Ema Fin., LLC v. Nfusz, Inc.

444 F.Supp.3d 530

EMA FINANCIAL, LLC, Plaintiff, Counterclaim Defendant,

v.NFUSZ, INC., Defendant, Counterclaim Plaintiff.

18 Civ. 3634 (NRB)

United States District Court, S.D. New York.

Signed March 16, 2020

Richard William Nicholson, Jr., Thomas James Fleming, Olshan Frome Wolosky LLP, New York, NY, for Plaintiff, Counterclaim Defendant.

Mark R. Basile, Marjorie Santelli, The Basile Law Firm P.C., Jericho, NY, for Defendant, Counterclaim Plaintiff.

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE

This litigation, between lender EMA Financial, LLC ("EMA" or "plaintiff") and borrower NFusz, Inc. ("NFusz" or "defendant"), concerns two substantially similar transactions whereby plaintiff provided defendant with cash in exchange for (1) a one-year note bearing interest convertible into shares of NFusz common stock and (2) a warrant agreement granting plaintiff a five-year option to purchase shares of NFusz common stock at a fixed price (the "exercise price").¹ Both transactions consist of a Securities Purchase Agreement (the "SPAs"), a Convertible Promissory Note (the "Notes"), and a Stock Purchase Warrant (the "Warrant Agreements"), (collectively, the "Agreements").²

In April 2018, after NFusz had repaid the Notes in full, EMA initiated this action to enforce its right to certain shares of NFusz common stock pursuant to the "cashless exercise" procedure as set forth in the Warrant Agreements. EMA now moves for partial summary judgment seeking a declaration regarding the validity of the formula pursuant to which EMA's entitlement to NFusz common stock is calculated, and dismissal of defendant's affirmative defenses and counterclaims. Defendant cross-moves for summary judgment on the grounds that the transactions are usurious and thus void ab initio under New York law. In the alternative, defendant seeks rescission of the Warrant Agreements or reformation of the cashless exercise formulas therein.

For the reasons that follow, the Court grants EMA's motion for partial summary judgment as to NFusz's usury defense, but denies EMA's motion insofar as it seeks a declaration regarding the cashless exercise formula as written in the Warrant Agreements.³ Indeed, notwithstanding the plain terms of the cashless exercise formula, the Agreements read in their entirety reveal that NFusz's position regarding the proper cashless exercise formula is the only sensible one and that the cashless exercise formula must be enforced accordingly.

I. Background ⁴

EMA is a Delaware limited liability company with a principal office in New York City. ECF No. 65 ¶¶ 3, 4. NFusz, now known as Verb Technology Company, Inc., is a Nevada corporation headquartered in Los Angeles. Id. When EMA initiated this lawsuit, NFusz's shares traded on the OTCQB market under the symbol "FUSZ." See ECF No. 51-7.

On December 5, 2017, the parties entered into an SPA (the "December SPA") pursuant to which NFusz issued to EMA: (1) an 8% convertible note in the original principal amount of $185,000 (the "December Note"); and (2) 1,200,000 warrant shares for NFusz common stock (the "December Warrant"), exercisable at $0.11 per warrant share. ECF No. 74 ¶ 23. On January 11, 2018, the parties entered into a substantially similar SPA (the "January SPA") whereby NFusz issued to EMA an 8% convertible note in the original principal amount of $75,000 (the "January Note");⁵ and (ii) 500,000 warrant shares for NFusz common stock (the "January Warrant"), exercisable at $0.14 per warrant share.⁶ Id. ¶ 25. While the December and January transactions were being negotiated, both parties participated in calls with representatives of a fund called Auctus Fund Management, LLC ("Auctus"). ECF No. 70 ¶¶ 13, 22. NFusz and Auctus entered into two separate, similarly structured transactions whereby Auctus provided NFusz with cash in exchange for convertible notes and warrant shares.

On March 12, 2018, NFusz repaid both the December and January Notes in full, in the amounts of $225,811.51 and $87,121.23, respectively.⁷ ECF No. 59 ¶ 28. At that time, EMA had not yet attempted to exercise any of the warrant shares underlying the December and January Warrant Agreements, which were set to expire in December 2022 and January 2023, respectively.

