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Eastside Distilling (OTC: EAST) CEO Grover Wickersham and CFO Steve Shum on Positioning the Firm to Profit in the Booming Craft Spirits Industry

January 12, 2018

Gerardo Del Real: This is Gerardo Del Real with Small Cap Stock Digest. Joining me today is Chairman and CEO of Eastside Distilling (OTC: EAST), Mr. Grover Wickersham and CFO Steve Shum. Grover and Steve, thank you for joining me today.

Grover Wickersham: Thank you, Gerardo. I appreciate it.

Steve Shum: Thank you.

Gerardo Del Real: Here at Small Cap Stock Digest we enjoy being able to bring you quality stories early on, and quality stories that have important differentiators. Eastside Distilling definitely checks both of those boxes and also happens to have a fast-rising megatrend anchoring it. Now, Eastside Distilling has been producing high-quality, award-winning craft spirits in Portland, Oregon, since 2008.

Now, Grover, Steve, most people are familiar with craft beer. I'm based out of Austin, Texas, and I can tell you that craft beer is a staple of both weekday and weekend life here. Now the craft liquor market is in its infancy, which makes it a perfect time to introduce Eastside Distilling.

The company has had a very active 2017, and most recently announced the game-changing partnership with country music super star John Rich, the multi-platinum country music artist and one-half of the award-winning duo, Big & Rich. I'd like to start by asking you a bit about the company's history. How did Eastside Distilling get its start?

Grover Wickersham: Well, it actually started kind of right at the beginning of the craft spirit boom. It was, I think, something like a hundred distilleries in the country. It started, as you mentioned, in 2008 and started with our founder’s basement. It just kind of grew on the strength of the product that we put out. We went public a couple of years ago and then this summer we up-listed to full Nasdaq. Our symbol is EAST and we're traded on Nasdaq.

Gerardo Del Real: Excellent. Now you mentioned the Nasdaq listing that you recently secured the updated ticker symbol and the rollback that was completed. You have an incredibly tight share structure and a tiny market capital. I believe closing today was approximately $19.5 million. Tell me about the team in place and also, if you could tell us a bit about your background, Grover. You have a very, very interesting, diverse, and obviously, successful background. Can you tell me a bit about it?

Grover Wickersham: Well I appreciate you saying that. I was trained as a securities lawyer and worked at the SEC. My career really has been working with smaller companies and taking them public. So this kind of plays to most of my strengths from a financing standpoint. Regarding our capital structure it's something Steve and I tried to do is keep it simple. We don't have preferred stock and we don't have a lot of convertibles and things like that. It’s pretty plain vanilla common. We do have some publicly traded warrants but it’s a pretty simple capital structure. With a small company you want people to focus on the company, not trying to figure out the capital structure.

Gerardo Del Real: Agreed. Steve, could you chime in a bit and tell us a bit about your background. You're CFO of the company, obviously an important position, can you tell us a little bit there?

Steve Shum: Sure. As Grover mentioned, I've been in the world of micro-cap companies most of my career, 24 years plus. I started my career as an analyst and then went on to the buy side money management and then ultimately did a couple of different projects where I served as CFO of a small public company, Eastside being the current one I am involved with.

Gerardo Del Real: Now I mentioned how active and how important 2017 was for Eastside Distilling. It was a transformational year and a large part of the foundation for future growth was laid when the company hired Sandstrom Partners to increase the brand value. For those that are not familiar with Sandstrom, can you please explain who Sandstrom Partners is and why bringing them on was so important, and some of its best known success stories because they've been incredibly successful and selective in the clients they take on.

Grover Wickersham: Well, we are really fortunate that in Portland that we have Sandstrom Partners because they're an internationally recognized branding firm. Just to mention four of the brands that they've done. Bulleit which is a leading bourbon and also a needle mover for Diageo, which is the biggest company in the business. It’s been incredibly successful as a brand. Bulleit Bourbon, Bulleit Rye, that was a product they branded. They also did St-Geramain Liqueur which is something that over five years grew from nothing until it was acquired for $160 million. Two other brands. There’s another local company that is Aviation Gin. That’s one that Joe Montana and a number of San Francisco folks were invested in and that we don't exactly have the dollar amount for what it was sold but it was something in excess of $50 million. They also came up with all the branding for Stillhouse which is another brand that has an over $100 million valuation.

