Eastside Distilling, Inc.

Good day and welcome to the Eastside Distilling Fourth Quarter and Year End 2021 Financial Results Conference Call. All participants will be in a 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 a touchtone phone. 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, Eastside's Corporate Affairs Director and 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 fourth quarter and year-end 2021. I'm Amy Broussard, Eastside's Corporate Affairs Director and Corporate Secretary, and I'll be your moderator for today's call. Joining us on today's call to discuss these results are Mr. Jeffrey Gwynn, the company's interim chief executive officer and chief financial officer, Ms. Tiffany Milton, the company's controller, and Ms. Amy Lancer, the company's chief commercial officer. Following their remarks, we will open the call to your questions. I also wanted all shareholders to be on the lookout for announcements regarding our Q1 results release mid-May, our 2022 annual meeting date, and we are also planning to host an investor day in Portland sometime mid to late summer. More details to come. Now, 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 plan, 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 31st, 2021, 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. As Amy said, I'm Jeffrey Gwynn, the interim CEO and CFO, and I would like to add my welcome to our fourth quarter and fiscal year 2021 conference call. I will begin my remarks with some major accomplishments in the year and talk about our performance in the fourth quarter, areas we're clearly need to improve upon, and finally, what you can expect from us in 2022. Tiffany Milton will take us through the details of the quarter, the year, and of course, we will answer your questions. I've asked Amy Lancer, our Chief Commercial Officer, to join us on the call, and she can add her perspective during the quarter, about the quarter, in the question and answer section of our call today. So 2021 was an important year for Eastside Distilling as we successfully navigated a dynamic environment and delivered on some key objectives, such as margin improvement in spirits. We restructured the balance sheet, and we began our investment program outlined in our three-year strategic plan. However, we were disappointed in our other performance metrics. We failed to grow volume and spirits, and we struggled through the year with a challenging environment at Kraft. However, I do believe we are still on track to deliver our long-term financial growth goals, and I'm confident you will see progress there this year. We entered 2022 with a completely revamped Kraft business, strategically focused on a significant opportunity to leverage state-of-the-art digital can printing technology to bring new products and services to our network in the Pacific Northwest. This has gone from an idea on paper to having built out a digital printing facility, one of its kind in Portland, in just a handful of months. This is a testament to the vision, the dedication, and the resilience of the entire craft team, and I celebrate them. In spirits, we are executing performance improvement plans that will drive sustainable growth. The focus of this is on near-term improvements specifically in our business in Oregon. And the plans require innovation, investment, and execution. And we have proven that we can do these things. We invested in key partnerships such as the Portland Trailblazers and the Moda Center to bring our waterway experience to thousands and thousands of new customers. And last year, We partnered with Lays to launch a potato vodka and saw that product sell out in a few hours. And I think this is a great example of the innovation our team is capable of delivering. We have also increased our commitment to our community by working with organizations such as American Forest to plant trees, heal the bay, go to coast, and recently developed a campaign to donate proceeds from Portland potato vodka sales in Oregon to Ukraine refugees via the IRC. These partnerships are important for a number of reasons, and they play a key role in our plan to revive growth in our home market. A significant portion of our spirit strategy has been to drive growth in key markets, including California, Arizona, and Texas. Last year, we have struggled in this effort as we met with the distributor resistance to support and invest in our brands above competing brands, and this largely impacted our the Eastside Legacy brand launch that we talked about last year. Now, we've redoubled our efforts, and we believe we are on the path to improving our engagement from our key distributor partners in 2022. But there's a lot of work to be done there. As Craft Spirits recovers, both on and off-premise to pre-pandemic demand levels, we believe we will be positioned to renew growth across our portfolio. But throughout the year, we have invested time and effort in improving our supply chain and our ability to manage our gross margins. Now, this has required skewed rationalization, price increases, which in some cases meant lost volume, and it's also required investment in supply chain initiatives. All these things take time. Although these initiatives had a negative impact on sales volume, and we saw that again in the fourth quarter, they are critical initiatives for the long-term profitable growth of the company. We have more work to do in our spirits business, and I believe you should expect to see progress through the year. We are starting with outstanding products in a compelling market category. The pace of improvement there will pick up as we execute on our go-to-market strategy and build awareness in our key markets. Crafts faces a transformative year ahead. Now, we've been talking about this business for the last few calls, but I'm excited to say that we are getting close to taking a key next step in our growth plans at Kraft. In the first quarter of 2022, we have moved out of our old facility and into the newly built 50,000 square foot digital can printing facility. This facility is the first of its kind in the Pacific Northwest and will serve our vast Kraft beverage customer base. Kraft's expanded assortment of services will make us unique in our market, truly offering a one-stop shop to all needs of the growing Kraft beverage customer. We still have incremental investments to make to get us to our key milestones in our three-year plan. However, the first step was securing the Hintercroft partnership. And since then, we've made other sequential steps, including financing, can supply, facility buildup, and installation that gets to this point. It's critical we execute well from here in order to deliver this component of our strategic plan. Digital can printing will also improve our existing craft business, which we didn't have last year. I believe this new technology in digital can printing will highlight the power of hyperlocal marketing, specifically in craft beverage. Now, this term hyperlocal marketing is not well understood when it comes to consumer products specifically in craft beverage. But in truth, we are still dreaming of what is possible. Now, this technology is expanding what is possible and allowing us to merchandise craft beverage like it's never been done before. I would argue we are in a key craft market that is in the forefront of this creative trend, and we are delivering our customers tools they have never had before. So in summary, I'm excited about some of the opportunities we have before us. I'm also excited that we plan to deliver improvements that are measurable in both businesses this year. I want to assure you a near-term goal is to drive growth to a point where we no longer need external capital to sustain the business. I believe we can accomplish that this year. That doesn't mean we may not seek the ability to grow faster with incremental capital. However, we will continue to be measured and disciplined with capital allocations. You should expect us to be vocal about our progress in the year, and we will work to engage as many external stakeholders as possible to highlight our strategy and the progress we are making. Now, I would like to turn it over to Tiffany Milton, our controller, who can take us through the financial performance of the company.

