UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended August 31, 2023
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ______ to ______
Commission
file number 001-41738
PINEAPPLE
FINANCIAL INC.
(Exact
Name of Registrant as Specified in Its Charter)
Unit 200, 111 Gordon Baker Road
North York, Ontario M2H 3R1
(Address of principal executive offices, including ZIP code)
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Shares, no par value $0.0001 PAPL NYSE American
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The registrant was not a public company as of May 31, 2023 the last
business day of the registrant’s most recently completed second fiscal quarter, and therefore it cannot calculate the aggregate
market value of its voting and non-voting common equity held by non-affiliates at such date. The registrant’s common shares began
trading on the NYSE American on November 2, 2023.
Number
of shares of common shares outstanding as of December 11, 2023 was 7,181,978.
Documents
Incorporated by Reference: None.
TABLE
OF CONTENTS
Part I
Item 1. Business 1
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 25
Item IC. Cybersecurity 25
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Mine Safety Disclosures 25
Part II
Item 6. [Reserved] 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 41
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 41
Part III
Item 10. Directors, Executive Officers and Corporate Governance 42
Item 11. Executive Compensation 48
Item 14. Principal Accountant Fees and Services 53
Part IV
Item 15. Exhibit and Financial Statement Schedules 54
Signatures 55
i
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Any statements in this Annual Report on Form 10-K about our expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through
the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” and “would.” For example, statements concerning financial condition, possible or
assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common
stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees
of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity,
performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied
by any forward-looking statement.
Any
forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this Annual Report on
Form 10-K. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections
contained in the forward-looking statements include, but are not limited to:
● the timing of the development of future services,
● projections of revenue, earnings, capital structure and other financial items,
● statements regarding the capabilities of our business operations,
● statements of expected future economic performance,
● statements regarding competition in our market, and
● assumptions underlying statements regarding us or our business.
The
foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking
statements. You should read this Annual Report on Form 10-K and the documents that we reference herein and have filed as exhibits to
the Annual Report on Form 10-K, completely and with the understanding that our actual future results may be materially different from
what we expect. You should assume that the information appearing in this Annual Report on Form 10-K is accurate as of the date hereof.
Because the risk factors referred to on page 10 of Annual Report on Form 10-K could cause actual results or outcomes to differ materially
from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking
statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we
undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to
predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
We qualify all of the information presented in this Annual Report on Form 10-K, and particularly our forward-looking statements, by these
cautionary statements.
ii
SUMMARY
OF RISK FACTORS
Our
business is subject to numerous risks described in the section titled “Risk Factors” and elsewhere in this prospectus. The
main risks set forth below and others you should consider are discussed more fully in the section entitled “Risk Factors”
beginning on page 8, which you should read in its entirety.
●
our operations could be adversely affected by possible future government legislation, policies and controls or by changes in applicable
laws and regulations;
●
public health crises such as the COVID-19 pandemic may adversely impact our business;
●
the volatility of global capital markets over the past several years has generally made the raising of capital more difficult;
●
risks associated with political instability and changes to the regulations governing our business operations;
●
our success is largely dependent on the performance of our directors and officers, Field Agents, and employees;
●
our Common Shares may be subject to significant price volatility;
●
internal controls cannot provide absolute assurance with respect to the reliability of financial reporting and financial statement preparation;
●
we may be unable to manage our growth;
●
risks associated with security breaches;
●
risks associated with software errors or defects;
●
our operations depend on information technology systems; and on continuous reliable internet access;
●
our business now or in the future may be adversely affected by risks outside our control;
●
risks associated with the Company’s reliance on strategic partnerships;
●
reputational risk, and
●
risks associated with protection of intellectual property.
iii
ITEM
1. BUSINESS
General
We
are a Canadian-based mortgage technology and brokerage company that provides mortgage brokerage services and technology solutions to
Canadian mortgage agents, brokers, sub-brokers, brokerages and consumers. Through data-driven systems together with cloud-based tools,
we believe we offer competitive advantages in the Canadian mortgage industry relative to alternative mortgage broker arrangements.
