Beeline Holdings, Inc. (BLNE) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Eastside Distilling reports First Quarter Fiscal Year 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you, Andrea. And good morning, everyone, and thank you for joining us today to discuss Eastside Distilling’s financial results for the quarter ended March 31, 2019 as well as management transition. I am Robert Blum with Lytham Partners. I will be your moderator for today's call. Earlier, Eastside issued their first quarter 2019 results in a press release as well as issued their 10-Q. Joining us on the call today to discuss these results are Grover Wickersham, Robert Manfredonia and Steve Shum. 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. 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 involves 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 its business model and strategic plans, success in integrating acquired entities and assets, ability to obtain capital, ability to continue as a growing 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, 2018 filed with Securities and Exchange Commission on March 28, 2019. Now, I'd like to turn the call over to Grover Wickersham, Executive Chairman of Eastside Distilling. Grover, you may proceed.

Thank you very much, and good morning, Robert, and good morning to all of you. I’d just give a shout out to the Eastside employees that are on the call, most of whom are also shareholders and I know we've got a lot of them on the call today too. So let me just launch into our financial recap. We completed the acquisition of Craft Canning + Bottling during a historically slow quarter for that business and obtained results that surpassed our internal projections and contributed more than $1.4 million in revenue during the quarter. Craft has taken over a lead role in increasing production efficiencies across the board with all of our products and is surpassing expectations for a integration of the two businesses. We are getting -- as we will talk about later we’re getting some very, very good efficiencies in our production, which are going to be flowing through the cost of goods sold in Q2 and Q3. Also, we accelerated authorizations of Redneck Riviera Whiskey in some of the country's largest retailers including Kroger, Fred Meyer, QFC, Albertson, VONS, Pavilions, Safeway, Walmart, Winn-Dixie, Jewel-Osco, Binny’s, Meijers, WinCo, and many others. Overall this quarter, we shipped 6,000 cases of Redneck Riviera and very few of those cases include the above-mentioned authorizations. In Oregon we maintained this quarter 50% year-over-year organic growth in case sales. We also launched the major advertising program to invest in our Burnside brands and I'm very, very happy about momentum that we have going in Oregano. I just mentioned that last month, we did a largest ever month of our flagship Portland Potato Vodka, and it seems like it's gathering momentum every month and our whiskeys are growing 5% to 10% sequentially every month this year. So I really feel this momentum is building and will continue to build. We expanded our operations into some new high-growth categories including RTD cocktails, which we canned on our own equipment and that was with our launch of the new Portland Mule and our initial introduction into the CBD beverage market is also on the brink right now. Overall on a comparable basis our sell grew by 161% to $3.7 million. And again, this is during a historically slower quarter for our business and for Craft. This surpassed our original Q1 expectations and I believe it's safe to say that surpassed us on the street. I could not be more proud of the team’s execution during the first quarter of 2019. I would like to talk a little bit about myself personally and we can spend a couple minutes on that. But as many of you are aware, I recently became involved in Eastside originally as an investor and this was back in 2016. In those days I was captivated by -- with Mel and Steve and the other great people on the team had in terms of a product base and I saw a lot of potential in it. In the end of 2016 when I became CEO I put forth as a company policy and with the board a three point strategy to first of all create a scalable platform that will allow the company to benefit from a so called brand factory approach to develop a -- development of new products in partnership with the leading branding firm Sandstrom, also based in Portland. Secondly, I wanted to maintain, build a cash generating business in Oregon with the large number of product offerings that we have across the board and the solid co-packing business to take advantage of other things, very solid, wine canning growth in the Pacific Northwest. And then finally, make use of our public company status to make accretive acquisitions. One of the first moves we made as a company at that point was to bring on Sandstrom partners to create high level branding that reflected on the outside of the bowl the tremendous product I believe we have on the inside. We also look to expand our production capabilities to meet the growth demand that we believe we could create and we also made strategic acquisitions, including Motherlode in 2017, which got us into our current Milwaukee location, Milwaukee, Oregon and now recently the Craft Canning + Bottling acquisition to greatly expand our co-packing capabilities, as well as I alluded to increase our own manufacturing efficiencies with our core products. We also expanded the product portfolio including the acquisition of Big Bottom Distilling. We reached an agreement with country music star John Rich to develop Redneck Riviera Whiskey and that’s starting on to become one of the most successful first year product launches for our craft spirits brand. More recently we leveraged these integrated capabilities of products development, branding production and distribution so that we can enter the high-growth RTD and CBD markets. I just mentioned regarding RTD and the CBD markets, we're relying very heavily as you can imagine on our relationship with Sandstrom and they've created the product we refer to as Outlandish. So -- and importantly, I think we have a very strong and deep management team. We've got Tom Wood who's done a great job in production. We got the Craft Distilling crew with Owen Lingley heading that up as Chairman of Craft Canning. We’ve got Mel Heim, Travis Schoney, two of the best distillers in the industry. On the sales side obviously Robert Manfredonia is leading on sales side but we have a good team underneath him and then we've got Steve Shum who has really been my right hand guy during this whole process and will continue to be. So anyway I believe that we have a great team in place, we can execute and drive operating efficiencies and performance, and help take Eastside to the next stage of its evolution. We're conducting a search to identify a CEO with a solid industry background and we already have candidates in that department. And me staying in my role as Executive Chairman I will remain focused on the key strategic opportunities, including the rollout of our CDB initiative. Just a couple more words on the CBD initiative because I think that consistent with our philosophy on CBD, we've been very conservative about not getting ahead of our skis and announcing things that as future developments so I'll just say where we are right now. We've been sampling product in Oregon, initial feedback is excellent. We hope to have the production details dialed in very, very quickly and I hope to have more news coming in that area. Our goal on that product just so for those of you that are coming in late to the discussion of Outlandish, this is a CBD product in the 187 can. That's kind of a wine glass size can, and it's designed to go through our existing channels of distribution nationally and locally. Our initial strategy is to take advantage of the laws in Oregon. Oregon legalized CBD in 2014. And because of current FDA regulations we're not planning to go outside of Oregon at this time, but our plan is to gear up, so that when the expected flood gates open for having products -- with CBD available throughout the country, our goal is to create a product that would be appealing to our existing distributor and other distributors to sell to on-premise alcohol establishments and also liquor in convenience stores. So it's going to be a mixer type product that would be served with alcohol or it could be standalone and we have three initial iterations to that, that all three of which I expect us to be shipping this forward. So with that, I'm going to turn to Robert, and Robert Manfredonia will drive further into the progress we’re achieving the Redneck, and also touch on our other Oregon-based brands. Robert?

