Pineapple Financial Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. Please read the following management’s discussion and analysis of our financial condition and results of operations, along with our consolidated financial statements and the related notes and other information included in this Annual Report on Form 10-K. It is important to note that this discussion and analysis contain forward-looking statements with certain risks and uncertainties. These risks and uncertainties could cause our results to differ materially from anticipated in these forward-looking statements. You can find more information about these risks and uncertainties under the heading “Special Note Regarding Forward-Looking Statements” in Part I and elsewhere in this Form 10- K. Special Note Regarding Forward-Looking Statements This Form 10-K includes forward-looking statements that entail potential risks and uncertainties. These statements are usually identified by the use of specific terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and other comparable terminology. All the statements in this Form 10-K that are not about historical facts, including those related to our future operations, financial position, Revenue, projected costs, strategy, plans, management objectives, and expected market growth, are forward-looking. While reading this Form 10-K, you should know that these statements do not guarantee our performance or results. They include known and unknown risks, uncertainties, and assumptions, as mentioned under the “Risk Factors” section in this Form 10-K. We believe that these forward- looking statements are based on reasonable assumptions. Still, you must be aware that many factors, including those mentioned under the “Risk Factors” section in this Form 10-K, could affect our financial results or operations and cause actual results to differ from those stated in the forward-looking statements. These statements were made as of the date of this Form 10-K, and we are not obligated to update or revise any forward-looking statements made here to reflect any change in our expectations or any change in events, conditions, or circumstances on which these statements are based. All written or oral forward-looking statements made by us or on our behalf are qualified by the cautionary statements mentioned in this Form 10-K. Objective In this section, we provide an analysis of the Company’s financial condition, cash flows, and results of operations from management’s perspective. We recommend you read this with the consolidated financial statements and notes in Part II, Item 8 of this Annual Report on Form 10K. Executive Summary We are a fintech company based in Ontario, Canada. Our tech-driven businesses are focused on mortgages and insurance. Our goal is to provide clients with an industry-leading experience through our trusted digital solutions that are simple and fast. 35 Recent Developments Business Trends Throughout 2022 and 2023, the Bank of Canada raised the prime rate multiple times to address inflationary pressures, which significantly increased mortgage interest rates. However, beginning in mid-2024, the Bank of Canada reduced the policy rate by 1.25%, aiming to stabilize the economy and improve affordability. Despite this, the elevated mortgage rates and ongoing economic uncertainty continued to suppress demand for mortgage originations in 2024. While the market shows early signs of recovery due to improved consumer confidence, the overall mortgage origination market remained contracted compared to pre-2022 levels. Summary of the Year Ended August 31, 2024. During fiscal year ended August 31, 2024, we generated $ 1.529 billion in residential mortgage loans compared to $1.399 billion in the previous financial year, which ended on August 31, 2023. This amount represents an increase of $130.462 million or 9.33% compared to the same period that ended on August 31, 2023. Our net loss stood at $4.102 million for the year ended August 31, 2024, as compared to the $2.809 million recorded in the same period on August 31, 2023. Key Performance Indicators As part of our business operations, we closely track several key performance indicators (KPIs) that help us measure our performance. We can evaluate our ability to generate revenue by monitoring our loan production KPIs and comparing our performance to the mortgage origination market. Additionally, we use KPIs related to our technology setup and underwriting processes to assess our performance further. Year Ended August 31, 2024 2023 2022 Mortgage volume 1,528,926,510 1,398,464,338 1,785,424,632 Gross billing 16,264,172 15,026,896 19,497,519 Commission expense 14,895,885 13,931,836 16,780,133 Net sales revenue 1,368,287 1,095,060 2,717,385 Underwriting revenue 153,757 148,080 266,731 Subscription revenue 738,697 736,708 616,734 Other income 428,246 522,416 266,731 Our sources of revenue include commissions from lenders, underwriting revenue, membership fees from mortgage agents, and other income. 36 Gross Billing Revenue: Gross billing revenue refer to commission collected from financial institutions with whom it has contracts in place. The Company’s gross billing is based on a percentage of mortgage amount funded between individual referred by the Company and financial institutions funding the mortgage. We are an agent in these deals as we provide the platform for other parties to provide services to the end-user. For each contract with a customer, the Company identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognizes revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. The Company recognizes revenue when: a contract exists with a lender party and an agent broker, the contract identifies the use of the platform service to close a mortgage deal, the mortgage deal has been closed with the lending financial institution, and commissions paid by the lending financial institution based on various criteria of the mortgage deal including but not limited to interest rates available at that time, term, seasonality, collateral, income, purpose, etc. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business. Revenue is recognized at the end of the deal upon completion of all the actions listed above. A typical transaction attracts a commission fee payable to Pineapple Financial Inc. Subscription Revenue: Users access and use our technology platform, MyPineapple, for a flat monthly service fee of $117 In exchange for this fee, users of MyPineapple have access to a network management system that allows them to perform back- office procedures more efficiently and effectively. This platform will enable them to process the deal described above prepare, and complete the package for submission to be funded by the financial institution. We have a strong user base, which has experienced significant growth since our inception. Revenue is recognized at the beginning of the month when a user is invoiced and pays the fee. Underwriting Fee: Users can optionally use our expert risk pre-assessment service, which assists them in pre-underwriting their loans before submission to a lender for approval and funding. This service significantly reduces the time for the lender partners’ assessment of the deal. For mortgages of $390,000 and less, we charge an underwriting fee of $273; for mortgages greater than $300,000, the Company charges an underwriting fee of $390. The Company has undertaken a special program to educate and inform users of this service in further detail. Approximately 40% of the deals originated by users are using this service. This program is intended to further increase the number of deals and improve the services offered. Other Income: Other income includes a technology setup fee and sponsorship fee. 37 Components of operating expenses Our operating expenses, as presented in the statement of operations data, include salaries, commissions and team member benefits, general and administrative expenses, marketing and advertising expenses, and others. Salaries and commissions and team member benefits All payroll expenses include our team members’ salaries, commissions, and benefits. Selling, general and administrative expenses Selling, general and administrative expenses include software subscriptions, license fees, professional services, marketing expenses, and other operating expenses. Share-based compensation Share-based compensation comprises equity awards and is measured and expensed accordingly under Accounting Standards Codification (“ASC”) 718 Compensation—Stock Compensation. Comparison of the years ended August 31, 2024 and 2023 Year Ended August 31, 2024 ($) August 31, 2023 ($) Increase/ (Decrease) ($) Increase/ (Decrease) % Revenue 2,688,987 2,502,264 186,723 7.46 Expenses Selling, general and administrative 2,382,225 2,170,149 212,076 9.77 Advertising and Marketing 860,047 844,797 15,250 1.81 Salaries, wages and benefits 2,436,783 2,330,127 106,656 4.48 Interest expense and bank charges 93,472 56,316 37,156 65.98 Depreciation 838,843 441,159 397,684 90.15 Share-based compensation - 33,091 (33,091 ) (100.00 ) Government Incentive (97,646 ) (591,480 ) (493,834 ) (83.49 ) Total expense 6,513,724 5,284,159 1,229,562 23.27 Loss from operations (3,824,737 ) (2,781,895 ) 1,042,842 37.49 (Loss) Gain on extinguishment of liability ( 156,339 ) (27,143 ) 129,196 475.98 Foreign exchange gain (loss) ( 38,836 ) ( 38,836 ) 100.00 ) Gain(loss) on change in fair value of warrant liability 63,769 - 63,769 100.00 Gain(loss) on change in fair value of conversion feature liability 76,543 - 76,543 100.00 Accretion expense ( 223,059 ) - ( 223,059 ) 100.00 Loss before income taxes (4,102,659 ) (2,809,037 ) (1,293,622 ) 46.05 Loss after income taxes (4,102,659 ) (2,809,037 ) (1,293,622 ) 46.05 Revenue Gross billings increased from $15.027 million for the fiscal year ending August 31, 2023, to $16.264 million for the fiscal year ending August 31, 2024, representing a year-over-year increase of 8.23%. To address high inflation, the Bank of Canada increased its policy rate from 2.5% on September 1, 2022, to 5.0% by August 31, 2023. However, beginning June 5, 2024, the Bank of Canada initiated rate reductions, decreasing the policy rate by 125 basis points to 3.75%. While this reduction has the potential to bolster consumer confidence, the real estate market remains subdued, contributing to decreased real estate transactions and a corresponding decline in mortgage activity. 38 Revenue for the year ended August 31, 2024, increased to $2,688,988 from $2,502,264 in the year ended August 31, 2023, representing a 7.46% year-over-year growth. This increase is primarily attributed to the Company’s efforts in enhancing its software offerings, which improved customer retention and attracted new agents. Additionally, strategic investments in marketing and operational efficiency during a challenging economic environment contributed to this positive performance despite the broader contraction in the mortgage origination market. This growth reflects the resilience of the Company’s business model and its ability to adapt to fluctuating market conditions. Cost of gross billing During the fiscal year ended August 31, 2024, the cost of revenue increased to $14.895 million, compared to $13.932 million in the prior fiscal year ended August 31, 2023. This increase aligns with the growth in gross billing and reflects