We
also provide back office services, together with pre-underwriting support services (collectively the “Brokerage Services”)
to Canadian mortgage brokerages (the “Brokerages”). In connection with the provision of the Brokerage Services, we employ
and engage several licensed mortgage brokers and agents (collectively, “Field Agents”). We have a total of full-time employed
staff of 55. In addition, we also enter into affiliation agreements with certain licensed mortgage brokers (collectively, “Affiliate
Brokers” and, together with Field Agents and Brokerages, the “Users”), pursuant to which the Company and the Affiliate
Broker enter into an affiliation relationship with the intention of jointly marketing mortgage brokerage and other financial services
as affiliated entities, sometimes referred to as “white labelling”, which allows the Affiliate Broker to sell a mortgage
that is branded with its company name to its own client base.
Our
services distribution and fee structure for each stream is detailed hereunder:
We
currently operate exclusively in Canada, specifically in the provinces of Ontario, Newfoundland and Labrador, New Brunswick, Nova Scotia,
British Columbia, Prince Edward Island and Alberta. We launched our first brokerage in Ontario in November 2016. We have been approved
by each of the applicable provincial mortgage regulators to operate in 11 provinces and territories namely Alberta, British Columbia,
New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, and Yukon, and 2
provinces to follow are Manitoba and Saskatchewan. We launched our first brokerage office in Alberta on July 1, 2021. We also launched
our first brokerage office in Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island on May 4, 2022. Thereafter,
we expect to open our first British Columbia brokerage office and our first Quebec brokerage office sometime in late 2022 or early 2023.
We provide our Brokerage Services to both residential and commercial mortgage opportunities and, in each case, through a proprietary
technology called MyPineapple, as discussed in further detail below.
MyPineapple
At
the heart of our Brokerage Services is an innovative technology system, MyPineapple, that provides real time data management and reporting,
lead generation opportunities, customer relationship management, deal processing, education and knowledge center, payroll, regulatory
compliance, data analytics, document collection and storage, automated onboarding, lender access, back office support and direct underwriting
support, all in one. MyPineapple offers network management capabilities for Users, including hundreds of qualified Field Agents, to create
an efficient marketplace for the provision of mortgage lending and insurance industry services. MyPineapple integrates directly with
Salesforce, Equifax, OneSpan, G Suite and Filogix and manages Users’ day-to-day business through automated triggers and tasks,
ensuring nothing falls through the cracks. Backed by Salesforce, pursuant to the Salesforce Agreement (defined herein), and built with
proprietary code deep data analytics, MyPineapple syncs up with Users’ calendar and emails, produces robust reporting, advanced
analytics, and real-time notifications on marketing communications, and more. MyPineapple is a sophisticated and fundamental tool for
revenue growth and relationship development. It plays a significant role in what we believe makes our Brokerage Services distinct and
cutting-edge.
MyPineapple
was created to address key issues within the mortgage brokerage industry. We built MyPineapple to create a long-term competitive advantage
relative to traditional service providers, who have comparatively high-touch, labor intensive and costly operations. We believe that,
through MyPineapple, we are able to deliver faster services and with fewer errors. Our MyPineapple platform is completely automated,
simplifying the mortgage process while providing efficiencies to and alleviating pressure on Users’ staff in completing traditional
administrative tasks, which in turn reduces the Users’ cost structure and results in increased profit margins and scalability.
MyPineapple reduces manual processes through robust quality control mechanisms, logistics management capabilities, capacity planning
tools and end-to-end transaction management. MyPineapple also includes a leading education technology platform, which enables Users to
continuously stay informed and educated on what mortgage solutions and market conditions could impact Canadian consumers.