Thanks Grover, and good morning, everyone. As Grover stated, I’d be adding some additional details off to Grover’s remarks, because I think it’s important to provide additional detail, and let's get right to it. Quarter one, Redneck Riviera, our internal plan was -- for quarter one was 6,250 cases, we finished slightly above plan at 6,320 cases. General market update; and we have now communicated on previous calls our focus to progress and its ongoing area, but as we move forward we will be providing an update. So the latest information is channel, we have now secured distribution in most of the larger retailers across the country, including Hi-Time’s liquor in Southern California, Yankee Spirits in Boston, Kenwood in Chicago, Orgonite in Denver, just to name a few. Quarter one, on-premise account wise were 91% above buying accounts from the first quarter of 2018. New distribution in regional and state chains include: Twin Peaks in 80 stores in 25 states; Coyote Ugly and [Forged Barrage] in all Florida locations, also Redneck has created a light and refreshing signature cocktail called the Saddle Up. You'll find the Saddle Up in selected menus across the country and there will be more to come. All of this is due to a consorted effort by the national sales team that continues to improve brand awareness and promote sampling. Last call we announced regarding national corporate off-premise account that we will be adding 2,150 new points of distribution by the end of May. We will slightly exceed that by 303 points of distribution. Redneck Riviera is now confirmed in 2,453 corporate accounts just for the first trimester of the year. We announced on 5/9 the Redneck Riviera is mandated in 856 Walmart stores in 17 states. The exciting news is that this new distribution was achieved in large part due to the current distribution of 350 stores exceeding the Walmart internal rate of sell performance expectation. So existing distribution validates future decisions and in part because we exceeded their plan, they've provided us the additional 856 incremental points of distribution. We will be shipping initially two-fold cases to all 856 stores by June the 2nd. On our previous call, we announced the release of Redneck Riviera 175 for April 1st. We confirmed we released the last week of March. The early market response has exceeded our 2019 expectation, in fact we will be announcing a very large account authorization in the near-term by the end of the month in fact. The opportunity in the market continues to grow for the 175 size, this is part is driven by an increasing size buyer consumer. Visiting to non-Redneck related brands, Grover mentioned the Oregon performance. Quarter one finished 51% of the quarter one of 2018 and we’re on track to exceed our 2019 buy-in objectives. Burnside Whiskey and Bourbon entering into California was announced on Friday, May 10th. This is our first non-Redneck related brand on to the national platform. This is consistent with our platform strategy to gateway other brands off of the accelerate development and performance of Redneck onto the national and regional market. Burnside will continue to expand in other key markets in the coming months. There will be other brands to follow originating from our existing portfolio or new product development or through M&A. In closing we will be announcing other substantial new distribution confirmations later this month or in the early part of June. And I will turn that over to Steve.

