that was a plus $8.7 million. This was primarily achieved by securing relief from our PPP loan, converting debt to equity, and income from discontinued Redneck Riviera operations. And lastly, we're very proud of growing EBITDA 170% year on year. which was negative 3.8 as of June 2020, and as we reported now, a plus 3 million June 2021. This was primarily achieved via net income from discontinued R&R operations and lower loss from operations overall. So four areas that I just wanted to mention that we're extremely proud of. When I started as CEO about one year ago in July 2020, I was optimistic about the prospects for Eastside. While the path to success and the obstacles ahead were not clear, I could see the possibility and the opportunity to stabilize operations and begin to build value. Now, one year later, despite the impact of the COVID pandemic and the plethora of obstacles that we've had, I'm even more excited about the potential of the company, primarily because the path forward is clearly delineated, and we now have a specific and realistic three-year strategic growth plan. In addition to the one-year turnaround, mostly behind us, and a clear three-year plan, we have the right people in the right place, and most importantly, we have you. We have our stakeholders that are very supportive of the team and our plan forward. And more than the financial support itself, I can't emphasize enough how much management appreciates the moral support and the expressed confidence in the team and in our future. Your desire to see us win is very motivating, and I can assure you this type of support will propel the team to deliver extraordinary results as we execute our three-year plan. With one year complete, I'd like to share how I see the business and how you might think about the business. Obviously, the market is not static. And with COVID ups and downs, as Jeffrey mentioned, the dynamics and challenges are more significant than ever. So we must set a clear course, learn very fast as we compete in a hyper dynamic market, be flexible to change rapidly, and most of all, focus on execution, and deliver the plan. For our spirits division, while we have work to do, I believe we're now on the right course. Since our Q1 call, our VP of spirit sales, Ray Wetzel, has taken the helm. He immediately recruited two sales industry managers, one in California and one in Arizona. He built a new pricing model by brand by state that will guide our sales team and our distributors forward. He stopped all below-cost discounting that was destroying profit. He focused his team on six states, four brands, and 20 SKUs. With only two months in the new role, Ray and his team achieved disproportionate results in their second month at the helm in the month of June. So June, specifically, was reported sales up 19%. It's gross profit up 26% and operating expenses down 28% for the month compared to June 2020. As we speak today, Ray is making distributors changes in the state of Texas that will expand our brands from one to four and our excuse from six to 20. Janet Oak, who you all know, our chief branding officer, is now partnering with Ray to execute a three-prong approach to building our four brands, which we've discussed and include engaging consumers at the point of purchase with point of sale, targeting micro-community events to sample products and link consumer experiences, and three, build brand champions primarily through social media. Most recently, to round out the Spirits team, we just recruited Joe Ibrahim, to spearhead all of our spirits supply chain. Joe will work with Ray and Janet as we continue to produce the highest quality spirits products, as we explore, select new products, and as we streamline the supply chain to optimize efficiency. Joe will be building our distilling capability along with purchasing the finest products for blending and barrel aging. In addition to being a head winemaker for EJ Gallo, Joe has also been an extraordinary distiller. He's a superior executive with a depth of industry knowledge across the supply chain. Eastside is very fortunate to have Joe as a new team member. So despite a bit of a soft start for Spirits revenue in the first half of 2021, the team is now in place. The course is set. and the growth will accelerate in the back half of 2021. And the next step for SPIRITS is to ensure we maintain adequate cash to execute the plan. So switching over to Kraft, for the Kraft C&B division, the environment for manufacturing and supply chain has changed in a rapid manner, limiting our double-digit growth plan in the first half, as Jeffrey mentioned. For the specialty and craft canning industry, one of the biggest issues has been can supply and can cost. For the West Coast mobile canning industry in general, capacity demand has been consistent but capacity utilization has shifted from less larger runs to smaller runs. Craft revenue has increased due to the higher price charge for the smaller runs but has been offset by lower revenue generated by each of the small runs. As Jeff mentioned, first half craft profit was impacted by lower CAN margins and the increased downtime between smaller runs. The team has since taken action to raise CAN prices mid-2021 to improve margins and to increase service revenue with new customers in the back half to mitigate lower revenue from smaller runs. So clearly, the overall solution for craft, as described in our three-year plan, is to pivot. Pivot from a single mobile canning business serving small craft brewers in the microbeverage market to end-to-end canning solutions serving small medium and large customers in the microbeverage market. Now, as we mentioned in the three-year plan, the primary driver of this end-to-end strategy will be expanding craft capability into digital craft printing. Canned printing solves a number of issues for the customer. First, it's uniquely recycled, where plastic sleeves and other labels are not. Second, It eliminates the need for label application on the line, which will increase efficiency and reduce bottlenecks. Third, the graphic quality is comparable to large batch silkscreen cans. And finally, it can be customized to any size order. Craft management estimates that 80% of our current craft mobile customers prefer a digital printing option and may move to digital printing, which could amount to 8 million cans and significant incremental revenue per can. In addition to serving our own mobile customers, the opportunity to print cans for other beer, wine, RTD, and seltzer beverage customers is significant. The craft team believes one can printer at capacity and produce 24 million cans and generate over 5 million in revenue. The second driver of the craft strategy is the addition of a pasteurizer at a fixed can facility. Because the pasteurizer is so large, a mobile option is not feasible. The immediate revenue from pasteurized canned products could exceed 5 million in the near term. Eventually, we believe one fixed facility can generate $20 million in revenue overall. With three strategic pillars in place in our three-year plan for craft, printing, fixed, and mobile, craft can expand well beyond the current mobile beer customer base and potentially exceed $50 million in revenue as outlined in the three-year plan. Now, a big part of the three-year plan will be accessing additional shares, and we appreciate your vote to approve the incremental shares on the proxy statement. The three-year plan only requires the use of 5 to 7 million shares, with the remaining 13 to 15 million shares on the shelf and available for highly accretive acquisitions. We believe CRAF can generate strong cash flow with a portion of the cash flow allocated to spirits and the remaining allocation to debt and debt reduction. The two business units are highly complementary and together and combined we believe can accelerate value. We really look forward to discussing this in more detail with you and if you're interested to discuss the three-year strategic growth plan further, We encourage you to contact Amy Broussard and she will schedule time with Jeffrey and I. Again, we thank you very much for your interest, your support, 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're using a speakerphone, please pick up the 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. Your first question comes from Bjorn Young with 10X Capital. Please go ahead.

