10-Q: Groovy Co. Swings to Profit on Pineapple Express Deal

Groovy Company, Inc. reported a significant net income for Q1 2025, driven by an asset exchange agreement with Pineapple Express Cannabis Company, despite ongoing operational losses and a 'going concern' warning.

Summary

• Net income reached $7,641,808 for the three months ended March 31, 2025, a substantial improvement from a net loss of $314,620 in the prior year period.
• This profit was primarily attributed to a $7,772,404 gain from a Share Purchase Agreement (SPA) with Pineapple Express Cannabis Company (PNXP).
• The company exchanged all its assets for an 87% controlling interest in PNXP and will continue developing the Groovy Platform as a Service (PaaS) for PNXP.
• Revenues increased to $8,494 in Q1 2025 from $0 in Q1 2024, indicating initial business activity.
• Total current liabilities dramatically decreased from $8,418,961 at December 31, 2024, to $308,037 at March 31, 2025, largely due to the extinguishment of significant debt and derivative liabilities through the PNXP deal.
• Cash and cash equivalents decreased to a critically low $1,141 at March 31, 2025, from $2,184 at December 31, 2024.
• Net cash used in operating activities significantly worsened to ($1,402,386) in Q1 2025 from ($54,651) in Q1 2024.
• A 1-for-2,500 reverse stock split was implemented effective May 6, 2025.
• Management identified material weaknesses in internal controls over financial reporting, including the lack of an independent Audit Committee, insufficient cash controls, and inadequate information technology controls.
• The company continues to operate with a 'going concern' warning due to insufficient revenue to cover operating costs and the need for additional capital.

Sentiment

Score: 3

Explanation: While the company reported a net income due to a one-time asset sale, its operational cash flow significantly deteriorated, cash reserves are critically low, and it carries a 'going concern' warning. Material weaknesses in internal controls further dampen sentiment, indicating high financial and operational risk despite the temporary accounting profit.

Positives

• Achieved a net income of $7,641,808 in Q1 2025, a significant turnaround from a net loss of $314,620 in Q1 2024.
• Realized a substantial gain of $7,772,404 from the Share Purchase Agreement with Pineapple Express Cannabis Company.
• Total current liabilities dramatically decreased from $8,418,961 at December 31, 2024, to $308,037 at March 31, 2025, largely due to the extinguishment of significant debt and derivative liabilities through the PNXP deal.
• Operating expenses decreased by 21.3% to $139,090 in Q1 2025 compared to $176,634 in Q1 2024.
• Generated revenue of $8,494 in Q1 2025, compared to $0 in Q1 2024, indicating initial business activity.
• Accumulated deficit significantly reduced from $11,339,099 at December 31, 2024, to $3,704,815 at March 31, 2025.

Negatives

• Cash and cash equivalents remain critically low at $1,141 as of March 31, 2025, down from $2,184 at December 31, 2024.
• Net cash used in operating activities significantly worsened to ($1,402,386) in Q1 2025 from ($54,651) in Q1 2024.
• The company continues to operate at a net loss from operations of ($130,596) for Q1 2025.
• Total assets decreased significantly from $247,038 at December 31, 2024, to $46,632 at March 31, 2025, following the asset exchange.
• Professional fees increased substantially to $50,241 in Q1 2025 from $716 in Q1 2024.
• The company has an accumulated deficit of $3,704,815 as of March 31, 2025.

Risks

• The company has not yet established an ongoing source of revenue sufficient to cover its operating costs, raising substantial doubt about its ability to continue as a going concern.
• The company will require additional funding for continuing the development and marketing of products and cannot assure it will obtain sufficient funds on satisfactory terms.
• Management believes current trends toward lower capital investment in start-up companies pose a significant challenge.
• Limited operating history and minimal revenues since inception, with no guarantee of business success.
• Business is subject to risks inherent in establishing a new enterprise, including limited capital resources and possible cost overruns.
• Management time may be limited by financial disclosure and reporting requirements, especially Section 404 of the Sarbanes-Oxley Act, potentially impeding business plan implementation.
• Material weaknesses in internal control over financial reporting were identified, including the lack of an independent Audit Committee, insufficient cash controls, and inadequate information technology controls, increasing the risk of material misstatements.
• The company's ability to offset future taxable income with net operating loss carryforwards may be limited due to non-filing of tax returns and potential changes in ownership under Internal Revenue Code Section 382.