Our
primary objectives and goals include, but are not limited to, the following:
Streamline
the insurance approval and application process for mortgage clients using technology.
Services
and Products
Brokerage
Services
The
following is a detailed description of the Brokerages Services that we offer:
Insurance
Products
Pineapple
Insurance Inc. (“Pineapple Insurance”) is a wholly owned subsidiary of Pineapple Financial Inc. This entity is to serve the
insurance needs of our brand mortgage brokers and agents across Canada. Pineapple Insurance is to act as an Managing General Agent (MGA)
supported by Industrial Alliance. This entity will create both a revenue channel and retention strategy for borrowers that live within
our database. This will also allow a growth opportunity and an overall holistic financial services opportunity for us. We are currently
in the early stages of development of Pineapple Insurance Inc. Operational infrastructure and a budget has been prepared alongside technology
modifications to our MyPineapple system in order to manage the delivery of this product. We have also created a sales and marketing plan
alongside assets and materials, which will be used for initial launch. Our next steps are staffing and human capital requirements in
order to execute on the business plan and goals of developing Pineapple Insurance.
Pineapple
Insurance provides the following services:
We
offer a wide range of investment options to suit clients risk tolerance and investment preferences. A financial advisor will review and
assess the needs of each client to determine the short- and long-term goals for financial success. Such options may include segregated
funds or mutual funds for registered (registered education savings plans (RESPs), registered retirement savings plans (RRSPs), tax-free
savings accounts (TFSAs), etc.) and non-registered accounts. A segregated fund, or seg fund, is a type of investment fund administered
by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder
such as reimbursement of capital upon death and mutual funds. As a regulatory requirement, all Canadian mortgage approvals being presented
by the mortgage broker channel must include the option for a client to consider an insurance option in an effort to protect the liability
in the case of death or disability. Pineapple Insurance Inc. will be presenting this insurance option for a client to accept or not via
the products that we have available. This will be presented to all mortgage approvals being offered via our parent company, Pineapple
Financial Inc.
As
a complementary service to our parent company, Pineapple Financial Inc., this insurance subsidiary was created to easily serve the needs
of the homeowners whose mortgages originate with us. With any mortgage product in Canada, an insurance component is a requirement, hence
the diversification and business development into insurance.
Our
insurance services identified above currently are provided by a third-party insurance company, Industrial Alliance Inc., with whom we
are affiliated as a managing general agent (MGA). We, therefore, act as an agent earning commissions from the premiums charged by the
insurance company.
We
believe the material steps for Pineapple Insurance to grow form its early stages of development are as follow:
The
costs we anticipate relate to mostly the marketing efforts undertaken, human capital which will be a fixed cost for the senior person
and variable for additional personnel. As we develop and progress this business, it is anticipated that our major expenses will be payroll,
marketing, and platform development. We have identified approximately 15% of the use of the proceeds from the shares offering to be dedicated
to developing this business.
The
timeline we feel to grow this subsidiary would be approximately 12 to 36 months depending upon the marketing efforts, acceptance of the
products and services offered by Industrial Alliance, the prices / premiums for these products and services, and the understanding of
the products because of the many variations that are inherent in the insurance products and services.
InsurTech
MyPineapple
is a key reason for our success and has the ability to drive interested and timely insurance prospects to a replicated module that we
have built in order to streamline and manage the customer flow for insurance products. The process is designed to create a unique synchronicity
between the client obtaining a mortgage approval and insurance approval.
Combined,
the simplicity of the two platforms with its connectivity and integrations will allow Pineapple Insurance to successfully process and
approve insurance applications.
We
have also created client segmentations and retention programs to ensure that we can maximize our database of over 150,000 potential clients.
Growth
Strategy
Brokerage
Services
We
aim to gain further market share and consumer adoption by focusing on the following areas of growth:
Insurance
Products
In
order to achieve our objectives and goals, Pineapple Insurance will focus on four main areas:
Markets
for our Services
Brokerage
Services
The
clients for our Brokerage Services include mortgage agents, brokers, sub-brokers, brokerages and consumers. Our customer activity is
intrinsically linked to the health of the real estate or commercial markets generally, particularly in Canada.