Hey, Paul. Hey, Joffrey. Congrats on a great quarter. We have been following the progress of Eastside and it's exciting to see how the story is unfolding. So I have a question for Paul. From our previous earnings call, we are adopting a research-based approach to market our brand of spirits. So could you give us an update on that front? For example, for Paula Potato Vodka, we are building a brand with the beach community to gain more consumer mindshare. And how do we measure our progress and the success of our marketing campaigns? Thank you.

Okay. Well, hey, thank you for all your support. Appreciate your attending. First of all, We are continuing to research our brands. The most recent research we've concluded has been on new products, and we researched a number of concepts that led us to flavored whiskey, and we're now moving the flavored whiskey for Eastside, a cranberry, a marionberry, and a cherry into the market to evaluate the in-market throughput and revenue, and that specific research was very positive about those flavored whiskeys in particular. We also are moving forward with an organic Zunia Margarita. That research tested very well. We're now perfecting a product, the packaging, and we have yet to move that into the market, but that will be the next step. And one of the last new products we researched has been Burnside. And that tested very well for an RTD. And we're moving that now from product concept and product development into market in the near future. The second research we conducted that's propelled us to potentially move in a different direction has been some of the packaging and positioning research on tequila. And we've looked into different packages. and we're now looking at different positioning. So that's propelled us forward. Once we get settled down, the way we're going to manage research forward and really understand how these brands are expanding is through a brand equity matrix. So when Janet and I happened to work together maybe, I don't know, 15, 20 years ago, And we put together a brand equity model for the spirits industry. And the brand equity model primarily looks at attribute ratings and derived attributes which are basically a combination of attributes. Now as we get more funding, we can then move to more primary and more syndicated research And we can then pick up on some of these attribute ratings for our brand and specifically measure the equity development. Unfortunately, money has been very tight. We've just been trying to buy material, you know, pay salaries. But with everyone's support, now we're turning the corner and, you know, we'll be able to do more.

Right. Thanks, Paul. So to turn to my next question, there is renewed lobbying by different interest groups to pass laws on direct-to-consumer, especially for alcoholic drinks. So if passed, how does this affect our business and relationships with key distribution channels?