Thank you, Jeff, and thank you all for joining our call today. I'm Tiffany Milton, the controller for Eastside. I've been with the company since January 2020. As I was preparing the year-end audit of our financial statements and for this call, I started reflecting on where we started to go. When I joined, we were finalizing the sale of Redneck Riviera. It seems like since that time, things haven't slowed down a bit. We have made great progress. We've taken a clean sheet approach to rebuilding many of the company's processes, developed internal reporting, which is key to decision-making, and we continually add great people to the company. I've had the pleasure of getting to know and working with a great team for both spirits and craft, And let me tell you, we're all committed to driving this company towards success, all using our unique talents and skill sets to make that happen. While we've had a lot of internal successes, those haven't necessarily translated to the bottom line yet. And I do emphasize yet. But I truly feel that in 2022, we will finally drive our internal successes to the bottom line. One of our significant accomplishments for the 2021 10K is finally reporting segments. We feel that it's important for our investors and financial statement users to be able to see and understand what is driving our consolidated results by segment. Now, let's review our 2021 results. Overall, we raised almost $12 million during the year and cleaned up the balance sheet by reducing our overall debt by almost $13 million, from over $27 million at year end 2020 to less than $15 million at year end 2021. Our working capital increased by a whopping $22 million primarily reflective of the reduction of our current debt of $18 million. We've become current on our payables and reduced them over $1 million during 21, and we continue to work with vendors to receive favorable terms. Our prepaids at year-end 21 reflect payments for our printer that we've since received and is in the process of being installed. Turning to the statements of operations, on a consolidated basis, our gross sales were almost $13 million for 21, compared to 15 million for 2020. Spirit sales were flat at about 6 million for both years and craft sales were 7 million for 21 and almost 9 million for 2020. The consolidated decrease of $2 million was primarily driven by craft as a result of the pandemic in 2020 and increased competition in 21. Our consolidated gross profit was 3 million for 21 compared to 3.6 million for 2020. Again, driven by craft and partially offset by spirits with a significant reduction in COGS and customer programs. For the year ended 2021, we reclassed certain expenses from SG&A to COGS, which are also reflected in 2020 for comparability. Our consolidated gross margins were 24% for 21 and 26% for 2020. Spirits margins were 28% for 21 and 18% for 2020. And craft had margins of 20% for 21 and 31% for 2020. While our gross profit doesn't reflect our internal successes, our operating expenses certainly do. We've significantly reduced them by almost $3 million in both sales and marketing and G&A. We've reduced the Spirit sales team to focus on our key states. We are thoughtful and conscientious as to where we spend our marketing dollars in order to make them count. We've also decreased our overall corporate compensation by reducing headcount and cycling through the depreciation related to leasehold improvements of our Spirit production warehouse. Both of these have translated to our adjusted EBITDA of negative $4 million for 2021 and negative $5 million for 2020. We still have a lot of room for improvement. We have been very actively working on our balance sheet, which has resulted in higher professional fees, and we expect those to be lower in 2022. Our net loss decreased to $2 million for 2021 from an outstanding $10 million in 2020. It is an $8 million decrease, again, reflecting our internal successes to the bottom line. I would like to wrap up the financial results with this reflection. In Jeff's commentary for Q4 2020, he mentioned transforming the company internally by building a professional platform, integrating systems and processes to transform all areas of the company. I strongly feel that we have achieved this goal. Honestly, it has taken us a little longer to achieve than we initially thought. As we started down this path, we realized it was a little rockier than we anticipated. But our success this year is that we prevailed. We have a tremendous team in place with relevant, related industry and professional experience that will drive results in 2022, a team that is continuously focused on the bottom line for the total company. We will now open the floor for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Our first question will come from Bajoran Ng with 10X Capital.

Please go ahead.

Hey Geoffrey, so first off I want to commend you and your team. Previously you shared that the printer was going to be operational end of March and you guys kept to the schedule despite the supply chain issues we are facing. So my first question is regarding the credit facility provided by Pat Kilkenny and I mean it's a disappointment because it carries such a high interest rate and it's attached with a warrant issuing shares to him at $1.20. it almost feels like we are giving him a piece of the company on a silver platter. And knowing you, I'm sure there are some strategic reasons behind this credit facility. So could you just walk us through your thought process throughout this capital raise?