Strong
housing demand during 2020, 2021 and the first quarter of 2022 positively impacted the seasonal variations. With the onset of inflationary
pressures around the globe, not only the seasonality but the normal trends of the housing markets have declined with the increase of
interest rates. Although our business may be negatively impacted, we believe our multiple channels of revenue helps to mitigate any such
impact.
On
April 7, 2022, the 2022 budget was released by the Government of Canada which focuses on affordable housing alternatives for Canadians
and additional tax measures to assist first time home buyers. With the continual influx of new immigrants as proposed by the Government
of Canada; the renewed demand in home renovations and refurbishments; the users becoming more knowledgeable about additional use of their
home equity, and other varying and creative measures, we plan to capitalize on these growth initiatives into the future.
Insurance
Products
The
insurance market for Pineapple Insurance is focused around growth in the Canadian mortgage landscape as well as market share growth for
Pineapple Financial.
Pineapple
Financial Inc. and Mortgage Market Dependency
We
take a long-term view to manage and measure the success of our ongoing business strategy. In this regard, our principal focus is on market
share growth. We seek to achieve increased market share irrespective of residential and commercial mortgage origination market conditions.
Market share growth can be achieved through both the onboarding of new Users to MyPineapple and by increasing market share within its
existing Users, including recently onboarded Users.
We
are confident in our ability to increase the number of Field Agents using MyPineapple in conducting their brokerage services primarily
due to the efficiency that MyPineapple brings to the mortgage brokerage process. From August 1, 2022 to August 1, 2023, our active users
increased at a rate of 9.35%.
The
mortgage market and residential and commercial mortgage originations are subject to the influence of many external factors, such as broader
economic conditions and fluctuating interest rates, over which we have no control. We believe we have substantial growth opportunities
to expand our market share within our existing total addressable market. In particular, we expect to have access to more opportunities
in the commercial mortgage segment through our partnership with MCommercial. Additionally, we expect to gain access to greater market
share opportunities as we continue to develop MyPineapple and improve the efficiency of the mortgage approval process.
Industry
Overview
The
Canadian Mortgage and Mortgage Brokerage Industry
According
to the Bank of Canada, as of May 1, 2022, Canada’s chartered banks held over $1.523 trillion of residential mortgages
(which amount does not include mortgages held by provincially regulated entities such as credit unions or mortgage investment corporations).
Mortgage lenders typically offer a range of products, with options for fixed or variable rates, varying terms and amortization periods,
as well as differing ancillary terms for pre-payment, incentives or other matters. Interest rates are typically renegotiated every three
(3) years. While mortgage lenders post both fixed and variable interest rates at which the lender offers mortgages of varying terms,
typically most lenders are willing to negotiate interest rates lower than those posted, a practice referred to as “discounting”.
The practice began in Canada in the early 1990s and is considered the norm in today’s mortgage market. The practice of discounting
permits mortgage lenders to improve their ability to price discriminate and offer different rates to different borrowers based on their
willingness to pay. Price discrimination allows lenders to increase their profits through negotiating different rates with individual
borrowers instead of offering a blanket reduction in rates. The advent of price discrimination in the Canadian mortgage market has increased
the importance of the mortgage broker in the lending negotiation process. In return for a fee (paid by the lending institution), the
mortgage broker is typically able to negotiate a better rate than the consumer, or to efficiently reduce the time and effort required
to be applied by the consumer to achieve similar results. Mortgage brokers are provincially regulated and subject to training and licensing
requirements. See “Regulatory Environment” for details. However, there are relatively few barriers to entry in the mortgage
brokerage market. Nevertheless, the ability of a given mortgage broker to erode lender price discrimination and secure rates at the lower
end of the range at which lenders are prepared to lend is dependent upon a number of factors. While experience and negotiating ability
are relevant factors, a key factor in the potential success of a mortgage broker in securing advantageous rates is the bargaining power
of the mortgage broker, which varies directly with the volume of mortgages the broker is able to place with lenders.
