Clever Leaves Holdings Inc

OTC:CLVR

Earnings Call Transcript

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clever Leaves' financial results for the fourth quarter and full year ended December 31, 2020.

Joining us today are Clever Leaves' CEO, Kyle Detwiler; and the company's CFO, Hank Hague.

Before I introduce Kyle, I'll remind you that, during today's call, including the question-and-answer session, statements that are not historical facts, including any projections or guidance, statements regarding future events or future financial performance or statements of intent or belief, are forward-looking statements and are covered by the safe harbor disclaimers contained in today's press release and the company's public filings with the SEC. Actual outcomes and results may differ materially from what is expressed in or implied by these forward-looking statements. Specifically, please refer to the company's Form 10-K for the year ended December 31, 2020, which was filed prior to this call; as well as other filings made by Clever Leaves with the SEC from time to time. These filings identify factors that could cause results to differ materially from those forward-looking statements.

Please also note that, during this call, management will be disclosing adjusted EBITDA. This is a non-GAAP financial measure defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure and a statement disclosing the reasons why the company management believes that adjusted EBITDA provides useful information to investors regarding the company's financial condition and results of operations are included in today's press release that is posted on the company's website.

With that, I will turn the call over to Kyle.

[Kyle Detwiler, executive]

Thank you. And good afternoon, everyone.

It is a pleasure to speak with you today on our first earnings call as a public company. We are proud to have ended 2020 on a strong note by reaching this important milestone, capping off a year of significant operational and financial progress towards our growth strategy, so for the benefit of new listeners on the call, please let me provide a quick overview of our story and how we got to where we are today.

Clever Leaves is a multinational cannabis company with operations and investments in the United States, Canada, Colombia, Germany and Portugal. Clever Leaves was founded around a very simple idea, that cannabis production facilities have not been constructed where they made economic or environmental sense. Instead, they were built where cannabis was first made legal. Our goal is to think several years ahead. And our goal is to build an industry-leading, cost-effective B2B supply chain that provides high-quality cannabis and wellness products to companies and customers around the world. Across the geographies in which we operate, we emphasize ecologically sustainable, large-scale cultivation; and pharmaceutical-grade processing. At present, we believe we are one of the largest legal international producers of cannabis as measured by capacity.

In the U.S. cannabis industry, quality is traditionally defined by THC potency levels, celebrity endorsements, brand narratives or the convenience and prestige of a dispensary's retail locations. Quality in the international cannabis industry is much less subjective, often sharing attributes with a traditional pharmaceutical market. As a result, we have secured the coveted EU GMP certification in Colombia to differentiate ourselves from the tens of thousands of cannabis operators in the world. And we believe we are one of only a few companies to have successfully obtained this credential, especially for an integrated cultivation and extraction operation. The EU GMP certification required a 4-year effort that would have been difficult to replicate today because of logistical limitations imposed by COVID. We believe it illustrates through recognized national health agencies that our cannabinoid products are produced with similar pharmaceutical-quality standards, rigor and traceability as other prescribed medication in Europe.

From a financial perspective, we have focused on capital efficiency and growth as we've expanded our global footprint to address the legalization of cannabis around the world in both markets which have already initiated legalization as well as for future markets if and when legalization occurs. By constructing our facilities, we're agronomically efficient, as opposed to in locations which must be shielded from snow and supplied with artificial lighting. We believe we have created a long-term sustainable business model which is better for the environment and better for the bottom line. Through our expansive platform, our goal is to pioneer a new model in the cannabis industry, that of the multinational operator or MNO. In a landscape defined by Canadian license producers and U.S. multistate as well as single-state operators, we are aiming to distinguish ourselves through our low-cost cultivation, geographic flexibility and distribution model enabled by regulatory permits and licenses. We also expect to gain a distinct operational advantage from each of our global markets, particularly in our 4 core geographies, Colombia, the U.S., Germany and Portugal.

