Eastside Distilling, Inc.

Good afternoon, and welcome to the Eastside Distilling Third 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 Secretary. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the third quarter 2021. I'm Amy Broussard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued third 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 Distillery may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements describe future expectations, plans, results, or strategies that are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipate, 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 with 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 Paul Block. Paul, please proceed.

Thank you, Amy. And I'd like to thank all of our participants. for joining the Q3 earnings call today. Certainly appreciate your continued interest in Eastside Distilling and your support as we strive to fix, build, and grow the company. Now, despite all the obstacles of the marketplace and this turnaround, we continue to make significant progress, especially on the balance sheet. I must say, for the first time in over a year, it's nice to have adequate cash and liquidity to run the operations of the company for today tomorrow, and throughout the year. We can now fund changes in working capital to grow our can inventory for craft. We can fund investment capital needed to build new revenue streams like digital can printing. And we can increase much needed discretionary spend for spirits to fuel sales and marketing. As you know, the company is broadly underinvested in its spirits brands for years and has significantly curtailed many growth initiatives due to balance sheet and cash burn issues. In addition to liquidity, we've made significant progress in the debt stack and structure. The company continues to extinguish maturing notes and loans, substituting them with much improved loan terms and strategic partners. As good stewards of your capital, we continue to work diligently to accelerate value. Jeff Gwynn, our CFO, We'll give more detail on the balance sheet in his overview. So what I'd like to do now is move on to the operational progress and performance for Q3. We remain on track to deliver the three-year strategic growth outlined in our plan. Unfortunately, the Q3 2021 consolidated revenue was a bit softer than we forecasted, down 23%, primarily due to our craft canning and bottling projects. vision. We did believe in the short term we could ride on the coattails of COVID a bit longer as we serviced craft beer filling and craft beer raw material purchases. Q3 2020 was the peak of the COVID lift for craft as the pandemic was just emerging and summer was driving seasonal production demand. Therefore, we're experiencing a bigger year-on-year decrease for craft in Q3 2021, down 32%. Despite the near-term softness in the mobile revenue stream, we have accelerated our fixed facility initiative, and the first facility with pasteurization capability will be up and running in two weeks from today, and a second similar fixed facility will be operational by Q2 2022. In addition to the fixed facilities, we're in the final stages of closing a can purchase agreement with G3. G3 is a supply chain subsidiary of Gallo with significant scale. If you recall, aluminum can shortages also caused many issues for us at Kraft throughout this year. We now have guaranteed adequate supply of cans at an agreed upon price throughout 2022. This is an absolutely critical component as we receive our digital cram printer in Q1 and bring it operational in Q2. We also have a new 50,000 square foot facility that we will secure for craft as of December 1st, 2021, with rent abated until April 1st, 2022. This facility will house the first printer, the small fixed line or another small fixed line and the Portland craft operation. The facility has the ability to accommodate a second printer that we plan to purchase and receive later in 2022. Now, for those of you who recall the mix of growth in the craft three-year plan, the mobile business unit growth was relatively flat with fixed facilities and digital printing leading the charge. As mentioned, to offset the short-term softness in the mobile business unit, we're accelerating the startup of the fixed facility business unit. As planned, we will be using the printer and can supply to attract customers to mobile and to drive the overall craft revenue forward. In an effort to accommodate the shift in market demand, we'll further boost mobile revenue for craft by adding two small mobile lines that will serve new small customers and current customers wanting smaller runs. One of the larger lines, mobile lines, will be used for the new Spokane market, and the second line will be moved to the fixed facility in Milwaukee. We continue to be agile and respond to market conditions. with the need for speed of execution to build a reoccurring stream of revenue that meets our strategic operational objectives. To fuel the new printer, the new lines, and the new market for mobile, we plan to add 22 additional full-time employees for craft by Q1 of 2022. Now turning to the spirits division, the opportunity for growth has not changed. just the headwinds and speed of execution. For those that remember, that reviewed the Q3 results, the Spirit's 9-liter EQ case volume is down 7%. However, when normalized for discontinued products and the 2020 one-time sell-in with no sell-out of Portland Potato Vodka in California, volume is actually up 8%. for the third quarter of 2021 year-on-year. Now, of course, our goal is to achieve a much higher rate of growth than 8%, and the Q3 spirits volume would have been even more robust if not for the issues on the Azunia supply chain and the slower conversion of our wholesale distributors in priority states. For Azunia, we unfortunately experienced lingering periods of out-of-stock due to limited company liquidity throughout the year. In addition to our out of stocks, our Mexican bottle supplier informed us in the summer of 2021 that our bottle was no longer available due to the high demand of big players and COVID-19 issues. We're currently finalizing a five-year agreement with OI Packaging Solutions, a leading supplier of glass bottles, to supply the full portfolio of Eastside. And we now have a short and long-term bottle solution for Azunia. We continue to work with our distiller in Mexico to optimize production, increase supply, and reduce costs. And we'll have more information on our discussion and success going forward relative to our Mexican supply. In terms of our wholesale distributors, Our goal has been to convert our large mega distributors, where we are small fish, to craft-focused distributors, where we are big fish. We've made the change in Texas from R&DC to Greenlight, as I mentioned before, and we just recently made the change in Colorado from R&DC to Classic, which will be effective January 1st. Our focus now has shifted to Azunia. I'm sorry, to Arizona. which is targeted to change in February 2022, and then to California, which is targeted to change in April of 2022. Although I've reported the new Texas distributor change in the last conference call, the additional products from Eastside Portfolio are just now hitting the streets with Burnside Bourbon and Portland Potato Vodka. We've continued to focus on point of purchase, micro event sponsorship, and targeted digital marketing. To this end, we just announced our sponsorship of the Portland Trailblazers, which will give us tremendous brand visibility and product sampling, product sales opportunity in our larger market. In addition, we anticipate these product sales at the Moda Center for both basketball games and music concerts. Our spirits brand strategy continues to connect with consumers directly on an experiential level with local events that correlate with the target consumer's lifestyle. Equally important is the opportunity for consumers to simultaneously sample products and enjoy the distinct features of handcrafted Eastside spirits. And most important of all is the opportunity we have to reconnect with these consumers at the point of purchase with point of sale. We are pursuing and securing other event sponsorships tied to the sales promotion and retail merchandising like Heal the Bay, Beach Cleanup in California, Hood to Coast, Run in Oregon, and Cinco de Mayo across all priority markets. We will continue to announce our biggest sponsorships and events as they come to fruition. While our plan is to stay focused on Azunia, Burnside and Portland Potato Spirits brands. We're now finalizing Burnside ready-to-drink cocktails like bourbon and cola and honey and lemonade, both with a very distinct product attribute of 12% alcohol by volume. We will also be launching the Eastside Cherry and the Eastside Cranberry Whiskey in Q1 2022. and we continue to develop our Azunia Organica Margarita ready to drink cocktail. With all of these accomplishments in place for spirits, we're turning our focus and increasing our focus to a more methodical approach of concentrating on three primary brands in our top six priority states. We are targeting markets, setting objectives for physical and effective distribution, measuring lift from our promotions, and accelerating velocity per point of distribution. Again, the most critical element of success for eSight overall is adequate liquidity. With liquidity now in place and our strategy established, it's now time to thrive and kick in executions. With a balance sheet that now fully supports the operating plan, we can move forward in a more deliberate manner to purchase product, build programs, and execute plans. Now, before we open the line for questions, let's first hear from Jeff Gwynn, our CFO, who will review the quarter and specific performance year to date.