Eastside Distilling Inc (EAST) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Eastside Distilling reports second-quarter fiscal year 2016 financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Robert Blum of Lytham Partners. Please go ahead.

Good afternoon everyone and thank you for joining us today to discuss Eastside Distilling's financial results for the second quarter ended June 30, 2016. I'm Robert Blum of Lytham Partners and I will be your moderator for today's call.

Earlier this afternoon Eastside issued its second-quarter 2016 results in a press release as well as filed its 10-Q. Both are available Company's website in the investor relations section.

Joining us on today's call to discuss these results are Eastside's President and CEO Steven Earles and the Company's CFO Steve Shum. Following the remarks we will open the call to your questions. Then before we conclude today's call we will provide the necessary cautions regarding any forward-looking statements made by management during our call as well as provide information regarding the Company's use of non-GAAP financial information.

I'd like to remind everyone that recording of today's call will be made available for replay later today on the Company's website via a link in the investor relations section of the Company's site.

Now I'd like to turn the call over to the President and CEO of Eastside Distilling, Steven Earles. Steven, please proceed.

Thank you, Robert, and welcome everyone. Thank you for joining us today.

This is a historic call for Eastside Distilling in a number of ways. As many of you know this is our first earning call as a public Company and we're grateful for this opportunity to speak directly to our shareholders as well as many others who have been supporting our growth and development as an emerging producer of craft beer. This includes our followers in the financial community who have been tracking or progress as one of the few public companies producing craft beers.

We also welcome today those new to our story. We decided to hold our first earnings call not only to address any questions you might have about our recent results and our outlook for the future but to also bring to greater light the transformation and tremendous progress our Company has experienced over the course of the last year.

After reporting a record first quarter, we began our second-quarter of the year by announcing several new states where we can now sell our full lineup of spirits. We are now selling in 20 states, four of which are the highest liquor consumption states in the country compared to only five states just 18 months ago. With so many new states we have entered into in such a short period of time including recently California, the largest spirits market in the country, we clearly needed to add more boots on the ground to support our marketing efforts.

At the same time, we are fortunate enough to attract the interest of some of our major new investors, one of which has become our new Chairman of the Board Grover Wickersham. Grover and our other new investors recognize the tremendous value we've created in our lineup of award-winning spirits and our drive for continuous innovation led by our master distiller Melissa Heim who has created a uniquely broad range of 14 premium high-end spirits from whiskeys and rums to bourbon, vodka and specialty liqueurs, most of which have won numerous awards for exceptional quality, taste and design.

Our new investors also witnessed how we brought our regional success to the national stage in a fairly rapid pace. Their generous investments have been strong affirmation of what we have achieved but also a great potential to grow further and faster. Our progress, their support and some key new appointments to our sales team have now all come together and has set the stage for significant growth in the second half of 2016 and beyond.

Now before I talk further about our operational progress and some of the key initiatives we will be focused on in the coming quarters, I'd like to turn the call over to our CFO Steve Shum to walk us through the financial highlights of the second quarter. Steve?

Thank you, Stephen. Thanks everyone for joining us on the call today. Since most of you should have a copy of our financial results from today's press release I'd like to spend time focusing on the more interesting details for the quarter and discuss their effect on our financial outlook.

Starting with our income statement for the second quarter, gross sales increased 47% over the same year-ago quarter to $627,000. And for the first six months of 2016, sales were also up 47%, reaching $1.2 million. Net sales, which exclude the excise tax, increased to $504,000 during the period versus $304,000 in the same period a year ago.

During the quarter we sold approximately 3,300 cases which was up 72% over last year's second-quarter. The higher percentage increase in case volume was a result of a shift in mix toward more wholesale business.

Our record sales were driven by strong growth in the Oregon market as well as the expansion efforts into the additional states. To put this in perspective, in the second quarter of last year Oregon represented more than 95% of revenue with limited sales in a few additional states. While the Oregon market continued to experience strong year-over-year growth, our Oregon-based sales mix represented about 59% in this year's second quarter, demonstrating the expansion in new markets outside of Oregon.