higher transaction volumes. Additionally, the cost increase is attributed to the company’s strategic focus on leveraging high-volume agents to drive business, who typically operate at lower margins but generate higher transaction volumes, resulting in increased variable costs. Selling, General and Administrative Expenses. The breakdown of selling, general and administrative expenses are as follows: Year Ended August 31, 2024 ($) August 31, 2023 ($) Increase/ (Decrease) ($) Increase/ (Decrease) % Software subscription 898,870 816,913 81,957 10.03 Office and general 199,756 187,818 11,938 6.36 Professional fee 414,482 661,265 (201,783 ) (30.52 ) Dues and subscription 269,106 58,366 210,740 361.07 Rent 207,560 165,750 41,810 25.22 Consulting fee 62,598 210,063 (147,465 ) (70.20 ) Travel 160,643 97,372 63,271 64.98 Donations 7,449 46,002 (38,553 ) (83.81 ) Lease expense 71,148 7,534 63,614 844.36 Insurance 90,613 (80,934 ) 171,547 (211.96 ) 2,382,225 2,170,149 212,076 9.77 Selling, general, and administrative expenses increased by $212,076, or 9.77%, from $2,170,149 during the fiscal year ended August 31, 2023, to $2,382,225 during the fiscal year ended August 31, 2024. This increase reflects the company’s disciplined approach to maintaining essential expenses amidst a depressed economic environment. Adjusting for inflation, expenses effectively decreased in real terms, demonstrating the company’s commitment to cost efficiency and prudent financial management while ensuring sustained support for core operations and strategic initiatives. 39 Software subscription expenses increased by $81,957, or 10.03%, from $816,913 for the year ended August 31, 2023, to $898,870 for the year ended August 31, 2024. This increase is primarily attributable to the continued development and enhancement of our proprietary software, which necessitated the use of complementary third-party subscription tools. These tools have been critical in ensuring the software meets industry standards and client expectations. Once our proprietary software is fully developed, reliance on external subscriptions is expected to decrease significantly, leading to long-term cost savings and improved operational efficiency. Office and general expenses increased by $11,938 or 6.36%, from $187,818 for the fiscal year ended August 31, 2023, to $199,756 for the fiscal year ended August 31, 2024. This increase reflects the cost increase due to inflation. Professional fees decreased by $201,783, or 30.52%, from $661,265 for the fiscal year ended August 31, 2023, to $414,482 for the fiscal year ended August 31, 2024. This significant decrease is primarily attributable to the completion of IPO-related activities on November 3, 2023, which resulted in a reduction in legal, accounting, and advisory expenses. During the prior year, the company incurred substantial costs to achieve the IPO milestone. The decrease also reflects the transition to a steady-state operating environment post-IPO, with reduced reliance on external consultants and professional services. Dues and subscriptions increased significantly from $58,366 during the year ended August 31, 2023, to $269,106 for the year ended August 31, 2024, representing a 361.07% increase. This substantial rise is primarily attributable to additional regulatory and listing fees incurred following the Company’s IPO, including NYSE subscription fees and other compliance-related charges. These fees are essential to maintaining our public listing and ensuring compliance with the regulatory requirements of a publicly traded company. Consulting fees decreased significantly by $147,465, or 70.20%, from $210,063 for the fiscal year ended August 31, 2023, to $62,598 for the fiscal year ended August 31, 2024. This decline is primarily attributed to the completion of IPO-related activities, which required substantial consulting support in the prior year. The decrease also reflects the company’s strategic shift toward utilizing in-house resources for post-IPO operations and a focus on optimizing recurring expenses to align with the company’s long-term cost management initiatives. Travel expenses increased by $63,271, or 64.98%, from $97,372 for the fiscal year ended August 31, 2023, to $160,643 for the fiscal year ended August 31, 2024. This increase reflects higher management travel to attend investor conferences and engage with stakeholders to present the company’s vision and growth strategy, a critical activity following the IPO. Additionally, the company prioritized in-person meetings with institutional investors and partners to strengthen relationships, which are expected to drive long-term value creation. 40 Expenses Year Ended August 31, 2024 ($) August 31, 2023 ($) Increase/ (Decrease) ($) Increase/ (Decrease) % Advertising and marketing 860,047 844,797 15,250 1.81 Salaries, wages and benefits 2,436,783 2,330,127 106,656 4.58 Interest expense and bank charges 93,472 56,316 37,156 65.98 Depreciation 838,843 441,159 397,684 90.15 Share based compensation - 33,091 (33,091 ) (100.00 ) Government incentive (97,646 ) (591,480 ) (493,834 ) (83.49 ) Advertising, marketing, and promotions expenses increased by $15,250, or 1.81%, from $844,797 for the year ended August 31, 2023, to $860,047 for the year ended August 31, 2024. This increase reflects the company’s strategic efforts to retain agents and sustain sales revenue amidst challenging economic and real estate market conditions. Additional investments were made to enhance brand visibility and strengthen relationships with key stakeholders to maintain market share during this period of economic uncertainty. These initiatives are expected to position the company for growth as