Lufthansa ends contract with troubled Irish travel software group Datalex

Irish software company mulls legal action against former executives, and cash call

Datalex, the travel retail software company grappling with an accounting scandal, is set to lose its biggest and most problematic contract, a project to overhaul German airline Lufthansa's digital commerce offering.

“We confirm that we have terminated the provider contract with Datalex,” a spokesman for the carrier told The Irish Times, after the software company disclosed in its long-overdue annual report, published yesterday, that it had received a termination notification from an unnamed customer this week.

Datalex said, however, that it “strongly disputes the legality of this notice”.

A series of disclosures in the annual report included news that the company is considering legal action against former directors, and that its auditors EY have refused to give an audit opinion as it plunged into a net loss of $50 million (€45.3 million) last year.

The company also revealed 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, will support a planned 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 there was a weak internal control environment in Datalex, and that revenues and earnings for the first half of last year had been overstated.

Over budget

Much of Datalex's accounting issues relate to its booking of service revenue on the Lufthansa project, agreed in 2016, which had gone over budget and missed key deadlines.

Datalex said in the annual report that it had identified that a $4 million dividend payment received from its main subsidiary, Datalex (Ireland) Ltd, last year to fund shareholder dividends amounted to an “unlawful distribution”.

That’s because Datalex (Ireland) Ltd 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’s 2018 loss compared to a profit of $7 million for 2017. It said that EY refused to give an 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 now 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 was consistent with the financial statements”.

It is also understood that the new management team, acting chairman Sean Corkery and chief financial officer Niall O'Sullivan, have stress tested the company against various contract-loss scenarios in preparing the annual accounts on a going-concern basis.

Impairment charge

Datalex took an impairment charge of $20 million against research and development costs that had previously been capitalised, or converted into assets.

“During 2018, the total cash spent on deployment and product investment was circa $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.”

The report showed that remuneration of former CFO David Kennedy, who left in December, amounted to $2.56 million. That included a $2.21 million gain at the time of the vesting of share awards last year.