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Hexo CEO exits after activist investor slams performance

A Hexo Corp logo is pictured behind cannabis plants at their facilities in Gatineau, Quebec, Canada, September 26, 2018. REUTERS/Chris Wattie
Hexo CEO Sebastien St-Louis is leaving the Canadian cannabis producer after an activist investor complained to the company's board about his performance. REUTERS/Chris Wattie (Chris Wattie / Reuters)

Hexo (HEXO.TO)(HEXO) chief executive officer Sebastien St-Louis is leaving the Canadian cannabis company he co-founded weeks after an activist investor sent a letter to the board slamming his leadership, Yahoo Finance Canada has learned.

According to a source close to the matter, activist shareholder Adam Arviv delivered a letter to the board on Sept. 26 demanding significant changes due to concerns including, "recent dilutive financings, the CEO's misalignment with shareholders, and a lack of basic business skills to lead."

Arviv was an advisor to the family behind Redecan, a privately-held Ont.-based cannabis company that Hexo agreed to acquire in May for $935 million in cash and stock. Arviv also co-founded Ohio-based cannabis cultivator and retailer Green Growth Brands, and BRN Group, a cannabis consulting company. His business interests span cannabis and online gaming. He declined to comment on Monday.

Hexo shares have plunged more than 75 per cent since the company announced its deal to acquire Redecan on May 28. The stock fell sharply in late August, following Hexo's announcement of plans for a US$140 million underwritten public offering. The company's deal to acquire Redecan closed on Aug. 30.

St-Louis' immediate departure was announced as part of a strategic reorganization of Hexo on Monday. The Ottawa-based company did not name a successor. Donald Courtney, Hexo's chief operating officer will also leave the company, according to the release.

“I would like to thank Sebastien for his tremendous impact on the Canadian cannabis industry. Through his years of dedication, he has helped build Hexo into a market leader in Canada,” said Hexo chair Michael Munzar in Monday's release.

The story of St-Louis and fellow co-founder Adam Miron growing Hexo into a significant player in Canada's legal cannabis market is the basis for the book Billion Dollar Start-up. In a bid to scale the company, St-Louis has led Hexo through a series of cannabis acquisitions in recent months, striking deals to purchase Zenabis Global, 48 North, and Redecan.

Hexo said it's in advanced discussions with a preferred CEO candidate, and expects to make an announcement in the coming days.

"Notwithstanding Mr. Arviv's letter, this was the right time to make this change," a Hexo spokesperson told Yahoo Finance Canada in an emailed statement. "Given Hexo's recent acquisitions, there is a real opportunity for a new leader to leverage Hexo's market-leading position to drive growth and profitability."

Canaccord Genuity analyst Matt Bottomley called St-Louis' exit "particularly troubling" in a research note on Monday.

He sees the sudden departure of two senior executives as poorly-timed, given the company is in the midst of integrating a trio of acquisitions. Bottomley also called Monday's news a "potential red flag" ahead of the companies earnings later this month.

Canada's legal cannabis industry has seen a revolving door of senior executives. Most major players have shook up their senior ranks in recent years as the industry struggled against a litany of headwinds, from oversupply to a persistent black market.

In June, Hexo reported a number of company-specific stumbles that resulted in lost market share. It removed well-performing products from Quebec, a key market for the company. Hexo also said it sold hash that was not as potent as competitors, and was "absolutely surprised" by the quality of products from craft competitors.

"Q3 was our fault," St-Louis told analysts on a post-earnings conference call on June 14. The company reported a wider-than-expected $20.7 million net loss on $22.6 million in sales for the three-months ended April 30.

Toronto-listed Hexo shares dipped 2.79 per cent on Monday, to $2.09 at 2:41 p.m. ET.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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