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DX (Group) Plc

DX (Group) PLC £24m Fundraising, CEO Appointment and Proposed Board Changes

Fundraising

· DX (Group) PLC (LON:DX) is pleased to announce that it has reached agreement on legally binding heads of terms for a £24.0m fundraising (the “Fundraising”), following the announcement regarding its funding requirements on 22 September 2017

· The Fundraising is time critical to address the short term cash position of the Company which has become weak reflecting the previously announced challenges in the business that have impacted profitability and cash generation

· The Fundraising is to be in the form of secured loan notes with conditional conversion rights (the “Loan Notes”):

− Tranche 1 of £16.3m – to be issued principally to GCM Partners II LP (“Gatemore”) and the Proposed Directors

− Tranche 2 of £7.7m – to be issued principally to Hargreave Hale Limited acting as investment manager for Marlborough Special Situations Fund (“Hargreave Hale”), conditional on shareholder approval of conversion rights

· Subject to receiving the requisite shareholder approvals, these convertible Loan Notes will be capable of conversion at 10 pence per new DX share, which represents a premium of c.28 per cent. to the average closing price of DX ordinary shares over the 20 trading days immediately prior to the date of this announcement

· The Board considers that a fundraising by way of Loan Notes with conditional conversion rights is the most appropriate route for the Company to raise the capital it needs in the timescale available

· Refinancing of £2.0m unsecured term loan from Gatemore is included in the aggregate issue

· The principal amount of Tranche 2 may be extended by up to £2.0m, following the completion of the £7.7m subscription but before 30 June 2018, and only on application of the Company and the agreement of a 75 per cent. majority, in value, of the Lenders. Such additional Tranche 2 Loan Notes would be offered pro-rata to all Tranche 1 and Tranche 2 Lenders

· The net proceeds of the Fundraising will be used to address the working capital shortfall, and capital expenditure and restructuring costs

Board Changes

· Lloyd Dunn is appointed as CEO with immediate effect, initially a non-Board position

· Ron Series, Lloyd Dunn, Russell Black and Paul Goodson (the “Proposed Directors”) are to be appointed to the Board as Chairman, CEO and Non-executive Directors, respectively, on completion of Tranche 1, with the announcement of final results for the year to 30 June 2017

· The Proposed Directors are subscribing for £5.25m of Tranche 1 Loan Notes

· The Proposed Directors bring significant collective experience in managing and improving the performance of freight operations, which is central to the proposed turnaround of DX’s performance

Bob Holt, Chairman of DX (Group) Plc, said: “I am delighted to announce details of DX’s refinancing and new leadership team. As of today, Lloyd Dunn will be taking the helm as Chief Executive Officer and, on completion of the first tranche of the fundraising, he will join the Board along with Ron Series, who will join as Chairman, and Russell Black and Paul Goodson, who will join as Non-executive Directors.

“These changes together mark a new chapter for DX and provide firm foundations for the turnaround of the Group. I would like to thank our shareholders, bankers, staff and customers, for their ongoing support during a difficult time for the Group, and I view the future for DX with renewed confidence.”

Lloyd Dunn, newly appointed Chief Executive Officer and Ron Series, Proposed Chairman of DX, commented: “We believe that this refinancing is a critical step in the exciting opportunity to turn DX around. Together with Russell Black and Paul Goodson, and alongside DX’s major institutional shareholders, Gatemore and Hargreave Hale, we are pleased to be directly participating in this fundraising, and we look forward to leading the wider DX team as we translate the opportunity that we see into sustainable revenue and profit growth for all stakeholders.”

Background

The Company notified the market on 22 September 2017 that it has a near term, material funding requirement, over and above the Company’s existing resources, to address a working capital shortfall, caused by the Company’s recently reduced levels of profitability, and to provide funds for the planned investment into improving the financial performance of the DX business.

This statement was required as the forecast short-term cash position of the Company had become weak. This reflects the previously reported challenges in the business that have impacted profitability and cash generation. In particular, the Company has seen the underperformance of higher margin areas within DX Freight combined with the fixed cost nature of this network result in significant losses in this division. As previously stated, divisionalisation is expected to provide greater flexibility in managing costs and puts the Company in a better position to advance its operational and sales performance, and to provide an enhanced service to its customers.

Since the end of August 2017, the Board has been in detailed discussions regarding its financing options with Gatemore and its bankers. The Company’s worsening cash position has necessitated a faster route to securing the required funds and, accordingly, the Board considers that a fundraising by way of Loan Notes with conditional conversion rights is the most appropriate route for the Company to raise the capital that it needs in the timescale available. The support of certain of the Company’s largest shareholders and the Proposed Directors has been key to this.