Industry
Growth Strategy
Our
overall aim has been to increase market share through organic (non-acquisition related) means and to achieve growth on the number of
mortgages funded annually. In an effort to accomplish our growth goals, we maintain a consistent, focus on recruiting Field Agents and
overall Users. We have employed a significant number of recruiters which has resulted in growth rate than most of our competitors. Secondly,
with ongoing concentrated efforts towards recruiting, it has allowed us to gain a strong understanding of the competitive models that
exist and also to continually enhance our offerings in the most effective way to recruit and retain qualified Field Agents. Additionally,
through MyPineapple, we are able to support Field Agents growth in sales volume, productivity and efficiency in delivering mortgage solutions
and increasing corporate revenue. Our aim has always been to have the leading model on which to recruit and support Field Agents, based
on offering them a superior value-proposition.
Competitive
Conditions
Mortgage
Brokerage Market Conditions
Effective
January 1, 2018, the Office of the Superintendent of Financial Institutions Canada (“OSFI”) adopted Guideline B-20 - Residential
Mortgage Underwriting Practices and Procedures (the “Guideline B-20”). The revised Guideline B-20 applies to all federally
regulated financial institutions. The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage
lenders remain vigilant in their mortgage underwriting practices. As Guideline B-20 made mortgage borrowing more difficult for many Canadians,
management believes more Canadians may have turned to mortgage brokers to help navigate the complex rules. Management expects that mortgage
brokers will increase their market share in the coming years due to the following factors:
Primary
Competitors
Our
primary competitors consist of the following 3 categories:
Competitive
Advantages
We
compete with a number of mortgage brokerage companies. However, we offer competitive advantages relative to alternative mortgage broker
arrangements as a result of the following:
● Switch: We allow clients to easily transfer to another lender upon renewal.
Specialized
Skill and Knowledge
Our
business requires specialized skills and knowledge, which include, but are not limited to, expertise related to mortgage underwriting,
mortgage originations, private lending, business development, marketing and business strategy development. Our executive and management
team has a strong background and significant experience and expertise in these areas. Our team also possesses specialized skills in data
architecture, software development, programming and coding, finance and accounting, automations and process, training and education.
Additionally, we currently rely upon, and expect to continue to rely upon, various legal and financial advisors and consultants and others
in the operation and management of our business.
Intangible
Assets
Our
business is substantially dependent on our proprietary technology platform, MyPineapple, which it licenses from Salesforce. While the
Company has not registered any intellectual property rights with respect to MyPineapple, it relies on trade secrets to protect the applicable
proprietary information. Additionally, MyPineapple has been built through various development partners, such that no single developer
has access to the complete technological architecture. See “Business –– Material Contracts” for more information
on the Salesforce Agreement
Additionally,
we rely on confidentiality agreements with its employees, consultants and advisors to protect its trade secrets and other proprietary
information. Nonetheless, these agreements may not effectively prevent disclosure of confidential information and may not provide an
adequate remedy in the event of unauthorized disclosure of confidential information. If we are not able to adequately prevent disclosure
of trade secrets and other proprietary information, the value of its business could be significantly diminished.
