Eastside Distilling, Inc.

Good day and welcome to the Eastside Distilling Business Update 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 your telephone keypad. And 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 Ms. Tiffany Milton. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's business update. I'm Tiffany Milton with Eastside Distilling, and I'll be your moderator for today's call. Joining us on today's call to discuss updates to the business are Mr. Jeffrey Gwynn, the company's interim chief executive officer and chief financial officer, and Ms. Amy Lancer, the company's chief commercial officer of spirits. Following their remarks, we will open the call to your questions. 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 words such as may, future, plan or planned, will or should, expected, anticipate, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements. Such matters involve risks and uncertainties that may cause actual results to differ materially include but are not limited to the company's acceptance and the company's products in the market, success in obtaining new customers, success in product development, ability to execute the business model and strategic plan, 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, 2020, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Gwinn. Jeffrey, please proceed.

Thank you, Tiffany. And let me add my welcome to Eastside and Stillands Update call. I am Jeffrey Gwynn, the CEO, and I'd like to share some thoughts on recent news and then have Amy Lancer update you on Spirits volume results for the fourth quarter and the year. Amy joined us last year from Heineken, but has had a number of roles with Spirits companies over the years, including Diageo and Bacardi. And we are fortunate to have a seasoned executive like her on the team. I'm excited for you to get to know Amy over the coming quarters. Now let's discuss some of the recent Eastside news. As you all are aware, Paul Block resigned from his position as the CEO and Chairman at the end of January. Paul had a significant impact on Eastside and was instrumental in building our three-year plan. We thank Paul for his efforts and his leadership. It's important for you to know that we are not deviating from the strategy we communicated last year. Eastside is unusual in that we have two extraordinary businesses in dynamic and fast-growing industries. Last summer, we laid out a multi-year plan for both businesses, Spirits and Craft Canning, that if successfully executed would drive long-term profitable growth. To launch this strategy, we had to first repair the balance sheet, and on that score, we made a lot of progress. Now, I won't go into all the elements of the financing strategy as I spoke about them at length on the last conference call for the third quarter. Now, I have to say that in other areas, we did fall short and executed poorly in 2021. Our launch of the east side rare and hard to get limited edition products did not meet our expectations. We also executed poorly at Kraft Canning with poor performance in both sales and margins. And finally, we did not fully realize objectives for improving key spirit margins. And we spoke about some of these challenges on the third quarter. And we'll detail more about the performance when we deliver annual results in March. But I would like to call out some successes that I feel are critical to understand. Despite the performance in 2021, we have succeeded in repositioning craft to dramatically benefit what I would call a paradigm shift in marketing, merchandising, and craft beverage. Now, how this fits into a larger east side with its spirits division will become more clear in the future. But for now, I'd like to point out that Kraft's business model is dramatically changing over the next few months. Last week, we made two very important announcements. First, we announced we are entering a digital can printing landscape and have partnered with Pentacoff and Canadian Canning to deliver nearly a $25 million run rate of decorated cans by the year end And this will come out of our recently built out Portland Argyle facility. This brand new 50,000 square foot facility will be fully operational by the beginning of next quarter. We will serve all our existing mobile canning customers as well as new digital printing customers from this facility. Now to date, we have largely just served the micro beer space. but this investment drives us much wider into other categories, and it also drives us deeper vertically with our customer. Now, critical to the success of this strategy is canned supply, a challenge that you've heard us talk about all year. Last week, we announced we have entered into a supply agreement with Canadian Canning. Some of the terms of that partnership we won't discuss, but suffice it to say that this relationship will be an important competitive advantage for Kraft Cannings. Now, on the spirits side, we announced the sale yesterday of 798 barrels of rye whiskey. Now, this sale represents excess barrels that are not in our five-year product plan and leaves us with more than 2,400 barrels of whiskey that we own. Now, a few years ago, we bought large quantities of high-quality bourbon and laid up these barrels, and they significantly increased in value. Eastside continues to own a very viable, difficult-to-replace asset, I have said in the past we are committed to monetize this asset by building outstanding products such as the Burnside bourbon and finding new committed fans for those products. However, we simply do not have the ability to fully utilize all the raw material we own. The barrel sale transaction resulted in $1.5 million in cash, of which $856,000 was used to repay a portion of the live-up loans. And as of today, the outstanding balance of that loan is only $1.9 million. That's nearly a $5 million reduction from the same time last year. Now, our near-term challenge is to execute our sales plans and spirits. I believe we have everything we need to make this business grow profitably and unlock shareholder value. We need to invest in our brands. We need to invest in our distribution partners. and we need to make wise capital allocation choices. I believe Amy will do an excellent job working with our sales team to drive results. And you'll hear more about the SPIRIT strategy on the coming calls this year, but for now, I'd like to introduce you to Amy Lancer and have her take us through results, after which we will take some of your questions.