Well, it impacts us directly because we can sell direct to consumers directly. It's a little bit tricky when you're in the three-tier distribution system, but it does impact us. I'll tell you the thing that impacts us even more here in the United States is if you're following the Attorney General and his white paper on three-tier distribution in the spirits industry, he's come out and said that it's apparent to him that a lot of the big distributors and some of those that we're even with today have been creating a monopoly and blocking small craft beverages and small craft distillers like ourselves from participating in the marketplace by taking on new products and expanding, allowing us to expand into new markets. So direct to the consumer, we're taking advantage of. We're also taking advantage of these specific clubs that we can sell directly to. But most importantly to me, the biggest trend and the biggest has been around the Attorney General's view of three-tier distribution and the monopolization that could be taking place with larger distributors. That will benefit us more than anything.

All right. Thanks a lot, Paul, for that insight. So I've just got one more question on the spirit side. I was just wondering, what is the typical markup that the industry practices? Is it somewhere between 15% to 20%? If it's okay for you to comment on that, please.

Oh, sure. No, the markup is higher because what we look at is when we look at our price matrix, we look at markup and margin. And the first thing is markup, and their markup is closer to 30, 35, and their margin is closer to 20 or 25. So they're marking up higher, and then obviously then they're taking their margin. So, yeah, markup is higher. This is called 35 plus, and their margin is in the realm of 22 to 25. All right, all right.

Thanks a lot, Paul. Thanks for the insight. I do have some questions, but I think I'll jump back to the queue first. Thank you.

Okay, thank you.

Again, if you have a question, please press star, then 1. Your next question comes from Ross Taylor with ARS Investment Partners. Please go ahead. Thank you.

Can you guys go a little deeper into how you're going to get the utilization back up in the craft side? Are you going to therefore drive back higher margins? You talked about price increase and things of that nature. I kind of thought of craft as effectively a very important driver going forward, and This hiccup, obviously, is something that would seem to need to be addressed fairly quickly. Also, you talked about the ability to do printing on the can. Can you talk about what kind of margin increase we should expect to see from that and what kind of growth we should see from that? And does that, in and of itself, will that meaningfully increase demand for your mobile canning business versus... just driving up the price for those that you're currently working with or the value added from an east side standpoint from those you're working with.

Well, I'll take a quick shot and then I'll let Jeff jump in. The margin drop off on craft, as Jeff said, was extraordinary. I mean, through the half year last year, the margin for craft was 46%. And through the half year this year, it's 37%. So while there's been margin declines, you know, the pandemic really drove it up, but we're still at pretty good margin levels. So the challenge is to, you know, maintain that 37%, push it up a few clicks, get it closer to 40 through the price increase and other mitigation measures. So our position on the margin is, yeah, it was disproportionately high before, Now it's probably where it should be. We were hoping it would hang on a little bit longer. It hasn't. So switching over to printing, the printing margins for customers that would buy a can and the printers would be in the realm of that margin expectation, somewhere at 38% to 40%. So there would be no margin deterioration. It would continue to support our margins. Um, and the one thing, the way we can, uh, we believe we can fortify the margin and the market going forward is to, is to bring end to end solutions. So if we can offer printing, we can offer, uh, canning and in some cases, pasteurization, that would be enormous. Let me give you just one small, quick example. Uh, first of all, printing is sustainable, which is huge. But secondly, a lot of these craft brewers are putting sleeves on their cans, and then they're heated to shrink them. And that heat is actually altering the taste of the product. So what they can do is now they can print cans, not sleeve them and not heat them. On the other hand, some customers actually want products to be pasteurized that can't be. So for us to bring more capability, more end-to-end solutions, and more of a complete package to the market, will really actually open up a bigger market to us, you know, and a bigger size of the prize. So really, we're shifting from mobile craft beer to end-to-end craft beverage. And that's a big shift, creates a new market, and actually allows us to bring in, we think, more customers. The other point I'd like to make, I could go on forever, but I'll keep it short, is with mobile canning, it's really hand-to-mouth, right? meaning, you know, we get a customer, but maybe they don't return, or we get a new customer, they don't return. When we bring end-to-end solutions and we bring the printing, we can actually start to ask customers to come on for a longer term and potentially sign a contract packing agreement. So a lot of what we're talking about has tremendous upside potential. longer-term engagement with the customer and maintains our margin. And we'd be, you know, certainly happy to elongate on that discussion. But for today, I'll keep it brief and let Jeff chime in if he'd like.