Thanks, Robert. Before running through the numbers I would like to thank Grover in helping bring the organization to its current state and working to put the foundational pieces in place that positions the company with a solid platform for future success. With Grover's desire to evolve his role in the company, I agree to assume the CEO title on interim basis and look forward to working with and supporting the Board’s efforts to indentify a permanent long-term industry expert to fill the role. I would also like to take a quick moment to make mention of Richard Wolf. Richard is an industry veteran and has been actively consulting and working with the company over the past few months. Richard was formerly the Vice President, General Manager of Sazerac’s Buffalo Trace Distillery, maker of Pappy Van Winkle where he helped lead a massive growth effort during his tenure. Richard is working closely with us as a Senior Consultant in all areas of the business and we may consider him future for a more permanent role in the future but we recognize the fact that he has other obligations in logistics to contain with first. Either way we're thrilled to have Richard’s involvement advice, consultation and active participation in our operations. With that, I will review the numbers. For the first quarter 2019 gross sales totaled approximately $3.7 million compared to $1.4 million in 2008. Net sales, which exclude the excise taxes and customer incentives increased a 187% to $3.5 million versus $1.2 million in the prior year. For the period we sold 270,447 cases overall, this consisted of 12,091 cases of our branded product and 258,356 cases of co-packaged products. The case volume reflects an increase of 76% over the prior year in our branded products. The dramatic increase in co-packing in the quarter compared to just under 1,500 cases last year was enhanced by the recent acquisition of Craft which added a substantial operation to this side of the business in the period. As we had anticipated the addition of Craft also contributed to an increase in volumes within our model of co-packing operations. From a revenue standpoint, wholesale revenues grew by approximately 94% in the period over the last year. That success was driven by was Redneck Riviera Whiskey as well as continued strong increases in wholesale traction within the Pacific Northwest, especially with our Vodka and Burnside lines. Revenues derived from our retail and special events operations were approximately $225,000, which represented a 26% decrease from a year ago. As we have mentioned on a number of occasions, we made decisions to reduce certain unprofitable event activities along with targeting a more focused retail approach. Overall, the average case sale price for the branded products inclusive of wholesale and retail for the period was approximately $140 in the quarter. Revenues from co-packing jumped nearly $2 million representing a 467% increase. The addition of Craft this quarter contributed just over $1.4 million of that dollar increase. Gross profit for the period totaled approximately $1.18 million, compared to $592,000 in the prior year. Gross Margin relative to net sales was 34% versus 49% last year. While the mix of business was much different this year than last year, the margin in the first quarter of this year was also lower than we expected to be in the upcoming quarters as we anticipate higher volumes and improved efficiencies in our now larger production facilities. Advertising, promotional and selling expenses for the period increased to $1.33 million, up approximately 107% over last year. As we had noted throughout 2018, we ramped our investment spending of key brands, and made strategic decisions to ramp our marketing efforts and support and more rapid and planned geographic expansion of Redneck Riviera Whiskey. We also feel that it substantially helps develop our platform and positions us for long-term success, particularly as we work to expand other key products both regionally and nationally. Equally important as we move forward, we expect to see improved efficiencies with the anticipated growth and our ability to leverage the infrastructure now in place. G&A expenses for the period totaled $2.68 million, an increase of 121% from last year, which was a result of additions of key personnel in order to support our larger footprint, similar to the point on advertising, selling and marketing costs. However, we also incurred a number of one-time expenses in the period, part of which is related to the Craft acquisition. Now loss for the period totaled approximately $2.9 million or $0.32 per share compared to a net loss of $1.3 million or $0.27 a share last year. Our adjusted EBITDA during the quarter was a loss of approximately $2.2 million compared to a loss of $780,000. We ended the period in a strong working capital position. Cash at the end of the quarter totaled $4.2 million. Inventories totaled just over $11 million. We also saw a large amount of the business close in the final weeks of the quarter both for our branded and co-packing activities, which caused us to end the period with just over $1.8 million in receivables. The bulk of those receivables turned within a 45 day period. We closed the year with a positive working capital position of $15.2 million. I would like to take a minute to run through a couple of the key numbers as they compare to our internal goals we set for ourselves during into the quarter. In terms of gross sales, we came right in line with a $20,000 higher figure than our internal forecast. Gross profit was off by $94,000 from our goal. This was almost entirely due to the production efficiencies we mentioned. Our EBITDA loss was $572,000 higher than our internal plan. A major portion of that nearly $500,000 was related to the one-time costs, we do not expect to repeat, with the balance being those production and efficiency that affected the gross profit. So on balance, we feel good about how we performed versus our internal goals. We have very high or maybe better classified and exciting expectations for ourselves and our internal goals for the balance of this year. Business is good and we believe we can start driving improved efficiencies with our existing infrastructure as we further ramp the top-line. The co-packing business is surging currently as they have entered their heavy busy season, and we are operating at full capacity working quickly to bring additional capacity online. And the branded business continues to be strong in its key areas. We look forward to reporting our upcoming progress. That concludes the financial highlights for the quarter. Further details are available in our 10-Q. And with that, I think we'll open it up for questions.

We will now begin the question and answer session. [Operator Instructions]. And our first question comes from David Bain of ROTH Capital. Please go ahead.