In Colombia, we are the first company in the country's history to have legally exported cannabis, following the trends of other agricultural operators who have migrated to equatorial regions. In Colombia, we benefit from optimal growing conditions for cannabis with 12 hours of natural sunlight that allow for year-round cultivation. We expect that this will allow us to achieve approximately 90% savings as measured in our costs of production. We have a sizable cultivation footprint of 1.8 million square feet, with an option to acquire another 73 million square feet of agricultural land for open-field cannabis production. Our pharmaceutical-grade extraction facility, which exclusively uses high-quality CO2 extraction equipment, was the first medical cannabis facility to receive EU GMP certification in Latin America.

We currently have the capacity to extract over 100,000 kilograms of dried flower annually. We believe our presence in Colombia offers a robust foundation for global growth, as we have also received authorization from the Colombian Technical Quotas Group to manufacture or process up to 59,000 kilograms of cannabis dried flower. Although we are not currently extracting our full allocated amount, this allocated amount represents approximately 50% of Colombia's total quota and about 18% of the world's 2021 legal medical cannabis production quota. Additionally, due to our scale and leadership in the region, the Colombian government recently recognized Clever Leaves as a P-I-N-E, which roughly translates to projects of national and strategic interest. We are grateful for the continued support we have received from the Colombian government as well as the associated regulatory agencies as we work towards leveraging this capacity to meet the demand of our international distribution network in geographies where cannabis has been legalized.

Further, we were able to navigate the complexities between Colombia and the United States during the recent importation of our first U.S.-bound commercializable CBD shipment from Colombia and with our 2020 imports of psychoactive cannabis for R&D purposes which utilize DEA import permits. Our goal is to improve our position to supply high-quality, low-cost raw materials to the U.S. market, which would help us capture our share of the growth that the CBD industry is expected to generate or if cannabis is legalized in the United States. We also believe we are well equipped to capture share in the U.S. THC industry, again depending on the shape of future regulations.

In the United States, our 2019 acquisition of Herbal Brands, a branded nutraceutical company, provides us access to a nationwide distribution network of over 15,000 retail locations. If favorable regulatory developments occur and cannabis achieves U.S. federal legality, our goal is to leverage this network as we prepare for widespread cannabinoid distribution. In the meantime, the fact that we do not have cannabis-touching operations in the United States allowed us to list on NASDAQ when we went public via a transaction with a SPAC on December 18, 2020. While we wait for U.S. regulatory reforms, we will focus on growing EBITDA from our Herbal Brands nutraceutical business.

Before we discuss Germany, Portugal and other market highlights, I'd like to turn the call over to our new CFO, Hank Hague, to provide more details on our financial performance for the fourth quarter and full year. Hank joined Clever Leaves last month and brings extensive financial leadership to the team, having formally served as the CEO of Aidance Scientific and the CFO of Abacus Health Products which was acquired by Charlotte's Web last year. We are pleased to welcome Hank to our company as we enter our next phase where we will work on growing and expanding our commercial footprint and distribution network around the world as local regulations permit.

Hank, over to you.

[Henry Hague, executive]

Thank you for the warm introduction, Kyle. I'm honored to be part of this growing team at such an important time for our company.

Turning to our financial results.

Revenue in the fourth quarter increased 28% to $3.3 million compared to $2.6 million in the year-ago period. The increase was primarily driven by sales contributions from our cannabinoid business, which has continued to grow as our business development efforts continued to unlock sales opportunities across the globe. Our Herbal Brands business was also able to make a healthy recovery from COVID-19-related reductions in U.S. retail foot traffic as a result of lockdowns and stay-at-home mandates in 2020.

Due to increased efficiencies and more streamlined operations in Colombia, our all-in cost per gram of dry flower decreased from $0.22 per gram in Q4 2019 to $0.15 per gram in Q4 2020, representing a 31% improvement. Gross profit for the fourth quarter increased 52% to $2.3 million, resulting in a gross margin of 67.9%.

