Eastside Distilling, Inc.

Good day and welcome to the East Side Distilling Report's first quarter 2022 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 touch-tone 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, 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 first quarter 2022. 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 Nguyen, 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. 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 can 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, 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. And let me add my welcome to our first quarter conference call of 2022. The first quarter was a very important quarter for the company, and the results we are presenting today don't fully reflect the full impact of what was accomplished in the quarter. And looking at our Q1 performance, we still need to improve upon revenue growth in our spirits, canning and printing businesses, and I believe we've laid the foundation for this for the balance of the year. Let's start with the craft canning and printing business. I would like to remind everyone that we wake up every day with the intent to help our craft beverage customers win at retail. This vision has driven us toward a new business model, and after a lot of planning and investment, we have taken the first steps towards implementing this strategy. In summary, Kraft went through a huge transformation in Q1 and I couldn't be more proud of the Kraft team. We moved our mobile home base and largest warehouse into a brand new 50,000 square foot facility we refer to as Argyle. This facility now houses the Portland mobile business stores cans and disposables which we sell to our customers and it also is the home to our new digital printing operation. In the quarter, we took delivery and began the installation of our first Hinterkopf D240 digital can printer. The installation was finished in April, and this machine can digitally print multiple can sizes of aluminum craft beverage cans with high-impact graphics that rival the graphics seen in magazines. And I have spoken at length about how transformational I believe this technology will be to our customers in many of our prior calls. In Q1, we did not print any production cans. Our first production can run fell into April, and I'm excited to announce we printed Von Ebert's volatile substance craft beer as our first production run. Building out and installing a highly automated digital printing plant was a huge and costly feat that impacted our first quarter results. We had no digital printing revenue in Q1, yet started to incur the expenses for that effort, which impacted our results. The mobile business had a tough comparison to last year, where the impact of COVID last year helped that business. This quarter, last year, on-premise dining was still largely shut down. And this year, a majority of our core craft beer customers were racing to keep up with on-premise distribution and that typically doesn't involve cans. Now, we expect better results for craft as we move through the year and ramp up digital printing. We are now breaking out craft results, so you'll be able to see this transformation and mark our progress yourself. Now, turning to spirits, where we also made progress in the quarter, I'd like to point out in Q1, we had strong wholesale spirit sales, approximately 800 barrels of excess brown spirits, Barrels that are not currently needed in our product pipeline were sold. We achieved very high prices for these spirits, and that sale positively impacted our results. Now, nine-liter case shipments for our key brands were 7,491 versus 8,894 in the prior year. The majority of this difference was lower sales of Azunia tequila, which also negatively impacted our revenue mix. As we have said in the last few quarters, we are purposefully walking away from very low margin legacy tequila placements and taking full advantage of our premium tequila products. Now, Tiffany will get into the results in a moment, but I'd like to highlight how our product margins are improving. Wholesale whiskey gross margins were 39%, while branded margins were 35% in the quarter, healthy levels. This was an important quarter for Spirits in that we achieved two critical objectives. First, we reengaged our distribution partners in Oregon, California, and Arizona. Second, we made tangible progress improving our supply chain costs in tequila, which has long been an issue for the company. We will continue to push to improve in these two deliverables this year, but are also turning to a third. which I'm going to talk about today, which is improving the effectiveness of our marketing spend. In the quarter, we saw both retail spirits volume and mixed decline. However, price improved. On our key brands, we are utilizing marketing spend to turn this around and drive both velocity and price. And I think it's worth mentioning we have not taken advantage of inflationary pressures to achieve price gains. I believe what you see happening in the wholesale spirits market will eventually make its way into retail. We sell outstanding products. Our Buckman bourbon is better than 99% of what comes out of Kentucky, in my opinion, yet we have yet to achieve what I would call the fair price for this product. We will continue to make investments that unlock this opportunity to drive up gross margin dollars. Now, in order to get there, we need to have better visibility into how our brands are performing. And over the past year, we have made investments in people, in systems, and now have the data necessary to gain insights to how to improve Spirit's results. Oregon is a very important market to us. Our performance in this market is critical. And I believe we have made more progress there, too. In our current quarter, we have built and implemented a strike plan in Oregon where we are working with our broker to quickly close 81 distribution gaps and high-velocity retail accounts on our core SKUs. Our program calendar is aligned with our broker's, and we have key initiatives that we will be executing throughout the year to drive positive growth. Now, this program calendar includes programs is also in place, excuse me, in our top five junior states outside of Oregon. Here we plan to replace the low margin sales with higher margin sales that we've been talking about for the past few quarters. So a lot has been accomplished in SPIRITS, and we'll make more progress to report, I think we'll have more progress to report in the second quarter. Now pulling back and looking at consolidated results and taking out one-time restructuring charges, our G&A continues to improve year over year. On the balance sheet, you should see working capital cycle times improve if we hit our plan, and you should also see us generate free cash flow in the back half of the year. For Q2, expect to see improvements at craft as well as a methodical ramp-up of printing. Remember, we're coming off of a zero base and bring customers along on this journey. So it will take a while, but we're very encouraged by the initial results. And finally, you should expect to see volume improvements in spirits as we go through the year. Now, with all that, I'll now turn it over to Tiffany to walk you through our results in some more detail, and then we will take your questions. Tiffany?

