Sysgroup Regulatory News (SYS)

15 June 2016

Daily Internet plc

("Daily Internet" or the "Company" or the "Group")

Proposed acquisition of System Professional Ltd

Placing of 8,333,334 New Ordinary Shares at 60 pence per share to raise £5 million

Share Consolidation

Capital Reduction

Change of name to SysGroup plc

and

Notice of General Meeting

Daily Internet plc (AIM: DAIP), the managed hosting and cloud integrator, announces that it has entered into a conditional agreement with the vendors of System Professional Ltd ("Sys-Pro") to acquire the entire issued share capital of Sys-Pro, a managed services provider and IT consultancy, for an initial consideration of £3.9 million, to be satisfied by £3.3 million in cash and through the issue of 975,000 Consideration Shares ("the Acquisition") and further contingent consideration of up to a maximum of £1.865 million subject to the achievement of certain performance criteria.

Highlights

· Acquisition provides immediate critical mass to the Group's core Managed Services offering

· Sys-Pro has a proven consulting model that accelerates the contracted revenue base and will provide complimentary technical ability supporting larger Managed Services projects

· The Enlarged Group will have increased technical capabilities, a more diversified customer base and potentially significant synergistic opportunities

· Enlarged Group pro-forma revenue for FY2016 of £10.02 million (Daily Internet FY2016: £4.76m)

· Enlarged Group pro-forma adjusted EBITDA for FY2016 of £1.45 million (Daily Internet FY16: £0.67m)

· Oversubscribed Placing to raise £5 million (gross) at 60 pence per New Ordinary Share (or 1.5 pence per Existing Ordinary Share) supported by both new and existing institutional shareholders

· Investor demand allowed a further placing of 1,170,040 New Ordinary Shares held by two former employees of the Group, including the former CEO

Information on Sys-Pro

Sys-Pro was founded in 2003 as a Value Added Reseller ("VAR"), reselling hardware and software, and has since undergone a transition from VAR to managed services provider and consultancy, whereby the latter divisions accounted for more than half of its revenue for the year ended 31 March 2016. Sys-Pro aims to provide a consultation led sales approach by offering strategic advisory services to both new and existing customers in the public and private sectors, with the view to providing an end-to-end IT service for its clients. The Acquisition will allow the Enlarged Group to enter into new sector verticals, in particular healthcare, education and charity/not for profit. Sys-Pro is headquartered in East Sussex with an additional office in London and currently employs 39 people across both sites. Further information on Sys-Pro is set out below.

Placing of New Ordinary Shares

The Company has raised £5.0 million (before expenses) through a conditional placing by Shore Capital, as sole broker, of 8,333,334 Placing Shares at the Placing Price of 60 pence per share (following the proposed Capital Reorganisation and equating to 1.5 pence per Existing Ordinary Share, representing a 10% discount to the last closing middle market price per Existing Ordinary Share). The Directors intend that the net proceeds of the Placing will be used to satisfy the initial cash consideration due under the Acquisition agreement and for general working capital purposes of the Enlarged Group. In addition and as a result of strong institutional demand, a further 1,171,040 New Ordinary Shares, equating to 9.18 per cent. of the current issued share capital of the Company, were placed on behalf of two existing shareholders of the Company at the Placing Price. The selling shareholders are the former CEO of the Company, Abby Hardoon, and Stuart Gibson a former employee of the Group. As a result and conditional of the Proposals being approved, neither individual will have a notifiable holding in the share capital of the Enlarged Group.

Share Consolidation and Capital Reduction

It is also proposed that the Company effects a Capital Reorganisation whereby every 40 Existing Ordinary Shares will be consolidated into one New Ordinary Share. Subsequent to the Share Consolidation the Company will apply to the Court to effect the Capital Reduction whereby the nominal value of the New Ordinary Shares will be reduced from 20 pence to 1 penny and the Company's share premium account will be cancelled in order to create distributable reserves to reduce the Company's retained losses so that dividends can be declared in respect of profits of the Company going forward.

Change of Name to SysGroup plc

To reflect the change in the composition and focus of the Company's business following the Acquisition it is also proposed to change the Company's name to SysGroup plc.

Notice of General Meeting

The General Meeting to be held at the offices of Kuit Steinart Levy LLP, 7th Floor, Blackfriars House, The Parsonage, Manchester M3 2JA on 5 July 2016 at 11:30 a.m.

Chris Evans, CEO of Daily Internet commented: "We are delighted to announce the transformational acquisition of Sys-Pro and are looking forward to working with the Sys-Pro team. As well as being immediately earnings enhancing it will greatly strengthen our core Managed Services business in terms of scale and capability. This will enable us to better exploit the ongoing market shift toward cloud delivered services and accelerate our growth. In addition, synergies and our increased scale are expected to reduce combined incremental costs going forward. We are excited by the many opportunities the acquisition presents and would like to thank both our existing shareholders and new institutional investors for their support."