Thank you. First, Grover, congratulations on your execution of CEO and transition. I know we look forward to analyzing your continued leadership as Executive Chairman. I think our first question, this would be for Robert, I was hoping to follow up on Burnside’s moving to California through the platform that was built. We look at that is pretty big milestone and I'm wondering how we should think about the Burnside rollout in terms of I don't know how you want to calculate it, but additive cases, perhaps in the national rollout. I understand some of this may be more art than science, but if you can kind of give us a sense as to what Redneck is still in terms of the opportunity and then look at the Burnside opportunity? And then related to that same question, how we should think about the rollout differences with other brands that may go through the system like the RTD with Redneck or wholly online that may come online going forward?

Thanks, David. Your first question was on was the anticipated potential volume of Burnside and to be quite frank, I don't have that yet. I don't have that yet. But if you want to look at it in a larger context of what we're trying to do, Redneck, we spent last year developing the Redneck portfolio and really sort of the infrastructure of the brand, which built the platform that you mentioned. It's in 46 states now, plus DC. Where that we see Burnside is, it's not going to be a 46 state type of brand, right? It's a Craft brand. It's going to be a large Metro Focus, sort of brand. So going into California with Los Angeles and San Diego and obviously San Francisco, we're going to focus a little bit differently on that brand and we do with sort of Redneck which is a suburbia rural type of brand in a general way. Okay? So what we see very exciting about Burnside is one, all of the accolades that the brand has won; two craft, whiskey and bourbon is extremely, extremely hot at this point in time. In fact, one of the areas in which we think we can grow is the rye area. Rye is the one of the fastest growing sub segments in the whiskey category. And Burnside rye is the double gold winning product at the right price point. So we think we can scale that up in 46 markets very quickly. So I didn't answer your question direct but I want to refer the context of how we see Burnside. And then the second part of the question is as you said the platform is really, really important. We set in the market that the gateway effect is really part of our strategy and that's what we're going to be doing over the next couple of months. There may be an RTD, there maybe it could be something that we see from a transactional standpoint, consumer behavior standpoint, from retail and from distributor and we will develop on our own or it will be something that we may have in Oregon be at a way that potentially can go out. We're still finalizing toward that way that we're going to look and feel but that’s going to be a big part of where we're are the nationalized and scale up a lot of events we have or we can develop or we will acquire as we move forward. So hopefully I answered your question enough without giving you a final answer on what I think the volumes going to be.

Steve, I guess I’m trying to calculate current cash. If we could -- so essentially near-term receivables are close to 2 million so if we're closer to 6 million prior to 2Q results, I guess that's how we should look at? And then, could we get a sense of due to the 11.6 million of inventory you mentioned at cost. Can you may be apply to the true value and I mean how liquid that inventory actually is?

If you look at the break down of inventory, a significant portion of it is in raw material which means a lot of that is distill in bulk form in barrels and when it's in that form it is intended highly liquid in the market place. The other dynamic lot of that is obviously the brown spirits and brown spirits generally show a trend that as they get older they do improve in value sometimes fairly substantially. So obviously we keep all of our inventory held at cost but we certainly have inventory and there that should have a higher street value than we originally paid for as that is ageing. So I said it’s over 10 million the raw format and the bulk spirits, and I said a big chunk -- a big significant portion of that is the brown spirits. And I would also make note that we even have -- we have some inventory deposits out probably little over 400,000 worth in our prepay. So the inventory is actually even a little bit higher but nonetheless we have a very strong inventory position. We may little that back a little bit in the next quarter to just to be able to have inventory also as a source of cash, just want to lead down a little bit. Of course part of our long-term goal as everybody knows is we want to continue to maintain strong inventory balances and ultimately grow them for a future which is important as we build out key products like our single malt program, now that is new still is up and running, so that will be an important dynamic in a longer term is to continue to actually build inventory but for the next quarter or two we may see that might bring that back down a little bit.

Dave, I’m going to jump in little quick -- just to quick add to that. I was actually kind of lead guy on acquiring inventory and if you recall back when there uplifting the focus was Burnside. So we acquired an awful lot of aging Bourbon and like Steve said that's a liquid market and with the emphasis on Redneck where incidentally where again we acquired a whole lot of new still and we're in a currently really good position right now with our Redneck Whiskey inventory. But because we really focus on Redneck we have a bourbon that aged that we're not really taking full advantage of, so Richard Wolf one of the things he has done which is very helpful is like when he was running Buffalo Trace, he's got sort of a model for looking at basic coordinating the aging of inventory with the projected sales. So I would expect we actually will be surplus in a significant amount of our Bourbon inventory that -- and I would hope a lot of that's appreciated. That would still leave us with plenty to take advantage of what Robert is suggesting that we're going to be doing, rolling out in the Redneck platform with our bourbon. I will say at the time David we were aware that we were definitely over committing but with brown spirits appreciating 20% to 30% a year it just seemed like a good place to put our cash.

Right. So that with the drawdown -- if there's a little bit of a drawdown for additional cash then the true value of the inventory is pretty much close to the same perhaps or we can rebalance that maybe off-line at the time but that I just wanted to get a better idea. Okay, fantastic. Thank you so much.