Thank you, Jeffrey. I am excited about the opportunity ahead for Eastside. I'd like to start by saying in the many years I have been involved in Spirits, I have never seen so much opportunity to bring best practices to sales, including gross margin management, using data to target opportunities, and investment discipline. Now let's talk about volume performance. Sales in Q4 were 8,400 cases, down 10% versus the prior year. The majority of the shortfall was in California, where we cycled 1,000 case load in of Portland potato vodka, as well as continued softness of Azunia, which skews very heavily on premise and was disproportionately impacted by the pandemic. Oregon was also down on both PPB and Burnside, where we were outspent by the competition. Looking at full year 2021 in Oregon, Eastside was down 10% while the market was plus 1% versus the prior year. Keep in mind, U.S. craft spirits are growing faster than non-craft spirits. Whiskey is more than a third of the category and blended whiskeys are expected to hold the greatest growth potential. We have clearly underperformed and this is not satisfactory. Therefore, our number one priority for 2022 is growing the Burnside brand family in Oregon. We've recently announced an exciting sponsorship with the Portland Trailblazers, which will allow us to gain new distribution, drive consumer trial, and increase brand awareness. Our second priority is growing Portland Potato Vodka in Oregon. While we have solid retail distribution, we have poor distribution in the on-premise. We've hired an on-premise sales manager in Portland to more effectively go to market. Additionally, we've recently announced that we are sponsoring the 40th annual Hood to Coast Relay, including a significant investment behind sampling. Our third priority is to accelerate Azunia sales in our top five markets. Our focus will be to grow retail distribution because, as I mentioned before, Azunia skews very heavily on-premise. We plan to invest in strategic pricing and promotions, and we continue to work on our supply chain on tequila. I want to leave you with this thought. While I was at Bacardi, we faced similar performance with a popular brand you may know, Grey Goose. We focused on the basics, much of what I have described above, and saw a rapid transformation of that brand. At Eastside, we are in some of the fastest-growing categories in craft spirits with strong brands with significant brand equity. While not as large as Grey Goose, we do have concentrated brand equity in Portland. We have assembled a great team and have a solid plan to reignite growth, and I believe that we will in 2022. Thank you, Amy. And with that, let's take some questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. Again, to ask a question, please press star then 1. Our first question will come from Jorn Ng with 10X Capital. Please go ahead.

Hey, Joffrey. Thanks for the updates. So I have two questions on my end. Apart from Michael Beeger and Crater Lake, may we know what is your current shareholdings, including shares under your affiliates? How are you incentivized to keep this site going?

Right, right. Jorn, thanks for the question. So I own shares through myself and then I also own shares through the Group G Capital Partners entities and I think we keep the form for filings pretty well updated and I'm a significant shareholder. I don't know the exact number of shares off the top of my head but it's in the hundreds of thousands of shares and I'll say that I'm committed to continue to support the company. I think the valuation that we have in the company is low. And if there's one thing that I know, I mean, I've looked at a lot of small companies and a lot of situations, and I believe that the market doesn't understand the value here. And I'm not talking about just, you know, on one side of the business and spirits, which is the natural place where you're thinking, oh, my gosh, this is a, all this brand value and the value of the raw materials, but I'm also thinking in terms of craft and the canning and printing side of the business. I don't think people understand how significant of an opportunity we have there as well as in the spirits business. But I think you should expect to see me continue to support the company and if anything, get more involved as an equity owner.

Great, thank you. Are we intending to buy a second printer after selling the barrels?

That's a good question. I mean, a number of people have heard us talk about this. We have purchased and fully paid for the first digital can printer from Hinterkopf. We've made that announcement. Just to set this up a little bit, I think people have to understand what's going on in the marketplace. We are one of the few people in North America with a Hinterkopf digital can printer, and it's on a boat. It'll be arriving at our facility in mid-March. It'll be operational by the end of March. There's a company called Hart that was one of the early guys up in Canada to get a digital printer. There's a company in Austin, and there's also a company in St. Louis called DigiCAN. And those are the only people that have this technology in North America. We will dominate the digital printing landscape in the Pacific Northwest. And we're going to add more capabilities in our brand new Argyle facility. And if you look at the map, the white space of this opportunity, these digital cam printers are showing up in craft markets everywhere. You know, Hart's serving the Vermont, you know, New England market. You know, the CanWorks is serving Austin, Texas market. You know, we are going to, you know, serve the Pacific Northwest, which is one of the hottest craft brewing market, and it covers a broader slate of opportunities than just microbreweries. It covers, you know, all kinds of craft beverage opportunities. And as I said in my prepared remarks, We have focused just in serving beer. Why? Because it's easy for us to attack that market. Microwaves don't move beer. You can't move beer without affecting the quality. The mobile canning operation of going in there is a is a key reason why we've focused and we've attempted to move that business to wine and to alternative beverages, but this investment in digital printing will push us to a much broader set of customers. So, yes, we're going to add more printing capabilities. We haven't determined exactly when that will be and at what point we'll bring it in, but We're committed to work with Hinterkopf and all the digital opportunities that are out there and be a leader in this space.

Great. Thanks, Joffrey. So I just got one last question on my end. You know, with the digital printer coming in, how should we think about the profitability and the margins of craft canning in the long term? Has it changed? No.