Yeah, Paul, I'll just say, Ross, one thing that I can rest assured, we're not happy with how we buy cans at Kraft. I mean, we're in a business where we're sourcing cans from middlemen and It's been a scramble to buy cans, frankly. And as you sometimes get a position where you're unable to get the cans, customers buy cans for themselves, and they're developing their own supply chain, and you lose the opportunity to catch the margin there. And that had a big impact on the gross margin, specifically at Kraft. With that change in the quarter, you would have seen something completely different. But to Paul's point about the strategic direction of the company, this end-to-end strategy completely changes that picture. we can walk you through how literally a can has produced a ball and makes its way onto a grocery store shelf and is consumed. When you think about where that can has to go, where it has to travel, the lead times, the graphic impact, as Paul was saying, later, you know, after it's used, the recyclability, and I walk you through the new path this can takes in kind of future 2.0 of craft canning, it's going to look completely different and it's going to make craft brewers, you know, have to adapt quickly to this, this new opportunity with digital printing. And I'm just pleased that we're going to be on the forefront of that. And we have a great partner there. We haven't talked a lot about that, but it's, it's transformational for craft and it's a, it's going to be a huge driver of the gross margin improvement that we've talked about. We said we're going to see gross margins up 50%. I don't, I don't, have any doubt that we're going to be beyond that number in some near future. It's about timing and the execution between the plans there. It's about executing that now. So I'm pretty confident that we're not going to have this kind of, you know, impact on our gross margins because, you know, can pass through, you know, gross margins are not going to be that important to the company in future quarters.

Okay. So, Jeff, that raises – several questions. First, how many cans do you need? And I'm going to ask them while I think of them because, you know, I'm seeing the consciousness. How many cans do you need to be using to where you can go direct to Ball or one of the other can producers? Second is, you talked, there's significantly greater margin. If I think on a sense per share, you make a penny or two a can now. Yes. What do you end up making when you get through these things and you end up being able to do both printings When I hear you talk about pasteurizing and going from basically beverage to from brewing, I take that to mean everything from, you know, perhaps wine products to ciders and things of that nature. So how big a market in your region does that expand you to? And then also long-term contracts, how unique is what is this technology and are people really willing to play for it? And lastly, Everyone thinks craft is really kind of like the cool, the environmental thing to do. It's kind of the way you hit back at demand. But what you're saying is that basically if I have currently a craft can with a shrink wrap, I can throw it in my recycling bin, but someone has to pick that out and it's not recycled. So then the question ends up being effectively how do you market the advantages, the environmental advantages of of this technology so that myself, when I walk down the aisle and see all these super colorful labels, say, I want one, and how do I know? How am I going to know that it's actually printed on the can and not simply adhered to the can?

Yeah. Well, let me hit one point. So let's go back to the can number for a second. Paul alluded to it. I mean, we're talking about an opportunity right now to convert up to 8 million cans of existing customers, I would actually call that and say that when we look at how many cans we buy today and we look at where we are on the CapEx plan and our glide path to what we think will be at the end of next year, we're going to be talking about changing that number by a factor of at least 4%. I mean, you move to 50 million cans, and you're not buying from a middleman. And if we're not buying from ball and crown directly, we're going to be the biggest importer of cans in the Pacific Northwest, and I don't think the ball and crown wants that. So we're here to tell you we're going to take this strategy to the Pacific Northwest, and we're going to dominate. and we're going to dominate, and we're going to provide outstanding opportunities for customers to do marketing that you have never witnessed before. And the timeframe on how they execute it is going to be, you know, I mean, it's going to be completely different from what they deal with today, which is long lead times for labels and shrink wrap products. So... We can get into some more details. Some of this still has to get put into place and we have to execute. We don't want to share too much of the strategy up front. But this is transformational. And just to not neglect the spirit side, what we're doing in spirit I think can be as transformational as this with some of the new products, the distribution focus that we're doing. Paul also alluded to this in his script, and I think you have to pay attention to this. we're changing distribution in Texas. It kind of speaks to what Paul spoke about with this effort for people to realize that craft is pushing its way, and up until now, it's had a lot of resistance from distribution to take more share in craft markets. That's going to change, and we're already seeing it start to change in some key states.

Mm-hmm. Let me take it. Go ahead.

