Good evening, and welcome to the Eastside Distilling First Quarter 2024 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Tiffany Milton, Controller. Please go ahead. Thank you.

Good evening, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the first quarter of 2024. I'm Tiffany Milton, Eastside's Controller. And joining us on today's call to discuss these results is Geoffrey Gwin, the company's Chief Executive Officer; and Conor Kilkenny, Craft CEO. Following our 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 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, including, but 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, 2023, filed with the Securities and Exchange Commission. Now with that said, I'd like to turn the call over to Geoffrey Gwin. Geoffrey, please proceed.

Great. Thank you, Tiffany, and welcome to our first quarter 2024 conference call. We have a lot to discuss this quarter. In addition to Tiffany, I'm excited to have Conor Kilkenny join us today. Conor joined Eastside in January as the CEO of Craft and comes to us with an extensive background in manufacturing. Conor will share some of his first impressions of Craft's business and outlook in a moment. Now if you're new to the company, we operate two distinctly unique businesses, including a Craft Beverage services business, which we refer to as Craft, and we also have a Spirits business, which sells a number of great brands, including Burnside whiskeys, Portland Potato Vodka, and Azunia Tequila, primarily in the Pacific Northwest as well as other regional markets. Now one particular highlight in our company is the investment in craft and digital can printing a couple of years ago. This is a very new technology that allows us to decorate 100% recyclable aluminum cans for the Craft Beverage segment. This is a very exciting business opportunity for us as one of the most dynamic and competitive spaces in consumer packaging. Now new entrants in this category are faced with tough decisions as they chart their course to market. It's a crowded space and extremely expensive to launch a new beverage brand. Think about it. How many new products have you come across in your daily life over the last year? Now I'd be surprised if you accurately guessed that number. I suspect you'd be way off on that number. But the reality is many new products simply go unnoticed. They simply show up. You may notice them briefly, but they fade away in the morass of all the new ideas and concepts we see daily. Now for a startup, reaching a potential consumer, just getting their attention, let alone actually building brand equity, is a huge challenge. Now there are many paths you can take to try to build your brand. Take for example the influencer space, which at times feels like a tsunami for me. My inbox is filled daily with suggestions from people claiming they can introduce us to influencers in the spirit side. There is an unknowable army of people claiming to have access to a large segment of social media promoters who can get your product in front of large numbers of virals. For many brands, navigating that road is fraught with challenges. Now, why is this important for us? It's important because marketing around your product has changed. When I say around the product, I'm talking about where it's sold on the shelf, the point of purchase, the moment a consumer makes a choice, that moment is huge. It's a moment of opportunity. Unlike a consumer connecting online, we have to see it, seek it out, find it, purchase it, and have intent. On the shelf at retail, you're at the moment of opportunity as the consumer rolls by. They are there to buy something. So a new brand has a huge opportunity to win a customer. And I've said this repeatedly in the past, in the Craft Beverage space, the great equalizer at the moment of opportunity is the packaging opportunity. You can go with old boring cans and old technology, or you can pick something that speaks to the consumer. Consumer beverage marketing has changed and we deliver the opportunity to run circles around national brands. To see this opportunity, you need to start by wandering through the craft beer space in your grocery store. There, you will see great marketing, local brands, fighting successfully for shelf space. We see them win daily with data. Craft beer is not struggling. Those brands that embrace their advantage are winning in that aisle of the grocery store. You will see can decoration in many forms: old school, screen printed, limited colors, same design. You'll see paper labels that are not recyclable, and shrink wrap plastic labels that are not recyclable. The latter two require high volumes and a lot of working capital. And in our market, you'll see a new type of digital packaging, digitally printed cans; these cans are extraordinary. They are the digital billboards that can change after 15 minutes when you drive by the stadium on your way home from a concert. They can be unique, unique for a season, for a day, for a week. They can represent a special beer, unexpected, hard to get seasonal. The opportunities are endless here. Beverage manufacturers embracing this technology are just getting started. I started talking about this adoption two years ago, and we've only seen it gain momentum. But now we finally have data that shows these digital trend cans are driving incremental sales for our customers. We saw the adoption expand again this quarter. In fact, I would say the adoption is accelerating for us. In the quarter, Craft produced a record number of cans. Conor will talk about that in a moment. Now while gross margins were impacted by a number of factors, including transitioning to a lower-priced can contract, expensing new parts, and a price investment for large volume, we are pleased with the performance. We expect improved margins in Q2, but most importantly, we see this business growing and evolving very quickly. Now I'm going to let Conor talk in more detail about digital printing and craft, but I want to talk for a minute about the spirits and its performance for the quarter. Spirits had a great quarter, producing the best operating result without bulk sales we've seen in some time. EBITDA for that segment was only a $56,000 loss for the core for the entire quarter. Importantly, volumes were in line with what our expectations were, despite the clear trend of consumers trading down at retail. This consumer shift has been ongoing for a few quarters now, and we've seen it across multiple categories. Also, it's important to keep an eye on agave prices. We're seeing input prices come off all-time highs, and we expect to see savings in the upcoming quarters. That said, the tequila market is clearly facing strong near-term headwinds as consumers trade down there as well. We embarked on a multiyear effort to refocus our spirits investment in profitable segments and regions. We will have more to report on that progress in the coming quarters, but suffice it to say, for Q1, I'm really pleased with the results. Now I want to pause there and introduce Conor, our CEO at Craft, and he can take you through his thoughts on the progress there and a little bit more about his background. Welcome, Conor.

