Beeline Holdings, Inc. Q3 FY2023 earnings call

• Geoffrey mentioned progress towards EBITDA and net income goals despite economic headwinds in craft beverage and spirits categories.
• Craft digital printing had positive developments with new customers and 4.8 million digital can orders, though mobile canning faced challenges.
• Spirits saw improved EBITDA loss to $70,000 in the quarter, with Portland Potato Vodka performing well and cost-cutting measures in place.
• Recorded a $1.3 million loss on debt to equity swap, excluded from adjusted EBITDA. Craft printing operations working to streamline costs.

Consolidated gross sales were $3.1 million for both third quarter of 2023 and 2022, with Craft sales at $2.2 million in 2023 vs $1.9 million in 2022 and spirits sales at $850,000 in 2023 vs $1.2 million in 2022. Consolidated gross profit was $500,000 in 2023 vs $200,000 in 2022. Consolidated gross margins were 17% in 2023 and 6% in 2022; Craft margins were 16% in 2023 and -7% in 2022; Spirits margins were 21% in 2023 and 29% in 2022 (excluding barrel sales, 27% in both 2023 and 2022). Adjusted EBITDA was negative $430,000 in 2023 vs negative $1.4 million in 2022.

• Acknowledged need for further improvements across all assets to achieve positive cash flow and net income.
• Anticipated seasonal softness in the fourth quarter.
• Focus on digital printing growth and spirits improvement starting with Oregon market first.

• Economic headwinds in craft beverage and spirits categories.
• Challenges in mobile canning business related to logistics and utilization.
• Underinvestment in Burnside and Azunia brands.
• High cost of capital and difficulties in obtaining funding.
• Supply chain challenges and consumer/retail destocking issues.

Q: Hi. Good afternoon, Geoff. I continue to see some improvement here, a continued improvement on the cost side. I was wondering if you could talk about mobile canning business being down relative to maybe what the forecast was and, at the same time, Craft digital growing and how you think about that business on a going-forward basis in terms of better visibility.

A: Right. Thanks for the question. Mobile is not an easy business. I mean if you think about it, it's a logistics business. You're moving basically a canning line remotely to the customer. You're setting it up. If your customer is struggling with their product, the temperature is not right, carbonation is not right, it's your problem and you're trying to figure out how to basically can it, deliver a great product and then you pack it all off and go home. And you're paying for this the whole time. And so a critical part of that story is utilization -- concentration, utilization, not driving 6 hours, spending a lot of time on that. And that's something that Craft did well for a long time. We were in Denver, Seattle, Portland, so can is dominant in the Pacific Northwest. And that's not a business that we want to invest the time on, frankly. That's a business that we want to develop, improve, but we want to be in the digital canning printing business. I mean, we know for a fact, large consumer product companies, Coca-Cola, Budweiser, the PGA, have turned to digital printers to digitally print special-edition cans for various things that they're doing, not with us but hopefully with us at some point in the near term. That's the business that we want to invest in. So we're going to spend less time on mobile. But having said that, mobile is critical right now because, last year, we converted almost all our mobile customers to digital print customers, right? They were important for the build-out of the demand curve for us. So we're going to stay involved in Portland digital, mobile canning, and we're going to serve our customers there, but we're going to focus on printing.

Q: Got it. So when you look at that business, how much of the mobile business was like affected?

A: It's largely Seattle. We initially expected to invest in Seattle, capture more market share, compete on price there, and we decided that we're just going to defend and compete in Portland very vigorously. We're not going to give up any share there, and that's where we'll be. And so initially, when we looked at the year, and I was looking at the opportunity for the company, I was expecting for the third quarter that mobile would be stronger in Seattle. And our sense is that we would be able to convert more of the demand that we are building on in the early part of the year in the third quarter in digital printing. I think we got distracted at Craft, focusing on mobile, restructuring it, exiting Seattle. And that's one reason why we weren't able to generate the EBITDA in the quarter that I thought we were going to do for that segment.

Q: Got it. That's helpful. And just a little bit more color around Portland Potato Vodka. It sounds like that's starting to bounce back for you. Why is that occurring? And then just a little color on why we're seeing that.

A: So let's talk about the three major brands, and we have a lot of brands, but our three major brands are Portland Potato Vodka and Burnside, those are focused in Portland and Pacific Northwest; and then we have Azuñia, the tequila brand that we purchased a few years ago. Vodka for us is a critical space because that's a place where we can do a lot of volume, and we can do a lot of volume with our concentrated footprint in Portland. We can really deliver more cases, more volume, leverage the fixed expense base. What you've seen with this company is we've been shifting investment from spirit brands to the digital can printing. And a lot of people ask me, why are you doing that? Spirits is supposed to be a hot category. And the truth of the matter is it is a hot category, but it's extremely difficult to do, to compete, in California with the 3-tier distribution system and the way that the structure of the segment operates. You're going to need a tremendous amount of capital or you're going to need a celebrity partner or someone who can pull demand through a reluctant distributor. That's a fact. I mean that's a real challenge. However, thankfully, we have a strong market position in a control state in Oregon, and that limits the leverage the distributor has on taking gross margin from us. So I'm growing the spirits business back in Oregon first. And then we will expand when we have more leverage with our partners, right? So Portland Potato Vodka is critical. So what we've done there is we have lowered the cost there significantly. Liquid costs, the bottle, packaging, whole manufacturing process has been rebuilt. We've sized that to improve the margins. And so we're going to put more volume through our facility in Milwaukee, Oregon. And we're going to see those margins improve at PPV. And that's going to be the growth driver. So what you've seen in the summer is we got aggressive with our main competitors in Portland, and we did okay. We weren't positive in units. We were mid-single-digit down. But based on what we're seeing in the economy, I'm happy with that. Now the next thing, as you mentioned, is Burnside. Burnside's a disappointment. We're in a position to really grow Burnside. In fact, we have some outstanding Burnside products that we're working on, one of which is a 17-year bourbon for Buckman. And we think that it's outstanding. And we believe that we have an opportunity to roll out some unique products in the Burnside line and get more interest in that brand and get some growth. But that's the challenge. Burnside and Azuñia are two brands that need investment. And this company has been about restructuring and reducing costs and underinvestment there. It has been one of the things that I think slowed the turnaround in those two brands. But here, this is where the market makes a decision. In a small-cap market, the cost of capital, where our stock is, is telling us that they don't have the capital to invest there. It's extremely expensive to borrow funds at this point. We just did the debt for equity swap. You saw that. So we're having to pick our areas very carefully where we invest, and we have a limited amount of capital to use. And it's to retain the public company status and grow digital can printing because that's immediate. That's the investment made and we have immediate impact because we're seeing customers who are transitioning to this package. So Burnside is a work in progress and the same thing with Azuñia. When we have a little bit more capital, we have a plan in place and we think we're going to be able to execute it, then in the near term, we're going to do some unique things in Burnside, we think, that are going to drive awareness and volume in Portland. But right now, PPV is leading the way.