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EXCEL - IDEA: XBRL DOCUMENT - Steel Excel Inc.Financial_Report.xls


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, 2014 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, 2014, there were 11,410,657 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,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per-share data)
Net revenues
$
58,583

 
$
31,420

 
$
155,666

 
$
86,532

 
 
 
 
 
 
 
 
Cost of revenues
40,599

 
23,340

 
111,095

 
62,061

 
 
 
 
 
 
 
 
Gross profit
17,984

 
8,080

 
44,571

 
24,471

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 

Selling, general and administrative expenses
9,531

 
5,146

 
27,075

 
16,204

Amortization of intangibles
2,273

 
1,985

 
7,347

 
6,616

Total operating expenses
11,804

 
7,131

 
34,422

 
22,820

 
 
 
 
 
 
 
 
Operating income
6,180

 
949

 
10,149

 
1,651

 
 
 
 
 
 
 
 
Interest income, net
554

 
472

 
1,763

 
2,341

Other income (expense), net
(1,299
)
 
1,467

 
2,283

 
1,408

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and equity method loss
5,435

 
2,888

 
14,195

 
5,400

 
 
 
 
 
 
 
 
Benefit from (provision for) income taxes
(1,537
)
 
297

 
1,059

 
2,314

Loss from equity method investees, net of taxes
(4,843
)
 
(138
)
 
(3,402
)
 
(218
)
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
(945
)
 
3,047

 
11,852

 
7,496

 
 
 
 
 
 
 
 
Loss from discontinued operations, net of taxes

 
(888
)
 

 
(1,477
)
 
 
 
 
 
 
 
 
Net income (loss)
(945
)
 
2,159

 
11,852

 
6,019

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

 
 

Continuing operations
(238
)
 
(178
)
 
99

 
(122
)
Discontinued operations

 
489

 

 
954

 
 
 
 
 
 
 
 
Net income (loss) attributable to Steel Excel Inc.
$
(1,183
)
 
$
2,470

 
$
11,951

 
$
6,851

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

 
 

Net income (loss) from continuing operations
$
(0.10
)
 
$
0.23

 
$
1.02

 
$
0.58

Loss from discontinued operations, net of taxes
$

 
$
(0.03
)
 
$

 
$
(0.04
)
Net income (loss)
$
(0.10
)
 
$
0.20

 
$
1.02

 
$
0.54

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

 
 

Net income (loss) from continuing operations
$
(0.10
)
 
$
0.23

 
$
1.01

 
$
0.58

Loss from discontinued operations, net of taxes
$

 
$
(0.03
)
 
$

 
$
(0.04
)
Net income (loss)
$
(0.10
)
 
$
0.20

 
$
1.01

 
$
0.54

 
 
 
 
 
 
 
 
Shares used in computing income (loss) per share:
 
 
 
 
 

 
 

Basic
11,437

 
12,529

 
11,769

 
12,736

Diluted
11,437

 
12,546

 
11,790

 
12,754

 
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,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net income (loss)
$
(945
)
 
$
2,159

 
$
11,852

 
$
6,019

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
16

 
(3
)
 
30

 
(39
)
Reclassification to realized gains

 
(346
)
 

 
(346
)
Net foreign currency translation adjustment (A)
16

 
(349
)
 
30

 
(385
)
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Gross unrealized gains (losses) on marketable securities, net of tax (B)
(761
)
 
2,421

 
6,622

 
5,917

Reclassification to realized gains, net of tax (C)
(911
)
 
(1,176
)
 
(2,488
)
 
(1,158
)
Net unrealized gain (loss) on marketable securities, net of taxes
(1,672
)
 
1,245

 
4,134

 
4,759

 
 
 
 
 
 
 
 
Comprehensive income (loss)
(2,601
)
 
3,055

 
16,016

 
10,393

Comprehensive loss (income) attributable to non-controlling interest
(238
)
 
311

 
99

 
832

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Steel Excel Inc.
$
(2,839
)
 
$
3,366

 
$
16,115

 
$
11,225

 
 
 
 
 
 
 
 
(A) No tax effect on cumulative translation adjustments
 
 
 
 
 
 
 
(B) Tax benefit (provision) on gross unrealized gains (losses)
$
586

 
$
(1,351
)
 
$
(3,449
)
 
$
(3,455
)
(C) Tax benefit on reclassifications to realized gains (losses)
$
434

 
$
687

 
$
1,296

 
$
676

 
See accompanying Notes to Consolidated Financial Statements.

