EMA Financial, LLC v. AppTech Corp.

Background

EMA Financial, LLC sued AppTech Corp. over a $300,000 convertible debt note and a related common stock purchase warrant. The note allowed EMA to convert amounts owed into AppTech common stock. The warrant gave EMA an option to purchase AppTech shares and included a cashless-exercise provision and an anti-dilution provision.

On July 13, 2021, EMA submitted two notices seeking to convert debt into 990,791 and 491,262 shares. EMA also submitted a notice seeking to exercise 480,000 warrant shares through a cashless exercise, which it calculated as 287,693 common shares. AppTech did not honor those notices.

In an earlier order in this case, the court granted in part and denied in part EMA’s motion for summary judgment and denied AppTech’s motion to dismiss. The court granted EMA summary judgment on liability, finding that AppTech breached the agreements, but left the damages amount for later determination. The court also ruled that EMA could not both double the note’s default sum and convert that doubled sum into shares.

Note Damages

EMA elected to double the default sum under Section 3.20 of the note rather than convert the default sum into shares. The court concluded that the default sum included the outstanding principal and accrued unpaid ordinary interest. It determined that the outstanding principal was $279,500, making the doubled principal $559,000. It determined that accrued unpaid ordinary interest was $20,435.34, making the doubled ordinary interest $40,870.68.

The court held that default interest applied to both the outstanding principal and accrued unpaid ordinary interest, but that the default interest itself was not doubled. The court treated the contractual default-interest rate as the prejudgment interest rate replacing the statutory rate. It also rejected EMA’s argument that the ordinary 12% note rate should apply after the doubling.

AppTech raised arguments that the note’s interest terms were usurious and that the term “and/or” allowed default interest to apply only to principal. The court declined to consider the usury argument because AppTech had not timely pleaded it and raised it outside the scope of the supplemental briefing. The court rejected the “and/or” argument on the merits, interpreting the provision to apply default interest to both principal and accrued interest when both remained unpaid.

The court therefore awarded $599,870.68 in damages for the note breach, plus prejudgment interest at 24% per year on a principal amount of $299,935.34 from June 14, 2021, until final judgment was entered.

Warrant Damages

The warrant’s cashless-exercise formula referred to the exercise price in its denominator, but both parties agreed that the market price should be used instead. Because EMA had sought damages using the market price and did not request a larger award based on the exercise price, the court calculated damages using the market price.

The court held that AppTech’s issuance of shares after EMA’s earlier conversions triggered the warrant’s anti-dilution provision. That issuance reduced the warrant’s exercise price from $1.50 to $0.625 and increased the number of warrant shares to 480,000, preserving the warrant’s aggregate exercise price at $300,000. The court rejected AppTech’s argument that a conversion by an existing noteholder could not qualify as a dilutive issuance because the contract contained no such exception.

The court also rejected AppTech’s argument that EMA suffered no warrant damages. It determined that the relevant market price was the July 12, 2021 closing price, the trading day before EMA submitted its notice of exercise. That price was $1.56 after adjustment for AppTech’s later reverse stock split. Applying the market-price calculation, the court awarded $427,999.39 for the warrant breach, plus interest at Delaware’s statutory rate of 5% plus the Federal Reserve Discount Rate, with adjustments as that federal rate changes, from July 15, 2021, until final judgment.

Disposition

The court directed the Clerk of Court to enter judgment for $1,027,870.07, consisting of $599,870.68 for the note breach and $427,999.39 for the warrant breach. The judgment also includes the specified prejudgment interest on each principal amount. The court directed EMA to submit additional briefing by December 5, 2022, concerning reasonable attorneys’ fees and costs.