If anything, it gets bigger. One of the early things that I remember when I was an early analyst studying companies is the importance of thinking about the scope of the wallet. I remember hearing this concept of the wallet, how much of the wallet are you getting? If you think with me about what's happening in that space right now, we go in, we fill, and we leave. Historically, the company's had a lot of success actually going, filling, and and adding disposables and selling disposables. And that's one of the reasons why, you know, we had a lot of success during the pandemic. People got caught without the ability to, you know, no cans. And so they came to us with cans and, you know, need for cans and hack techs, the things that connect the cans. But, you know, we lost that this last year. We weren't able to buy cans at a price that was even close to economical about turnaround and reselling to our customers. And that's what you saw in the third quarter when we spoke to that. But Bjorn, this is completely changing the game. We're going from, you know, low single-digit can sales to a machine that's going to be able to pump out close to 30 million cans in a year. And when we sell those cans, we're selling those cans with an end, and we're selling those cans with the connecting component, the Pac-Tex, and you're also selling a lot of other disposables that deal with it. And... You know, so the scope of what, you know, we're providing for a customer is going to be growing. And the margins there grow. And it's all coming through a four-wall space, right? So, you know, I look at this as a huge opportunity to improve margins, expand revenue dollars, you know, raise prices in areas where we're adding value and not getting paid for that. And... and doing it with really efficient working capital investment. And this is a complete relook at craft canning. It's going to make the company more stable, more predictable, fast-growing, and definitely a lot more valuable.

Thanks, Geoffrey. That's all the questions I have. I appreciate you taking the time as the CEO, and I have confidence in you and the team, yourself, Amy, and Tiffany. So thank you and your team for your hard work, and you have my full support.

Thanks, Bjorn. I appreciate that.

The next question will come from Sean McGowan with Roth Capital Partners. Please go ahead.

Hey, Sean.

Hi, guys. Can you hear me okay, Jeff?

Yeah, sound great.

Okay, cool. First, I just wanted to clarify a comment from your opening remarks. Was the digital printers 25 million cans or $25 million?

25 million cans is the volume. Yeah. They're rated at different speeds depending on what you're printing. Just for the group, for people that might be new, if I could just take a minute and re-explain what we're talking about. Normally, can is printed, you know, through a screen printing process. Right. I mean, it's a very basic concept, you know, digital printing different because we don't use plates like offset printing. Instead, we deliver basically tiny little drops of ink on the surface of the rotating can. The way I'd best describe it is, you know, you know, 15 years ago or 20 years ago, when my kids were going through Italy, you know, you'd go and you'd have to buy a T you know, the Jersey and you'd buy a thousand because it was so expensive to screen print them all. Right. And literally a couple months ago for my son's birthday, I went online and ordered a custom jersey, a basketball jersey, a customized logo, and I ordered one, one single jersey. It came within 15 days, and apparently the company is doing it profitably. Imagine that on the scale of digital printing on cans. The challenge with cans, and the reason why it's taken so long to get here, is because the speed that the cans have to move through this machine is is really a challenge. You've got to have a high volume moving through the machine. The ink has got to adhere. It's got to be able to do the volume. You can't imagine a digital laser printer that's taking you a minute per page. That won't work here. So we're late. This technology seems late to the game, but it's instrumental. And I'd point you to one concept to think through, and that is if you go back and recall in 2014 – Coca-Cola came out with a campaign, and that campaign was share a Coke. I don't know if you guys remember this, but I remember.

I remember that, yeah. I remember that.

You showed up and you went and you think, holy crap, they got my name on the Coke, or they got my friend's name or my brother's name. And you were scrambling to buy as many of those things as you can. That was the first time in a decade that Coke had positive organic growth. Now, let me throw this concept to you. That was done with 240 different cans. Imagine with me, I just got back from Portland. I'm standing in this facility. The printer's, you know, preparing to be installed. And there's a pallet, what we call a whole high pallet of cans. That's 8,169 cans stacked, you know, almost 10 feet tall. And those cans are going to drop into this machine and come out. And every single one of those cans could be printed with a different label. And it won't slow down. Now, that's going to be specifically unique to our machine for one reason, because we have some updated software and technology that early machines don't have. But that is powerful. That's an incredible new merchandising tool, and it's going to empower the craft market to take more share in the center of the grocery store aisle. It's going to be incredibly powerful. It's going to be local, hyper-local, and it's going to be transformational as far as merchandising is concerned. And if there's any category where merchandising has been taken by storm, by creative, very thought-forward, talented people, it's in the craft beer section. Hinterkopf wants to work with us. because we dominate the Pacific Northwest and we touch all these small, extremely valuable customers already. So that's the opportunity we're talking about. It's a paradigm shift on how this stuff's going to be marketed, right? A lot of people ask, it sounds like a great machine. It does a lot of amazing things, but why is this important? You're going to have to dream a little bit and think about the merchandising here, but it's going to be transformational.

Thank you. Thanks for that clarification. I have a couple of other questions if I can. So on the comments that Amy gave us earlier on the case count, how can we translate that, or can we at this point, into what kind of the net sales figures look like for the fourth quarter?

Yeah, we'll update you on that. The good news here is that we did have success. you know, raising price points across the spirits category. That was a key priority of the company last year. You know, moving away from selling redneck Riviera, you know, inexpensive and low price point is not the game that we can play at our scale. We have outstanding spirits product products. Our, our whiskey is outstanding. In fact, if anything, we put too valuable a whiskey into our burn side because we without over aged it. Right. I mean, the quality of their product is something that you should be competing with Jefferson and higher quality bourbons. And the same thing with tequila. Our tequila is outstanding tequila. The challenge is that, you know, we've been selling at a lower price point. So what you'll see in the fourth quarter is while the volume was not as great, I think the revenue won't be as bad as the volume suggests. And you should continue to see us improve on revenue performance, versus historically where we've been on a volume basis, right? So I think that's something that you can keep your eye out for. We want to give you insight to how the business is finished, and we're going to be reporting our fourth quarter numbers on time, and we're going to have a conference call here just shortly in the next few weeks on the fourth quarter. So we'll update you on all the numbers, the revenue numbers and craft numbers, and at that point I think we can really hit that topic well.