Right, right. Well, Bjorn, I appreciate the question. You know, I actually look at that cost of capital, and although it appears high to you and it certainly appears high to me, it's higher than what we've paid in the past. you know, looking at what this thing is financing Bjorn, it is, um, going to be a good deal for everybody, including shareholders. And I can base that on the fact that of your first comment, which is the digital printing business is ready to go. We're going to start next week. And, um, the take up by our customer base is, is pretty phenomenal from what I've seen so far. And, um, You know, when we finished the year, as we talked on the last conference call, the third quarter conference call, we were really close to getting an AVL facility in place that is critical, frankly. I mean, this AVL facility was critical for us to finance the volume of cans that we're going to need to buy. I mean, I think it's important for the people on the call to understand that, you know, last year one of the things we struggled with is You know, we weren't able to sell disposables, you know, the cans, the pack techs. You know, we, you know, faced challenges of sourcing and selling them and making a decent margin on them. And that was a problem. You can't go into can printing and not have cans. The volume that this thing's going to chew up and spit out on the other end is, you know, in the 20s of millions. I mean, it's a huge number. And, uh, so we had to line up cans. We had to make sure that we had a strong partner and the partner wanted to make sure that we had the capability to, you know, to meet the, the, the working capital needs of the company. So as we went into the third quarter, we had a deal lined up. We thought it was going to be a good deal. And as we got deeper into the quarter, you know, it turned out that there wasn't as good of a deal as, uh, we thought it was going to be, you know, there was some sliding there and what our expectations were. And, and, uh, we ended up not getting the deal done in December. And, um, and uh looked at a couple other opportunities and um this was the what we felt like was the best deal this deal has no covenants in it it's got no dilution provisions in it and so on the face of it it's what it is right unlike other deals where you have covenants and you can lose access to capital and uh have issues this is a a deal that's been built for A venture business opportunity. And that's what we're facing with can printing. It's a venture. It's a, you know, it's a, it's a high return, big growth opportunity. And as good as we are, as good as Tiffany is forecasting, as good as the craft team is, we need some flexibility to make sure that we hit the ball out of the park. I don't want one pitch. I want many pitches, right? And so this is the structure that we needed to, to make sure that we got that done. So. But I think down the road, we're all going to be pleased with the results. And looking back on this financing, I'm hopeful that we'll be happy with the choices that we made.

Just to expand on that a little bit, could you share with us why is there a need for these warrants because the interest rate is really high enough on it. If we just do a calculation from a shareholder's point of view, if these warrants get exercised at $1.20, it seems that it is potentially a 10% dilution. I mean, would there be any dilution at all if this gets excised? So I just want to understand that warrant that's input together with this loan.

Yeah. So, I mean, the thing that you have to think about when we went through the banking process here is that, as you know, every time you take a term or an item off the plate, you know, it changes the cost of capital and the impact. So in our case, we, you know, we have a handful of things. We have rate, interest rate. We have optionality, right? We have the warrant value that we can put in the package. We have other things that we could put in, like I said before, strict covenants. We could put in certain kind of payment plans and amortization of the principal and things like that. And then the last thing is that we still have a first lien facility with Live Oak, and we have you know, bigger capital and district two, which has the second lane. So we have to, we had to fit something in that meets all these other creditor requirements. Right. And, uh, and so as we put it all together, this was the formula that works. What you'll see here is Pat Kilkenny, you know, is really excited about the opportunity. He didn't want, you know, covenants. He wanted, you know, upsides. He sees a huge opportunity with Kraft. I think I agree with him. And so this was the package that we ended up, you know, having to, having to work with. We, I think we did a pretty good job pushing back in some areas. But, you know, as you know, the, this was not the best quarter for, for a small cap stock to go looking for capital. Right. And this is a quarter where we saw multiples come down everywhere. And it's a pretty volatile, difficult time. And so I think this was, I think, a better deal than we could have gotten if we would have gone out to a wider group. But like I said before, Bjorn, I think that this capital is critical. And the returns that we're going to get specifically from these investments are going to be you know, unusually large. And that's why I'm, you know, comfortable with the decision we made and the board made.

Got you. So I just got one last question before I jump back into the queue. I think one thing I'd like to comment is right now we are clearly showing the financials of Kraft Canning and Spirix separately. And for Kraft Canning, it's surprising to see the gross margins drop down to 10%. From our three-year strategic plan, our target is 20% EBITDA margin. So could you break down in detail how this new digital printing can actually help to bridge this gap?

