STAR EQUITY HOLDINGS, INC.
This management's discussion and analysis of financial condition and results of
operations ("MD&A"), contains forward-looking statements that involve risks and
uncertainties. Please see "Important Information Regarding Forward-Looking
Statements" for a discussion of the uncertainties, risks, and assumptions that
may cause our actual results to differ materially from those discussed in the
forward-looking statements. This discussion should be read in conjunction with
our unaudited condensed consolidated financial statements and related notes
thereto and the other disclosures contained elsewhere in this Quarterly Report
on Form 10-Q, and the audited consolidated financial statements and related
notes thereto for the fiscal year ended December 31, 2020 , which were included
in our Form 10-K, filed with the SEC on March 29, 2021 .
The results of operations for the periods reflected herein are not necessarily
indicative of results that may be expected for future periods.
Overview
The year 2020 marked the first full year that Star Equity , known prior to
January 1, 2021 as Digirad Corporation , operated as a multi-industry holding
company. With the acquisition of ATRM in September 2019 , we added construction
businesses to what had historically been a healthcare company and thereby
transformed the Company into a diversified holding company with operating
businesses in two important industry sectors of the economy, healthcare and
construction.
Our Healthcare division, which is operated as Digirad Health , provides products
and services in the area of nuclear medical imaging with a focus on cardiac
health. Digirad Health operates across the U.S. The healthcare business involves
two reporting segments, Diagnostic Services, which offers imaging services to
healthcare providers using a fleet of our proprietary solid-state gamma cameras
and Diagnostic Imaging, which manufactures, distributes and maintains our
proprietary solid-state gamma cameras.
Our Construction division is a single reporting segment but is made up of three
operating business, KBS, EdgeBuilder and Glenbrook. KBS is based in Maine and
manufactures modular buildings for installation throughout the New England
market. EdgeBuilder and Glenbrook, referred to together as "EBGL" internally and
based in the Minneapolis -Saint Paul area, together manufacture structural wall
panels and other engineered wood-based products as well as distribute building
materials to professional builder customers in the Upper Midwest.
Currently, our Investments division is an internally-focused unit that is
directly supervised by
Strategy
Star Equity We believe our diversified, multi-industry holding company structure will allowStar Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, investor relations, management of our real estate and investments, and other public company activities. Our structural will free up our operating Chief Executive Officers to manage their respective businesses, look for organic and bolt-on growth opportunities and improve operations, with fewer distractions and administrative burdens. We continue to explore strategic alternatives to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or through strategic transactions. Some of these strategic transactions have included, and could continue to include, selective acquisitions of business segments or entire businesses, divestitures of assets or divisions, or a restructuring of our company. We seek to grow our business by, among other things: •Organic growth from our core businesses. We believe that we operate in markets and geographies that will allow us to continue to grow our core businesses, allowing us to benefit from our scale and strengths. We plan to focus our efforts on markets in which we already have a presence in order to take advantage of personnel, infrastructure, and brand recognition we have in these areas. 39 -------------------------------------------------------------------------------- •Introduction of new services. In the Healthcare division, we plan to continue to focus on healthcare solutions related businesses that deliver necessary assets, services and logistics directly to the customer site. We believe that over time we can either purchase or develop new and complementary businesses and take advantage of our customer loyalty and distribution channels. In the Construction division, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in theNew England market by adding a structural wall panel line. Other areas might include logistics, installation on site, and manufacturing of sub-components or enhancements that create even more complete modules, such as full HVAC installation. •Acquisition of complementary businesses. We plan to continue to look at complementary businesses that meet our internally developed financially disciplined approach for acquisitions to grow our company. We believe there are many potential small targets that can be acquired over time and integrated into our platform. We will also look at larger, more transformational acquisitions (public or private) if we believe the appropriate mix of value, risk and return is present for our shareholders. The timing of these potential acquisitions will always depend on market conditions, available capital, and the value for each transaction. In general, we want to be "value" buyers, and will not pursue any transaction unless we believe the post-transaction potential value is high for shareholders. We continue to explore strategic alternatives to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth and through strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions of business segments or entire businesses, divestitures of assets or divisions, or a restructuring of our company. Current Market Conditions The year 2020 proved to be a challenging year for the vast majority of businesses across many sectors of the economy. With the COVID-19 vaccine rollout now well underway, we are hopeful that we will soon make our way back to pre-COVID levels of business activity. We believe the uncertainty surrounding the pandemic will continue to decrease as we progress through 2021. On the healthcare side, we expect to see imaging volume recover as the pandemic is brought under control. In construction, we expect that continued recovery in employment and a strong housing market will underpin the growth we are seeing. The target market for our healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, IDNs, and federal institutions