10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________ 

FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission file number 0-15071
 _____________________

Steel Excel Inc.
(Exact name of Registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)
94-2748530
(I.R.S. Employer Identification No.)
 
 
1133 WESTCHESTER AVENUE, SUITE N222
WHITE PLAINS, NEW YORK
(Address of principal executive offices)
10604
(Zip Code)
 
Registrant's telephone number, including area code (914) 461-1300
 _____________________

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of October 31, 2015, there were 11,351,542 shares of Steel Excel’s common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Steel Excel Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(Revised)
 
 
 
(Revised)
 
(in thousands, except per-share data)
Net revenues
$
33,480

 
$
58,583

 
$
107,975

 
$
155,666

 
 
 
 
 
 
 
 
Cost of revenues
26,489

 
41,400

 
86,052

 
113,422

 
 
 
 
 
 
 
 
Gross profit
6,991

 
17,183

 
21,923

 
42,244

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 

Selling, general and administrative expenses
8,108

 
8,730

 
24,150

 
24,748

Amortization of intangibles
1,992

 
2,273

 
6,229

 
7,347

Total operating expenses
10,100

 
11,003

 
30,379

 
32,095

 
 
 
 
 
 
 
 
Operating income (loss)
(3,109
)
 
6,180

 
(8,456
)
 
10,149

 
 
 
 
 
 
 
 
Interest expense
(627
)
 
(778
)
 
(1,883
)
 
(2,468
)
Impairment of marketable securities
(7,886
)
 
—

 
(30,626
)
 
—

Other income (expense), net
7,905

 
33

 
9,177

 
6,514

 
 
 
 
 
 
 
 
Income (loss) before income taxes and equity method income
(3,717
)
 
5,435

 
(31,788
)
 
14,195

 
 
 
 
 
 
 
 
Benefit from (provision for) income taxes
(2,393
)
 
(517
)
 
4,267

 
(1,094
)
Loss from equity method investees, net of taxes
(8,153
)
 
(4,843
)
 
(4,818
)
 
(3,402
)
 
 
 
 
 
 
 
 
Net income (loss)
(14,263
)
 
75

 
(32,339
)
 
9,699

 
 
 
 
 
 
 
 
Net loss (income) attributable to non-controlling interests in consolidated entities
(211
)
 
(238
)
 
79

 
99

 
 
 
 
 
 
 
 
Net income (loss) attributable to Steel Excel Inc.
$
(14,474
)
 
$
(163
)
 
$
(32,260
)
 
$
9,798

 
 
 
 
 
 
 
 
Basic income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 

 
 

Net income (loss)
$
(1.27
)
 
$
(0.01
)
 
$
(2.81
)
 
$
0.83

 
 
 
 
 
 
 
 
Diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 

 
 

Net income (loss)
$
(1.27
)
 
$
(0.01
)
 
$
(2.81
)
 
$
0.83

 
 
 
 
 
 
 
 
Shares used in computing income (loss) per share:
 
 
 
 
 

 
 

Basic
11,421

 
11,437

 
11,489

 
11,769

Diluted
11,421

 
11,437

 
11,489

 
11,790

 

See accompanying Notes to Consolidated Financial Statements.

3


Steel Excel Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(Revised)
 
 
 
(Revised)
 
(in thousands)
Net income (loss)
$
(14,263
)
 
$
75

 
$
(32,339
)
 
$
9,699

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
(5
)
 
16

 
(6
)
 
30

Reclassification to realized gains
—

 
—

 
—

 
—

Net foreign currency translation adjustment (A)
(5
)
 
16

 
(6
)
 
30

 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Gross unrealized gains (losses) on marketable securities, net of tax (B)
(5,871
)
 
(1,347
)
 
(2,807
)
 
10,071

Reclassification to realized losses (gains), net of tax (C)
(567
)
 
(1,345
)
 
11,487

 
(3,784
)
Net unrealized gain (loss) on marketable securities, net of tax
(6,438
)
 
(2,692
)
 
8,680

 
6,287

 
 
 
 
 
 
 
 
Comprehensive income (loss)
(20,706
)
 
(2,601
)
 
(23,665
)
 
16,016

Comprehensive loss (income) attributable to non-controlling interest
(211
)
 
(238
)
 
79

 
99

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Steel Excel Inc.
$
(20,917
)
 
$
(2,839
)
 
$
(23,586
)
 
$
16,115

 
 
 
 
 
 
 
 
(A) No tax effect on cumulative translation adjustments
 
 
 
 
 
 
 
(B) Tax benefit on gross unrealized gains
$
3,279

 
$
—

 
$
1,572

 
$
—

(C) Tax benefit (provision) on reclassifications to realized gains (losses)
$
284

 
$
—

 
$
(6,434
)
 
$
—

 
See accompanying Notes to Consolidated Financial Statements.