Okay. Thank you. A question about the sale of the Ryan. You and I have talked about this a bit. Two questions. One, what's the accounting on that sale? How much profit do you book on that? Are there other costs against that? More importantly, can we apply that value or should we apply a greater value to the remaining inventory?

That's a great question. The the value of bulk whiskey aged has gone up significantly. And the prices that you see people talk about are not indicative of really where I think the price will be. And I know that by the fact that when we went to check this on selling this product, it was a scramble. It felt to me like a scramble of people trying to get and specifically on stuff that's over six and seven years. So when you think about the remaining portfolio, a lot of the stuff that's left is going to feed our premier stuff. Buckman, outstanding. If you haven't tried it, that's the best bourbon we make, and it's outstanding. And then we blend with some of the other Burnside products. So I think the balance of what we own is, is a nicer portfolio as far as age. But I'll tell you, Sean, we have a problem. You know, and the problem is when they bought all this bourbon, we weren't thinking that we were going to be at this case volume, right? We were thinking we were going to be at a much higher case volume. So we have all this bourbon, whiskey that's aging, you know, and it should be going into super high price point products. And so, you know, one of the mistakes we made last year is we said, you know, we can make a super high price point product, but when you take a super high point price point product, like a one 99, you know, barrel select product, and you bring it in Oregon, it's not going to sell well, despite the fact that it's outstanding. I mean, you can take it to some key craft markets and they'll literally take the bottle and put it under the shelf and give it to the best customers, but in Oregon and where we really have great distribution and great distribution partners, there's not going to be a lot of people that are going to lift it off the shelf at that price point. So we have to manage through a lot of value that's left in these 2,400 barrels and make sure we have the right product going into the right specific SKU so we're not basically delivering a $100 opportunity and only getting paid for $45 or something like that. So to the counting on this.

Yeah, that's my concern is that, you know, like we're sitting on all this value and to try to raise some capital for whatever, you know, totally legitimate reasons. Are we underselling these assets that we have?

Right.

Or are we, you know, are we selling it out slow enough to really capture that extra value?

Yeah. So I've said this before and we've talked about this and some of the other people on the call probably heard me say this is that Absolutely. We want to take these barrels through our income statement, right? We want to basically, you know, bring them into pods, take them out, sell them and, um, and monetize them because we can get multiples more than we can if we just sell the barrel outright. Right. Well, that's, that's, we understand that the hard reality that you have to also accept though, is that we have to really improve our distribution partner and our relationships. We have to improve our relationship with distribution so we get buy-in when we want to bring things into new markets. I mean, how long has this company been telling you guys that we're going to bring Burnside to California? And we haven't made a lot of progress there because we thought we could just do it on our own. And that's the biggest mistake that people are making on the other side of the phone here is the company has to figure out how to empower people to inspire our distribution partners to invest in our business. And I'm going to tell you the way we're going to do it, Sean. We're going to do it because we're the only public spirits company, right? And when this starts growing, and it will grow, and we will get credit for it growing, we will have the capability to grow spirits in our key markets, these five key states that we talked about, and support them and grow them in a way that Small private spirit companies will not be able to do that. It's not going to happen. The only other people that are able to grow aggressively are the people that link up and basically give their brand away to a celebrity. And we're not going to go that route. We're going to go the route of building something that's sustainable, that's highly valuable, has a tremendous amount of brand equity, And the results that you've seen historically this year in spirits is a sheer clear indication that we didn't invest in distributor relationships as much as we should have. And, you know, we failed to support the brands in key markets, right?

Okay. I mean, just to return to the core of that question, are we booking a big profit on this sale?

Yeah, there'll be a profit. And Tiffany can – I don't know, Tiffany, if you're ready to talk about the gain. Just the way this works is when we – Sorry, Jeff.

It's actually recorded to revenue. The net proceeds will be recorded to revenue. Okay. No, I'm sorry. The gross revenue would be to – the gross proceeds, rather, would be to revenue.

Right. And the way we figure out the cost – Yeah, that's right. So we lay up the barrels at historically what we pay for, and they incrementally increase in value for insurance and storage costs. And we've sold them significantly above where our costs are. So you'll see in the first quarter, gain on sale from the barrels, and we'll tell you that number when we report the first quarter. And, yeah.

Yeah, and then last question, how – What can you say at this point about the financing on the printer? How does that work, and how does the financing affect the P&L?

Right. So we raised a lot of capital last year, and a lot of people, you know, we did a lot, right? We sought out key and strategic investors. I mean, Bigger and District 2 were two of them. Crater Lake and Slingshot and some others were critical partners in this. And we basically paid for a $4 million printer. So we've got that 100% paid for. It's not financed. We're expecting, however, to possibly do a stale leaseback transaction on that asset, which will raise more liquidity. And then, as we've talked about, we were in the 11th hour of refinancing Live Oak last November, early December, and then decided, based on our cash position and a number of You know, situations, you know, we decided that, you know, the partner that we had picked wasn't going to be the partner that we wanted longer term for the development of the business and where the business was and the scope of what we needed going forward. So we changed our plan there and we're working with a new group that would set us up to refinance Live Oak. Provide incremental liquidity for the incremental can volume that we're going to be doing and funding the company going forward that way. The second printer, we have not determined how we'll fund that or whether we'll seek a private group to help us fund that. But I'm pretty confident that we have a path forward to navigate our next couple of quarters here and the dramatic change that's happening. in a working capital with the investment in, you know, cans.

