Beeline Holdings Inc (BLNE) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to the Eastside Distilling Third Quarter 2021 Financial Results Conference Call.

(Operator Instructions) Please note, 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 third quarter 2021.

I'm Amy Brassard with Eastside Distilling, and I'll be your moderator for today's call.

Earlier, Eastside issued third quarter 2021 financial results in a press release.

Joining us on today's call to discuss these results are Mr. Paul Block, the company's Chairman and Chief Executive Officer; and Mr. Geoffrey Gwin, Eastside's Chief Financial Officer.

Following their remarks, we will open the call to your questions.

Before we begin with the prepared remarks, we submit for the record the following statements.

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 that 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 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 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, 2020 filed with the Securities and Exchange Commission.

Now with that said, I would like to turn the call over to Paul Block.

Paul, please proceed.

Thank you, Amy, and I would like to thank all of our participants for joining the Q3 earnings call today.

I certainly appreciate your continued interest in Eastside Distilling and your support as we strive to fix, build and grow the company.

Now despite all the obstacles of the marketplace and this turnaround, we continue to make significant progress, especially on the balance sheet.

I must say, for the first time in over a year, it's nice to have adequate cash and liquidity to run the operations of the company for today, tomorrow and throughout the year.

We can now fund changes in working capital to grow our can inventory for Craft.

We can fund investment capital needed to build new revenue streams, like digital can printing, and we can increase much needed discretionary spend for spirits to fuel sales and marketing.

As you know, the company is broadly underinvested in its spirits brands for years and has significantly curtailed many growth initiatives due to balance sheet and cash burn issues.

In addition to liquidity, we've made significant product -- progress in the debt stack and structure.

The company continues to extinguish maturing notes and loans, substituting them with much improved loan terms and strategic partners.

As good stewards of your capital, we continue to work diligently to accelerate value.

Geoff Gwin, our CFO, will give more detail on the balance sheet in his overview.

So what I would like to do now is move on to the operational progress and performance for Q3.

We remain on track to deliver the 3-year strategic growth outlined in our plan.

Unfortunately, the Q3 2021 consolidated revenue was a bit softer than we forecasted, down 23%, primarily due to our Craft Canning and Bottling division.

We did believe, in the short term, we could ride on the coattails of COVID a bit longer as we serviced craft beer filling and craft beer raw material purchases.

Q3 2020 was the peak of the COVID lift for craft as the pandemic was just emerging and summer was driving seasonal production demand.

Therefore, we're experiencing a bigger year-on-year decrease for craft in Q3 2021, down 32%.

Despite the near-term softness in the mobile revenue stream, we have accelerated our fixed facility initiative, and the first facility, with pasteurization capability, will be up and running in 2 weeks from today, and a second similar fixed facility will be operational by Q2 2022.

In addition to the fixed facilities, we're in the final stages of closing a can purchase agreement with G3.

G3 is a supply chain subsidiary of Gallo, with significant scale.

If you recall, aluminum can shortages also caused many issues for us at craft throughout this year.

We now have guaranteed adequate supply of cans at an agreed-upon price throughout 2022.

This is an absolutely critical component as we receive our digital can printer in Q1 and bring it operational in Q2.

We also have a new 50,000 square-foot facility that we will secure for craft as of December 1, 2021, with rent abated until April 1, 2022.

This facility will house the first printer, the small fixed line -- or another small fixed line and the Portland craft operation.

The facility has the ability to accommodate a second printer that we plan to purchase and receive later in 2022.

Now for those of you who recall the mix of growth in the craft 3-year plan, the mobile business unit growth was relatively flat, with fixed facilities and digital printing leading the charge.

As mentioned, to offset the short-term softness in the mobile business unit, we're accelerating the start-up of the fixed facility business unit.

As planned, we will be using the printer and can supply to attract customers to mobile and to drive the overall craft revenue forward.

In an effort to accommodate the shift in market demand, we'll further boost mobile revenue for craft by adding 2 small mobile lines that will serve new small customers and current customers wanting smaller runs.

One of the larger lines, mobile lines, will be used to -- for -- will be used for the new Spokane market.