Fundraising

DX is pleased to announce that it has agreed legally binding heads of terms with respect to a £24.0m fundraising (before expenses) through the issue of secured loan notes with conditional conversion rights, principally to existing institutional investors and the Proposed Directors (together the “Lenders”).

The Loan Notes will be issued in two tranches. Tranche 1 of £16.3m will be issued principally to Gatemore and the Proposed Directors on completion of final documentation, which is expected within the next few weeks with the announcement of the Company’s audited final results for the year ended 30 June 2017. Tranche 2 Loan Notes, of £7.7m, is conditional, inter alia, on DX shareholder approval of the conditional conversion rights, which will be sought as soon as reasonably practicable, and, in any case, by no later than 31 December 2017. Tranche 2 will principally be issued to Hargreave Hale. The principal amount of Tranche 2 may be extended by up to £2.0m following the completion of the £7.7m subscription, but before 30 June 2018, and only on application of the Company and the agreement of a 75 per cent. majority, in value, of the Lenders (the “Additional Notes”). Any Additional Notes will be offered pro-rata to all Tranche 1 and Tranche 2 Lenders. No listing of the Loan Notes, nor the Additional Notes, is proposed, nor will the Loan Notes or the Additional Notes trade on a readily available market.

A further announcement regarding the posting of a circular to shareholders will be made when appropriate.

The Loan Notes and any Additional Notes will have a term of 36 months. Subject to shareholder approval, the conditional conversion rights attaching to the Loan Notes will be crystallised and the convertible Loan Notes will be capable of conversion into ordinary shares of DX, at the election of the Lenders up to the maturity date, at 10 pence per new DX share which represents a premium of c.28 per cent. to the average closing price of DX ordinary shares over the 20 trading days immediately prior to the date of this announcement. Additional Notes will also be capable of conversion into ordinary shares of DX, at the election of the Lenders up to the maturity date, however the conversion shall be equal to a 30 per cent. premium to the average mid-market price of ordinary shares of DX over the 20 trading days immediately prior to the date of the Additional Notes subscription.

The aggregate issue of Loan Notes includes the refinancing of the £2.0m unsecured term loan from GCM Partners II LP (a fund controlled by Gatemore) as announced on 22 September 2017. The net funds raised after expenses will be used to meet DX’s near-term material funding requirements, addressing its working capital shortfall, as well as capital expenditure and restructuring costs. The Loan Notes and Additional Notes are not to be used for acquisitions or any other material capital item. Further details of the Loan Notes and Additional Notes are included below.

CEO appointment and further proposed Board changes

DX is also pleased to announce the appointment of Lloyd Dunn as Chief Executive Officer, with immediate effect. Mr Dunn has 38 years of experience in the transportation industry. In 1985, he joined Russell Black as a founding member of Nightfreight Plc, which was admitted to the Official List of the London Stock Exchange in 1994. Mr Dunn was an Executive Director of the company until it was sold to private equity in 2001. In 2002, Mr Dunn joined Tuffnells Parcel Express Limited, becoming Managing Director in 2003 and CEO in 2005. He led the company through a significant turnaround and ultimately to a sale for a total consideration of c.£135 million in 2014.

Mr Dunn’s appointment is currently a non-Board position. It is expected that Ron Series, Lloyd Dunn, Russell Black and Paul Goodson (the “Proposed Directors”) will be formally appointed to the Board of DX as Chairman, CEO and Non-executive Directors, respectively, on completion of Tranche 1 and the announcement of the audited final results for the year ended 30 June 2017. On the appointment of the Proposed Directors, it is intended that Bob Holt and Paul Murray will retire from the Board, with Paul Murray continuing in a consultancy role over a three month period. Ian Gray will remain as a non-executive director of the Company until the 2018 AGM to provide Board continuity. The Proposed Directors have agreed to subscribe for £5.25m of Tranche 1 Loan Notes.

The Proposed Directors bring significant collective experience in managing and improving the performance of freight and logistics operations, which is central to the proposed turnaround of DX’s performance.

A further announcement on the proposed Board changes will be made as appropriate in due course.

Overview of Loan Notes

The Loan Notes are being issued to certain existing institutional investors and the Proposed Directors. The existing institutional investors include Gatemore, which is a substantial shareholder in the Company.

The key terms of the Loan Notes and Additional Notes, as applicable, are:

1.