Thank you, Jeff. Let's review our first quarter results. On a consolidated basis, our growth sales were 3.8 million for Q1 2022, compared to 3.2 million for Q1 2021. Spirit sales were 2.7 million this year, compared to 1.3 million last year, driven by bulk sales. Craft sales were 1.1 million this year, compared to 1.9 million last year, reflecting increased competition, enforcing by customers, and the significant resources devoted to the printer installation. The encouraging news is that the printer is fully operational, and our current and past mobile customers are excited about the new technology, which had not yet been available in the Pacific Northwest. Our consolidated gross profit increased to $950,000 for Q1 2022, compared to $550,000 for Q1 2021, again driven by the bulk spirit sales and partially offset by craft. Our consolidated gross margins were 25% for 2022 and 17% for 2021. Serious margins were 37% this year versus 15% last year, and craft margins were down 3% this year and 19% last year. Craft gross margins reflect the challenges that I referred to above. We continue to reduce our operating expenses to $2.6 million in 2022 from $2.8 million in 2021. Here, its decrease in operating expense was due to lower headcount, professional fees, and marketing expense. Kraft had slightly higher operating expense due to our new Argyle and Spokane warehouses. Without our non-cash restructuring charge, our operating expenses would have improved by almost $500,000. Adjusted EBITDA improved to down $1 million for 2022 versus down $1.4 million for 2021, representing continued efforts to improve gross profit and reduce overheads. Adjusted EBITDA includes the proceeds from the redneck sale, PPP loan forgiveness, and other significant one-time items that occurred last year. Turning to the balance sheet, note that we have accounted for the purchase of the digital printer and prepaids. and reflected the change in working capital. Our liabilities increased versus last year, reflecting our investment in inventory to support the CAM printer, as well as to ensure we have adequate levels of Azunia as we enter our key selling season. We ended the quarter with $2.6 million of cash on the balance sheet, and we're excited about the balance of the year. 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 touchtone 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 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Sean McGowan with ROPS Capital Partners. Please go ahead.

Hey, guys. Thanks for taking the questions. Hey, Sean. Hey, Jeff. I want to start on spirits. It looks like that line of excise tax and customer programs is unusually low. Can you talk a little bit about what's going on there and how indicative that would be of what we can expect in the future?

Sure. Well, maybe, Amy, do you want to?

Yeah, I can take that one. So we are, you know, cycling some pretty deep discounts on Azunia last year in H1. So we were expecting the reduction in the customer programs or discounts line. That being said, there is a bit of a lag in processing those since they come through the distributor as a chargeback. But we definitely will see a reduction in discounts for the full year, you know, continue versus last year.

Okay. Thank you. And could you, I don't know if it would be Jeff or someone else, talk a little bit more about how do we look at the printer on the balance sheet? It sounds like it's hitting a couple of different lines. Is that right?

