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Licensed producers value all parts of the plant as “biological assets,” and assess their fair value based on what they think the future per gram price might be. As prices start declining, companies may have to take writedowns on that fair value. If producers are holding more cannabis trim than flower, and trim prices decline more quickly, the impairment issue could be compounded.

In a recent note to clients, Bank of Montreal cannabis analyst Tamy Chen alluded to this specific issue of an oversupply of cannabis trim, saying that piling trim could further exacerbate inventory impairment issues on the balance sheets of some LPs over the next few quarters — especially those that have already been hit by price declines of dried flower and product returns.

“We have heard anecdotally from a number of other industry participants that trim represents a meaningful amount of industry inventory. For some cannabis genetics, the ratio of trim to flower could be as high as 1 to 1,” Chen wrote.

“We believe most LPs intend to extract this trim to produce rec 2.0 products but we note there are limitations that may make some trim no longer extraction-grade (low potency, degradation of quality over time, pesticides etc.),” she added.

Sutton says one of the biggest problems when assessing Canadian licensed producers is that most of them do not disclose how much trim they are storing, versus flower. “They don’t break it down,” he said.

“Trim can only last for about a year, and when it’s not good anymore, when you can’t use it, you’re forced to write that down.”

HEXO’s writedown comes in addition to $26 million of inventory impairments and sales provisions disclosed in its most recent earnings, compounding financial issues for the company that has seen its revenue slip and cash balance erode over the last six months.

The company’s stock price has dropped almost 25 per cent since reporting earnings in mid-December, though it rose three per cent Thursday to close at US$1.64.

• Email: vsubramaniam@nationalpost.com | Twitter: VanmalaS