Item 1. Legal Proceedings
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 an investor (“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 (the “July 2020 SPA”) 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 (the “Prior SPAs”) 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.
On April 30, 2021, the Arbitrator granted
in part the Company’s motion for partial summary judgment and denied the Investor’s motion for partial summary judgment,
and ordered the following:
(i) the
July 2020 SPA is a fully merged and integrated agreement and its publicity clause supersedes the publicity clauses of the Prior
SPAs between Company and Investor with respect to securities filings relating to the July 2020 SPA transaction;
(ii) the
Company had no obligation to allow the Investor to review and approve certain 8-K’s and 10-Q’s concerning the July
2020 SPA transaction and the purported failure to allow the Investor to review and approve such filings was not a breach of the
Prior SPAs between the Company and Investor;
(iii) the
Company’s obligations under the parties’ prior debenture and note (the “Debenture” and “Note”)
were discharged when the Investor fully converted those instruments on or before June 30, 2020;
(iv) the
subsequent delivery notices sent by the Investor were void ab initio and the Company no longer has any obligations under the Debenture
and Note; and
(v) the
Investor’s claim for liquidated damages arising from the Company’s alleged failure to deliver conversion shares under
the Debenture and Note was denied on the grounds that (1) the Investor’s right to issue delivery notices had expired, and
the Company’s obligations under the Debenture and Note had been discharged prior to June 30, 2020, and (2) all the Investor’s
delivery notices rely at least in part on the Company’s alleged breach of the Prior SPAs’ publicity clause with respect
to securities filings relating to the July 2020 SPA transaction, a claim to which the Arbitrator ruled in the Company’s favor.
In so holding, the Arbitrator also
denied, as a matter of law, the Investor’s claims for breach of contract (Counts 1 and 2) and its claim seeking specific
performance of delivering additional shares (Count 4).
Certain claims remain for trial in
the Arbitration and the ultimate outcome of this matter cannot be determined with certainty. As it has stated previously, the Company
believes that claims raised by the Investor in and related to the Arbitration are without merit, and the Company intends to continue
to both defend itself vigorously and to vigorously prosecute its counterclaims.
It is possible that actions related
to this dispute with the Investor may yet be filed in the same or other forums. The Company does not intend to file further Current
Reports on Form 8-K describing the additional lawsuits, or provide updates, except as required by law.
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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.
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.