[Operator Instructions] And our next question will come from Ian Gilson of Zacks Investment Research, please go ahead.

If we look at Granny Rich as being an extension, how is that doing as compared to the rest of the Redneck Whiskey?

I can answer that Steve, if that's okay?

Sure, that’s your part, Robert.

So good morning Ian, really I think I step back and talk about the purpose of Granny Rich, Granny Rich price point is the 39.99 suggested EVLP priced item where Redneck as you're aware is 24.99. So there’s sort of a tiered approach. Granny Rich is a softer sort of rollout type of item. What we're trying to do is capture off of the back of Redneck and then bring it to an elevated point where some consumers are looking for an aged brand. So, the purpose of the brand is not the same scale model as the, I'll call it the original is meant to be. Right? It's an additional SKU that's going to fit a need and a growing need within a higher price point. So it's in 15 states roughly across the country. The early adoption has been fantastic, it exceeded our expectations. But the purpose alone is not to be that scale typed items like the original is. Now 175 which I mentioned earlier are going to be a scale iteming. That's going to be something that we think we could do very, very, very well with even in 2019 we brought in earlier it was meant to be a 2020 item. But we brought in early just based upon what we saw in the marketplace and based upon early demand and you'll see a substantial next way coming in the following weeks.

Okay, you have spoken a lot about the brown spirits but I’m not make sure about the vodka which everybody has talked about for doing, as well as the brown spirit. So why is that, is vodka basically just a local product that can be rolled that out down with the brown sprits and in California?

I will answer that too, Ian. You let me take that Steve, or do you want to handle that one?

Yes, I think and Grover might want to make comment on it but go ahead first Robert please.

Okay, so really when you look at Portland Potato Vodka that’s outperforming are ahead of our 2019 and reached earlier on, in '18 it far exceeded our expectation. But I think we look at it a little bit differently, and last week in fact I just went through I descript all the transactional data nationwide and just looked at what pockets in general are dealing by price segmentation. There is not a category within vodka nationally that has been in black, every single, price pint, every single SKU level except for where [indiscernible] is and it's right now it's taking one driver market within vodka everything is in the red. So for us to take it out it would, one, we would be fighting the data; and number two, we would have to pay disproportionately the dry through what the board just thinks. So at this point in time even though Portland Potato Vodka is exceeding plan in Oregon it's not the right time to bring it to the national platform.

I'm going to jump in Ian and I’m just going to say that having said that, it's really on Ontario right now, and I think I mean in fact actually people ask me why are we doing so well all of a sudden and this year has been really strong for that product but I think we've added to the sales team and also I think it's kind of becoming maybe through advertising or something else it's kind of hitting critical mass but I would -- as I mentioned we did -- we beat December in Q1 and that's normally December's 40% above whatever your best number in Q1. So it's really -- and we're adding a few extra SKUs, we're doing the rebrand, we've been talking about well as coming out with Sandstrom momentarily, the additional SKUs I think help a bit. So that's a good product.

Is it a price sensitivity that you are going to take advantage of when demand is over?

Is the question about national Ian about expansion or is it about Oregon specifically?

No where the bulk of your sale is all, if you ex out Riviera.

Guys let me just jump in on that one, I think we do have with our Portland Mule role, either the Portland Mule which is our new RTD with the Portland Potato Vodka, something similar to that I think would be a pathway to going into Northern California but right now the focus is on [indiscernible].

Ian I would just reiterate the point of what we want to try to do is ride where the transactional data is saying we should go because that is a pick path least resistance for major retailers. If we want to scale up we want have to follow the data and Grover mentioned it really a key follow with whiskey filling and the subsegments of bourbon and rye which we have in Burnside so we fit where the data is going. RTD development which we've already started in Oregon, we can bring out to the national platform. Trying to go against it, at least at this point in time we're better served I always say follow the data and make those calls with Walmart, Kroger, Albertson’s, heck of a lot easier and that’s sort of why we rationalize it that way.

Our next question comes from Harold Weber of Aegis Capital. Please go ahead.

I have a couple of questions for you. Either gentleman has pushed it before we got the inventory issues. Would you say that the majority of the inventory is the brown stuff that was being talked about in the past that’s had a using numbers out there 20% a year appreciation with that you said that’s 11 million, totally, that's most of it, half of it? Just to give an idea and looking at the asset value of real else product just to get a better ideas, is there a way to look at that on a cumulative basis, one way or the other?

Yes, Harold I would say that probably over 75% of the inventory is in bulk brown spirits. So a significant portion of it.

So okay, that's a real-time view of what the market's been doing in the current timeline, is that right?

Yes. If there is -- the market has definitely saw a big surge in appreciation and there’s been some slow down in some of that growth but what we do see is again as Grover often points out is that you can buy earlier spirit which we have done a lot in our portfolio over the last year and half or so. And there is usually pretty good step up in value in the first couple of years that it’s when it gets to a point you can then take it from bulk and put it in to a bottle whether that usually starts at two and then for bourbon, four. So definitely you still hit those key timeline then you get increase in value in the spirit.