Terms used in this announcement shall have the meanings given to them in the Company's shareholder circular dated 15 June 2016, which has been posted to all shareholders today and is available to download on the company's website http://investor.daily.co.uk.

About Daily Internet

Daily Internet is a leading cloud integrator. Solutions delivered comprise best of breed technologies, tailored and delivered to ensure customers benefit from the vast array of solutions and ever advancing hosting technologies. The Daily Group team keeps customers at the forefront of technology, enabling them to free up resources so they can focus on growing their core business without the distractions or complexity of the ever-changing hosting landscape.

The Group has offices in Liverpool, Nottingham and Coventry.

For more information, visit http://www.dailyplc.com

1. Information on Daily

Daily was founded in 2006 as an internet hosting services provider focused on delivering a broad range of mass market products and hosting services to SMEs and individuals in the UK ("SME Mass Market"). In January 2014, the Company acquired Namehog and complimented this with the subsequent acquisition of Evohosting in August 2014.

The Group entered into the managed hosting market through the acquisition of Netplan in October 2013. It subsequently acquired Q4Ex in December 2014 (which now trades under the Netplan brand).

For the year ended 31 March 2014, the SME Mass Market division of Daily accounted for 71 per cent. of the Group's revenues with managed hosting contributing 29 per cent. of revenues. In December 2014 the Board made the decision to focus on the business of managed hosting due to its belief that managed hosting offered the highest growth opportunity and the potential for increased margins and longer contracts providing greater revenue visibility. For the year ended 31 March 2016 the revenue split had altered with managed hosting contributing 53 per cent. of revenues with SME Mass Market providing 47 per cent. The change has largely been driven by the differing growth rates in managed hosting compared to SME Mass Market; for the year ended 31 March 2016 the SME Mass Market grew revenues by 10 per cent. whilst managed hosting grew 36 per cent.

1.1. Managed Hosting

The managed hosting segment has become the core focus of the Group. Netplan has particular sector strength in certain key verticals including the Financial Services and Merchant & Distribution sectors. Netplan is established as a PCI Level 1 service provider and maintains an Attestation of Compliance to v3.0, which adheres to PCI DSS as set by the PCI Council, which covers Infrastructure and Network, Co-Location, Systems Security Services and IT Support.

Following the acquisition and incorporation of Q4Ex under the Netplan brand, Netplan has strong vertical presence within the Merchant & Distribution sector. The Board believes this is as a result of its strong technical and commercial knowledge of a sector leading ERP application. In addition, Netplan is partnered with Epicor, an ERP provider to the manufacturing, distribution and retail sectors and is their UK hosting partner for a subset of Epicor applications including Epicor BisTrack, a sector ERP application. Netplan's ability to provide Professional Services coupled with IaaS for Epicor BisTrack, provides Netplan with a competitive advantage as a one-stop-shop service provider.

The Board believes that with the on-going transition from on-premise IT solutions to both public and private cloud services, and an increasing trend of IT outsourcing in general, Netplan is ideally placed as an established managed services provider to secure future contracts in multiple verticals that translate to contracted monthly recurring revenue.

1.2. SME Mass Market

The SME Mass Market division consists of the Daily.co.uk brand, Namehog and Evohosting. A range of 'self-serve' products are offered by this division including:

• Domain Name Registration, e.g. register a Register a ".com" or other suffix;

• Shared Server Hosting, e.g. Host multiple websites from a single server;

• Virtual Private Servers (VPS), e.g. Slice a server into multiple smaller ones;

• Dedicated Servers e.g. Servers that are not shared by other customers;

• Email Mailboxes e.g. Allow people to email from their domain name, e.g. bob@domain.com; and

• Value Added Services e.g. Small bolt on services, e.g. SSL certificates for securing website.

1.3. Customer concentration

The Board has continued to seek to diversify the Group's customer base by sector and contribution. As at the year ended 31 March 2016 ("FY 2016") the Group's the top ten managed hosting customers represent less than 50 per cent. of the Group's revenues in FY 2016 and are from a variety of sectors including Financial Services, Merchant & Distribution and SaaS. The customers are predominantly on contracts with a term of more than two years and are provided with a variety of services including private and public cloud services, IaaS and PCI DSS services. The Group has managed to maintain high levels of customer retention within its managed hosting division. For FY 2016, customer churn in managed hosting was less than 3 per cent. (by existing revenue, excluding new revenue contracted during FY 2016).

