Reinhardt v. Ikonics Corporation — Entry #1: COMPLAINT against Marianne Bohren, Lockwood Carlson, Jeffrey D

Case 1:21-cv-09833 Document 1 Filed 11/23/21 Page 1 of 13


UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

                                                   :
CHARLES REINHARDT,                                 :
                                                   :   Case No. _____________
                       Plaintiff,                  :
                                                   :
        v.                                         :   COMPLAINT FOR VIOLATIONS OF
                                                   :   THE FEDERAL SECURITIES LAWS
IKONICS CORPORATION, WILLIAM C.                    :
ULLAND, GLENN SANDGREN,                            :
MARIANNE BOHREN, LOCKWOOD                          :   JURY TRIAL DEMANDED
CARLSON, JEFFREY D. ENGBRECHT,                     :
ERNEST M. HARPER, JR., DARRELL B.                  :
LEE, and GREGORY W. JACKSON,                       :
                                                   :
                       Defendants.                 :
                                                   :
                                                   :

       Plaintiff Charles Reinhardt (“Plaintiff”), upon information and belief, including an

examination and inquiry conducted by and through his counsel, except as to those allegations

pertaining to Plaintiff, which are alleged upon personal belief, alleges the following for his Complaint:

                                     NATURE OF THE ACTION

       1.      Plaintiff brings this action against IKONICS Corporation (“IKONICS” or the

“Company”) and its corporate directors for violating Sections 14(a) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78n(a), 78t(a), and U.S. Securities and

Exchange Commission (“SEC”) Rule 14a-9, 17 C.F.R. § 240.14a-9. By the action, Plaintiff seeks to

enjoin the vote on a proposed transaction pursuant to which TeraWulf Inc. (“TeraWulf”) will merge

the Company through IKONICS’s subsidiaries Telluride Holdco, Inc. (“Holdco”), Telluride Merger


              Case 1:21-cv-09833 Document 1 Filed 11/23/21 Page 2 of 13


Sub I, Inc. (“Merger Sub I”), and Telluride Merger Sub II, Inc. (“Merger Sub II”) (the “Proposed

Transaction”). 1

       2.      On June 25, 2021, IKONICS announced its entry into an Agreement and Plan of

Merger dated the same day (the “Merger Agreement”).             That agreement provides IKONICS

stockholders will receive (a) one share of Holdco common stock; (b) one contractual contingent value

right (“CVR”) to be issued by Holdco; and (c) $5.00 in cash for each share of Company common

stock they own (the “Merger Consideration”). 2

       3.      On November 12, 2021, IKONICS filed a Prospectus on Form 424B3 (the

“Prospectus”) with the SEC. The Prospectus, which recommends that IKONICS stockholders vote

in favor of the Proposed Transaction, omits or misrepresents material information necessary and

essential to that decision. Defendants authorized the issuance of the false and misleading Prospectus

in violation of Sections 14(a) and 20(a) of the Exchange Act.

       4.      It is imperative that the material information omitted from the Prospectus is disclosed

to the Company’s stockholders prior to the forthcoming stockholder vote so that they can properly

exercise their corporate suffrage rights.

       5.      For these reasons and as set forth in detail herein, Plaintiff seeks to enjoin Defendants

from taking any steps to consummate the Proposed Transaction unless and until the material


1 Non-party TeraWulf was formed to own and operate fully integrated environmentally clean
cryptocurrency mining facilities in the United States. TeraWulf will provide domestically produced
bitcoin powered by more than 90% zero-carbon energy with a goal of utilizing 100% zero-carbon
energy. Its mining facility in New York is expected to be operational in the fourth quarter of 2021
and its mining facility in Pennsylvania recently commenced site work with targeted operation in the
second quarter of 2022. Non-party Holdco is a Delaware corporation and a wholly owned subsidiary
of IKONICS, formed for the purpose of holding IKONICS and TeraWulf as wholly owned
subsidiaries following completion of the mergers. Non-party Merger Sub I is a wholly owned
subsidiary of Holdco. Non-party Merger Sub II is a wholly owned subsidiary of Holdco.
2 IKONICS stockholders will own approximately 2% of Holdco’s common stock upon completion of
the Proposed Transaction. TeraWulf stockholders will own the remaining 98%.

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information discussed below is disclosed to the Company’s stockholders or, in the event the Proposed

Transaction is consummated, to recover damages resulting from the defendants’ violations of the

Exchange Act.

