Eastside Distilling, Inc.

Good afternoon, and welcome to the Eastside Distilling Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Heather White with Eastside Distilling. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the second quarter 2022. I'm Heather White with Eastside Distilling, 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, Eastside's controller, and Mr. Bruce Wells, Kraft's controller. Following their remarks, we will open the call to your questions. Now, before we begin with the prepared remarks, we submit for the record the following statements. 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 words such as may, future, plan, or planned, will or should, expected, anticipate, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results, to differ materially from those projected in the forward-looking statement. 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 the 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, Heather, and let me welcome you all to our second quarter conference call. You should have had an opportunity to review our earnings press release, and Tiffany Milton will take you through the performance of the company in a few minutes. I'd like to update you on our performance as well and some of our progress to date in the transformation of our businesses as we implement our three-year strategic plan. Our spirits business had a good quarter. We executed some key strategic wholesale agreements and realized some gains on the sale of excess brown spirits that are not currently in our operational plan. Spirits gross margins in the quarter was 53%, which I think is a record for the company, and is up from the 21% in the prior year. Now, breaking that down, year-to-date, we've achieved 32% gross margins in our spirits wholesale business branded retail businesses, and 53% in bulk spirit sales. And this margin improvement underscores some comments I think I've made in prior calls that we sit on very valuable aged whiskey inventory. This inventory is in very short supply and has increased in value over the course of the pandemic. Now, it's critical for us to capture these expanded gross margins in our traditional branded spirits business. As we've said in the past, we will no longer sell the spirits at a loss, so retailers and distributors can enjoy disproportionate profits. Let's take a look at the second quarter branded spirits results in volume, price, and mix. Volume was a headwind, but most of our decline there was a result of lower sales of Azunia through channels where we were losing money. Now, adjusting for one-time sales of about 175 cases of Burnside to Taster's Club last year, volumes of Burnside would have been down 6% year-over-year for the quarter versus the 20 we reported. We have begun to see improvements as we have moved price points up for the key SKUs. Our mix has been somewhat affected negatively by the fact that we're selling less Azunia, which has a much higher gross revenue rate than the rest of the portfolio. But that's been offset by some savings and a lack of discount in our part. As we head into the third quarter, we need to make more progress on improving volumes, but you should expect to see us continue to lap the discontinued Azunia sales through the discount channels and that impact on year-over-year comparisons. The sales team had a number of key wins and spirits in the quarter. For example, we were invited by Club Corp, the largest owner-operator of golf clubs and country clubs in the U.S., to test our Zunia tequila in their Texas market. We were authorized in 50 QFC stores at the Division of Kroger in Washington, starting in Q3, and also one placement in another 17 Pinky stores in Texas. So the sales team has done a good job in laying the groundwork for profitable sales growth, and we hope to have more wins here to report in the coming months. We've made progress in spirits. We believe with more investment dollars, we could probably accelerate this growth. Now, for the balance of the year, we face a number of opportunities and challenges. We need to continue to implement the shift where we're taking strategic price increases, where we are reducing input costs and investing in local marketing. This is not going to be easy in a market where distributors are destocking And inventory is running at very low levels. With consumers facing higher prices and less disposable dollars, they are shifting to lower price points. This kind of environment favors large spirits distributors, but we have outstanding products and in some markets, strong brand equity. So now let's turn for a minute and let's talk about Kraft Canning and Printing. Kraft had a very important quarter. At the end of April, we turned on our new digital can printer and began the long-awaited next phase of growth in that business. As many of you know, digital can printing is transforming the craft beverage space. We are taking share of can decoration from additional craft label and shrink sleeve providers. The business proposition here is very simple. Most traditional craft labels found on aluminum cans are technologies where that effectively make the cans unable to be recycled, and they have to go into landfills. However, digital can printing cans, they are 100% recyclable. Now, in a key market like Portland, where craft beverage is driven by environmentally conscious consumers, this is a powerful differentiator. But that's not all the benefits of digital can printing. We also provide unparalleled decorating capabilities, photorealistic graphics, and the ability to make label changes at the last minute. These capabilities are game changers in space. As a reminder, the space I'm referring to is not just beer, but all types of craft beverage. It's a space that's growing dramatically, encompassing every imaginable beverage variety. It's important to keep in mind this new technology will take time to reach its full potential. So in the quarter, we began introducing our customers to our digital can printing capabilities. And through the end of July, over 60 customers had switched to digital can printed cans. And we had printed over 1.4 million cans. Our strategy has been to introduce can printing to key customers, believing that once they see the benefits they will never return to traditional labels. Given that focus and the methodical ramp-up in utilization, we still have a ways to go to show you all the profitability of our new digital printing business. However, I believe we are on the way in seeing printing utilization improve weekly as we continue to build a printing backlog of customers. We have added a second printing shift and we will be in a position to improve printer utilization in the current quarter. Now, Kraft's mobile canning business saw volume decline versus last year. As many of our Kraft customers shifted to on-premise sales, we were also impacted by stiffer competition and fewer sales of consumables. As I've shared in prior calls, our investment in digital can printing will strengthen our performance in mobile canning and open the door to new opportunities. As an example, We made an announcement this quarter about a new relationship with Approach Beverage. This is a direct opportunity that came from digital can printing. We bring this key new customer, digital can printing capabilities, and have acquired its production assets in Portland. This will be our first co-packing facility to attack the underserved micro craft beverage space. So we're excited about all the changes at Craft. and we believe we have made good progress positioning the company to grow. Now let's talk about some other important developments. So we continue to make progress working on our balance sheet. In the quarter, we terminated our relationship and paid back Live Oak and extended our bank line for a short period with First Interstate. We are planning on replacing that line with an asset-based facility in the current quarter. The balance of the year, we faced two critical challenges. We have to drive earnings improvement despite an uncertain consumer environment while pushing forward on our transformation plans with both craft and spirits. We do need to identify sources of capital to help us drive incremental investment in both businesses. And I believe we have the team, the strategy, and the opportunity to do so. But before I hand it over to Tiffany for some more numbers, I'd like to introduce you to a new member of the team, Bruce Wells, who has joined Kraft as our controller there, and he will be glad to help answer your questions on Kraft's performance. Now, Tiffany, can you take us through some of the details of the quarter?