Okay, that's reasonable so wanted just to get a view of you guys have made timely and where are the investments in your main business, raw materials and it's clearly you seem to have paid off pretty well at this point, if you're going to monetize some of that it sounds like the thing to help grow the rest of your business. As far as, at this point it looks like going into the next quarter where we could be in full production, so if that's the case we're looking to ramp up some additional, where does not put us as far as what do you feel is, are we going to continue to grow revenues 50% or 100% quarter-over-quarter, are we going to start to show some profitability, margins should be improving because we had a lot of one-time expenses in this quarter, right?

Yes. Well, we again we certainly think the trends are in our favor on the top-line, I could say the Craft business is really in there, heavy busy season, they're doing fantastic, the Redneck Riviera product and our other branded products are doing well. So we're certainly looking forward to continued strong top-line growth and you're right we certainly feel that we'll start really demonstrating the leverage in the infrastructure and on top of that removing some of these one-time expenses, we think we can show some pretty meaningful improvement in EBITDA as we go forward from here.

We should be starting to make some money if our costs are down and our revenues are up, our margins should be improving, what's the problem?

So Harold just to kind of put a point on the advantage of the Craft acquisition is that they almost acquired us really because they're really taking over our production, they have a huge team and all they do is focus on making -- putting things in cans and bottles extremely efficiently. So a lot of our margins are related to the overall cost per facility or manufacturing costs and direct labor which are part of the cost of goods sold but as our volume goes up and as they continue to put some discipline and real efficiencies into the process you would expect margins to grow -- to improve as the cost per unit dropped.

Okay, that perfectly makes sense, but that's one thing the branded stuff is a whole different ballgame, you're increasing sales tremendously.

I am including Harold -- I’m putting the branded products because they're essentially using the same discipline on manufacturing Redneck Riviera, the bourbons and the vodka and everything else, so there are cost per bottle should be dropping. Our goal is to drop it pretty dramatically this quarter and continuing on through the year.

Is it reasonable to say that as time goes flow you’re going to be able to let's say separate or differentiate to some degree branded product sales which has a much higher obviously profit margin versus packaging, pre-shipping all case sales which is a large part of the business but it's a contract manufacturing which is obviously a whole different scenario. How do you see this?

Well, I mean, it's still -- it's very possible.

That's kind of a question for Steve but it is, there's a huge demand right now for co-packing especially wine but also beer in the Pacific Northwest. There's also frankly, we've been approached by a number of people to co-pack CBD beverages, since we can do that legally in Oregon. So I think the co-packing actually is real one of the main drivers of the business for long time -- long size some of the other things like Redneck. I don't know Steve you want to say anything or?

And do you have any type of a I don't know foresight of how much CBD products you'll be able to actually manufacture over the next let’s say couple of quarters six, 12 months? It sounds like you're starting to produce it now or whether for distribution, or just I am not sure?

Yes, I mean, we're talking to some leading distributors, Harold we know it's a huge market and we know there's a lot of demand. But it's too early for us to say that we're anything other than extremely optimistic. I mean, we're very optimistic. And the initial feedback on sampling has been very, very positive. But I'm hoping and we'll put some -- we'll have some more color on that when through the roll out of Q2.

Okay, and just hoping to see you guys have some real premium brand opportunities. And hopefully, we should be able to get some good much out of that. So that we can have benefits. Appreciate it.

Yes. Have Harold. If I could chat one more time. I think to your last comment, that's why we're very excited that we released the first non Redneck brand into the national platform. This is where we're going to be able to help our brand utilize all the work that we put forth in 2018. So this is this is priority one to move into this national platform. And for inside is the first of a few brands that will be coming out 2019.

Our next question comes from Geoffrey Gwin of Quad Group. Please go ahead.

Thanks for thanks for taking the question. And congratulations on a great quarter and Grover as well on building such an amazing platform. My question is really wanted to focus on the second quarter. Can you recap for us the distribution just growth quarter-over-quarter, but also year-over-year? I mean, what we should be expecting on the national platform stage, specifically, how many incremental doors are we expecting -- incremental points of distribution?

Robert you want to take that one?

Yes, I can. Good afternoon, Geoff. So, the way we look at it it’s an early stage brand, right with Redneck Riviera. I'm looking at the numbers. We actually in the third quarter, we doubled our placement in quarter three versus quarter four in the on-premise and the off-premise. We've added as we mentioned, almost 2,400 points of distribution just in national accounts. We're going to have a another large on-boarding of incremental distribution in the second quarter, then it will I won’t call it’s flat now but it will start to build off of our organic business substantially more than just the incremental piece. And then the next large ramp of business will be the first quarter of 2020. So it's sort of a timing mechanism of how the market works and how accounts on board new distribution. The first trimester is usually a large portion of when new business is seeded and then you just start to work through displays in the summer and obviously the fourth quarter with driving sort of seasonality with that part of the year. And then we will have a large surge next year. So you will see a substantial ramp up in early part of this quarter and then what we're going to try to do Geoff and I will bring it in little bit of a different direction, we're going to trying to start going deeper with our business, meaning where we have Redneck Riviera’s 750s our objective is to start putting the 175s next to the 750s and we're flexible to put the Granny Rich brand beside that. So we are starting to build a billboard effect for that for the Redneck Riviera brand. That’s a part what we're trying to do. So it’s not about as many new doors it’s about depth within the existing business that we have. Now so the old one plus one equals to four approach by the way that we look on the shelf is part of what we're going to be driving in the second and the third quarter.

