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Eastside Distilling, Inc. (EAST)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 net sales were flat year over year at $2.98M while gross margin expanded to 17% (vs 6% LY); adjusted EBITDA loss improved to $(0.43)M; the quarter included a $1.32M non‑cash loss from a debt‑to‑equity exchange that reduced debt by $6.5M and lifted shareholder equity to $2.65M .
  • Craft C+P printed a record 4.8M digitally decorated cans and posted 16% gross margin (vs -7% LY); Spirits narrowed its quarterly segment loss to $(0.11)M, with PPV cited as a relative strength, though overall spirits top line declined .
  • Prior guidance (Q2) that Craft would generate cash flow in Q3 and Spirits would further reduce losses was largely met: management said printing operations delivered positive EBITDA in Q3 and spirits losses improved .
  • Liquidity remains tight ($0.36M cash; $1.7M working capital) and management flagged macro headwinds (destocking, cautious consumers); equity overhang exists from Series C preferred convertible into up to 1.838M common shares over time .

What Went Well and What Went Wrong

  • What Went Well

    • Digital printing momentum: “record‑breaking quarter with 4.8 million digital can orders,” positioning Craft as a leading decorated can provider in the Pacific Northwest .
    • Material margin and cost improvements: gross margin rose to 17% (6% LY) and operating expenses fell to $1.17M ($2.14M LY), reflecting headcount and fee reductions and better Craft utilization .
    • Balance sheet progress: executed debt‑for‑equity swap cutting debt by $6.5M and returning shareholders’ equity to Nasdaq compliance at $2.65M .

  • What Went Wrong

    • Spirits revenue pressure and mix: spirits net sales fell to $0.81M ($1.10M LY) and gross margin declined to 21% (29% LY) amid lower bulk sales and competitive pressure; excluding barrels, spirits margins were stable yoy per call commentary .
    • Mobile canning underperformed plan: management exited Seattle to focus on Portland and digital printing, citing utilization/logistics challenges that weighed on Craft EBITDA vs internal expectations .
    • Macro/demand headwinds: management highlighted retailer destocking and broad weakness into Q4, creating near‑term risk to volumes and utilization .

Financial Results

MetricQ3 2022Q2 2023Q3 2023
Net Sales ($M)$2.98 $2.66 $2.98
Gross Profit ($M)$0.19 $0.03 $0.51
Gross Margin (%)6% 1% 17%
Total OpEx ($M)$2.14 $1.43 $1.17
Loss from Operations ($M)$(1.95) $(1.40) $(0.66)
Interest Expense ($M)$(0.81) $(0.33) $(0.21)
Loss on Debt-to-Equity ($M)——$(1.32)
Net Loss ($M)$(2.73) $(1.64) $(2.16)
Basic EPS ($)$(3.59) $(1.96) $(2.00)

Segment performance (Net Sales, Gross Margin):

SegmentQ3 2022 Net Sales ($M)Q3 2022 GM%Q2 2023 Net Sales ($M)Q2 2023 GM%Q3 2023 Net Sales ($M)Q3 2023 GM%
Craft C+P$1.88 -7% $1.90 -3% $2.18 16%
Spirits$1.10 29% $0.76 12% $0.81 21%

KPIs and non‑GAAP

KPI / Non‑GAAPQ1 2023Q2 2023Q3 2023
Digital cans printed (units)>2.5M cans >4.0M cans 4.8M cans
Adjusted EBITDA ($M)$(0.75) $(0.99) $(0.43)
Cash and Equivalents ($M)$0.27 $0.84 $0.36

Notes: Adjusted EBITDA excludes non‑cash/one‑time items including stock comp, gains/losses on asset sales, and the Q3 loss on debt‑to‑equity conversion .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent UpdateChange
Craft C+P cash flow/EBITDAQ3 2023Craft to “generate cash flow in Q3 2023” Management stated printing operations delivered positive EBITDA in Q3 Achieved/maintained
Spirits operating lossQ3 2023Further reduce segment loss in Q3 Segment loss improved to $(0.11)M vs $(0.28)M LY Improved as guided
Quantitative revenue/margin outlook2H23Not providedNot provided; mgmt flagged seasonal softness into Q4 N/A