4


Steel Excel Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
September 30,
2015
 
December 31, 2014
 
 
 
(Revised)
 
(in thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
69,746

 
$
51,910

Restricted cash
20,171

 
21,311

Marketable securities
126,635

 
138,457

Accounts receivable (net of allowance for doubtful accounts of $38 in 2015)
14,113

 
28,016

Deferred income taxes
1,696

 
1,696

Prepaid expenses and other current assets
5,600

 
4,228

Total current assets
237,961

 
245,618

Property and equipment, net
99,676

 
107,187

Goodwill
30,864

 
30,864

Intangible assets, net
29,553

 
35,782

Other long-term investments
3,490

 
28,525

Investments in equity method investees ($33,177 in 2015 and $24,355 2014 reported at fair value)
36,100

 
30,060

Deferred income taxes
447

 
80

Other long-term assets
1,014

 
1,238

Total assets
$
439,105

 
$
479,354

 
 
 
 
Liabilities and Stockholders' Equity:
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,736

 
$
3,936

Accrued expenses and other liabilities
10,974

 
8,916

Financial instrument obligations
20,171

 
21,311

Current portion of long-term debt
13,214

 
13,214

Current portion of capital lease obligations
—

 
412

Deferred income taxes
85

 
85

Current liabilities of discontinued operations
450

 
450

Total current liabilities
47,630

 
48,324

Capital lease obligations, net of current portion
—

 
177

Long-term debt, net of current portion
56,161

 
66,071

Deferred income taxes
3,549

 
3,549

Other long-term liabilities
218

 
3,715

Total liabilities
107,558

 
121,836

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock ($0.001 par value, 18,000 shares authorized; 14,397 and 14,220 shares issued in 2015 and 2014, respectively; 11,352 and 11,406 shares outstanding in 2015 and 2014, respectively)
14

 
14

Additional paid-in capital
269,750

 
267,444

Accumulated other comprehensive loss
(6,532
)
 
(15,206
)
Retained earnings
154,376

 
186,636

Treasury stock, at cost (3,045 and 2,814 shares in 2015 and 2014, respectively)
(85,967
)
 
(81,355
)
Total Steel Excel Inc. stockholders' equity
331,641

 
357,533

Non-controlling interest
(94
)
 
(15
)
Total stockholders' equity
331,547

 
357,518

Total liabilities and stockholders' equity
$
439,105

 
$
479,354


 See accompanying Notes to Consolidated Financial Statements.

5


Steel Excel Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)

 
Steel Excel Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-Controlling Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
 
(in thousands)
Balance, January 1, 2015
14,220

 
$
14

 
(2,814
)
 
$
(81,355
)
 
$
267,444

 
$
(15,206
)
 
$
186,636

 
$
(15
)
 
$
357,518

Net loss attributable to Steel Excel Inc.
—

 
—

 
—

 
—

 
—

 
—

 
(32,260
)
 
—

 
(32,260
)
Net loss attributable to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(79
)
 
(79
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
8,674

 
—

 
—

 
8,674

Net issuance of restricted shares
177

 
—

 
—

 
—

 
(32
)
 
—

 
—

 
—

 
(32
)
Stock-based compensation
—

 
—

 
—

 
—

 
2,338

 
—

 
—

 
—

 
2,338

Repurchases of common stock
—

 
—

 
(231
)
 
(4,612
)
 
—

 
—

 
—

 
—

 
(4,612
)
Balance, September 30, 2015
14,397

 
$
14

 
(3,045
)
 
$
(85,967
)
 
$
269,750

 
$
(6,532
)
 
$
154,376

 
$
(94
)
 
$
331,547


See accompanying Notes to Consolidated Financial Statements.


6


Steel Excel Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
Nine Months Ended September 30,
 
2015
 
2014
 
 
 
(Revised)
 
(in thousands)
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
(32,339
)
 
$
9,699

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Loss from equity method investees
4,818

 
3,402

Stock-based compensation expense
2,338

 
2,305

Depreciation and amortization
17,768

 
18,127

Impairment of marketable securities
30,626

 
—

Deferred income tax provision (benefit)
(5,230
)
 
408

Loss (gain) on sales of marketable securities
1,430

 
(4,065
)
Loss (gain) on financial instrument obligations
(1,063
)
 
752

Loss on change to equity method at fair value
2,807

 
568

Gain on non-monetary exchange
(9,326
)
 
—

Other
627

 
561

Changes in operating assets and liabilities, net of effects of acquisitions:
 

 
 

Accounts receivable
13,865

 
(4,402
)
Prepaid expenses and other assets
(1,281
)
 
709

Accounts payable and other liabilities
(2,568
)
 
2,725

Net cash provided by operating activities
22,472

 
30,789

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchases of businesses, net of cash acquired
—

 
(517
)
Purchases of property and equipment
(4,477
)
 
(13,610
)
Proceeds from sale of property and equipment
39

 
413

Investments in equity method investees
—

 
(144
)
Purchases of marketable securities
(25,590
)
 
(99,296
)
Sales of marketable securities
39,446

 
105,112

Maturities of marketable securities
—

 
4,302

Proceeds from issuance of financial instrument obligations
374

 
171

Repayments of financial instrument obligations
(451
)
 