Our hope is that what we can do is kind of be a branding factory. We haven't just hired them, we've really brought them in as major shareholders. Jack Peterson, who's the president of Sandstrom, is on our board of directors and they're kind of like a marketing department in the sense that they are actually developing brand ideas from scratch. It's not like we're taking their ideas. They're going through our whole portfolio as well and they’re helping us really upgrade the game tremendously. You mentioned 2017 as a transformational year, in fact, actually we started with them right at the end of 2016. The pipeline got started to come out with their new branding, we started coming out actually in the end of September, beginning of October with the first of several of their innovations.

Another thing that we did that was again totally because of the close relationship with Sandstrom, we had this opportunity to work with John Rich of the Big & Rich country band, which is hugely popular in the Southeast and also nationally. They were wondering why they would work with a small distillery in Portland but we had in our arsenal the Sandstrom team. Over a three or four-day period, over a weekend we came up with a whole branding proposal that knocked their socks off, John Rich's socks off that is. That has now come to fruition this month with our launch of the Redneck Riviera brand, which is in conjunction with John Rich. Steve will echo what I'm saying I’m sure, but it's incredibly exciting and we're getting inquiries from distributors and from retailers. Where in the past, we had to knock on their door, they’re knocking on our door. It's very, very exciting.

Gerardo Del Real: Well there's a lot that you just said there, Grover, that I want to touch on, and I want to go one at a time. Now, the first thing that caught my ear is that you mentioned that Sandstrom Partners had taken a large stock position in Eastside and that's important, of course, because that aligns its interests with shareholder interests, which for shareholders is critical.

Steve, can you speak to the position they took and the thinking behind that?

Steve Shum: Sure. Normally they work for spirits companies where they're essentially just collecting fees for their services. Our argument to them was to basically take a portion of their fees that they would normally earn and actually take it in stock and become partners with us. I think they were excited about that opportunity to do so especially for a small public company where their impact could make a big difference and they could enjoy the benefits of that downstream. Essentially the work they've been doing for us has been paid more so in stock in addition to a small cash component as well.

Their president of the company joined our board of directors. So not only are they earning stock for services but they have some options in the company to further benefit with our success. Combine that it’s probably somewhere in the neighborhood of 3 or 4% of the company.

Gerardo Del Real: Wow. Now, the second thing that really caught my ear was the John Rich partnership, of course. That is a milestone partnership. Can you share the details of this exciting partnership? Somebody as intelligent and well known as John Rich being able to be the face of this spirit has got to be incredibly gratifying to you.

Grover Wickersham: Steve and I were just at the launch party at his house, which was just amazing. It's an incredible thing. What John says is that a lot of people might have a bar in their house but he has a house in his bar. It's basically a 200-person venue with a soundstage set up so he can have his whole band perform. I got to say that he's such an amazing guy. I had six emails this morning from him when I woke up talking about different possible customers that had contacted him. He’s very, very hands on.

Gerardo Del Real: That sounds like a party that I should have been at and maybe in the future we'll be able to make that happen, guys. So, listen, Redneck Riviera, of course, it’s exciting. You're getting a lot of calls, but the portfolio of products that you have on file, is equally exciting.

Can you share some of the highlights from the existing product line?

Grover Wickersham: We're not a one trick pony.

Steve Shum: Sure. First of all, we have approximately 18 products in our portfolio line up. Obviously we have what we believe will be the initial lead horses or flagship products, and those are, clearly, we're very optimistic about the Redneck Riviera product being a very significant product for us in 2018.

Our Burnside product lineup which is currently comprised of three different specific products under that umbrella brand Burnside. That has historically always been a flagship for the company and with the new branding we anticipate that to continue to be so. We've done extremely well in the Oregon market with our Portland Potato Vodka. It's really developed quite a name and reputation in the local market for us. So that's a pretty significant product in our current lineup.

One of the newest products that Sandstrom helped us rebrand, it was originally called Coffee Rum, we rebranded it to Hue-Hue and put it in a much better looking package, really capitalizing off of the cold brew coffee theme to it. We just recently have been putting that on the shelves in the local market and reception has been very good.

