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Eastside Distilling (NASDAQ: EAST) Leadership Outlines the National Distribution Platform It Built on the Back of Redneck Riviera and Key Hires

July 22, 2019

Gerardo Del Real: This is Gerardo Del Real with Small Cap Stock Digest. Joining me today is the CEO and the President of Eastside Distilling (NASDAQ: EAST), respectively, Mr. Steve Shum and Robert Manfredonia. Gentlemen, how are you this afternoon?

Steve Shum: Great. Thanks, Gerardo. Nice to talk to you again. 

Robert Manfredonia: Same here, thank you. I look forward to our conversation.

Gerardo Del Real: It's a pleasure to have the two of you on and have you here with me. You know it's interesting to me, Robert, that you came on right around the same time that Steve and I last touched base, which was around the early part of 2018. I have to congratulate you because it's been a heck of a run on the execution front and I'd love, maybe Steve, if you could start us off by just providing a brief overview of what that has looked like because it's been impressive.

Steve Shum: Sure, sounds great. I think it's first important to understand the two major components that now make up Eastside. We have our branded business products which we own, produce and handle all the distribution and sales for. And then we have our co-packing services business, which we significantly expanded recently with our acquisition of Craft Canning + Bottling early this year. That part of the business provides production services for other small producers in the beer, wine, spirits and even non-alcoholic beverage sectors.

So it's really important for shareholders to understand where Eastside is today. As many recognize, we've made tremendous investments over the past couple years. But few may fully appreciate the platform we've now built and the company's positioning. We really feel we've built a strong foundation and something that is really unique for a small producer in this industry. Our platform now includes a number of critical components. As you may recall throughout our history, we've had a good reputation for creating quality products in the bottle or can. That is thanks to our strong product development team spearheaded by Mel Heim and Travis Shoney.

Then in late 2016 we teamed up and formed a close relationship with Sandstrom Partners, a very high-class branding, packaging and marketing firm. Over the last couple of years we've also made significant investments in our own production facilities as well as completed the Craft acquisition, the combination of which now affords us substantial production capabilities not to mention providing us with an attractive and profitable service component to our business to compliment our branded products business.

And the final piece to the platform is our national distribution footprint. Thanks to the success of the Redneck Riviera product over the last 18 months, we've been able to develop a strong distribution framework, working with several Tier 1 distributors. We are now selling products across 46 states and have our own national sales team. So it's really an end-to-end platform solution whereby we can create product, properly package, brand and market it. Produce it in volume. And we now possess the ability to distribute and sell well beyond our home state.

We feel this positions the company extremely well for the future, as such our key initiative as we look forward involves maintaining our high growth rates for both organic growth and by way of additional acquisitions, leverage our existing platform by driving more product and business volume through our national distribution capabilities, which would include utilizing existing products in our branded portfolio, developing new products and potentially acquiring products. As we do that, we also believe we can better leverage the existing infrastructure and drive improved efficiencies and bottom line performance.

So that's kind of a quick summary, Gerardo, and unless you have some questions I thought we could maybe let Robert take over and elaborate on that national sales platform and progress with the Redneck Riviera product.

Gerardo Del Real: I would love to get Robert's take. That was a lot that you just went over and I want to make sure that people really get a good grasp of the importance of all the different pieces that you've managed to put together.

Let's start with the platform. You're working directly with Sandstrom Partners and these folks are the marketing force behind the likes of Coors, Miller, Coca-Cola, Fireball. Can we talk about that aspect, Robert? And then I'd love for you to touch on the platform and how it all works together.

Robert Manfredonia: Yeah. I would be remiss if we didn't mention Bulleit Bourbon too, an iconic brand. I was just reviewing transactional data and it's one of the fastest growing brands in part because of the packaging. When you have sort of a high-level brand identity company such as Sandstrom, it affords you the opportunity to have compelling transformational packaging that we've been able to create. We're able to sell that also with the corporate national accounts as part of the brand in its totality of what it's all about.

So we've mentioned that quite frequently on not just the brand but brand extensions and then other items that we are creating right now that Sandstrom will be the driving force with the brand identity part of it. So that's really a crucial part that truly smaller operators don't have access to those types of companies and I think that's a point of differentiation for Eastside Distilling. 