—

Other investments
—

 
(3,000
)
Reclassification of restricted cash
1,140

 
(20,264
)
Net cash provided by (used in) investing activities
10,481

 
(26,833
)
 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Repurchases of common stock - treasury shares
(4,612
)
 
(10,354
)
Repurchases of common stock - reverse/forward stock split
—

 
(10,071
)
Repayment of subordinated notes
—

 
(346
)
Repayments of capital lease obligations
(589
)
 
(289
)
Repayments of long-term debt
(9,910
)
 
(9,911
)
Other financing activities
—

 
60

Net cash used in financing activities
(15,111
)
 
(30,911
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
17,842

 
(26,955
)
Effect of foreign currency translation on cash and cash equivalents
(6
)
 
30

Cash and cash equivalents at beginning of period
51,910

 
73,602

 
 
 
 
Cash and cash equivalents at end of period
$
69,746

 
$
46,677


See accompanying Notes to Consolidated Financial Statements.

7


Steel Excel Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Description and Basis of Presentation

Steel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments - Energy and Sports. Through its wholly-owned subsidiary Steel Energy Services Ltd. ("Steel Energy"), the Company’s Energy business provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., the Company’s Sports business provides event-based sports services and other health-related services. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.

The accompanying unaudited consolidated financial statements of Steel Excel and its subsidiaries, which have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles, should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s annual report on Form 10-K for the year ended December 31, 2014. The Company believes that all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation have been included in the financial statements. The operating results of any period are not necessarily indicative of the results for the entire year or any future period.

During 2015, the Company identified an error in the manner in which the provision for income taxes had been recorded for all quarterly and annual periods in the years ended December 31, 2014 and 2013. The Company's balance sheet at December 31, 2014, its statements of operations and statements of comprehensive income for the three and nine months ended September 30, 2014, and its statement of cash flows for the nine months ended September 30, 2014, have been revised to reflect the correction of these errors (see Note 3).

On July 7, 2015, the Company's common stock commenced trading on the Nasdaq Capital Market under the ticker symbol "SXCL". Prior to such date, the Company's common stock traded in the over the counter market and was quoted on the OTCQB marketplace under the ticker symbol "SXCL".

Certain other prior period amounts have been reclassified to conform to the 2015 financial statement presentation.
    
2.
Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU No. 2015-03. ASU No. 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted for financial statements that have not been previously issued. Upon adoption, ASU No. 2015-03 should be applied retrospectively, with the balance sheet of each individual period presented adjusted to reflect the period-specific effects of applying the standard. The Company does not expect the adoption of ASU No. 2015-03 to have a material effect on its consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), which requires that adjustments to provisional amounts recognized at the time of a business combination that are identified during the measurement period be recognized in the reporting period in which the adjustment amounts are determined. ASU No. 2015-16 also requires that the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, be recognized in the same period’s financial statements, with disclosure of the portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not expect the adoption of ASU No. 2015-16 to have a material effect on its consolidated financial statements.


8


3.
Revised Financial Statements

During 2015, the Company identified an error related to the manner in which the change in the valuation allowance for deferred tax assets was reflected in its financial statements for all annual and quarterly periods in the years ended December 31, 2014 and 2013. The change in the valuation allowance, which resulted from a change in deferred tax liabilities related to unrealized gains on available-for-sale securities, was recognized as a component of income from continuing operations, resulting in a benefit from or provision for income taxes allocated to continuing operations in each period, with an offsetting provision for or benefit from income taxes allocated to other comprehensive income relating to unrealized gains or losses on available-for-sale securities. Upon subsequent review, the Company determined that proper intra-period allocation of the provision for income taxes would have resulted in this change in the valuation allowance being allocated to other comprehensive income, resulting in no provision or benefit for such item. In periods in which the valuation allowance decreased, the impact of this error was an overstatement of income from continuing operations and an understatement of other comprehensive income; in periods in which the valuation allowance increased, the impact of this error was an understatement of income from continuing operations and an overstatement of other comprehensive income.

The correction of this error has resulted in adjustments to the Company's balance sheet at December 31, 2014, its statements of operations and statements of comprehensive income for the three and nine months ended September 30, 2014, and its statement of cash flows for the nine months ended September 30, 2014. The correction of this error did not result in any adjustments to the statement of operations or the statement of comprehensive income for the year ended December 31, 2014. In addition, the Company's disclosures for the three and nine months ended September 30, 2014, related to income taxes (see Note 12) and net income (loss) per share (see Note 14) have been revised to reflect the impact of these adjustments.