And the second line will be moved to the fixed facility in Milwaukee.

We continue to be agile and respond to market conditions, with the need for speed of execution to build a reoccurring stream of revenue that meets our strategic operational objectives.

To fuel the new printer, the new lines and the new market for mobile, we plan to add 22 additional full-time employees for craft by Q1 of 2022.

Now turning to the spirits division, the opportunity for growth has not changed, just the headwinds and speed of execution.

For those that remember, that reviewed the Q3 results, the spirits' 9-liter [EQ] case volume is down 7%.

However, when normalized for discontinued products and the 2020 onetime sell-in, with no sellout of Portland Potato Vodka in California, volume is actually up 8% for the third quarter of 2021 year-on-year.

Now of course, our goal is to achieve a much higher rate of growth than 8%, and the Q3 spirits volume would have been even more robust, if not for the issues on the Azuñia supply chain and the slower conversion of our wholesale distributors in priority states.

For Azuñia, we unfortunately experienced lingering periods of out-of-stock due to limited company liquidity throughout the year.

In addition to our out-of-stocks, our Mexican bottle supplier informed us in the summer of 2021 that our bottle is no longer available due to the high demand of big players and COVID-19 issues.

We're currently finalizing a 5-year agreement with O-I Packaging Solutions, a leading supplier of glass bottles, to supply the full portfolio of Eastside.

And we now have a short- and long-term bottle solution for Azuñia.

We continue to work with our distiller in Mexico to optimize production, increase supply and reduce costs.

And we'll have more information on our discussion and success going forward relative to our Mexican supply.

In terms of our wholesale distributors, our goal has been to convert our large mega distributors, where we are small fish, to craft-focused distributors, where we are a big fish.

We've made the change in Texas, from RNDC to Green Light, as I mentioned before.

And we've just recently made the change in Colorado, from RNDC to Classic, which will be effective January 1. Our focus now has shifted to Azuñia -- I'm sorry, to Arizona, which is targeted to change in February 2022, and then to California, which is targeted to change in April of 2022.

Although I have reported the new Texas distributor change in the last conference call, the additional products from the Eastside portfolio are just now hitting the streets, with Burnside Bourbon and Portland Potato Vodka.

We've continued to focus on point of purchase, micro events sponsorship and targeted digital marketing.

To this end, we just announced our sponsorship with the Portland Trail Blazers, which will give us tremendous brand visibility in product sampling, product sales opportunity in our largest market.

In addition, we anticipate these product sales at the Moda Center for both basketball games and music concerts.

Our spirits brand strategy continues to connect with consumers directly on an experiential level, with local events that correlate with the target consumer's lifestyle.

Equally important, is the opportunity for consumers to simultaneously sample products and enjoy the distinct features of handcrafted Eastside Spirits.

And most important of all is the opportunity we have to reconnect with these consumers at the point of purchase with point of sale.

We are pursuing and securing other event sponsorships tied to the sales promotion and retail merchandising, like Heal the Bay beach cleanup in California, Hood To Coast run in Oregon and Cinco de Mayo across all priority markets.

We will continue to announce our biggest sponsorships and events as they come to fruition.

While our plan is to stay focused on Azuñia, Burnside and Portland Potato spirits brands, we're now finalizing Burnside ready-to-drink cocktails, like Bourbon & Cola and Honey & Lemonade, both with a very distinct product attribute of 12% alcohol by volume.

We will also be launching the Eastside Cherry and the Eastside Cranberry Whiskey in Q1 2022.

And we continue to develop our Azuñia Organica Margarita ready-to-drink cocktail.

With all of these accomplishments in place for spirits, we're turning our focus and increasing our focus to a more methodical approach of concentrating on 3 primary brands in our top 6 priority states.

We are targeting markets, setting objectives for physical and effective distribution, measuring lift from our promotions and accelerating velocity per point of distribution.

Again, the most critical element of success for Eastside overall is adequate liquidity.

With liquidity now in place and our strategy is established, it's now time to thrive and kick in execution.

With a balance sheet that now fully supports the operating plan, we can move forward in a more deliberate manner to purchase product, build programs and execute plans.