4



Steel Excel Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
September 30,
2014
 
December 31, 2013
Assets
(in thousands)
Current assets:
 
 
 
Cash and cash equivalents
$
46,677

 
$
73,602

Restricted cash
20,264

 

Marketable securities
169,635

 
178,485

Accounts receivable, net of allowance for doubtful accounts of $0
29,930

 
25,355

Deferred income taxes
15

 

Prepaid expenses and other current assets
5,133

 
5,870

Current assets of discontinued operations
31

 
31

Total current assets
271,685

 
283,343

Property and equipment, net
108,337

 
105,890

Goodwill
67,530

 
67,530

Intangible assets, net
38,017

 
44,438

Other investments
28,540

 
25,844

Investments in equity method investees ($26,871 at fair value in 2014)
32,728

 
8,339

Deferred income taxes
3,732

 
1,556

Other long-term assets
1,440

 
1,754

Total assets
$
552,009

 
$
538,694

 
 
 
 
Liabilities and Stockholders' Equity:
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,460

 
$
4,754

Accrued expenses and other liabilities
10,942

 
7,763

Financial instrument obligations
20,264

 

Current portion of long-term debt
13,214

 
13,214

Current portion of capital lease obligations
412

 
412

3/4% convertible senior subordinated notes

 
346

Deferred income taxes
3,838

 
3,612

Current liabilities of discontinued operations
987

 
987

Total current liabilities
54,117

 
31,088

Capital lease obligations, net of current portion
283

 
572

Long-term debt, net of current portion
69,375

 
79,286

Deferred income taxes
2,373

 

Other long-term liabilities
3,715

 
3,813

Total liabilities
129,863

 
114,759

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock ($0.001 par value, 40,000 shares authorized; 14,224 and 14,508 shares issued in 2014 and 2013, respectively; 11,410 and 12,005 shares outstanding in 2014 and 2013, respectively)
14

 
14

Additional paid-in capital
267,047

 
274,826

Accumulated other comprehensive income
10,680

 
6,516

Retained earnings
225,918

 
213,967

Treasury stock, at cost (2014 - 2,814 shares; 2013 - 2,503 shares)
(81,355
)
 
(71,001
)
Total Steel Excel Inc. stockholders' equity
422,304

 
424,322

Non-controlling interest
(158
)
 
(387
)
Total stockholders' equity
422,146

 
423,935

Total liabilities and stockholders' equity
$
552,009

 
$
538,694

 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
 
Retained Earnings
 
Non-Controlling Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
 
(in thousands)
Balance, January 1, 2014
14,508

 
$
14

 
(2,503
)
 
$
(71,001
)
 
$
274,826

 
$
6,516

 
$
213,967

 
$
(387
)
 
$
423,935

Net income attributable to Steel Excel Inc.

 

 

 

 

 

 
11,951

 

 
11,951

Net loss attributable to non-controlling interests

 

 

 

 

 

 

 
(99
)
 
(99
)
Other comprehensive income

 

 

 

 

 
4,164

 

 

 
4,164

Net issuance of restricted shares
13

 
1

 

 

 
(14
)
 

 

 

 
(13
)
Stock-based compensation

 

 

 

 
2,305

 

 

 

 
2,305

Reverse/forward stock split
(297
)
 
(1
)
 

 

 
(10,070
)
 

 

 

 
(10,071
)
Repurchases of common stock

 

 
(311
)
 
(10,354
)
 

 

 

 

 
(10,354
)
Contribution from non-controlling interest

 

 

 

 

 

 

 
328

 
328

Balance, September 30, 2014
14,224

 
$
14

 
(2,814
)
 
$
(81,355
)
 
$
267,047

 
$
10,680

 
$
225,918

 
$
(158
)
 
$
422,146


See accompanying Notes to Consolidated Financial Statements.