Thank you, Conor. I'll summarize the financial results for the quarter, and then we will take questions. On a consolidated basis, our gross sales were $2.5 million for the first quarter of '24 and $2.9 million for Q1 '23, primarily due to bulk Spirit sales of $600,000, offset by an increase in printed can sales. Craft sales were $1.8 million for '24 and $1.5 million for '23 as printing is finally gaining its full potential. Spirit sales were $600,000 for '24 and $1.4 million for '23, decreasing as a result of the bulk spirit sales in Q1 2023. Our consolidated gross profit was $200,000 for Q1 '24 and $600,000 for 2023, primarily due to our bulk spirit sales in Q1 '23 of $500,000, and our consolidated gross margins were 8% for '24 and 22% for 2023. Craft had margins of 3% for '24 and negative 7% for 2023. Spirits margins were 23% for '24 and 54% for 2023, primarily related to the bulk spirit sales. Operating expenses were $1.2 million for Q1 '24 and $1.9 million for Q1 '23, a decrease of almost $650,000. Our lower expenses reflect the success of our restructuring efforts throughout 2023. Our net loss was $1.3 million for Q1 '24 and $1.6 million for Q1 '23, and our adjusted EBITDA was flat at about negative $800,000 for both periods. We will now open the floor for questions. Operator?

The first question today is from Sean McGowan with ROTH.

Can you give us a little clearer sense of the ramp-up of output on the digital can printer? Like what kind of ramp-up are you seeing there?

I'll start and I'll let Conor add anything if he'd like to. I think we're really meeting our expectations in the first quarter on volume. As Conor said, the year-over-year comparison is there really no comparison, we're fully into 24/7 printing now. And that basically puts us on a path to get to full capacity shortly. There'll be opportunities to get more out of it, but I see ourselves really on track here to fill the machine up. I expect that we'll be in a position later in the quarter, later in the year to announce more capacity coming online in the facility. So we'll be able to double what we're producing with one machine. So I'm very pleased with the ramp-up. And Conor has done a fabulous job debottlenecking it, but more importantly, getting out into the field and really seeing the customer base understand where the market is and pulling people over the fence into the digital printing landscape. I can't stress how important that is today because once you get them over and you convert their supply chain and you start to really show them what they can do with this new packaging, then you're really in a position to just build off. This is a reoccurring business, too, right? So we're going to resell the stuff every cycle. So Sean, I think I'm pleased with where we are in the ramp-up.

I don't know if there are going to be more details on this, but the actual revenue number wasn't too far off from what I have, but I'm just wondering how we got there. Are you getting the pricing you're expecting? Are you getting the number of cans up to where you want it to be?