2. Current trading and prospects

Shareholders' attention is drawn to the announcement made on 1 June 2016 setting out the final results for the year ended 31 March 2016. The Group generated revenues of £4.8 million (FY 2015: £3.9 million), with Adjusted EBITDA of £0.7 million (more than 50 per cent. ahead of the previous financial year (FY 2015: £0.4 million)).

Trading since 1 April 2016 has been in line with management expectations. During FY 2016, the Company repaid the principal amounts outstanding under its existing convertible loan notes, leaving the Group in a net cash position. With the slimming down of cost base in the Group's SME Mass Market division, the continued growth in the managed hosting business along with the Group's cash generation the Board believes that the Group is well placed going into the 2016/2017 financial year with a strong foundation for future growth.

3. Information on Sys-Pro

Sys-Pro was founded in 2003 as a Value Added Reseller ("VAR") reselling hardware and software. In 2008, the company launched managed services and began its transition from VAR to managed services in line with the market trends, described further in paragraph 5.1 below, from on premise IT infrastructure to externally hosted and managed IT services. The company is headquartered in East Sussex with an additional office in London, which opened in 2012.

Sys-Pro aims to provide a consultation led sales approach by offering strategic advisory services to both new and existing customers in the public and private sectors with the view to providing an end-to-end IT service for its clients. This is achieved by initially undertaking an analysis of a client's current IT infrastructure before designing and implementing a new system design for which it has the ability to provide on-going managed services tailored to the needs of each client. Sys-Pro's management team have taken this approach with a view to generating long term value creation through strong customer relationships to underpin continued growth. In line with the general market transition, the Directors believe that cloud-based services such as those offered by Sys-Pro are forming an increasingly important part of the managed services offering to clients.

Sys-Pro has the capability to provide an on-premise deployment, a cloud-based service model, or a combination of these. In addition Sys-Pro can provide clients with a standalone consultancy service which can lead to a delivery orientated project entailing the implementation of a new hardware and software platform, deployed either on premise or possibly hosted remotely. In such cases Sys-Pro is also able to provide managed cloud services such as IaaS or PaaS. Finally, Sys-Pro can offer IT Support services which can range from basic remote user IT support through to on-site, fully outsourced IT service provision.

The Board believes that Sys-Pro has a strong presence within the Education, Charity and Not for Profit verticals supported by an experienced management team resulting in low levels of client churn and a balanced revenue mix of managed services and consulting.

3.1. Cloud services

Sys-Pro offers a wide range of options for remote IT system hosting. This ranges from a simple 'Co-Location' proposition to a fully-virtualised, multi-tenanted environment where both IT infrastructure and software are provided as a service. Allied to this, the data centre facilities employed by the company are used to provide back up and disaster recovery services to its clients, whether their systems are cloud-hosted or otherwise.

3.2. IT support

Sys-Pro provides a range of IT Support services to both its hosted clients and customers with a dedicated on-premise IT infrastructure. The service desk team is structured to provide coordinated IT support across all types of client need. IT Support services include:

• Network monitoring services

• Manned IT helpdesk

• Management reporting

• Full outsource IT support

The IT Support function operates standard hours of 8am to 8pm Monday to Friday but can be

extended to 24/7 coverage to fit in with the client's requirements.

Sys-Pro is also a Microsoft Managed Partner (one of circa 130 in the UK) enabling Sys-Pro to deliver training to its clients, based on the official Microsoft curriculum for Microsoft certifications.

3.3. VAR

Sys-Pro generates 48.9 per cent. of its revenue as a value added reseller. A substantial proportion of such sales are to clients who also procure professional and/or managed services and are often part of a more wide-ranging client engagement, involving the consulting team.

3.4. Customer concentration

Sys-Pro has diversified its customer base with specialisms in healthcare and charity/not for profit. In the year ended 31 March 2016, the top ten customers represented less than 40 per cent. of Sys-Pro's revenues. These customers are provided with a variety of services including virtual desktop, managed services, IaaS and DRaaS. The Group has managed to maintain high levels of customer retention within its managed hosting division. For FY 2016, customer churn of annual recurring revenue was 3.4 per cent.

3.5. Property

Sys-Pro occupies sites in both London and Sussex.The London property is occupied under a five year lease which commenced on 26 July 2012 and will automatically expire on 25 July 2017 with annual rent of £55,000 (with insurance rent and service charge paid as further rent).

The company also currently owns part of the premises occupied in Sussex. This freehold property is being transferred to a nominee company owned by the Vendors with effect from completion of the Acquisition, details of which are set out in paragraph 6.1 below. Sys-Pro is then being granted a full repairing and insuring lease in respect of the Transferred Property for a term of three years with effect from completion of the Acquisition, with Sys-Pro having an option to renew this lease for a further two years. The annual initial rent is £19,125, with a rent review on renewal.