6



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

 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Cash Flows From Operating Activities:
 
 
 
Net income
$
11,852

 
$
6,019

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

 
 

Loss from discontinued operations

 
1,476

Loss from equity method investees
3,402

 
218

Stock-based compensation expense
2,305

 
1,979

Depreciation and amortization
18,127

 
14,361

Deferred income tax benefit
(1,745
)
 
(2,364
)
Gain on sales of marketable securities
(4,065
)
 
(1,834
)
Loss on extinguishment of debt

 
463

Loss on financial instrument obligations
752

 

Loss on change to equity method at fair value
568

 

Other
561

 
155

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

 
 

Accounts receivable
(4,402
)
 
2,419

Prepaid expenses and other assets
709

 
(1,981
)
Accounts payable and other liabilities
2,725

 
(1,690
)
Net cash used in operating activities of discontinued operations

 
(1,894
)
Net cash provided by operating activities
30,789

 
17,327

 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchases of businesses, net of cash acquired
(517
)
 
(1,125
)
Purchases of property and equipment
(13,610
)
 
(6,052
)
Proceeds from sale of property and equipment
413

 
527

Investments in equity method investees
(144
)
 
(9,202
)
Purchases of marketable securities
(99,296
)
 
(161,288
)
Sales of marketable securities
105,112

 
65,474

Maturities of marketable securities
4,302

 
134,669

Proceeds from issuance of financial instrument obligations
171

 

Other investments
(3,000
)
 
(25,000
)
Reclassification of restricted cash
(20,264
)
 

Net cash used in investing activities of discontinued operations

 
(196
)
Net cash used in investing activities
(26,833
)
 
(2,193
)
 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Repurchases of common stock - treasury shares
(10,354
)
 
(17,816
)
Repurchases of common stock - reverse/forward stock split
(10,071
)
 

Proceeds from issuance of long-term debt

 
70,000

Repayment of subordinated notes
(346
)
 

Repayments of capital lease obligations
(289
)
 
(314
)
Payments for debt issuance costs

 
(1,130
)
Repayments of long-term debt
(9,911
)
 
(15,500
)
Other financing activities
60

 

Net cash provided by (used in) financing activities
(30,911
)
 
35,240

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(26,955
)
 
50,374

Effect of foreign currency translation on cash and cash equivalents
30

 
(35
)
Cash and cash equivalents at beginning of period
73,602

 
71,556

 
 
 
 
Cash and cash equivalents at end of period
$
46,677

 
$
121,895

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 continues to identify business acquisition and investment opportunities 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, 2013. 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.

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. ("Black Hawk Inc."), a provider of drilling and production services to the oil and gas industry. The fair values recognized at December 31, 2013, were provisional pending further analysis and valuations. In 2014, the Company recorded measurement period adjustments to reflect revised fair values of the assets and liabilities acquired from Black Hawk Inc. The Company's balance sheet at December 31, 2013, has been revised to reflect such measurement period adjustments as if they were recorded at the acquisition date (see Note 3).

The Company shut down the operations of Ruckus Sports LLC (“Ruckus”), a provider of obstacle course and mass-participation events, in November 2013. The consolidated financial statements reflect Ruckus as a discontinued operation in all periods presented (see Note 4).

The Company's effected a 1-for-500 reverse stock split (the "Reverse Split") in June 2014, immediately followed by a 500-for-1 forward stock split (the "Forward Split", and together with the Reverse Split, the "Reverse/Forward Split"), of its common stock. The consolidated financial statements reflect the effects of the Reverse/Forward Split (see Note 19).

Certain other prior period amounts have been reclassified to conform to the 2014 financial statement presentation.
    