Okay, great. Thank you very much.

Yeah, thanks, Sean.

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

Hey, Ross. Hey, Jeff. Thanks for having the call, and congratulations on your position. I actually hope that they find you to be the one they keep. I appreciate that. We'll see. Okay. A couple of things. First, with regard to the issues on case counts in the fourth quarter, have you guys taken steps and are you seeing traction on reversing those issues?

Yes. I mean, we believe that we're going to see some improvements here and we've seen some in the first quarter. I think there's something important we have to also talk about. Some of that case count drop was us pulling back from the Zunia sales that were unprofitable, right? And we had said all last year, and Ross, you and I have talked about this, is that tequila is a unique spirit. You can't bottle it in North America in all circumstances. You really have to bring it in as a finished product. Your partnership down there is another thing that you really have to be close to and work with. In our case, our partner down there has had a lot of cost increases and has pushed our costs to a point where we've pushed prices up and there wasn't attractive margins, particularly if you're going to go into larger accounts, discounting through the chains. And so we had to back out of some of that stuff. And that's what some of the things you heard Paul talking about and us talking about last year is we had to back out of some unprofitable deals. I think, and we said this last year, that our key priority was to work with that partner and to restructure that supply chain. And I don't have anything yet to report emphatically on that, but I can tell you we've made more progress in the last two weeks than we have in the last two years there. And we will see improvements in that partner, that relationship, and we're going to see that business get more valuable, the margins expand. We've done the heavy lifting, pushing the price points up dramatically. The frontline prices have been moved up, and Amy can talk more about that if you're interested. I mean, that's been a feat, and we've been benefited by the fact that everybody in tequila and spirits has been rushing to raise prices, and we've just kind of, hang out below and in some cases push our prices up, but not much. And so we have a lot of room to work with to re-engage and reverse the volume, I think. But again, the main issue is distribution relationships. We have to really re-engage there, just like we're talking about with the supply chain, and have them see us as a valuable partner. And we're working on that and that's on the schedule here in the very near term.

Well, a couple of things. First, I've known you for a long time, so I know that, you know, I'm not surprised you've accomplished more in two weeks than you had in the last two years. And I'm sure that you'll get this done. Second, what kind of just ballpark economics improvement do you think we can get as we move forward? I think one of the issues with this stock has always been that you've you have this great opportunity, but you haven't been able to quite break into where you can sell finance as a business. And therefore people are trading you like you're a call option or actually a warrant in here. So what do we need to do? What do you, cause I'm confident that you have thought a lot about this. What do we need to do to get to where in your eyes, we see this business to where it can sell finance. And then the growth really does start to gain traction for the shareholders.

Yeah. Great question. And this has been the big enigma that a lot of people don't understand and have struggled with. And they ask me, why do you have a spirits business and you call it a canning business? And I just want to, going forward, I'm going to do the best I can. I know Tiffany's going to catch me on this a lot of times. I'm going to do the best I can. I'm not going to refer to the canning business as a co-packing business. This is a technology business. This is a digital printing, you know, consumer-focused technology business. The good news is that you don't have to wait much longer. The last time we spoke, I think, last week, you know, we were talking about the fact that it feels like waiting for a good dough. It never ends. It never ends. And I've been on the same side. I've been involved in this company, and it's like, when does it change? And I'm going to tell you, it's changing on March 28th when we turned the switch on this machine. Now, that might sound too simple to a lot of people on the phone, But it's going to change. It's either going to work and the customers are going to buy the stuff. And I see evidence of it with our competitors who have these things, who have this machine. We have a better team. We have more technology. We have engineers that have actually been in Germany and trialed this thing. We've worked on the cans. We've worked with marketing. We have, you know, an incredibly talented Portland-based group. Kraft is an amazing organization. It feels more like a startup than, you know, than anything. And they're going to attack this opportunity, and you will see the results in the revenue, right? The question that I spent a lot of time ruminating on is how profitable will it really end up being given all the pieces that we're putting together? Nobody else that's doing this has a filling, you know, side of the business. Kenworks in Austin doesn't have that. They start with nothing. They had a business plan, an SBA loan, and a machine. We're coming to this with close to 350 customers, right? We've got customers that are already dropping their cans in our facility because they've been kicked out of Ball, and Ball's not printing for them anymore, even though they do a million units. So you're going to see this thing spinning up opportunity, and I'm going to make this statement that I think this thing's going to generate a lot of gross profit dollars, and those four walls absorb a tremendous amount of the the fixed cost of the entire company, and we're going to get heading towards a place where this year you're going to see line of sight to see this thing sell fun. And now, having said that, I can tell you this, Ross, and I believe this to my deep core. I see five or six investment opportunities on my desk every single day, and I have to scratch off four of them because I don't have any money for them, right? I literally sit there and cringe as I see an opportunity pass by and And I say, we don't have the cash for that. And I'm not going to sell 20 million shares at a dollar to fund, you know, one of them, right. Or two of them. Right. So what we're going to do and what the team knows and what the board's aligned on is we're going to deliver the results on this single campaign that we're going to get the market focused on the fact that this is a technology opportunity that you want to invest in venture. If this is a close to ventures, you can get right. The great thing about it is you get with you to go along with the show, right? And we're going to get revenue going in the right direction and you're going to see the margins change. And then when the stock reacts, I'm going to selectively decide, you know, obviously with the board's input, when we can afford to bring down shares and invest in something that's going to make us go even faster. And, and, and, and there'll be a day on a conference call and I'm, I, I hope it is this year. And it's you that asked me the question, can we see growth even faster than this? I mean, there's going to be a day when I'm hoping that this question is behind us and you're going to see a transformational change here. And, you know, it's happening in the second quarter. We'll report on it as we go.