So SKUs growing, doors growing. So a following question I had is. I’m sorry go ahead.

It’s a combination of both, just to say that it won’t be just 750s just being incrementally growing only, we want to start utilizing all of the work that the team has done in 2018 and start to build that within the existing account base.

Like for example Port where you have outstanding distribution and probably would take up the products from the one SKU to multiple SKUs. As that happens what happens to the on-premise distribution, have you seen any notable changes in on-premise as the mass pick the brand up?

Yes. That’s really good point. I mentioned earlier in the call that account wise for 91% above the first quarter, we’re above what we did in the fourth quarter. That’s been a concerted effort that we know that we need to have on-premise availability for awareness but also trial. So we’re trying to be a little bit more complete. We were really -- we took a nontraditional path which is corporate accounts being the focus but we're trying to make sure that we have balance with the general market off-premise and then add on-premise availability and features and drink features and start bringing people to understand the brand a little bit further above and beyond all the hard work that John Rich does with above the line pressure coming down. We want to make sure that we have availability on-premise and Florida has been I have to go back through it but I don’t think I’m too far off from this is by far where we are exponentially growing to be on-premise above and beyond Illinois and Texas but Florida, we had a lot of gist and the team is doing a great job down in that marketplace.

And then lastly, the Craft acquisition just looks like has been an amazing acquisition and you’ve mentioned on the call that you're going to add capacity there. And so when we think about rolling out these new these next products where you mentioned the Portland Mule RTD and in prior calls you’ve also mentioned Redneck Riviera RTD, that I am assuming you hadn’t enough of the capacity to package that and distribute that yourself with these new assets.

Yes. Geoff. I mean, that's our strategy. I know there are some people who have really focused on developing products and they are marketing and having other people co-pack them. But I think the co-packing business that we're in right now with Craft could be within five years to be a $30 million business. Perhaps the growth in the Pacific Northwest is huge. So, not only do we get to participate in our growth, quite frankly, co-packing is the resource that’s very hard to come by. For our 187 can that we've been pounding the drum on and saying well, that's the new one plan is really -- I mean, we're not exactly the only game in town, but we pretty much are in the Pacific Northwest. And so we're running out equipment full out. So I think our ability to take a Sandstrom branded product and it’s something like CBD where you don't even have to wear it with the TTB, it approves label for alcoholic beverage. You just basically go to the printer and you come out with this as fast as you can. So the ability to go directly from a product concept to a product that -- Mel Heim and I want to do a shout out to her, she's fantastic, that Mel Heim can put together. And then run it on our own equipment. And I think that's a competitive advantage. It also improves our cost scope for us.

Our next question comes from Shawn Willard of Orca Investment Management. Please go ahead.

I'd be interested in reading your q. When you do an acquisition the size of the canning business that you have picked up, it's always kind of a blind guess of where that's going to roll in. But one of the things that you said in the quarter that I'd like to know kind of where it falls is, in your commentary you said there was roughly $500,000 of one-time expenses, you didn't really delineate what that was specifically for. But did that happen at the gross margin line? Or was that very somewhere down in operations?

Shawn most of that was in the D&A line.

Okay.

So I wouldn’t say that what I referred to in terms of production efficiencies is where we are off the mark from our goal about 90 some thousand in our gross profit target. That is probably related to some of those situated where bringing their operations into the fold. And at the same time Craft was going through a rapid growth cycle, trying to bring on new equipment, higher new body, get prepared for some big customers we took on right at the end of quarter. So, that certainly drove some of those efficiencies in the production facilities.

On a go forward basis did Q1 look like a somewhat normalized gross margin with the new business, just having a higher overhead costs to it, or was there anything that was artificially lowering that?

Yes, I think that we still had some prior bourbon stock for being into a little bit of the quarter so that contributed, but if you look at the -- those production efficiencies I think mathematically it’s a couple of 3 points on the gross margin line and then some of the material costing that was a little bit higher and for that we think -- we’ve mentioned this on the last call as we start getting into some of our additional stock and bulk spirit inventory that will improve as some upward bias in the margin too. So you have to know to answer your question, it’s not perfectly normalized but pretty close.

Yes, Shawn also keep in mind Craft Canning was -- we didn’t get a fourth quarter with Craft Canning and they didn’t really get hands on so that we could start picking-up the efficiencies until well end of the Q1 and that's an ongoing process. So I think I would expect us to see cost improvements definitely in Q2 and I think it’s going continue on into Q3 based on the manufacturing efficiencies that we are getting because of that acquisition.