Now before we open the line for questions, let's first hear from Geoff Gwin, our CFO, who will review the quarter and specific performance year-to-date.

Thank you, Paul, and let me add my welcome to our third quarter call.

You have heard us repeat all year, fix, build and grow, and I would like to take the liberty to start my discussion of our results with the balance sheet and address how we have fixed it and prepared for growth.

When we finished our 2020 fiscal year-end, our cash balances were depleted.

Moreover, if you recall, in our 10-K, we reported current liabilities of $30 million, with cash of less than $1 million to address those liabilities.

Now with a business that was still consuming cash, we had little time to deploy our business plans.

Among these current liabilities, we faced an imminent maturity of our ABL facility as well as upcoming unsecured notes maturing in the second quarter.

So in the first quarter, we engaged a broad range of stakeholders and we began working through an initial financing plan.

One critical component was completed with the R&R deal, which included the sale of unproductive inventory and closing that money-losing business.

The successful completion of that deal injected much needed liquidity into the company, giving us cash to pay down debt and address the upcoming note maturities.

That hard work in the first quarter led to a successful private placement of convertible notes, which we reported in the second quarter.

So I'm happy to report, that in the third quarter, we continued to achieve more milestones, probably the most significant of which was the finalization and Board approval of the 3-year strategic plan, an exhaustive effort to blueprint the growth that we have been referring to since we started last year.

In August, shareholders embraced that plan and voted to increase the share count.

That's a huge vote of confidence in management, which Paul and I appreciate.

Since then, we have seen a number of strategic large investors recognize the plan and invest in the company.

And I would like to take a moment to thank these stakeholders for their confidence in the team and the strategy.

Those partnerships have allowed us to immediately go to work on improving the company's balance sheet, liquidity, and begin investing in the future.

So I'll summarize the 3 -- some of the third quarter successes, starting with the fact that, early in the quarter, we seized an opportunity to accelerate our business transformation plan at craft with the purchase of a key can printing equipment that Paul referred to from a partner [hedging cost].

This is the single largest investment we have made since the Redneck Riviera deal.

The hedging cost investment was funded by $2.4 million in equity warrant proceeds we pulled forward.

Second, rather than do a dilutive and likely disruptive equity placement, we engaged B. Riley and launched an ATM.

The ATM had immediate success, and we placed 2 significant blocks of stock with institutional investors via reverse inquiry and continued the ATM through the quarter.

This program allows us to raise equity at very low transactional costs, limiting dilution.

In total, we've raised over $3 million in equity from the ATM.

In addition, we successfully placed another $2.5 million in a private Series B preferred transaction with another important stakeholder.

In total, in Q3 and subsequent to the close of the quarter, we have raised nearly $8 million of equity in preferred.

And I consider it as a huge success, given where we started, with the $1 million in cash and maturing debt.

We have carefully managed the increases in our share count.

And just like many of you, we are focused on keeping share issuance to a minimum, and as of today, I can report that our shares outstanding total 15.5 million.

Now we have reduced short-term debt by $23.7 million, either refinancing it out longer or paying it down since we started the year.

Looking out next year, we see even more progress there.

And today, we announced more news as we're in the final stages of closing a senior loan with Siena Lending Group, which is a $9.6 million ABL facility backed by our assets, including our valuable whiskey.

That line, along with cash on hand, will finish off the repayment of Live Oak and add to liquidity and provide more growth capital.

We are through due diligence there and in documentation.

We expect the loan to close late November, probably more likely early December.

Now where does all this activity leave the company today?

As of today, we have $3.5 million or more in cash and largely prepaid for our first digital printer.

Once the Siena ABL line is closed, our liquidity will expand to over $13 million, assuming the full use of the ABL line.

For those that like ratios, our current ratio at December was, as I mentioned, [0.42].

That's $12.8 million of current assets, over $30 million of liabilities.

That's a distant memory, and we now stand at 1.8.

Our net current debt, that's debt due in less than a year, less cash on hand, is $1.1 million, a significant improvement.

And assuming our stock stays around the price -- this price or higher and the Siena ABL is closed, our next meaningful maturity, which the company would have to repay in cash, is out over 2 years.

