CLEANSPARK, INC. 10-Q

Item 1. Legal Proceedings We are subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business. CleanSpark, Inc. v. Discover Growth Fund, LLC On August 5, 2020, the Company filed a verified complaint (the “Complaint”) in the Supreme Court of the State of New York against Discover Growth Fund, LLC (“Investor”). Among other things, the Complaint seeks: declaratory relief against Investor in response to Investor’s claim that a Form 8-K filed by the Company in relation to a July 20, 2020 securities purchase agreement needed pre-approval by Investor prior to filing, and injunctive relief in response to conversion notices sent by Investor claiming trigger events and defaults arising out of the failure to obtain the Form 8-K pre-approval. The case was subsequently removed to the United States District Court for the Southern District of New York, which then determined that the parties’ agreements required a JAMS arbitrator sitting in the U.S. Virgin Islands to resolve the parties’ dispute over which of their agreements’ competing forum selection clauses was controlling, and that therefore the Court’s personal jurisdiction over Investor had not been established. While the New York action was pending, Investor filed a demand for arbitration with JAMS in the U.S. Virgin Islands, alleging breach of the Securities Purchase Agreement dated December 31, 2018, and the Purchase Agreement dated April 17, 2019 between Investor and the Company (the “Arbitration”) and seeking issuance of additional shares of the Company. The Company then filed a response to Investor’s claims, denying Investor’s claims and asserting counterclaims against Investor, and also filed for emergency injunctive relief in the Arbitration seeking, among other things, an order enjoining Investor from continuing to pursue certain remedies based on the allegations in the Arbitration between Investor and the Company. On September 21, 2020, the arbitrator granted the Company’s motion for emergency interim relief in the Arbitration. The arbitrator issued his interim award on September 22, 2020, (the “Interim Award”), which restrains Investor from: (i) proceeding with an asset sale or taking any actions in furtherance of the asset sale; (ii) pursuing any remedies in connection with the purported trigger events, conversion notices, notices of default, or sale notices that Investor issued; (iii) claiming or issuing any additional trigger events, conversion notices, delivery notices, notices of default, or sale notices pursuant to the debenture, note, or prior securities purchase agreements between the parties that relate to or arise out of the facts and allegations at issue in the Arbitration; and (iv) pursuing any other remedies that relate to or arise out of the facts and allegations at issue in the Arbitration. Following the Interim Award, the Company completed an underwritten public offering with HC Wainwright (the “Offering”). In connection with the Offering, the Company provided notice to Investor of the Offering in compliance with a right of first refusal provision (the “ROFR”) in the parties’ agreements with the Company. Investor responded to the notice claiming that the notice was not sufficient and the ROFR was not satisfied by the notice and, as a result, proceeding with the Offering constituted a trigger event under the parties’ prior securities purchase agreements. Investor included the preceding allegations regarding the ROFR in its statement of claim in the Arbitration, and they are now at issue in that proceeding. The Company forcefully denies those claims. Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the claims raised by Investor in and related to the Arbitration are completely without merit, and the Company intends to both defend itself vigorously and to vigorously prosecute its counterclaims. Additionally, the Company believes that it has fully complied with its obligations under the right of first refusal and public disclosure review provisions of the parties’ prior securities purchase agreements. Notwithstanding the merits of Investor’s claims, however, the Arbitration may distract the Company and cost the Company’s management time, effort and expense to defend against the claims and threats made by Investor. Notwithstanding the Company’s belief that it has complied with all of its obligations under the parties’ agreements, no assurance can be given as to the outcome of the Arbitration, and in the event the Company does not prevail in such action, the Company, its business, financial condition and results of operations would be materially and adversely affected. Bishins v. CleanSpark, Inc. et al. On January 20, 2021, Scott Bishins (“Bishins”), individually, and on behalf of all others similarly situated (together, the “Class”), filed a class action complaint (the “Class Complaint”) in the United States District Court for the Southern District of New York against the Company, its Chief Executive Officer, Zachary Bradford (“Bradford”), and its Chief Financial Officer, Lori Love (“Love”) (the “Class Action”). The Class Complaint alleges that, between December 31, 2020 and January 14, 2021, the Company, Bradford, and Love “failed to disclose to investors: (1) that the Company had overstated its customer and contract figures; (2) that several of the Company’s recent acquisitions involved undisclosed related party transactions; and (3) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.” (the “Class Allegations”). The Class Complaint seeks: (a) certification of the Class, (b) an award of compensatory damages to the Class, and (c) an award of reasonable costs and expenses incurred by the Class in the litigation. To date, no class has been certified in the Class Action. 11 Table of Contents Although the ultimate outcome of the Class Action cannot be determined with certainty, the Company stands behind all of its prior statements and disclosures and believes that the claims raised in the Class Complaint are entirely without merit. The Company intends to both defend itself vigorously against these claims and to vigorously prosecute any counterclaims. Notwithstanding the Class Allegations’ lack of merit, however, the Class Action may distract the Company and cost the Company’s management time, effort and expense to defend against the claims made in the Class Complaint. Notwithstanding the Company’s belief that the Company and its management have complied with all of their obligations under applicable securities regulations, no assurance can be given as to the outcome of the Class Action, and in the event the Company does not prevail in such action, the Company, its business, financial condition and results of operations would be materially and adversely affected.