Yeah. Yeah. So maybe I'll start and Tiffany can add if she wants to. But The way we counted for the printer is it wasn't installed in Q1. We received it, but it wasn't in service in the quarter. So we've been making payments on it. So you'll see it in prepaid. And then in the second quarter, you'll see it move to PP&E. Now we'll have an opportunity to decide if we want to. finance it or not and if we do a sale lease back or something like that you know it'll it'll come off the balance sheet but uh right now that's kind of how you can think about it and uh and just to clarify so we did like a write-up would it shift to like a right of use thing somewhere in there yeah right at least lease accounting has changed dramatically and tiffany has schooled me on this more than one time so I'll let her explain it if we really want to get into that kind of topic, but yes, it would be addressed that way.

Okay, and it's also affecting inventory then because you're loading up on cans now?

Right, right. So one of the key things I've talked about in the past couple calls, last year we really struggled with cans. We were in a position where we were caught super short cans. We were going, you know, looking for, scratching for cans. It affected margins last year. It affected our relationship with customers. And frankly, it allowed, you know, competitive interest into the market, I think, which was unfortunate, but this year is different. This year, we are in a much different position as we've talked about and we've talked about on other calls. The digital printing evolution is huge because Portland is full of people that are putting cans into retail that are not recyclable. Digital printing is 100% recyclable. I think you're going to see a very quick transformation, much like you saw in Canada, where people are going to start to be aggressively move into digital printing. And so in preparation for this, we've done a contract with a large can supplier, and it dramatically improves our position in cans, and we have plenty of cans to work with. So we spent some money in the first quarter building our inventory of cans, so we wouldn't have any issues with slowing down the printing process.

Okay. And then my last question is, can you give us a little bit more color on the craft of bottling gross margin? What were some of the one-time items that hit that? What can we expect going forward?

Yeah, so that's a hard one to pull out because, and we've talked about this a lot, we went through the process of thinking about trying to walk people through what are normalized margins. But to be perfectly honest with you, Sean, I'm not sure what craft gross margins are going to look like because there's so many moving pieces here. The can printing business has already led us in some directions that we didn't expect. So when we look at where our plan was for the beginning of the year for printing, as we go through the balance of the year, the margins are going to look different because the opportunities are different than we expected. But, I mean, you can think about this from this standpoint. The facility that we were operating in was nothing larger than you know, a pretty, you know, medium to small size warehouse in Portland, and we've moved to a very large facility, tremendous amount of space, moved into it early in the quarter, and then prepared ourselves, actually started taking delivery of components all through the quarter, and then built up the printing plant in the back end of the quarter into April. And so, you know, there were a lot of, you know, if Transition that impacted the company in the quarter. And so, you know, it's hard to pull out specifics. But I think what I would suggest is that let's get into the second quarter numbers. We're going to be reporting both revenue and expense. And we'll be able to start to guide you towards a normalized margin in printing. And because you're going to have craft broken out separately, you'll be able to see that yourself and kind of see, you know, that performance develop. But I'm encouraged. I think we'll see some much better numbers as we get into the year.

Okay, thank you very much.

The next question comes from Kelvin Seto with Crater Lake. Please go ahead.

Hey, Kelvin. Hey, Joffrey. Yeah, hi. Thanks so much for the updated commentary on the spirits. I think seeing this turnaround and this updated strategy will be an extra boost and also we had a great time learning about the company meeting the people behind the business so thanks for hosting us so you know from the prices of eggs to milk I think everything is going up these days I just want to find out like how has the inflation affected the cost of our business and could you comment a bit of on you know the ways we are mitigating the adverse effects because I recall you know we are quicker now to pass down the cost to our customers so Just wonder how our customers are responding to our requests. Thanks.