Operating expenses for the fourth quarter were $9.6 million compared to $18.8 million in the year-ago period. The decrease in OpEx was driven primarily by significant actions we took during the COVID-19 pandemic, including salary reductions for senior management and significant decreases in many of our variable expenses. While COVID-19 has changed the way many companies operate, we have been diligent in rationalizing costs where we can. With our New York City lease expiring later this year, the company has opted to go virtual in New York and relocate its principal physical corporate office to South Florida, which will provide additional cost savings.

Adjusted EBITDA for the fourth quarter was negative $6.3 million compared to negative $15 million in the year-ago period, representing a significant improvement driven primarily by the $9 million reduction in operating expenses as well as the aforementioned revenue and gross profit improvements.

At December 31, 2020, our cash balance was $79.5 million compared to $13.2 million at December 31, 2019, with the increase primarily reflecting the gross proceeds we received in connection with the closing of our business combination on December 18, 2020. We remain comfortable with our balance sheet, as we are currently consuming approximately $10 million of operating cash per quarter, which we would expect to come down as we deepen our presence across various markets and drive revenue growth across both our cannabinoids and Herbal Brands businesses or if we lower cash consumption. We remain disciplined on our cash investments as our platform continues to grow.

Now briefly turning to our full year results.

Revenue in 2020 increased 55% to $12.1 million compared to $7.8 million in 2019. The growth was primarily driven by sales contributions from our Herbal Brands business as well as the sales in our cannabinoid segment. Note that this year-over-year growth was partially offset by the aforementioned COVID-19-related sales impacts in Herbal Brands.

Our annual cost to produce each gram of medical cannabis was down to $0.14 in 2020, more than 10x lower than the most efficient Canadian licensed producers, which speaks volumes to the competitive advantage we have through our cultivation in Colombia. Gross profit in 2020 increased significantly to $7.4 million compared to $3.1 million in 2019, resulting in a gross margin of 61.2%, which represents a significant basis point increase from our gross margin of 39.6% in the prior year. The increase was primarily due to the aforementioned sales strength in Herbal Brands as well as impacts related to the fair value of Herbal Brands' inventory following our acquisition in 2019.

Operating expenses in 2020 lowered to $35.9 million compared to $39.6 million in 2019. The year-over-year improvement was primarily due to prudent cost management, including specific measures we took to reduce expenses in response to COVID-19. This was partially offset by a $1.7 million goodwill impairment in Q1 2020 related to the impact of the pandemic on Herbal Brands.

Adjusted EBITDA for 2020 came in at negative $23.3 million compared to a negative $33.5 million in 2019. The improvement in adjusted EBITDA was driven organically with the significant improvement in gross profit and operating expenses outlined earlier.

Capital expenditures for the full year were $3.7 million compared to $18.7 million in 2019. The reduction was primarily driven by cautious cash management in light of uncertainty, the full impact of COVID-19 on our operations as well as the fact that the capital program in Colombia is effectively completed.

As we navigate these early days as a public company, we are pleased with the operational progress we have made thus far. And we will work together towards driving growth through our pipeline and distribution network as and when regulatory restrictions ease and new markets open up around the world. Nevertheless, the markets in which we operate are evolving very rapidly. And the measures required to ship cannabinoids either as a controlled or a noncontrolled substance look very different today than they even did late last year. This underscores our full year outlook for 2021.

We currently expect revenue for 2021 to come in between $17 million to $20 million, with gross margins of approximately 61%. We also expect adjusted EBITDA in the range of negative $24 million and negative $26 million. This estimate includes costs associated with being a public company of approximately $5 million. Additionally, we expect our 2021 CapEx to be approximately $10 million as we work to expand our Portugal operations.

Although we cannot predict the timing of regulatory developments around the world, longer term, we remain confident in our ability to be one of the leading suppliers of cannabis to the global market. And we continue to see new markets such as Mexico illustrating the trend of cannabis legalization. As you can see in our investor presentation and the footnoted assumptions, we believe we can generate more than $220 million of annual revenue, with adjusted EBITDA margins north of 40%, as the markets mature and adapt to the growing pains of a new industry.