market conditions improve. Salaries, wages, and benefits increase by $106,656, or 4.58%, from $2,330,127 for the fiscal year ended August 31, 2023, to $2,436,783 for the fiscal year ended August 31, 2024. This nominal increase reflects the company’s efforts to align compensation with inflation while maintaining a disciplined approach to expense management. The nominal increase also supports retaining key talent and ensuring competitive employee benefits during a challenging economic environment, which is essential for sustaining business continuity and future growth. Depreciation and Amortization Pineapple Financial continues to actively invest in the development of its proprietary software to enhance functionality and meet market demands. During the fiscal year ended August 31, 2024, $1.112 million was capitalized as intangible assets, primarily representing salaries, wages, and benefits of staff directly involved in the development process. This strategic investment underscores the Company’s commitment to innovation and long-term growth. The increase in intangible assets has contributed to higher amortization expenses during the year, reflecting the progressive utilization of these investments in delivering value to our operations and clients. 41 Government based incentive During the fiscal year ended August 31, 2023, the Company successfully claimed and received Scientific Research and Experimental Development (SR&ED) tax credits from the CRA for the fiscal years ended August 31, 2022, and August 31, 2021. These claims provided a valuable source of non-dilutive funding to support the Company’s innovation initiatives. However, following the completion of our IPO on November 3, 2023, the Company no longer qualifies for SR&ED tax credits under CRA regulations, resulting in a decrease in credit recognition for the fiscal year ended August 31, 2024. This change reflects the Company’s transition to a publicly traded status, and we are actively exploring alternative funding opportunities to support ongoing research and development efforts. Liquidity and Capital Resources Our primary liquidity needs encompass working capital and capital expenditures, specifically those associated with technological enhancements, investments in skilled personnel, and marketing services. These three categories have constituted a significant portion of our liquidity and capital resource demands throughout the year. We primarily utilize cash on hand and cash flows generated from our operations to meet these requirements. The following table summarizes our cash flows from operating, investing and financing activities: Year Ended August 31, 2024 ($) August 31, 2023 ($) Increase/ (Decrease) ($) Cash (used) provided in operating activities (1,708,261 ) (2,116,105 ) 407,843 Cash (used) provided by financing activities 2,912,627 349,008 2,563,619 Cash (used) provided in investing activities (1,117,390 ) (1,362,298 ) 244,908 Cash at the end of the period 580,356 720,365 (140,009 ) Net cash flow from (used in) operating activities Year Ended Description August 31, 2024 ($) August 31, 2023 ($) Operating activities Net loss (4,102,659 ) (2,809,037 ) Adjustments for the following non-cash items: Depreciation of property and equipment 87,803 67,674 Amortization of intangible assets 616,532 265,150 Depreciation on right of use asset 134,508 108,335 Interest expense on lease liability 62,604 56,316 Share-based compensation - 33,091 Write-down of investment - 27,143 Change in fair value of warrant liabilities 63,769 - Accretion expense 223,059 - Loss on extinguishment of liability 156,339 Foreign exchange gain (loss) 38,836 - Chang in fair value of conversion feature liability (76,543 ) - Net changes in non-cash working capital balances: Trade and other receivables 603,764 (26,242 ) Prepaid expenses and deposits 60,239 265,545 Accounts payable and accrued liabilities 519,943 (174,795 ) Income taxes receivable - 70,715 Deferred Government Grant (208,376 ) - Deferred revenue 111,921 - (1,708,261 ) (2,116,105 ) 42 Our primary source of cash flow comes from our core business operations. During the year ended August 31, 2024, the Company’s net cash used in operating activities decreased to $1,708,261 from $2,116,105 in the previous year ended August 31, 2023. This decrease of outflow of cash was primarily due to lower cash expenses as compared to the previous year. Net cash flow from (used in) financing activities During the fiscal year ended August 31, 2024, the Company successfully closed its Initial Public Offering (IPO) on November 3, 2023, generating net proceeds of $2,751,937. These funds have strengthened the Company’s financial position and provided critical capital to support strategic initiatives, including investments in proprietary software development, expansion of operational capabilities, and enhancing shareholder value. The successful IPO marks a significant milestone in the Company’s growth journey, enabling access to broader capital markets and positioning the business for future opportunities. In addition, company issued share capital through conversion note and equity purchase agreement with Brownstone. Net cash flow from (used in) investing activities During the fiscal year ended August 31, 2024, the Company invested $1,112,399 in developing proprietary software designed to streamline and enhance the accuracy of mortgage application processes for field agents. This investment reflects the Company’s commitment to leveraging technology to improve operational efficiency and provide a competitive edge in the mortgage industry. The enhanced software is expected to not only attract new mortgage agents but also improve agent retention by