The Green Organic Dutchman Holdings Ltd. (CSE: TGOD) (OTC: TGODF) agreed to issue 937,500 shares at a price of $0.08 per share to settle around $75,000 worth of debt owed to a financial consulting firm.
The move significantly increases the number of shares outstanding for TGOD, which serves to dilute ownership. It can be a risky move, but outstanding debt can have its own challenges.
Debt is still an attractive mechanism to raise capital in the cannabis industry, accounting for 55.3% of capital raised year-to-date, according to Viridian Capital Advisors,
However, debt held is going down, particularly in Canada where debt has declined 72.3% since last year. U.S. debt, on the other hand, is down only 14.1%.
As of Aug. 19, debt accounted for 81% of trailing four-week capital raises.
Overall, cannabis capital raises are off 63.1% versus last year, Viridian said.
The Green Organic Dutchman’s issuance of common shares to settle the debt is dependent on regulatory approvals, including final acceptance by the Canadian Securities Exchange, and will be subject to a four-month statutory hold period.
The company also announced that it has granted options to purchase up to 37,000 shares to certain employees.
Viridian Eyes 2023 Recession
Viridian also posited that falling cannabis margins face additional threat from a potential recession next year.
“We believe that a recession is likely in 2023, although economists are sharply divided on the topic,” the Aug. 24 report said. “The yield curve, particularly in the closely watched two-year to 10-year range, continues to be inverted, which has been a solid indicator of future recessions.”
If a downturn occurs, it will not take similar shape to previous recessions, the firm said. Viridian pointed to low unemployment, high inflation and reoccurring supply chain issues.
“High inflation is the most concerning aspect for cannabis since cannabis prices are unlikely to be able to rise to allow recovery of increased costs,” it said.
Viridian also cited “significant” downward wholesale pricing pressures in California, Colorado, Michigan and other lax cultivation markets “in what looks like a classic commodity overproduction cycle.”
Illicit market prices are generally stable and deliberately more competitive, which would intensify the downward pressure.
“Cannabis consumption should hold up relatively well in a downturn,” the report said, however, more consumers will search for lower prices and pay more attention to what they are putting in the shopping cart.