Financial

Due Diligence Report

prepared by

Taylor Torrington and Associates

for

(“Acquirer”)

in respect of

(“Target”)

as at

2019
Introduction

1. Background

1.1. Taylor Torrington and Associates has been requested by herein after referred to as (the “Acquirer”) to undertake a financial due diligence
investigation (the "Investigation") of the business and affairs of (“ or the “Target”).

1.2. The principal aim of the Investigation is to identify any potential or contingent financial risk associated with the Target which may have an impact on the
negotiation, structuring and implementation of the proposed acquisition of 100% of the est in the Target by the Acquirer (the “Proposed
Transaction”).

1.3. The scope of the Investigation is limited to the information made available to Taylor Torrington and Associates for the purpose of disclosing confidential
information to the Acquirers and their advisors.

2. Format of this due diligence report ("Report")

This document is divided into three sections:

2.1. this introductory section, including the status of this report, Taylor Torrington and Associate’s assumptions in preparing this Report, and definitions;

2.2. the red flag issues report, with key issues and suggestions going forward relevant to the Proposed Transaction; and

2.3. the key issues list, being an executive summary of the material issues described in the Report.

3. Status of this report

3.1. This Report sets out the results of the Investigation and the review performed by Taylor Torrington and Associates in relation to the various documents
furnished to and reviewed by Taylor Torrington and Associates.
3.2. This Report sets out only those findings which in the professional discretion and opinion of Taylor Torrington and Associates are material issues which have
a bearing on either the implementation of the Proposed Transaction or which would have a material influence on the Acquirers’ decision whether or not to
proceed with the implementation of the Proposed Transaction. In the circumstances, the potential for undisclosed documents, arrangements, agreements
and financial information which may constitute a risk for the Acquirers in relation to the Proposed Transaction does exist.

3.3. This Report pertains only to the financial aspects of the documentation provided to us and we have not specifically reviewed or commented on any legal,
scientific or technical aspects in this Report.

3.4. As such, Taylor Torrington and Associates sought to isolate, through the Investigation and based on the documentation provided, those material issues
relating to the Target of which the Acquirers should be aware in order to determine whether the Proposed Transaction should occur.

3.5. This Report is to be considered as part of the overall process of due diligence being undertaken by and on behalf of the Acquirers in relation to the Target
and the Proposed Transaction and is not to be taken in isolation. We do not accept responsibility for assessing the technical implications of the documents
or information reviewed by us (as such a review would require, among other things technical and industry knowledge and expertise as well as a full
understanding of the Acquirers’ strategic plans), although we have sought, where possible, to highlight matters which we consider, in our professional
discretion and opinion, to be commercially significant. Accordingly, this review should not be seen as a substitute for examination of appropriate documents
and materials by technical personnel and advisors.

3.6. This Report does not contain a detailed description of each document reviewed and its purpose is to set out those material financial issues which we
consider, in our professional discretion and opinion, to be material in the context of the Proposed Transaction. Reliance should not be placed solely on any
of the summaries contained in this Report, which are not intended to be exhaustive of the provisions of any document or circumstances. It is important to
note that the Investigation does not consist of a full and comprehensive due diligence investigation.

3.7. Unless otherwise expressly agreed by us in writing, no person other than the Acquirers is entitled to rely on this Report, and we shall have no responsibility
or liability to any party who has access to this Report, whether in contract, delict (including negligence) or otherwise.

3.8. It is recorded that this Report is strictly confidential and may not be released to any person who has not signed the appropriate release letter in favour of
Taylor Torrington and Associates.
4. Scope of the Investigation

4.1. The Target was furnished with a due diligence data questionnaire setting out those documents and information which Taylor Torrington and Associates
required for consideration in the Investigation.

4.2. Documentation was made available via Microsoft OneDrive and email.

4.3. In accordance with our instructions, any legal and technical issues were specifically excluded from the scope of our review in this Report.

5. Assumptions

This Report has been prepared on the basis of the following assumptions:

5.1. any scanned or photocopied documentation made available to us are complete and true copies of the originals, any accounting system information exports
have not been amended in any way, power and authority (to the extent that any of the documentation and/or information made available to us turns out to
be inaccurate, incorrect or false, we make no representation as to the accuracy and completeness of this Report);

5.2. the information reflected in the documents provided is accurate – we have not verified such accuracy independently;

5.3. there have been no variations to the documentation as presented to us;

5.4. the terms of such documentation have been complied with in all respects;

5.5. the reports and opinions expressed are not adversely affected by the laws of any jurisdiction other than those of South Africa;

5.6. the documents and information provided by the Target are all that is necessary in order to address the issues under Investigation or all that is in fact
available; and
 5.7. except where expressly stated by us to the contrary all transfer duties and/or similar duties, taxes or levies relating to the documents and the transactions
contemplated therein have been paid in full on the due date.