The other part of the property in Sussex occupied by Sys-Pro is pursuant to a 15 year lease which commenced on 5 April 2006 and is due to expire on 5 April 2021. The rent payable is currently £23,500 per year.

4. Historic financial results of Sys-Pro

Set out in the table below are the unaudited financial results of Sys-Pro for the years ending 31 March 2014 to 2016:

Note:

1. Source Filed unaudited statutory accounts

2. The Vendors receive a significant proportion of their income in the form of regular monthly dividends and the cost of these dividends has been taken into account in calculating a "normalised" EBITDA.

4.1. Revenue by division

Set out in the table below is the breakdown of revenue generation by division extracted from the unaudited financial results for the years ending 31 March 2014 to 2016:

Note:

1. Source: Management accounts

5. Background and reasons for the Acquisition

5.1. Background

The managed hosting segment has become the Group's core focus since the acquisition of Netplan in October 2013, subsequently supplemented by the acquisition of Q4Ex in December 2014. Managed hosting includes a range of cloud offerings including design, implementation, control and managing environments and solutions for the Group's customers.

The Board believes that the market is currently experiencing a number of trends which indicate that the shift to cloud delivered solutions and outsourcing in general will remain a key future focus points for customers. The Board believes that growing levels of customer confidence and acceptance of cloud based systems are drivers behind increased client adoption of cloud hosted solutions and a move away from on-premise servers enabling companies to move from CAPEX investment to on-going OPEX. In parallel with a broader transition to cloud based solutions, the Board has noted increased adoption rates by its clients of the public cloud. This shift in the market has enabled the Group to extend its product mix to offer public cloud based solutions when proposing a new solution to a customer, particularly concerning business continuity. Previously, for smaller business, the private cloud solution could prove to be cost prohibitive.

5.2. Rationale and benefits

The Board believes the Acquisition provides an opportunity to harness these market trends and enable the Group to continue to drive growth in managed hosting. The Board believes the Acquisition will provide a number of benefits to the Group:

5.2.1. Accelerate the Group's growth:

• Provides increased access to markets in managed services, the Group's core service offering;

• Anticipated to generate economies of scale through reduced infrastructure costs;

• Proven consulting model that accelerates managed services business;

• Complementary technical ability supporting larger managed services projects; and

• Leverage Sys Pro's specialist Microsoft capabilities providing an expansion to the Group's technical capabilities.

5.2.2. Diversification

• Entry into new sector verticals, in particular healthcare, education and charity/not for profit;

• Expands the Group's geographic reach; and

• Further diversifies the already low customer revenue concentration.

5.2.3. Opportunity for further value creation

• Continues and accelerates conversion of Sys-Pro's VAR customers to higher margin contracted managed services.

• Significant expansion of Sys-Pro's existing service offering through Netplan, which will be offered to existing Sys-Pro customers, and visa-versa.

• Increase in complementary skills of Netplan and Sys-Pro and increased resources should allow the Group to compete for higher value projects.

5.2.4. Incremental Synergies

• Netplan has spare capacity on its network and rack space in datacentres. It is envisaged that Sys-Pro would benefit from this capacity and not incur any significant additional network or datacentre costs for a period of at least one year from completion of the Acquisition. In addition, there may be synergies realisable by combining technical support teams, network operations centre and other combined functions such as finance and marketing.

• The Board believes that the Enlarged Group should to also be able to negotiate improved volume discounts with suppliers of hardware and commodities, such as bandwidth and power.

6. Principal terms of the Acquisition

Under the terms of the Acquisition Agreement, the Company has conditionally agreed to acquire Sys-Pro from the Vendors, for an initial consideration of £3.9 million to be satisfied as to £3,315,000 in cash and £585,000 by the issue of 975,000 New Ordinary Shares (being the Consideration Shares) representing 4.4 per cent. of the Enlarged Share Capital (the "Initial Consideration"). The Acquisition Agreement is conditional, inter alia, on the passing of the Resolutions and Admission. In addition, the Company intends to issue 83,333 New Ordinary Shares at the Placing Price to a consultant as consideration for provision of services to the Company in relation to the Acquisition.

6.1. Post completion adjustment

The Initial Consideration is subject to adjustment following Admission through the preparation and agreement/determination of accounts drawn up as at the date of Admission to confirm Sys-Pro's cash balance and debt and tying this in with a normalised working capital level. As part of this adjustment, the Transferred Property will be afforded a net cash value of £282,185 less any sum required to redeem the mortgage on the Transferred Property on completion within the completion balance sheet, resulting in a positive adjustment payment due by the Company. The £282,185 value afforded to the Transferred Property will be paid by the Company direct to Sys-Pro on behalf of and at the direction of the Vendors in satisfaction of the purchase price for the Transferred Property payable by the purchasing nominee company owned by them.

