July 3, 2019
Updated at 2:32 p.m. ET
Canopy Growth co-CEO and founder Bruce Linton has been fired from his role and Canopy's board effective immediately. Linton's co-CEO Mark Zekulin will assume the role as the sole chief executive officer at the world's largest publicly traded cannabis company.
"It is a crappy day if you are in the company and you are a fan of Bruce," Linton told Cheddar.
The change in leadership comes just weeks after the Canadian cannabis giant reported disappointing losses in the latest quarter. In a company statement Linton said, "the Board decided today, and I agreed, my turn is over."
Zekulin will work with Canopy's board of directors to find a replacement leader for the company, considering both internal and external candidates. Canopy's board also announced Rade Kovacevic, who currently leads Canadian operations and recreational strategy, will assume the role of president, and John Bell has been appointed Board Chair, a role that will be reviewed at the company's board meeting in September.
"While Canopy will never be the same without Bruce, the team and I look forward to continuing to do what we have done for the past 6 years: investing in world class people, infrastructure and brands, and always seeking to lead through credibility and vision," Zekulin said in a statement. "I know the company will continue to thrive as the Canopy story continues on for years to come."
Shares of the company sank in pre-market trading, but rebounded to trade up close to 2 percent.
Linton founded the company in 2013 in an abandoned Hershey chocolate factory in Smith Falls, Ontario, and built it into the largest publicly-traded cannabis company on the planet with a market cap approaching $14 billion. Under Linton's leadership, the company attracted a $4 billion investment from Corona-maker Constellation brands, which upped the alcohol company's stake in Canopy to about 40 percent; and brokered an unprecedented cross-border deal with one of the largest multistate operators in the U.S., Acreage Holdings.
When Canopy reported its fourth quarter and full year results, however, the company disappointed investors. Despite growing its annual net revenue nearly 200 percent in fiscal 2019, in the fourth quarter, the company reported a $74 million loss and its gross margins dropped to 16 percent. Linton told Cheddar the narrowing margins were a result of expenses incurred from Canopy's rapid growth, adding that the "pain of growth in Canada has now been largely undertaken, so we think we can ramp up our margins back to normal by the end of the fiscal year."
Constellation Brands CEO William Newlands didn't see it that way, according to MarketWatch.
"While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy's recent reported year-end results," Newlands said, adding "we continue to aggressively support Canopy on a more focused long-term strategy to win markets and form factors that matter, while paving a clear path to profitability."
In a statement a Constellation spokesperson provided some additional detail.
"We fully support the decision made by Canopy Growth’s Board of Directors to appoint Mark Zekulin as the company’s sole CEO," the spokesperson said. "He is committed to helping ensure a successful transition, as Canopy begins a process to identify a leader to drive the company’s vision going forward."
GreenWave Advisors founder Matt Karnes said a bad quarter of earnings likely wasn't to blame for Linton's ouster. The shuffle, he speculated, could indicate Constellation is preparing to steer Canopy Growth more firmly into the cannabis beverage space in the event of impending federal cannabis legalization in the U.S. ー a claim lent credence by the work Canopy and Constellation have put into a 197,000-square-foot bottling facility in Smith Falls. Products like cannabis beverages will be legal for sale in Canada by mid-December, following the country's second wave of legalization for products like vapes and edibles in October.
"The industry is morphing and from the get-go, the long-term play for this industry is that it would be dominated by big tobacco, big alcohol, big pharma. Constellation came up early with a sizable check," Karnes said. "This is maybe an indication that federal legalization could happen earlier than expected, and this gives them a chance to get their strategy in order when the floodgates open."
Canopy Growth appointed Mike Lee, a beverage industry and Constellation veteran, as CFO in late May, which Karnes called foreshadowing for Linton's departure. He said the company won't likely seek out another cannabis executive in its search for fresh leadership, but rather "someone from Constellation or someone from the beverage world."
Linton's departure comes as a shock, not only because of the company's recent successes, but because of Linton's high profile role. A media darling, Linton rarely declined speaking and interview opportunities, while his quieter counterpart, Zekulin, oversaw the more granular portions of company, like managing day-to-day operations.
Zekulin joked in an April interview with MarketWatch that "somebody has to get all the attention, and somebody has to do all the work."
Stifel analysts in a note characterized the changes as typical for a turbulent early stage industry. In the early years of the technology industry, for example, it was more common than not for founders to lose control of their companies, oftentimes before they even went public. The iconic Steve Jobs, for example, left Apple ($AAPL) for about a decade before eventually returning to lead.
"The vision of Mr. Linton and his Founder status at the company will be sorely missed," Stifel analysts wrote in a note. "No doubt the early stages of the development of this industry and company have been choppy – we believe the Board is making a definitive statement about its view of the development progress of the company and its view that there could be better leadership to execute Canopy's vision."
Linton, for his part, came to a similar conclusion.
"I suspect you only get terminated if they want to do something different," he told Cheddar, adding "while this day isn't a super fantastic one for me ... the place will rip on."
Linton told CNBC he owns an estimated 18 million shares of Canopy Growth.
Cheddar's Spencer Feingold contributed to this reporting