EFPRIME CONSULTANCY LTD.

CLIENT REPORT

FOR : EMERITO ANG, JR.

Consultancy Client

FROM : EFRAIM C. OSINGAT

Managing Partner

SUBJECT : Due Diligence Report on the Proposed Investment to

Kaagapay 888 Lending Corporation (Kaagapay for brevity)

DATE : 18 August 2018

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This has reference to your request for the conduct of due diligence to aid in
decision making as to whether or not to invest to Kaagapay.

After thorough analysis of all the relevant transaction documents i.e. Articles
of Incorporation, By-Laws and Government Information Sheet, I am of the position to
recommend that an investment to Kaagapay entails high risks which would be
detrimental to your investment portfolio and may expose you to future actions in
court as complainant, hence, I recommend that you should “Not Invest” in the
above mentioned Corporation, unless appropriate adjustments/changes have been
made to make Kaagapay a prime investment vehicle.

The summary of my findings are as follows:

1. President Dela Cruz has committed ultra vires act in contravention of the
Corporation’s Articles of Incorporation (AOI);
2. Violation of Section 8 of Securities Regulations Code (SRC);
3. Gross Misrepresentation as to the key financial aspects of Kaagapay;
4. Probable exposure to liability under Section 9 of RA 9160 or otherwise
known as Anti Money Laundering Act (AMLA); and
5. Probable court litigation to pursue criminal and civil action involving
violation of BP 22 and collection of sum of money

Before I start elaborating the findings, let me give you a background about the
corporation including the persons behind the business.

The Corporation is duly registered Corporation with the Securities and

Exchange Commission with primary business of direct lending without however

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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engaging in pawn broking under Presidential Decree No. 114 and financing under
Republic Act No. 8556 xxx. Its primary address is located at 2ndFlr. ANVIC Building
99-A, San Guillermo Ave., Buting, Pasig City 1600.
As reflected in the Articles of Incorporation1, Mr. Gerry Valdez, who is an
incorporator, who was represented as a CPA Lawyer, has the controlling interest
over 99.9% of Kaagapay. Further, Mr. Dela Cruz is also an incorporator and at the
same time the President of the Corporation. The other incorporators who hold
position of Auditor and Treasurer in Kaagapay are Mr. Gerardo Gustilo and Ms.
Kareen Rhea Dimalig.Lastly, Mr. Jaypee Robles is the only incorporator that does
not serve as an officer in the Corporation.
On the other hand, the General Information Sheet2 (GIS) reflected that there
are five (5) stockholders, three (3) of whom are not Incorporators which include
Guillermo V. Sebastian, Sherry ObilesBaura and Erly Rose M. Tabanera. Mr.
Sebastian does not hold an office while Ms. Baura and Ms. Tabanera holds treasurer
and Secretary positions respectively.
A thorough analysis of the stockholders’ ownership via the two important
documents reflects that the existing President, Mr. Dela Cruz is not a Director3 of
the Corporation. Further, the Corporation’s By-Laws state that “xxx the directors of
the corporation must formally organize by the election of a PRESIDENT, who shall
be a director xxx” (Emphasis supplied). This will lead us to conclude that Mr.
DelaCruzhold no authority to exercise the powers ofthe President since he is not
an owner of any single stock as reflected in the calendar year 2018 GIS which is an
important requisite to become a Director and the foundation of his being a President.
This is a gross violation of the By-Laws of the Corporation which is meted by penalty
by the BP Blg 68 since the By-Laws of Kaagapay specifically mentioned that the
former law is supplementary in application to the By-Laws of the Corporation.
Lastly, Ms. Kareen Rhea Dimalig who currently holds the position of Treasurer
is likewise not a Director. However, the By-Laws allow the Treasurer to be held by a
person who is not a Director. Conflict however arises because the GIS reflect Ms.

1
As of 21st October 2016
2
For the year 2018
3
Every Director must own at least one (1) share of the Capital Stock of the Corporation: By-Laws

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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Sherry Banua as Treasurer while the actual designation of Treasurer is given to Ms.
Dimalig.
These are only few of the matters that you should include in your decision
making since the return of your investments as well as your optimum recurring profit
will depend from the people who run your business. Let me now discuss on some of
the equally important findings that you should include in your decision making.

To elaborate, please see the following explanations:

President Dela Cruz has committed ultra vires act in contravention of the
Corporation’s AOI

The action of Mr. Dela Cruz of engaging as a fund manager in behalf of the
investor under a fund management contract is contrary to the Corporation’s AOI.
The AOI specifically allows only the corporation to engage in the business of direct
lending without however engaging the borrower to pawn broking under
Presidential Decree No. 114 and financing under RA no. 8556. Hence, Mr. Dela
Cruz has no capacity to bind the Corporation into engaging into fund
management contracts.

Violation of Section 8 of SRC

Section 8 of SRC provides that securities shall not be sold or offered for sale
or distribution within the Philippines, without a registration statement duly filed
with and approved by the Securities and Exchange Commission (SEC) xxx. It
should be noted that securities as defined in Section 3 paragraph (b) of the SRC
are investment contracts, certificates of interest or participation in a profit
sharing agreement xxx. It is clear that the act of Mr. Dela Cruz of soliciting
management contracts is what the SRC prohibits. Hence, he is in clear violation
of a special law wherein good faith is not a defense.
Further, under Section 73 of the same law provides penalty to any person
who violates any of the provisions of the SRC xxx shall upon conviction, suffer a
fine of not less than PhP50,000.00 nor more than PhP5,000,000.00 or
imprisonment of not less than seven (7) years nor more than twenty-one (21)
years or both in the discretion of the court.