Turning back to the near term. Following a trend we are observing outside North America, many international markets are adopting increasingly stringent quality standards which mimic or equal those of traditional pharmaceuticals. Israel, for example, recently raised its quality standards. And our quality team and our customers must focus and collaborate to ensure that our products and processes align with the new regulatory mandates. This contrasts with Canadian or American cannabis frameworks, which combine elements of the nutraceutical and alcohol industries. We view the pharmaceutical nature of new markets as a long-term positive because consumers benefit from increased quality standards, greater differentiation and transparency. Pharmaceutical sales channels require more upfront investments such as EU GMP certification, product validation, stability testing and product registration. Consequently, fulfilling this nature of demand will require more time than traditional spot sales arrangements. However, we believe these contracts should be more valuable over the long term, as switching costs are significant. Contracts are multiyear. Price points are higher and margins are relatively more attractive.

Other markets are still recovering from pandemic-related impacts, whether in the form of lower retail foot traffic in the U.S. or interruptions to transnational shipments, the timing of regulatory approvals and processes and supply chain impacts in other global markets. We have experienced this firsthand in delayed extensions of our EU GMP certifications to certain new products or form factors. And given the varied state of recovery around the globe, we do not have equal level of visibility on how conditions may change across all of our markets, yet as markets for pharmaceutical-grade and high-THC products open up around the world, we believe our certifications, low-cost production and large THC quotas keep us well positioned to capitalize on these high-growth opportunities for the long term.

We have already garnered a robust 2021 quota in Colombia, as Kyle mentioned earlier. For example, if we were to use this full quota for high-THC sales, in the event of accelerated regulatory advances, increased demand in sales, we believe we could add approximately $62 million in incremental revenue with an approximately $50 million of additional adjusted EBITDA. We have limited visibility as to how changes in regulatory and other operating conditions may affect our time frame and ability to achieve this. However, high THC sales remain a strong opportunity for our business, and we believe we are well positioned to capitalize on that sales channel. These incremental sales could provide valuable upside as we continue to grow our platform, especially if one believes that the regulatory reform will move forward, not backward, across the globe.

This concludes my prepared remarks. I'll turn the call back over to Kyle.

Kyle?

[Kyle Detwiler, executive]

Thank you, Hank.

There is increasing sentiment that cannabis regulatory reform is likely to accelerate around the world. Weeks after President Biden won the U.S. elections, Israel announced plans for a recreational market and the United Nations rescheduled cannabis off its strict Schedule IV list. South of the U.S. border, Mexico has recently advanced its legalization initiatives as well. And then of course, there is the possibility of U.S. legalization at the federal level. Most industry experts agree that it is no longer a matter of if but a matter of when medical cannabis is federally legalized in U.S. This would be a windfall for Clever Leaves, as a more functional and federal regulatory structure could allow for the importation of cannabis similar to that of alcohol or pharmaceuticals. We believe the industry and all of its participants would benefit from increased choice, lower prices as well as pharmaceutical-grade products produced by a GMP-certified company like Clever Leaves which has been audited and certified by the regulatory equivalents of the U.S. Food and Drug Administration in other various countries. There is also the possibility that state-by-state protections of the cannabis industry will phase out. And even if state-by-state protections hold and there isn't a way for Colombian, Portuguese or Canadian operators to export to the United States, a federally sanctioned cannabis industry would still provide Clever Leaves with the opportunity to invest in the U.S. market across any part of the supply chain given the access to capital we believe we can obtain following our NASDAQ listing.

Moving on to Europe. We believe we are well positioned in Germany, Europe's largest medical cannabis market. Earlier this year, we became the first company to ship EU GMP-certified cannabis extract from Colombia to Germany. We have also built a distribution network comprising of a few specialized controlled substance importation companies. One is Cansativa, in which we have a minority investment. Another is a wholly owned subsidiary which we may develop to distribute our pharmaceutical cannabinoids under the brand name of IQANNA. We are pleased that all of this foundational work has recently yielded a supply agreement with Ethypharm, a private equity owned European manufacturer and distributor of specialty pharmaceutical products, for the sale of medical cannabis extracts produced from our EU GMP-certified facilities in Colombia. We have contracted to supply a differentiated portfolio of medical cannabis extract products with both high and balanced CBD and THC formulations. Within Germany, these will be Ethypharm branded, prescribed by physicians and dispensed through pharmacies. We believe the Ethypharm partnership will allow us to further benefit from the strong potential of Germany's high-growth medical market while ensuring that patients have access to the trusted and quality products they need.