No, I want to take a shot at the recycling because you hit on a really big, big topic here. And the irony is that just what you said, that everybody's drinking all the craft beers. They're all millennials, young people, or relatively, like you said, countercultural. And they're all for sustainability, but they're drinking out of cans that can't be recycled. So it's going to be like an Intel inside. You know, we'll do B2B marketing to the customers, to these small brewers. But trust me, they're going to do the marketing. And we're going to put a small logo on there like NutraSweet did. I was in the sweetener business. That says, you know, craft recycling. That we are giving, you know, that this is our can. This is recyclable. And we have a small logo on there. And, you know, our customers are going to want to, market it themselves because it's a huge benefit to their end users. And the irony is they're not doing it now. So that alone would cause almost complete changeover in the market. So I think you hit a hot button there. We're on top of it. We'll be doing the B2B, and the customers will be doing the B2C, I promise you.

Okay, and then two quick things. One, you're talking about being able to increase your CANs utilization by 4x over the next year?

I'm saying that the number with what we have in the plan and what we think we can do, it's not unreasonable to see our canned throughput increase by fourfold.

Okay. Which is obviously powerful and meaningful even without some of these other advantages. I want to go real quick to the east side of I have to say, I don't know, you know, they're not available back here. I got my hands on a bottle of your rye whiskey, and I had a friend with me who basically, I think, took a straw and finished the bottle in about a few hours. It was an amazingly good liquor. And I'm not a rye whiskey drinker, and I thought it was really powerful. How do you get that product out there so that people start to recognize how honestly really good that, you know, that is?

Well, can I jump in there real quick, Paul, and say one thing, and then Paul can explain how we're going to sell it. One of the things about this company that people have started to understand is we bought a lot of brown spirits a long time ago with the view that we were going to be selling Burnside nationwide right behind Redneck Riviera. Ross, you know this fallacy of what the old strategy was. It was going to be to roll out Redneck Riviera, create this pipe, and down that pipe we're going to be selling Burnside and Mass. And they built the back end of this for that. Not the production, but the raw material. They bought a tremendous amount of brown spirits and not cheap stuff, good stuff. They went out and they bought brown spirits from groups that were going out of business, They bought inventory when it was available. The company sits on really important and valuable ground spirits, and we can't use it at a reasonable rate. So what ends up happening is it just gets older. It's aging faster than we can sell it. When people wake up to how good this product is, I think their pace of sales increase. You're seeing that with Burnside. This quarter was phenomenal. I think it was a really impressive showing. And there was nothing behind it. We just put in place Ray Wetzel, the head of sales. He hasn't even kind of wound up yet to throw the first pitch. So there's a lot of horsepower behind Burnside to come, and I'm excited about that. I'm excited to watch Paul drive the team and have that distribution become more clear. But it's important for people to realize that this is, Really outstanding spirits to start with. And it's a product that wins awards. So I think that's an important point to start with.

Yeah. And even better than winning awards, I'll be honest, it's just, you know, one of the hardest things to do is to spend $60 or $80 for something that you're not sure you're going to like. And so when I drank it, I first drank with some trepidation that I wasn't quite sure what I would do with it if I didn't like it. But it was pretty damn amazing stuff.

Yeah, no, we've launched new products. We launched Burnside Black, which is a rye and a bourbon cask. We've launched an Eastside American Single Malt that's aged in a sherry cask. Both of those got immediate gold medals. But the way we're going to do it is similar. If you want to look at a story that is advanced, look at Maker's Mark, because I used to work on that at Allied to Meck with Bill Samuels. and Pickens, their master brewer. But it's word of mouth. That's how we're going to grow these brands. And the way we're going to get word of mouth is through micro-marketing. And you don't see it on the East Coast because we can't do that across the country. We've got to start concentrically. So we're starting in the West, and as we said, we're going to be starting in the neighborhoods. We're going to be starting at the point of purchase. The point of purchase is going to be our medium of communications. You know, so when consumers walk in the store, that's where our advertising is going to happen because that's where their decision happens. And then we're going to do micro events so that, you know, we link consumer experiences with the brand experiences. And then, you know, obviously we're going to engage consumers directly. So it's word of mouth and micro marketing. But we'll build these brands and we'll do it. you know, the old-fashioned way, like one consumer at a time. But that's why we're focusing on these key states, and you might not see it, although we will be in the East Coast, but it's not our target.

Okay. Well, I understand that I need to acquire patients, but I've been an Eastside shareholder for a while, so patients is something I seem to have acquired.