6.2. Earnout Consideration

Under the Acquisition Agreement further contingent consideration of up to a maximum of £1.865 million may be payable subject to the achievement of certain performance criteria ("Earn-out Consideration"). Payment of the Earn out Consideration is based upon the financial performance of Sys-Pro for the financial years ending 31 March 2017 ("FY 2017") and 31 March 2018 ("FY 2018"). Upon achievement of the financial performance criteria, set out below, the Earn-out Consideration will be satisfied as to 85 per cent. in cash and as to 15 per cent. through the issue of shares ("Earn-out Shares"). The Earn-out Shares will be issued at the Placing Price.

6.3. Earn out mechanism

To the extent that Sys-Pro generates an EBIT that is equal to or more than £850,000 ("Base Threshold") and less than £950,000 in FY 2017 the Company shall pay the Vendors a fixed further amount of £815,000 ("Additional Consideration"). If the EBIT generated by Sys-Pro in FY 2017 is less than the Base Threshold, the Additional Consideration is reduced by an amount equal to six times the shortfall, such that should Sys-Pro generate an EBIT less than £714,166.67, no Additional Consideration would be due.

Should Sys-Pro generate an EBIT in FY 2017 greater than £950,000 (the "Outperformance Threshold") the Company shall pay the Vendors further consideration equal to three times the excess EBIT of the Outperformance Threshold (the "Excess Sum"). The Excess Sum is capped at £1,050,000 which is reached on Sys-Pro achieving an EBIT of £1,300,000.

6.4. "EBIT Credit" incentive system

In order to incentivise the Vendors to focus on generating long term contracted revenue in managed services in calculating any Earn-out Consideration due an "EBIT Credit" will be added to the underlying EBIT achieved in FY 2017 equating to 25 per cent. of the value of any revenue generated for FY 2018 from any new contract entered into, extension or upsell of an existing managed hosting customer during FY 2017 with a duration of two years or more. Contracts qualifying for an "EBIT Credit" will be agreed quarterly between the Company and the Vendors to ensure they satisfy criteria. Payment of any Earn-out Consideration due as a result of contracts for which an "EBIT Credit" is granted will be deferred until receipt of the associated revenue on completion of FY 2018.

To the extent that the Vendors do not achieve the Base Threshold in FY 2017, after taking into account any "EBIT Credits" due, the Vendors will have the opportunity to achieve the Additional Consideration if they exceed the Base Threshold in respect of the underlying EBIT performance for FY 2018. No "EBIT Credits" can be added to the FY 2018 EBIT in calculating whether any Additional Consideration is due. No payment of Excess Sum will crystalised in respect of the financial performance of Sys-Pro in FY 2018.

6.5. Lock in and orderly market arrangements

Under the terms of the Acquisition Agreement, the Vendors have entered into an irrevocable undertaking not to dispose (save in certain specified circumstances) of any interest in their Consideration Shares for a period of one year from Admission and for a period of one year from the date of issue in respect of their Earn-out Shares (in each case, the "Lock-in period").

The Vendors have also undertaken that they will not dispose of any interest in Consideration Shares or Earn-out Shares for a period of 12 months following expiry of the relevant Lock-in period unless such disposal is effected through Shore Capital.

7. Details of the Placing and use of proceeds

The Company has conditionally raised approximately £5.0 million (before commissions and expenses) through the conditional placing of the Placing Shares at the Placing Price. The Placing Shares, when issued, will represent approximately 37.6 per cent. of the Company's Enlarged Share Capital immediately following Admission. The Placing Shares will rank in full for all dividends with a record date on or after the date of Admission and otherwise equally with the New Ordinary Shares in issue from the date of Admission. It is expected that the Placing Shares will be admitted to trading on AIM on 6 July 2016.

The VCT Placing shares will be issued to investors seeking to benefit from the tax advantages pursuant to the VCT legislation. The Company has obtained advance assurance from HMRC that the VCT Placing Shares will constitute a qualifying holding for VCTs. The Placing (which is not being underwritten) is conditional, amongst other things, upon:

(a) the Placing Agreement becoming unconditional in all respects (save for Admission) and not having been terminated in accordance with its terms prior to Admission;

(b) the Resolutions set out in the Notice of General Meeting forming part of the shareholder circular ("Circular") being approved by the Shareholders (other than Resolution 5 relating to the proposed change of name); and

(c) Admission of the Placing Shares becoming effective on or before 8.00 am on 6 July 2016 or such later date as the Company and Shore Capital may agree, being no later than 8.00 am on 31 July 2016.