This partnership is also noteworthy because it marks one of the first times a major pharmaceutical company has directly entered the cannabis sector through its own branding, as opposed to past partnerships which involved the marketing or distribution of a cannabis company's brands. By [ saving ] our partners the 4-plus years required to obtain licenses as well as build and certify EU GMP capabilities to produce the controlled substance, Clever Leaves is enabling pharmaceutical companies to enter the cannabis sector on their own terms, as opposed to requiring them to market a third party's brand. This B2B solution for global pharma has been a central tenet of Clever Leaves' strategy since day 1.

[ Meanwhile ], our operations in Portugal began to scale in 2020, where we are one of a few companies that have received a cannabis cultivation license. We have already successfully completed 3 production cycles with approximately 110,000 square feet of existing active greenhouse and post-harvest facility space and with expansion underway for an additional 150,000 square feet of cultivation and R&D expansion. Portugal represents a geographically and strategically advantageous next step in developing our global footprint. This is primarily because Colombian regulations only currently permit the export of extracted or isolated products, whereas Portugal permits the export of flower products. This is especially true in light of recent market developments, including the acquisition of one of the other peer licenses in Portugal by a leading U.S. cannabis operator. A significant step forward was recently taken these pasts month with our facilities in Portugal receiving GACP certification, which we believe increases our ability to attract customers and enables us to produce pharmaceutical-grade cannabis products for consumers in numerous global markets.

Clever Leaves is also growing its client base both with recognized global names as well as regional specialists. For example, beginning last year, we added one of the more recognizable partners in the industry, Canopy Growth. In terms of publicly announced names, we have a partnership with UNIVO in Israel and Cannatrek in Australia, where we are proud to have introduced products which were not previously available in market. I would also call out the growth opportunity for us in Brazil, where we have made public 2 partnerships.

Brazil represents Latin America's largest potential medical cannabis market benefiting from a robust addressable market of over 3 million possible patients and the approval of the Brazilian health authority Anvisa of bulk medical cannabis imports. Market entry requires a number of capabilities, including GMP certification; extract- or oil-only product format; as well as non-accelerated stability data conducted in Zone IVb, a measure not typically undertaken by U.S., Canadian or European pharmaceutical companies, let alone cannabis companies. Domestic production in Brazil is also prohibited, so the market is currently entirely reliant on imported cannabinoids. Thus, entering the Brazilian market has allowed us to leverage early-mover capabilities to continue building upon this long-term opportunity for our business. Our partnerships with GreenCare and Entourage have resulted in firm contracts or take-or-pay orders over the next few years, although each of these announced contracts are for one specific product. We believe we can successfully sell additional products to these partners as well as to other new partners.

With these recent initiatives underway, our goal is to build up the solid foundations and deep relationships we have cultivated across the geographies in which we operate and the global markets to which we export. However, our work is far from done. Our team remains keenly focused on growing our pipeline and international distribution network, from continuing to drive sales with existing partners to closely monitoring the fluid regulatory status of other targeted markets around the world. As of the fourth quarter in 2020, we have already successfully exported cannabis products to 14 different countries across 5 continents, which we believe demonstrates our ability to maintain partnerships with global, national and regional governments and regulatory bodies. All of this was accomplished while we worked to mitigate pandemic-related supply chain disruptions in several of our markets such as the cessation of most air cargo flights emanating from Colombia, import restrictions or freezes in Brazil, travel restrictions impacting customer audits, employee or regulatory inspections, the temporary closure and reduction in foot traffic of many U.S. retail locations and disturbances for traditional human resource recruiting needs for both our company as well as for our service providers.

