A securities fraud class action complaint has been filed that allege that well enhancement and fluid management services provider Enservco, in growing via acquisitions and geographic expansion took on an alarming amount of debt. By the beginning of its revenue-generating “heating season” in 2019, Enservco had incurred over advances of approximately $1.2 million beyond the $37 million credit limit under its revolving credit facility with its senior secured lender and had issued over $2.5 million in subordinated debt to Cross River Partners.

By the end of 2019, Enservco fell out of compliance with several financial covenants in the documents governing its credit facility, which made the entire loan balance immediately due. This caused the Enservco’s working capital balance—funds available for day- to-day operations—to plunge to negative $31 million, meaning its current liabilities exceeded its current assets by almost $31 million. As a result, the Company informed investors in March 2020 that its ability to continue as a going concern was placed in substantial doubt and would depend on its ability to renegotiate its debt obligations.

In early 2020, senior management devised a multi-point plan to improve the Company’s balance sheet. Over the first three quarters of 2020, Enservco cut over $4 million in costs out of the business. In September 2020, Cross River Partners exchanged half of the $2.5 million in subordinated debt it held for an equivalent amount of Enservco common stock, and the Company successfully finalized a debt restructuring with its lender which reduced its outstanding bank debt by $16 million, converted the remaining outstanding balance into a $17 million term loan, and established a new $1 million working capital revolving line of credit. Less than a week later, the Company also raised another $3.5 million in an equity offering.

Enservco carried out several other capital improvement projects in February 2021. First, between February 10, 2021 and February 11, 2021, the Company conducted another public offering in which it sold 4,199,998 shares of Enservco common stock at $2.30 per share (the “February 2021 Equity Offering”), and used $3 million of the proceeds to pay down the balance on its $17 million term loan. Second, upon completing the February 2021 Equity Offering, all remaining subordinated debt held by Cross River Partners was exchanged for an equivalent amount of Enservco common stock as well as a warrant to purchase shares of Enservco common stock with a fair value of $304,000 (the “February 2021 Debt for Equity Exchange”). In addition, the Company secured an amendment to its loan agreement which extended the maturity date of its term loan to October 15, 2022.

During this time, Enservco, also took advantage of various relief programs offered by the federal government in response to the COVID-19 pandemic. Starting in early 2021, Enservco began claiming employee retention credits (“ERCs”) available under the Coronavirus Aid, Relief, and Security Act (“CARES Act”) to offset federal payroll taxes, including by amending previously filed tax returns for periods during which ERCs were available.

By March 23, 2021, Enservco averted financial collapse, but had not eliminated its risk. The Company still had over $15 million of debt due by October 15, 2022, and, as a result, Enservco’s ability to continue as a going concern hinged on its ability to successfully refinance that debt. This provided powerful economic incentive for the Individual Defendants misrepresent Enservco’s financial condition and engage in cash maximizing strategies ahead of its refinancing discussions, particularly Defendant Murphy, whose investment fund owned roughly 20% of Enservco’s outstanding common stock, having recently converted over $2.5 million of subordinated debt into equity securities.

The Company then, through certain of its officers and directors, caused Enservco to file periodic reports with the SEC that materially misrepresented its liquidity and financial position. Many of these reports advised that, as a result of the Company’s capital improvement projects, “we have ample capital resources to fund operational requirements beyond [March 23, 2022].” During 2021, the Company also filed three quarterly reports with the SEC on Form 10-Q which (i) affirmatively represented that financial statements therein were prepared in accordance with generally accepted accounting principles (“GAAP”); (ii) included certifications by the Individual Defendants that the information in each report fairly presented the financial condition of Enservco in all material respects; and (iii) informed investors that its disclosure controls and procedures were effective. These representations were all false, as the Company was later forced to admit.

The market began to learn the truth on November 15, 2021, when Enservco disclosed that it had burned through the majority of its cash balance by September 30, 2021, and recently fell out of compliance with a revenue covenant under its revised loan agreement, which restricted it from accessing its $1 million revolving line of credit. As Enservco later revealed, it was unable to draw on its $1 million revolver during the fourth quarter of 2021, and, consequently, depleted nearly its entire cash balance by the end of 2021. In fact, in January and February 2022, the Company was in such dire need of working capital that it sought a series of loans from Cross River Partners and even used the ERC refund that it expected to receive from the Internal Revenue Service (“IRS”) to secure a cash advance from its bank.

On March 28, 2022—the same day that it announced the successful completion of a refinancing transaction—Enservco revealed that it needed to restate the interim financials from every quarterly report it filed in 2021 to correct two accounting errors arising out of (i) its failure to account for the warrant issued to Cross River Partners in the February 2021 Debt for Equity Exchange; and (ii) its recognition of income for ERCs that it was not entitled to receive.

On April 11, 2022, Enservco filed amended quarterly reports, each of which restated the previously issued interim financial statements included therein to correct for the two accounting errors. In addition, these filings all acknowledged that the Company’s disclosure controls and procedures were not effective at the time of each report. However, they all assured investors that the restated financials “were prepared in accordance with [GAAP]” and attached new certifications that the amended filings fairly presented the financial condition of Enservco. This was again untrue.

On April 18, 2022, just one week after filing its restatement, Enservco disclosed that it needed to restate the same financials again to correct another accounting error. The new restatement, filed on May 24, 2022, revealed that Enservco experienced a “ownership change” within the meaning of section 382 of Title 26 of the United States Code (the “Internal Revenue Code” or “IRC”) as a result of the February 2021 Equity Offering, which limited the ability of the Company to recognize up to $1.4 million of its deferred tax assets (“DTA”). As with the first restatement, the second restatement acknowledged that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by each filing.

To put the impact on the Company’s bottom line into perspective, the adjustments made in connection with the two restatements collectively increased the net losses reported by Enservco in the quarterly reports it originally filed by between approximately 19% to 80%. In other words, Defendants’ misconduct allowed Enservco to understate its net losses by up to 80%.

As Defendants’ fraud was revealed, the Company experienced other fallout from the restatements. On March 31, 2022, Enservco informed the market it was unable to file its 2021 annual report by the deadline for doing so as a result of the need to restate its previously issued financials. At the beginning of April 2022, the Company’s CFO, Defendant Marjorie Hargrave, and its Principal Accounting Officer (“PAO”) both resigned. Enservco again delayed the filing of its 2021 annual report as a result of the need to restate its financial a second time. After filing the two restatements, the Company finally completed its 2021 annual report. But soon after doing so, which required an opinion based on an audit by its accounting firm, Enservco fired its auditor.

As a result of Defendants’ wrongful acts and omissions, there was a precipitous decline in the market value of the Company’s securities.

If you are a current Enservco shareholder who has held shares since on or before March 23, 2021, you may be able seek corporate reforms, the return of funds expended defending litigation back to company coffers, and a court approved incentive award if appropriate.

If you would like to learn more about this matter at no cost to you, contact us at jgrabar@grabarlaw.com or call 267-507-6085.