Eastside Distilling, Inc.

Hi, everyone, and welcome to the East Side Distilling fourth quarter 2022 earnings 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 Secretary.

Please go ahead. Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the fourth quarter and year-end 2022. I'm Amy Broussard, Eastside's Corporate Secretary, and I'll be your moderator for today's call. Joining us on today's call to discuss these results are Mr. Jeffrey Gwynn, the company's Chief Executive Officer and Chief Financial Officer, Ms. Amy Lancer, Eastside's Chief Commercial Officer, Ms. Tiffany Milton, Eastside's Controller, and Mr. Bruce Wells, Crafts Controller. 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 the conference call today 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 planned, will or should, expected, anticipates, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks. and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements. Such matters involve risks and uncertainties that may cause actual results to differ materially include but are not limited to the company's acceptance and the company's product 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 concerns, and all of 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, 2022, 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.

Welcome to Eastside's fourth quarter 2022 earnings conference call. I'm Jeffrey Gwynn, the interim CEO and CFO, and appreciate your interest in our company. 2022 was a transformational year for Eastside Distilling. The business we have today is very different from that of last year or the year prior. The most obvious change is at Kraft, our beverage services business. Last year, we built out and began operating a state-of-the-art digital can printing plant in Portland, Oregon. To remind everyone on the call, this is the only digital direct-to-can decorating operation in the Pacific Northwest. This new facility allows us to create extraordinary can design for the craft beverage segment that is 100% recyclable and doesn't use plastic shrink sleeves or sticker labels. The cans we are now producing are important marketing tools for our customers. I've been stating this for the past three quarters, that this technology, I believe, will transform the craft beverage space. It's a critical tool for them. And I believe we are seeing that proof now. We've converted nearly all of our existing customer base to this 100% recyclable product, and we've won many new customers. Moreover, we've watched as a number of our customers have really fully embraced the capabilities of this new technology, and they're using it successfully at retail. Now, if you've followed the company over the past few quarters and the past year, getting this investment at Kraft up and running has been a huge challenge. I mean, think about it. It's a brand-new product. It's new technology. It's a new market for us. We've had to build a new plant, install a new team, build new processes, it's been a huge undertaking. And initially, we had projected a faster ramp-up to full capacity, but we faced a steep learning curve that impacted our ability to get to scale through last year. Now, while printing performances improved in 2022, the fourth quarter was particularly challenging as we had to address the bottlenecking, among many other issues that were inhibiting our ability to achieve that full capacity that we're looking for. Seasonal slowness in the beer category, a core part of our current customer set in the fourth quarter, gave us a chance to improve our processes in printing, but it meant not achieving that full capacity in the quarter. So that had a negative impact on the gross margin in the quarter, and you can see that in the numbers. Each challenge we faced, though, during the year, we sorted out a solution for the credit of the team. We improved our processes, and we always served our customers. And we did the same thing in the fourth quarter. Now, as we sit here now on the last day of the first quarter of 2023, I can say our performance this quarter will be much better. Although coming out of the year, we started generation very low. We've seen sequential, uh, improvement in January, February, and March. And in March, we've printed well over a million cans alone this month, a record for us and mobile. We've also made a number of improvements in the fourth quarter and the first part of this year, and we expect better performance there as well. But now let me turn to our spirits business. Light Crafted had its own challenges, and in 2022, we made a very hard decision to reposition our Zunia tequila brand in retail channels where we would be able to make an adequate return on all the investment spending. This meant exiting a number of distribution deals where we were effectively losing money. So each quarter of last year, we saw volumes decline, and they continued doing that in the fourth quarter. But at the same time, we are working on improving our distribution partnerships in all our focus states. Now, walking away from this volume is hard to do, but it was critical for the long-term success of the companies. Now, we have completed this realignment of investment in Azunia with restructuring actions that took place in the first quarter of this year. And this completes a big shift from an overinvestment in Azunia to a more balanced approach that allows us to leverage the opportunity in both Portland Potato Vodka and Burnside, our other portfolio brands. In addition, you will see that we've written down a large portion of the goodwill associated with the Azunia acquisitions. We continue to look across our brand portfolio and target the most attractive segments to invest our scarce capital. And given our high cost of capital, this is exactly the disciplined approach we have lacked in the past. Let's go. We're going to stay at it. Overinvestment in Azunia has meant an underinvestment in the Oregon brand. That underinvestment is reflected in their volume performance in the fourth quarter. But rest assured, we will be increasing our investment there in the Oregon portfolio in 2023, and we expect to see significant improvements. Now, over the course of the year, I've heard from many of you expressing a general frustration of the performance of our stock, and I, too, share that frustration. I bought a lot myself early last year, and I know many of you want an immediate solution that will unlock the value of that we all believe is in this company for all stakeholders. In December, the board, along those lines, instructed the company and me to consider the potential sale of Spirit Brands, one or all, and we put every option on the table and gone through a process that's not complete to date. We do anticipate that we will be wrapping that process up shortly. And while I'm not in a position to answer any questions on that topic today, I can assure you that we will be updating you all once the process has been completed. Now, Tiffany will take you through our year-end results in a moment, but I first would like to give you some rough guidance on what to expect from us this year. We have set a goal to be even at positive for both Kraft and Spirit in the Spirit's business by the third quarter. Kraft will likely hit that mark sooner than Spirit's. We expect improving trends in SPIRITS volumes and strong growth at CRAFFT due to our digital printing investment. These goals will not be easy to achieve, but I believe we have put a thorough plan together and we have it in place. The board has approved it, and if we execute it, we will achieve these goals. With that said, I'll turn the call over to Tiffany, who will cover more details, and then we can get into some questions.