Material
Contracts
Salesforce
Agreement
In
connection with the development of MyPineapple, we entered into a licensing agreement with Salesforce.com, Inc. dated (NYSE: CRM) December
1, 2020 (the “Salesforce Agreement”) and expires on November 30, 2023. Salesforce is a cloud-based software company headquartered
in San Francisco, California. It provides customer relationship management software and applications focused on sales, customer service,
marketing automation, analytics, and application development. Pursuant to the Salesforce Agreement, we are licensed to use the Salesforce
software as the platform or infrastructure on which we build the various applications such as MyPineapple. The applications we develop
on this platform are the core that drive the operational software and applications used by Field Agents to initiate and process mortgage
originations, which is the primary basis of our revenue generation. The Company is billed annually at a rate of $500,172 per year, which
was during the year ended August 31, 2023
Affiliation
Agreements
We
enter into affiliation agreements with Affiliate Brokers, pursuant to which we and the Affiliate Broker enter into an affiliation relationship
with the intention of jointly marketing mortgage brokerage and other financial services as affiliated entities, sometimes referred to
as “white labelling”, which allows the Affiliate Broker to sell a mortgage that is branded with its company name to its own
client base. Pursuant to these affiliation agreements, we generally receive a fixed commission from the Affiliate Broker for any mortgage
transaction where the Affiliate Broker has acted as the mortgage broker for the borrower. In general, these affiliation agreements have
an indefinite term and may be terminated by either party upon thirty days written notice.
Changes
to Contracts
The
Company does not expect its business to be affected in the current financial year by renegotiation or termination of contracts or sub-contracts.
Regulatory
Environment
Brokerage
License Requirements
In
order to operate its mortgage broker business, we must remain duly licensed as a mortgage broker to deal and trade in mortgages in accordance
with the Mortgage Brokerages, Lenders and Administrators Act, 2006 (Ontario), as amended (the “MBLA Act”). We have had our
mortgage brokerage license since November 2016 and it has been renewed each year without issue. We will be subject to similar legislation
and license requirements in the other provinces in Canada where we intend to expand.
In
accordance with the MBLA Act, individuals, including directors, officers, partners, directors and officers of corporate partners, employees
or agents of a mortgage brokerage company, such as the Company, who are engaged in dealing mortgages or trading in mortgages on its behalf
must obtain a mortgage broker or mortgage agent license. A mortgage broker or agent license authorizes an individual to work for only
the mortgage brokerage company named under the license. An individual cannot be licensed to work for more than one mortgage brokerage
company. The Superintendent of Financial Services will use the information obtained in a mortgage broker license application to determine
whether an applicant meets the prescribed eligibility requirements and is suitable for a license. The applicant will be required to submit
documents to support certain pieces of information about the business.
Insurance
Regulation
Pineapple
Insurance is subject to federal, as well as provincial and territorial, regulation in Canada in the provinces and territories in which
they underwrite insurance/reinsurance. The Office of the Superintendent of Financial Institutions (“OSFI”) is the federal
regulatory body that, under the Insurance Companies Act (Canada) (the Insurance Companies Act”), prudentially regulates
federal Canadian and non-Canadian insurance and reinsurance companies operating in Canada. Pineapple Insurance is licensed to carry on
insurance business by OSFI and in each province and territory.
Under
the Insurance Companies Act, Pineapple Insurance is required to maintain an adequate amount of capital in Canada, calculated in accordance
with a test promulgated by OSFI called the Minimum Capital Test. Under the Insurance Companies Act, approval of the Minister of Finance
(Canada) is required in connection with certain acquisitions of shares of, or control of, Canadian insurance companies such as Pineapple
Insurance, and notice to and/or approval of OSFI is required in connection with the payment of dividends by or redemption of shares by
Canadian insurance companies such as Pineapple Insurance.
Other
Regulations
In
addition, the Company must comply with all federal, provincial and municipal laws that affect a Canadian business including employment,
workers’ compensation, insurance, corporate, and tax laws and regulations.
Bankruptcy
and Similar Procedures
The
Company has not had any bankruptcy (whether voluntary or otherwise), receivership or other similar proceedings instituted by it or against
it since its incorporation nor are any such proceedings being contemplated or threatened in the foreseeable future.
Material Restructuring Transactions
Pineapple
has not completed any material restructuring transactions since incorporation.
