Good day everyone and welcome to the Eastside Distilling Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Amy Brassard, 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 Brassard, 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. Geoffrey Gwin, 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, [ph] Craft's 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 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 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 31, 2022, 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.

Welcome to Eastside's fourth quarter 2020 earnings conference call. I'm Geoffrey Gwin, 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 that Craft, 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 directed 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 past -- 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 have 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 followed the Company over the past few quarters in the past year, getting this investment at Craft 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 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…

Thank you, Geoff, and thank you all again for joining our call today. Let's review the fourth quarter. On a consolidated basis, our gross sales were over $2 million for the fourth quarter of '22 compared to almost $3 million for the fourth quarter of '21. Spirit sales were $1.1 million for '22 compared to $1.4 million for '21, due to volume softness in Azuñia as we reduced discounting and had soft holiday sales. Craft sales were $1.2 million for '22 and $1.4 million for '21, reflecting our continued challenges in mobile canning. And we experienced some unexpected seasonality in can printing during the holidays. Our consolidated gross profit was negative $148,000 for Q4 '22 compared to positive $598,000 for Q4 2021. Our consolidated gross margins were negative 6% for '22 and positive 23% for '21. Spirits margins were 13% for '22 and 38% for '21, and craft had margins of negative 23% for '22 and positive 10% for '21. Craft margins are expected to continue to improve as we build volume of printed cans, as Geoff mentioned earlier. Adjusted EBITDA was negative $1.6 million for '22 and negative $1.5 million for '21 due to the continued softness in both businesses. In addition, we recorded an impairment loss related to our Azuñia brand of $7.5 million. Turning to the balance sheet. We raised a net of almost $2 million during the fourth quarter of 2022, ending with cash of $700,000 as we continue to pay down debt, which we fully repaid all loans at craft. These financial results were not what we expected to deliver, but we believe we are now better positioned in spirits as we've eliminated unprofitable volume and reestablished ourselves with our distributors. At craft, we printed 1 million cans during March, and we are focusing only on profitable mobile customers. We are excited about the outstanding growth of the printer for the remainder of the year. As Geoff said, we are also expecting better results from the continued restructuring of both businesses, which will be more apparent in coming quarters. We will now open the floor for questions. Operator?

[Operator Instructions] Our first question comes from James Watson, a Private Investor. Please go ahead.

I was looking at the full year's adjusted EBITDA margin. It's roughly negative 30%. And if I heard you correctly, we are targeting a positive EBITDA by quarter three, if I'm not wrong. So the swing will be quite a big one to be a breakeven level. What gives us the confidence that we will reach there?

Sure. So, the way I think you need to look at this business, as I referenced in my remarks is it's really a completely different business than what you've seen before, the Company. I mean, in the past, we've had a mobile canning operation, which for the people that are new on the call, that's a business where you basically pick a small, mini canning line to a brewery and you fill cans there. And we've transitioned to a big plant that does high-quality, super high-end digital graphic printing. And then we can also do the mobile filling too. But the point there is that in the fourth quarter, you saw a pretty big gross margin miss by craft. And that's a function of the fact that we didn't get enough ramp-up of cans in the fourth quarter. We went from not having any digital printing to having the only plant in the Pacific Northwest in less than a year, and we converted 100% of our customers in less than a year. And now beyond that, you have to ramp up and add a lot more customers who are going from buying a few million cans a year. So now we're in a different game. We're in the game where we're buying 20-plus million cans a year. So, what will get us to that EBITDA positive number is three things: it's getting the mobile -- I'm sorry, the digital printing business to a point where we're doing over 1.5 million cans a month. And just to correct the number, it was actually this month, I think we were close to 1.2 million. Now that number is kind of -- is not a number that's written in stone because it depends on what cans and the margins and how we source cans and what customer base it's going to. But suffice it to say, we hit that number, and we're moving through that number and heading north of that number. We're generating positive EBITDA at craft. And then in spirits, you're going to see something else happen in there. You'll see we've done quite a bit of restructuring in spirits. We've reduced the workforce significantly, really focused our sales on the core portfolio of brands. And we believe that, that business with some production restructuring is going to also turn around and generate EBITDA. And then in -- we've shrunk our corporate headcount pretty significantly, by half. And that's going to be the last piece. So, I have a lot of confidence we're going to get there. This is a complicated business for the size it is since there's multiple businesses. But the teams are focused, the plan is in place. We have a couple of things left to do in spirits and then we're fully locked in. But I have every confidence that we're on our way to a much better year this year.

Yes. I just wanted to follow up, because if we look at the gross profit margin for Craft Canning, I think it's been a negative gross profit margin for quarter four as well. So, when we talk about wanting to be breakeven, right, how is that going to happen? Because we are not addressing any positive gross margins at this point.

That's because you have a fixed expense. In the Oregon facility, you have large lease payment, you have a team that we didn't have before, a printing team, the support staff, right? And we -- and the losses that you saw in the year in craft are a function of putting that in place, and then it's a scramble to get that machine up and going, right, get us to a point where you have enough customers on that mission that we're generating enough gross margin dollars to absorb that fixed cost. So, once you sell a customer, right, and he's taken his supply chain away from traditional labels that can decoration, he's going to come back for more unless he goes out of business, right? Or you disappoint and he goes back to the old label. We haven't had any of that happen. So, we're slowly building, adding customers, onboarding new customers of craft, this means we're loading the volume on that machine, getting the utilization up. And as the gross margin dollars start to grow there, absorb the overhead and then you see the margin change. So looking at the margins statically in the rear window, this year [ph] is going to be way off where this is going to be going forward.

Got it. And also, I think it's a great thing to know that we are achieving EBITDA positive this year. My question is, how are we going to self-finance ourselves until we get to that level? Because assuming we are losing about $1 million to $2 million a quarter, we kind of need about $3 million to $4 million perhaps to take us through until we become breakeven. So what are your thoughts around it?

Well, there's a couple of interesting things that we have going for us. On the one hand, we -- EBITDA is not the same as free cash flow. We have a large barrel inventory, and we have more barrels today than we need. And so, when we sell a bottle of vodka, we don't go and we have to rebuild that raw material. But in the case of bourbon, we're selling it and we don’t actually have replacement to it. So free cash flow is a bigger number in spirits than EBITDA, unless we turn on the stick and spend a lot of money on CapEx, which we're not doing. So, that helps the Company. And the other thing that you have to think about is how we survive today. We've rationalized things that really are high value, not reflected on the balance sheet. And we did that throughout last year with taking advantage of very high whiskey prices in front of the Company as we executed our build-out of craft. So I think those are some ways we can do it. Now having said that, I'll be the first to admit, last year, I was hoping that we would be in a position that we could accelerate growth at another machine move faster. And equity markets obviously haven't helped us get there. Micro caps are not the beloved investment opportunities as they once were just a few years ago. So that window feels like it's closed to some degree. But this is a situation where I really believe that if we perform here in the first and second quarter -- and I just want to be crystal clear, the second quarter is going to be better than the first quarter. And -- but if we perform, then I'm hopeful that we're going to have multiple avenues to pursue growing the Company.

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

Yes. So, thank you. I'm looking ahead and seeing both of our businesses heading in a much improved direction. I'm super excited about the team and what they've accomplished at craft. But I also am really excited to see how spirits is going to perform this year because I think we've made a tremendous amount of investment in architecting a plan that's going to take us to a much better place on both sides of our business here, both the craft services, beverage -- can printing business and our spirits business in Oregon. So, thank you for the time today, and we look forward to talking to you here shortly in the first quarter.

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