Yeah, so there's a really good question. And we see the inflation like everyone else does. I mean, there are places where you see it significantly impacted, which is in the form of prices and logistics and inbound freight and getting things up into Portland. But it's also in the supply and availability of things from glass to other things. And it can lead to, you know, out of stocks, which is what we struggled with last year with Azunia and very, very super long lead times. So when I think about that question, I also think about the opportunity because I can tell you one thing, everybody's facing the same challenges. Our customers, their craft, you know, canning customers have super long working capital cycles and we're going to be able to shorten it dramatically because we're going to be able to, you know, print whatever label they want, deliver it the next day. And that's going to cut off a huge amount of their supply chain. Their cost in inducted and working capital is going to drop pretty dramatically. It's a huge competitive advantage that we're going to have there. But on our end, we haven't really pushed through a lot of price increases to reflect what we're seeing. And one benefit the company has is we sit on a lot of barreled inventory, you know, barrel spirits that, you know, age out past a decade. And we're seeing the values of those just continue to go up. And so that's another big opportunity. So the challenge is when you can make almost as much money selling something wholesale rather than take it through retail, pay three-tier distribution fees to your broker, it's hard not to want to go that direction. But it doesn't build long-term value for our shareholders and for our customers. So we haven't raced out to take advantage of price increases in wholesale other than these one-off barrel sales here and there. I think you should expect to see us look to take advantage of price increases. I think bourbon prices are going to be moving up. I mean, just the demand that we see for people clamoring to buy wholesale bourbon that's over five years old tells me that there's a shortage of this stuff. Aged craft premium products bourbon out there. If you walk in a grocery store and you can buy a nice aged craft bourbon for $50 around that price point, you're getting a deal. Most of our bourbons are all there. Buckman, you can find it for $80 or some places, but that's like a $150 product. There's a lot of room for us to move. We can do that. We can push and make changes. Some markets, you can't move the price You know, overnight you have to go through a price change. But we have that to consider. On the craft side, you know, right now we're just benefiting from the bundling of services, offering a great product, printing on can. We've got an outstanding group that does a really great job doing that, and we can really deliver, I think, a complete product to a lot of people that – you know, that would benefit from that in our markets for crafts. So we've seen inflation in just about every aspect of the business, but we haven't really taken advantage of it on the income statement. And I'm not going to promise you that we're going to race out and do it because I'd rather drive the volume that we're looking for. The turnaround in this business is going to start with volume moving up and it's capturing the margins that we've already built in by structural changes, lower G and a, better contribution margins from the structural reductions we've got in our cost of goods sold. And that'll get us, you know, headed in the right direction. But you're right. I mean, it's something to watch. And, you know, when you get a dollar price, that's a dollar gross margin that immediately hits the bottom line, assuming that nothing else changes. So we're going to keep our eyes on that and see what happens this year.

Got it. Got it. Thanks so much. So one thing I noticed, I think a lot of earnings calls these days is, you know, analysts are asking this question, you know, if Federal Reserve is, you know, increasing the interest rates throughout the year. There's a lot of talk about a potential recession. I think nobody knows whether it's going to happen or not. So this is a broad one. Just really want to get your perspective on this. You know, how does that affect our business? Because I also know that our business tends to be quite resilient in nature because of the products that we are selling. So wanted to get your view on it.

Right. So, I mean, Amy Lancer might be able to shed some light on her views, unless she's been in the spirits industry for years. But I don't particularly think that we will be dramatically impacted on the spirit side by a recession. And certainly there will be challenges to the consumer. There's going to be challenges on premise. But we're really in a sweet spot. We deliver a great product. We're not the most expensive product. you know, product on the shelves in our various categories. We have focused on, you know, elevating tequila, and our Zinnia Black is an expensive product. As I talked about, Buckman's expensive. But these aren't big workhorses for the company yet. I'd like to see them become so down the road. So I don't foresee that. I think our challenge is going to be on the interest rate side, as you mentioned. We don't really have that much... you know, exposure to flooding rate debt. I mean, most of our situations are pretty fixed rate. I think the question for us really is going to be, you know, what happens to demand on the road, but I feel pretty confident that we're in a good place. And as I said in my remarks, if our plan plays out on craft and spirits, and I'm not saying, you know, it's in the can, in the bag yet, but if our plan plays out, we're not using any more external capital from other people other than to refinance existing debt or do big growth projects. We're not using external capital in the back half of the year to fund operating losses. We're going to be moving towards generating positive cash flow from releasing working capital and from improved results. So I'm not as worried about that aspect of this as I would be if I was a small company that had a two-year burn or a three-year burn down the road to finance in this market environment. So, you know, I'm feeling good. Having said that, I mean, we have near-term challenges, you know, like everybody. We have a really big working capital component, and we're starting up a brand-new business that's going to be as big, if not bigger, than our existing business. So that's a working capital execution challenge we've got to keep on top of. But I'm encouraged that this environment is not going to throw us off.