inthe United States that perform or could perform a diagnostic imaging procedure, have a need for cardiac event monitoring, or have interest in purchasing a diagnostic imaging products. Our diagnostic services businesses currently operate in approximately 25 states. The overriding challenge during 2020 was the drop in imaging volume due to the COVID-19 pandemic. During the three months endedMarch 31, 2021 , while we provide critical and important imaging services focused in the cardiac area, the risks of exposure led to reduced patient volumes as these tests were deferred or canceled in hopes that the pandemic would abate. The target market for our construction division includes residential home builders, general contractors, owners or developers of commercial buildings, and individual retail customers. While we witnessed a number of municipalities, especially in theBoston area, shutdown construction sites during the early wave of infections and even shutdown our own plant inSouth Paris, Maine for six weeks in April and May of 2020, housing demand and demand for building materials have increased as the COVID-19 pandemic has led to "nesting" at home, which were positive factors in the second half of 2020 and have continued through the first quarter of 2021. The challenge has been less on the demand side and more on the supply chain, as wood-based commodities prices, lumber and OSB, have increased rapidly coming out of the first wave of the pandemic in the Spring of 2020 and supply has not kept up with demand. We have seen some supply chain disruption and tightness during the second half of 2020 and that has continued into 2021 as lead times have extended out, but we are still able to operate at normal levels of production. We believe that the high price environment that we are currently experiencing will lead to additional supply coming on line later this year. 40 -------------------------------------------------------------------------------- Trends and Drivers The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, COVID-19 pandemic impact, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use, reliability, and mobility. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services business models, and by assisting our healthcare customers in complying with new regulations and requirements. In our construction division, we continue to see a greater adoption of offsite or prefab construction in single-family and multi-family residential building projects, our target market. Our modular units and structural wall panels offer builders a number of benefits over traditional onsite or "stick built" construction. These include shorter time to market, higher quality, reduced waste, readily available labor and potential cost savings, among others. 3D BIM software modeling and developments in engineered wood products offers greater design flexibility for higher-end applications. The need for more affordable housing solutions also presents a great opportunity for the continued emergence of factory built housing. COVID-19 Pandemic During the three months endedMarch 31, 2021 , we experienced a$0.4 million decrease in Healthcare division revenue which was offset by a$3.6 million increase, in Construction revenue, as compared to the same period of the prior year. With the COVID-19 vaccine rollout now well underway, we are hopeful that we will gradually make our way back to pre-COVID levels of business activity. We believe the uncertainty surrounding the pandemic will continue to decrease as we progress through 2021. On the healthcare side, we expect to see imaging volume recover as the pandemic is brought under control. In construction, we expect that continued recovery in employment and a strong housing market will underpin the growth we are seeing. Discontinued Operations The DMS Sale Transaction was completed onMarch 31, 2021 , for$18.75 million in cash, subject to certain adjustments, including a working capital adjustment. The divestiture ofDMS Health , which operated ourMobile Healthcare segment, met the definition of a strategic shift that has a significant effect on our operations and financial results; therefore, the results of operations for theMobile Healthcare segment have been presented as discontinued operations in accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations for all periods presented. Additionally,Mobile Healthcare's assets and liabilities as ofDecember 31, 2020 are separately presented as held for sale on the unaudited consolidated balance sheet. Unless otherwise noted, discussion within these notes to the unaudited consolidated financial statements relates to continuing operations. Business Segments As ofMarch 31, 2021 , our business is organized into four reportable segments: •Diagnostic Services •Diagnostic Imaging •Construction •Investments Diagnostic Services Through this segment, we offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter into annual contracts for a set number of days ranging from once per month to five times per week. 41 -------------------------------------------------------------------------------- Diagnostic Imaging Through this segment, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily inthe United States , although we have sold a small number of imaging systems internationally. Our imaging systems are sold in both portable and fixed configurations, provide enhanced operability and improved patient comfort, fit easily into floor spaces as small as seven feet by eight feet, and facilitate the delivery of nuclear medicine procedures in a physician's office, an outpatient hospital setting, or within multiple departments of a hospital (e.g., emergency and operating rooms). Our Diagnostic Imaging segment revenues derive primarily from selling solid-state gamma cameras and post-warranty camera maintenance contracts. Construction Through this segment, by way of our wholly-owned subsidiaries KBS, Glenbrook and EdgeBuilder, we service residential and commercial construction projects by manufacturing modular housing units, structural wall panels, permanent wood foundation systems, other engineered wood products, and supply general contractors with building materials. KBS is aMaine -based manufacturer that started business in 2001 as a manufacturer of modular homes. KBS offers products for both multi-family and single-family residential buildings with a focus on customization to suit the project requirements and provide engineering and design expertise. Glenbrook is a supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials to professional builders and conducts its operations inOakdale, Minnesota . EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations inPrescott, Wisconsin . Investments Through this segment, we hold real estate assets that we have acquired and will potentially manage other future investments ofStar Equity . InApril 2019 , the Company funded the initial purchase of three manufacturing facilities inMaine that manufacture modular buildings and leased those three properties back to KBS. The initial funding of the assets acquisition was primarily through the revolver loan under our SNB Credit Facility. Since that time, we have secured a new facility from Gerber to finance these properties. Healthcare Services and Products Diagnostic imaging depictions of the internal anatomy or physiology are generated primarily through non-invasive means. Diagnostic imaging facilitates the early diagnosis of diseases and disorders, often minimizing the scope, cost, and amount of care required and reducing the need for more invasive procedures. Currently, the major types of non-invasive diagnostic imaging technologies available are: ultrasound and nuclear imaging. The most widely used imaging acquisition technology utilizing gamma cameras is single photon emission computed tomography, or SPECT. All our current internally-developed cardiac gamma cameras employ SPECT technology. Diagnostic imaging is the standard of care in diagnosis of diseases and disorders. We offer, through our businesses, the majority of these diagnostic imaging modalities. All of the diagnostic imaging modalities that we offer (both from provision of services and product sales) have been consistently utilized in clinical applications for many years, and are stable in their use and need. By offering a wide array of these modalities, we believe that we have strategically diversified our operations in possible changing trends of utilization of one diagnostic imaging modality from another. Construction Services and Products In the construction business, KBS markets its modular homes products through a direct sales organization and through inside sales, outside sales, a network of independent dealers, builders, and contractors in theNew England states (Connecticut ,Maine ,Massachusetts ,New Hampshire ,Rhode Island , andVermont ). KBS's direct sales organization is responsible for all commercial building projects, and works with developers, architects, owners, and general contractors to establish the scope of work, terms of payment, and general requirements for each project. KBS's sales people also work with independent dealers, builders, and contractors to accurately configure and place orders for residential homes for their end customers. KBS's network of independent dealers and contractors do not work with it exclusively, although many have KBS model homes on display at their retail centers. KBS does not assign exclusive territories to its independent dealers and contractors, but they tend to sell in areas ofNew England where they will not be competing against another KBS dealer or contractor. KBS's backlog and pipeline, along with its market initiatives to build more workforce housing, are expected to position KBS for continued growth. 42 -------------------------------------------------------------------------------- EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people and a network of builders, contractors and developers in and aroundMinneapolis andSt. Paul areas. EBGL's direct sales organization is responsible for both residential and commercial projects and it works with general contractors, developers and builders to provide bids and quotes for specific projects. Our marketing efforts include participation in industry trade shows, production of product literature, and sales support tools. These efforts are designed to generate sales leads for our independent builders and dealers, and direct salespeople. Critical Accounting Policies and Estimates In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Results of Operations Comparison of the Three Months EndedMarch 31, 2021 and 2020 The following table summarizes our results for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended March 31, Percent of Percent of Change from Prior Year 2021 Revenues 2020 Revenues Dollars Percent Total revenues$ 22,354 100.0 %$ 19,190 100.0 %$ 3,164 16.5 % Total cost of revenues 19,277 86.2 % 15,947 83.1 % 3,330 20.9 % Gross profit 3,077 13.8 % 3,243 16.9 % (166) (5.1) % Total operating expenses 4,646 20.8 % 5,439 28.3 % (793) (14.6) % Loss from operations (1,569) (7.0) % (2,196) (11.4) % 627 (28.6) % Total other expense 983 4.4 % (145) (0.8) % 1,128 (777.9) % Loss before income taxes (586) (2.6) % (2,341) (12.2) % 1,755 (75.0) % Income tax expense (2) - % (27) (0.1) % 25 (92.6) % Net loss from continuing operations$ (588) (2.6) %$ (2,368) (12.3) %$ 1,780 (75.2) % Revenues Healthcare
Healthcare revenue by segments is summarized as follows (in thousands):
Three Months Ended March 31,
2021 2020 Change % Change
Diagnostic Services $ 10,239 $ 10,814 $ (575) (5.3) %
Diagnostic Imaging 3,068 2,861 207 7.2 %
Total Healthcare Revenue $ 13,307 $ 13,675 $ (368) (2.7) %
Although Q1 2021 revenues for the Diagnostic Services decreased slightly from Q1
2020, this division has largely recovered and is now performing near
pre-pandemic levels. Most doctor offices have reopened and hospitals are now
performing non-emergency procedures. As state-by-state vaccination levels
increase, we expect to see our operations fully return to normal levels later
this year.
The increase in Diagnostic Imaging is due to higher number of cameras sold
compared to the prior year quarter.
43
--------------------------------------------------------------------------------Construction
Construction revenue is summarized as follows (in thousands):
Three Months Ended March 31,
2021 2020 Change % Change
Construction $ 9,047 $ 5,484 $ 3,563 65.0 %
Construction Revenue $ 9,047 $ 5,484 $ 3,563 65.0 %
The increase in revenue for the Construction division was predominately due to
higher production levels at KBS, with $2.7 million in revenue recognized on a
large commercial project.
Investments
Investments revenue is summarized as follows (in thousands):
Three Months Ended March 31,
2021 2020 Change % Change
Investments $ - $ 31 $ (31) (100.0) %
Investments Revenue $ - $ 31 $ (31) (100.0) %
The decrease in investments revenue was due to the wind down of investment
vehicles from LSVM.
Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows
(in thousands):
Three Months Ended March 31,
2021 2020 % Change
Diagnostic Services gross profit $ 1,608 $ 2,005 (19.8) %
Diagnostic Services gross margin 15.7 % 18.5 %
Diagnostic Imaging gross profit$ 990 $ 869 13.9 % Diagnostic Imaging gross margin 32.3 % 30.4 % Total healthcare gross profit$ 2,598 $ 2,874 (9.6) % Total healthcare gross margin 19.5 % 21.0 % The decrease in Diagnostic Services gross margin percentage was mainly due to the COVID-19 pandemic impact and the associated public health measures in place, which directly reduced scanning revenue. While management proactively applied measures to contain costs during the pandemic, there were fixed costs which resulted in the decrease in gross margin. The increase in Diagnostic Imaging gross margin percentage was mainly due to higher camera revenue recognized in the three months endedMarch 31, 2021 compared to the prior year same period. Construction Gross Profit Construction gross profit and margin is summarized as follows (in thousands): Three Months Ended March 31, 2021 2020 % Change Construction gross profit$ 544 $ 403 35.0 % Construction gross margin 6.0 % 7.3 %
The increase in Construction gross profit was predominately due to higher
production levels at KBS, with
44
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Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
Three Months Ended March 31,
2021 2020 % Change
Investments gross loss $ (65) $ (34) 91 %
The Investments gross loss relates to depreciation expense associated with the
three manufacturing facilities acquired in April 2019 and investment vehicles
through LSVM. The decrease was due the reduced activities in investment vehicles
from LSVM.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
Three Months Ended March 31, Percent of Revenues
Change
2021 2020 Dollars Percent 2021 2020
Selling, general and
administrative $ 5,055 $ 4,863 $ 192 3.9 % 22.6 % 25.3 %
Amortization of intangible assets 438 576 (138) (24.0) % 2.0 % 3.0
%
Gain on sale of MD Office Solutions (847) - (847) (100.0) % (3.8) % -
%
Total operating expenses$ 4,646 $ 5,439 $ (793) (14.6) % 20.8 % 28.3
%
The$0.2 million increase in sales, general and administrative expenses was primarily due to a$0.3 million increase in the Construction business as a result of increased commissions and headcount, offset by$0.1 million reduced travel expense in Healthcare division. The$0.1 million decrease in amortization of intangible assets and the$0.8 million gain was due to the sale of MD Office Solutions. Total Other Income (Expense) Total other income (expense) is summarized as follows (in thousands): Three Months Ended March 31, 2021 2020 Other income, net $ 1,255$ 160 Interest expense, net (272) (305) Total other income (expense) $ 983$ (145) Other income, net for three months endedMarch 31, 2021 is predominantly comprised of$1.3 million PPP loan forgiveness from KBS and EBGL. Interest expense, net, for the three months endedMarch 31, 2021 and 2020 are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt, respectively. Income Tax Expense For the three months endedMarch 31, 2021 , we recorded an income tax expense from continuing operations of$2 thousand . See Note 10, Income Taxes, within the notes to our unaudited consolidated financial statements for further information related to the Company's income taxes. Income from Discontinued Operations See Note 2, Discontinued Operations of the unaudited condensed consolidated financial statements for information regarding discontinued operations. 45 -------------------------------------------------------------------------------- Liquidity and Capital Resources Overview We used cash of$2.2 million for operations during the three months endedMarch 31, 2021 . Cash flow used in operations primarily consist of our net loss (adjusted for depreciation, amortization, and other non-cash items), and the net effect of changes in working capital. Cash flow provided by investing activities was used primarily for investment in capital equipment required to maintain and grow our business, as well as acquisitions and dispositions. Cash flow from financing activities primarily consisted of our net proceeds from borrowings on various revolving facilities and the receipt of cash from the conversion of cash warrants converted into common stock, offset by the repayments of long-term borrowings. Our principal sources of liquidity include our existing cash and cash equivalents, cash generated from operations, and funds available under various credit facilities and proceeds from sale ofDMS Health . As ofMarch 31, 2021 , we had$13.3 million of cash, cash equivalents and restricted cash and$4.5 million available under our Sterling revolving line of credit. We require capital, principally for capital expenditures, acquisition activity, dividend payments and to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on inventory requirements, the timing of deliveries, and the payment cycles of our customers. Our capital expenditures consist primarily of medical imaging and diagnostic devices utilized in the delivery of our services, as well as vehicles and information technology hardware and software. Regarding our debt, we had approximately$12.5 million in short term debt due to our borrowings which is classified as short term as disclosed in Note 8. Debt. The$5.0 million SNB credit facility primarily supports our healthcare business and actually matures in 2024, but GAAP rules require that the outstanding balance be classified as short-term debt, due to the automatic sweep feature embedded in the traditional lockbox arrangement along with a subjective acceleration clause in the SNB Loan and Security Agreement. In practice, we have the ability to immediately borrow back these daily sweeps to fund our working capital. As ofMarch 31, 2021 , we were in compliance with all borrowing arrangements related to our Healthcare division. As ofMarch 31, 2021 , we had$4.5 million of borrowing capacity to fund the operations of these divisions. As