                                  JURISDICTION AND VENUE

       6.       This Court has jurisdiction over the claims asserted herein for violations of Sections

14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder pursuant to Section

27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331 (federal question jurisdiction).

       7.       The Court has jurisdiction over defendants because each defendant is either a

corporation that conducts business in and maintains operations in this District, or is an individual who

has sufficient minimum contacts with this District so as to render the exercise of jurisdiction by this

Court permissible under traditional notions of fair play and substantial justice.

       8.       Venue is proper in this District pursuant to 28 U.S.C. § 1391 because defendants are

found or are inhabitants or transact business in this District. Moreover, IKONICS’s common stock

trades on the Nasdaq Capital Market LLC, which is headquartered in this District, rendering venue in

this District appropriate.

                                           THE PARTIES

       9.       Plaintiff is, and has been at all times relevant hereto, a stockholder of IKONICS.

       10.      Defendant IKONICS is a Minnesota headquartered at 4832 Grand Avenue, Duluth,

Minnesota 55807. The Company’s shares trade on the Nasdaq Capital Market LLC under the ticker

symbol “IKNX.”

       11.      Defendant William C. Ulland (“Ulland”) is nd has been Chairman of the Board since

1976 and a director of the Company since 1972. Defendant Ulland previously served as the

Company’s Chief Executive Officer (“CEO”) from February 2000, and as President from December

2000, until his retirement from those positions in February 2020.


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        12.    Defendant Glenn Sandgren (“Sandgren”) is and has been CEO and a director of the

Company since February 10, 2020.

        13.    Defendant Marianne Bohren (“Bohren”) is and has been a director of the Company

since 2016.

        14.    Defendant Lockwood Carlson (“Carlson”) is and has been a director of the Company

since 2009.

        15.    Defendant Jeffrey D. Engbrecht (“Engbrecht”) is and has been a director of the

Company since 2016.

        16.    Defendant Ernest M. Harper, Jr. (“Harper”) is and has been a director of the Company

since 2012.

        17.    Defendant Darrell B. Lee (“Lee”) is and has been a director of the Company since

2012.

        18.    Defendant Gregory W. Jackson (“Jackson”) is and has been a director of the Company

since 2017.

        19.    Defendants identified in paragraphs 11-19 are referred to herein as the “Board” or the

“Individual Defendants.”

                                SUBSTANTIVE ALLEGATIONS

The Proposed Transaction

        20.    On June 25, 2021, IKONICS and TeraWulf jointly announced in relevant part:

        EASTON, Maryland & DULUTH, Minnesota – June 25, 2021 – TeraWulf Inc.
        (“TeraWulf”), poised to become a best-in-class bitcoin mining company, announced
        today it expects to become a Nasdaq-listed company through a business combination
        with IKONICS Corporation (Nasdaq: IKNX), a Duluth, MN imaging technology
        company. The companies have entered into a definitive merger agreement to combine
        under a new holding company, which will change its name to TeraWulf Inc. and is
        expected to be listed on The Nasdaq Stock Market LLC under the trading symbol
        “WULF.”


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Environmental, Social, and Governance (ESG) Focused Cryptocurrency Mining
Company

TeraWulf is positioned to generate environmentally sustainable bitcoin at an industrial
scale in the U.S. using over 90% zero-carbon energy. With 60,000 state-of-the-art
miners on order, TeraWulf expects to have 50 MW of mining capacity online this year,
and consistent with its buildout plan, expects to have 800 MW mining capacity
deployed by 2025, enabling over 23 EH/s of expected hashrate.

TeraWulf is leveraging its management team’s decades of experience in energy supply
optimization, operations and engineering to create a premier platform for sustainable
cryptocurrency mining. In addition, TeraWulf plans to implement its proven model
for large cryptocurrency mine development and operations, which will help ensure
TeraWulf can scale efficiently. With an institutional commitment to ESG principles
and a target of 100% zero-carbon energy utilization, TeraWulf is positioned to be a
leading miner of sustainable bitcoin globally.

Paul Prager, Chairman & Chief Executive Officer of TeraWulf, said, “TeraWulf
represents an exciting new paradigm for cryptocurrency mining, which is built on a
significant strategic advantage to utilize reliable, secure and low-cost sustainable
energy sources to support our bitcoin mining activities. We have a talented
management team with a proven track record and we are ready to rapidly scale due to
an established supply chain and strong partner relationships. Site work is underway
at the Company’s mining facilities in New York and Pennsylvania with competitive
power supply agreements already in place. As we prepare TeraWulf to trade on the
public market, we are confident that we have the in-house technology, infrastructure
and operations expertise to deliver unparalleled value for shareholders.”