Gerardo Del Real: You talked about brand identity and I'd be doing listeners and readers a disservice if I didn't ask about Redneck Riviera and the partnership with John Rich. Can you speak to that a bit?

I know the brand sold, I believe it's something like 20,000 cases in the first 14 months. I think of Aviation Gin for example, it took them 10 years to reach 20,000 cases and they eventually were sold for $50 million. Talk about Redneck Riviera for me and explain that acceleration in sales. It's been fascinating to watch.

Robert Manfredonia: Yeah, it's incredible in so many different ways. Let me first touch on John and then I'll touch upon the performance since its inception. John Rich has been an incredible partner. I could use a lot of different ways of explaining John's relationship with us but the way that John drives a brand it's very personal to him, the idea, how he came up with the name and what it actually means. In a lot of ways I talk about Redneck Riviera being sort of a Margaritaville, the next generation of Margaritaville which has been a highly successful brand itself in a lot ways with Jimmy Buffett.

So the Redneck Riviera is the same thing. It's aspirational in a lot of ways. It's a place which is off of the Gulf area of Florida, but it's actually, people talk about it with reverence and John's been able to drive that through his relationship, not just in music but also on political shows such as Fox News. John's on there quite frequently as a contributor. So we have a lot of different ways of being able to drive top-down pressure with John, his stardom and also John is a very active owner of the brand itself.

As an example, when he goes on tour we set up geographical bottle signings with John with that location. So if it's in Northern California, John is actually doing bottle signings at the local grocery stores, things of that nature. So he's been fantastic, I don't think we could get a better partner to not just work with creatively but also from an execution standpoint he's been phenomenal.

That's number one. Number two, in part the early success of Redneck is attributed to a non-traditional route to market. And what I mean by non-traditional, usually within spirits or even the wine space, you start methodically with the on-premise, independent stores or independent restaurants, bars, lounges and then you gravitate a year after that or two years after that to liquor stores and then you finally get to the corporate national accounts, the Wal-Marts of the world which we're in, and Safeway or a Kroger and I can go down the list.

We actually, because of the brand itself, because of John Rich, because of the cause which is Folds of Honor, because of access and I can keep going down, the price point strategy, I can go on and on and on. We were able to directly go to Wal-Mart and Kroger and Albertsons and be able to get penetration when it usually takes three to four attempts. That's the usual norm within the business and that's attributed to the sales team. We brought in from a sales team aspect high-level people that are industry experts I'll call them that have contacts along with myself. But we have a great group of people that are able to speak top-to-top with these major chains, which is not the norm for an early-stage brand. All that stuff wrapped together in part has been the success of Redneck Riviera.

Gerardo Del Real: Impressive. And when you say you're in Wal-Mart, I believe you're in over 1,200 Wal-Marts, right? We're not talking about a local distribution deal with a local Wal-Mart retailer. We're talking about a national push of over 1,200 stores. Is that accurate?

Robert Manfredonia: That is correct. So let me break it down for you. It's a great question. They kind of categorize it different ways. So you have a mandatory, which means that you have to be on the shelf and then you have optionals. So with our 750 package we are mandatory to be on your local Wal-Mart shelf. 1.75, the larger size, we call them the handles. Those are optionals and right now we're working on another project with Wal-Mart, a special package, which again very few small producers ever are talking about special packages for Wal-Mart. We're working with them right now on that. So a lot of exciting things on the short-term horizon with Wal-Mart.

Gerardo Del Real: Let's talk about the bigger picture a bit and I'll ask either of you to take this one, Steve or Robert. We talked about or we touched on I should say the Craft Canning + Bottling acquisition and I couldn't help but notice that your most recent press release touched on the CBD-infused beverage space that obviously you have some pretty impressive first-mover advantage with. It contributed, I believe, more than $1.4 million dollars in revenues in Q1. What does that look like moving forward and how significant is that space to Eastside Distilling?

Steve Shum: I'll take that one. Our co-packing or the service side of the business, you're correct in the first quarter was about $1.4 million. We were really not doing any CBD activities in the first quarter. There's really two components on the CBD side. We have actually created our own branded CBD product under our banner called Outlandish. We've introduced the very first product just in the last few weeks. It's a slimline 187 milliliter can of seltzer water infused with CBD. What we've told the market is, as a fully legalized state here in Oregon, we'll just be launching that here in Oregon or keeping in contained in our Oregon market.