So in summary, the balance sheet has been fixed and rebuilt.

And most importantly, it's been loaded for investment growth.

Now let's turn to the income statement and cash flow.

The third quarter sales were down to $3.3 million compared to $4.3 million in the prior year.

And as Paul said, the majority of that decline is from our Craft Canning division due to lower demand for our filling services and [cans that were recycled behind the] pandemic last year.

Spirit net sales were $1.4 million, flat to the prior year.

Remember, net sales of spirits includes commissions, discounts and excise taxes.

If you adjust for the PPV sell-in last year, as Paul stated, we would be positive.

We reported the quarter volumes in the press release.

However, I would like to point your attention to our brand performance, particularly on gross margin -- on a gross margin basis.

Now we don't normally go into specifics here on margins by brand, but I want to make a very important point and share a new milestone.

Burnside's gross margin -- gross profit margin was better year-over-year despite the lower case sales due to price increases and our focus on higher-margin SKUs, like Burnside Black and Buckman Reserve.

In the category, premium spirit brands have all faced out-of-stock and supply shortages, and we are in an enviable position with over 3,000 barrels of brown spirits, raw material stock that we pull from to build our products.

And in Azuñia, we saw the reverse, an increase in volume and lower profitability.

The lower profitability was due to a shift in selling more lower-priced Agave Syrup and the 1 liter SKUs, due to the fact that we're out-of-stock for much of the quarter, and the 750 higher-value SKUs.

Again, as a reminder, Azuñia is imported, and we have less control over that supply chain but we're working on that.

So on a consolidated basis, even though we had a reduction in gross revenues, we largely made up for the craft gross margin shortfall in spirits, with a reduction in discounts, improved position.

So here's the milestone.

I will venture to say spirits is successfully being repositioned at higher gross margin levels.

We just need to sell more.

Now moving down the income statement.

We had better performance in OpEx, with meaningful expense improvements in SG&A.

Our loss from operations was $1.5 million better than last year's $1.6 million.

And adjusted EBITDA was a loss of $611,000, a 16% improvement over the prior year.

And we have provided a reconciliation of EBITDA and adjusted EBITDA in the press release, so please refer to that for more details.

Our net loss per share was $0.32 versus $0.17 last year.

And I want to call out the fact that the GAAP treatment of the warrant pull forward that occurred in the quarter required we treat the exercise as a deemed dividend and was recorded as a loss attributable to common shareholders pushing up EPS losses for the quarter.

You can refer to the income statement for details on that.

On balance, looking across our financial report this quarter, we've made substantial progress.

While we would like to see more volume growth in spirits and the immediate impact of our pivot in Craft Canning, we are on track with our fix, build, growth thesis and believe we will see more tangible progress in the quarters ahead.

Now with all that said, let's turn this over to you for questions.

Operator?

(Operator Instructions) Our first question comes from Kelvin Seetoh with Slingshot Capital.

I think your earnings call is always informative and educational.

It's something I appreciate, and I think it differentiates the quality of the team.

So I'll start off by asking which stage of our turnaround are we at currently.

Yes.

Hey, Kelvin.

How you doing?

This is Paul.

Yes, I think we're at the -- as I said in the last call, we're towards the back end.

It's just been a year of mitigating risks and taking care of all the skeletons in the closet.

I would say there's 1 or 2 other issues that are on our list of things to do.

But other than that, we pretty much have most of it behind us.

I mean, the biggest part of the turnaround is in the balance sheet, honestly, and to get in a position now where we just have some cash and also due to you and your team and your investment, has been great.

So I would say we're in the back 25%.

We've got 80% to 90% of it complete now.

All right.

Also, given where we are right now, you have fixed the balance sheet.

And your Branding Officer, Janet Oak, I think signed an incredible deal with the Portland Trail Blazers.

But -- and kudos to Janet Oak and the team.

There are 2 parts to my question.

Number one, it seems that we are more willing to spend on marketing dollars right now.

Is that the right way to think about it?

And second, would you elaborate more on this deal?

For example, what are some potential outcomes we are seeking from it?