6. Disclaimer

6.1. This Report is addressed to the Acquirer solely for their use and benefit and may not be transmitted to any other person without our prior written consent,
except in those instances where the Acquirers may be obliged by law to do so.

6.2. This Report may not be relied upon by any person other than the Acquirers and may not be used for any purpose other than the consideration by the
Acquirers of the Proposed Transaction. We shall accordingly not accept any responsibility for any loss or damage suffered by any person other than the
Acquirers as a result of reliance on the contents of this Report.

6.3. We reserve the right to amend this Report in the light of any new information received but do not undertake any obligation to do so.

7. General Definitions

The following definitions should be used to the extent relevant:

7.1. "Acquirer" means ;

7.2. “CIPC” means Companies and Intellectual Property Commission;

7.3. “Companies Act” means the Companies Act 71 of 2008;

7.4. “Distribution Agreement” means the agreement entered into between Target and (therein referred to as the Supplier) for
the supply and distribution the product;

7.5. “Insurance Policy” means the insurance policy entered into between and the Target in respect of the business of the Target;
7.6. “Premises” means the leased premises situated at ;

7.7. “Proposed Transaction” the transaction whereby 100% of the in the Target will be purchased by the Acquirer from the Seller;

7.8. “SARS” means the South African Revenue Service;

7.9. “Seller” means ;

7.10. “Supplier” means (owner of the product name);

7.11. “Target” means (Registration: );

7.12. “VAT” means value-added tax in terms of the Value-Added Tax Act 89 of 1991;
Red Flag Issues Report Summary of key findings and suggested actions going forward

1. Inventory
The Acquirer indicated that not all stock items have been booked into the system, nor has a proper stock count been performed. The Acquirer should perform
a stock count and identify slow moving or obsolete inventory. A detailed inventory list reconciled to the Management Accounts should be provided.

2. Cash and cash equivalents

Cash and cash equivalents as per the Management Accounts were R ,

The Acquirer must confirm that has full rights and legal entitlement to all money that is disclosed.

3. Disclosures in the Financial Statements and to SARS relating to Income Tax and VAT
The Financial Information submitted to SARS on the ITR14 for and in the VAT201 Returns for and did not match the Financial
Information reflected in the Financial Statements.

If revenue and profits disclosed to SARS have been understated, then there are material Income Tax penalties and interest that could be due, which would
necessitate a large adjustment to the Financial Statements to record the new liability, with a consequential decrease in NAV in the Target, as well as serious
cash flow implications.
 If revenue and profits disclosed in the Financial Statements have been overstated, then the Financials should be restated and audited, potentially with new
accountants and auditors. This will materially affect the enterprise value of the Target.

If the revenue and profits in the Financial Statements are a true reflection of trading performance, and there has been material understatement of tax
payments and liabilities, then the nature of the Proposed Transaction should be altered to rather purchase the business of the Target out of the actual legal
entity and start operating out of a new legal entity, as opposed to acquiring the Members Interest in the CC.

4. Employees Tax
All people doing work for the Target are treated as independent contractors. However, they all need to be properly evaluated in terms of their status as
employees vs independent contractors to avoid being possibly deemed as employees, resulting in potential Employees tax penalties and interest.
 Key Issues List

Key issues/ information Implication and/or possible mitigation

Trading Implications

The Financial Statements and Management Accounts show robust and The trading strength of the target appear to be strong based on the data
consistent revenue growth over the past 3 Financial Years: received. However, there are some discrepancies that have been identified
equating to a cumulative further on in this document that must be addressed.
average growth rate of % in total revenue growth over this time.
Mitigation
Gross Profit margins have remained high at approximately %. It was
Further investigation in the underlying data might be necessary. The Acquirer
noted that there was a spike in GP Margin in to %, which
should consider including additional profit warranties by the Seller in the
might warrant further investigation.
Proposed Transaction, or possibly adjusting the purchase price to allow for
Revenue appears to be high enough (with current GP margins) to provide any risk of misstatements in the trading history that has been presented.
sufficient headroom above breakeven point to cover overheads. The
headroom over the past 3 Financial Years has been:
.

