Just shy of a decade after opening doors to its first location in Toronto, cannabis retailer Tokyo Smoke has announced that it will be shuttering 29 stores across the country as it enters into creditor protection.
A press release put out by the retailer on Wednesday afternoon explains that it has obtained an initial order under the Companies' Creditors Arrangement Act (CCAA) from the Ontario Superior Court, and that 167 locations across Ontario, Manitoba, Saskatchewan and Newfoundland and Labrador will remain operational during the restructuring proceedings.
“Following a thorough review of all available options and alternatives, Tokyo Smoke commenced the restructuring to align its operations with current market and regulatory conditions, which have significantly changed since the initial licensing regimes in the provinces where Tokyo Smoke operates were introduced,” the release says.
Court filings from the CCAA monitor, Alvarez & Marsal Canada Inc., shed more light on the events that prompted Tokyo Smoke to file for creditor protection, noting that changes in regulatory conditions have “devalued cannabis retail licenses and saturated the market.” In Ontario alone, the number of cannabis retail licenses has allegedly shot up from less than 100 to over 1,600, and this has put “downward price pressures on retail cannabis due to lack of product differentiation between retailers.”
As such, the retailer’s book value of liabilities exceeds the book value of its assets by approximately $89.1M, according to an August 27 document.
“As [of] June 30, 2024, the applicants held assets with a book value of approximately $148.2M and had liabilities with a book value of approximately $237.4M,” the document reads. “The companies have been operating at a loss and are wholly dependent on financing from related parties and third-party lenders to meet their working capital needs. Tokyo Smoke had a net loss of $29.3M for the fiscal year ended June 30, 2024. Without financing, the companies are not able to satisfy their obligations as they become due.”
In the near-term, the restructuring process will see the immediate closure of the aforementioned 29 stores, the beginning of negotiations with landlords to seek “consensual lease amendments,” and the termination of other contracts and franchise agreements in order to “streamline the overhead cost structure.”