Incorporation
The
Company was incorporated under the OBCA on October 16, 2015 under the name “2487269 Ontario Limited” (doing business under
the name of Capital Lending Centre). The Company’s head office is located at Unit 200, 111 Gordon Baker Road, North York, Ontario
M2H 3R1 and its registered and records office is located at 67 Mowat Avenue Suite 122, Toronto, Ontario M6K 3E3. On June 16, 2021, the
Company changed its name to “Pineapple Financial Inc.”
Corporate
Structure
The
Company has two wholly owned subsidiaries: Pineapple Insurance Inc. (“Pineapple Insurance”) and Pineapple National Inc. (“Pineapple
National”). Pineapple Insurance was incorporated under the OBCA on December 14, 2016, under the name “CLC Insurance Inc.”
and changed its name to Pineapple Insurance Inc. on July 12, 2021. Pineapple Insurance has a registered and records office located at
Suite 200, 111 Gordon Baker Road, Suite 200, North York, Ontario M2H 3R1. Pineapple National was incorporated under the Canada Business
Corporations Act on November 9, 2021, with a registered and records office located at 10th Floor, 595 Howe Street, Vancouver, British
Columbia V6C 2T5.
ITEM
1A. RISK FACTORS
Risks
Related to the Company
We
are dependent on the residential real estate market.
Our
financial performance is closely connected to the strength of the residential real estate market, which is subject to a number of general
business and macroeconomic conditions beyond our control.
Macroeconomic
conditions that could adversely impact the growth of the real estate market and have a material adverse effect on our business include,
but are not limited to, economic slowdown or recession, increased unemployment, increased energy costs, reductions in the availability
of credit or higher interest rates, increased costs of obtaining mortgages, an increase in foreclosure activity, inflation, disruptions
in capital markets, declines in the stock market, adverse tax policies or changes in other regulations, lower consumer confidence, lower
wage and salary levels, war or terrorist attacks, natural disasters or adverse weather events, or the public perception that any of these
events may occur. Unfavorable general economic conditions, such as a recession or economic slowdown, in the United States, Canada or
other markets the Company enters and operates within could negatively affect the affordability of, and consumer demand for, its services
which could have a material adverse effect on its business and profitability.
In
addition, federal and state governments, agencies and government-sponsored entities could take actions that result in unforeseen consequences
to the real estate market or that otherwise could negatively impact the Company’s business. Some of the above-mentioned economic
factors and conditions are currently adversely affecting Pineapple as the Users and consumer sentiment has waned and has precipitated
fears of a possible economic recession. In the event of a continuing market downturn, our results of operations could be adversely affected
by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may further
decline.
The
real estate market is substantially reliant on the monetary policies of the federal government and its agencies and is particularly affected
by the policies of the Bank of Canada, which regulates the supply of money and credit in Canada, which in turn impacts interest rates.
The Company’s revenues could be negatively impacted by a rising interest rate environment. As mortgage rates rise, the number of
home sale transactions may decrease as potential home sellers choose to stay with their lower mortgage rate rather than sell their home
and pay a higher mortgage rate with the purchase of another home. Due to a prospective higher debt assumption with the rise in interest
rates, homeowners also may choose to not participate in refinancing or other similar mortgage financing activity that would create revenue
for Pineapple. Potential home buyers may choose to rent rather than pay higher mortgage rates. Changes in the interest rate environment
and mortgage market are beyond the Company’s control, are difficult to predict and could have a material adverse effect on its
business and profitability.
We
may not be able to secure additional capital and achieve adequate liquidity to grow and compete.