Sure, sure. You know, the thing that it's hard for people to see here, and I've said this on the last number of conference calls, is digital printing does not, you know, immediately hit people with what the opportunity is. And I've tried anecdotally to share it here and there, but I think I might have mentioned this before, and I apologize if some people have heard this before, but If you go all the way back 10 years, actually more than that, I think it was about 10 years ago, it was 2011, Coke attempted to go with a quasi-hyper-local marketing strategy. Sales at Coke were down negative volumes. They were facing some real challenges in their network worldwide, and they dreamed up the idea to come up with 250 names individual's names and they started a campaign called share a coke and they picked the 250 most common names during why they picked 250 because the way that they print their cans there's no way they could do more than that right then there's no way they can get more variation than that it got it's super expensive and the end result was coke it turned around its volume it was hugely successful what they did is nothing compared to what we're about to unleash on portland Digital printing is probably one of the biggest transformation opportunities for small craft beverage guys. I mean, if you want to ask me my opinion, my opinion on this is my personal goal is to get rid of and destroy crappy beer. And we're going to bring one of the best tools that's ever been invented to make small brewer's bring their product and make the customer aware of what they can do. This past weekend, again, this is going to more directly answer your question. This past weekend, I bought a six-pack, I'm sorry, a four-pack, four beers, and paid $23 for them in my local grocery store. And when I walked in and I was looking at the price points, I was shocked. How in the world can these guys get away with 20, it was almost $24, right? that's like $6 a beer at a grocery store. And it's a craft beer. You've probably never heard of it before. It's called Forever and Always. But the label on this beer is a sticker that runs halfway around the can, and it's got at least a million colors on this label. It's an incredible work of art. The beer is just as good as the label is. But the point with this is, That beer stood out, that label stands out, that brand is elevated, and it's a very not well-known craft manufacturer in the area, yet they're able to win at retail and command a premium price point. The cost of what we're going to deliver to our customer is nothing for a $6 product. It's nothing. You know, this tool is going to transform beer. It's going to transform cider. And it's going to do it in one of the hottest, most creative markets in the United States, in Portland. That's why Hinterkopf picked us. You know, that's why we're working with them when they could have picked a lot of other people to get involved with. They picked us because Portland is full of super creative, outstanding manufacturers of all kinds of beverages, not just beer. And I'm going to bring a tool to these customers that's going to destroy the competition. By the time we're done, I'm going to bring the tool so that they can basically kick every single product that Anheuser-Busch makes out of the grocery store. And I really believe strongly that this tool is going to be transformational for our customer base. And when They see it, and they see it working, and they get more creative with it. It's going to be even more powerful, and we're going to be able to charge a premium for it. And we know it's happening because of the customer base that we have now. The customers that we used to have that have outgrown us have all come back and said they want to work with us, right? And we saw the same thing on canned supplies. Could get people to pick up the phone. Now we have a major canned deal at incredible rates, right? And we can go after... business that we weren't able to go after before. So, Bjorn, I really believe Craft Can is going to be the point of the spear that's going to reinvigorate this company and it's going to handsomely reward investors that believe in it. And if we can execute this well, this is going to be a really, really big growth opportunity for the company.

All right, thanks, Joffrey. Well, I can feel your confidence right from here. So, you know, we've been following the company closely over the past year, and we went through the ups and downs together. I believe that right now we are on the cusp of greatness in this turnaround, and I just want to say that we appreciate the hard work from you and your team, and we will continue to support you in the journey ahead. Thanks, Joffrey.

All right, thanks, Nguyen.

Our next question will come from Kelvin Seto with Crater Lakes. Please go ahead.

Hey, Geoffrey. I recognize that you are doing so much within a short period of time, and I think all the shareholders can see that very clearly. Today, I think what's concerning in my mind is that we are going through a tightening monetary policy. We are battling persistent inflation. I did my math. It seems like we are still losing money and the gap is quite wide for us to be self-funded, right? It's actually breakeven. Balance sheet is already quite stretched right now. So I know that our previous call was not too long ago. It was on 17 February 2022. So do you see any silver lining that suggests that this gap could be closed earlier since the previous call?

Yes, I do. I mean, we can have some other members of the team share on this. Maybe Amy Lancer can talk a little bit about the outlook on Spirits. Keep in mind, the fourth quarter is a seasonally weak quarter for us in both sides. I mean, Spirits does have a bump in And, you know, as we get into November, but, you know, typically it's a week and quarter. And for that matter, as we start the year, it's a week and quarter. But the point that I've made before with Bjorn, and I'll make it again here, is that when you go back and you look at the comparison between what Kraft and, for that matter, Eastside income statement is going to look like this year versus last year, by the time we get to the end of the year, it won't even look the same. The margins won't look the same. The revenue growth won't look the same. You know, the sequential change between quarters won't be the same. You know, we're working, we're really talking about a completely different business for half of our business. Spirits, on the other hand, you know, as we've said in the call, is a real work in progress. I mean, I think the biggest disappointment for me last year was we had outstanding products. phenomenal um bourbons i mean they're just really extraordinary and when you compare them to a pendleton a crappy canadian blended whiskey right that has no connection to portland and it does 20 times our volume it's ridiculous right and the challenge has been we've invested so much of our time and money chasing money losing opportunities like redneck riviera you know, trying to fix a tequila brand. It took us a while to get that organized, you know, and struggling with that, you know, then we really lost the focus that we needed to basically go to market and make things work. And the most critical part of that mistake was losing the focus of the distributor. And you don't get that back, you know, from November to December, right? You just don't, you know, pick up the phone and say, hey, start selling my stuff again. You know, it takes time for you to, Engage them. Make them aware. Push. Show them that you're investing. We're doing that, Kelvin. We spent a lot of money investing in the Moda Center. We've launched a special Burnside bar there at the Portland Trailblazers game last week. We opened it up and had a big tasting. We're doing more of that. We're doing more engagement. We've probably done more for local market funding and, you know, attacking the market than we've had last year. And Amy can probably step in here in a second and share more about that. But just to finish on the gap, I believe you already begin to see some of the changes that you'll have in the first quarter and we'll see that funding gap start to close. But the big part of that is going to be when Kraft starts really kicking in with its transformation plan, which really begins in the second quarter. Annie, you want to share some about the outlook for 22 on spirits?