offering a comprehensive and user-friendly solution, positioning the Company for sustainable growth in a competitive market. As of August 31, 2024, the Company’s cash balance was $580,356, a decrease from $720,365 on August 31, 2023. The Company’s capital structure consists of contributed common shares, accumulated deficit, additional paid-in capital, and other comprehensive losses. Its primary sources of liquidity are cash generated through operations and capital raised from investors through the issuance of common shares. The Company remains committed to meeting all financial and operational obligations as they come due, maintaining a disciplined approach to liquidity management. Future capital requirements will depend on several factors, including planned investments in technology, market expansion initiatives, and overall growth trajectory. While the Company continues to actively manage controllable factors, external variables such as interest rates and real estate market conditions remain potential challenges. By aligning its financial strategies with operational priorities, the Company is well-positioned to navigate these uncertainties and achieve sustainable long-term growth. 43 The following table presents our liquidity: Year Ended August 31, 2024 ($) August 31, 2023 ($) Cash 580,356 720,365 Trade and other receivables 155,224 758,988 Prepaid expenses and deposit 157,910 218,150 893,490 1,697,503 As of August 31, 2024, Pineapple Financial maintained a liquidity position with $580,356 in cash and along with trade and other receivables, prepaid expenses, and deposits, demonstrating the Company’s ability to meet its short-term obligations. However, cash decreased by $140,009 compared to August 31, 2023. This decrease was primarily driven by strategic investments in the expansion of operations and technology development to strengthen the Company’s competitive position. Additionally, broader macroeconomic challenges, including a depressed Canadian real estate market and economic headwinds, have impacted liquidity during the year. Despite these challenges, Pineapple Financial remains focused on prudent financial management, ensuring that resources are allocated efficiently to support growth while maintaining sufficient liquidity to meet ongoing obligations. Critical Accounting Policies and Significant Judgments and Estimates This management’s discussion and analysis of the financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of Revenue and expenses during the reported period. Per U.S. GAAP, we base our estimates on historical experience and various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions differ from our assumptions. While our significant accounting policies are more fully described in Note 2 in the “Notes to Financial Statements,” we believe the following accounting policies are critical to making effective judgments and estimates in preparing our financial statements. 44 Revenue Recognition The Company has adopted ASC 606, Revenue from Contracts with Customers, which provides a single comprehensive model for revenue recognition. The core principle of the standard is that Revenue should be recognized when goods or services are transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract- based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. It establishes a five-step model to account for Revenue arising from contracts with customers. Under this standard, Revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with customers. Additionally, the standard specifies the accounting for incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. When the Company transfers goods or services to a customer, Revenue is recognized at an amount that reflects the consideration expected to be received. The Company operates an online platform powered by Salesforce, that enables brokers and agents to efficiently close deals. The Company’s subsidiary, Pineapple Insurance Inc., generates Revenue by charging premiums for insurance policies and services. Pineapple Insurance is affiliated with a major insurance company, from which it earns commissions for providing services, primarily mortgage insurance. Mortgage insurance is a requirement for each mortgage. Pineapple Insurance acts as the agent that supplies insurance services to the consumer and is paid a commission from the premiums collected by the insurance company whose products and services it provides to the end consumer. Additionally, Pineapple Insurance has adopted ASC 606. Basis of presentation, functional and presentation currency The Company’s headquarters is in Ontario, Canada, and the functional currency is in Canadian Dollars (CAD) with the presentation currency being US Dollars (USD). The Company’s subsidiaries have a functional currency of CAD and presentation currency of USD which have been applied consistently. There will be a foreign currency translation undertaken to report under US GAAP which will be the basis of presentation. Lease Accounting The relevant criteria applicable is ASC 842. We assess at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. We apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. We recognize lease liabilities to make lease payments and right-of- use assets representing the right to use the underlying assets. 