Nazar Khan, Chief Operating Officer, added, “Our team’s unique access to energy
assets and deep sector expertise in the wholesale electricity markets allows us to
quickly develop a large-scale cryptocurrency mining platform that can help facilitate
and can expedite the electric grid’s transition to a zero-carbon future. Sited and
managed appropriately, mining operations provide resiliency to the electric grid while
leading the rapid development of the global fintech infrastructure.”

Glenn Sandgren, Chief Executive Officer of IKONICS, said, “We are pleased to have
reached this agreement with TeraWulf and look forward to partnering with them. This
transaction provides ideal outcomes for our shareholders, customers and employees.
It delivers our shareholders the opportunity to realize a substantial upfront cash
payment while continuing to benefit from the value of our legacy imaging business,
and provides them with the opportunity to participate in the potential upside of
TeraWulf at an exciting time for the cryptocurrency mining space. The agreement will
be instrumental in securing the long-term viability of IKONICS’s legacy business,
allowing it to continue to meet the needs of our customers with a secure supply of our
high quality products in addition to continued employment opportunities for our
workforce.”


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TeraWulf’s Leading ESG Focus

TeraWulf’s aim is to be the most environmentally sustainable bitcoin mining company
focused on ESG through its purpose-driven business practices, determined clean
energy goals, and support for its communities. TeraWulf is committed to diversity,
equity and inclusion at all levels of the organization and is proud of its highly qualified,
diverse management team. As an industry leading producer of bitcoin with a targeted
path of zero-carbon energy utilization, TeraWulf intends to maintain a high level of
transparency, reliability, and environmental stewardship across its operations and
throughout its supply chain.

Kerri Langlais, TeraWulf’s Chief Strategy Officer, said, “Our core focus on ESG sets
us apart from our competitors and ties directly to our business success. We are
confident that by integrating flexible baseload energy demand into the electric grid,
we will accelerate the transition to a more resilient, stable and sustainable energy
future while generating attractive investor returns and tangible benefits, including job
creation, for our communities.”

Transaction Overview

Under the terms of the agreement, which has been unanimously approved by the
Boards of Directors of both companies, each outstanding share of IKONICS common
stock will receive $5.00 in cash, one CVR, and one share of the combined company’s
common stock. Through the CVRs, which will not be publicly traded, the IKONICS
shareholders will be entitled to received 95% of the net proceeds from any sale of
IKONICS’s legacy business completed during the 18 months following the closing of
the business combination, and will expire at the end of such 18 month period with
respect to any portion of IKONICS’s legacy business which has not been sold. The
shares of the combined company’s common stock to be received by the IKONICS
shareholders will collectively represent 2% of the combined company’s pro forma
common equity ownership. As of March 31, 2021, IKONICS had a net book value of
$11.6 million, cash of $4.4 million and working capital of $4.1 million.

Following consummation of the transaction, the legacy business of IKONICS will be
operated consistent with past practices but will be positioned for sale on terms that are
acceptable to the Board of Directors of the combined company.

The transaction is expected to close in the second half of 2021, subject to the receipt
of regulatory approvals, the approval of IKONICS and TeraWulf shareholders, and
other customary closing conditions.

Management and Board of Directors

The combined company will be led by Paul Prager as Chairman and Chief Executive
Officer. In addition, several members of the existing TeraWulf leadership team are
expected to serve on the combined company’s management team, including:


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                 Case 1:21-cv-09833 Document 1 Filed 11/23/21 Page 7 of 13


             •   Nazar Khan, Chief Operating Officer;
             •   Kerri Langlais, Chief Strategy Officer;
             •   Ken Deane, Chief Financial Officer; and
             •   Stefanie Fleischmann, Chief Legal Officer.


       TeraWulf’s executive team has worked together for nearly 15 years in the energy
       infrastructure space with a proven track record of risk management and investment
       performance.

       Upon completion of the transaction, all members of the IKONICS Board of Directors
       will resign and be replaced by persons to be designated by TeraWulf.

       Transaction Materials

       A presentation and additional materials regarding the transaction are available on
       TeraWulf’s website.

       Advisors

       Paul Weiss, Rifkind, Wharton & Garrison LLP is serving as legal advisor and Moelis
       & Company LLC is serving as financial advisor to TeraWulf. Faegre Drinker Biddle
       & Reath LLP is serving as legal advisor and Northland Capital Markets is serving as
       financial advisor to IKONICS.