7.1. Dilution

Following the issue of the Placing Shares and Consideration Shares pursuant to the Placing and Acquisition, a Shareholder who is not participating in the Placing will suffer a dilution of approximately 42.4 per cent. to his economic interests in the Company.

7.2. The Placing Agreement

Pursuant to the terms of the Placing Agreement, Shore Capital has conditionally agreed to use its reasonable endeavours, as agent for the Company, to procure subscribers for the Placing Shares with certain institutional and other investors.

The Placing Agreement contains warranties from the Company in favour of Shore Capital in relation to, inter alia, the accuracy of the information in the Circular and other matters relating to the Company, Sys-Pro and their respective businesses. In addition, the Company has agreed to indemnify Shore Capital in relation to certain liabilities they may incur in respect of the Placing. Shore Capital has the right to terminate the Placing Agreement in certain circumstances prior to Admission, in particular, in the event of a material breach of the warranties given in the Placing Agreement, the failure of the Company to comply in any material respect with its obligations under the Placing Agreement, the occurrence of a force majeure event which in Shore Capital's opinion may be material and adverse to the Company or the Placing, or a material adverse change affecting the financial position or business or prospects of the Company.

7.3. Settlement and dealings

Application will be made to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on AIM. It is expected that Admission will become effective and that dealings in the New Ordinary Shares will commence on 6 July 2016. The New Ordinary Shares being issued pursuant to the Proposals will, on Admission, rank in full for all dividends and other distributions declared, made or paid on the New Ordinary Shares after Admission and will otherwise rank pari passu in all respects with the then issued New Ordinary Shares.

7.4. Use of proceeds

The Directors intend that the net proceeds of the Placing will be used to satisfy the initial cash consideration due under the Acquisition agreement and for general working capital purposes of the Enlarged Group. The placing proceeds resulting from the VCT Placing Shares will only be applied for working capital or other qualifying purposes and not to fund the Acquisition.

8. Capital Reorganisation

It is also proposed that the Company effects a Capital Reorganisation whereby, first, every 40 Existing Ordinary Shares be consolidated into one New Ordinary Share and then a capital reduction be effected to reduce the paid up amount on each New Ordinary Share by £0.19 (19 pence) and the associated nominal value of each New Ordinary Share to £0.01 (1 penny) with the Company's share premium account also being reduced and cancelled in order to create distributable reserves to reduce the Company's retained losses so that dividends can be declared in respect of profits of the Company going forward. Further details of the Capital Reorganisation are set out below.

8.1. Share consolidation

As at the date of this announcement, the Company has 510,379,335 Existing Ordinary Shares in issue and the mid-market price of each Existing Ordinary Share as at the close of business on 14 June 2016 was £0.0165 (1.65 pence). The Directors believe that the Share Consolidation is necessary in order to increase the marketability of the Company's shares through the creation of a higher price per share.

The Board is therefore of the view that it would benefit the Company and its Shareholders to reduce the number of Existing Ordinary Shares in issue (with a resulting adjustment in the market price of such shares) by consolidating the Existing Ordinary Shares on the basis of:

40 Existing Ordinary Shares becoming one New Ordinary Share

Upon implementation of the Share Consolidation, Shareholders on the register of members of the Company on the Share Consolidation Record Date will hold one New Ordinary Share for every 40 Existing Ordinary Shares they held on the Share Consolidation Record Date. The proportion of the issued ordinary share capital of the Company held by each Shareholder following the Share Consolidation will, save for fractional entitlements and the issue of ordinary shares pursuant to the exercise of any outstanding options or warrants granted by the Company, the Placing and the Acquisition, be unchanged.

Holders of fewer than 40 Existing Ordinary Shares will not be entitled to receive a New Ordinary Share following the Share Consolidation. Shareholders with a holding in excess of 40 Existing Ordinary Shares, but which is not exactly divisible by 40, will have their holding of New Ordinary Shares rounded down to the nearest whole number of New Ordinary Shares following the Share Consolidation. Fractional entitlements, whether arising from holdings of fewer or more than 40 Existing Ordinary Shares, will be sold in the market and the proceeds will be retained for the benefit of the Company. Other than the change in nominal value, the New Ordinary Shares arising on implementation of the Share Consolidation will have the same rights as the Existing Ordinary Shares, including in respect of voting rights, entitlement to dividends and other rights. Further (and ignoring the effect of fractional entitlements), although the Share Consolidation will reduce the number of shares held by each Shareholder by a factor of 40, the Share Consolidation should not, by itself, affect the market value of their aggregate shareholding.