As an example, in , the overheads were . At a GP

margin of % the breakeven revenue would be , cost of
sales would be , and gross profit would be .
Thus the actual revenue of was % more than the
breakeven revenue amount of .
 Trading per Financial Year
7,000,000.00 60.0%

6,000,000.00
50.0%

5,000,000.00
40.0%

4,000,000.00

30.0%

3,000,000.00

20.0%
2,000,000.00

10.0%
1,000,000.00

- -
Feb 2016 Feb 2017 Feb 2018 Feb 2019

Revenue Gross Profit GP%

 100,000.00
200,000.00
300,000.00
400,000.00
500,000.00
600,000.00
700,000.00
800,000.00

-
Sep 2016

Oct 2016

Nov 2016

Dec 2016

Jan 2017

Feb 2017

Mar 2017

Apr 2017

May 2017

Jun 2017

Jul 2017

Revenue
Aug 2017

Sep 2017

Oct 2017

Nov 2017
Monthly Trading

Dec 2017
Gross Profit

Jan 2018

Feb 2018

Mar 2018
GP%

Apr 2018

May 2018

Jun 2018

Jul 2018

Aug 2018

Sep 2018

Oct 2018

Nov 2018

Dec 2018
-
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Financial Statements Implications

Financials Statements have been provided for There could be possible misstatements in the Financial Statements as audits
Feb 2019 Financials Statements are not yet complete. The Acquirer have not been conducted.
has indicated that he has had sight of signed cover sheets (signed by the
Mitigation
Director and the Preparer), however, these have not been provided for the
purpose of this Due Diligence report.
The Acquirer should consider including additional profit warranties by the
Seller in the Proposed Transaction, or possibly adjusting the purchase price to
The Financial Statements are not required to be audited as the Public
allow for any risk of misstatements in the trading history that has been
Interest score is below However, very low financial reliance can be
presented.
placed on unaudited financials.

Plant and equipment Implications

A list has been provided illustrating a book value of total plant and Items might not actually exist at the premises. Items might not all be legally
equipment of R , but the list does not have itemized values. It is owned by the Target. Items might need repairs or maintenance if their
also not clear if the Acquirer has physically verified the existence and condition has not been verified. The market value of items might differ
condition of all the items on the list. materially from the book value.

Mitigation

The Acquirer should physically verify the existence and condition of all the
items on the list. The Acquirer should also consider the actual market value of
 items, and possibly conduct some independent price checks on significant
items as a reasonability test.

Vehicles Implications

There are vehicles with a combined Book value of R . Individual Expensive repairs and maintenance of the vehicles could be imminent should
values have not been provided. A reasonability test with independent price the service history of the vehicles be incomplete or questionable, or if there is
checks showed that the market value for similar makes and models of no cover by a manufacturer warranty, service plan, or motor plan.
vehicles on Autotrader are approximately R per vehicle, thus a
Vehicles might not actually belong to the Target.
combined market value of R in total. Consequently, there doesn’t
appear to be a negative equity value in the vehicles.
Mitigation

The Acquirer has physically verified the vehicles and confirmed their current
The Acquirer should consider using a qualified mechanic to technically inspect
state and condition, which appears to be adequate.
the vehicles for any adverse mechanical conditions.

The service history of the vehicles has not been verified, nor whether they
The Acquirer should have sight of the Vehicle Licensing Department RC1 or
are still covered by a manufacturer warranty, service plan, or motor plan.
NCO documents to confirm actual ownership.

Motor vehicle ownership documents were not provided to verify the actual
title holder of each the vehicles.
 Vehicles Description VW Polo Nissan NP200 Nissan NP200 Total
Registration
Mileage
Year 2016 2015 2015
Banking Institution Standard Bank Nissan Finance Nissan Finance
Original Loan value 100,130.00 134,763.96 101,135.00 336,028.96
Current Loan Value 58,169.54 45,378.22 28,704.39 132,252.15
Monthly Payment 2,323.03 2,557.43 2,277.03 7,157.49
Total Payments 61 60 60
Payments Remaininig 26 20 13
Settlement Date 31/05/2021 01/09/2020 02/02/2020
Applicable Interest Rate 11.75% 11.47% 11.30%

