Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
On March 22, 2022, Enservco Corporation (the “Company”), in consultation with the Audit Committee of its Board of Directors, concluded that the Company’s previously issued condensed consolidated financial statements as of and for the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021 (collectively, the “Relevant Periods”) should no longer be relied upon largely because of the Company’s accounting for a conversion of debt to equity with a related party, in addition to misinterpretation of eligibility for certain employee retention tax credits under relevant provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as discussed below. The Company intends to amend its Quarterly Reports on Form 10-Q for the Relevant Periods to reflect restatements of its condensed consolidated financial statements for the Relevant Periods. These restatements will have no impact on the Company’s revenues, operating expenses, loss from operations or Adjusted EBIDTA for the Relevant Periods.
Employee Retention Tax Credits
The errors in the condensed consolidated financial statements as of and for the quarters ended June 30, 2021 and September 30, 2021 relate to the Company’s recognition of certain payroll tax credits (“Employee Retention Credits”) under relevant provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). During the second quarter of 2021, the Company amended payroll tax returns originally filed for the third and fourth quarters of 2020 in order to claim refundable Employee Retention Credits for those periods. Enservco reported such refundable Employee Retention Credits as other receivables on each of its balance sheets for the quarters ended June 30, 2021 and September 30, 2021, and the amounts were reflected as other income in the Company’s condensed consolidated statements of operations for the quarter ended June 30, 2021.
In consultation with Plante & Moran, PLLC, the Company’s independent registered public accounting firm, and with the Company’s independent tax consultants, the Company has determined that it was not eligible for a portion of the Employee Retention Credits due to the aggregation of eligible employees at the Company and its subsidiaries. As a result, the Company determined that it improperly recorded accounts receivable of approximately $304,000 during the quarter ended June 30, 2021 related to Employee Tax Credits to which it was not entitled, and recognized such amount in other income in the Company’s condensed consolidated statements of operations for such quarter.
Cash reflected on the Company’s condensed consolidated balance sheets for the quarters ended June 30, 2021 and September 30, 2021 was not impacted by the error because the Company did not receive cash payments for the ineligible Employee Tax Credits until the first quarter of 2022.
Loss Attributable to Conversion of Subordinated Debt and Warrant Issuance
On February 3, 2021, Cross River Partners, L.P., a related party, converted subordinated debt in the principal amount of $1.25 million and $62,000 in accrued interest into 601,674 shares of Company common stock. In connection with such conversion, the Company issued a warrant to Cross River Partners, L.P. to purchase up to 150,418 additional shares of Company common stock in the future at an exercise price of $2.507 per share. At the time, the Company did not record a loss on the debt conversion and recorded the transaction through equity. This transaction is similar to the conversion that was done with Cross River Partners, L.P. in the third quarter of 2020 that was correctly accounted for through equity as the conversion resulted in a gain, However, the combination of the fair value of the common stock and warrant provided in this transaction resulted in a loss. The Company has since determined that the debt conversion in conjunction with the warrant issuance resulted in a loss of $304,000, which should have been reflected on the Company’s consolidated statement of operations for the quarter ended March 31, 2021.
Restatements
The errors described above are not related to operating matters, and adjustments to correct the errors will have no impact on revenues, operating expenses or loss from operations as reflected on the Company’s condensed consolidated statement of operations for the Relevant Periods. Further, the adjustments to correct the errors will have no impact on Adjusted EBITDA, which is an important non-GAAP reporting metric presented by the Company and used by analysts and investors in evaluating Company performance. Nonetheless, the Company has determined that these changes have a material impact on the as filed condensed consolidated financial statements for the Relevant Periods. As soon as practicable, the Company intends to amend its Quarterly Reports on Form 10-Q for the Relevant Periods to reflect restatements of its condensed consolidated financial statements for the Relevant Periods.
The Audit Committee of the Company’s Board of Directors has discussed the matters disclosed in this Item 4.02 with Plante & Moran, PLLC, the Company’s independent registered public accounting firm.