Well, you know I believe in you. I believe in your ability to really make change and to lead an organization. I'll be blunt. I already hear a change. I hear a lot out of you right now. On economics, You said what, the machine can do 25 million cans a year? Yes.

That's assuming a lot of factors. That assumes the quality of the printing on the can, the 80% utilization. It assumes a certain number of shifts. There's a lot of gating factors. Some people say these machines can go faster than that. You can definitely go faster if you don't print the Mona Lisa on the can, but you can basically print the Mona Lisa on the can if you wanted to. So it really depends on where our customers go with this technology.

If they want the Mona Lisa, do they pay more for it?

That's a great question, and I've been preaching that to the team, that one of the interesting things about being the first in the market is you can look to your competitors and and take their pricing or you can build your own, right? And the discipline around pricing is what's going to drive the big upside here. If someone shows up and they say, I want a seamless can, I want you to print a full pallet, 8,169 cans, and I want every single one of those cans to be different, right? I want you to put the faces of every single person that's ever walked through our microbrewery you know, and send us a photograph. I want you to put their face on each one of these cans. We can do that, right? The challenge for us is to make sure that we are getting compensated for the investment we've done, the technology, right, and the value that we're going to be providing them. And I believe that these microbreweries and people that are making these kombuchas and these, you know, spiked seltzers and different types of RTDs are going to start to realize the power of this machine And as they start to queue up, and I think it won't take long to see this, we're going to be in a position where we're going to start to be able to price much like an airline does. You show up late and you have to be on the plane, you're going to pay for first class and it's going to be hard. You're willing to commit to us for a longer relationship and you'll fit in when we can fit you in. You want a coach seat, you're going to get a coach ticket. But I think at the end of the day, what the customers are going to have is an outstanding product. And craft is going to really be able to be at the forefront of transforming some of these small businesses. And really, at a critical time, craft, you know, particularly craft beer, has to continue to push forward and drive people to be willing to pay for more, right? I don't know about you, Ross, but, you know, at Carluzzi's around the corner from my island, I go in, and I'm spending $17 on four 16-ounces, if you get this thing dialed in and packaging right, there's no reason in the world why people won't pay $5, $6 a beer for something that's just a story. And that's going to be transformational for some of the smaller companies, right, that are trying to compete in a craft space where big guys are pretending like they're small craft guys and they're not. Right?

Well, it also... It therefore becomes interesting because you kind of like to think of this and model it saying you do 25 million cans and you get five, you net five cents, you know, your operating profit will be four cents a can, five cents, six cents a can. But it really means that you're going to have a broad spectrum. You know, some people you'll get, you might get a lot more than five or six cents a can for.

You're thinking too linearly. I mean, I mean, it's not just the cap. Yes, it's, it's dynamic. Some you capture more margins, some less, but you're also getting billing. You're also getting disposables. As we buy more cans, it's critical we get a second machine because as we move up to a larger absolute can purchase, our cost per can go down. That's a graduated graph line. You can see it. We know it. For the first time, we had multiple people trying to do a can deal with us, and we struggled last year just buying cans. But getting the digital printing completely changed the relationship. It's like we discovered ourselves all of a sudden and everybody wanted to dance. So you will see what I'll say about that margin story is applying a flat margin rate to 25 million cans is too simplistic. There's too many revenue opportunities around that limited resource for you just to pick decoration as the one thing that makes it work. It's going to be bigger than that.

And so in looking at this, I would assume also your canning relationship helps transfer the working capital the cans, perhaps off your balance sheet.