ofMarch 31, 2021 , we have$4.6 millionoutstanding on our Construction revolvers with Gerber and were in compliance with all borrowing covenants for Gerber, however, we were in breach of our covenants as ofDecember 31, 2020 and may be in breach at our next measurement period atJune 30, 2021 . While Gerber has historically provided us with waivers, there is no assurance that we will be able to receive waivers for covenant violations in the future, or that we will meet compliance with covenants in the future. Related party notes of$2.3 million was paid off onApril 1, 2021 using proceeds from the DMS Sale Transaction. In addition, as ofMarch 31, 2021 , we had cash and cash equivalents of$13.3 million . Management believes that the Company has the liquidity and operations to continue to support the business through the next 12 months from the issuance of this Quarterly Report. Our ability to continue as a going concern is dependent on its ability to execute its plans. Common Stock Equity Offering OnMay 28, 2020 , we closed a public offering (the "Offering") of 2,225,000 shares of our common stock, and 2,225,000 warrants (the "Warrants") to purchase up to 1,112,500 additional shares of our common stock. The Offering price was$2.24 per share of common stock and$0.01 per accompanying Warrant (for a combined Offering price of$2.25 ), initially raising$5.0 million in gross proceeds before underwriter discounts and offering-related expenses. The underwriting agreement (the "Underwriting Agreement") we entered into withMaxim Group LLC ("Maxim"), as representative of the underwriters, for the Offering contained customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim and certain other obligations. Pursuant to the terms of the Underwriting Agreement, we granted to Maxim an option for a period of 45 days (the "Over-Allotment Option") to purchase up to 225,000 additional shares of our common stock and 225,000 Warrants to purchase up to an additional 112,500 shares of our common stock. Effective as of the closing of the Offering, Maxim exercised the Over-Allotment Option for the purchase of 225,000 Warrants for a price of$0.01 per Warrant. OnJune 10, 2020 , Maxim exercised the Over-Allotment Option for the purchase of 225,000 shares of our common stock for a price of$2.24 per share, before underwriting discounts. The closing of the sale of the over-allotment shares brought the total number of shares of common stock we sold in the Offering to 2,450,000 shares, and total gross proceeds to approximately$5.5 million . In addition, the Company received$0.5 million from investors in the Offering throughout the balance ofMarch 31, 2021 due to the exercise of a portion of the Warrants sold in the Offering, bringing the total gross proceeds from equity issuance to$6.5 million . 46 -------------------------------------------------------------------------------- The net proceeds to the Company from the Offering and Warrant exercises in 2020 were approximately$5.2 million (inclusive of the exercise of the over-allotment option), after deducting underwriter fees and offering-related expenses estimated at$0.8 million . We used a significant portion of the net proceeds from the Offering to fund working capital needs at our construction businesses, particularly related to modular housing projects which we produced atKBS Builders, Inc. ("KBS") for theBoston -area projects. The remainder of the net proceeds is being used for working capital and for other general corporate purposes. We have broad discretion in determining how the proceeds of the Offering is used, and our discretion is not limited by the aforementioned possible uses.
As of
Three Months Ended
2021 2020
Net cash (used in) provided by operating activities $ (2,232) $ 623
Net cash provided by (used in) investing activities $ 18,315 $ (135)
Net cash (used in) provided by financing activities $
(6,180)
Operating Activities The increase in cash used compared to the prior year period was primarily due to increased investment in working capital to fund the revenue growth in the Construction division. Investing Activities The increase in investing activities cash flow compared to the prior year period was primarily attributable to$18.75 million proceeds received fromDMS Health disposition. Financing Activities The decrease in cash flows from financing activities is primarily due to a$7.9 million pay down of the SNB Credit Facility using the proceeds from the sale of theDMS Health business. Sterling Credit Facility OnMarch 29, 2019 , the Company entered into a Loan and Security Agreement (the "SNB Loan Agreement") by and among certain subsidiaries of the Company, as borrowers (collectively, the "SNB Borrowers"); the Company, as guarantor; and Sterling as lender. The SNB Loan Agreement is a five-year credit facility maturing inMarch 2024 , with a maximum credit amount of$20.0 million for revolving loans (the "SNB Credit Facility"). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed$0.5 million at any one time outstanding. The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As ofMarch 31, 2021 , the Company had$0.2 million of letters of credit outstanding and had additional borrowing capacity of$4.5 million . At the Borrowers' option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.25% per annum. As our largest single debt outstanding, our floating rate on this facility atMarch 31, 2021 was 2.61%. 