Our gross profit for the quarter totaled $236,000, up 61% from $147,000 in the year-ago quarter. Gross margin relative to net sales in the second quarter was approximately 46.8% versus 48.2% in the year-ago quarter. The difference in gross margin is primarily attributed to the sales mix.

Net loss in the second quarter totaled $1.3 million, or $0.02 per share compared to a net loss of $668,000, also $0.02 per share in the year-ago quarter. It should be noted that the quarter included significant unusual expenses both non-cash and cash expenses primarily associated with our various financing efforts and prior debt payoff. Those unusual charges during the period included professional legal fees, comps associated with the amortization of a beneficial conversion feature on the prior convertible note payable, amortization of debt issuance cost and interest expense associated with those prior notes outstanding.

Our cash at June 30 totaled approximately $1 million compare to $141,000 a year ago with the increase due primarily to those funding activities. During the quarter we closed on a number of financings that resulted in net cash proceeds of $2.4 million. At the end of the quarter we had 95.3 million common shares outstanding compared to 45.5 million in the year-ago period. If we exclude those additional unusual costs from our adjusted EBITDA our cash burn during the second quarter would have been less than approximately $650,000.

That concludes the key highlights on the quarter results. Further details about the second quarter are available on our quarterly report on Form 10-Q, which is now available for download from the investor relations section of our website at Eastsidedistilling.com.

Before I turn the call back over to Steven I would just like to make a couple of final comments. While we have enhanced our team recently with the addition of key sales personnel, the rest of our infrastructure has remained consistent and we expect improved bottom-line performance going forward as sales continue to ramp and we leverage the investments already made.

I would also draw everyone's attention to the fact that if you look over the past two years in both 2014 and 2015 the Company generated approximately 68% of its total annual sales in the second half of the year. In other words, we are heading into our busiest time of the year and this year is even more exciting for all of us at Eastside in that we have -- we are now selling into a number of additional states versus those prior years.

With that I would like to turn the call back over to Steven.

Thank you, Steve. As mentioned we have entered a significant number of new markets in which we are just now beginning to sell into. One includes California as one of the six new states we entered during the quarter.

In addition to being the country's most populous state, California happens to be the nation's top liquor consumption state with spirit sales exceeding 25 million cases annually. So given such an expansive opportunity entering into California was a major move for us. And we hit the ground running as our national distribute operating in California placed initial orders that included our award-winning Burnside Bourbon and Barrel Hitch American Whiskey. Orders have continued to come in as well.

Soon after we announced California one of our major distributors on the East Coast placed a fifth purchase order since it came online in late February. This order opened us up to selling in Massachusetts, Rhode Island, New Hampshire, Maine and Vermont and brought the availability of our spirits to a total of 20 states nationwide. We have now turned our focus on deploying a number of market initiatives designed to drive sales in select metropolitan areas within these states to raise brand awareness and engage new customers.

For example, we sponsored and participated in a number of local community events in various markets. These sponsorships have been a part of larger strategic marketing plan we're following that has continued to generate increasing sales in the Northwest in some of the earlier markets we've entered into. However, it's been equally important to have the best team in place to execute these plans and strategies, and to this purpose in June our sales organization realized huge gain with the addition of Jay Harkins as our new Executive Vice President of Sales.

As the former CEO of Blackheath, Jay Harkins has been leading our national expansion as a highly respected industry consultant to several emerging spirits brands. Given the tremendous job he has done doing for us there we are fortunate and excited to have him now fully dedicated to Eastside.

Jay will be responsible for further developing and implementing all of our sales strategies and he will continue to oversee our national rollout and marketing plan. We believe Jay is an invaluable asset as he brings to us more than two decades of experience in the spirit industry along with strong combination of sales, marketing and business development expertise.