All right. Thank you so much.

The next question comes from Ross Taylor with ARS Investment Partners. Please go ahead.

Thank you. Well, Jeff, it's great to hear you say that we're basically done with the need to raise external capital. I think that alone, is a huge home run and it's been a long road, but I hope the market will recognize that that would be transitioning you from a survival stage to a growth stage again. Second, can you talk about kind of the run rate, whether it's in EBITDA, whether it's in revenues or whether it's in volumes that you expect to be at with cans and printing at the end of the year?

Uh, I could tell you what I think it's going to be because I'm sitting here staring at my model. But, uh, I, I mean, I, the, the challenge we have, you know, Ross, as you know, is that this company has been, uh, waiting for go for, you know, good dough forever. We've been waiting for something to finally happen in the turnaround. And, and it's easier for me to point you to the changes in the business. And then, um, we can start to see the progress as we move forward. Um, I, as I get into the second quarter and the third quarter, I'm going to have a lot more confidence in telling you where I think we're going to end. And I'd like to start, you know, being in a position to, you know, focus the eyeglasses, so to speak, and give you better numbers than just positive free cash flow. I think that's kind of a ridiculous statement, frankly, from my part. But as we have more visibility, we're going to be able to say this is what we expect for EBITDA for the year and where we're going to end. and what the run rate would be at the end of the year. But let me just walk you backwards into how the business changes. Digital can printing transforms this company because the machine that we installed this year can generate and print 25 million cans in a year easily. Already to date, we have on the books over 350,000 cans printed. Not all of them have been printed yet, but it's queued up. So we'll be highlighting the landmarks as we sweep by them over the coming weeks, but I'm excited about that. So when you think about that and you think about the cost of a can, which I'm not going to tell you what our cost is, and you think about the incremental cost of a label, right? I'm not going to tell you what our cost is. You can do your research and start to multiply it by $25 million and you can see what a revenue number looks like. And then I think that the margins that we'll see, the gross margins we'll see in this business will do nothing but improve from where they are here and be what I would call a gross margin that's better than the industry average in this case. And the reason why it's going to be better is because we're going to be capturing more revenue, the funnel of the customer. We're going to be doing more for them. And we're going to be able to leverage more of the fixed overhead that we have been controlling and working into one facility like we've talked about. So if I could bear on you to, you know, ask for your patience for another quarter at least, maybe two. we're going to start getting really precise on what we think we can do. Spirits is also important in this because one of the things that we talked about was challenges last year. We had alienated our key partner and distribution partner in the West Coast markets, even in Oregon. I'm more encouraged about that today than I was just three or four weeks ago. We've had a good reaction to our plans to re-engage and partner. And if you have both sides of this business moving where we're getting volume gains, we've transformed one business and we have one that's been getting volume gains on a better, you know, expense structure, then the east side that you're going to see at that point is going to look completely different from what you've ever seen before, even in the former, you know, days of Redneck River era.

So if you can look at doing 25 million cans a year, kind of reasonably full run rate, not heroic, but certainly full run rate, do we expect that you are going to be at or close to that run rate at the end of next year?

Yes.

Okay. And I understand that you want me to be patient. My only issue is that the market is clearly not patient with you, I think. I'm just looking here just to give you an idea. It costs your share of self or a discount to what it would cost me to buy an Amazon 2520 call that expires Friday. So we need to create some level of excitement here. That's not me you need to satisfy.