45 At the commencement date of the lease, we recognize lease liabilities measured at the present value of lease payments to be made over the lease term. Lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. Lease payments also include the exercise price of a purchase option reasonably certain to be exercised by us and payments of penalties for terminating the lease, if the lease term reflects us exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, we use our incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. We recognize right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Investments We invested in a commercial mortgage firm, MCommercial, based in Montreal and Toronto, Canada representing 5% of the total issued and outstanding shares. This strategic partnership allows Pineapple residential mortgage agents to have access to a leading commercial mortgage firm and experts, which will expand their product offerings, service levels and corporate Revenue through increased transactions. The Company entered into a share purchase agreement with 9142-2964 Quebec Inc. pursuant to which the Company acquired five Class A Shares of 7326904 Canada Inc. (dba as Mortgage Alliance Corporation) (“Alliance”), representing 5% of the total issued and outstanding shares of Alliance. Alliance is a mortgage brokerage firm based in Ontario, Canada with locations in Calgary, Vancouver and Halifax. The total amount of both investments was recorded at fair value, and any impairment loss is recognized in profit and loss account. 46 Share Based Compensation Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee, non-employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, non- employee, and director services received in exchange for an award based on the grant-date fair value of the award. The Company has a share option plan (the “Plan”) to attract, retain and motivate qualified directors, officers, employees, and consultants whose present and future contributions are important to the success of the Company by offering them an opportunity to participate in the Company’s future performance through the award of share options. Each share option converts into one common share of Pineapple Financial Inc. on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither right to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry. In 2017, the Plan was amended such that the total number of common shares reserved and available for grant and issuance pursuant to the Plan is to equal 10% of the issued and outstanding common shares of the Company. Options granted on June 14, 2021, vest over a 2-year period whereby 25% of the options granted vested on the date of grant, and the remaining unvested options vest in equal instalments every 6-months thereafter. The fair value of stock options granted was $1,317,155. These options were fully vested in year ended August 31, 2023. On July 6, 2023, we completed a 1-for-3.9 reverse stock split, or the Reverse Split, effective immediately. Consequently, all the share numbers, shares prices, and exercise prices have been retroactively adjusted in these condensed interim consolidated financial statements for all periods presented. 47 Controls and Procedures While the Company is not currently required to maintain an effective internal controls system, we recognize the importance of strong internal controls and have proactively initiated steps to establish and enhance our control environment. These measures include: ● Employing skilled staff in financial, accounting, and external reporting roles, focusing on segregation of duties. ● Conducting regular reconciliations to ensure accurate recording, correct classification, and balanced books. ● Ensuring timely and accurate recording of expenses, liabilities, and other accounting entries in accordance with the matching principle. ● Maintaining a detailed fixed assets register to track users, departments, and assets. ● Requiring internal review and approval of accounting transactions by at least two independent personnel. ● Documenting processes, assumptions, and conclusions related to significant estimates. ● Establishing comprehensive documentation of accounting policies and procedures. As of August 31, 2024, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on this assessment, management concluded that our disclosure controls and procedures were effective as of August 31, 2024. Improvements made during the year include implementing independent reviews, approval processes for transactions and reconciliations, and hiring additional personnel to strengthen our control environment. Plans are underway to further enhance controls by segregating duties and improving processes, ensuring robust and effective internal controls that support the integrity of our financial reporting. Financial Instruments As on August 31, 2024, the Company’s financial instruments consist of cash, trade and other receivables, investments, accounts payable and accrued liabilities. 48 As per ASC 820, Fair value measurement establishes a fair value hierarchy based on the level of independence, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorizing within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. i) Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; ii) Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and iii) Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table provides the fair values of the financial assets in the Company’s consolidated statements of financial position, categorized by hierarchical levels and their related classifications. As of August 31, 2024 Level 1 Level 2 Level 3 Total Assets: Cash 580,356 580,356 Investment 10,042 10,042 Risks and Uncertainties The Company’s business is subject to numerous risks and uncertainties, including those described elsewhere in this MD&A, as well as general economic and market risks. These risk factors could materially affect the Company’s future operating results and could cause actual events to differ materially from those described in forward-looking information relating to the Company.