Eastside Distilling, Inc. (EAST) Earnings Call Transcript & Summary

Greetings. Welcome to the Eastside Distilling Annual Meeting for Shareholders Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Paul Block, Chairman and CEO. Paul, please go ahead.

Good afternoon, ladies and gentlemen. I'm Paul Block, Chairman of the Board of Directors and Chief Executive Officer of Eastside Distilling Company. And it's certainly a pleasure to welcome you to Eastside's Annual Meeting of Stockholders. We're happy to have you with us today even if it's in virtual format. With that said, I'll now call the meeting to order. I've asked Amy Brassard, our Corporate Secretary, to record the minutes. We'll conduct the formal business of the meeting after some brief introductions. First, let me introduce the company's directors who are with us today: Mr. Eric Finnsson, Ms. Stephanie Kilkenny and Ms. Elizabeth Levy-Navarro. The company's officers with us today are myself, Paul Block, Chief Executive Officer; Mr. Geoffrey Gwin, Chief Financial Officer; and Ms. Amy Brassard, Corporate Secretary. Welcome to our directors and officers with us today. I have proof by affidavit that notice of this meeting has been duly given and that our notice of proxy materials was mailed on or about July 6, 2021, to all stockholders of record as of June 21, 2021. The affidavit, together with copies of the proxy statement and proxy card, will be filed with the minutes of this meeting. In addition, Carol Hall of Transfer Online has been designated as inspector of elections. An oath of inspector of elections will be filed with the minutes of this meeting. The inspector of elections has the stockholder list of the company as of the close of business on June 21, 2021, the record date for determining stockholders eligible to vote at the meeting, which shows the stockholders and their respective number of shares entitled to vote at this meeting. The list has been available for inspection by any stockholder at the company's headquarters for the past 10 days, if any stockholder wishes to examine it. The list will be filed with the minutes of this meeting. The inspector of elections has advised me that we have present, in person and by proxy, a sufficient number of shares to constitute a quorum. So the meeting is duly constituted. We will now proceed with the formal business of the meeting. You may vote today by clicking on the Vote My Shares button, which opens up a blank proxy card for completion. If you've turned in a proxy and do not intend to change your vote, it's not necessary that you vote because we'll count your proxy. Those of you who did not turn in a proxy or who did turn in a proxy but wish to change your vote, please click Vote My Shares link to access a blank proxy card, complete an e-mail directly to proxy@issuerdirect.com. That's proxy@issuerdirect.com. The first item of business is the nomination and election of 5 directors to serve until the latter of the next annual meeting of stockholders or until his or her successor is duly elected and qualified. The Board of Directors nominated the following nominees: Mr. Paul Block, Mr. Eric Finnsson, Mr. Robert Grammen, Ms. Stephanie Kilkenny, Ms. Elizabeth Levy-Navarro. These are the only nominees as the company did not receive any other nominations under the advanced notice provision of our bylaws. The second item of business is the approval as a nonbinding advisory note of the compensation of our named executive officers as disclosed in the proxy statement. The Board of Directors has recommended the nonbinding advisory approval of the compensation of our named executive officers as disclosed in the proxy statement. The third item on the agenda is to approve an amendment to the company's articles of incorporation to increase the number of authorized shares of the company's common stock from 15 million to 35 million. The Board of Directors has recommended approval of the amendment to the company's articles of incorporation. The fourth item of formal business is to approve a proposal, which we refer to as the Anti-Dilution Approval Proposal. The proposal is to approve the antidilution protection provisions included in the convertible promissory notes and common stock purchase warrants that the company issued between April 19, 2021, and May 12, 2021. The notes are $3.3 million of principal amount of 6% secured convertible promissory notes of the company, which notes are convertible into shares of common stock pursuant to the terms and conditions set forth in the notes with the initial conversion price of $2.20 per share. The warrants grant the right to purchase up to 900,000 shares of common stock at an initial exercise price equal to $2.65 per share. The anti-dilution protection provision could reduce the conversion price of the notes and the exercise price of the warrants as disclosed in the proxy statement. The Board of Directors has recommended approval of the Anti-Dilution Approval Proposal. The fifth item of formal business is the ratification of the appointment of M&K as the independent registered public accounting firm of the company for the fiscal year ending December 31, 2021. The Audit Committee and the Board of Directors have approved the appointment of M&K subject to ratification by our stockholders. The sixth item of formal business is the approval of a proposal to continue, adjourn or postpone the meeting if there are not sufficient votes to approve proposal 3 and 4 to allow the Board of Directors to solicit additional proxies. The Board of Directors has recommended approval of the adjournment proposal. This now concludes the formal business of the meeting. To reiterate, if you have not turned in a proxy and do not intend to change your vote, it's not necessary that you vote because we will count your proxy. Those of you who did not turn in a proxy or who did turn in a proxy or wish to change your vote, please click the my shares -- the Vote My Shares link to access a blank proxy card and complete an e-mail directly to proxy@issuerdirect.com, proxy@issuerdirect.com. We'll now pause for the next 3 minutes to allow time for vote submission. [Voting]