And are we going to bring this excitement to the social media as well?

Yes.

Okay.

Well, I think marketing is the right spend in the markets where we have distribution.

Now that's why you see us thinking about Oregon.

We have over 20 points of distribution in Oregon, which is great, but we probably can double it.

I mean even though Oregon's our top market, there's a lot of room for growth.

And I think by spending in a market where we have a lot of visibility, distribution base, and we can build on that, is the right way to go.

The Trail Blazers will give us tremendous awareness and hopefully, more unaided awareness.

And the cost per point of contact is very cost-effective, and we'll be able to sample and engage our consumers.

So I think marketing spend is the right way to go in the markets and in the neighborhoods where we have a distribution base and where we have a strong consumer demand already engaged.

So that's how we're thinking about it.

In the other markets, we're trying to get distribution first.

And so we want to get distribution first, get margins in line, get pricing and then start to overlay programming.

I think the outcomes that we're looking for in the markets where we spend against marketing is going to be a real lift over the run rate.

So you and I and the company should expect a lift over the run rate in Oregon for all our brands based on this investment.

We should also look for lift in other markets where we invest in marketing.

And the way we'll begin to convert this to social media is by extending the experiential connection with consumers.

So Janet's job is really to take all the good things we do at the Moda Center with the Trail Blazers and with all the connectivity and sampling and further extend it to repeat the impression because it takes multiple contacts and multiple interactions with consumers to really start to create brand loyalty.

So we're trying to -- as I -- maybe you've made heard me use the word before, "impact stack," or stack all of our elements around specific time frames, around specific events, so that we can get multiple impressions.

So we use social media to create multiple impressions around our events and around times where we target point-of-purchase material at the point of sale.

All right.

Because I have seen how [big] the graph had changed the landscape of how marketing is done.

For example, SoFi is a fintech app that spends roughly $75,000 but has generated over $8 billion deals.

It's this thing called the [#SoFimoneymoves].

So I do agree with you.

I think social media is an incredible multiplier for brands to gain consumer recognition quickly.

So I'm imagining it's very possible for Eastside Distilling as well.

So lastly, there's one thing I wish to value-add as a shareholder.

I think back in the days, I look at Monster Beverage, I went, wow, this company was formally known as Hansen's Natural.

They did [IC], but because of some mismanagement, they almost went bankrupt, and it pivoted to RTDs, energy drinks.

They met with some [fillers], but they persisted.

Today, the Monster Beverage is up more than, I think, 50x, and there's Rockstar and a [new, emerging hit] called Celsius Holdings.

So similarly, I think Celsius was nearly bankrupt, and existing shareholders had to pour capital inside.

But again, Celsius is persistent and decided to grow like wildfire once again.

So I think despite the differences between energy drinks and craft spirits, I see a lot of parallels between the stories of Monster Beverage, Celsius Holdings and Eastside Distilling.

All 3 companies operate in massive addressable markets of beverages.

I spoke to [Michael Beger], who's the largest, I think, single shareholder is Eastside Distilling.

So we will support the company in every way.

Of course, I'm not setting up any expectations.

I think things do take time.

I think there's a lot of literature about Monster Beverage and Celsius, the [researches] they have paid and how they have created their own successes too, so I think the management of Eastside might want to have a deep dive.

And I think we should be able to replicate and create our own successes too or even meet out with Mr. John Fieldly, the CEO of Celsius, for a good exchange.

So with that, I look forward to the next quarter's results.

Yes.

Thank you, and I appreciate that insight.

Thanks, Kelvin.

The next question is from Bjorn Ng with 10x Capital.

So I just got 2 questions here.

The return to on-premise sales has reduced the demand for mobile canning.

And with the digital can printing and pasteurizer coming in together with the partnership with G3, could you share with us how this will help to generate more sales and capture more margin for Craft Canning?

Yes.

Well, first of all, when you think of mobile, the mobile canning throughout the United States has been focused on craft beer only.

And I think as Kelvin just said, there's an enormous beverage market that's growing, kombucha, energy drinks, coffee, teas, RTDs, alcoholic beverages.