2.
Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), which changes the requirements for reporting discontinued operations. Pursuant to this pronouncement, the disposal of a component of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on an entity’s operations and financial results. This pronouncement also requires additional disclosures for discontinued operations and requires disclosures about disposals of individually significant components of an entity that do not qualify for discontinued operations presentation in the financial statements. ASU No. 2014-08 is effective for annual reporting periods beginning after December 15, 2014, and for interim reporting period within those years. The Company does not expect the adoption of ASU No. 2014-08 to have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a core principle, achieved through a five-step process, that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and for interim reporting periods within those years. Upon adoption, ASU No. 2014-09 can be applied either retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. Early application is not permitted. The Company

8



needs to evaluate the impact on its consolidated financial statements of adopting ASU No. 2014-09 and will determine the implementation method to be used.
In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718), to address diversity in accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting period within those years, with earlier adoption permitted. The Company does not expect the adoption of ASU No. 2014-12 to have a material effect on its consolidated financial statements.

3.
Acquisitions

On December 16, 2013, the Company acquired the business and substantially all of the assets of Black Hawk Inc. for approximately $60.8 million in cash, subject to a post-closing working capital adjustment. The fair values recognized in 2013 in connection with this transaction were provisional pending the Company's continued evaluation, including assessing any identifiable intangible assets acquired, and completing a valuation of the tangible and intangible assets. During 2014, the Company recorded adjustments to the initial fair value estimates based on the Company's continued assessment of the fair values of the assets and liabilities acquired, including a valuation. The following table summarizes the provisional fair values previously reported, the measurement period adjustments recognized in 2014, and the revised fair values of the assets and liabilities acquired.
 
Previously Reported
 
Measurement Period Adjustments
 
Revised
 
(in thousands)
Accounts receivable
$
9,663

 
$
451

 
$
10,114

Prepaid expenses and other current assets
208

 
111

 
319

Property and equipment
30,581

 
(493
)
 
30,088

Intangible assets

 
12,210

 
12,210

Accounts payable
(1,333
)
 
(251
)
 
(1,584
)
Accrued expenses
(1,756
)
 
(404
)
 
(2,160
)
Total identifiable net assets acquired
37,363

 
11,624

 
48,987

Goodwill
23,400

 
(12,824
)
 
10,576

Net assets acquired
$
60,763

 
$
(1,200
)
 
$
59,563

 
The measurement period adjustments include an adjustment to the purchase price of $1.2 million, which represents a payment received by the Company in 2014 for the post-closing working capital adjustment. The intangible assets acquired represented customer relationships, a trade name, and a non-compete arrangement with estimated fair values of $11.3 million, $0.8 million, and $0.1 million, respectively. The intangible assets are being amortized over five-year periods. The revised amounts are subject to further revision pending the Company's continued assessment of the fair values of the assets and liabilities acquired. The Company's balance sheet at December 31, 2013, has been revised to reflect the measurement period adjustments as if they had been recognized at the acquisition date, including the amount due for the post-closing working capital adjustment. The measurement period adjustments did not have a material effect on the Company's statement of operations for the year ended December 31, 2013.

In 2014, UK Elite Soccer, Inc. ("UK Elite"), the Sports' segment soccer operation, acquired the business 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.

The following unaudited pro forma financial information for the three months ended September 30, 2013, combines the results of operations of the Company with the results of operations of Black Hawk Inc., which business was acquired in December 2013, as if the acquisition had occurred at the beginning of the year prior to the date of acquisition. The unaudited pro forma financial information for the nine months ended September 30, 2013, combines the results of operations of the

9



Company with the results of operations of Black Hawk Inc. and UK Elite, which business was acquired in June 2013, as if those acquisitions had occurred at the beginning of the year prior to the date of acquisition. The pro forma financial information does not include the results of Ruckus, which was acquired in January 2013 and is reported as a discontinued operation in the Company's consolidated financial statements. No pro forma information is provided for the businesses acquired by UK Elite in 2014 since their results of operations are not material. The pro forma financial information is not necessarily indicative of what would have actually occurred had the acquisitions been consummated at the beginning of the year prior to the date of acquisition or results that may occur in the future.