The Existing Ordinary Shares have been admitted to CREST. Application will be made for the New Ordinary Shares to be admitted to CREST, all of which may then be held and transferred by means of CREST. It is expected that the New Ordinary Shares arising as a result of the Share Consolidation in respect of Existing Ordinary Shares held in uncertificated form, i.e. in CREST, will be credited to the relevant CREST accounts on 6 July 2016 and that definitive share certificates in respect of the New Ordinary Shares arising as a result of the Share Consolidation from Existing Ordinary Shares held in certificated form will be despatched to relevant Shareholders within 10 business days of completion of the Share Consolidation. No temporary documents of title will be issued. Share certificates in respect of Existing Ordinary Shares will cease to be valid at close of business on 5 July 2016 and, pending dispatch of share certificates in respect of New Ordinary Shares will be certified against the register. The Share Consolidation Record Date is 5 July 2016.

The effect of the Share Consolidation will be to reduce the number of shares in issue from 510,379,360 (after the issue to the company secretary of an additional 25 Existing Ordinary Shares for the purpose of effecting the Share Consolidation, given that the number of Existing Ordinary Shares in issue is not divisible by 40) to 12,759,484 and to increase the nominal value of the Company's shares from £0.005 (0.5 pence) to £0.20 (20 pence). However, the nominal share capital of each New Ordinary Share will then be reduced again to £0.01 (1 penny), following the Capital Reduction, described in paragraph 8.2 below, becoming effective.

The ISIN of the New Ordinary Shares will be GB00BYT18182 following the Share Consolidation.

8.2. Capital Reduction

The Company has accumulated retained losses amounting as at 31 March 2016 to £5,447,334.67. Therefore, although the Group is now trading profitably the Company does not and will not for the foreseeable future have sufficient distributable reserves to declare a dividend to Shareholders. The Directors therefore propose that the Capital Reduction be effected in order to create reserves which are distributable to reduce the Company's retained losses so that dividends can be declared in respect of profits of the Company going forward.

Pursuant to the Capital Reduction, it is proposed that:

1. the paid up capital in respect of each New Ordinary Share be reduced by £0.19 (19 pence) with the nominal amount of each New Ordinary Share becoming an ordinary share of £0.01 (1 penny) each;

2. the share premium account (including the premium in respect of the Placing Shares and Consideration Shares) of the Company be cancelled; with

3. the amounts by which the paid up capital and share premium account are so reduced being credited to a reserve which is distributable.

The nominal value of the Company's shares will be reduced from £0.20 (20 pence) to £0.01 (1 penny) once the Capital Reduction takes effect.

In addition to the approval by the Shareholders which is being sought at the General Meeting through Resolution 3, the Capital Reduction requires the approval of the Court. Accordingly, following approval of the Capital Reduction by Shareholders, an application will be made to the Court in order to confirm and approve the Capital Reduction. The Capital Reduction, if approved by the Court, will create realised profits of £10,250,042.65 which will be applied in eliminating the accumulated deficit on the Company's profit and loss account.

In seeking the Court's approval of the Capital Reduction, the Court is likely to require protection for the creditors (including contingent creditors) of the Company whose debts remain outstanding on the relevant date, except in the case of creditors who have consented to the Capital Reduction. Any such creditor protection may include seeking the consent of the Company's creditors to the Capital Reduction or the provision by the Company to the Court of an undertaking to deposit a sum of money into a blocked account created for the purpose of discharging the non-consenting creditors of the Company as at the Effective Date, or not to distribute reserves arising upon or following the Capital Reduction until such creditors have been discharged.

It is anticipated that the initial directions hearing in relation to the Capital Reduction will take place on 21 July 2016, with the final Court Hearing expected to take place on 3 August 2016 and the Capital Reduction becoming effective on the following day, after the necessary registration of the Court Order at Companies House has taken place.

Shareholders should note that the Capital Reduction itself will not involve any distribution or repayment of capital or share premium by the Company and will not reduce the underlying net assets of the Company. The distributable reserves arising from the Capital Reduction will, subject to the terms of any undertakings required by the Court as explained above, support the Company's ability to pay dividends, should circumstances in the future make it desirable to do so.

The Directors reserve the right to abandon or to discontinue (in whole or in part) the application to the Court in the event that the Board considers that the terms on which the Capital Reduction would be (or would be likely to be) confirmed by the Court would not be in the best interests of the Company and/or the Shareholders as a whole. The Directors have undertaken a review of the Company's liabilities (including contingent liabilities) and consider that the Company will be able to satisfy the Court that, as at the date (if any) on which the Court Order relating to the Capital Reduction and the statement of capital in respect of the Capital Reduction have both been registered by the Registrar of Companies at Companies House and the Capital Reduction therefore become effective, the Company's creditors will be sufficiently protected.

