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?