It's the market you need to satisfy. And I'll answer that in this offer. We want every single investor on the call and those that weren't able to hear the call live and came on after the fact to come visit. Kelvin already mentioned he had a chance to come from Asia, and he was with us for a while. We had some other large, you know, of our large strategic investors come visit. And so at the end of this month, starting on the 31st of May, we'll be hosting anybody that can get to Portland, and we'll take our investing, you know, stakeholders through our digital campaign facility. The 31st and the 1st, I believe it is, Amy Brizard is going to help us organize some of this. And you'll have a chance to meet the team. You're going to have a chance to see how this works. You'll see for yourself why it's an important investment for the company. And I think you'll have enough information from that to really better understand what the direction of eSight is. And in addition to that, we'll talk a little bit about spirits as well, and we'll spend some time talking about that side of the business. So, you know, again, anybody that is interested in being in Portland in a few weeks, we can We'd be happy to set that up, and we would love to host you guys for a few days to show you the business. But I agree with you. As people start to understand what the business strategy is, you can hear me talk about it. You can read it in the queue. You know, you can go over, but when you see it and tangibly can touch it and understand why it works and hear it from more than me, people that have been in the craft candy business for years, you know, describe the product offering that our customers have now and what they're getting with us. and the breadth of where we can go with it beyond just beer customers. It's a big change.

I appreciate the offer, but I'll say as someone with decades of experience, we need to attract people who aren't going to get on an airplane and fly to Portland. We need to create a bar and we need to create an energy. And bluntly, we need to create a sense of greed in this kind of market. And therefore, I do actually argue that you need to start to put out some of these things. You don't want to talk to us. But it sounds like you've got some pretty high numbers you think you can achieve. Right now, the street literally is more worried about you as a going concern than they are about you as a growing business. So start to talk to us about where you see you need to be on the low end to consider yourself having achieved the low end of your expectations. Because my bet is they're a lot better than people actually are pricing in. As I said, I think that to me, You and I know each other well. I think we need to create that greed. We need to make people come off this call and say, I want to own this stock because literally it's a call option. It's a warrant. It will never expire. If you don't go broke, it will never expire. I can't think of a better way to spend 73 cents a share or 74 cents or $1 or $1.25 in here because you're talking about that. Second thing I want to ask you about is How do you get people to care about the recyclability of their can? I mean, most people I know don't even think about the recyclability of their can. Now, maybe that's because I live in the Northeast, but I can't think of anyone who's ever looked at a can and said, wow, I can't recycle that. They tend to toss it into the recycle bin whether they can or not. How do you create that as a positive that drives revenue on the top line and gets you premium pricing?

One of the things that I have to say that's special about Portland is people in Portland are unique in a lot of ways. And one of the things they're really unique about is when they have the information, they understand how they can help the environment. I mean, it's hard to find someone who's not wanting to run in that direction. And that's distinctly different, obviously, as you said, to the people that you might find in other parts of the country. And so I think people will care when they understand why it's important to care. And I think people will also start to care when they get pushed in that direction. And Portland's very progressive about taking care of our environment. And this is an outstanding way to do that. I mean, just for the people on the call that might not understand what we're talking about, aluminum cans are exploding. And the reason why you see them everywhere is because, you know, people are tired of plastic. Just the other day, I was in the grocery store, and I saw Instant Death. It's basically a water, and you can buy it for $1.70 or something a can, and it's a water brand that's exploded. It's just in a silver bright can. You know, it's nothing more than just, you know, tap water. But the packaging has been instrumental in that marketing story. And so... aluminum cans are exploding because they're 100% recyclable. There's not any loss with that when you go through the recycling process, but the challenge with it is if you shrink wrap the can, which is what you see in a lot of companies that are decorating cans, or you put a sticker label in it, then they usually get kicked out of the recycling bin, or you have to take off the shrink wrap. That's a time consuming. I know if you're like me, I sit there and pick up my beer sometimes and and play with the label and, you know, it'll take you a while to get that thing off. So the other part about this that's hard is that it's not just recycling. If you have a can, you've decorated it with a shrink wrap and then you need to pasteurize it and you heat that can up, the label can, you know, get messed up. And so that's, you know, one aspect about non-beer customers that, you know, make it harder. And obviously you have to label a beer can carefully because, It's a more challenging product to put in a can. But in any event, I think, Ross, we're going to get there and get people excited about this aspect. And this aspect is only one small lever of why digital can printing is so exciting. It's one of the many levers that make this an important transformation for people to consider.