So now we have a total of seven highly experienced spirit sales representatives with each assigned to a specific region and market across the country. With Jay Harkins and Pat Roth, our National Sales Manager, now working together to lead this team we have established a very deep bench of senior sales and marketing leadership with broad experience in the spirits industry. And over the last several weeks they have been rolling out their plans to a national sales rollout for -- taking our national sales rollout to a whole new level.

In addition to the sales team appointments we ended the quarter on a strong note, as Steve mentioned, with a major equity raise that allowed us to pay off our remaining high interest convertible debt and strengthen our balance sheet. The funding also enabled us to expand our inventories in preparation for the upcoming fall and winter holiday season that is traditionally our strongest period of the year.

In all, with US spirit industry sales continuing to set new records the timing for the events during the quarter could not have been better for Eastside. And the numbers show that whiskey is one of the fastest growing segments in the spirits market. As a craft producer with an award-winning line of whiskeys Eastside is well positioned to benefit from this industry trend.

We also see the craft spirit space evolving like the craft beer space where those who have achieved regional and national brand identity with strong case volume have experienced significant value creation and our goal is to grow Eastside in a similar fashion. It is important to consider all these factors when looking at Eastside for the first time and especially how far we've come in a relatively short span of time, from a small craft distiller with a passion for excellence and who found itself winning award after award for quality and taste to a now fast emerging national craft brand.

Given the unique appeal of our premium spirits we believe that over the course of the next several quarters if we simply do it right with our sales team focused in the right way our growth will continue on its current trajectory. In fact, now halfway through the current third quarter we can report that our sales growth is up significantly in both our home Oregon market and others across the board.

Now with that let's open up the call to questions.

(Operator Instructions) Marc Robins, Catalyst Research.

Kate, thank you for taking my call and I appreciate you holding the conference. Got a couple of questions. The first is I guess I don't understand something, Steves.

When I first started picking up the coverage of the Company, Eastside had brought Washington into the Eastside fold of states that it was servicing. And I know there's some kind of sales transmission mechanism and I'd kind of like to understand how that works and how you expect to expedite the sell-in of product or the sell-through of product once you are there.

The reason why I bring this up is that Washington still is, and I don't think Washington is still not a real large consumer of Eastside spirits, how do you get things -- how do you get the channel filled and people to sell, buy the product more quickly? That's my first question.

Well, Marc, thank you for the question. That's great question.

To go back a little bit of what you said about Eastside is not distributed in Washington, we are the largest distributor in the state of Washington. We're selling throughout the Seattle, Vancouver and Bellevue area in a tremendous amount of locations. What we're doing up in Washington, Washington is the Pacific Northwest, it is an extension of Portland and Oregon itself and we're doing the same on the boots ground tactics of market up there just like we are doing in Oregon.

So the uptake of the volume would be probably pretty similar in California or New York or some of these other states as it might be in Washington or could we expect it to be a little quicker?

I think it's going to be a little bit quicker just because the Pacific Northwest a lot of people from Seattle, Bellevue area they do travel down to Portland often and they are familiar with our spirits and a little less education is going to go into training the consumer to understand what Eastside Distilling is all about.

I understand that you now are using salespeople and I think that's a great move to get the product in and established and, if you will, establish shelf space facings. Is there a way to employ social media to help drive the brand and consumer demand? That seems to be an awfully effective way to get consumer products into the market, and I don't know how much you use that now.

Yes, another great question. We've always been using salespeople. We had an outsourced sales company that was working for us to help us both on a local and a national stage.

What we've done is the evolution of Eastside is now we have brought our salesforce in-house and we have 100% focus from them and they are our true boots on the ground. And by doing that I think we're going to be able to really expand our footprint both in Oregon and nationally at the same time.

And then using the social media?

I'm sorry. Using the social media, our social media presence we do have a division of Eastside that works just in the marketing department for social media.

We're getting a lot of footprint out there. Both Pinterest, Instagram, Twitter, Facebook, our followers are growing every day.