We were a little lower on cans than we expected, but part of that was getting into the quarter. We had to scramble to make sure we had the machine working at the level needed to get the volume we were expecting and the consistency and reliability we're looking for. There have been some price investments with larger customers to bring them over, but not as much as could be expected. And again, what we're seeing, and Conor can echo this, is that the breadth of customers moving over is wider than I expected. For example, if you're going to enjoy a Dodgers baseball game this summer, you're going to be drinking beer out of a can we printed. We're starting to do business for other college groups that are part of the NIL. So this is not going after the same large customers and fighting for them over price; these are starting to be customers that specifically need something unique like this who are looking for something where they can really benefit from the advantages we have with digital printing.

And any updates that you can provide would be helpful on shoring up the balance sheet or any changes there, both during the quarter and anything subsequent to that.

One of the big things that everybody is obviously aware of and concerned about is the NASDAQ listing issue. Last year, we went down this road, and this has been something I've been working on for two years now: fixing the balance sheet. Fixing the balance sheet has been a priority, and we've made big changes there. Last year, we reduced a large amount of debt converted to equity. That was a hard choice to make, but it was a choice I think was absolutely necessary to put us in a position where we could invest in the business and move forward. I think that's a focus in the first quarter here and into the second quarter. We're looking to build a credible plan that's not just wholly built on balance sheet adjustments, debt to equity, but really on the income statement now. What you're starting to see in the company is the income statement change. We're seeing Craft's revenue really grow through what it historically did because we've realigned the business. But on the Spirit side, we're at a point where we're starting to see that business really at breakeven. As I alluded to in the comments, I'll reiterate now, we're in advanced discussions with a group, and you should expect to hear something from us shortly that really pushes spirits into a new realm of profitability here in the back half of the year. So between the balance sheet and some possible changes that we're working on to get us in compliance with NASDAQ, and finishing these priorities on the income statement, driving Craft to full capability out of its one facility, leveraging fixed expenses with multiple digital printers, and then on the Spirit side, finally getting to a point where we're generating positive cash and net income out of that business, those two elements are going to be the best fix for the balance sheet, I think.

The next question is from Matt Campbell with Laridae Capital.

Jeff, I want to say it's been a long haul here, but it was pleasing to hear from Mr. Kilkenny about hiring a business development guy. Now it sounds like we're now hiring people to go out and get us business, which is phenomenal. Did I hear that correctly?

Sure. Conor, do you want to talk about your team and the investments you're making in Seattle?

Yes. So our first goal was to hire a salesperson up in Seattle. We laid out a skill set of what we were looking for up there, mainly geared towards a business development manager to help with our sales team. What we found is a guy who has, like I said, he has 5 years of experience as the marketing and sales director for one of the largest beverage companies in the Northwest. He's very hungry, but he's also very skilled at finding how we are a value add for the customer. So we're not just offering a beautiful can to them; we can also help them with their forecasting, their business strategy, as well as how to leverage that. In its first three weeks, he has already sold a tremendous number of cans.

So it sounds like you guys have gotten the kinks out of the printing side of the equation that you can drive the revenue, which is great to hear. Were there any other one-time items on the Craft side? Like where is mobile canning that side of the business? Is that now breakeven for us, so it's not going to bleed?

Mobile was actually positive EBITDA in the first quarter. So yes, we've gotten the operation down to where the expenses align with what the sales are. It's actually above breakeven.

