Friday 20 September 2019

Datalex flies into uncertain future after dropping dividend bombshell


'All of Datalex's problems appear to stem from that overstatement of revenue for 2018, but the real issues run much deeper' Stock photo
'All of Datalex's problems appear to stem from that overstatement of revenue for 2018, but the real issues run much deeper' Stock photo
Richard Curran

Richard Curran

The old cliché of 'who knew what and when' comes to mind when figuring out what has transpired at troubled airline software group Datalex. The firm dropped a bombshell last week that the payment of its €3.8m dividend to shareholders last September had in turn been financed through the payment of an unlawful dividend from a subsidiary company.

This subsidiary payment was unlawful as a result of the overstatement of revenue which the company notified the market about back in January.

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In other words, if the revenue had not been overstated, the subsidiary would not have been in a position to pay over the dividend to the parent group. The payment of dividends from the plc to shareholders was legal, but the internal dividend was built on revenues that did not exist.

All of Datalex's problems appear to stem from that overstatement of revenue for 2018, but the real issues run much deeper. Poor internal controls and a question over whether it even kept proper books of account point toward the deeper issues that allowed accounting irregularities to occur.

The really surprising issue is that something like this could take place at a publicly traded company with all of the checks and balances that it should have, including auditors, non-executive directors, reporting standards and internal controls.

Sometimes the guff that companies put near the front of their annual reports can come back to bite them when things go wrong. Datalex's 2018 annual report gave some choice words of wisdom about its values.

"Courage: we believe in people with the courage to make a difference," it beamed out to shareholders.

Former finance director Dónal Rooney, who uncovered the accounting irregularities, had that courage. Clearly, somebody else also made a difference at Datalex, and it was not a positive one.

"Collaboration: we make decisions collaboratively and everyone has a voice." Well, if that were strictly correct, then everybody in the place would know what went on.

"Creativity: we continually seek innovative and creative solutions." It was definitely creative and innovative to come up with overstated revenue and the subsidiary dividend payment.

The company is now fighting for its life. It has lost a couple of customers and has shipped massive reputational damage.

Dermot Desmond has made €10m available to the firm through debt and equity, but it needs to raise more money.

There is no doubting that it has a good underlying business but its future may no longer lie as a publicly listed company.

It is planning cost cuts and trying to rebuild its reputation while also considering suing some former directors. Such a move would have to be weighed up very carefully, given the level of time and expense associated with legal actions and the question of how much Datalex could receive at the end of the process, even if it won the court action.

There has been a reference of the company to the Office of the Director of Corporate Enforcement by former auditor EY, and that probe should take its course as the best way of establishing what exactly has happened.

Desmond seems willing to put more money behind the business. But given that he already owns north of 30pc and may be required to supply more equity and/or loans, it is hard to see the future attraction for investors.

Datalex shares were suspended back in March and if the company can get them back trading again, they could sink like a stone once investors have a chance to get out.

Datalex may well have a better future as a privately held company.

Sunday Indo Business

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