One of the things I was wondering about is the holiday gift pack that you sell in Oregon is a huge benefit for your fourth-quarter sales. And I was just wondering now that you're in more markets, couldn't you join with some sort of major retail outlet or operator to carry the same item, say I don't know if it's Freddies in Washington or, what do you call, Beverage Barn in California or something of that kind as a seasonal gift item, is that a possibility?

Well, our holiday gift pack was introduced in late 2014 for the holiday season. It's shown improvement itself that it's a great seller.

The Oregon market has spoken and they love the product. Through our national launch, I can't get into the particulars who we're talking to, but it is going to be piped into all the channels for this upcoming holiday season.

That's very exciting. Thank you, I will get back in the queue.

Thank you very much for your questions.

(Operator Instructions) Richard Rudgley, Glenbrook Capital.

Hi guys, I've just got a couple of questions. I was wondering if you could provide some additional color on the national rollout strategy, I suppose especially in regards to larger alcohol consumption states like California and New York? And, secondly, can you tell us a bit about the international market potential you are seeing and envisaging for the future?

Well, I can start with the international market. Generally speaking, we are pursuing a number of opportunities within a few key initial markets. And we'll probably see something come in an international-type sale within the next six to 12 months.

Now, to our marketing plan nationally what we're going to do what we're doing is exactly what we did in Oregon and what we've proven in Oregon since 2012 and beyond. It is boots on the ground, in-your-face tactics for getting liquor to lips so people can taste the product and appreciate what it is. Understand that we do produce a fine quality product at a value price.

Richard, I would probably add also that obviously what's particularly exciting for us at Eastside is that some of these new major markets are significantly bigger markets than the Oregon market. So deploying what's been successful in Oregon into markets that are so much bigger has a lot of potential opportunities for us.

Okay, thanks guys.

Amit Tandon, SeeThruEquity.

Hi guys, congratulations on the quarter. Just a one quick question, actually two.

How many products do you guys have on the market now versus last year? And which ones are new products?

And then in terms of your rollout strategy is there any particular state outside the home state where you see the greatest sales opportunity? Thank you.

Well, right now we have 14 award-winning products in the Eastside portfolio. We did launch two new American whiskeys last year. They are the two newest products to our portfolio, they came out last July.

That's Barrel Hitch American Whiskey and Barrel Hitch Oregon Oak American Whiskey. And to answer your second question in regards to what markets we are focusing on it's the top five consumption states in the US is where we're focusing are targeting now.

Okay great. Thank you.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Earles for closing remarks.

Thank you, operator. Thanks for everyone joining us on the call today. I'd also like to extend a special note of thanks to our customers, suppliers, distributors and our internal team who are all essential contributors to our success this last quarter and for also certainly the quarter ahead.

If we weren't able to address all of your questions today please feel free to reach out to us or our investor relations team after the call. We look forward to speaking with you soon.

Before we conclude today's call, I would like to provide Eastside Distilling's Safe Harbor statements that includes important cautions regarding forward-looking statements made during today's call as well as a statement regarding the Company's use of non-GAAP financial information.

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 and Section 21E of the Securities Exchange Act of 1934 as amended and such forward-looking statements are made 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, 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 of 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 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 contained in the Company's annual report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on April 13, 2016.

Such statements made during this presentation include but are not limited to the management's expectation that the Company is heading into its busiest time of the year, it has great potential to grow further and faster, it is well-positioned to benefit from current industry trends and new appointments to its sales team have set the stage for significant growth in the second half of 2016 beyond. The Company assumes no obligation to update the cautionary information in this release.

Today's presentation also included financial measures defined as non-GAAP financial measures by the SEC. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the generally accepted accounting principles accepted in the US, otherwise referred to as GAAP. Please refer to a more detailed discussion about the Company's use of non-GAAP measures and a reconciliation of the nearest GAAP measures in today's earnings press release which is available on the Company's website at www.eastsidedistilling.com.

Finally, I would like to remind everyone that a recording of today's call will be available for replay after the call and through August 18, 2016 in the investor relations section of the Company's website. Please refer to today's press release for dial-in instructions.

Thank you for joining us today for our presentation. You may now disconnect.