So mobile has only served one small segment of beverage that's been the craft beer segment.

And the craft beer segment, overall, forget about the pandemic, has really been giving up share of stomach to craft spirits and to wine.

And so just by its very nature, it had a great heyday and it's rescinded.

What the pandemic did is kind of just dialed it up a little bit more in the near term.

What we're doing now is we're pivoting quickly from just craft beer, with the mobile business unit operation, to being able to service the entire beverage business.

Now we're not going to service the big guys, like Anheuser-Busch or Monster or some of the others, but we're going to service the smaller players.

And when you have pasteurization, you can do a lot more.

And when you have a different type of fillers, we can certainly service higher-carbonated pasteurized beverages, like kombuchas.

We can do cold filling and cold storage, so we can start to look at coffee and tea.

And we can move beyond other types of just malt beverages and even into RTDs.

So there, in the fixed facility with pasteurization, opens up a different marketplace and a marketplace that is growing significantly, and some of it is underserved.

Now when you overlay the printing, the digital printing, it really creates a technological innovation because a lot of these smaller beverages are not using silk screening to print their cans, they're using either plastic sleeves or paper wraps.

In the case of plastic sleeves, they're not biodegradable.

They go into landfill.

And with many paper wraps, depending on the ink they use, those too are not biodegradable.

So when you overlay an opportunity to target an expanded market with digital printing, you now have the idea to move into something that's user-friendly, environmentally friendly, still the same cost and now service a bigger market.

For the mobile market, this will -- the digital printing will also be an innovation.

It will allow our can lines to move faster because we won't be putting labels and applying paper labels on the line that have already been printed.

And so the efficiency will increase in the mobile line, and the cost will come down for users that want to use the mobile lines.

It will also give us a competitive advantage against other mobile purveyors in the market because they won't have digital printing.

So in the near term, it will be a tremendous competitive advantage.

So again, while we're not ecstatic about our short-term softness, our focus is clearly on exponential and accelerated growth and leaning into markets that are growing, that are underserved, and we know we can have a point of difference.

So hopefully, that answers your question, not too long-winded.

And Bjorn, if I can just throw in one other, just to tackle in on the end of it is, Kelvin was out mentioning Hansen's and the evolution into Monster Beverage.

And one of the things about that story and the history of that company that always -- that I'm reminded of is how underappreciated they were when they made their pivot.

And when they were focusing on a category that was not appreciated, the energy drink market was in infancy.

And one part that we're still trying to understand, how significant it is, is the marketing advantage of working with the digital printing machine for cans as opposed to the long supply chain for the other forms of packaging that the current craft market uses.

I mean this is a market with the consumer product and the marketing attack points and at point-of-sale are tremendous.

I mean they're basically creating new forms of advertising by season with what they put on cans.

It's unlike anything else in the grocery store, I would argue.

And this is a machine that's going to allow us to let them do something even more fantastic.

So what does that mean for us?

I think it's really hard to quantify, but I think it's the tip of a spear.

And craft is going to look completely different next year than this year.

Got it.

And I think what you both described sounds exciting, opening up new markets.

So I'll just go one last question.

For the customers that Craft Canning is currently serving, could you share with us some feedback that you have gotten on the ground?

Like how are they navigating and adapting to the shift?

And also, to squeeze in another thought that I have, what are your thoughts on the digital printing and pasteurizer value-add that [these] can provide to them?

Well, I can respond -- take a shot at that.

Geoff can chime in, if you would like.

But I think what's been interesting, one of the things that has been an unintended consequence in the mobile market space with the small craft brewers has been these PPV loans.

So the government has given out a lot of loans to small purveyors.

And a lot of them have used those loans to buy their own equipment.

So that's something that was an unintended consequence that nobody really could foresee.

So a lot of them have shifted over to their -- not a lot, but a significant amount has really just invested in their own equipment.

Secondly, certainly, with the on-premise opening up, they can go back to keg business and forgo their can business.

So what's happened across the United States is a lot of -- that small brewers are running shorter runs, smaller runs, which obviously are less efficient.

And the third thing I think that's really shifted has been their ability to purchase raw material.

