HEXO (NYSE:HEXO) has been mired in controversy over the past few months. Not only did the company's CFO resign, but the company also withdrew its entire forecast for fiscal 2020. It has also been cutting jobs to try to save money. There've been many concerns surrounding the company, and unfortunately, in Q1, the company didn't alleviate any of them.

There were three concerning numbers from the company's most recent results that should give investors pause before considering investing in the troubled stock.

1. Revenue of CA$14.5 million down from Q4 fiscal 2019

HEXO's Q1 net revenue of $14.5 million Canadian was down from Q4 of fiscal 2019, when it reported CA$15.4 million in sales. A key reason for that: The company's shipped revenue was down 11%, from CA$22.8 million in Q4 to CA$20.2 million this past quarter. That's despite HEXO's selling 4.7% more grams of cannabis during the quarter.

As a result, the average gross revenue per gram of CA$4.35 was down 8.2% from Q4's average of CA$4.74. And that number could decline further now that HEXO is being more aggressive in introducing a low-priced brand of cannabis, "Original Stash," to undercut the black market. 

Cannabis plant.

Image source: Getty Images.

It's normally a bad sign when a company's price per product declines. It could be an indication that demand isn't as strong as the company may have been expecting.

2. Impairment loss of CA$25.5 million

Another bad sign that investors didn't want to see in Q1 was that the company incurred an impairment loss of CA$25.5 million, which was more than the company's sales. What's particularly troubling is that the company has incurred an impairment loss in consecutive quarters. In Q4, HEXO reported an impairment loss of CA$16.9 million.

Impairment expenses mean the company is writing down its assets, suggesting that the values it had on the balance sheet were too high. In HEXO's press release, it indicated that some of the writedowns were related to inventory that sat for too long. A total of CA$3.4 million of writedowns were incurred because "oil-based products haven't captured the market share as originally estimated." The company also noted that provinces return oil products that are older than three to four months. HEXO also wrote down finished goods totaling CA$1.2 million.

The writedowns, along with lower prices per gram realized by the company, point to one thing: demand that's falling short of expectations.

3. EBITDA loss of CA$66 million

In Q1, HEXO reported an earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$66 million. That's a 10% increase from the CA$60 million EBITDA loss it incurred in Q4 of fiscal 2019. However, HEXO did record a moderately improved adjusted EBITDA number after restructuring costs of CA$3.7 million were adjusted out along with inventory write-offs and destruction costs totaling CA$28.3 million. After the adjustments, HEXO's adjusted EBITDA loss of CA$24.6 million compared favorably to Q4's loss of CA$29.8 million. 

While adjusted EBITDA improved from Q4 2019, investors shouldn't ignore write-offs and other amounts the company deems to be non-recurring or irregular.

What's concerning is that the company's adjusted EBITDA as a percentage of its net loss was 39% in Q1. In Q4, that figure was 53%, and in Q1 of fiscal 2019, it was 82%. The lower the percentage, the more noise there is on the financials as it indicates a bigger gap between adjusted EBITDA and net income. What this tells investors is that in relation to the net income number, there's been a growing number of adjustments, and that hurts the quality of the adjusted EBITDA number. 

And with more noise, it becomes harder to assess how a company did and it diminishes the value of saying that a company's adjusted EBITDA number has improved since there are more adjustments in there as well.

Bottom line

There wasn't a whole lot of good for investors to take away from HEXO's most recent quarterly results. There are signs that demand isn't strong and inventory has been sitting around for too long, resulting in impairment losses.

HEXO was a risky buy before these results, and nothing has changed since they've been released. Before investors consider investing in this stock, it would be a good idea to first monitor impairment costs and metrics like average revenue per gram to see that the company is going in the right direction. For now, however, this is a stock I'd suggest staying far away from and looking at other marijuana stocks instead.