We
will require additional capital to operate, grow and compete, and failure to obtain such additional capital could limit our operations
and our growth. When such additional capital is required, we will need to pursue various financing transactions or arrangements, which
may include debt financing, equity financing or other means. Additional financing may not be available when needed or, if available,
the terms of such financing might not be favorable to us and might involve substantial dilution to existing shareholders. In addition,
debt and other debt financing may involve a pledge of assets and may be senior to interests of equity holders. We may incur substantial
costs in pursuing future capital requirements, including investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. The ability to obtain needed financing may be impaired by such factors as the
capital markets (both generally and in the mortgage brokerage industry in particular), our status as a relatively new enterprise with
a limited history and/or the loss of key management personnel.
We
have a limited operating history and, therefore, cannot accurately project our revenues and operating expenses.
We
have a relatively limited operating history. As such, we will be subject to all of the business risks and uncertainties associated with
any new business enterprise, including under-capitalization, cash shortages, limitations with respect to personnel, financial and other
resources. Although we possess an experienced management team, there is no assurance that we will be successful in achieving a return
on shareholders’ investment and the likelihood of our success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the establishment of any business. There is no assurance that we can
continue to generate revenues, operate profitably, or provide a return on investment, or that we will successfully implement our business
and growth plans. An investment in our securities carries a high degree of risk and should be considered speculative by investors. Prospective
investors should consider any purchase of our securities in light of the risks, expenses and problems frequently encountered by all companies
in the early stages of their corporate development.
We
may continue to incur substantial losses and negative operating cash flows and may not achieve or maintain positive cash flow or profitability
in the future.
Our
financial statements have been prepared on a going concern basis under which an entity is considered to be able to realize its assets
and satisfy its liabilities in the ordinary course of business. Our future operations are dependent upon the identification and successful
completion of equity or debt financings and the continued achievement of profitable operations at an indeterminate time in the future.
There can be no assurances that we will be successful in completing equity or debt financings or in achieving profitability. The financial
statements do not give effect to any adjustments relating to the carrying values and classifications of assets and liabilities that would
be necessary should we be unable to continue as a going concern.
Currency
exchange rates fluctuations could adversely affect our operating results.
The
Company is exposed to the effects of fluctuations in currency exchange rates, Our functional currency is in Canadian dollars (CAD) and
our presentation currency is in US dollars (USD). Due to the currency exchange rates fluctuations between the two currencies, there is
a risk the company’s operations and profitability may be affected during the translation. Currently the company does not have many
international transactions and the fluctuations are mostly limited to the financial statements currency translation adjustments relating
to the movements. The financial statements contain a line disclosing this translation amount.
Our
operating results may be subject to seasonality and vary significantly among quarters during each calendar year, making meaningful comparisons
of successive quarters difficult.
Seasons
and weather traditionally impact the real estate industry in the jurisdictions where we operate. Continuous poor weather or natural disasters
negatively impact listings and sales. Spring and summer seasons historically reflect greater sales periods in comparison to fall and
winter seasons. We have historically experienced lower revenues during the fall and winter seasons, as well as during periods of unseasonable
weather, which reduces the Company’s operating income, net income, operating margins and cash flow.
Real
estate listings precede sales and a period of poor listings activity will negatively impact revenue. Past performance in similar seasons
or during similar weather events can provide no assurance of future or current performance, and macroeconomic shifts in the markets we
serve can conceal the impact of poor weather or seasonality.
Home
sales in successive quarters can fluctuate widely due to a wide variety of factors, including holidays, national or international emergencies,
the school year calendar’s impact on timing of family relocations, interest rate changes, speculation of pending interest rate
changes and the overall macroeconomic market. Our revenue and operating margins each quarter will remain subject to seasonal fluctuations,
poor weather and natural disasters and macroeconomic market changes that may make it difficult to compare or analyze our financial performance
effectively across successive quarters.
Our
growth strategy may not achieve the anticipated results.
Our
future growth, profitability and cash flows depend upon our ability to successfully implement our growth strategy, which, in turn, is
dependent upon a number of factors, including our ability to:
● expand our customer base;
● increase and retain more qualified agents;
● expand into additional jurisdictions;
● support growth of existing customers;