Sure. I mean, to Jeff's point, we have so much room to grow on distribution. You know, we have, you know, decent distribution on Portland Potato Vodka in Oregon and, you know, retail, but very, very low in the on-premise. Burnside, we have a very low distribution even at retail, so that's a high priority for us. And whereas union distribution in the core five states is low as well. So as we engage the distributors and close those distribution gaps, you'll definitely see performance improving. Also, Jeff mentioned the great work that Janet Oak is doing on the brand building activities, like the Moda Center. We're very focused on our base business. So Moda Center and Trailblazers for Burnside, Hood to Coast for PPB, So that should make a really big difference. We also have, you know, a couple of new salespeople, one in Oregon in the on-premise, and then one in Northern California to focus on Azunia. And another, you know, exciting development for us in terms of our focus on gross margin management is that, you know, we've done some work. Joe Ibrahim in operations has done a lot of work working with Agua Veras to get the cost of – the Azunia liquid down and is now working on optimizing, you know, whiskey for burn size. So you'll definitely see an improvement in gross margins as well.

All right. Thank you, Sophie and Amy.

Yeah. All right. I do have a second question. So, yeah, I think we saw that the company is strengthened with some good hires recently. And I think the most important thing is the arrival of the first digital printer. So could you educate us like hypothetically with a second printer, how much does this change our business in terms of revenue and profitability? And, you know, one of the things that I'm thinking about is can we apply the same pricing to even bigger customers as well? Because, you know, we don't really want to sacrifice margins as we scale, right?

Right. Right. Well, yeah. I don't have anything to say yet about a second printer, but if we did have a second printer, we would really be in a position to control the Pacific Northwest. And as I've said, I think on the last call, we know who the big movers are in this space. You know, there's a great startup company. down in Austin, Texas, we have a lot of respect for. Those guys are amazing. You can see them on Instagram. It's fun to watch them build and empower their customers forward with digital printing. There's two other printers that are in different parts of the United States. Our goal is to absolutely control the Pacific Northwest with this. And we're going to do not just digital printing, but, you know, also move into other opportunities to serve, you know, craft beverage. You know, Kelvin, one of the things that we're doing is right now this is kind of largely serve our customer base and customers that we've touched before. But, you know, adding capability, adding capacity to do more just means we're going to be able to reach up and get more and more customers. But to your point, I would mention this. we are the people that are that are decorating their cans have a few choices they can decorate their cans with a label like i talked about for this small you know brewery that you know goes with a super high-end label they can decorate their cans with a shrink sleeve if they do a shrink sleeve they have to put the shrink sleeve on the can uh before they put the beer in it usually because they heat up the shrink sleeve and it messes up the beer If it's a non-beer product and they have it shrink sleeve first and they put it through the canning process and it has to be heated up, pasteurized, it can mess up the label. So there's a lot of logistical challenges, which means that people are buying these cans and shipping them all over regionally and all over the United States. And the last choice is to go to the major can producers like, you know, the large crown and some of the others that we all know about and they print and they can actually print the old fashioned way with, you know, screen printing. But what you've heard and what you've seen specifically with ball is that they've kicking customers out who don't do at least a million cans per skew a year in volume. That basically means there's customers who are, are going to have to figure out how to decorate their cans because they're not going to be made anymore with decorated cans. That means they're not only losing the cans, they're probably losing their can supply. So what we didn't see initially, which was what we saw initially was we're going to collect all the customers and serve the customers in our market. Now we're realizing there are a lot bigger customers who we never really touched that are falling down into our market because they have no other choices. If you're in that environment, you have the capability to command the margin that you need to get the returns you need. And so that's our, that's our, you know, you know, plan. But as I've said before, and we've talked about this and I would, you know, I'd like to say this to the, to the wider group is a bigger plan is to catch more volume and be more important to the customer, to give them more tools to win, to deliver a better product, something that improves their ability and working capital. to manage their own working capital, a lower price product because of the working capital savings. And so we think we can bring all those pieces together and sell the whole bag of tricks as opposed to just one. Craft Canyon has been a one-trick pony and then the pandemic pulled out a second trick and it worked and then it came back to what we saw before. This new company is completely different from what it's been in the past. You know, so I do believe we're going to be able to capture margins. I do believe we're going to be able to grow more than one, you know, business line and SKU. I do believe we're going to grow by customer type. It's not going to just be craft and brewers anymore. We're going to be growing in growing categories. And I think, you know, with the success, you're going to see more investment and more opportunity and more capacity and a bigger footprint in the Pacific Northwest.

All right, great. Thank you so much for the great details. So I'll just end with a simple remark. Back in 2019, Eastside Distilling acquired Azuna for $15 million and Kraft Canning for $5 million, right? So that's about $20 million. Today, we have a market cap of $15 million plus our whiskey inventory and spirits business. So this is after we have performed pounds of capital raising. So it's either the market is undervaluing us or we are not getting something right. So I hope it's the first case. And like you, I really want to believe that Eastside Distilling is finally making a strong comeback. So, you know, best of luck and we'll catch up soon. I'll call back to the call.

Great. Thanks, Kelvin. I think, you know, your point is correct. I mean, it's time for the market to see results. And we're going to deliver results this year. You're going to see a different Eastside. And my hope is that it comes, you know, out, you know, clear. And you're going to see the results quickly. And we're going to be only able to accelerate from there. So let's see how it goes.