The Prospectus Contains Material Misstatements or Omissions

       21.       The defendants filed a materially incomplete and misleading Prospectus with the SEC

and disseminated it to IKONICS’s stockholders. The Prospectus misrepresents or omits material

information necessary for the Company’s stockholders to make an informed voting or appraisal

decision on the Proposed Transaction.

       22.       Specifically, as set forth below, the Prospectus fails to provide Company stockholders

with material information or provides them with materially misleading information concerning (a)

TeraWulf’s financial projections and the valuation analyses underlying the fairness opinion provided

by Northland Securities, Inc. (“Northland”); and (b) the background of the Proposed Transaction.


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Material Omissions Concerning the Company’s Projections and the Financial Analyses Relied on
by the Board

       23.     The Prospectus omits material information regarding the Company’s financial

projections, including TeraWulf’s forecasted unlevered free cash flows and all underlying line items.

See Proxy Statement at 86.

       24.     The Prospectus omits material information regarding the data and inputs underlying

the valuation analyses performed by Northland.

       25.     The Prospectus describes Northland’s fairness opinion and the various underlying

valuation analyses. That description, however, omits key inputs and assumptions forming the bases

of these analyses.   The absence of this material information precludes the Company’s public

stockholders from fully understanding the Northland’s work. As a result, IKONICS stockholders

cannot assess what significance to place on Northland’s fairness opinion in determining whether to

approve the Proposed Transaction or otherwise act.

       26.     With respect to Northland’s IKONICS Selected Public Companies Analysis, IKONICS

Selected Precedent Transactions Analysis, and TeraWulf Selected Public Companies Analysis, the

Prospectus fails to disclose the individual multiples and financial metrics for each of the companies

and transactions analyzed.

       27.     With respect to Northland’s TeraWulf Discounted Cash Flow Analysis, the Prospectus

fails to disclose: (a) the unlevered free cash flows TeraWulf could generate over the calendar years

ending December 31, 2021 through December 31, 2027; (b) calendar year 2027 unlevered free cash

flows used to calculate the terminal values for TeraWulf; (c) the implied terminal values for

TeraWulf; and (d) the inputs and assumptions underlying the range of discount rates utilized in

connection with the analysis.

       28.     The omission of this information renders the statements in the “Financial Forecasts”

and “Opinions of Financial Advisor to IKONICS” sections of the Prospectus false and/or materially

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misleading in contravention of the Exchange Act. Indeed, when a banker’s endorsement of the

fairness of a transaction is touted to shareholders, the valuation methods used to arrive at that opinion

as well as the key inputs and range of ultimate values generated by those analyses must also be fairly

disclosed.

Material Omissions Concerning the Background of the Proposed Transaction.

       29.      The Prospectus fails to disclose material information concerning the background

leading to the Proposed Transaction, including whether the confidentiality agreement between the

Company and “Party A” (or any other party during the process) is s still in effect and/or contains a

“don’t ask, don’t waive” standstill provision that is presently precluding Party A or any potential

buyer from making a topping bid for the Company.

       30.      The disclosure of the terms of the confidentiality agreements is crucial to IKONICS

stockholders being fully informed of whether their fiduciaries have put in place restrictive devices to

foreclose a topping bid for the Company.

       31.      The omission of this information renders the statements in the “Background of the

Mergers” section of the Prospectus false and/or materially misleading in contravention of the

Exchange Act.

       32.      The Individual Defendants were aware of their duty to disclose the above-referenced

omitted information and acted negligently (if not deliberately) in failing to include this information

in the Prospectus. Absent disclosure of the foregoing material information prior to the stockholder

vote on the Proposed Transaction, Plaintiff and the other IKONICS stockholders will be unable to

make an informed voting or appraisal decision on the Proposed Transaction and are thus threatened

with irreparable harm warranting the injunctive relief sought herein.


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                                        CLAIMS FOR RELIEF

                                                 COUNT I

               Claims Against All Defendants for Violations of Section 14(a) of the
                    Exchange Act and Rule 14a-9 Promulgated Thereunder

       33.      Plaintiff repeats all previous allegations as if set forth in full.

       34.      During the relevant period, defendants disseminated the false and misleading

Prospectus specified above, which failed to disclose material facts necessary to make the statements,

in light of the circumstances under which they were made, not misleading in violation of Section

14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder.