Principal Subscription Amounts:

£24.0m as to Tranche 1 of £16.3m and Tranche 2 of £7.7m.  Existing GCM Partners II LP loan (£2.0m principal amount) to be rolled into the Tranche 1 subscription.  The total amount of Tranche 2 may be extended with the issue of the Additional Notes, subject to the agreement of the Company and a 75 per cent. majority, in value, of Lenders.

2.

Interest:

Interest at 8 per cent. per annum, accruing monthly from date of issue and payable annually in arrear.  On the application of the Company, and at the election of a Lender, which may be independently given by any Lender, with or without any other Lender, interest due to that Lender on any interest payment date may be rolled into the principal as Payment in Kind (“PIK”).

3.

Repayment:

In full together with all accrued interest 36 months following date of subscription, as may be adjusted as described below (“Repayment Date”).

4.

Use of Proceeds:

General working capital purposes, capital expenditure and restructuring costs.  Not to be used for acquisitions or any other material capital item.

5.

Prepayment:

Permitted, without penalty.

6.

Mandatory Early Repayment:

Repayment in full or pro-rata of the full amount outstanding upon (i) equity issue(s) or debt refinancing(s) (excluding any renegotiation or replacement of DX’s existing invoice discounting facility) totalling an aggregate of £20.0m or its currency equivalent, or following the subscription of Tranche 2, £30.0m or its currency equivalent, as measured over a 6 month period, (ii) upon an event of default or (iii) upon a delisting or take private.

7.

Shareholder Approvals:

DX to seek shareholder authority for the issue of new shares and disapplication of pre-emptive rights to permit the conversion of the full amount of the Loan Notes, plus any PIK interest thereon, which is a condition to the subscription of Tranche 2 Loan Notes (and any agreed upon extension for Additional Notes), by no later than 31 December 2017.

If shareholder authority is not obtained by 31 December 2017 then:

(i)           the repayment date for the Tranche 1 notes will fall 18 months following date of subscription; and

(ii)          from and including 1 January 2018, the annual interest on the Tranche 1 Loan Notes will increase by an additional 8 per cent. accruing quarterly in arrears, all of which increased interest will be rolled into the principal as PIK

8.

Conversion:

Subject to the Company obtaining all necessary shareholder approvals, conversion of the Loan Notes and Additional Notes will be at the election of the Lenders, which may be independently given by any Lender with or without any other Lender (either as to the whole amount of the principal and interest owed to such Lender, or any part of it) into ordinary shares of DX (Group) plc (i) for the Loan Notes, at 10p per share and (ii) for the Additional Notes, equal to a 30 per cent. premium to the average mid-market price of ordinary shares of DX over the 20 trading days immediately prior to the date of the Additional Notes subscription, on the Repayment Date or (to the extent proposed to be prepaid) the date of any prepayment.  In any case, the conversion price will be adjusted to account for any intervening share issue, stock split or redenomination by the Company.

9.

Security:

By not later than 31 December 2017, DX will grant to the Lenders:

(i)           a first fixed charge on freehold properties, including the Willenhall hub; and

(ii)          a floating charge over the entire undertaking of the DX group.  Security will be held by Lenders jointly or by a security trustee nominated and appointed by them.

If the security described above is not put in place by 31 December 2017 then:

(i)           the repayment date for the Tranche 1 notes will fall 18 months following date of subscription; and

(ii)          from and including 1 January 2018, the annual interest on the Tranche 1 Loan Notes will increase by an additional 8 per cent. accruing quarterly in arrears, all of which increased interest will be rolled into the principal as PIK

For the avoidance of doubt, if shareholder approval is not obtained as set out in paragraph 7 above, and the security is not put in place as set out above, the interest on the Tranche 1 Loan Notes will increase in each case by 8 per cent. to a total of 24 per cent.

10.

Additional Risk Fee:

The Tranche 1 Lenders (which are Gatemore and the proposed directors) shall be entitled to a fee in the amount of 5 per cent. on their subscribed Tranche 1 amounts, which shall be added as PIK to the principal amount owed under the Tranche 1 Loan Notes in full as at the subscription date.

Related party transaction

Gatemore, as a substantial shareholder of the Company, is a related party and therefore all of the legally binding arrangements relating to the issue of Loan Notes to Gatemore constitute “related party transactions” under the AIM Rules.

The Directors of the Company consider, having consulted with the Company’s Nominated Adviser, Zeus Capital, that the terms of such arrangements are fair and reasonable insofar as the Company’s shareholders are concerned.

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