The procedure for exercising the warrant shares requires EMA to deliver to NFusz an executed version of the Notice of Exercise Form that is annexed to the Warrant Agreements. See ECF No. 67-3 at 2. The Notice of Exercise form, in turn, requires EMA to designate whether payment for the common stock shares will be made "in lawful money of the United States" (i.e., with cash or cash equivalents), or pursuant to the cashless exercise procedure as set forth in the Warrant Agreements. Id. at 12.

The cashless exercise mechanism, which is at the center of this dispute, is described in identical provisions of the Warrant Agreements as follows:

c) Cashless Exercise. In the event that the shares underlying this Warrant are not registered for resale with the Securities and Exchange Commission under an effective registration statement with a current prospectus, then this Warrant may also be exercised by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [ (A-B)(X) ] by (B), where:

(A) = the Market Price (as defined below)

(B) = the Exercise Price of this Warrant (as adjusted); and

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

"Market Price" shall mean the closing sale price per share of Common Stock on the principal market where the Common Stock is traded on the Trading Day immediately preceding delivery of the Notice of Exercise or the Closing Date, whichever is greater. Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

Id. at 3.

The Notice of Exercise Form further describes the cashless exercise procedure as "the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c)." Id. at 12. Stated simply, if at the time EMA seeks to exercise its warrant shares the NFusz common stock underlying those shares have not been registered for resale with the SEC, EMA has the option to pay NFusz for the common stock shares via the "cancellation" of warrant shares instead of with a cash payment.

On March 28, 2018, EMA delivered to NFusz a Notice of Exercise form indicating its intent to exercise, on a cashless basis, 500,000 of the 1.2 million warrant shares underlying the December Warrant Agreement (the "March Exercise Notice").⁸ See ECF No. 67-8 at 2. At the time EMA sought to exercise the 500,000 warrant shares, NFusz common stock was trading at $1.71 and the exercise price under the December Warrant Agreement remained $0.11. Applying the $1.71 market price and the $0.11 exercise price to the cashless exercise formula as written in the December Warrant Agreement, EMA calculated that it was entitled 7,272,727 shares of NFusz common stock.⁹ In response to the March Exercise Notice, NFusz informed EMA that the cashless exercise formula as written in the December Warrant Agreement was clearly an error and that NFusz would not permit its transfer agent to deliver the requested number of shares. See ECF No. 67-9. According to NFusz, the cashless exercise formula has no sensible application unless the denominator reflects the market price, rather than the exercise price, thus entitling EMA to 467,836 shares of NFusz common stock using the agreed upon inputs.

For ease of comparison, the formulas that each party maintains are correct are set forth below, along with the number of common stock shares each formula yields when calculated using the agreed upon variables.

        EMA's Formula                NFusz's Formula
         (A - B) (X) (A - B) (X)
              B                             A
   ($1.71 - $0.11) (500,000) ($1.71 - $0.11) (500,000)
            $0.11                         $1.71
  = 7,272,727.27 shares          = 467,836.257 shares

As shown, EMA and NFusz agree that the numerator of the cashless exercise formula should reflect the exercise price ("B") subtracted from the market price ("A"), multiplied by the number of warrant shares being exercised ("X").¹⁰ The parties' formulas diverge in that EMA would, consistent with the formula as written in the Warrant Agreements, divide the numerator value by the exercise price (here, $0.11), whereas NFusz maintains the numerator should be divided by the market price (here, $1.71). The parties do not dispute that inputting the $0.11 exercise price and $1.71 market price into their respective formulas entitles EMA to 7,272,727 and 467,836 common stock shares, respectively, upon a cashless exercise of 500,000 warrant shares.

Several other provisions of the Agreements are relevant to this dispute:

• Choice-of-law: The SPAs and Notes contain identical provisions that provide for the application of Nevada law. Section 9(a) of the SPAs state, in relevant part, that "[t]his Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws." ECF Nos. 41-1; 41-6. Similarly, ¶ 4.6 of the Notes state that "[t]his Note shall be governed by and construed in accordance with the laws of the State of Nevada without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction." ECF Nos. 41-2; 41-7. The Governing Law provisions of the SPAs are incorporated by reference into the Warrants, which state that "

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