Before opening up the call for questions, I wanted to provide a framework for how you might think about Clever Leaves going forward, as our business is largely driven by 5 key pillars, some of which are controllable, while others are not. First is our cost of goods sold, the core of our strategy. Our goal is to have a 90% cost advantage, which is probably the most controllable item of our business. And I am proud of our team's continuous improvement.

Second is the regulatory environment. We were the first company to legally export cannabis from Colombia. Operating in Latin America can be hard enough for the average company. However, we believe we have localized ourselves well. For example, we were named a project of national and strategic importance by the Colombian government. Then there is our THC quota, which represents 50% of the country and [ 18% ] of the world's total quota. We believe we are 1 of only 4 companies with EU GMP certification for cultivation and contraction in an integrated operation. And in Europe, taking all the lessons we've learned, we built from the ground up one of Europe's few licensed cannabis operations. And we recently became GACP certified.

The third pillar in our business is extracts. This is the base around which the business is built. It took 4 years to secure EU GMP certification, but our hard work is paying off. We believe partnerships may become much more valuable because, once the supply chain is built and operating, it's very difficult to change. We are now embedding with our customers' supply chains and business models down to the formulations, registrations, relationships; and even of logistics providers. We hope this will create strong foundations for a long-term business.

Fourth is flower. Flower remains a significant component of even mature medical and adult use markets in countries such as Canada, United States or even Germany. Licensing for the production of flower in Europe is scarce, but we focused on where we wanted to grow cannabis instead of utilizing the place that was first opened to cannabis, [ like a ] country like Canada. Our genetics are stabilizing, and our customers are gaining comfort with our production. To maximize our Portuguese potential, we are expanding our facilities, which are under construction as we speak; and pursuing EU GMP certification, which we hope to receive in late 2022.

Finally, there is our non-cannabinoid business, also known as Herbal Brands. Access to the U.S. is highly coveted. While we have revenue and cash flow here, we believe we manage the controllables within COVID-19 and have upgraded a business from a 30-year-run family business to a true corporate team by integrating them as a unit in our 5-year-old growing enterprise. The next major milestone ahead of us is launching a U.S. CBD product, which we target for early 2022. If we are successful and if U.S. federal legalization of cannabis occurs, we believe this could one day lead to a U.S.-based THC product. Uncontrollables in this segment are largely the shape and speed of U.S. legalization; and the prospect of another wave of COVID-19-related closures, which could affect U.S. retail, among other things.

So with that breakdown of our business, we hope that our shareholders and prospective investors have a better sense of the drivers of our business. We are proud of the work we have accomplished to develop our commercial partnerships, grow our international distribution network and build upon the foundation we have established over the past 5 years. I'm incredibly grateful for the hard work of our team and the continued support of our shareholders as we work to develop a new subsection in the growing cannabis industry, that of the MNO. Our mission is to cultivate mojo, create value and change lives. We are excited for you to join us on that journey.

Operator, we'll now open up the call for Q&A.

[Operator]

[Operator Instructions] Our first question is from Vivien Azer with Cowen.

[Vivien Azer, analyst]

So Kyle, I appreciate the callouts on the U.S. It's pretty consistent with the commentary that we've heard from the Canadian LPs that I cover. And I'll reiterate what I've said on those calls. I don't think it's a near-term opportunity. And I think it's more important to focus on the tangible catalysts that are available to you, so with that said: You called out extracts as one of the core, #3 but a core, pillar of your business. And as I look at the midpoint of your guidance, 53% revenue growth, give or take. And extracts are implied to only be up 2%, so can you help me reconcile that, please?

