(This story has been updated to include commentary from the company and an analyst.)
Ottawa, Ontario-headquartered Hexo Corp.’s longtime CEO, Sébastien St. Louis, is leaving the cannabis producer he helped create almost a decade ago, effective immediately.
The CEO’s departure is part of a strategic reorganization announced by the company Monday morning, which also includes the resignation of its chief operating officer, Donald Courtney.
Courtney will remain as COO until a replacement is found.
St. Louis had been CEO since Aug. 13, 2013, when the business was called The Hydropothecary Corp.
Since then, St. Louis helped grow the company to become one of the largest cannabis producers in Canada, with net revenue of 22.7 million Canadian dollars ($18.6 million) in its previous quarter.
But Hexo has struggled to turn a profit.
The company generated a loss of CA$20.7 million in the quarter ended April 30 and a year-to-date loss to CA$45.7 million. Hexo lost CA$546 million in the previous fiscal year.
In a statement, St. Louis said Hexo’s future is bright, and he is proud of the employees, the brands “and the loyalty our customers have shown us.”
“As a significant shareholder I look forward to the Company’s next exciting stage of growth,” he said.
Hexo is in advanced discussions with a candidate to take over the CEO position, and an announcement is expected to be made “in the coming days.”
The company did not appoint an interim CEO.
Hexo’s next leader “will be well-positioned to integrate Hexo’s recent transformative acquisitions and leverage the company’s lean production capabilities, solid brands and robust product offering to lead Hexo through its next phase of strategic evolution,” the company said in a news release announcing the changes.
Under St. Louis, Hexo made a string of acquisitions so far this year, totaling over CA$1 billion, inducing:
- Buying rival producer Zenabis for CA$235 million.
- Acquiring cannabis firm Redecan for CA$925 million.
- The deal to buy 48North Cannabis for CA$50 million.
St. Louis was the last remaining CEO among a group of founders who left, voluntarily and involuntarily, the cannabis businesses they founded over the past couple of years as the companies struggled to turn a profit.
In an email to MJBizDaily, a Hexo spokesperson wrote that “this was the right time to make a change” in the chief executive position as the company “continues to mature and enters its next stage of its strategic evolution.”
The spokesperson did not say why there was no interim CEO or whether St. Louis had been asked to resign by the board.
Analysts greeted the move with skepticism.
In a note to clients, Canaccord Genuity Corp. analyst Matt Bottomley said the move is “particularly troubling.”
“In our view, the company had already been struggling as of late with its most recent quarter overshadowed by sequentially lower revenues in its home market of Quebec, production headwinds, and stock limitations on some of its branded products,” he wrote.
Bottomly also noted that:
- Amid the significant transition, St. Louis won’t remain in an interim capacity.
- The resignation of the COO might not bode well for the company’s next quarterly results, slated to be released this month.
- Hexo is in the midst of integrating “transformational M&A.”
“As one of the most acquisitive Canadian Licensed Producers as of late, Hexo is currently in the midst of integrating transformational M&A, which we believe makes the timing of this announcement unfavorable,” he wrote.
“Although specific details on the timing/rationale for today’s announced changes remains thin, we believe additional clarity will come in the next few days/weeks from the potential announcement of Mr. St. Louis’ successor as well as the company’s (fourth quarter) earnings release later in October.”
Per Hexo’s latest proxy last November, St. Louis was entitled to a lump-sum severance payment worth 24 months of salary in the event he was terminated without cause. Such a situation would have amounted to at least CA$1 million in the previous fiscal year.
His employment agreement also contains termination provisions making him eligible for medical, dental and life insurance coverage for two years after the date of termination or until he obtains alternative employment.
The former CEO will be under a noncompetition clause for 18 months.
In addition to the lump-sum severance payment, any termination without cause would mean St. Louis is eligible to receive two times any annual incentive amount earned during the previous fiscal year, plus two times any executive cash bonus earned during the previous fiscal year.
Had the company been profitable, he also would have been eligible for a payout “equal to the bonus of 5% of the corporation’s earnings before tax which would be payable to him over the eighteen month period subsequent to the date of termination calculated on a proportionate basis.”
Matt Lamers can be reached at email@example.com.