When COVID first started, there were no can availability.

There were no corrugated, no pack tack for the holders that go on top.

And so everybody just bought from us because we had a supply.

And actually, we really didn't have a supply because it was touch-and-go on the cans and corrugated and pack tack.

So they just looked to us for all their supply.

Now they're buying a lot more on their own as the supply loosens up a bit.

And as I said, we now have all our cans locked and loaded for 2022, both quantity and price, same with our bottles.

That's very different.

So I think a lot has changed over the years, and I think they're shifting more towards buying their own material.

They're shifting more towards using their own equipment.

And they're shifting more towards servicing a different type of package now that on-premise has opened up.

So those are all trends that have changed.

Our pivot is timely.

I mean we put it in place 4 or 5 months ago when we did the 3-year plan.

It's just that the market has -- the trend that we're going against are -- have been a little bit different.

Q3 trend was significantly accelerated last year.

If you look at our Q3, we've been pretty flat ever since Q2 are -- if you look at our trend, if you trend out craft, it's had a small increase over the summer, and it's pretty flat now in Q3 and will be flat in Q4.

So really, the biggest variation has been the lift that's occurred.

And I think that's the same for all mobile canners throughout the country.

So the shift will occur in that brewers will take on more of the responsibility through kegs, through raw material purchase and through their own equipment.

And I think craft -- those that pivot the quickest will be the winners.

Got it.

I think that's all I have.

I think following how Eastside has faced and built the business from where it is, is amazing and exciting.

And I'm looking forward to the growth plan ahead.

Well, hey, thank you.

And sometimes, internally, I know we are doing some good things.

Like Geoff said, margin's up 50% on spirits, OpEx is -- operating expense is down 27%.

We're getting quality distribution, not quantity.

But sometimes, inside, it's just relentless, knocking out the issues one after another.

And I think we've got 8 out of 10 of the issues behind us, 1 or 2 more.

So we appreciate the external view and your encouragement.

So thank you.

(Operator Instructions) The next question is from Kelvin Soh with GIM and Partners.

First of all, I would like to say that I'm happy to see that our company has sort of stabilized itself.

I think the turnaround is more or less done.

And kudos to Paul and Geoffrey.

And it's testament to show the effort that you guys have put in, in terms of stabilizing our gross margins.

Even though the revenues have come down a little bit, but our gross profits remained strong and the operating losses did not actually widen.

So I think we are in a very good shape now to really pursue the growth verticals that we want to go after.

I have 2 questions on my end.

First of all, even though we have kept our losses tight this quarter, it seems that our spirits business is affected badly by our distribution strategy.

So could you give us more color on what happened to the distributors, whether is this a onetime event so that we can understand and make an accurate assessment about the spirits trajectory going forward?

Yes.

Well, it's just been a little bit slower in terms of like engaging our bigger distributors or transitioning from our bigger distributors.

So I would say that, as a onetime event, it's basically a onetime pivot, so to speak, in terms of our strategic focus.

And I was talking to the Board about this the other day, that when we were pricing our products lower and targeting national on- and off-premise chain accounts to just get distribution, large distributors made a lot of sense because we were out getting the distribution mostly through lower price, which, as we talked about in prior calls, we believe that's unsustainable because that's a race to the bottom.

We, and actually, over time, I think, even our past Board realized, that we're getting a lot of distribution, but we weren't getting a lot of velocity.

So we've completely changed our strategy to be more special, to be more premium and to be more craft-oriented.

And what that means is shifting our focus from large chains on- and off-premise, large distributors, going up and down the street, being focused and engaging our -- not only our retailers, but our consumers.

And that means that, sometimes, the bigger distributors, or most of the time, really aren't the right distributors because they're really good at taking orders, but they're not really good at working out in the market.

And let me just give one example.

I was talking to our salesperson in Texas, where we changed our distributor.

And he told me that his sales, just on Azuñia, because the distributor hadn't brought in Burnside or PPV yet, that month-on-month, from September to October, his sales were up 20% because that distributor was working with him in the street, they were targeting accounts.

The distributor was more open to his engagement, and the engagement was more frequent.