 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
(in thousands. except per-share data)
Net revenues
$
48,696

 
$
133,634

Net income from continuing operations
$
6,890

 
$
14,811

Net income
$
6,002

 
$
13,334

Net income attributable to Steel Excel Inc.
$
6,313

 
$
14,160

Net income per share attributable to Steel Excel Inc. - Basic
$
0.50

 
$
1.11

Net income per share attributable to Steel Excel Inc. - Diluted
$
0.50

 
$
1.11


4.
Discontinued Operations

In November 2013, the Company shut down the operations of Ruckus after it did not meet operational and financial expectations. For the nine months ended September 30, 2013, Ruckus reported revenues of $1.0 million and a loss from discontinued operations of $1.5 million. For the three months ended September 30, 2013, Ruckus reported revenues of $0.4 million and incurred a loss from discontinued operations of $0.9 million.
 
5.
Investments

Marketable Securities

All of the Company's marketable securities at September 30, 2014, and December 31, 2013, were classified as "available-for-sale" securities, with changes in fair value recognized in stockholders' equity as "other comprehensive income (loss)". Marketable securities at September 30, 2014, consisted of the following:
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
42,554

 
$

 
$

 
$
42,554

Mutual funds
15,722

 
5,153

 
(116
)
 
20,759

Corporate securities
105,932

 
13,539

 
(2,675
)
 
116,796

Corporate obligations
31,248

 
995

 
(163
)
 
32,080

Total available-for-sale securities
195,456

 
19,687

 
(2,954
)
 
212,189

Amounts classified as cash equivalents
(42,554
)
 

 

 
(42,554
)
Amounts classified as marketable securities
$
152,902

 
$
19,687

 
$
(2,954
)
 
$
169,635

 
Marketable securities at December 31, 2013, consisted of the following:
 

10



 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
60,909

 
$

 
$

 
$
60,909

Mutual funds
15,722

 
5,061

 

 
20,783

United States government securities
50,356

 
23

 

 
50,379

Corporate securities
69,806

 
9,961

 
(5,208
)
 
74,559

Corporate obligations
31,356

 
885

 
(276
)
 
31,965

Commercial paper
1,799

 

 

 
1,799

Total available-for-sale securities
229,948

 
15,930

 
(5,484
)
 
240,394

Amounts classified as cash equivalents
(61,909
)
 

 

 
(61,909
)
Amounts classified as marketable securities
$
168,039

 
$
15,930

 
$
(5,484
)
 
$
178,485

 
Proceeds from sales of marketable securities were $105.1 million and $65.5 million for the nine months ended September 30, 2014 and 2013, respectively, and $9.4 million and $20.4 million for the three months ended September 30, 2014 and 2013, 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, 2014 and 2013, were as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Gross realized gains
$
682

 
$
1,914

 
$
7,078

 
$
5,779

Gross realized losses
(1,683
)
 
(51
)
 
(3,012
)
 
(3,945
)
Realized gains (losses), net
$
(1,001
)
 
$
1,863

 
$
4,066

 
$
1,834



The fair value of the Company’s marketable securities with unrealized losses at September 30, 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
$
28,611

 
$
(2,675
)
Corporate obligations
7,592

 
(163
)
Mutual funds
5,079

 
(116
)
Total
$
41,282

 
$
(2,954
)

The fair value of the Company’s marketable securities with unrealized losses at December 31, 2013, and the duration of time that such losses had been unrealized, were as follows:


11



 
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
$
15,609

 
$
(4,757
)
 
$
803

 
$
(451
)
 
$
16,412

 
$
(5,208
)
Corporate obligations
10,477

 
(276
)
 

 

 
10,477

 
(276
)
Total
$
26,086

 
$
(5,033
)
 
$
803

 
$
(451
)
 
$
26,889

 
$
(5,484
)
 
Gross unrealized losses primarily related to losses on corporate securities. The Company has evaluated such securities, which primarily consist of investments in publicly-traded entities, as of September 30, 2014, and has determined that there was no indication of other-than-temporary impairments. 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, 2014, by contractual maturity, were as follows:

 
Cost
 
Estimated 
Fair Value
 
(in thousands)
Debt securities:
 
 
 