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1, Q2 2023)Current Period (Q3 2023)Trend
Digital can printing adoption/utilizationQ1: guidance for Craft EBITDA positive in Q2; strong sequential printing ramp . Q2: positive EBITDA in June; >4M cans in Q2 .4.8M cans in Q3; Craft now “preeminent decorated digital can provider” in PNW .Improving volumes/margins
Mobile canning strategyQ1/Q2: restructuring; focus on printing .Exiting Seattle; de‑emphasize mobile due to utilization/logistics drag .Pivoting away from mobile
Spirits portfolio/PPV focusQ1: reset prices; Oregon focus . Q2: PPV double‑digit growth offset by tequila softness .PPV competitive; units mid‑single‑digit down; cost resets improve margins; Burnside/Azuñia need investment .Mixed: cost wins vs volume
Macro/supply chain/destockingQ1: input cost inflation (glass/shipping) .Retail destocking, cautious consumer; Q4 seasonal softness expected .Headwinds intensifying
Capital structure/Nasdaq complianceQ1: reverse split to address bid price; working on equity/tangible net worth . Q2: ATM raised $1.3M; pursuing debt‑equity swap .$6.5M debt‑for‑equity completed; equity to $2.65M; shares increase to be voted late Dec .Balance sheet improved; dilution risk

Management Commentary

  • “Craft's record‑breaking quarter with 4.8 million digital can orders demonstrates continued demand for our services... we anticipate seasonal softness [in Q4]” — Geoffrey Gwin, CEO .
  • “Craft printing operations... delivering positive EBITDA in the quarter... we continue to gain momentum... and are exploring avenues to streamline operating costs” — Tiffany Milton, Controller .
  • “We decided... to defend and compete in Portland... and focus on printing” — Gwin on exiting Seattle mobile canning and reallocating focus .
  • “We managed to mitigate [spirits softness] by implementing successful pricing strategies... Portland Potato Vodka performed well” — Gwin .
  • “There’s a destocking going down... That happens in retail... We’re going to feel that” — Gwin on macro headwinds into Q4 .

Q&A Highlights

  • Craft strategy and mobile canning: Management is prioritizing digital printing economics, exiting Seattle mobile to improve utilization and focus resources on Portland and printing; mobile remains supportive for conversion funnel but not an investment focus .
  • Spirits focus and PPV: PPV is core due to strong Oregon positioning and improved unit costs; Burnside and Azuñia need capital to reignite growth; near‑term emphasis is on PPV margin/volume leverage in home market .
  • Macro outlook: Management warned about retailer destocking and broadly weaker demand into Q4, tempering near‑term expectations .
  • Capital structure/governance: Annual meeting set for late December to seek approval to increase authorized shares, following the Q3 debt‑for‑equity exchange that restored Nasdaq equity compliance .

Estimates Context

  • S&P Global consensus estimates for EAST were unavailable in our system at the time of this analysis; therefore, no versus‑consensus comparisons are presented. Given limited coverage, we expect few or no street estimates for revenue/EPS in Q3 2023.

Key Takeaways for Investors

  • Digital printing is scaling with improving unit economics: 4.8M cans printed and Craft gross margin at 16% suggest operating leverage as utilization rises .
  • Spirits nearing breakeven: segment loss narrowed to $(0.11)M, aided by PPV cost resets; mix and investment constraints remain watch items .
  • Balance sheet improved but liquidity tight: $6.5M debt reduction and equity to $2.65M are positives, yet cash was $0.36M and working capital $1.7M, implying continued financing needs .
  • Near‑term demand risk: management flagged destocking and seasonal Q4 softness, which could weigh on volumes and margin progression; traders should anticipate volatile prints .
  • Strategic pivot away from mobile canning should enhance focus on higher‑return printing, though transition could dampen near‑term Craft EBITDA vs internal targets .
  • Dilution overhang: Series C preferred could convert into up to 1.838M common shares over time as ownership thresholds permit, potentially pressuring the stock .
  • Potential catalysts: continued Craft throughput gains, evidence of sustained spirits profitability, and any additional capital that enables brand investment (particularly Burnside/Azuñia) could re‑rate the equity .