As a result of these adjustments, there was no impact on any of the assets or liabilities reported at December 31, 2014, nor was there any impact on any component of income before income taxes and equity method income for the three and nine months ended September 30, 2014. The impact of these adjustments on the individual line items of the Company's financial statements was as follows:

Balance Sheet at December 31, 2014:

 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands)
Stockholders' equity:
 
 
 
 
 
Common stock
$
14

 
$
—

 
$
14

Additional paid-in capital
267,444

 
—

 
267,444

Accumulated other comprehensive loss
(18,730
)
 
3,524

 
(15,206
)
Retained earnings
190,160

 
(3,524
)
 
186,636

Treasury stock, at cost
(81,355
)
 
—

 
(81,355
)
Total Steel Excel Inc. stockholders' equity
357,533

 
—

 
357,533

Non-controlling interest
(15
)
 
—

 
(15
)
Total stockholders' equity
$
357,518

 
$
—

 
$
357,518


Statement of Operations for the three months ended September 30, 2014:


9


 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands, except per-share data)
Income before income taxes and equity method income
$
5,435

 
$
—

 
$
5,435

Provision for income taxes
(1,537
)
 
1,020

 
(517
)
Loss from equity method investees, net of taxes
(4,843
)
 
—

 
(4,843
)
 
 
 
 
 
 
Net income (loss)
(945
)
 
1,020

 
75

Net income attributable to non-controlling interests in consolidated entities
(238
)
 
—

 
(238
)
 
 
 
 
 
 
Net loss attributable to Steel Excel Inc.
$
(1,183
)
 
$
1,020

 
$
(163
)
 
 
 
 
 
 
Basic and diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
Net loss
$
(0.10
)
 
$
0.09

 
$
(0.01
)

Statement of Operations for the nine months ended September 30, 2014:
 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands, except per-share data)
Income before income taxes and equity method income
$
14,195

 
$
—

 
$
14,195

Benefit from (provision for) income taxes
1,059

 
(2,153
)
 
(1,094
)
Loss from equity method investees, net of taxes
(3,402
)
 
—

 
(3,402
)
 
 
 
 
 
 
Net income
11,852

 
(2,153
)
 
9,699

Net loss attributable to non-controlling interests in consolidated entities
99

 
—

 
99

 
 
 
 
 
 
Net income attributable to Steel Excel Inc.
$
11,951

 
$
(2,153
)
 
$
9,798

 
 
 
 
 
 
Basic income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
Net income
$
1.02

 
$
(0.18
)
 
$
0.83

 
 
 
 
 
 
Diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
Net income
$
1.01

 
$
(0.18
)
 
$
0.83


Statement of Comprehensive Income for the three months ended September 30, 2014:


10


 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands)
Net income (loss)
$
(945
)
 
$
1,020

 
$
75

Other comprehensive income (loss):
 

 
 

 
 

Foreign currency translation adjustment
16

 
—

 
16

Reclassification to realized gains
—

 
—

 
—

Net foreign currency translation adjustment (A)
16

 
—

 
16

 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
Gross unrealized gains on marketable securities, net of tax (B)
(761
)
 
(586
)
 
(1,347
)
Reclassification to realized gains, net of tax (C)
(911
)
 
(434
)
 
(1,345
)
Net unrealized gain on marketable securities, net of tax
(1,672
)
 
(1,020
)
 
(2,692
)
 
 
 
 
 
 
Comprehensive loss
(2,601
)
 
—

 
(2,601
)
Comprehensive income attributable to non-controlling interest
(238
)
 
—

 
(238
)
 
 
 
 
 
 
Comprehensive loss attributable to Steel Excel Inc.
$
(2,839
)
 
$
—

 
$
(2,839
)
 
 
 
 
 
 
(A) No tax effect on cumulative translation adjustments
 
 
 
 
 
(B) Tax benefit on gross unrealized gains
$
586

 
$
(586
)
 
$
—

(C) Tax benefit on reclassifications to realized gains (losses)
$
434

 
$
(434
)
 
$
—



Statement of Comprehensive Income for the nine months ended September 30, 2014:


11


 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands)
Net income
$
11,852

 
$
(2,153
)
 
$
9,699

Other comprehensive income (loss):
 

 
 

 
 

Foreign currency translation adjustment
30

 
—

 
30

Reclassification to realized gains
—

 
—

 
—

Net foreign currency translation adjustment (A)
30

 
—

 
30

 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
Gross unrealized gains on marketable securities, net of tax (B)
6,622

 
3,449

 
10,071

Reclassification to realized gains, net of tax (C)
(2,488
)
 
(1,296
)
 
(3,784
)
Net unrealized gain on marketable securities, net of tax
4,134

 
2,153

 
6,287

 
 
 
 
 
 
Comprehensive income
16,016

 
—

 
16,016

Comprehensive loss attributable to non-controlling interest
99

 
—

 
99

 
 
 
 
 
 
Comprehensive income attributable to Steel Excel Inc.
$
16,115

 
$
—

 
$
16,115

 
 
 
 
 
 
(A) No tax effect on cumulative translation adjustments
 
 
 
 
 
(B) Tax provision on gross unrealized gains
$
(3,449
)
 
$
3,449

 
$
—

(C) Tax benefit on reclassifications to realized gains (losses)
$
1,296

 
$
(1,296
)
 
$
—


Statement of Cash Flows for the nine months ended September 30, 2014:
 
Previously Reported
 
Adjustments
 
Revised
 
(in thousands)
Net income
$
11,852

 
$
(2,153
)
 
$
9,699

Deferred income tax provision (benefit)
$
(1,745
)
 