So basically January and February were transitioned for the business required. It was probably up and running at seasonal rates in March and then the same thing we confirmed is, is that the -- rather than the -- and I look at that term but the sample stocking that you've been providing to some of the large retailers was migrating over to replenishment and permanent placement inventory was also again in March. Right?

Right. Yes, those are correct statements. And I think also as we've previously said Craft added some high-capacity equipment midway through the quarter. That equipment hit the ground running. It's fully utilized. And as Steve mentioned he is looking to acquire more equipment and plus they are beginning to really maximize the utilization of the existing Mother Lode equipment that we have. So all of that’s effecting our manufacturing efficiencies not just for the co-packing but also for our product cost. And you're going to see more of that in Q2, I would expect.

So one more question and then I'll stop. But it looks to me like based on what I'm seeing for volumes of the core business, your volumes have been such you're going to use entire tax credit for the Craft business that's allowed probably by third quarter at some time this year. Is that reasonably fair?

Yes, we will be bumping up against the 100,000 group limit at the lower tax rate for sure.

Our next question is a follow-up from David Bain of Roth Capital. Please go ahead.

Great, thanks. I know it's a long call. But just if I could just follow-up on one Ian's question and Robert your discussion with Geoff on depth. Still trying to get our hands a little around the products expansion potential into the Redneck gateway you termed it. I just understand myself for Granny Rich but the 1.75 is that close to like a 1.1 potential in terms of the Redneck flagship, a form factor in terms of dollars sales potential? And then if we look at the RTD Redneck that's coming out, how do you think about that in terms of either volume or sales potential versus what’s out there right now?

So the way I look at it, David is in 2020, I think we're going to have a mix of business getting close to the 750 business meaning half gallons, 1.75 and 750s will be getting close. You have to remember when you look at 750s a lot of that is a byproduct of timing with national corporate accounts. So as an example, we will be picking half gallons in September of this year for spring of 2020. We did the same thing with 750s, spring of 2018 for on-boarding in this period of time. So a lot of the volume in large chunks will be coming spring of next year. So you're going to start to see an exponential lift in 1.75 next year. However, there are accounts in Texas and I can go around the country that don't have sort of a very tight windows of time for presentations that we're going to start our on-boarding the 1.75 specs could be putting in Texas, Twins in Texas are all accounts that we feel pretty good about at this point in time. RTDs, we mentioned that on our last call, that's something that we're really excited about back to riding this data. And we think we have something that is very unique and different versus a lot of the mainstream RTDs that are being developed right now, especially with Redneck Riviera. And then we're going to have some other non-Redneck related brands that are going to be coming out to the national platform, but we will start bringing in volume of RTDs in the third quarter and then we will be presenting to the large box stores again in the fall of this year or next year. So we will receive incremental volume and revenue in the back half of the year, but most of that growth David is going to be in 2020 -- early 2020.

And when you add that and all these products with the Burnside mix into the national platform, I mean what's the average number of SKUs you need to begin to get incentives to kick in for even more distribution potential. I mean …?

So in part, I think you bring up a really good point, which is when you have several brands within a portfolio, your ability to have favorability efficiency with let’s call it discounting as one example of it, becomes exponentially better. So when we can walk into an Albertson’s or we can walk into a distributor in California, and we have a Redneck and the lines of Redneck and the Burnside in another area, our costs starts to go down incrementally. So part of what we're trying to do is utilize the national platform gateway strategy. But also we start to cut costs a little bit on just sort of the below the line costs that we have that we are occurring right now. The model becomes a lot more efficient. So we're going to start to recognize and see those efficiencies in the coming months as we start to add new brands onto the platform.

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

Great. Thanks, everyone. We really appreciate your time today. Speaking on behalf of the whole management team, we're very excited about 2019. We think that all the investments that we've made in our infrastructure and our people over the last year will really start to show themselves as we move through the balance of this year and so the power of the platform that we've created and build for the organization. So feel free to reach out to any of us with any follow-up questions, we’d be happy to take your call and answer any remaining questions you might have. And Grove, I don’t if you want to say any last remarks as well? Otherwise we will wrap up the call.

Well, I just like to echo what Steve just and also say that I'm really looking forward to my new role of Executive Chairman, because hopefully what I'll be able to do working with the Board is to focus on strategic acquisitions and deal making and also get involved very heavily in the strategy on this CBD launch. So I'm excited that Steve handing over operational -- day-to-day operational duties to Steve, Robert definitely freeze me up and that opens up a lot of possibilities for creativity that I'm excited about. So I want to thank everyone I know, we have investors on the call that have been with us since 2016 and we -- like Shawn, for example, and we definitely and we appreciate the support that we're getting from our investors, shareholders, we really appreciate the support that we've gotten from ROTH Capital as well. So I just want to end on a note of thanking everyone and I think the best is still ahead.

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