All right.

Our next question will come from Harold Weber with AGS Capital. Please go ahead.

Hello, guys. Hi. How are you doing? I would like to get a little more information. caller on the printing story. When is this going to be producing at what you'd consider to be a regular run rate?

Right. So the printer, the machine, it's more than just a printer. It's a whole system.

So when is this system going to be up and running on it, not just on a pilot run, but Being able to produce consistently quantities that were supposed to be based on the nameplate production basis.

Next week.

Okay.

Next week.

Next week it's going to be producing based on the official rate. You had quoted about 25 million capacity a year, right? Well – Two million a month.

Right. We don't go to 25 million in, you know, one week.

I realize that.

That – That involves multiple shifts and the machine running pretty much three full shifts. Right. But we've already scheduled our first customers. We have a number of schedules. I'd say as many as a third of our customer base has already signed up to begin. We're scheduling them out. We have the Germans in our new facility, and they're finalizing the installation of the printers. The last step is really the alignment of the ink jets, basically, if you think about it in relation to your own printer. That's kind of one of the old things you have to do before you're off and running and printing. But once that last step is done, we're printing. We've queued the facility up with A ton of cans. I mean, we pre-bought a bunch of cans. So that ends up to be a good deal because as the aluminum prices goes up, we've already got cans ready to go. That's one variable beside the picture that we don't have to worry about. And so we're prepped and ready to go. I think we're going to have a good start. We do know that this is a pretty complicated machine. We have a machine that's different from the machines that were delivered to North America um, to earlier customers. And we, we know that our machine has some capabilities that other customers don't have. Um, and we were one of the few people we understand that were spent a lot of time in Germany testing our cans, our team on our machine. So we've done everything we possibly can do to prep this thing for a launch. Um, and, uh, uh, you know, seamless launch. So I'm, I'm confident, you know, the team's confident. I think we have outstanding people in the game here, and I think we're going to do a great job this quarter. Whether we go from three initial customers that take all the printing time initially to completely filling the schedule and moving to a three-shift plan much earlier than we planned, I don't know. We'll have to see how we go. The most important thing is what I said earlier, this is a tool that we're giving our customers a market advantage, and we want to make them successful. If we can make our customers who take this on successful immediately in many different ways, more than just printing incredible designs on cans and having people get excited about it, working capital advantages, you know, times to market, shorter runs on their production, If we can make them successful in multiple ways, we're going to be successful down the road. So as much as everybody wants us to hit the ground running and be spitting out dollars left and right, the most important thing is to have a lot of people winning on this.

Well, I understand. That's why I'm trying to get an idea of when you feel it's going to be up and running consistently.

Next week.

Okay. When do you think it's going to be producing the commercial? Let's say, I guess I understand you're scheduling a shift at a time. Okay, that's fine. Is it going to be running a full shift in the next four weeks?

Sure. Yep. We're going to be off and running. Yeah.

Okay. So according to that, that means based on your previous numbers, let's say use the 25 million number, that would be based on running three shifts. Is that right?

Yes, but that has a percentage efficiency associated with it, which I don't want to go into a lot more detail of that. But we're basically running the machine to get to $25 million. There's capacity to do more than that, but it's a function of how many onboarded customers we want to bring on, how many pilot cans we want to do for them so they can see what it looks like. what the graphics are, how fast we do transitions between 16 ounces and 12 ounces. There's a lot of pieces to this that make it a little bit more complicated to figure out what the actual number of cans are. But I will tell you this, as I said in my script, I'm going to keep you, Harold, very well updated and everybody on the progress we're making intra quarter on getting this business up and going. It's too critical for us just to wait and report every quarter.

on this we will update the market on the success we're having or lack of success we're having and getting this full scale and you know at a place where where we expect it to be okay well i'm pleased to hear that because uh yes uh waiting three months to get an update on this is really not satisfactory based on what we've been through um The other question is we talked about expanding distribution on the spirit side to the East Coast. I wonder if you made any progress on that yet?

Yes.