Don't be afraid to be bold. It sounds like you feel you've crossed the Rubicon. So if you have, as I said, you know, I think your shareholders would appreciate a little bit of boldness out of you guys. You know, you clearly have the confidence. You can hear it in your voice. You hear it in the choice of words you're using. So I'm just saying, you know, let's get out there and be bold with this. Because if you're right, this company is transforming. But it would be nice to have it. transform in a way so that we don't have to wait until the end of the year to actually try to make some money on it.

Great. We're working on it, Ross. Appreciate it. Thank you, sir.

The next question comes from Bjorn with 10X Capital. Please go ahead.

Hey Geoffrey, thank you so much for hosting us in Portland a few weeks back. We've learned so much about Eastside Distilling and the facility looks incredible with the mountains of Cairns. So I have a few questions on my end. If I remember correctly, you talked about generating free cash flow in the second half of this year. And is it fair to say that we have certainty that Eastside is going to break even in 2022, you know, the end of this year? So, for example, would it be fair to say that this quarter's results will be our low-water mark and we should see improved results for the remaining of this year?

Right. So, thanks, Jeroen. Yeah, I appreciate it. It was great to have you guys and have you see the facility. I think... you got a better sense of what we've been talking about. So on that question, let's just talk a minute about when I refer to free cash flow. So EBITDA, obviously, as you typically think about it or I think about it, it's the income statement generation of cash flow. When you assign the balance sheet categories of working capital, CapEx, Things like that to EBITDA, then you get the free cash flow number. And because we're already so loaded up in working capital, we have a tremendous amount of cans. We have pretty much gone through our CapEx cycle here. We have invested in Burnside raw material that we've been sitting on for a while. We don't have to basically pay for that. So when we shrink working capital, that generates cash. So for the back half of the year, that's how I'm looking at it, and I think we can get there. But to your point, sequentially, yes, absolutely, you're going to see improved results. So April, we started can printing. We've got off to a pretty good start with that, but it wasn't like lightning speed. We saw others get into digital printing and race off and then immediately have some issues. So we went through a pretty methodical ramp up slow, took only some customers in, didn't try to get over our skis with that. And we're starting to build now and grow. Now, one of the things that we have to think about is the pace of that growth. And as we add customers and we more burden, we load up the shifts here with the machinery, we're going to get to a point where we're going to have a better ability to see the pace of take-up we have. And that's going to inform us of how the second quarter is going to pan out, like how much improvement we should expect to see. So, yes, I think we're going to see a better second half. This quarter is going to be one that looks different than you've ever seen before because we're going to have new revenues here and we're going to be growing off of a pretty low base. But I'm pretty encouraged. Like I said, I think that The company's in a good position. We still have to manage refinancing. We have to manage the continued peak super spike. We have a working capital here over the next month or so. And as we say in our queue, we need to transition away from traditional bank lending. Our partners at Live Oak and our partners at FIB have been outstanding partners. We couldn't have gotten here without their help. But Live Oak's not interested in staying involved in a tiny facility, and they have now. We've paid them down a little bit in the court, and we'll continue to work to pay them out and refinance them. We'll do the same with FIB. So we've got work to do, but I'm optimistic that, as we just talked about with Ross, that we're going to be getting into a position where you're going to start to see better results as we move out here.

Got it. So I see there's a lot more focus towards craft canning towards this jewelry digital printer and I do see why this makes sense as I believe is the key in this turnaround story. So in terms of optimizing our operational expenses, could you talk about the movement of employees such as are we expected to hire more people to support the craft canning side?

Right. That's a very good question. The company went through a pretty dramatic downsizing and both businesses have, I'd say, been redirected to a different point as far as when we think about strategy. If you were to think about it, that's been a difficult process to line up our investment in people and talent and make sure that we're we're covering the areas that we need to and we have areas for growth and i think we have some more work to do i mean craft is definitely going to need um and they're going to need some more more people there more partners to help meet the the growing demand for their their products and services and uh so we'll be making investments there and then there's all the controls that need to be made underneath that i mean as you think about a new line of business you're going to account for it. You got to collect there. You got to work behind the scenes to make sure it runs smoothly. And I said in my script, we've been doing that on the spirit side for the past year. One of the things that's really hard for investors to understand is we've gone through a pretty significant transformation on the spirit side, not really knowing what things cost or how much money we made when we did things, to having a lot more transparency into what we produce and how much it costs us to produce it, how much it costs us to store it, what happens when we go to retail, how much we can discount without losing money. And I have to give credit to Amy Lancer, who's on the call today. I mean, she's done an absolutely fabulous job coming from Heineken and starting to have us behave with a lot more stewardship when it comes to managing spirit margins. And that's one of the things that gives me tremendous amount of confidence that we're heading in the right direction there. But there's more changes to be made. There's more investments to be made on both sides of business. But I think we're a lot closer to where we need to be than we were this time last year.