Inventory Implications

A list of inventory product types was provided, along with a detailed system The inventory quantity and pricing reported in the Financial Statements might
generated list of inventory products. However, this list was exported on be incorrect. Slow moving or obsolete inventory might be unable to be sold.
and did not have a total to agree back to the Management
Mitigation
Accounts for . In addition, it did not have aging categories, so it
was not possible to identify slow moving stock.
The Acquirer should perform a stock count and identify slow moving or
obsolete inventory. A detailed inventory list reconciled to the Management
The Acquirer also indicated that not all stock items have been booked into
Accounts should be provided.
the system, nor has a proper stock count been performed.
Debtors Implications

A detailed customer list was provided as at , as well as a It is vital to understand the age of debtor amounts, to identify slow paying
customer transactions report for the month of Jan 2019, and a debtors age customers, or bad debts that need to be written-off. It also has an impact on
analysis as at . cash flow projections, and the strategy of which customers to focus on, and
which ones to avoid. It appears that the proportion of long outstanding debts is
The debtors age analysis as at showed a balance of
very small.
R , and did not reconcile back to the Management Accounts as at
, which showed a balance of R . However, the aging Mitigation
did show that only R %) of the R was in days
The Acquirer should confirm that the debtors age analysis exported as at
and older, which is highly favourable.
reconciles to the Management Accounts as at to
ensure the Management Accounts reflect the correct balance.

Creditors Implications

A creditors age analysis as at that reconciles back to the If the system generated creditors report does not match the balance as per
Management Accounts was not available. the Management Accounts, the possibility of unrecorded liabilities can exist.

The Acquirer has indicated that the policy of the Target is to settle all Mitigation
creditors within 30 days, however, this hasn’t been substantiated with
The Acquirer should obtain the creditors age analysis that reconciles to the
evidence.
Management Accounts as at to ensure the Management Accounts
reflect the correct balance. The age analysis should be inspected to see if
 there are any long outstanding amounts indicating potential disputes with
suppliers or possible cash flow concerns.

Cash and cash equivalents Implications

Cash and cash equivalents as per the Management Accounts Cash and cash equivalents appear to be materially overstated in the
were R , which do not agree to the Bank Statement amount of Management Accounts. There is also a risk that transactions going through
R ). The difference multiple bank accounts of different entities might not be correctly recorded in
is R the books of the Target.

A further bank statement was provided ( Mitigation

which showed a balance of R . However, this
The Acquirer must confirm that has full rights and legal entitlement
account is held by a different legal entity:
to all money that is disclosed. The second bank account appears to belong to
an entity owned by the . , should be
After adding the 2 bank accounts, there is a shortfall remaining of listed as a Related Party, and all transactions and balances should be
. This must be explained. appropriately disclosed, possibly as a Loan Receivable, not Cash and cash
equivalents.

Related parties Implications

All legal entities and other related parties to were required to be Transactions between related parties are required to be disclosed in the
disclosed for the purposes of the Due Diligence. This includes subsidiaries Financial Statements in order to comply with IFRS for SMEs. The risks
or other companies owned by members or their families that interact with concerning related party transaction and balances are that they might not be
. conducted at arms length, and the true economic value of might not be
accurately reflected.
appears to be a
Related Party that has not previously been disclosed. Mitigation

All Related Parties must be properly disclosed, and all such transactions and
balances must be reported.

Income Tax Implications

The following documents were provided: Either:

1. Tax Clearance Certificate encompassing: 1. The revenue and profits disclosed to SARS have been understated

1.1. Income Tax 2. The revenue and profits disclosed in the Financial Statements have been
overstated
1.2. VAT
Mitigation
2. Income tax return ITR14 for
The Acquirer should urgently investigate this matter further with the
Although the current Tax Clearance Certificate showed that the company
Purchaser.
was in Good Standing with SARS as at the Financial Information
submitted to SARS on the ITR14 for did not match the Financial The following further documents should be obtained:
Information reflected in the Financial Statements.
1. Income tax return ITR14 for

2. Income tax assessment ITA34 for

3. Provisional tax return IRP6 for

4. Income tax Statement of Account ITSA from

5. Tax calculations for the previous 3 years

6. List of actual payments made to SARS over the past 3 years

If revenue and profits disclosed to SARS have been understated, then there are
material Income Tax penalties and interest that could be due, which would
necessitate a large adjustment to the Financial Statements to record the new
liability, with a consequential decrease in NAV in the Target, as well as serious
cash flow implications.

