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Airline tech vendor Datalex had a spectacular accounting meltdown in 2018. Lufthansa, its largest customer, wants to kill its contract. Meanwhile, Datalex's auditor threw up its hands and quit. What a mess.

Datalex, a software maker for airlines, continues to spiral after an accounting disaster last year. The company, based in Dublin, risks losing its largest customer, Lufthansa Group, while the tech vendor’s new bosses may choose to prosecute its former top bosses.

Lufthansa Group is ending its contract with the vendor, a group spokesperson said. Datalex said late last week it would challenge the termination notice because it believed the move was illegal.

Lufthansa had hired Datalex to make a new digital commerce platform. Datalex had reported to investors last year that the project was “on schedule,” with a first phase to arrive by the end of last year.

But Datalex didn’t keep the project on track. Ignoring that fact, the company overstated revenue — booking revenue in 2018 for phases of work not yet done.

At issue now is $56 million worth of services not satisfied in full as of the end of 2018. The contract value represents the largest share of $99 million of Datalex’s outstanding work obligations to its clients, according to financial documents Datalex filed on Friday.

A partial or full loss of $56 million worth of contract value would be a blow to a company of Datalex’s size.

In 2018, Datalex suffered a net loss of $50 million in 2018 on revenue of only $45 million, it said Friday. Those numbers were the result of a months-long review but not officially blessed yet by an auditor.

Legal Action Against Former Executives?

Datalex said it may pursue legal action against former executives.

It alleged that executives wrongfully okayed $3.8 million in shareholder dividends, which a subsidiary, Datalex Ireland, distributed to the parent company during 2018. The subsidiary didn’t have the earnings to cover the dividend.

Under Irish law, the directors may have a personal liability for repayment. The directors were Aidan Brogan, then the longtime CEO of Datalex, and then-chief financial officer David Kennedy.

Datalex didn’t provide details on whether it would pursue legal action.

Separately, the parent company’s failure to keep proper books in 2018 was potentially a criminal offense. Datalex said it has been sharing its documents with Ireland’s agency for corporate enforcement.

Audit Problems

The chair of Datalex’s audit committee was John Bateson, who was also managing director of the investment vehicle that has been the vendor’s largest shareholder. Billionaire Dermot Desmond owns the investment vehicle, which holds a 29.9 percent stake in the tech vendor.

Desmond wants Bateson to remain on Datalex’s board. But two global investor advisory firms, Glass Lewis and International Shareholder Services (ISS), recommended earlier this month that shareholders vote against Bateson at a meeting on September 17, given Bateson’s potential conflict of interest.

Datalex said Friday that Desmond had agreed to arrange a loan of about $5.5 million for the company. Other shareholders would need to agree to the terms. Earlier this year, Desmond arranged an about $11 million (€10 million) equity-and-debt funding line for the firm.

In a blow, auditor Ernst & Young (EY) declined to offer an opinion on the company’s accounting statements published Friday. EY also said it would drop Datalex as a client.

Datalex said on Friday it would seek a replacement auditor to confirm its financial figures. It had paid EY $900,000 for the audit and a half-million more for additional services, the report said. Help from PricewaterhouseCoopers (PwC) for an earlier audit attempt had cost $700,000.

In May, Sean Corkery became acting chairman and interim CEO. Niall O’Sullivan became its chief financial officer. The new bosses said Friday that their team had strengthened the company’s internal accounting controls.

Datalex said it and some potential new customers were in “advanced-stage” talks. Current customers include Aer Lingus, Air China, Brussels Airlines, and JetBlue Airways.

Meanwhile, mentions of Lufthansa as a customer that we saw on Datalex’s website a year ago are no longer there.

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Tags: Datalex, lufthansa

Photo credit: Lufthansa aircraft shown at Germany's Frankfurt Airport. Parent company Lufthansa Group is a major customer of Datalex, which suffered an accounting disaster in 2018 that continues to bring aftershocks. 280982 / 280982

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