Well, we'll ship it directly to you. Just ask us, and we'll send it to you.

Expect a call in the near future, thank you. No problem. We're happy to share it. Thank you, gentlemen.

Your next question comes from Harold Webber with Aegis Capital. Please go ahead.

Hi, guys. How are you doing? Great. Good. I hope you guys are healthy. The I saw what was just being asked. I wanted to get an idea of when you're going to do some kind of pilot test marketing out on the East Coast with some of these premium products. I see the market is very open to stuff like this. I see new things coming out constantly, and I'm wondering when we're going to be able to do our brand building. Maybe we could do some of that. micro-marketing in some regions over here. So I was wondering if you could get some thought about that. And in regards to the decanting, I'm trying to understand this properly. The digital printing stuff, this is a machine that's mounted on the truck or this is a separate facility? How does that work?

I'll start, Paul, and then you can jump in on the distribution. Yes, the printing that we're talking about is a digital direct-to-can printing technology. It's very new. However, it has been well-trialed, and there's not too many people in North America with this technology, and we think there's a limit to the ability to bring this technology to the market. So we're involved with a partnership to bring that to the Pacific Northwest. To your question, and it's too big to go in a truck, so think of it like a canned bank. We own cans. We source and print for customers, and then we fold it into our existing footprint and activities. We don't think there's any other mobile operator that's going to have the technology that we have.

Okay, so you print the cans and put them on the truck. Is that the idea, basically?

That's right. The cans are getting moved all over the place in logistics to get them to a point where we can fill them if we're not doing the shrink wrap and the labeling. We don't do those now. We have a label, but we don't do the shrink wrapping. To your point about moving to the East Coast, I think an important part of the strategic plan that I would encourage people to look at and think through is the focus on the craft markets. I mean, it's really important when you think about the business. In craft, brew, you know, beer, the craft markets have really exploded, and you can go just about anywhere in the United States and see it taking hold in restaurants and grocery stores. In the case of... I'm afraid...

I'm talking the spirits, the malt whiskeys, the zunions, the potatoes.

That's right. I'm getting there. I'm sorry I'm a little long. What I'm going to say is in spirits, we haven't seen that yet in the sense that it's not as open as Paul referred to earlier. There's been obstacles in distribution. However, it is happening in core craft markets. We in the three-year plan have identified the core markets and what One of the important things to understand is we're sitting right on top of a treasure trove of this core craft market in the Pacific Northwest, in Seattle, Portland, Oregon, Colorado, parts of California, Texas. These are key craft markets where it is happening in spirits. It's starting to really take off. Same thing. It's happening in other eastern markets. You highlighted it's happening in Vermont and Maine, other core markets like that. But one of the things that is different about the... Connecticut. That's really what I'm talking about.

Huge amount of people paying premium prices for this kind of boost. Yeah, right. You know what?

Let me jump in. Look, Harold, we're really just trying to utilize our resources, which are very thin right now. Obviously, when we get the shares and Jeff does more good work with some of the credit facility, we'll have more liquidity and more availability. Okay. But I take your point. We'll try and get to Connecticut or New York. Ray right now is just trying to deal with some of these bigger distributors. He's putting brokers in the East Coast.

Okay. You have it in mind that it's meaningful to pursue that at some point. Yes?

We're going to put it right next to your house. We're going to put a billboard up, and we're going to cover all the retail accounts right around it. So that's my – I got that on my to-do list.

Okay. Okay. So this printing scenario with the cancer. How long is this going to take until it actually becomes an operational reality?

Well, right now, probably the first of the new year. Okay. It'll be an operation, which is amazing. We're starting a planning task force. We actually just kicked it off. We had a board meeting yesterday. The board approved the three-year plan. The board approved the CapEx plan pending some of your support with the shares. And now we've put a planning task force together and we're going to, the first thing we're going to do is explore purchasing cans as Jeff talked and to try and, you know, get some quantity profit going on that part of the business. We're going to look at facilities and we're going to now, you know, make sure we get the equipment on time and that it's, we're ready to receive it. I mean, that's a multi, ton operation. It takes a lot of power and it takes a lot of planning. So we're starting as of today and it'll be operational if all things work the first of the year.

Your next question is a follow-up from Bjorn Jung with 10X Capital. Please go ahead.