Future Outlook

Management believes that current trends toward lower capital investment in start-up companies pose the most significant challenge. The company will require additional funding for continuing the development and marketing of products and cannot assure it will obtain sufficient funds on satisfactory terms. Profitability will ultimately depend upon the level of revenues received from business operations, but there is no assurance of attaining profitability.

Management Comments

• We are presently able to meet our obligations as they come due through our borrowing and the support of our shareholders.
• Management's plan to obtain such resources for the Company includes obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses.
• Management believes that current trends toward lower capital investment in start-up companies pose the most significant challenge to the Company's success over the next year and in future years.
• Management has concluded that these conditions raise substantial doubt about our ability to continue as a going concern.

Industry Context

Groovy Company's strategic shift to focus on the OTCM Protocol for Security Meme Tokens and providing PaaS for Pineapple Express Cannabis Company positions it at the intersection of emerging blockchain, cryptocurrency, and cannabis industries. The move into 'Security Meme Tokens' attempts to bridge traditional securities custody with blockchain tokenization, a novel approach in the evolving Web3 and 4IR landscape. The partnership with a cannabis company also indicates diversification into a rapidly growing, albeit regulated, sector. However, the company's 'start-up stage' and 'going concern' status suggest it is still far from establishing a stable market position within these competitive and capital-intensive industries.

Comparison to Industry Standards

• The filing does not provide specific comparisons to industry benchmarks, comparable companies, projects, or results.
• Given the company's 'start-up stage' and 'going concern' warning, it is not currently operating at a level that would typically be benchmarked against established industry standards or competitors.

Corporate Governance

Legal Proceedings

• No material pending legal proceedings to which the Company is a party or in which any director, officer, or affiliate has a material adverse interest.

Related Party Transactions

• Employment Agreement with Mr. Franjose Yglesias (CEO and controlling shareholder) for a ten-year contract with an annual salary of $150,000.
• Accrued compensation due to officers and directors for corporate obligations under employment and board agreements totaled $225,000 as of March 31, 2025.
• Notes payable to related parties (advances from the Chief Executive Officer) totaled $3,400 as of March 31, 2025, at a 0.00% annual interest rate.

Stakeholder Impact

• Shareholders: The 1-for-2,500 reverse stock split will significantly reduce the number of outstanding shares, potentially increasing per-share price but not necessarily market capitalization. The 'going concern' warning and internal control weaknesses pose significant risks to investment value. The one-time gain from the PNXP deal provided a temporary boost to net income and reduced liabilities, but operational challenges persist.
• Employees: Employment agreements for key employees, like Mr. Franjose Yglesias, are in place, but the company's 'going concern' status could imply future job insecurity if additional funding is not secured.
• Creditors: Significant reduction in convertible notes payable, accrued interest, and derivative liabilities due to the PNXP deal is positive for existing creditors. However, the company's reliance on related-party advances and need for future capital raises indicate ongoing financial fragility.
• Customers (Pineapple Express Cannabis Company): Groovy Company will continue to develop the Groovy PaaS for PNXP, indicating an ongoing service relationship.

Next Steps

• Continue development and operation of OTCM Protocol, a blockchain-based platform for Security Meme Tokens.
• Maintain and continue to develop the Groovy Platform as a Service (PaaS) for Pineapple Express Cannabis Company.
• Obtain additional capital from management and significant stockholders to fund operating losses.
• Address material weaknesses in internal controls over financial reporting, including establishing an independent Audit Committee, improving cash controls, and implementing formal IT data backup procedures.

Key Dates

Recommendation

Despite a reported net income driven by a one-time asset exchange, the company faces severe underlying financial and operational challenges. Cash reserves are critically low ($1,141), operating cash flow significantly deteriorated, and the company explicitly warns of a 'going concern' due to insufficient revenue to cover costs. Material weaknesses in internal controls indicate significant governance and financial reporting risks. The 1-for-2,500 reverse stock split is often a sign of distress. The temporary accounting profit does not mask the fundamental instability and high risk associated with this investment, making it a sell for any seasoned investor.

Keywords

Groovy Company, 10-Q, Quarterly Report, SEC Filing, Financial Results, Pineapple Express Cannabis Company, PNXP, Blockchain, OTCM Protocol, Security Meme Tokens, PaaS, Going Concern, Reverse Stock Split, Internal Controls, Financial Performance, Cryptocurrency, Web3, 4IR, Software Development, Cannabis Industry