We do already have a distributor that's teamed up with us and starting to put the product out into the market as we speak. So there's a branded component, again an Eastside-owned product that we've already launched. As the rules become clearer, that is definitely something that's particularly exciting to us is to eventually over time, and again assuming the interstate rules become more clear, to try to exercise our national distribution footprint to bring that product regionally and nationally into the marketplace.

I think that is exciting because we think we'll be an early player to be able to do that with a true distribution footprint. In the beverage sector regardless if it's alcohol or non-alcoholic, distribution is a pretty important component and it is something we're very proud of — that we've worked hard to create this national distribution platform that includes all the distributors we work with, but equally important and a credit to Robert we even have direct relationships, not through our distributor but direct relationships with some of these key retailers like Wal-Mart. We interface with the buyers there directly so that is a potential future opportunity for our branded CBD product.

Now on the co-packing side, what we also recently announced is that we are seeing interest from other small producers to do the packaging and production work for their CBD product. That is something that Craft and our co-packing services side of the business is just now starting to venture into. We think there could be tremendous growth opportunities to augment the service business with providing service work for other CBD providers.

Something that's unique, we actually spent a fair amount of time working out what I would call the kinks on our own CBD product in terms of production. That's something that I think we are able to leverage for the services side where we can, when someone comes to us wanting to use our co-packing services to bottle or can their product, we actually have credibility because we've done our own product and again have worked out some of the challenges that are inherent with trying to infuse CBD into a liquid product.

The other part of your question, just as a side note the services business seasonally has its weakest quarter in the first quarter. Seasonally they are very busy in the second and third quarters and that's really a nice fit with our branded side of the business because seasonally the branded business is seasonally heavy in the fourth quarter. So again first quarter on both sides of the business tend to be seasonally weaker, the second quarter really starts to accelerate for the services side in the second and third quarter and the branded side is seasonally particularly strong in the fourth quarter, what we call October, November, December, OND for the branded business.

Gerardo Del Real: Good stuff. We talked Redneck Riviera whiskey, we talked CBD-infused beverages and the future there. The acquisition of Big Bottom Distilling I think we have to touch on that because obviously that brought with it a number of award-winning gins, whiskies, brandies, rums and vodkas. Can we speak to that a bit?

Steve Shum: Sure. Big Bottom was a small local producer. We have been selling their products through our distribution, mostly here in the state of Oregon. Some of their products within their product line are opportunities we see to be able to again leverage the national distribution. So if you really step back and think about as Robert was pointing out, it was really thanks to the tremendous early success with the Redneck Riviera product that has afforded us a very unique opportunity to have built this national distribution, again key relationships with key distributors and retailers around the country basically.

So as we built that out and have put our own boots on the ground to support that network, now as we move forward is to be able to take products either within our portfolio like a Big Bottom or other products within our portfolio and introduce them into some of those outer markets, maybe not a complete national rollout of another product like a Big Bottom gin, but maybe selectively in certain regions where we think it fits well. But again that's the opportunity as we move forward from here is to be able to leverage that distribution part of the platform.

Gerardo Del Real: Well the last time I checked, Eastside Distilling is the only publicly traded craft distillery in the United States. You obviously trade on the NASDAQ under the ticker symbol EAST. Gentlemen, I want to thank you for your time today. I also want to give each of you an opportunity if there's anything else that you'd like to add, please do so. It's been a fascinating conversation.

Robert Manfredonia: Well, I'll start. Thank you again for the opportunity and Steve mentioned it a few times and I've kind of alluded to it with the national platform, I like to say externally and even internally a lot of the hard work is building the Tier 1 network and building the initial product. Redneck Riviera was the hard work so to speak. Now we have this model where we're ready to lay in additional brands and then you have a system that we can scale up from there. So as we move forward we couldn't be more excited about what we can do and what our capabilities are. So thank you again for the time.

Gerardo Del Real: Thank you, thank you. Steve?

Steve Shum: I concur with everything Robert said, no reason to reiterate it. We really appreciate the opportunity to speak to you and look forward to doing it again soon.

Gerardo Del Real: Thank you for the work you gentlemen have put in and I look forward to many more.

Steve Shum: Sounds great, thanks Gerardo.

Robert Manfredonia: Thanks again.

**Click here for Eastside Distilling (NASDAQ: EAST) investor presentation.**

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