       35.      By virtue of their positions within the Company, the defendants were aware of this

information and of their duty to disclose this information in the Prospectus. The Prospectus was

prepared, reviewed, and/or disseminated by the defendants. It misrepresented and/or omitted material

facts, including material information about the Company’s financial projections and the data and

inputs underlying the financial valuation analyses that support the fairness opinion provided by

Northland. The defendants were at least negligent in filing the Prospectus with these materially false

and misleading statements.

       36.      The omissions and false and misleading statements in the Prospectus are material in

that a reasonable stockholder would consider them important in deciding how to vote on the Proposed

Transaction.

       37.      By reason of the foregoing, the defendants have violated Section 14(a) of the Exchange

Act and SEC Rule 14a-9(a) promulgated thereunder.

       38.      Because of the false and misleading statements in the Prospectus, Plaintiff is

threatened with irreparable harm, rendering money damages inadequate. Therefore, injunctive relief

is appropriate to ensure defendants’ misconduct is corrected.


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                                               COUNT II

                   Claims Against the Individual Defendants for Violations of
                              Section 20(a) of the Exchange Act

       39.     Plaintiff repeats all previous allegations as if set forth in full.

       40.     The Individual Defendants acted as controlling persons of IKONICS within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their positions as

officers and/or directors of IKONICS, and participation in and/or awareness of the Company’s

operations and/or intimate knowledge of the false statements contained in the Prospectus filed with

the SEC, they had the power to influence and control and did influence and control, directly or

indirectly, the decision-making of the Company, including the content and dissemination of the

various statements which Plaintiff contends are false and misleading.

       41.     Each of the Individual Defendants was provided with or had unlimited access to copies

of the Prospectus and other statements alleged by Plaintiff to be misleading prior to and/or shortly

after these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

       42.     In particular, each of the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company, and, therefore, is presumed to have had

the power to control or influence the particular transactions giving rise to the securities violations as

alleged herein, and exercised the same.           The Prospectus at issue contains the unanimous

recommendation of each of the Individual Defendants to approve the Proposed Transaction. They

were, thus, directly involved in the making of the Prospectus.

       43.     In addition, as the Prospectus sets forth at length, and as described herein, the

Individual Defendants were each involved in negotiating, reviewing, and approving the Proposed

Transaction. The Prospectus purports to describe the various issues and information that they

reviewed and considered—descriptions the Company directors had input into.

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       44.     By virtue of the foregoing, the Individual Defendants have violated Section 20(a) of

the Exchange Act.

       45.     As set forth above, the Individual Defendants had the ability to exercise control over

and did control a person or persons who have each violated Section 14(a) and SEC Rule 14a-9,

promulgated thereunder, by their acts and omissions as alleged herein. By virtue of their positions as

controlling persons, these defendants are liable pursuant to Section 20(a) of the Exchange Act. As a

direct and proximate result of defendants’ conduct, IKONICS’s stockholders will be irreparably

harmed.

                                      PRAYER FOR RELIEF

       WHEREFORE, Plaintiff demands judgment and preliminary and permanent relief, including

injunctive relief, in his favor on behalf of IKONICS, and against defendants, as follows:

               A.      Preliminarily and permanently enjoining defendants and all persons acting in

concert with them from proceeding with, consummating, or closing the Proposed Transaction and any

vote on the Proposed Transaction, unless and until defendants disclose and disseminate the material

information identified above to IKONICS stockholders;

               B.      In the event defendants consummate the Proposed Transaction, rescinding it

and setting it aside or awarding rescissory damages to Plaintiff;

               C.      Declaring that defendants violated Sections 14(a) and/or 20(a) of the Exchange

Act, as well as SEC Rule 14a-9 promulgated thereunder;

               D.      Awarding Plaintiff the costs of this action, including reasonable allowance for

Plaintiff’s attorneys’ and experts’ fees; and

               E.      Granting such other and further relief as this Court may deem just and proper.

                                          JURY DEMAND

       Plaintiff demands a trial by jury on all claims and issues so triable.


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Dated: November 23, 2021                   WEISSLAW LLP


                                     By /s/ Richard A. Acocelli
                                        Richard A. Acocelli
                                        305 Broadway, 7th Floor
OF COUNSEL:                             New York, New York 10007
                                        Tel: (212) 682-3025
LONG LAW, LLC                           Fax: (212) 682-3010
Brian D. Long                           Email: racocelli@weisslawllp.com
3828 Kennett Pike, Suite 208
Wilmington, DE 19807                       Attorneys for Plaintiff
Telephone: (302) 729-9100
Email: BDLong@longlawde.com


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