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A brief overview of Pineapple Financial
According to an amended registration statement, Pineapple Financial (PAPL) has filed proposed terms to raise gross proceeds of $6.25 million through the sale of its common stock in an initial public offering.
The Company provides mortgage technology and brokerage services in the Canadian mortgage industry.
PAPL has experienced declining revenue on a small basis, with high operating losses and increasing free cash burn.
I will not go public.
Pineapple Overview
Based in North York, Canada, Pineapple was formed to develop data-driven technology offerings and brokerage services for licensed agents, brokers and consumers in the Canadian mortgage industry.
Management is led by Chief Executive Officer Shubha Dasgupta, who has been with the firm since October 2015 and was previously a mortgage broker at Bedrock Financial Group.
The company’s main offerings include:
MyPineapple data management, CRM, underwriting support and Reporting software for:
-
mortgage broker
-
mortgage broker
-
subbroker
-
brokerage firms
-
consumer
As of February 28, 2023, Pineapple has recognized $7.8 million in investments at fair market value from investors including Prodigy Capital Corp and individuals.
Pineapple – Customer Acquisition & Market
The Company generates revenue through agent subscription services, appraisal services and service commissions from lender partners for completed applications.
95% of its revenue comes from service commissions from lender partners and the company operates primarily in the central and eastern provinces of Canada.
Management plans to open its first brokerage offices in British Columbia and Quebec “sometime in early 2023.”
SG&A as a percentage of total sales remained high as revenue declined, as shown in the following figures:
|
Sale, Terms and Conditions |
Expenses vs. Income |
|
Period |
percentage |
|
Six Mos. Ended February 28, 2023 |
82.7% |
|
FYE Aug 31 |
82.7% |
|
FYE Aug 31 |
45.3% |
click to enlarge
(Source – SEC)
The Sales, G&A Efficiency Multiplier, which defines how many dollars of additional new revenue generated by each dollar of Sales, G&A spend, fell to negative (0.1x) in the most recent reporting period, as shown in the table below :
|
Sale, Terms and Conditions |
efficiency rate |
|
Period |
Several |
|
Six Mos. Ended February 28, 2023 |
-0.1 |
|
FYE Aug 31 |
0.2 |
click to enlarge
(Source – SEC)
According to a 2022 market research report by Mortgage Professional America Magazine, the Canadian market has been in a state of transition recently due to rising interest rates in response to high inflation.
In hot markets like Toronto and Vancouver, real estate prices have skyrocketed.
The report states: “The policy rate remains reasonable by historical standards, even after the recent hikes.”
The rental markets in larger cities are also in high demand, particularly in Toronto and Vancouver. As more people move to these cities, rental demand is expected to remain strong for years to come. But the rental markets in smaller urban centers and rural areas are also showing strong growth.
Graeme Moss, founder of a mortgage brokerage company in Hamilton, Ontario, believes “the opportunity remains for the brokerage and brokerage community and their customers.”
Financial performance of Pineapple
The company’s recent financial results can be summarized as follows:
-
Declining sales from a tiny base
-
Continued operating loss and worsening negative operating margin
-
Higher cash consumption in operational business
Below are relevant financial results derived from the Company’s registration statement:
|
total sales |
||
|
Period |
total sales |
% Variance vs. Previous |
|
Six Mos. Ended February 28, 2023 |
$1,334,691 |
-11.0% |
|
FYE Aug 31 |
$3,600,851 |
20.7% |
|
FYE Aug 31 |
$2,983,717 |
|
|
Profit (loss) before income taxes |
||
|
Period |
Profit (loss) before income taxes |
operating margin |
|
Six Mos. Ended February 28, 2023 |
$ (1,403,748) |
-105.2% |
|
FYE Aug 31 |
$(2,810,061) |
-78.0% |
|
FYE Aug 31 |
$(261,802) |
-8.8% |
|
Total Income (Loss) |
||
|
Period |
Total Income (Loss) |
net margin |
|
Six Mos. Ended February 28, 2023 |
$(1,538,826) |
-115.3% |
|
FYE Aug 31 |
$(3,015,283) |
-225.9% |
|
FYE Aug 31 |
$(388,401) |
-29.1% |
|
Cash flow from operations |
||
|
Period |
Cash flow from operations |
|
|
Six Mos. Ended February 28, 2023 |
$(1,924,986) |
|
|
FYE Aug 31 |
$(1,834,910) |
|
|
FYE Aug 31 |
$668,555 |
|
|
(Glossary of terms) |
click to enlarge
(Source – SEC)
On February 28, 2023, Pineapple had $1.2 million in cash and $1.6 million in total debt.