So we have talked with distribution on the East Coast, and I think we've talked about this before, and this goes back a number of years. One of the things that people have to understand about the three-tier distribution system is the strength and the control that distribution has in spirits It's pretty profound. And if we've learned anything at Eastside, you can have an outstanding marketing team. You can have a great product. I mean, a product that really is, you know, unique and very hard to compete with. But that's not enough to be successful in spirits. Believe it or not, that is not enough. You have to bring in and sell a sales partner in the form of a distributor. You can go with a small guy, and you can sell in a few places. You can try to go over the top and go with an online retailer, and you can have very limited spotting distribution and pay a ton of money in shipping. Or you can engage a distributor in the local market and make that work. Now, the problem with that, and I'm getting to your answer, is when you go into a liquor store, a craft store, but in particular a liquor store, Hundreds of brands. So when you bring a brand to a market, typically what you're doing is you're bringing your brand in and you're taking a brand out. So, for example, in Oregon, we're going to kill Pendleton. That's our goal. We're going in and we're taking them off the shelf. We're going to take off Monopolova. We're going to take that crappy vodka brand off the shelf. So if I'm going to go into the market of the East Coast, I've got to be ready to go to battle and take somebody out. And I'm going to tell you this, my best place to beat the shit out of these people, Harold, is in Portland. And that's where we're going to start. And that's why I keep saying we're going to start back in Portland. We didn't do that last year, right? We tried to do it more broadly. We tried to bring too much to the market. And it was a weak effort. It was a really weak effort, and we got our butt kicked. And RNDC has told us, hey, you got your butt kicked. And so we're back, and we're going to fight this time like crazy. You've never seen East Side Fight, and we're going to do it in our home market. And we're going to kick the competition's butt, and we're going to take them off the shelf. And we're going to do it with Moda. We're going to do it with the Trailblazers. We're going to do it with our point-of-sale opportunities. And if we can't get it done, we're going to keep throwing stuff at it until we win in Portland. And then when we win in Portland and people believe that we can fight and win, then we're going to go to other markets, and we're going to kick butt in other markets, and we're going to do it with great products. And we're going to do it with very wise spending. And so that's the game plan now. I could spend a ton of money, Harold, now and bring Burnside to Connecticut and people would love it. But the return on that investment is going to take too long to do what needs to be done for this company. I'd rather put that money in craft where I can mint money tomorrow with the new strategy. So the team believes that the board believes this is time for the market to believe it. And the way that you're going to believe it is when you see our second quarter numbers, right? When you come to visit, which we're going to do a investor day in, in, in Portland, and we're not going to just focus on craft. You're going to see the, the, you know, Willy Wonka's chocolate factory and the big machine, but we're going to take you in Portland, and we're going to show you where we're kicking people's butt in spirits. The team knows it. They've been put on notice that we're going to show the success this summer, and I think our team's ready to prove on both sides of the ledger that we're underdogs, and we're done losing. We're going to win, and we're going to win this year.

All of that sounds very fine, truly, but I still maintain that I mean, you guys, you did a whole bunch of stuff months ago with so many other products on social media and generated a whole lot of buzz without anything. And, of course, you're next to nothing. And those products sold out in four hours or three hours on this Pepsi vodka. I maintain that you could do other social media stuff without spending a zillion dollars and getting some additional coverage and exposure here. There's 40 million people over here. You've got 2 million people over there. I tell you that there is a monstrous market for the distilled spirits over here. And I believe that you guys are putting some effort into that and not banking on only kicking somebody else's butt at home. That doesn't mean you're successful, even if you do that. The key to success is to show that you can do it elsewhere. Big deal if you're beating up a guy at home. Nobody's going to take that, oh, you're doing a great job. That just means you're doing okay. I think you need to be doing some of that over here. This is the number one market in America.

Yep, yep.

If we're going to get to be hundreds of thousands of cases, we have to be there. That's correct.

But we're doing 37. Let's see you get, I mean, come on. I'm waiting for that. I'm loving that. I'm sitting there waiting for years. Forget about 100,000, hundreds of thousands of cases. You didn't even sell 10,000.

Yeah, the reality is exactly that. You're, we're 30, you know, we're talking about 3700 cases, right, and pills in 65,000 in Oregon, all the booze is sitting there in Oregon, we ship it all the way to Connecticut, you're at a, you're fighting with Proximo and and Diageo, and they have a huge cost advantage. This is the whole problem with Redneck Revere. That's why we got destroyed with Redneck Revere.

Okay, so that's not a premium product. We're out of that. That's not our issue. Our issue is how do we generate enthusiasm for our premium products?

Yeah, and I'm going to go back to the playbook that made Pendleton successful. and the one that made tito successful they started in a home market they dominated it people became passionate about it and then they were introduced and asked to join a national stage and they moved and and took you know to roll the table but that's the point you can't go fight markets thinly capitalized and and believe that you're going to win in spirits unless unless you got kylie jenner or someone who's promoting your name, right? We don't have that. We don't have that big push behind us. Nor do I think we want that because it's fleeting, right? And it's not authentic. And Burnside is an authentic Portland-based brand that's outstanding. And I think once we make this transition and have it working in Portland, then we're going to have an opportunity to come and it's going to be all over your market at some point. I hope sooner rather than later, but let's see.

Our next question will come from Ross Taylor with ARS Investment Partners. Please go ahead.

Thank you. Well, it's clear, Jeff, that your investors are hungry for traction in this process. And so I don't want to draw it out a lot more here. I just kind of want to get an understanding and a feeling. When you mentioned early in your prepared remarks that you were making progress, how close is that progress going to have us at year end to basically becoming a self-sustaining organization?

If we execute on the plan that we have on the table here, we will be self-funded to the extent that we don't want to make a huge very big investments in, you know, in our business, which I'm not saying we wouldn't do. But I'm going to pull the, you know, I'm going to basically tell you that if we execute the plan that's on the table today, right, we will be in the position that we've been talking about for two years by the end of the year, right, which is generate enough cash to meet our own needs. That doesn't mean there's any cash for me to do a lot of growth from here. But I'm going to tell you, if I can shorten that gap and get us to that point, then I would expect the market's going to give me credit for it, give the company credit for it, and we're going to be off and running with the capability to raise capital if we needed to to make ourselves grow much, much faster than even the growth that you would see this year. So that's what I would say to say. on that.

Okay. And I would say that I think at this stage, this company has always had really big vision and it's never lived up to its vision. So before you start thinking about summiting K2, I would think about getting to the top of Mount Hood.