Hey, Paul. Hey, John. There was some very interesting conversation earlier. I enjoyed it very much. So I just have some follow-up questions on the craft as well. You know, when we look at the prices of the aluminum cans, it has been rising because of commodity prices and the surge in the ready-to-drink segment. And have we been able to pass down this cost down to the customers this quarter? And, you know, are we able to secure the supply of cans we need as well?

Yeah.

I'll hit that one.

So we do, we can get the cans that we need. We haven't, you know, been short. Sometimes it comes at a higher price, obviously. And then we are unable to pass it through with adequate margins. So as we said in the script, we've passed on some price increases. Those will take hold. We'll be able to manage our margin better. But the other thing to think about, I think, on this, and it's really Probably hard to see, but if you're probably following other companies, you've seen this. The logistics that are going on right now, the supply chain trouble that's going on right now has a big impact on stuff like this. So it's not just the price of the can and the raw material that's moving, but then if you have something and you immediately need to move two truckloads of cans from here to there, and you get quotes on shipping, and it's astronomical, and it puts the price of the can up two cents or something, and you have to eat that, build that into your margin. So it's the effective full picture of the supply chain, having enough cans on hand, having them at the right price, not having to do last-minute freight and have that impact your margins. And that's what we're fixing.

I'd like to do something I'd like to say without getting too deep in the microeconomics, but there's two fundamental issues happening, right? One is we're just a teeny tiny player buying these little, you know, buying small batches of cans, which is killing us. And two, the market dynamics have been really kind of crazy. And so we know that, number one, if we get bigger, We have more buying power. You know, we have more clout. And as Jeff said, we could either go direct or we can deal with some of the big players. The second thing is the market dynamics. When about a year, year and a half ago, prices of aluminum were pretty, you know, the cans were pretty stable. But all production stopped. I mean, because of COVID, whether it be lumber. If you look at lumber, that's pretty synonymous with what happened, too. It just production just stopped. So then the price, the availability was limited. And so prices started to go up. Now that was good for us in the fact that cans were limited and we had them. So everybody came to us, but now what's happened is production started up again. Cans are available, but prices are still skyrocketing. So we're going to solve the problem by becoming a bigger player. and by carefully arbitraging the price of cans and aluminum with the price to the customers. So those, I would say, would probably be the two biggest initiatives we're going to take going forward.

All right, thanks for the call, Paul and Geoff. So my second question is also with regards to craft canning and modeling. So could you share the profitability of the different revenue mix? I know we have the can printing, the fixed can production, as well as the mobile canning.

You know, I can tell you that we make the most money right now in services, as you can imagine. and consumables was the area that we're working on currently. When we add the new component that Paul's speaking to, it's going to have another big positive impact on margins. But I think the bigger opportunity is the synergies between all of them together. And I can't stress this enough. I mean, the ability for a brewer to be able to source a printed can, have it filled, and the logistics around how you know, a shortest kind of stop or less traveled miles that this can's going to have to go through to get to the consumer is going to have a big impact on their ability to change how they, you know, approach their business, how they target which products to produce, how often to produce beer, you know, what they're marketing, how they're going to tie in with local opportunities there. I mean, it's a big opportunity, and it's not just beer. It's going to open the doors up to being able to serve a large number of other customers beyond who we currently call our customers. So the margins are going to be, I think, improving across the board from here. That gives me the confidence that I spoke to earlier about still achieving those significant improvements in gross margins.

Yeah, just to add to that, the other thing we haven't talked about, we could kind of really elaborate here quite specifically, but We're going to change our game plan. Right now we serve as kind of the medium market, you know, in the mobile market. But there's opportunity to even go down to much smaller customers that are just starting out with smaller trucks than box trucks, which we're going to do. So we're going to add two or three smaller trucks, smaller lines, so we can bring in smaller customers. We're also going to look at having – So small, medium, and then potentially larger runs that could be either serviced through larger mobile opportunity or the fixed facility. So we're actually going to expand, you know, really think about when we think of end-to-end, it's not just printing, filling, and packing. It's also small, medium, and large. And we'll have the ability to go out and do things for customers, you know, whether they're doing the small, medium, or large run. and let's say a brewer wants to do an Oktoberfest, instead of taking a week to run it on our mobile line, we could bring it in our fixed facility and run it in one day, print their cans. So there's just, it's going to bring a lot more customers into the fold, and by having so much capability that we can uniquely offer, we should be able to command a disproportionate margin over other competitors in the marketplace.