Free cash flow was negative ($3.1 million) for the twelve months ended February 28, 2023, representing a deterioration in cash utilization since my last report on the Company as of August 31, 2022.
Pineapple IPO details
PAPL intends to sell 1.25 million common shares at a proposed mid-point price of $5.00 per share for gross proceeds of approximately $6.23 million, excluding the sale of customary underwriter options.
No existing or potential new shareholder has shown any interest in buying shares at the IPO price.
Assuming a successful IPO in the middle of the proposed price range, the Company’s enterprise value at IPO (excluding underwriter options) would be approximately $31.5 million.
The float to outstanding share ratio (excluding underwriter options) will be approximately 16.54%. Anything below 10% is generally considered a “low float” stock, which can experience significant price volatility.
The company is an “emerging growth company” within the meaning of the JOBS Act 2012 and has chosen to benefit from the reduced reporting requirements of public companies; Potential shareholders will receive less information for the IPO and going forward as a publicly traded company under the requirements of the law.
Pursuant to the Company’s most recent regulatory filing, the plan is to use the net proceeds as follows:
Technology – about 40% for improving our technology.
Pineapple Insurance – Approximately 15% for the development of our Pineapple Insurance subsidiary.
Expansion – Approximately 20% to expand our business in North America and globally.
Working capital – the remainder serves as working capital and for other general corporate purposes.
(Source – SEC)
A presentation of the company roadshow by the management is not available.
Regarding lawsuits, management has not disclosed any lawsuits against the company.
The sole publicly traded underwriter of the IPO is EF Hutton.
Valuation metrics for Pineapple Financial
Below is a table of the company’s relevant capitalization and valuation metrics at the IPO, excluding the impact of underwriter options:
|
Measure [TTM] |
Crowd |
|
Market capitalization at IPO |
$37,784,890 |
|
Enterprise value |
$31,547,125 |
|
price / sale |
11.00 a.m |
|
EV / Revenue |
9.18 |
|
EV / EBITDA |
-10.67 |
|
earnings per share |
-$0.42 |
|
operating margin |
-86.09% |
|
net margin |
-95.04% |
|
Ratio of float to shares outstanding |
16.54% |
|
Proposed IPO midpoint price per share |
$5.00 |
|
Net Free Cash Flow |
-$3,142,269 |
|
Free cash flow yield per share |
-8.32% |
|
Debt/EBITDA multiple |
0.00 |
|
CapEx ratio |
-17.54 |
|
sales growth rate |
-11.00% |
click to enlarge
(Source – SEC)
Commentary on Pineapple Financial
PAPL is seeking public capital market investment in the US to fund its growth activities and invest in modernizing its technology offering.
The company’s financials caused sales to decline on a tiny basis, the operating loss to remain high, and cash flow from operations to increase.
Free cash flow for the twelve months ended February 28, 2023 was negative ($3.1 million).
Selling, general and administrative expenses as a percentage of total sales remained high as revenues declined. Its sales, G&A efficiency multiple fell to negative (0.1x) in the last reporting period.
The company currently plans not to pay any dividends for the foreseeable future and to reinvest any profits back into the company’s growth initiatives.
The market opportunity for providing technology solutions to brokers in Canada is significant but faces an uncertain future growth rate due to rising housing unaffordability and higher interest rates, which tend to dampen real estate activity.
EF Hutton is the sole underwriter and the IPOs the firm has managed over the last 12 months have generated an average negative return (58.7%) since going public. This is a bottom performance for any major underwriter over the period.
Risks to the Company’s prospects as a public company include the growing risk of a recession as the global economy slows due to persistent inflation and a higher cost of capital environment.
As for valuation expectations, management is asking IPO investors to pay an enterprise value/sales multiple of 9.18x.
The small company’s sales are declining and its valuation expectations are stretched, so I’m not going public.
Estimated IPO Price Date: To be announced
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