Cannabis retailer Tokyo Smoke will close 29 stores and seek creditor protection as part of a restructuring effort, the company announced.

Tokyo Smoke plans to continue to operate 167 recreational and medical pot shops in Ontario, Manitoba, Saskatchewan and Newfoundland and Labrador, the company said.

The Toronto-based company has obtained an initial order under the Companies’ Creditors Arrangement Act from the Ontario Superior Court of Justice. As part of the order, the court has granted a temporary stay of proceedings against Tokyo Smoke until September 7.

Tokyo Smoke had approximately $102.3 million of debt as of June 30.

“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,” said the company in a news release.

“The company will pursue an exit from CCAA protection as a stronger business, better positioned to continue providing premium products to its customers over the long-term, while continuing to provide jobs to its more than 500 dedicated employees across Canada.”

Toronto-based Alvarez & Marsal Canada is acting as the court-appointed monitor in accordance with the CCAA. The monitor attributed the urgent need for relief to a saturation of the market in Ontario after the province allowed an unlimited number of cannabis retail licenses and store authorizations.

The number of Ontario cannabis licenses has ballooned to 1,600 from 100 in 2019 after pot was legalized in the province, said Alvarez & Marsal in a court filing. Also, an oversupply has resulted because Ontario’s cannabis is sourced from one regulated wholesaler that sells the same product to all retailers, said the monitor.

Alvarez & Marsal also cited a thriving grey market, which has removed revenues and profits from legitimate operators, and the effects of the COVID-19 pandemic as causes of Tokyo Smoke’s financial woes. (A grey market is defined as a quasi-legal market.)

In a separate court filing, Alvarez & Marsal said Tokyo Smoke plans to seek a stalking-horse transaction with one of its creditors, Canadian private-equity firm TS Investments, as part of the solicitation of investment and sales process.

The stalking-horse transaction will set a minimum price for Tokyo Smoke’s assets and ensure that the restructured business can remain a going concern, said Alvarez & Marsalis.

Pending court approval, TS Investments will provide $8 million of debtor-in-possession financing in the form of a non-revolving loan facility, including an initial advance of $3.3 million, during the court proceedings.

Tokyo Smoke intends to negotiate consensual lease amendments with landlords for its remaining stores.

The company is owned by OEG Retail Cannabis, a holding of Edmonton Oilers owner Daryl Katz, according to the Canadian Press. Photo: JHVEPhoto/Shutterstock