Jackson Inv. Grp., LLC v. Thomas

325 F.Supp.3d 1334

JACKSON INVESTMENT GROUP, LLC, Plaintiff,

v.Johnny THOMAS and John C. Francis, Defendants.

CIVIL ACTION NO. 1:16-CV-4389-RWS

United States District Court, N.D. Georgia, Atlanta Division.

Signed October 3, 2017

Joshua Cole Hess, Stephen Earl Hudson, Kilpatrick Townsend & Stockton, LLP, Atlanta, GA, for Plaintiff.

Jeffrey Kaban, Jessica Valenzuela Santamaria, Matt Ezer, Adam C. Trigg, Cooley, LLP, Palo Alto, CA, Craig H. Kuglar, The Law Office of Craig Kuglar, LLC, Atlanta, GA, Maryam Toossi, Cooley LLP, San Francisco, CA, for Defendants.

ORDER

RICHARD W. STORY, United States District Judge

The captioned case is before the court for consideration of defendants' motion to dismiss [22].

I. Factual Background¹

Blue Earth, Inc. was a clean-energy startup formed in 2010 ("Blue Earth" or the "Company"). (Compl. ¶ 2.) Blue Earth provided comprehensive energy efficiency and alternative/renewable energy solutions for small and medium-sized commercial and industrial facilities. (Ex. 2 at 4.) Defendant Johnny Thomas ("Thomas") joined Blue Earth as its Chief Executive Officer ("CEO") on September 1, 2010 and served in that position until September 1, 2015, when he resigned to serve as CEO of a Blue Earth subsidiary. (Compl. ¶ 6.) Thomas also served as president of Blue Earth from September 1, 2010, until May 16, 2013. He was appointed to Blue Earth's Board of Directors in February 2011, a position in which he served until September 1, 2015. (Id. ) Defendant John C. Francis ("Francis") joined Blue Earth as its Executive Vice President of Corporate Development and Investor Relations on September 1, 2010, and served in that position until September 1, 2015. (Id. at ¶ 7.) Plaintiff Jackson Investment Group, LLC ("Jackson") is a private investment firm that invested in Blue Earth. (Id. at ¶ 3.)

In the first quarter of 2013, Blue Earth had a net loss of over $1.8 million. (Ex. A at 3.) In its quarterly report on Form 10-Q for the period ending March 31, 2013, Blue Earth explained that it had "not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern" and that its survival depended on "obtaining adequate capital to fund operating losses until it becomes profitable." (Id. at 7 n.2.) Blue Earth warned that "[i]f the Company is unable to obtain adequate capital, it could be forced to cease operations." (Id. )

In July 2013, Blue Earth acquired IPS Engineering Inc. ("IPS") and Global Renewable Energy Group, Inc. ("GREG"). This was Blue Earth's first foray into the combined heat and power ("CHP") business.² (Id. at 15.) In announcing the acquisition, Blue Earth stated:

IPS is an EPCM company (engineering, procurement, construction and management) and GREG is an affiliated renewable energy company, which companies specialize in the combined heat and power ("CHP") alternative energy space. The Acquisitions will enable the Company to become a significant independent power producer ("IPP"). The Company plans to build seven power plants and sell the thermal and electric power generated to one large customer and to local utilities through long-term power purchase agreements. The Company is funding permitting and remaining development tasks for the initial projects from a portion of the proceeds of a recent private placement, while finalizing project financing terms for the estimated total construction costs of the seven plants of over $120 million. Management anticipates that the projects will be financed primarily through project debt, which will allow the Company to maintain ownership of the projects without significant share issuances. Blue Earth is continuing to perform engineering tasks on additional power plants for the same customer, in anticipation of adding several more construction projects.

(Ex. 3 at 2.) Blue Earth also hired two founders of IPS, Robert Potts ("Potts") and Brett Woodard ("Woodard"). (Ex. 4 at 2.) Blue Earth named Potts as its COO and Woodard as its CFO. (Id. ) Woodard was responsible for overseeing "financial analysis of acquisition, merger, and divestiture activities." (Ex. 5 at 14.)

Following the acquisition, Blue Earth added Michael Allman ("Allman") and James Kelly ("Kelly") to its Board of Directors and its audit committee. Allman was appointed chair of the audit committee and served as its "financial expert." He had experience as a CEO and CFO of various renewable energy companies and was certified both as a management accountant and internal auditor. Kelly had "knowledge and experience in accounting, management and the energy industry" and "exclusive responsibility for multiple external audits and management reviews of energy company operations." (Ex. 6 at 5.)