47 -------------------------------------------------------------------------------- The SNB Loan Agreement includes certain representations, warranties of SNB Borrowers, as well as events of default and certain affirmative and negative covenants by the SNB Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by SNB Borrowers, as well as limitations on the SNB Borrowers' ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the SNB Borrowers and a pledge of all shares of the SNB Borrowers. OnMarch 29, 2019 , in connection with the Company's entry into the SNB Loan Agreement,Jeffery E. Eberwein , the Executive Chairman of the Company's board of directors, entered into Limited Guaranty Agreement (the "SNB Eberwein Guaranty") with SNB pursuant to which he guaranteed the prompt performance of all the Borrowers' obligations under the SNB Loan Agreement. The SNB Eberwein Guaranty is limited in the aggregate to the amount of (a)$1.5 million , plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty.Mr. Eberwein's obligations under the SNB Eberwein Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein. OnFebruary 1, 2021 , in connection with the closing of the Company's sale of MDOffice Solutions , the Company entered into a First Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of MD Office Solutions and the Company's name change fromDigirad Corporation toStar Equity Holdings, Inc. OnMarch 31, 2021 , in connection with completing the sale ofDMS Health , the Company, certain subsidiaries of the Company, and Sterling entered into a Second Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale ofDMS Health and its subsidiaries, removedDMS Health and its subsidiaries as borrowers under the SNB Loan Agreement, and required the principle to be paid down to$7.0 million . AtMarch 31, 2021 , the Company was in compliance with the covenants under the SNB Loan Agreement. Construction Loan Agreements As ofMarch 31, 2021 , the Construction division had outstanding revolving lines of credit of approximately$5.4 million . This debt includes: (i)$2.7 million principal outstanding on KBS's$4.0 million revolving credit facility under a Loan and Security Agreement, datedFebruary 23, 2016 , (as amended, the "KBS Loan Agreement"), with Gerber and (ii)$2.0 million principal outstanding on EBGL's$3.0 million revolving credit facility under a Revolving Credit Loan Agreement, and$0.7 million with Premier, datedJune 30, 2017 (as amended, the "Premier Loan Agreement"). The Construction division was at the maximum borrowing capacity under both revolving lines of credit, based on the inventory and accounts receivable onMarch 31, 2021 , which fluctuates weekly. KBS Loan Agreement OnFebruary 23, 2016 , ATRM,KBS and Main Modular Haulers, Inc. (a former subsidiary of ATRM) entered into a Loan and Security Agreement, (as amended, the "KBS Loan Agreement"), with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to$4.0 million . Availability under the line of credit is based on a formula tied to KBS's eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire onFebruary 22, 2018 , has been automatically extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire onFebruary 22, 2022 . The KBS Loan Agreement will be automatically extended for another one (1) year period unless a party thereto provides prior written notice of termination. As ofMarch 31, 2021 neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, equating to 6.00% atMarch 31, 2021 , with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS's obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS's obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, defined events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby certain receipts are swept daily to reduce borrowings outstanding. AtMarch 31, 2021 , approximately$2.7 million was outstanding under the KBS Loan Agreement. During the three months ended,March 31, 2021 , the parties to the KBS Loan Agreement have amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants. 48 -------------------------------------------------------------------------------- As ofDecember 31, 2020 and 2019, KBS was not in compliance with the financial covenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of 2020. The occurrence of any event of default under the KBS Loan Agreement may result in KBS's obligations under the KBS Loan Agreement becoming immediately due and payable. InApril 2019 ,June 2019 ,February 2020 andFebruary 2021 , we obtained a waiver from Gerber for these events. OnSeptember 10, 2019 , the parties to the KBS Loan Agreement entered into the twelfth amendment to the KBS Loan Agreement (the "Twelfth KBS Amendment"), pursuant to which the Company agreed to guarantee amounts borrowed by certain ATRM's subsidiaries from Gerber. OnJanuary 31, 2020 , the Company, ATRM, KBS and Gerber entered into a thirteenth amendment to the KBS Loan Agreement (the "Thirteenth KBS Amendment") to amend the terms of the KBS Loan Agreement, in order to, among other things (a) amend the definitions of "Ancillary Credit Parties," "Guarantor," "Obligations," and "Subordinated Lender" to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as defined below) to which they are a party and (b) add a new cross default provision. OnMarch 5, 2020 , in connection with the First EBGL Amendment, Gerber, KBS, ATRM and the Company entered into a fourteenth amendment to the KBS Loan Agreement in order to, among other things consent to the First EBGL Amendment and remove cash and cash collateral from the borrowing base. OnApril 1, 2020 , Gerber and KBS entered into a fifteenth amendment to the KBS Loan Agreement pursuant to which the "Minimum Average Monthly Loan Amount" was decreased to twenty-five percent (25%) of the Maximum Revolving Amount. OnJanuary 5, 2021 , Gerber and KBS entered into a sixteenth amendment to the KBS Loan Agreement in order to, among other things, amend certain definitions under the KBS Loan Agreement and to increase the inventory assets against which funds can be borrowed. OnFebruary 26, 2021 Gerber and KBS entered into a seventeenth amendment to the KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach and amended the financial covenants. The financial covenants under the KBS Loan Agreement, as amended, provide that (i) KBS shall make no distribution, transfer, payment, advance, or contribution of cash or property which would constitute a restricted payment; (ii) KBS shall report annual post-tax net income at least equal to (a)$385 thousand for the trailing 6-month period endingJune 30, 2021 and (b)$500 thousand for the trailing fiscal year endDecember 31, 2021 ; and (iii) a minimum EBITDA atJune 30, 2021 of more than$880 thousand or atDecember 31, 2021 of more