[Kyle Detwiler, executive]

Sure, yes. Thanks for the question, Vivien. I think, on the extracts side of things, those are typically more of a pharmaceutical contract. So the contracts with companies like Ethypharm, GreenCare or Entourage are typically extract-based. And so we -- as we are becoming one of the first companies to really begin to open these sales channels, it's just taking a little bit longer than we would have thought. So we still expect robust growth in those segments, and they also happen to be a bit of a door opener for us. So for example, once we are selling extracts to a customer, saying, "Hey, by the way, we have this amazing operation in Portugal. Here are the certificate of analysis. Here are the different strains," those might be interesting to customers as well. So I think there's still a patchwork of interest from different groups, but being able to sell a bundled solution to customers seems to be yielding benefits.

[Vivien Azer, analyst]

Okay. I guess I would just challenge you a little bit, respectfully, of course, on the categorization of robust growth. I mean every other segment is going to grow faster than extracts. And if that's your door opener, shouldn't that be at least growing in line with like the corporate rate?

[Kyle Detwiler, executive]

Well, I think that's generally the case. I'd have to go back and look at the exact breakdown of the estimated extracts contracts, but overall we look at the cannabinoid business in its different pieces. But we should see strong growth there, but again the extract sales processes take a bit longer. So some of those contracts may be kicking on later in the year than we anticipated. So flower sales might begin without as much ramp-up. You tend to see more -- you still see pathfinder shipments in flower, but in extracts it takes a bit longer. Also, the teams -- depending on which country we are talking about, the marketing efforts that go into extracts can often be more rigorous as well. So a customer typically has to ramp up a sales force, develop a marketing strategy, target specific indications. And so that often leads to a bit of delay as well.

[Vivien Azer, analyst]

Okay, that makes a lot more sense. Just sticking with the revenue line item, on CBD: That market has not performed kind of on a -- from a pre-COVID basis, understanding of course some of the challenges that COVID has presented, in particular as it relates to retail foot traffic; has not developed in line, I think, with kind of 2- or 3-year-ago expectations. So what gives you confidence that you can drive over 20% growth? Again, I mean, just kind of using your pie chart, using the midpoint of the revenue guide to solve for that.

[Kyle Detwiler, executive]

Well, I wholeheartedly agree that the CBD market has not materialized to the expectations that a number of people have had. And I would say internally we've always hoped for the best, but we never had lofty expectations that our U.S. CBD brands would create significant growth that others were expecting. So I think, we think the category is interesting. And we believe our platform at Herbal Brands allows us to attack it in a unique way by leveraging our relationships with GNC, Vitamin Shoppe, Walgreens and CVS, but our expectations are fairly conservative there. And so I think the growth that you're seeing there reflects humble aspirations for the launch of the CBD business. And I think you'll also see a bit of a rebound in the kind of core non-cannabinoid business, which was negatively impacted by the closure of retail.

[Vivien Azer, analyst]

Okay, that makes sense, perfect. Relative to the expectations and albeit a lot has changed since August, when you guys did your Analyst Day -- and admirably, you were doing an Analyst Day in the middle of COVID. So I'm not trying to ding you for it, but I am curious. The branded cannabinoid product guidance hasn't come down terribly. I mean obviously flower and extracts will come down a lot more for the reasons that you outlined on the call, but can you maybe just a tiny little bit more specific about like where you think you're going to be driving a bulk of, I think it's an implied, $2.4 million in revenue there?

[Kyle Detwiler, executive]

Yes. I think the -- one of the places that we compete downstream in terms of branded products is in the U.S. nutraceutical business. Probably the opportunities or interests that we will have to compete downstream on the branded segment in cannabinoids, there will be very unusual circumstances. And we've probably talked about it for several years now, but we believe that there is an interesting opportunity to do so in Germany. So those branded cannabinoid sales are mostly focused on the German market. And so it's narrowed the field division a bit, but hopefully, with that narrowed focus, the execution will be better.

[Vivien Azer, analyst]

Okay, okay. That seems reasonable enough. Certainly some of your Canadian competitors have had a fair amount of success in Germany despite COVID, so maybe that is a better operating backdrop there. Maybe I'll just pivot, please, to your gross margin guidance. So broadly holding margins flat, which makes sense given the magnitude of the negative earnings revision relative to the last guidance that I saw. That being said, it seems like you guys -- at least the tone of the press release was quite encouraged by your fourth quarter kind of exit gross margin. And so I'm just wondering if you kind of take 4Q '20 as kind of the last spot -- it's almost a 68%. Like how should we think about that 700 basis points of contraction given your renewed 2021 guidance?