$
2,153

 
$
408

Cash provided by operating activities
$
30,789

 
$
—

 
$
30,789


The selected quarterly financial data for the years ended December 31, 2014 and 2013, revised to reflect the adjustments to correct the error, is as follows:


12


 
Quarter Ended:
 
March 31
 
June 30
 
September 30
 
December 31 (A)
 
(in thousands, except per-share data)
Year Ended December 31, 2014 (B)
 
 
 
 
 
 
 
Net revenues
$
45,159

 
$
51,924

 
$
58,583

 
$
54,482

Gross profits
$
10,058

 
$
15,003

 
$
17,183

 
$
13,799

Net income (loss) from continuing operations
$
1,967

 
$
7,657

 
$
75

 
$
(33,968
)
Net income (loss)
$
1,967

 
$
7,657

 
$
75

 
$
(33,462
)
Net income (loss) attributable to Steel Excel Inc.
$
2,293

 
$
7,668

 
$
(163
)
 
$
(33,605
)
Net income (loss) from continuing operations attributable to Steel Excel Inc.
$
2,293

 
$
7,668

 
$
(163
)
 
$
(33,832
)
Net income (loss) from continuing operations attributable to Steel Excel Inc. per share of common stock
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.64

 
$
(0.01
)
 
$
(2.97
)
Diluted
$
0.19

 
$
0.64

 
$
(0.01
)
 
$
(2.97
)
 
 
 
 
 
 
 
 
Year Ended December 31, 2013 (C)
 
 
 
 
 
 
 
Net revenues
$
26,351

 
$
28,761

 
$
31,420

 
$
33,496

Gross profits
$
6,983

 
$
8,041

 
$
8,010

 
$
9,120

Net income from continuing operations
$
1,602

 
$
732

 
$
2,383

 
$
8,150

Net income
$
1,207

 
$
538

 
$
1,495

 
$
4,087

Net income attributable to Steel Excel Inc.
$
1,543

 
$
723

 
$
1,806

 
$
6,599

Net income from continuing operations attributable to Steel Excel Inc.
$
1,622

 
$
768

 
$
2,205

 
$
8,428

Net income from continuing operations attributable to Steel Excel Inc. per share of common stock
 
 
 
 
 
 
 
Basic
$
0.13

 
$
0.06

 
$
0.18

 
$
0.69

Diluted
$
0.13

 
$
0.06

 
$
0.18

 
$
0.69


(A) Includes goodwill impairments of $36.7 million and a foreign tax benefit of $1.7 million.
(B) Reflects adjustments to correct the provision for income taxes of $2.1 million, $1.1 million, $(1.0) million, and $(2.2) million in the four sequential quarters of 2014, respectively.
(C) Reflects adjustments to the provision for income taxes of $1.8 million, $0.3 million, $0.7 million, and $0.7 million in the four sequential quarters of 2013, respectively.

4.
Acquisitions

In 2014, UK Elite Soccer, Inc. ("UK Elite"), the Sports' segment soccer operation, acquired the businesses and assets of three independent providers of soccer clinics and camps for a total purchase price of $1.0 million, or approximately $0.5 million net of cash acquired. In connection with these acquisitions, the Company recognized approximately $0.2 million in current assets, primarily trade receivables, approximately $0.6 million in current liabilities, primarily deferred revenue, and approximately $0.9 million in intangible assets representing customer relationships.

In December 2013, Black Hawk Energy Services Ltd. ("Black Hawk Ltd."), an indirect wholly-owned subsidiary of the Company, acquired the business and substantially all of the assets of Black Hawk Energy Services, Inc., a provider of drilling and production services to the oil and gas industry, for approximately $59.6 million in cash. In April 2015, the Company received $0.5 million from the third-party escrow account as a purchase price adjustment to cover certain costs incurred. The purchase price adjustment, which occurred after the one-year measurement period, was recognized as a reduction of "Selling, general, and administrative expenses" in the consolidated statements of operations for the nine months ended September 30, 2015.

5.
Investments

13



Marketable Securities

All of the Company's marketable securities at September 30, 2015, and December 31, 2014, were classified as "available-for-sale" securities. Changes in fair value are recognized in stockholders' equity as "other comprehensive income (loss)", except for other-than-temporary impairments, which are reflected as a reduction of cost and charged to operations.

The Company's marketable securities at September 30, 2015, include investments in the common units of Steel Partners Holdings L.P. ("SPLP"), which beneficially owned approximately 58.2% of the Company's common stock as of September 30, 2015. The SPLP common units held by the Company are classified as "available-for-sale" securities. As of September 30, 2015, the Company held 442,337 SPLP common units that had a fair value of approximately $7.3 million and an unrealized loss of approximately $0.4 million.

