Datalex, the travel retail software company hit by an accounting scandal earlier this year, said on Friday it is considering legal action against former directors.
Separately, its auditors have refused to give an audit opinion as it plunged into a net loss of $50 million (€45.3 million) last year.
The company has also revealed that it has agreed a fresh $5.5 million funding line from its main shareholder Dermot Desmond to allow it to continue trading for the remainder of 2019, and that the businessman, who owns a 29.9 per cent stake, has committed to support a wider equity raise to shore up its finances.
Datalex first warned of suspected accounting irregularities in January, sending its shares tumbling by almost 60 per cent in one day.
A subsequent independent report carried out by PwC confirmed that there was a weak internal control environment in the company, and that revenues and earnings for the first half of last year had been overstated.
Much of Datalex’s accounting issues relate to its booking of service revenue on a project to overhaul German airline Lufthansa’s digital commerce offering, which had gone way over budget and missed key deadlines.
Datalex said in its long-delayed annual report that it has identified that a $4 million dividend payment received from its main subsidiary, Datalex (Ireland) Limited, last year to fund shareholder dividends amounted to an “unlawful distribution”. That’s because Datalex (Ireland) did not have sufficient retained earnings to support the payment, it said.
“The group is considering with its legal advisers whether it would be in the best interests of the group and its stakeholders to take actions against former executives to recover value and will take such action if advised that it is appropriate to do so,” it said.
Datalex dropped into a net loss of $50 million from a profit of $7 million for 2017. It said that its external auditor, Ernst & Young (EY), has disclaimed audit opinion, in a highly unusual move, due to the breakdown in controls and accounting irregularities.
“A disclaimer of audit opinion is a very serious matter,” Datalex’s report said. “As a result of the overall disclaimed opinion, the auditors are required to state that, inter alia, they have been unable to form an opinion on whether the information given in the directors’ report is consistent with the financial statements and whether the directors’ report has been prepared in accordance with the Companies Act 2014.” EY has informed Datalex that it plans to quit as external auditor.
Datalex said that it is of the opinion that it “exercised strict diligence to ensure that the directors’ report is consistent with the financial statements and in compliance with the Companies Act 2014”.
The company said that it also received a termination notification from a customer this week. “The group strongly disputes the legality of this notice and confirms that it is engaged in discussions with the customer concerning resolution of this matter,” it said.
That’s in addition to Brazilian loyalty programme operator Multiplus cancelling a contract with Datalex in May following the South American company’s takeover by LATAM Airlines.
Datalex’s service revenue slumped to $16.7 million last year from $34.6 million in 2017, according to the annual report. It also took an impairment charge of $20 million against research and development costs that had previously been capitalised, or converted into assets.
The company was forced cut jobs and resort to a €10 million equity-and-debt funding line from its main shareholder Dermot Desmond in March, pushing the stake of businessman’s IIU investment vehicle up to 29.9 per cent from 26.4.
“During 2018, the total cash spent on deployment and product investment was circa US$27 million,” Datalex said. “This amount, some of which was funded by our customers making advance payments for 2019, has put enormous strain on the finances of the group.”
A management overhaul has seen former Actavo chief executive Sean Corkery take over as acting chairman and interim CEO in May, replacing Aidan Brogan, and Niall O'Sullivan, previously a senior Google finance executive in Europe, being hired as chief financial officer.
“Restoring confidence, supporting our customers and ensuring long term growth for Datalex and its shareholders is the priority for the board and the entire Datalex team,” Mr Corkery said, adding that he will give investors more details at an annual general meeting on September 17th “about the in-depth transformation that has begun”.
Separately, two leading global investor advisory firms, International Shareholder Services and Glass Lewis, have urged Datalex shareholders to vote against the board re-election of Mr Desmond’s nominee, John Bateson, and a fellow audit committee member, Peter Lennon at the company’s agm.