Mature after one year through three years
$
223

 
$
228

Mature in more than three years
31,025

 
31,852

Total debt securities
31,248

 
32,080

Securities with no contractual maturities
164,208

 
180,109

Total
$
195,456

 
$
212,189


Financial Instrument Obligations

In 2014, the Company entered into short sale transactions on certain financial instruments in which the Company received proceeds from the sale of such financial instruments and incurred obligations to deliver or purchase securities at a later date. Upon initially entering into such short sale transactions the Company recognized obligations totaling approximately $19.5 million, with a comparable amount of the Company's cash and cash equivalents reclassified as restricted cash. Subsequent changes in the fair value of such obligations, determined based on the closing market price of the financial instruments, are recognized currently as gains or losses, with a comparable reclassification made between the amounts of the Company's unrestricted and restricted cash. The Company's obligations for such transactions are reported as "Financial instrument obligations" with a comparable amount reported as "Restricted cash" in the Company's consolidated balance sheet. As of September 30, 2014, the Company's financial instrument obligations consisted of the following.

 
Initial Obligation
 
Estimated Fair
Value
 
(in thousands)
Corporate securities
$
655

 
$
532

Market indices
18,685

 
19,603

Covered call options
80

 
123

Naked put options
92

 
6

Total
$
19,512

 
$
20,264




12



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, 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, a fitness equipment company, for total cash consideration of $4.0 million. In August 2013, the Company acquired 1,316,866 shares of the common stock of iGo, Inc. (“iGo”), in a cash tender offer for total consideration of $5.2 million. The shares of common stock of iGo acquired by the Company represented approximately 44.7% of the issued and outstanding shares of iGo at the date of acquisition. Both Again Faster and iGo are accounted for using the traditional method of accounting for equity-method investments, with the Company recognizing its equity in the losses of iGo 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".

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

 
Ownership
 
Carrying Value
 
Income (Loss) Recognized
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
 
 
 
 
(in thousands)
 
 
 
 
Traditional equity method
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Again Faster
40.0
%
 
40.0
%
 
$
3,115

 
$
3,671

 
$
(263
)
 
$
(138
)
 
$
(556
)
 
$
(218
)
iGo
46.9
%
 
44.7
%
 
2,742

 
4,668

 
(121
)
 

 
(1,926
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value option
 
 
 
 
 
 
 
 
 
 
 
 
 
 
API
20.6
%
 
 
 
26,871

 

 
(4,459
)
 

 
(920
)
 

Total
 
 
 
 
$
32,728

 
$
8,339

 
$
(4,843
)
 
$
(138
)
 
$
(3,402
)
 
$
(218
)

Based on the closing market price of iGo’s publicly-traded shares, the value of the Company’s investment in iGo was approximately $4.2 million at September 30, 2014.

Other Investments

The Company's other investments at September 30, 2014, include a $25.0 million cost-method investment in a limited partnership that co-invested with other private investment funds in a public company. The investment in the limited partnership had an approximate fair value of $23.4 million at September 30, 2014, based on the net asset value indicated in the monthly statement received from the partnership. The Company's other investments at September 30, 2014, also include investments in a venture capital funds 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, 2014.

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.


13



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 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, 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)
$
46,677

 
$
46,677

 
$

 
$

Restricted cash
20,264

 
20,264

 

 

Mutual funds(2)
20,759

 
20,759

 

 

Corporate securities(2)
116,796

 
100,409

 

 
16,387

Corporate obligations(2)
32,080

 

 
12,858

 
19,222

Investments in equity-method investees
26,871

 
26,871

 

 

Investments in certain funds(3)
540

 

 

 
540

Total assets
$
263,987

 
$
214,980

 
$
12,858

 
$
36,149

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Financial instrument obligations
$
(20,264
)
 
$
(20,264
)
 
$

 
$

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

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013, summarized by measurement input category, were as follows:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash, including short-term deposits(1)
$
72,602

 
$
72,602

 
$

 
$

Mutual funds(2)
20,783

 
20,783

 

 

United States government securities(2)
50,379

 
50,379

 

 

Corporate securities(2)
74,559

 
68,624

 

 
5,935

Commercial paper(3)
1,799

 

 
1,799

 

Corporate obligations(2)
31,965

 

 
14,535

 
17,430

Investments in certain funds(4)
844

 

 

 
844

Total
$
252,931

 
$
212,388

 
$
16,334

 
$
24,209

 
(1)
Reported within "Cash and cash equivalents."
(2)
Reported within “Marketable securities.”
(3)
$1.0 million reported within "Cash and cash equivalents" and $0.8 million reported within "Marketable securities."