So the way you should think about this is, by Q2 of next year, we'll have either engaged our big distributors or converted our big distributors to marry our operating strategy for spirits.

Now it's -- these things always take longer or have unintended consequences.

And when we talked about Portland Potato Vodka, selling in and not selling through, one of our old team members have put 1,000 cases of Portland Potato Vodka into one of our very large distributors in California.

And I always joke that it was like the Raiders of the Lost Ark.

It went into the distributor, and until there was a personnel change, we didn't even know it was there until we started to try and sell more Portland Potato Vodkas based on new promotions in California.

So the smaller distributors are going to be more nimble, they're going to be more agile, and they're going to work with us much more closely.

So the way to think about this is a comprehensive strategic pivot from on-premise, low price, low margin, to really being a special craft-oriented company.

And I'll give one more short anecdotal story.

I was interviewing an on-premise person for Oregon the other day.

And she said -- I said, "Why do you want to work at Eastside?" I said, "What really attracts you to Eastside?

Look, you can work anywhere.

You're working for some big folks now.

You can work for another big supplier." She goes, "I want to work for a company that makes special products and has pride in their products and just doesn't want to sell quantity, but wants to sell quality." And I said, "Perfect.

This is the right place." So that's where we want to go, and bringing our distribution network is going to take a couple more months.

And by Q2, I feel like we'll be well on our way.

Right.

That's awesome to hear.

It seems that opportunity ahead is really tremendous because we are making this onetime shift to distributors that are more aligned with us and are more incentivized to grow into our 3-year plan together with us.

So that's great hearing from you, Paul.

My last question would be regarding the filing that we have done.

We have actually announced a partnership with Frito-Lay.

And in the recent years, we've seen companies like Coca-Cola and PepsiCo entering the alcoholic space.

And Frito-Lay has a revenue run rate of over $18 billion, and its parent company, PepsiCo, is worth more than $200 billion.

So its potato chips are really well-known and sold all across the world.

And earlier this year, PepsiCo announced a partnership with Boston Beer Company to create an offering.

So are we doing a similar model here?

And I was just wondering how do we land this partnership with Frito-Lay.

What makes them decide to work with us, a $50 million market cap craft distiller?

What do they see in us, for us to have this working partnership with them?

Well, I think it comes down to one word that I would use, which is craftsmanship.

That's the first word I would use.

And the other word, I think, and again, you would have to ask them, this is just my interpretation, is our micro marketing ability.

And those 2 things are what they're focused on, is they want to build a very unique product that has a very special flavor profile and it's handcrafted.

And they want to do it in a very kind of discovery, targeted, micro marketing manner.

And I think, in that regard, the 2 of us share those 2 kind of strategies and capabilities and are working together.

In regard to what's possible, well, I think it's a tremendous compliment that they would want to work with us.

And I think it says something about who we are and why they would choose us.

And it makes me feel like maybe we are special.

Like I know you guys keep saying we're very special, and we really appreciate that, but it's always nice to have somebody like Frito-Lay to come to us and choose us.

And we're going to deliver for them on every measure with the product and with the micro marketing approach.

Now they're spending a little bit of their money on that.

And as to what's next and what's possible, that's the next chapter.

But we need to do this and we need to execute it well.

We're close with them, and then perhaps, we can look at other possibilities.

Wow, it looks like the future for our company is really getting more and more exciting, when you have such a large partner that has this alignment of values and who knows that you can actually pursue the market and grow together with them.

So yes, I'll be excited to look forward to the next earnings call.

This concludes our question-and-answer session.

I would like to turn the conference back over to Paul Block for any closing remarks.

Well, thank you all very much.

We appreciate your time, your interest and most importantly, your support as shareholders.

And Geoff and I will be continuing to work diligently to be good stewards of your capital.

I think one of the things that we said that really stood out is that, and I appreciate you seeing that, is that we're really trying to curtail the operating loss.

If we can drive revenue over time and maintain a reasonable operating loss, I think we do have an exciting business model.

We'll have much more to report to you during the next annual earnings call.

So have a great holiday season, and we look forward to talking with you then.

Thank you.

The conference has now concluded.

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