than$1.5 million . EBGL Premier Note OnJune 30, 2017 , EdgeBuilder and Glenbrook (together, EBGL) entered into a Revolving Credit Loan Agreement (as amended, the "Premier Loan Agreement") with Premier providing EBGL with a working capital line of credit of up to$3.0 million . The Premier Loan Agreement replaced the prior revolving credit facility. Availability under the Premier Loan Agreement is based on a formula tied to EBGL's eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire onJune 30, 2018 , but was extended multiple times by Premier untilJanuary 31, 2023 . EBGL's obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing. OnJanuary 31, 2020 , Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the "Modification Agreement") with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to$1.0 million , extended the final maturity date toJanuary 31, 2023 , and set the interest rate to at 5.75% per annum.Mr. Eberwein executed a guaranty in favor of Premier, which has been extended throughJanuary 1, 2023 , under which ATRM andMr. Eberwein have absolutely and unconditionally guaranteed all of EBGL's obligations under the Premier Loan Agreement. As ofMarch 31, 2021 , approximately$0.7 million was outstanding under the Premier Loan Agreement. 49 --------------------------------------------------------------------------------Gerber Star and EBGL Loans OnJanuary 31, 2020 , SRE,947 Waterford Road , LLC ("947Waterford "),300 Park Street , LLC ("300 Park"), and56 Mechanic Falls Road , LLC ("56 Mechanic" and together with SRE, 947 Waterford, and 300 Park, (the "Star Borrowers"), each an Investments Subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the "Star Credit Parties"), entered into a Loan and Security Agreement (as amended, the "Star Loan Agreement") with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to$2.5 million ($2.0 million and$0.5 million to KBS and EBGL, respectively) (the "Star Loan"). The advance of$2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of$0.5 million to EBGL, which has been temporarily increased by$0.3 million due to be repaid onApril 30, 2020 , is to be repaid in monthly installments of twelve (12) consecutive equal payments. OnFebruary 20, 2020 , the Star Borrowers entered into a first amendment to the Star Loan Agreement (the "First Star Amendment") in order to (i) temporarily advance$0.3 million to EBGL, which amount is to be repaid to Gerber on or beforeApril 30, 2020 ; (ii) clarify that Gerber can make multiple advances under the Star Loan Agreement, and (iii) to correct the maturity date of the Star Loan. OnApril 30, 2020 , the Star Borrowers entered into a second amendment to the Star Loan Agreement (the "Second Star Amendment") to change terms of repayment for the advance of$0.3 million to EBGL to provide for repayment in three consecutive equal monthly installments, commencing onMay 30, 2020 , with a final installment on or beforeJuly 31, 2020 . As ofMarch 31, 2021 , EBGL repaid approximately$0.5 million and$1.3 million was outstanding under the Star Loan Agreement. OnJanuary 31, 2020 , EdgeBuilder and Glenbrook (the "EBGL Borrowers"), each a Construction Subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the "EBGL Credit Parties"), entered into a Loan and Security Agreement (the "EBGL Loan Agreement") with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to$3.0 million (the "EBGL Loan"). OnMarch 5, 2020 , the EBGL Borrowers entered into a first amendment to the EBGL Loan Agreement (the "First EBGL Amendment") with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge$0.3 million of cash collateral by LSVI under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. OnJuly 1, 2020 , the EBGL Borrowers entered into a second amendment to the EBGL Loan Agreement to terminate the pledge of$0.3 million in cash collateral. OnFebruary 26, 2021 , the EBGL Borrowers entered into a third amendment to the EBGL Loan Agreement (the "Third EBGL Amendment") pursuant to which the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As ofMarch 31, 2021 , approximately$2.0 million was outstanding under the EBGL Loan Agreement. Availability under the Star Loan Agreement is based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. Availability under the EBGL Loan Agreement is based on a formula tied to the EBGL Borrowers' eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus 2.75% per annum. The Loan Agreements also provide for certain fees payable to Gerber during their respective terms. The Star Loan matures on the earlier of (a)January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan. The EBGL Loan matures on the earlier of (a)January 1, 2022 , unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. 50 -------------------------------------------------------------------------------- The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement,Jeffrey E. Eberwein , the Executive Chairman of the Company's board of directors, executed and delivered a Guaranty (the "Gerber Eberwein Guaranty") to Gerber pursuant to which he guaranteed the performance of all the Star Borrowers' obligations to Gerber under the Star Loan Agreement, including the full payment of all indebtedness owing by the Star Borrowers to Gerber under or in connection with the Star Loan Agreement and related financing documents.Mr. Eberwein's obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a)$2.5 million , plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations. OnMarch 5, 2020 , contemporaneously with the execution and delivery of the First EBGL Amendment,Mr. Eberwein , the Executive Chairman of the Company's board of directors, executed and delivered a Guaranty (the "EBGL Eberwein Guaranty") to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers' obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents.Mr. Eberwein's obligations under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a)$0.5 million , plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations. OnFebruary 26, 2021 , the Star Borrowers entered into a third amendment to the Star Loan