Marketable securities at September 30, 2015, consisted of the following:
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
45,198

 
$
—

 
$
—

 
$
45,198

Mutual funds
11,835

 
1,665

 
—

 
13,500

Corporate securities
82,044

 
5,091

 
(3,844
)
 
83,291

Corporate obligations
34,034

 
228

 
(4,418
)
 
29,844

Total available-for-sale securities
173,111

 
6,984

 
(8,262
)
 
171,833

Amounts classified as cash equivalents
(45,198
)
 
—

 
—

 
(45,198
)
Amounts classified as marketable securities
$
127,913

 
$
6,984

 
$
(8,262
)
 
$
126,635

 
Marketable securities at December 31, 2014, consisted of the following:
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
42,681

 
$
—

 
$
—

 
$
42,681

Mutual funds
17,030

 
4,262

 
(322
)
 
20,970

Corporate securities
103,761

 
7,821

 
(23,732
)
 
87,850

Corporate obligations
32,486

 
592

 
(3,441
)
 
29,637

Total available-for-sale securities
195,958

 
12,675

 
(27,495
)
 
181,138

Amounts classified as cash equivalents
(42,681
)
 
—

 
—

 
(42,681
)
Amounts classified as marketable securities
$
153,277

 
$
12,675

 
$
(27,495
)
 
$
138,457

 
Proceeds from sales of marketable securities were $39.4 million and $105.1 million for the nine months ended September 30, 2015 and 2014, respectively, and $22.8 million and $9.4 million for the three months ended September 30, 2015 and 2014, respectively. The Company determines gains and losses from sales of marketable securities based on specific identification of the securities sold. Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of "Other income (expense), net" in the consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, were as follows:


14


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Gross realized gains
$
2,135

 
$
681

 
$
4,891

 
$
7,077

Gross realized losses
(5,528
)
 
(1,683
)
 
(6,321
)
 
(3,012
)
Realized gains (losses), net
$
(3,393
)
 
$
(1,002
)
 
$
(1,430
)
 
$
4,065



The fair value of the Company’s marketable securities with unrealized losses at September 30, 2015, and the duration of time that such losses had been unrealized, were as follows:
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in thousands)
Corporate securities
$
54,093

 
$
(3,810
)
 
$
178

 
$
(34
)
 
$
54,271

 
$
(3,844
)
Corporate obligations
8,709

 
(3,312
)
 
3,705

 
(1,106
)
 
12,414

 
(4,418
)
Total
$
62,802

 
$
(7,122
)
 
$
3,883

 
$
(1,140
)
 
$
66,685

 
$
(8,262
)

The fair value of the Company’s marketable securities with unrealized losses at December 31, 2014, all of which had unrealized losses for periods of less than twelve months, were as follows:

 
Fair
Value
 
Gross
Unrealized
Losses
 
(in thousands)
Corporate securities
$
39,869

 
$
(23,732
)
Corporate obligations
13,530

 
(3,441
)
Mutual funds
4,873

 
(322
)
Total
$
58,272

 
$
(27,495
)
 
Gross unrealized losses primarily related to losses on corporate securities and corporate obligations, which primarily consist of investments in equity and debt securities of publicly-traded entities. Based on the Company's evaluation of such securities, it has determined that certain unrealized losses represented other-than-temporary impairments. This determination was based on several factors, including adverse changes in the market conditions and economic environments in which the entities operate. The Company recognized impairment charges of approximately $7.9 million and $30.6 million for the three and nine months ended September 30, 2015, respectively, equal to the costs basis of such securities in excess of their fair values. The Company has determined that there was no indication of other-than-temporary impairments on its other investments with unrealized losses as of September 30, 2015. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, and the Company's intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market value.
 
The amortized cost and estimated fair value of available-for-sale debt securities and marketable securities with no contractual maturities at September 30, 2015, by contractual maturity, were as follows:


15


 
Cost
 
Estimated 
Fair Value
 
(in thousands)
Debt securities that mature in more than three years
$
34,034

 
$
29,844

Securities with no contractual maturities
139,077

 
141,989

Total
$
173,111

 
$
171,833


Financial Instrument Obligations

Financial instrument obligations consisted of the following:

 
September 30, 2015
 
December 31, 2014
 
Initial Obligation
 
Estimated Fair
Value
 
Initial Obligation
 
Estimated Fair
Value
 
(in thousands)
Corporate securities
$
675

 
$
1,024

 
$
666

 
$
621

Market indices
18,685

 
19,067

 
18,685

 
20,451

Covered call options
113

 
80

 
7

 
4

Naked put options
—

 
—

 
109

 
235

Total
$
19,473

 
$
20,171

 
$
19,467

 
$
21,311


For the three and nine months ended September 30, 2015, the Company recognized gains on the financial instrument obligations totaling $1.3 million and $1.1 million, respectively, and for the three and nine months ended September 30, 2014, the Company incurred losses on the financial instrument obligations totaling $0.1 million and $0.8 million, respectively, all of which are included as a component of "Other income (expense), net" in the Company's consolidated statements of operations.

Equity-Method Investments

In January 2013, the Company acquired a 40% membership interest in Again Faster LLC ("Again Faster"), a fitness equipment company. In response to adverse developments in its business, in 2015 Again Faster began seeking out additional investors or buyers for the business and is currently pursuing other strategic alternatives, including liquidation. Based on the current state of the business and the available strategic alternatives, the Company fully impaired its investment in Again Faster as of September 30, 2015.