I would like to thank all of our shareholders who voted. At this time, I now declare the polls closed. I would now like Carolyn Hall, the inspector of elections, to report on the results of the voting. Carolyn?

Good afternoon. Based upon the proxies received, number one, Paul Block, Eric Finnsson, Robert Grammen, Stephanie Kilkenny and Elizabeth Levy-Navarro have been elected to the Board of Directors. Two, the resolution approving the compensation of the Board's named executive officers have been approved. Three, the amendment article -- excuse me, amended articles of the incorporation have been approved. Four, the anti-dilution protection provision have been approved. Five, M&K has been ratified as the independent registered public accounting firm for the company for the fiscal year ending December 31, 2021. And sixth, the adjournment proposal has been approved. The proxy holders have determined that they will not seek to continue adjourn, postpone this meeting to solicit additional proxies as proposal 3 and 4 have been approved.

Well, thank you, Carolyn. Final numbers of votes will be included in the minutes of this meeting. Within 4 business days, the company will file a Form 8-K with the SEC disclosing the specific voting results for the matters voted on at this meeting. This concludes the formal business of the meeting. We'll now open the floor to any questions.

We received 1 question from a shareholder. They asked, in the recent Q2 earnings, you mentioned that you have work to do at Craft and that a close the gap plan is in place to drive better performance ahead. Could you share with us more color on this close the gap plan for Craft?

Yes. Well, first, the first part is to change our pricing on raw materials. The price of cans has gone up significantly, and we've recently put a price increase in place for the back half of the year. The second, maybe not so much closing the gap, but certainly, going against last year's numbers, we gave a significant salary increase to our employees when COVID came into play, and we were going against the higher increase in salaries for the first half of the year. In the back half, we do not plan on any salary increases, and we'll be going against that increase from the first half. So it should streamline out in the back half. Thirdly, we've got an effort in place to look for new business and to increase the number of runs for Seattle, for Portland and for Denver. And then lastly, we're going to be working on, I believe, it's probably, I would say, 20 different points that our general manager has put into place with the team that has $10,000 or $15,000 or $20,000 increments overall to help close the gap for the back half of the year. So I would say those are the 4 primary areas that we're focused on, and that we'll be looking at to continue to bend the trend and accelerate performance.

And a follow-up to that question. How are customers taking the price increase? And how confident are we that the second half of the year will capture the margins that we expect?

Well, customers are taking the price increase as well as they can because the supply chain has a transformed dramatically over the past year, 1.5 years due to the initiation of COVID and the continuation of COVID. So prices in aluminum has been going up exponentially as well as prices in all raw materials, including lids, corrugated and a number of other materials that we use in the preparation and shipment of our cans. So I think the customers understand. They see the price increases across the board. And we're confident that they'll work with us, and the evidence to date has been that our increases, if anything, have lag behind the competitive set. In terms of how confident are we will improve the margins, we're certainly confident that we'll see margin improvement in -- due to the increase in the can price. So that's number one. We -- as we reported in the earnings call, we haven't seen any change in the trend in terms of the length of runs or the number of smaller runs, and we anticipate those will continue throughout the year. So we're not as confident that the overall margin will change back to the COVID time period or right before COVID. We feel that the current trend rate is in place now probably for the next 3 to 6 months.