Agreement (the "Third Star Amendment") with Gerber that, among other things, amended the contract rate to prime rate plus 3% and discharged the$2.5 million Gerber Eberwein Guaranty. The Star Loan Agreement and EBGL Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The financial covenants under the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of a minimum tangible net worth, a minimum debt service coverage ratio and minimum net income. The Financial covenants under the Star Loan Agreement applicable to the Star Borrowers include a minimum debt service coverage ratio. The occurrence of any event of default under the Loan Agreements may result in the obligations of the Borrowers becoming immediately due and payable. As ofDecember 31, 2020 , EBGL was not in compliance with the financial covenants under the Star Loan Agreement and EBGL Loan Agreement as of 2020. The occurrence of any event of default under the EBGL Loan Agreement may result in EBGL's obligations under the EBGL Loan Agreement becoming immediately due and payable. InFebruary 2021 , we obtained a waiver from Gerber for these events and, as part of the Third EBGL Amendment (described above), the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis, as well as discharge the EBGL Eberwein Guaranty. As a condition to the extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan Agreement and EBGL Loan Agreement, the holders of certain existing unsecured promissory notes made by ATRM and certain of its subsidiaries entered into subordination agreements (the "Subordination Agreements") with Gerber pursuant to which such noteholders (including the Company and certain of its subsidiaries) agreed to subordinate the obligations of ATRM and its subsidiaries to such noteholders to the obligations of the Star Borrowers and EBGL Borrowers to Gerber under the loan agreements. Paycheck Protection Program FromApril 2020 throughMay 2020 , the Company and its subsidiaries received$6.7 million , of loans under the Paycheck Protection Program ("PPP"). Total PPP loans received the Construction division and Healthcare division were$5.5 million and$1.2 million , respectively. The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by theU.S. Small Business Administration ("SBA"). PPP loans for the Construction and Healthcare division were made throughBremer Bank and Sterling as lenders, respectively. The PPP loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loans are deferred for ten months, after the end of covered periods. The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties. The promissory notes issued in connection with the PPP loans (the "PPP Notes") contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment. 51
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Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. However, no assurance is provided that forgiveness for any portion of the PPP loans will be obtained and even if forgiveness is granted the PPP loans may remain subject to review and audit due to all affiliated PPP Notes equaling more than$2 million . In order to apply for the PPP loans, we certified that the economic uncertainty at the time of application, made the PPP loans request necessary to support ongoing operations of the Company. This certification was made taking into account our then current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that would not be significantly detrimental to the business. The Company is continuing to evaluate the criteria and new guidance put out by the SBA regarding loan forgiveness criteria and procedures to seek loan forgiveness. DuringOctober 2020 andJanuary 2021 , the Company applied for forgiveness on all PPP loans. Our PPP loan forgiveness is sought under the belief all entities requesting loan forgiveness have met the stated criteria and guidelines provided by the SBA and terms of the CARES Act; however, no assurance can be provided that forgiveness for any portion of the PPP loans will be obtained. During Q4 2020,$2.5 million of the Healthcare division PPP Notes were forgiven. As ofMarch 31, 2021 , the Company has$3.0 million in PPP loans outstanding for the Healthcare division. During Q1, 2021, all amounts under the Construction division PPP Notes were forgiven. Off-Balance Sheet Arrangements OnSeptember 10, 2019 , the parties to the KBS Loan Agreement entered into the Twelfth KBS Amendment pursuant to which the Company agreed to guarantee amounts borrowed by certain of ATRM's subsidiaries from Gerber. The Twelfth KBS Amendment requires the Company to serve as an additional guarantor with the existing guarantor, ATRM, with respect to the payment, performance and discharge of each and every obligation of payment and performance by the borrowing subsidiaries with respect to the loans made by Gerber to them. OnJanuary 31, 2020 , the Company, ATRM, KBS and Gerber entered into the Thirteenth KBS Amendment, in order to, among other things (a) amend the definitions of "Ancillary Credit Parties," "Guarantor," "Obligations," and "Subordinated Lender" to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, the EBGL Loan Agreement and the Subordination Agreements to which they are a party and (b) add a new cross default provision. OnApril 1, 2020 , Gerber and KBS entered into a Fifteenth KBS Amendment pursuant to which the "Minimum Average Monthly Loan Amount" under the KBS Loan Agreement was decreased to twenty-five percent (25%) of the Maximum Revolving Amount (as defined in the KBS Loan Agreement). See Note 8, Debt, within the notes to our unaudited consolidated financial statements for further detail. OnJune 5, 2020 , the Company entered into a Guaranty Agreement (the "Tocci Guaranty") withTocci Building Corporation ("Tocci") pursuant to which the Company irrevocably guaranteed all the obligations of KBS under a certain Subcontract Agreement by and between Tocci and KBS in the event of a material breach by KBS under the Subcontract. The Company's liability under the Tocci Guaranty is limited to$2.0 million .
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