Gross Misrepresentation as to the key financial aspects of Kaagapay

There is here a clear misrepresentation on the part of President Dela Cruz by
that fact that he claims that he is managing a investment portfolio of
PhP35,000,000.00 and that he owns PhP8,000,000.00 net worth in

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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Kaagapaywhen in fact the total assets as reflected in the calendar year 2018 GIS
only reflect a total asset of Kaagapay of PhP4,297,844.004.
Further, the claim of President Dela Cruz of earning PhP200,000.00 per
month and that Atty. Valdez earning PhP1,000,000.00 every month is impossible
and preposterous. President Dela Cruz earns via his salary as President and his
net worth of PhP8Mn while Atty. Valdez earns via dividend being a stockholder. In
order to hold true that the statement of President Dela Cruz that he solely earns
PhP200,000.00 per month, his investment of PhP8,000,000.00 should be earning
at least PhP320,000.00 to PhP480,000.00 i.e. 4-6% per month. It runs contrary to
his very own claim. Further, adding to the already unsubstantiated statements of
the President is the treatment of the PhP8Mn net worth which should have been
booked as an addition to the total assets being a liability account of Kaagapay
however as viewed in the GIS of 2018 it revealed a resounding falsity of all his
claims as total assets reflect otherwise.
On the other hand, in order to hold true the statement of President Dela Cruz
with regard to the earnings of President Valdez, Kaagapay should be declaring
dividends on a monthly basis in observance of the separate entity rule in
accounting. Further, the income of the corporation should be in high level if we are
to sustain the fraudulent statements of the President. This however is impossible
since, high level of income would mean enormous number of individuals who were
lent by the Kaagapay at a rate higher than the rate given to the offered investment
contracts i.e. 4-6% coupled by increase in the number of employees that cater to
the lending program. This is however contradicted by the actual status of the
Corporation which has meager amount of assets and few registered number of
employees which cater to both investors and customers. Moreover, it is very
unlikely because of the perennial problems with regard to maintaining sufficient
cash flows for interest payments to investors, budgeting for expansion, strategic
targets, not to mention the administrative, financing of loans, fixed expenses, and
the taxes to be paid.
Such circumstances make me believe that such claims of earning
PhP200,000.00 and PhP1,000,000.00 respectively for the President Dela Cruz
and Atty. Galvez are purely baseless and does not deserve merit.

Probable exposure to liability under Section 9 of RA 9160 or otherwise known

as Anti Money Laundering Act (AMLA)

The GIS 2018 of the Corporation reflected a sole purpose of lending services,
however in reality it caters to receiving management contracts, the President
together with all members of the Board, if found negligent or in bad faith in
directing the affairs of the corporation may be held liable under Section 31 of BP

4
Base on the Latest Audited Financial Statements

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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68 which states that “Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation xxx, or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.”

Further, they can be punished under Section 3 of AMLA, Kaagapay is a

covered institution because it may be considered an entity managing securities
or rendering services as investment agent, advisor or consultant. In addition, the
corporation may be classified as a corporation by estoppel under Section 21 of BP
68 who assume to act as a corporation knowing it to be without authority to do so
shall be liable to as general partners for all debts, liabilities and damages incurred
or arising as a result thereof. They will be held liable for the failure of the
corporation to conduct a customer identification as found in Section 9 (a) and
record keeping as found in Section 9 (b) AMLA may be punished under the same
law.

Probable court litigation to pursue criminal and civil action involving violation
of BP 22 and collection of sum of money

Since part of the representation of President Dela Cruz is that an investor

would earn a monthly interest payment of 4-6% which will either be paid by
issuance of checks or compounded to the principal, the Corporation might incur
default payments in the payment of monthly interests. This failure to pay issued
checks may be subject to a cause of action which would translate into a criminal
case of violation of BP 22 since the law punishes the act of mere issuance of
bouncing check. In addition, you may also file a collection of sum of money suit
against Kaagapay in case your principal investment including the interests is not
paid. Further, since the corporation is not allowed under its AOI to solicit
management contracts, then collection from Kaagapay will undergo the tedious
judicial procedure to establish the right to collect from the responsible parties.

It is a basic concept of investment that when you invest in a business venture,

you as an investor must conduct a due diligence as to whether the prospective
business can return not just your principal investment but also it can give you the
optimum income from all the available prospective investment alternatives. Always
remember the basic finance maxim, the greater the risk the greater the return. In
addition, in investing, time is the greatest asset. If you were able to find a company
with high regard to integrity then there is a high chance that you’ll be enjoying an
exponential growth of your investments in the future. Thus, as an investor, you
should frown upon investments where the management has questionable integrity

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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09264869308
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because it is the fundamental quality that will determine the direction of your
investment. Moreover, investments that will expose your portfolio to unnecessary
litigation primarily caused by its own management must be avoided.

In the case of Kaagapay, not unless the question on the Presidency of Mr.
Dela Cruz issolved, I will not recommend that you invest in it. The primary reason is
because he is the primary source of the violations of Kaagapay as carefully
elaborated in the above discussion. Provided, the successor President shall comply
with the AOI and By-Laws of Kaagapay or amend these documents to align it with
the current programs of the corporation. Hence, as of now, it is not a viable
investment for you, my valued client.

To conclude, I am re-iterating my position, donot invest your hard earned

money to Kaagapay 888 Lending Corporation.

EFRAIM C. OSINGAT

Address: No. 69 Evan Building, Evangelista St., Bangkal, Makati City

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09264869308
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