We see in order of importance; Redneck Riviera, Burnside product line, our vodka, and our new Hue-Hue product. Over time we anticipate a number or our other products in our portfolio to also become increasingly more important to us.

Grover Wickersham: I'd say we have a line of other products coming in that we're moving forward with Sandstrom. I just want to mention the third leg of our stool, which is our wine canning and bottling operation. What that will enable us to do is to work with other distillers and also with our wine canning operation work with Pacific Northwest, Oregon, and Washington wineries and go with this new slim line can which is a single serving, either 187ml or 250ml. These are incredibly popular right now. I believe it's the fastest growing segment in wine. We are in a unique position to be the first to have this canning facility in the Pacific Northwest. I think this quarter we're hopeful of announcing some significant customers and that's a very high margin, very nice business.

Gerardo Del Real: I'm glad you mentioned the canned wine, Grover, because I was going to bring up the fact that Trader Joe's can't seem to keep it in stock. It's a small space, but you mentioned it's a rapidly growing space, so, thank you for mentioning that.

Steve, we mentioned that market cap of, let's just call it $20 million right now. For context, how big is the spirits market?

Steve Shum: In the US alone it is in excess of $24 billion industry just for spirits. Of course it’s a mature market but the fast growing segment within the spirits industry is obviously craft. As consumer trends are leaning more and more towards unique products, innovative products, and that's something Eastside is all about.

Gerardo Del Real: Fantastic. Now, you've started 2018 with a bang already you've announced that Tennessee's Lipman Brother, one of the premier distributors in Tennessee, would be distributing Redneck Riviera Whiskey, which of course is important because you mentioned the John Rich partnership and how that has the potential to be a flagship moving forward.

What else can current shareholders and new shareholders expect from the company in 2018?

Grover Wickersham: I'd say what we publicly announced is we're planning to roll the product out initially in the Southeast. We have started selling it in Oregon, and by the way, it's doing very well, people love it. We're planning to really concentrate on the Southeast. We're hopeful of having several other distributor announcements coming along following the Lipman announcement. And based on the launch party, I am very optimistic that this month will be announcing some significant relationships.

Gerardo Del Real: It sounds like, again, you're off to an incredible start this year. I'm looking forward, Grover to those announcements and hopefully being able to have you back on so you can fill in the details for us.

Grover Wickersham: Well, thank you very much. Before you go, I also want to mention that we kind of lucked out with the recent tax bill because people don't realize this, but a very, very high component of the cost of goods in the distilling area, especially for micro-distillers or small distillers like us, is that federal excise tax. Steve could quantify this for you, what the actual benefits to us could be, but it's an 80% tax reduction. That's had a very significant, effective January 1st, positive impact on our profitability and cash flow. Do you want to, maybe, put some numbers to that Steve, so people understand?

Steve Shum: As a small company it has a significant impact on us. Right out of the gate, if you look at our margins in the business, that tax improvement has at minimum somewhere in the neighborhood of 10-12 percentage points on our gross margin improvement. You don't often find a company that can improve its margins that dramatically almost overnight. That was one of the key benefits to this new tax program.

Gerardo Del Real: That's incredible.

Grover Wickersham: That's on the first 100,000 gallons of production. If we maxed it out that'd be a theoretical savings of over $1 million in 2018.

Gerardo Del Real: That's incredible. I really appreciate the context and the color. Steve and Grover, is there anything else you'd like to add? Thank you for your time.

Steve Shum: I'd like to say that we're a well-kept secret. There aren't very many people that are probably listening to this radio broadcast or interview that have heard about us, but we were hoping that we're going to change that in 2018 because John Rich is going to be out there being a spokesman for us. We have all these other really exciting projects that are well underway right now in the first quarter. We are hopeful that people learn about East and get involved with us in 2018.

Gerardo Del Real: Sounds likes it's going to be an exciting 2018. Again as I mentioned earlier, I look forward to having you back on to share the details of those milestones as you check them off.

Steve Shum: Thank you.

Grover Wickersham: Thanks.

Gerardo Del Real: Thank you very much, guys.

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