[Kyle Detwiler, executive]

Well, I think we feel pretty good about the gross margin that we ran through the end of the year as well as for 2021 estimates. As these contracts that I described are turning on, we're getting a better sense of pricing. And I guess I'm -- maybe I'm missing the point of the question, but I think we feel pretty good about those gross margins with the benefit of additional 6 or so months of time.

[Vivien Azer, analyst]

Yes, and sorry. Maybe my question wasn't clear. Let me try again. So you're guiding for, I believe, a 61% of gross margin in 2021. That's basically unchanged versus 2020, but it was 68% in the fourth quarter of 2020. So what's going to drive that sequential degradation in your gross margin?

[Kyle Detwiler, executive]

Well, hopefully, there is some conservatism in those numbers, but I think we're just basing a lot of our estimates based on customers, contracts, pricing, identified geographies. Some of it is impacted a little bit by volumes. As we would be able to ramp volumes, there might be a little additional leverage on kind of some of the direct labor segments. So some of those are the factors that we're trying to control for.

[Vivien Azer, analyst]

Okay, it sounds to me then that it must be the nature of the contracts because I would think you would get better operating leverage because, again, at the midpoint of your guide you're looking for over 50% revenue growth year-over-year.

[Kyle Detwiler, executive]

Yes. That's -- I mean that is generally right. I suppose one more factor just to acknowledge is that, some of the flower sales out of Portugal as that operation begins to kick on, those are a bit different. Initial sales out of Portugal will be at the GACP certification level. Margins of EU GMP-certified products are also a little bit higher. So I haven't looked at the exact breakdown, but that would be another factor that we could follow up with -- you with.

[Vivien Azer, analyst]

That incremental detail is very helpful. Last one for me and then I'll hop back in the queue, just in terms of your adjusted EBITDA guidance and again coming back to this kind of theme of operating leverage. And maybe the gross margin explains it entirely that in an absolute dollar sense you're just hoping to essentially hold your EBITDA losses constant. Are there incremental SG&A loads that you need to layer on into 2021 to kind of support your longer-term revenue aspirations that we need to contemplate?

[Kyle Detwiler, executive]

I think the way I would answer that is that the SG&A assumptions that we built into 2021 probably power a platform that would be a bit larger than currently anticipated. So it's probably more of the other way around, but we didn't want to make a commitment to do that because, when you talk about a contract like Ethypharm, right, that is a [indiscernible] that took months, if not years, to put together. You need a certain-sized team to handle that both from a quality perspective, regulatory perspective, also sort of a German sales relationship perspective. A lot of that won't change. Now those relationships are shifting from, "Hey, let's do a deal together," to, "Okay, how many bottles of product XYZ are required this quarter?" but there is sort of a basic infrastructure required. We also have gone public. That has added about $5 million of expenses. So excluding that, we are actually improving sort of on a partially adjusted basis, I suppose, but we feel that the G&A levels that are in here will support a much bigger business. I should also mention, at least for me personally, there are -- I would not receive a financial bonus receiving -- generating revenue in this range. So there are management incentives that would be at higher levels.

[Vivien Azer, analyst]

That's a helpful point of transparency. And I think that's admirable, Kyle. I will hop back in the queue.

[Kyle Detwiler, executive]

Thanks, Vivien.

[Operator]

At this time, it's -- appears that this concludes our question-and-answer session. There are no more questions. And I would now like to turn the call back over to Mr. Detwiler for closing remarks.

[Kyle Detwiler, executive]

Thank you. I'd like to thank everyone that attended the call today. And we look forward to speaking with our investors and analysts when we first -- when we report our first quarter results in May.

[Operator]

And ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your [ participation ]...