Yeah, yeah. So that's, that's going to be a change where we're, when you when you're printing for people think of this this way, far can relationship is unique in the sense that the people that we're competing with now, are people that are doing shrink wraps around cans. So when you go in the grocery store and you put your hand into a cold case and you grab that great craft beer, the label feels different. It's a sticker label or it's a plastic label that's been shrunk around the can. What's important for you people to understand about that is that can has, in some cases, moved all over the world. I mean, it's been bought and built in the Midwest maybe, Or the Pacific Northwest, then it's been shipped to a provider who shrinks, leaves, and decorates the can, and that empty can gets shipped again back to the customer where they fill it. You can't fill the can before you put the heat shrink on it because then you're heating up beer. That doesn't work. All right? So the supply chain is kind of funky, and so the end result is the cost of the can is And this gets to your earlier question. For some people, it's really super high. A decorated can can travel all around, and the logistics costs are crazy. The difference now for us is we're taking a huge volume of cans from Washington State over the border and putting it in our fourth wall facility, 50,000 square foot facility. Those cans are moving one time. They sit in our facility. It's a can bank. Customer calls us, sends us a note, hey, I want you to print, you know, You know, 50, 75, 80, 100, I don't know, cases of this summer hazy, right? It goes to the machine. The machine starts printing. We deliver it, you know, next week. As opposed to that guy sending his cans or ordering cans that are being labeled somewhere in Iowa or some distant market where the cans have already traveled halfway across the United States, so they've got built-in cost on them. He's hoping he gets the things in the cans in 45 days, 60 days, because he's got the beer waiting, right? And then the cans are delayed, and he's got the beer in the tank, and he's going, crap, now what do I do? How easy is it for him to plan his business and switch from a summer pale ale to an IPA? He can't do it. You know, his supply chain is hobbling. This is different because now he picks up the phone and we deliver whatever label he wants and we're right around the corner from him. And the part that we haven't even talked about yet, we don't got the plastic on the can and this is 100% recyclable. That's going to really start to become more well aware in Portland and the Pacific Northwest when people start to realize that stickers and plastic make aluminum not recyclable. Paint, you know, non-toxic, toxic, it's water-based, you know, is going to, water-soluble is a much better solution for the environment. So there's going to be a rapid shift, and it's going to be a challenge for capacity. Our biggest issue will be capacity. And there will be new, you know, iterations of the machine, and it will have machines that go faster, higher CPMs. But based on the numbers I'm seeing, these machines will pay for themselves very quickly.

Well, I could talk to you about this for a lot longer, but what I do want to say is thank you for having a call. Thank you for having a plan. And I think anyone who, who basically was worried about the change in leadership, my hope is they should be really reassured because as I said, I've, you've put a lot into this company and I think it's pretty clear that you thought a lot about it and, that we're lucky to have you inherit this position. So thanks.

I appreciate it, Ross. I appreciate your patience for one more quarter.

We'll say two. You know I'm not a patient person, Jeff. Okay.

I appreciate it. Thanks, Ross.

Take care. Bye.

The next question will come from Matt Campbell with Lorde Capital. Please go ahead. Hey, Matt.

Hey, Jeff. Good evening. Ross basically asked every question. And then the last one, you know, I think the environmentally friendly, I think that's a game changer as well on the canning side. But just to summarize this call, it sounds like on the spirit side of the business, we're going to see margin improvement. We're going to see better relationships with our distribution partners and And we're going to have a better focus on the five states that we already have a presence in and build out those states as opposed to try to be all things to all people in many states. Is that summarized? Basically that and Azunia, you know, we've gotten more done there with Azunia on the cost side. And you're going to continue to improve that. the cost of goods on the Azunia side. So we should see margin improvement across the board starting in Q1.

Well, we will see improvement through the year. I'm going to wait and let Amy really share more about that when we get to the fourth quarter conference call. We can start to give you some sketch out the plan for the year and the cadence for what we should see in spirit. Part of this, Matt, I tell you is we, you guys, the market thinks we're a hot mess. Our supply partners think we think we're a hot mess. Right. And so there's been, you know, there's have to be some really hard face to face sit down discussions where we look across the table, not a video call and explain to them what makes this different and what's, what we're going to be doing differently. And we think we have enough levers pulled now, right? That we're going to be able to make a strong case why our partners need to invest with us. And, uh, and so the challenge for that is when they turn the switch on and they're in agreement that they can get behind us and help us with our distribution and we're going to get deeper in is, you know, it, is when you're really going to see the numbers change dramatically in big markets. Oregon's a nice-sized market. We have a lot of presence in Oregon, right? Same Seattle, Washington. We have quite a bit of brand equity up there. But when you move into California, there's some markets in California that absolutely dwarf Oregon. And that's where these brands really move dramatically, right? They move significantly. And And, you know, it's white space. I mean, I don't see how we can go lower from here, right? We were so – our volume is so anemic. And we've underinvested in Burnside and Oregon and Portland Potato Vodka. I was just watching – walking in stores, you know, with one of our salespeople last week. And it's really, you know, surprising, you know, how we're – at so many places, but it wouldn't take much. It would, you know, a double facing here of a vodka instead of having just a, you know, two facings of two different skews. You get the, uh, off premises to, to have four faces in it. And Amy can probably speak to this better than I can. We've had a number of conversations with her about this. The spirit story is a one which blocking and tackling. You probably heard that before, but it's, it's doing what you say you're going to do. Being a good partner, consistent investment, So discipline, tracking, and the part that, again, Amy can speak to this, that's mind-boggling, is allocating capital wisely in spirits. You know, when I joined, we talked about cases sold. And then there was a push that said, well, that doesn't really help me anything. Tell me about the revenue on the case. And then it was gross revenue. And then it was net revenue. And then, you know, as I got deeper in, I was like, I don't want to hear about revenue. I want to hear about contribution margin in my case. Amy's figured it out. She's unwound that. And the biggest piece that hasn't happened until now is making sure that we live by those numbers. If we don't have the margin in this particular SKU and we can't get the price up, we can't get the cost of goods down, we're not allocating any money to working capital there. I think we lost you, Matt.

Yeah. Hey, Jeff.

Yeah.