14



(4)
Reported within "Other investments."

There were no transfers of securities among the various measurement input levels during the nine months ended September 30, 2014.

Changes in the fair value of assets valued using Level 3 measurement inputs during the three and nine months ended September 30, 2014 and 2013, were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Balance, beginning of period
$
32,346

 
$
20,952

 
$
24,209

 
$
2,804

Purchases
2,756

 

 
13,294

 
39,332

Sales
(137
)
 
(32
)
 
(4,869
)
 
(22,958
)
Realized gains (losses) on sale

 

 
(129
)
 
1,556

Unrealized gains (losses)
1,184

 
(2,210
)
 
3,644

 
(2,024
)
Balance, end of period
$
36,149

 
$
18,710

 
$
36,149

 
$
18,710

 
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 Company’s 3/4% Convertible Senior Notes originally due in 2023 had a carrying value of approximately $0.3 million at December 31, 2013, which was a reasonable approximation of fair value. The Company redeemed all outstanding Convertible Senior Notes in January 2014 with a cash payment of $0.3 million.

7.
Property and Equipment

Property and equipment at September 30, 2014, and December 31, 2013, consisted of the following:
 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Rigs and other equipment
$
111,538

 
$
100,884

Buildings and improvements
18,921

 
17,880

Land
1,893

 
1,893

Vehicles
2,170

 
1,869

Furniture and fixtures
690

 
512

Assets in progress
2,083

 
1,114

 
137,295

 
124,152

Accumulated depreciation
(28,958
)
 
(18,262
)
Property and equipment, net
$
108,337

 
$
105,890


The amounts at December 31, 2013, have been revised to reflect measurement period adjustments identified during the nine months ended September 30, 2014, related to the assets acquired from Black Hawk Inc. as if they had been recognized at the acquisition date (see Note 3). Depreciation expense was $3.7 million and $2.6 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation expense was $10.8 million and $7.7 million for the nine months ended September 30, 2014 and 2013, respectively.

8.
Goodwill and Other Intangible Assets


15



The Company's intangible assets at September 30, 2014, and December 31, 2013, all of which are subject to amortization, consisted of the following:
 
 
September 30, 2014
 
December 31, 2013
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Energy segment:
 
 
 
 
 

 
 
 
 
 
 
Customer relationships
$
54,430

 
$
(19,999
)
 
$
34,431

 
$
54,430

 
$
(13,700
)
 
$
40,730

Trade names
4,860

 
(3,006
)
 
1,854

 
4,860

 
(2,315
)
 
2,545

Non-compete agreement
120

 
(19
)
 
101

 
120

 

 
120

 
59,410

 
(23,024
)
 
36,386

 
59,410

 
(16,015
)
 
43,395

 
 
 
 
 
 
 
 
 
 
 
 
Sports segment:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
2,089

 
(550
)
 
1,539

 
1,163

 
(230
)
 
933

Trade names
122

 
(30
)
 
92

 
122

 
(12
)
 
110

 
2,211

 
(580
)
 
1,631

 
1,285

 
(242
)
 
1,043

 
 
 
 
 
 
 
 
 
 
 
 
 Total
$
61,621

 
$
(23,604
)
 
$
38,017

 
$
60,695

 
$
(16,257
)
 
$
44,438

 
The amounts for the Energy segment at December 31, 2013, have been revised to reflect measurement period adjustments identified during the nine months ended September 30, 2014, related to the assets acquired from Black Hawk Inc. as if they had been recognized at the acquisition date (see Note 3).     