In August 2013, the Company acquired approximately 44.7% of the common stock of iGo, Inc. (“iGo”), a provider of accessories for mobile devices. iGo is accounted for using the traditional method of accounting for equity-method investments, with the Company recognizing its equity in the income and losses of each entity on a one-quarter lag basis.

In May 2014, the Company increased its holdings of the common stock of API Technologies Corp. (“API”), a designer and manufacturer of high performance systems, subsystems, modules, and components, to 11,377,192 shares through the acquisition of 1,666,666 shares on the open market. Upon acquiring such shares the Company held approximately 20.6% of the total outstanding common stock of API. Effective as of that date the investment in API has been accounted for as an equity-method investment using the fair value option, with changes in fair value based on the market price of API's common stock recognized currently as income or loss from equity method investees. The Company elected the fair value option to account for its investment in API in order to more appropriately reflect the value of API in its financial statements. Prior to such time the investment in API was accounted for as an available-for-sale security, and upon the change in classification the Company recognized a loss of approximately $0.6 million that had previously been included as a component of "accumulated other comprehensive income".

In January 2015, two members of the Company's board of directors were appointed to the eight-member board of directors of Aviat Networks, Inc. ("Aviat"), a global provider of microwave networking solutions. At the time of the appointment, the Company held 8,042,892 shares of Aviat, or approximately 12.9% of the total outstanding common stock. Effective as of the date of the appointment, the investment in Aviat has been accounted for as an equity-method investment as the Company’s voting interest and board representation provide it with significant influence over Aviat's operations. The

16


Company elected the fair value option to account for its investment in Aviat, with changes in fair value based on the market price of Aviat's common stock recognized currently as income or loss from equity method investees, in order to more appropriately reflect the value of Aviat in its financial statements. Prior to such time the investment in Aviat was accounted for as an available-for-sale security, and upon the change in classification the Company recognized a loss of approximately $2.8 million that had previously been included as a component of "accumulated other comprehensive income".

The following table summarizes the Company's equity-method investments.

 
Ownership
 
Carrying Value
 
Income (Loss) Recognized
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
(in thousands)
 
 
 
 
Traditional equity method
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Again Faster
40.0
%
 
40.0
%
 
$
—

 
$
3,105

 
$
(2,548
)
 
$
(263
)
 
$
(3,105
)
 
$
(556
)
iGo
45.7
%
 
46.9
%
 
2,923

 
2,600

 
52

 
(121
)
 
323

 
(1,926
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value option
 
 
 
 
 
 
 
 
 
 
 
 
 
 
API
20.6
%
 
20.6
%
 
24,812

 
24,355

 
(3,888
)
 
(4,459
)
 
457

 
(920
)
Aviat
12.9
%
 
 
 
8,365

 
 
 
(1,769
)
 
—

 
(2,493
)
 
—

Total
 
 
 
 
$
36,100

 
$
30,060

 
$
(8,153
)
 
$
(4,843
)
 
$
(4,818
)
 
$
(3,402
)

The losses recognized for Again Faster for the three and nine months ended September 30, 2015, include an impairment charge of $2.5 million. Based on the closing market price of iGo’s publicly-traded shares, the value of the Company’s investment in iGo was approximately $4.1 million at September 30, 2015.

Other Investments

The Company's other long-term investments at December 31, 2014, included a $25.0 million cost-method investment in a limited partnership that co-invested with other private investment funds in a public company. The limited partnership was liquidated in August 2015, with the Company receiving its proportionate share of the common stock of the public company investee. Upon liquidation, the Company recognized a gain on the non-monetary exchange of $9.3 million based on the fair value of the shares received of $34.3 million. The shares of common stock of the public company investee received are reported with the Company's marketable securities and are classified as "available-for-sale" securities at September 30, 2015.

The Company's other long-term investments at September 30, 2015, include an investment in a venture capital fund totaling $0.5 million and a promissory note with an amortized cost of $3.0 million, which is a reasonable approximation of fair value at September 30, 2015.

6.
Fair Value Measurements

Fair values of assets and liabilities are determined based on a three-level measurement input hierarchy.

Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date.

Level 2 inputs are other than quoted market prices that are observable, either directly or indirectly, for an asset or liability. Level 2 inputs can include quoted prices in active markets for similar assets or liabilities, quoted prices in a market that is not active for identical assets or liabilities, or other inputs that can be corroborated by observable market data. The Company uses quoted prices of similar instruments with an active market to determine the fair value of its Level 2 investments.