So remember, I just want to remind people on the call, the legacy business of Craft is mobile. This conceptually, for people that don't know, was envisioned where they took a very small filling line and were able to architect it to fit it into a box truck, then go to a local site that's like a small brewery and successfully bring the facility and production capability to the local site. So that sounds complicated, and it is. To scale that business, the company struggled with the return on investment because if you think about it, moving a tiny small factory footprint — and we had 13 of them at our peak — to a customer, then bringing them back, you bear a tremendous amount of risk and operational complexity. When the customer gets large enough, they just move off and build their own factory or buy their own equipment. We haven't fully exited mobile because the mobile customer base is extremely important to us; it's part of our DNA, but it also informs the company on how we can better serve our customers. While we have reduced our mobile activities, we've exited Denver, reduced our activities in Seattle to some degree, and also Spokane, we're still very active in Portland, and we will continue to be very active there. Just as Conor said, we've gotten that to a point where we've sized the opportunity. It's a great part of the package that we can cross-sell. But the biggest opportunity, as you said, is digital printing. There are only a handful of people in North America with functional digital printing. There have been investments made in other technologies that are not effective apparently. Fortunately, we have a great partner in Hinterkopf, who is the technology partner that helps us with our equipment. We are doubling down there. So as far as the one-time items, you can imagine, I mean, there's a lot of things that you have to react to in a quarter. As we see this volume of demand in front of us and Conor gets that demand, we have to be in a position that we meet the customers' needs. We cannot win a 1 million can deal from someone and then wake up on a Sunday afternoon and say, 'We don't have the spare part to keep this thing running through the weekend.' We did have a number of items in the quarter that we had to expense. For example, we had a large amount of spare parts we bought pulled in, and we expensed that. We had a lot of scrap that we caught up with as we ramped up; there was extra freight. The other thing I'll take my hat off to Conor is that immediately in the door, he worked on our can costs. Our partner on the supply chain on the can side is outstanding; they've helped us source cans cheaper, so we can deliver that to our customers at a better price. We worked through some higher-priced plans in the quarter that normally we wouldn't have had. So as I look forward, I think we're in a position to really see some gross margin improvements. The bigger opportunity for the business is when you get even more horsepower in that facility. You're not going to pay for a large number of operators because our operators are outstanding; they can manage two machines. You won't have to pay another lease payment; you won't have to pay more towards the overhead because that's going to be leveraged. As we move the can volumes up through $2 million a month and into a much bigger number, you're really going to see the margins and the profitability here change.

How do you elaborate on Sean McGowan's question about the spirits business? You said you're in discussions to push spirits into profitability. Obviously, you commented on agave prices now coming down, but we never know where agave is going to go. So taking that out of the equation, is there a partnership that you envision here? How should we think about that where you do something that can really start to accelerate the opportunity that we have in these brands that haven't had any tender loving care for a while now?

For everybody on the call, the company evaluated selling brands two years ago, or basically not this past Christmas, but the holiday before that. We went through a full year looking at brands, talking to people that were potentially interested in them, and we've continued to do that. But one of the things we've realized is there's a huge opportunity to maximize the value of the brand by continuing this course to improve performance, specifically profitability. One of the challenges we've had goes back in the company's history a few years. The company was built to produce product at larger scales. The vision then was to serve one of our brands we're no longer involved in, which was the Redneck Riviera brand. We brought in blended whiskeys into Portland, built the product and then shipped it back East. Conceptually, it made no sense to keep costs low, and it proved to be a very bad business decision. Eventually, the company downsized across the board in sales, its whole market operation east. Harold Weber probably remembers this because he asked these questions after calls about why not be in New Jersey, bringing products to that whole apparatus was extremely expensive within the 3-tier distribution system. You must be super focused on your investment and your go-to-market plan. As that reality came back, focusing on our key core markets, we never downsized manufacturing enough. A key goal here is to be in a cost-leading position finally. We want to be in a position where we have significant market share and brand equity in our market. We can drive volumes, but we want to be in a cost-leading position, not just with the packaging, the liquid, but also our overhead. You've seen the liquid already; over the last two years, we've sold bourbon wholesale at record prices. The margins in that can be seen in this quarter compared to last quarter, as we had a significant profitability year-over-year. We have a very low cost position there, and we're realizing high prices in wholesale. My point is our cost position is being driven down everywhere: packaging, liquid. We now just finished the overhead piece, and we'll have enough gross margin dollars to do exactly what I was talking about on the Craft side, which is marketing around our brands in spirits. If there's one thing that's been positive about being in spirits and consumer products, it’s the importance of marketing around your bottle on the shelf in a liquor store. We've spent a ton of money on Portland Trail Blazers in the past and billboards, but not marketed around the bottle in the store. When we get our cost position right and have enough disposable dollars to attack the market, we'll win, take share, and you'll see volumes grow in Portland; we'll also adapt savings from Agave moves down to do the same thing. It's a little more complicated because it's a multistate product; it goes through the traditional distribution system. We have to work with our distribution partners, and that's been a long-running challenge. In Oregon, it's a control state, so it's a ship-around-to-market system. I'm very optimistic we are in a good position there. We'll see some improvements this year in spirits. I can't discuss the new potential partnership yet, but I think we are really close to having it done.

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

Great. Thank you, Gary. And I'd like to thank all of you on the call for listening to our conference call, and we look forward to updating you on the second quarter. All right. Great. Have a good evening.

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