Once the Capital Reduction becomes effective, the resulting new ordinary shares of £0.01 (1 penny) each will have the same rights as the New Ordinary Shares, including in respect of voting rights, entitlement to dividends and other rights.

If you hold a share certificate in respect of your New Ordinary Shares in the Company, this will remain valid from the time that the Capital Reduction becomes effective for the same number of shares but with the reduced nominal value of £0.01 (1 penny). New share certificates will not be sent to Shareholders following the Capital Reduction becoming effective.

8.3. Share options/warrants

The Company has in issue options over, in aggregate, 4,389,286 Existing Ordinary Shares, including options over 300,000 Existing Ordinary Shares which have been issued to Robert Khalastchy, all of such options being exercisable at various prices from 0.70 pence to 2.00 pence. Following the Share Consolidation, these options will apply in aggregate to 109,732 New Ordinary Shares and will have adjusted exercise prices from 28.0 pence to 80.0 pence.

In addition, the Company has granted warrants to subscribe for 5,600,000 Existing Ordinary Shares including warrants over 100,000 Existing Ordinary Shares which have been issued to Michael Edelson all of such warrants having a subscription price of 5 pence. Following the Share Consolidation, these warrants will apply in respect of, in aggregate 140,000 New Ordinary Shares and will have a subscription price of 200 pence.

Notice of the adjustment to the outstanding options and warrants will be sent to the option and warrant holders as soon as reasonably practicable following the Share Consolidation Record Date.

9. Related Party transaction

Livingbridge and Hargreave Hale are, as Substantial Shareholders, related parties of the Company. Livingbridge and Hargreave Hale have unconditionally agreed to subscribe for 2,266,313 Placing Shares and 1,590,643 Placing Shares respectively. Following Admission their interests in the Company will be as follows:

The issue of the Placing Shares to Livingbridge and Hargreave Hale are related party transactions under Rule 13 of the AIM Rules. The Directors consider, having consulted with Shore Capital, that the terms of the related party transactions with Livingbridge and Hargreave Hale are fair and reasonable insofar as Shareholders are concerned.

As part of their placing participation of 2,266,313 Placing Shares (amounting to approximately £1.36 million at the Placing Price and representing 10.23 per cent. of the Enlarged Share Capital), Livingbridge has been granted the right to appoint a director to the board of the Company for as long as it retains a minimum interest of 10 per cent. of the issued share capital of the Company.

10. Change of name

Subject to the Shareholders' approval by way of a special resolution, it is proposed, pursuant to Resolution 5, that the name of the Company be changed to SysGroup plc shortly after the General Meeting. If Resolution 5 to approve the change of name of the Company is passed at the General Meeting, the Company's AIM symbol will be changed to SYS and its website address will be changed to www.sysgroup.uk.

11. Irrevocable undertakings

The Company has received irrevocable undertakings to vote in favour of the Resolutions from Directors and certain Shareholders who hold, or are interested in, an aggregate of 369,909,080 Existing Ordinary Shares, representing 72.48 per cent. of the Company's current issued share capital.

12. General Meeting

Set out at the end of the Circular is a notice convening the General Meeting to be held at the offices of Kuit Steinart Levy LLP, 7th Floor, Blackfriars House, The Parsonage, Manchester M3 2JA on 5 July 2016 at 11.30 a.m., at which the Resolutions will be proposed as ordinary or special resolutions as set out below:

Ordinary Resolutions

1. to provide the Directors with the relevant authority pursuant to section 551 of the Act to issue and allot equity securities to facilitate the Placing, the Acquisition and provide the Directors with authority to issue and allot further equity securities up to an aggregate nominal value of £886,046.04;

2. to consolidate every 40 Existing Ordinary Shares into one New Ordinary Share;

Special Resolutions

3. to approve the Capital Reduction;

4. to disapply pre-emption rights in connection with the issue and allotment of equity securities to facilitate the Placing, the Acquisition and provide the Directors with authority to issue and allot further equity securities on a non-pre-emptive basis up to an aggregate nominal value of £886,046.04; and

5. to change the name of the Company to "SysGroup plc".

13. Recommendation

The Directors consider the Proposals to be in the best interests of the Company and its Shareholders as a whole and accordingly unanimously recommend Shareholders to vote in favour of the Resolutions to be proposed at the General Meeting as they intend to do in respect of their beneficial holdings amounting, in aggregate, to 57,417,134 Existing Ordinary Shares, representing approximately 11.25 per cent. of the issued ordinary share capital of the Company in respect of all Resolutions.