Level 3 inputs are unobservable for the asset or liability when there is little, if any, market activity for the asset or liability. Level 3 inputs are based on the best information available, and may include data developed by the Company. The Company uses the net asset value included in quarterly statements it receives in arrears from a venture capital fund to determine the fair value of such fund.  The Company determines the fair value of certain corporate securities and corporate obligations by

17


incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying securities.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2015, summarized by measurement input category, were as follows:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash, including short-term deposits(1)
$
69,746

 
$
69,746

 
$
—

 
$
—

Restricted cash
20,171

 
20,171

 
—

 
—

Mutual funds(2)
13,500

 
13,500

 
—

 
—

Corporate securities(2)
83,291

 
72,397

 
—

 
10,894

Corporate obligations(2)
29,844

 
—

 
8,709

 
21,135

Investments in equity-method investees
33,177

 
33,177

 
—

 
—

Investments in certain funds(3)
489

 
—

 
—

 
489

Total assets
$
250,218

 
$
208,991

 
$
8,709

 
$
32,518

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Financial instrument obligations
$
20,171

 
$
20,171

 
$
—

 
$
—

 
(1)
Reported within "Cash and cash equivalents"
(2)
Reported within “Marketable securities”
(3)
Reported within "Other long-term investments"

Assets and liabilities measured at fair value on a recurring basis at December 31, 2014, summarized by measurement input category, were as follows:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash, including short-term deposits(1)
$
51,910

 
$
51,910

 
$
—

 
$
—

Mutual funds(2)
20,970

 
20,970

 
—

 
—

Corporate securities(2)
87,850

 
72,798

 
—

 
15,052

Corporate obligations(2)
29,637

 
—

 
10,793

 
18,844

Investments in equity-method investees
24,355

 
24,355

 
—

 
—

Investments in certain funds(3)
525

 
—

 
—

 
525

Total
$
215,247

 
$
170,033

 
$
10,793

 
$
34,421

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Financial instrument obligations
$
21,311

 
$
21,311

 
$
—

 
$
—

 
(1)
Reported within "Cash and cash equivalents."
(2)
Reported within “Marketable securities.”
(3)
Reported within "Other long-term investments."

There were no transfers of securities among the various measurement input levels during the nine months ended September 30, 2015.

Changes in the fair value of assets valued using Level 3 measurement inputs during the three and nine months ended September 30, 2015 and 2014, were as follows:

18


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of period
$
35,483

 
$
32,346

 
$
34,421

 
$
24,209

Purchases
—

 
2,756

 
5,108

 
13,294

Sales
(1,229
)
 
(137
)
 
(1,751
)
 
(4,869
)
Realized losses on sale
—

 
—

 
—

 
(129
)
Unrealized gains (losses)
(1,736
)
 
1,184

 
(5,260
)
 
3,644

Balance, end of period
$
32,518

 
$
36,149

 
$
32,518

 
$
36,149

 
Realized gains and losses on the sale of investments using Level 3 measurement inputs are recognized as a component of "Other income (expense), net". Unrealized gains and losses on investments using Level 3 measurement inputs are recognized as a component of "Other comprehensive income".

The carrying value of the Company's long-term debt (see Note 9) is a reasonable approximation of its fair value since it is a variable-rate obligation.

7.
Property and Equipment

Property and equipment at September 30, 2015, and December 31, 2014, consisted of the following:
 
 
September 30, 2015
 
December 31, 2014
 
(in thousands)
Rigs and other equipment
$
118,884

 
$
115,391

Buildings and improvements
19,377

 
18,977

Land
1,893

 
1,893

Vehicles
2,304

 
2,197

Furniture and fixtures
851

 
673

Assets in progress
473

 
644

 
143,782

 
139,775

Accumulated depreciation
(44,106
)
 
(32,588
)
Property and equipment, net
$
99,676

 
$
107,187


Depreciation expense was $3.9 million and $3.7 million for the three months ended September 30, 2015 and 2014, respectively. Depreciation expense was $11.5 million and $10.8 million for the nine months ended September 30, 2015 and 2014, respectively.

8.
Goodwill and Other Intangible Assets

The Company's intangible assets at September 30, 2015, and December 31, 2014, all of which are subject to amortization, consisted of the following:
 

19


 
September 30, 2015
 
December 31, 2014
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Energy segment:
 
 
 
 
 

 
 
 
 
 
 
Customer relationships
$
54,430

 
$
(27,280
)
 
$
27,150

 
$
54,430

 
$
(21,938
)
 
$
32,492

Trade names
4,860

 
(3,629
)
 
1,231

 
4,860

 
(3,161
)
 
1,699

Non-compete agreement
120

 
(43
)
 
77

 
120

 
(25
)
 
95

 
59,410

 
(30,952
)
 
28,458

 
59,410

 
(25,124
)
 
34,286

 
 
 
 
 
 
 
 
 
 
 
 
Sports segment:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
2,089

 
(1,061
)
 
1,028

 
2,089

 
(678
)
 
1,411

Trade names
122

 
(55
)
 
67

 
122

 
(37
)
 
85

 
2,211

 
(1,116
)
 
1,095

 
2,211

 
(715
)
 
1,496

 
 
 
 
 
 
 
 
 
 
 
 
 Total
$
61,621

 
$
(32,068
)
 
$
29,553

 
$
61,621

 
$
(25,839
)
 
$
35,782

 
Amortization expense was $2.0 million and $2.3 million for the three months ended September 30, 2015 and 2014, respectively. Amortization expense was $6.2 million and $7.3 million for the nine months ended September 30, 2015 and 2014, respectively.

Estimated aggregate amortization expense related to the intangible assets for the remainder of 2015 and subsequent years is as follows:
 
 
 
 
 
Amount