All right, thanks, Paul. Thanks, Joffrey. So just one last question from me. So in our three operating plan, the strategic plan, I believe, which is conservative, I was wondering if we – did we project any ready-to-drink revenue inside this plan?

Great question. The reason we didn't put any RTD in the plan is because when we went to the board – We really didn't have, like when you asked, are we doing market research? How are we moving forward methodically? And, you know, what are we doing? You know, we really didn't have any products in the market or any proof of concept ready to go. And, you know, to be honest, you know, the board was digesting a lot, you know, with the whole craft plan and the overall CapEx request. So we said, you know what, we'll leave RTDs out of the three-year plan, but we're going to continue pushing ahead. And as we launch them in market and we have proof of concept and we have, you know, real quantitative in-market results, we'll bring them forward and we'll include them in the plan. So they're very much part of our ethos, as you could imagine. I mean, what's better than us producing RTDs and manufacturing them, right? but we only wanted to put things in the plan that had a little bit more teeth to them. So great question. We didn't forget about them. As we do our strategic plan next year, or in fact, as we do our budget, you know, we'll obviously be putting those type of products back in and allocating funds to them specifically.

All right. Thanks a lot, Paul, Geoffrey, and as well as Amy. So we are really looking forward to see this three-year strategic plan materialize progressively. And I just want to say thank you all for the hard work and, you know, have a great day ahead.

Yeah, thank you. And, you know, we're happy to jump on the line and go through the three-year plan in more detail. I know you wanted to do that.

Your next question comes from Matthew Campbell with Lord A Capital. Please go ahead.

Hey, guys. I'm going to ask just one question. I was interested to see that Burnside grew really well year over year. And I think it was you, Jeff, that said, and our guy hasn't even thrown out the first pitch yet, which led me to this question. How much money have you guys actually put behind the marketing of Burnside? Last year, and this year?

Well, that would be almost nothing because other than digital media, you know, it would be next to zero. And I could tell you specifically where the volume came from Burnside. Both Ray Wetzel and Janet Oak worked very diligently to get Burnside in the Tasters Club. and they took 350 cases of Burnside. And then Ray really, as soon as he came in, really worked with the California distributor who didn't really, you know, it's been difficult because there are these big, huge mega distributors, and he got him to take another 350 cases of Burnside. But getting the distributors to take it and really get them to sell through in micro market are two different things. But that's where a big part of the Burnside Upside came from. But the team is so excited about Burnside because of the Burnside Black, which is a phenomenal product. We launched Barrel Strength Buckman, which is phenomenal. And just Goose Hollow and the regular Buckman are great. So we're going to be switching. Now, as we get money in 2022, we'll be really getting product on the floor. That's the goal, on the floor with header cards, with marketing at the point of purchase. Burnside also is increasing because, crazy enough, we sponsor this little baseball team. I don't even think they're AAA. They're a club team called the Portland Pickles. And I don't know how many cases of Burnside – we sell a night when the Portland Pickles play. You do a shot of Burnside and a Pickle Chaser. And these are the kind of events, I know, hey, these are the kind of events, I skipped the Pickle Chaser. But these are the kind of events that we're going to do that are these little micro community events that allow for sampling and sell, you know, 10 cases an event. It's amazing. So, We're going to be dialing it up. We've done basically nothing is the answer. And now we're going to be doing a lot. It's going to be very focused. And it's going to communicate a message that supports the product and the values of the brand.

Thanks, Paul. That's helpful. Good luck. I'm looking forward to seeing what you guys can do with a little cash in the till. And it's nice to see that where 90% of the turnaround is behind us, you know, and we're going into growth mode. That, to me, is the message here. You know, whether we get to New York and Maine and Connecticut, you know, this year or next year or in two years, I really don't care. Just grow the business and do it profitably. You know, that'll make us all happy. So thanks a lot, and, you know, keep up the good work.

Yeah, thank you.

Thanks, Matt.

Appreciate it, Matt.

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

Well, thank you, everyone. We really appreciate it. Again, if you'd like a little more color on the three-year plan, we're happy to tell the story because we're really excited about it. I think in the back half, yeah, you'll see some interesting stuff on spirits. Next year, as Matt said, we can really get some marketing going with a few extra in our pocket and some gas in the tank. We appreciate your participation today. Call Amy if you'd like to get Jeff and I on the horn, and cheers, good luck, and thank you.

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