Yeah. Listen, I really appreciate, you know, all the hard work you're doing there. You know, at the end of the day, there's a lot of talk here. But I think it's evident, you know, by you communicating, you know, to the shareholders that have been patient, but you're going to walk the walk, too. And the fact that, you know, you're interested in putting more money in the company speaks volumes because you see it better than we do at this point. But, you know, I feel good about what you're doing and really appreciate all the clarity because this is about blocking and tackling. And then my last question, I don't know if I heard this, but has your team been properly trained on this new technology so we've taken that part of the risk out of the rollout of the canning business for the new technology?

Yeah, so we sent our – we sent our two best engineers over to Germany. I mean, these are the people that really dreamed up the concepts of digital printing. And they spent a large part of December there working with the partners over at Hinterkopf and took our machine, ran our own canned food machine, and worked on it. Now, having said that, The thing's on a boat somewhere in the Atlantic on its way over, scheduled to offload here shortly, and it'll be installed by Hinterkopf, and there's a lot of logistics around it. It's not just a digital can printer. It's SCA equipment, which is basically the equipment that feeds cans in. When you see the facility, and this is something that I'm hoping we can put together where we have people you know, coming from our stakeholder community. And when you see the Argos facility, what you're going to see is a long rectangular, you know, plant. And on its axis, cans move through bays on the right-hand side if you're looking, say, north, and exit on the west side through can print and digital printers. And so there's a lot of, you know, architecture that's being built in. You know, is it possible we get delayed for a week or two, you know, maybe, but I don't think that's going to be a problem. And I'm highly confident that, uh, that we're going to be off and going right now. There's, this is a machine and we have one of them and there's no redundancy built into one machine. We have a lot of spare parts. We have a process and a plan for fixing issues. You know, and so our goal right now is just to keep our ball up as high as we can. introduce the product to the customers, you know, and have them embrace it and then backfill behind that with more capacity as we can.

Yep. Yep. Got it. Understood. Look, it's a really good cogent plan, and I respect the fact that you're doing this and you're not going to dilute or try not to dilute the shareholder today. I think that's really prudent. And, you know, show the street that you can really grow and, And then we'll be able to raise money when and if at much better prices. So thank you for that.

Great. Thanks, Matt. The next question will come from Calvin Seto with 10X Capital. Please go ahead.

Hey, Geoffrey. Congrats on being the CEO of Eastside. And Amy, congrats on your promotion. I think you're incredible. Excited for you as well. So not really a question here, but sharing from my perspective. And since we have other shareholders here, I just want to share my perspective as well. So I've been an investor for more than 10 years and I've seen how companies could turn around with execution and focus. I think in the beverage industry, we have two shining examples, Celsius Holdings, Monster Beverage. And I can tell you that Eastside has good ingredients and there's a promising future. And I think we just need to make it happen Right now, the way I look at it, with this digital printing, I think it's a critical juncture for us right now. I think we simply need to execute. And Geoffrey, I hope that you will build your dream team which align and will march along steps with you. So I don't rule out that one day we definitely could be a 100 million market cap company or more. I think that's a playbook. Definitely, we can get it there. Maybe just one impromptu question that I have in my head is how prepared are we for the digital printer from day one? I think the people expect we have not an issue here, but in terms of the customers, I believe it will be a gradual ramp up in terms of utilization. Could you speak about that, please?

Sure. I think we're going to be ready for it. I think we've already prepared ourselves for it. There have been a lot of that are fortuitous in the sense that we have some very large volume customers who are looking for a printing solution, not just digital, a printing solution, and we happen to be very local to them. And that's a function of what's happening in the wider space, and you guys can do the research and Google that and see what's been transpiring with larger companies you know, manufacturers and printing places and how they're going for even larger scale customers and it's crowding out and dropping customers into our lab. I don't know when it's going to happen, but I'm highly confident that very quickly we're going to be completely sold out of the capacity of this machine. You know, we'll obviously report as we go, you know, how we're doing there and, you know, and the efficiency of the team. I have every confidence to believe we have the right team in place. And Kraft has their hands around this opportunity and will deliver a good result. So we'll see how that goes if they're If we need more adjustments there, we'll follow through and help support that team there. But I'm really confident, Kelvin, that they're going to execute well and we're going to see the results pretty quickly.

Yep, yep. Got it. Just to wrap up my comment. So, yeah, I think... You know, I'm just hearing from other investors who are on this call as well. A lot of them are very supportive about your plans and for you as a person as well. And from my view, I think you are a people's person and you really want the best for all of your team members. And I think a leader like that would really bring a company quite far. So pretty excited, but also patient to see the execution. And let's see how it goes. Thanks so much for the hard work. Okay. Thanks, Alan. Appreciate it.

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

Right, and I really appreciate everybody's interest in the company. I'm excited to see this year roll out in front of us all. I think there's going to be a lot of interesting things happening, and I think it's going to be a huge, important milestone year for the company. I have every confidence that we have a team that's committed, focused, experienced, is going to be able to really take both these big opportunities, both spirits and the digital printing landscape here and do a fabulous job. So with that, I think we'll be talking to you here in the next few weeks when we report our fourth quarter numbers. And we will be reporting milestones as we see them with press releases and reaching out to you. But feel free to reach out to me and I can set you up with myself or members of the team, and we can walk you through more aspects of our business plan for 2022. So thank you.

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