In its quarterly and annual financial statements filed pursuant to the requirements of the Securities and Exchange Commission (the "SEC"), Blue Earth disclosed its newly acquired CHP business. In its quarterly report on Form 10-Q for the period ending September 30, 2013 (first filing covering the period after the acquisition of the CHP business), which was filed on November 15, 2013, Blue Earth explained that "the cost of the assets acquired [were] capitalized and allocated to the several projects to be constructed" as "Construction in progress." (Ex. 7 at 11.) Blue Earth explained in its annual report on Form 10-K for the period ending December 31, 2013, which was filed on March 3, 2014, that the assets accounted for as "Construction in progress" were "[d]esigns for co-generation projects." (Ex. 2 at F-21.) The Form 10-K stated that the IPS purchase consisted of 15.5 million shares at $2.84 per share for a total of $44,035,500, resulting "in a construction in progress asset of $44,029,229." (Id. at F-27.)

On April 2, 2014, the SEC sent a letter to Blue Earth asking for details about Blue Earth's decision to account for the projects as "Construction in progress" in Form 10-K. (Ex. 11 at 3.) More specifically, the SEC asked:

We note that you disclose your construction in progress represents designs for cogeneration projects. To help us understand whether the assets represent physical assets in construction or an intangible asset related to contract rights, please tell us in sufficient detail about the nature of the underlying assets. Also tell us the estimated costs to complete the seven co-generation projects, the expected source of funds for the projects, the current status of each project, and the estimated timing of beginning and ending each project.

(Id. ) In response, on April 11, 2014, Thomas explained:

The underlying assets for the purchase of IPS/GREG are the designs and plans created by IPS/GREG to use natural gas to generate steam to power electrical generators in meat processing plants. The steam is secondarily used to butcher and process the meat. There were no contract rights existing beyond the right to build the plants at the time of the purchase of IPS/GREG. The Company is negotiating the purchase take off agreements with the local utilities for the excess electricity which they are required by law (PURPA) to accept at their avoided cost rate.

....

The first project is on schedule to be turned on line in August 2014 with 4 more in the fourth quarter of 2014 and the remaining 2 in the first quarter of 2015. All of the projects have begun preconstruction work including siting and permitting as of this date. Equipment has been ordered and is being built for the first 5 projects. During ... the fourth quarter of 2013, the Company raised approximately $12 million (including $1,600,000 payable through promissory notes) in equity capital through the exercise of approximately four million registered Class A warrants at $3 per share. The primary use of the capital raise[d] will be to provide the equity component of project financing for the seven initial combined heat and power projects. The Company has non-binding term sheets from an international bank and mezzanine debt providers that would result in approximately 8% equity and 92% project finance debt for the larger CHP power plants. The Company is negotiating with alternative financing services for various combinations of equity and debt project financing. To date, the Company is using cash on hand to advance the projects on schedule while deciding which of the various alternative sources of funding to use.

(Ex. 12 at 5.)

On April 23, 2014, the SEC sent another letter requesting the following:

Given the significance of these assets, please amend to disclose the nature of the assets similar to your response [dated April 11, 2014]. Further, with a view towards disclosure, please summarize the significant terms of the agreements you acquired. Based on your response, it appears that you acquired contracts to construct seven gas-to-steam generator facilities at certain meat processing plants in the U.S. and Canada. Also, revise your discussion of liquidity and capital resources in MD&A to provide disclosure similar to your response with respect to the estimated costs to complete the seven co-generation projects, the expected source of funds for the projects, the current status of each project, and the estimated timing of beginning and ending each project.

(Ex. 13 at 3.) In response, on May 12, 2014, Blue Earth amended its Form 10-K to include the following:

Our business model is to construct and own, on a customer's site under a long term lease, CHP or cogeneration systems, selling the thermal power to the customer and the electricity to the customer and the utility grid under long term power purchase agreements (PPAs). We have targeted large companies within the food-processing sector. To date, the Company has signed a letter of intent with a large U.S. and international protein provider to design, build and operate seven (7) CHP plants. We have invested significant revenues into the feasibility and permitting of these projects, have designed and ordered equipment for these projects and are negotiating and finalizing

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