Got it. So just a follow-up to what you shared. I think an important part is also ensuring that all the employees are aligned and motivated in this joint effort too. So how do we ensure that employees' morale are high for both business segments, especially the spirit side of things?

Right. So we went through a process a couple of months ago where we really – worked on the culture of the organization. We did a pretty elaborate employee survey, took the temperature of both sides of the business, and we've put together an action plan where we're going to really spend more time employing this, I'd say, over the next few quarters, even into next year. And then we're going to be actually changing our three-year strategy plan, updating it for the another year in the summer. And it involves a lot of the key employee, employee investments, um, that we're making, how to identify, target, motivate, and encourage people, uh, you know, to join some of the teams that we're building and, uh, and then they could also benefit in the, in the success of the company. So it's, it's, it's a topic that's, you know, we talk about internally, uh, on both sides of the business spirits, and also in Kraft, and we talked about it with the board pretty much at every board call. And, you know, I think that we'll have more there, and you'll certainly be able to learn more about that as we go through the conference calls, and certainly I hope you'll be able to note it as we report our bigger filings like the 10K. But there's nothing more important than the people that show up every day at Kraft and at Eastside. I mean, we have a great, you know, product offering. But what makes this work is the dedication of, you know, of the people that come here every day and spend their days, you know, working on being an outstanding service provider to craft beverage companies and making outstanding products for people to enjoy. So that's a key focus of the company.

Got you. So I just got one final question. And while it's difficult to control what the market does to stock price, our stock price is below $1 right now. And that's below the NASDAQ minimum requirement of $1 as the trading price. So what happens if we fall below these criteria? Do we actually move over to the OTC exchange?

No. No, the company, we've worked with NASDAQ on a number of occasions to make sure that we stay in compliance with them on all the requirements, listing requirements. And this is, there's no difference here. I mean, NASA gives you an opportunity to make changes that are necessary. And stock prices, in my opinion, is just a functional, you know, term that can be changed by the number of shares or however you decide to adjust it. It's the market cap that becomes important, obviously. And as long as we have positive tangible net worth and we meet some of the other requirements of NASDAQ, I don't foresee a problem with staying a listed company and staying in compliance. So we'll keep you informed with that. You know, this market is extremely volatile. I mean, I think my house, you guys have to deal with it every day. And we don't know where the stock price will settle out once people start to So look around and as Rob says, look at the values that are all around us. It's not just probably in our stock, it's probably in other people's stock as well. And then, you know, as stocks start to reflect, you know, probably a more normal environment without so much turmoil, then we'll see where we are and we'll address it if we need to. But I don't foresee we're going to need to address it in the near term.

Got it. Thanks, Joffrey. That's all the questions I have. I think it's been exciting and also a roller coaster together with A-Site. And we are looking forward to see how would Q2 and the subsequent quarters look ahead. So thank you guys for the hard work, and we will continue to support you wherever we can. Thank you. Okay. Thanks, Rowan.

Appreciate it.

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

Great. Thank you. Again, I just want to thank everybody that joined the call today and that has put an investment here in following Eastside. I am excited about the prospects for the company for the coming quarter. And for the balance of the year, as I said in my remarks earlier, and as we talked about in the question and answer, I think the company is in a position to do much better and really improve results. And the transformations that we've been talking about over the last basically two years, investments we've made have been made, and now it's about execution. So I'm encouraged to see those results develop, and I'm excited for the teammates that I have here that are working diligently to get this to happen. And hopefully you'll be pleased as we go through the balance of the year.

So thanks again for listening, and we'll talk to you next time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.