NetSol Scores Sweet Deal for Its Leasing Software

Vindication may come late for NetSol Technologies Inc., and it remains a question whether it will come at all. The Calabasas company, which makes software used by auto dealers and lenders for vehicle leases, announced on Aug. 27 it had signed a $16 million contract with a Chinese company for NFS Ascent, its next-generation software system. The name of the client was not disclosed because of a confidentiality clause. Shares of NetSol jumped 40 percent that day. The contract comes after a long summer in which more than a dozen law firms have announced suits accusing NetSol management of false and misleading statements regarding the launch of NFS Ascent back in October. NetSol declined to comment for this story but referred to public materials, including a press release that called the investor class-action suits “meritless.” “We have engaged counsel and will vigorously defend ourselves,” the release states. “We do not expect this matter to have any impact at all on our business and operations.” However, the parade of lawsuits has already affected the company’s stock. Since July 25, just before the drumbeat of filings started, shares have lost 21 percent of their value even with the recent run up. They closed Sept. 3 at $3.07. NetSol’s struggle began in October when it launched the NFS Ascent after promoting it as key to the company’s future. But sales didn’t materialize quickly, and the next month the company delivered disappointing earnings. It reported a net loss of $3.3 million (-12 cents a share), compared to net income of 15 cents that analysts expected. NetSol has maintained that acceptance of NFS Ascent was slow, but would yield results. “As with all large multimillion-dollar implementations, it takes time for both parties to conduct the necessary due diligence,” Chief Executive Najeeb Ghauri said in a conference call in May. “This, in turn, increases the length of the sales cycle in our near-term results. That said, NFS Ascent is being very well-positioned and very well received.” In announcing the $16 million contract late last month, Ghauri called it “a major win.” In an Aug. 25 report, online research service TheStreet Inc. called the wave of lawsuits one factor driving NetSol stock lower. The service gives NetSol a “sell” rating. “Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year,” the report stated. “This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year.” David Lee, a partner in securities law in the San Francisco office of Michelman & Robinson LLP, said the critical legal question in the lawsuits is whether NetSol management was negligent or fraudulent in explaining the risks of the NFS Ascent launch to investors. “The lawyers will argue some aspect of the company’s prospectus or filings were misleading, inaccurate or an overstatement compared to actual events,” he said. “The investors could have avoided the loss in share value if they had known the truth.” For now, the lawyers are looking to find a lead plaintiff before the deadline on Sept. 23. Assuming they find one, Lee expects the lawsuits will combine into one class action. Whether these suits exert any long-term effect on share price will depend on the strength of the legal case and the strength of the company. Lee noted that Apple Inc. gets sued all the time for patent violations, but the share price remains stable. “A lot of lawsuits brought by class action attorneys can have an effect on the value, just from a liability standpoint, because you have investors fleeing the stock,” he said. “But it’s a case-by-case basis.”