If revenue and profits disclosed in the Financial Statements have been

overstated, then the Financials should be restated and audited, potentially with
new accountants and auditors. This will materially affect the enterprise value of
the Target.

If the revenue and profits in the Financial Statements are a true reflection of
trading performance, and there has been material understatement of tax
payments and liabilities, then the nature of the Proposed Transaction should
be altered to rather purchase the business of the Target out of the actual legal
entity and start operating out of a new legal entity, as opposed to acquiring the
Members Interest in the .
Statement of Comprehensive
Income
Income Tax
Financials
ITR14 Variance

Revenue
VAT Implications

Value added tax returns “VAT201” for and were Either:

inspected, with a significant variance in figures between what has been
1. The revenue and profits disclosed to SARS have been understated
reported internally vs what has been disclosed to SARS.

2. The revenue and profits disclosed in the Financial Statements have been
The VAT Statement of Account “VATSOA” from 1 to
overstated
was provided (covering 24 trading months over 12 bi-monthly returns.

Mitigation
A reasonability calculation showed that management accounts were
showing % higher revenue than what was reported to SARS.
The Acquirer should urgently investigate this matter further with the
Purchaser.

The following further documents should be obtained:

3. All Value added tax returns “VAT201” from

4. All VAT reconciliations from

If revenue and profits disclosed to SARS have been understated, then there
are material VAT penalties and interest that would be due, which would
necessitate a large adjustment to the Financial Statements to record this new
liability, with a consequential decrease in NAV in the Target, as well as serious
cash flow implications.

If revenue and profits disclosed in the Financial Statements have been

overstated, then the Financials should be restated and audited, potentially
with new accountants and auditors. This will materially affect the enterprise
value of the Target

If the revenue and profits in the Financial Statements are a true reflection of
trading performance, and there has been material understatement of tax
payments and liabilities, then the nature of the Proposed Transaction should
be altered to rather purchase the business of the Target out of the actual legal
entity and start operating out of a new legal entity, as opposed to acquiring the
in the .
 Bi-monthly VAT returns
Revenue as per management
accounts
Standard rated supply of goods
and services
Variance amount
Variance %

Management Accounts
recalculation
Net VAT
VAT Period Receipts Payments Net Amount Output VAT Input VAT
Payment

Total
VAT Returns
Net VAT
VAT Period Receipts Payments Net Amount Output VAT Input VAT
Payment
Mar 2017 306,126.83 (275,466.04) 30,660.79 37,594.52 (33,829.16) 3,765.36

Variance
amount
Variance %
Employee expenses Implications

It was explained that all staff are considered by the Target to be independent The evaluation of the status of employees vs independent contractors is
contractors, and none are salaried employees. covered in great detail in Interpretation Note 17 (Issue 5) of the Income Tax
Act 58 of 1962 issued on 5 March 2019.
Accordingly, the Target does not appear to be registered for any Payroll
taxes, and Employee Tax Returns “EMP201” for PAYE, SDL, and UIF, or The tax implications for independent contractors are as follows:
Employee Tax Statement of Accounts “EMPSA” from to 28
1. Where the taxpayer is 4th schedule independent and common law
were not available.
independent - the taxpayer is a true independent contractor and no
employee's tax is to be deducted.

2. Where the taxpayer is common law independent but does not pass the
statutory exclusion (4th schedule) - Employee's tax is to be deducted on a
monthly basis as follows:

2.1. If the independent contractor works more then 22 hours a week,

he/she must be taxed in terms of the income tax tables.

2.2. If the independent contractor works less then 22 hours a week,

he/she is to be taxed at a flat rate of 25%. Here income is to be
indicated under the code 3616. This would then enable the taxpayer
to claim allowable expenses against the income earned.
 2.3. If the taxpayer is a VAT vendor and provided a tax invoice, the 25%
PAYE is to be deducted on the value of the invoice (therefore
excluding VAT) 3.

3. Where the taxpayer is 4th schedule not independent in terms of the 4th
schedule and also not independent at common law, the taxpayer is
classified as an employee and subject to employee's tax like any other
employee.

Thus there could be a potential unrecorded Employees tax liability in the

Target, which may include penalties and interest.

Mitigation

All people doing work for the Target need to be properly evaluated in terms of
their status as employees vs independent contractors.