I agree.

I agree. Although Mount Hood's a pretty mean mountain. But I'll go back to and use another anecdote and I've probably used this before. Sergio Marchion was sitting there, and I'm not comparing us in any way to Sergio Marchion, but he was sitting there on a failed business in the form of Fiat and Chrysler, and he laid out in front of the investment community, we're going to take all the Jeep or all the crappy cars, the Chrysler cars that we produce, and we're going to stop making them, and we're going to build Jeeps, and we're going to export them to Europe, and we're going to make a ton of money, right? We're going to have this. huge free cash flow capability. An analyst scoffed at him. I remember succinctly he said, the plan is on the paper. It's there. We have everything we need to execute the plan. All we have to do is execute the plan. I remember there was skepticism everywhere. On a very small scale, we're in the same boat. We have everything we need to execute a plan that's going to surprise the market down the road that this little company that couldn't could. And so it's up to the management team. It's up to the team on the call, the ones that are not on the call, to execute the plan that's on the paper. And when they do that, we're going to have a great result.

I agree. And I think it's just important to remember that you can hear it in the tone of this call. This call is a very different tone than any call I've sat on with you guys in a long time. And I think that's because people – really want to see the traction. I mean, if your passion is clear, you can listen to, you can hear it. It's not hard to know that you really believe that you're going to be successful in this. And I'm just, you and I've had this conversation. I think you need to be successful. You need to show this as a viable going entity. I live in Connecticut. I don't need your booze back here just yet. I can find ways for people to mail it to me. But what I do need, and I think all of us on this call need, is we need this story to start working. We need to get away from the fear that you're going to wake up one day and there's going to be an asterisk next to the name that says, A, you've done another equity financing, or B, you've rolled over the top. And I think that that's kind of where you're at.

I think you've got a vision executed, but execute it with alacrity. I do. I appreciate it, Ross. Yeah. Thanks. I'll talk to you later. Our next question will come from Matt Campbell with Lower Day Capital.

Please go ahead.

Hey, Jeff. Thanks for taking the call. Can you hear me? Yeah. Okay, cool. I'll make this brief. Just to summarize, you guys have been doing a lot of work underneath the water. It feels like that little duck that's paddling real hard, and we can't see the results yet. But the printer is now there. That's going to give you guys some gasoline to move across the lake, sounds like. The spirits business, you're going to improve margin now because you've got a lot of those cost issues you've worked on. So whether it's a slower road or not, you're going to have a better business outlook because the printing business looks like you have a lot of customers that are demanding it, they need it, and you're there for them. And That's exciting. But like Ross said, you know, it's, it's about, you know, it's about showing the opportunity. And I love hearing that we're going to see that, you know, come Q2 and you're going to have an analyst day. So really applaud the fact that you guys have been through what has been a long turnaround, but it feels like we're on good footing. So looking forward to the progress and thank you for, for all you're doing.

Thanks, Matt. Well, as I said, I'm really hopeful that we are going to be able to get a number of you guys out to Portland early summer. And then we can walk you through both businesses, and you can see for yourself where we are and benchmark where we are versus where you expect us to be. And I think we'll have a lot to show you then.

This concludes our question and answer session.

I would like to turn the conference back over to Jeffrey Gwynn for any closing remarks.

So again, I want to thank everybody for joining us for the call. You know, I will tell you, I am passionate about Eastside. I am passionate about the spirits that we have to sell, how we're going to go to market and win. And I am passionate about craft and the transformation of TED. You know, it's hard to to be in a stock that struggled through so many difficulties like this company has. And in fact, I think there are times when I take a phone call from an investor and we talk about the company and it almost is a point of running joke of how many mistakes have been made along the way with this company. And I think what I want to say is if you think about this company, and the challenge that we've had, you can start where the balance sheet ends, which is where tangible net worth is, and it's a big hole. This company has a huge hole at the bottom of its balance sheet, and it looks like something that was LBO'd back in the 1990s. That, to me, is the most disappointing and motivating thing that's sitting there for me. This company deserves better And the leadership needs to take this company to a place where, you know, investors' capital is rewarded. You take risk with us and you get rewarded. And we've laid out for you a plan to get us to a point where you're going to be rewarded on both sides of our business. And so what I would encourage you to do is look at the balance sheet and then go back and renote this. We are going to break out the performance of the businesses and You're going to watch them develop. There's going to be complete transparency about how it develops over the year. If spirits does poorly and craft does well, you will see it. If spirits is outstanding and craft does great, you will see it. And we're going to be there and be held accountable from this point going forward on what happens at the bottom of the balance sheet with retained earnings. And my goal is to fill in that hole. and I think I can do it with the team that we have and the opportunity that we have. The company has been entrusted with a lot of capital from some of the investors on this call today, last year, and that capital is going to be used to make more money and enhance the returns of the company. So I encourage you to stay engaged. Reach out to Amy. We'll set up some more calls as we make more progress. As I said earlier to Harold, we were going to report intra-quarter our milestones and the critical development of the digital printing business. And then hopefully we'll see you guys in May. We don't have a lot of time between now and the first quarter call, but we'll have more to talk about on the can printing in April or in May when we report results. So with that, I want to thank you again for taking the time to talk to us tonight, and we'll talk soon.

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