Amortization expense was $2.3 million and $2.0 million for the three months ended September 30, 2014 and 2013, respectively. Amortization expense was $7.3 million and $6.6 million for the nine months ended September 30, 2014 and 2013, respectively. Estimated aggregate amortization expense related to the intangible assets for the next five years is as follows:
 
 
 
 
 
 
Amount
 
 
 
 
 
(in thousands)
For the year ended December 31:
 
 
 
 
 
Remainder of 2014
 
 
 
 
$
2,234

2015
 
 
 
 
8,210

2016
 
 
 
 
7,202

2017
 
 
 
 
5,971

2018
 
 
 
 
5,232

Thereafter
 
 
 
 
9,168

Total
 
 
 
 
$
38,017


The changes to the Company’s carrying amount of goodwill were as follows:
 

16



 
Nine Months Ended September 30, 2014
 
Year Ended December 31, 2013
 
Energy
 
Sports
 
Total
 
Energy
 
Sports
 
Total
 
(in thousands)
Balance, beginning of period
$
65,359

 
$
2,171

 
$
67,530

 
$
52,939

 
$
154

 
$
53,093

Acquisitions

 

 

 
10,576

 
5,594

 
16,170

Adjustments to fair value

 

 

 
1,844

 

 
1,844

Impairments

 

 

 

 
(3,577
)
 
(3,577
)
Balance, end of period
$
65,359

 
$
2,171

 
$
67,530

 
$
65,359

 
$
2,171

 
$
67,530

 
The amounts for the Energy segment at December 31, 2013, have been revised to reflect measurement period adjustments identified during the nine months ended September 30, 2014, related to the assets acquired from Black Hawk Inc. as if they had been recognized at the acquisition date (see Note 3). The adjustment to fair value in 2013 represents an adjustment to reflect additional acquisition-date deferred income tax liabilities and non-current deferred compensation obligations related to the acquisition of Sun Well Service, Inc. (“Sun Well”) in May 2012. During the year ended December 31, 2013, the Company recognized a goodwill impairment of $3.6 million related to the shutdown of Ruckus (see Note 4).

The components of goodwill at September 30, 2014, and December 31, 2013, were as follows:
 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Goodwill
$
73,095

 
$
73,095

Accumulated impairment
(5,565
)
 
(5,565
)
Net goodwill
$
67,530

 
$
67,530


9.
Long-term Debt

In 2013, Steel Energy entered into a credit agreement, as amended (the “Amended Credit Agreement”), with Wells Fargo Bank National Association, RBS Citizens, N.A., and Comerica Bank that provided for a borrowing capacity of $105.0 million consisting of a $95.0 million secured term loan (the “Term Loan”) and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable.
Borrowings under the Amended Credit Agreement are collateralized by substantially all the assets of Steel Energy and its wholly-owned subsidiaries Sun Well, Rogue Pressure Services, LLC (“Rogue”), and Black Hawk Ltd., and a pledge of all of the issued and outstanding shares of capital stock of Sun Well, Rogue, and Black Hawk Ltd. Borrowings under the Amended Credit Agreement are fully guaranteed by Sun Well, Rogue, and Black Hawk Ltd. The carrying values as of September 30, 2014, of the assets pledged as collateral by Steel Energy and its subsidiaries under the Amended Credit Agreement were as follows:
 
Amount
 
(in thousands)
Cash and cash equivalents
$
22,625

Accounts receivable
28,195

Property and equipment, net
100,142

Intangible assets, net
36,386

Total
$
187,348

The Amended Credit Agreement has a term that runs through July 2018, with the Term Loan amortizing in quarterly installments of $3.3 million and a balloon payment due on the maturity date. At September 30, 2014, $82.6 million was outstanding under the Term Loan and no amount was outstanding under the Revolving Loans. The carrying value of the amount outstanding under the Amended Credit Agreement is a reasonable approximation of fair value since it is variable rate debt. Principal payments under the Amended Credit Agreement for the remainder of 2014 and subsequent years are as follows:

17



 
 
 
Amount
 
 
 
(in thousands)
Remainder of 2014
 
 
$
3,304

2015
 
 
13,214

2016
 
 
13,214

2017
 
 
13,214

2018
 
 
39,643

Total
 
 
82,589

Less current portion
 
 
13,214

Total long-term debt
 
 
$
69,375

The interest rate on the borrowings under the Amended Credit Agreement was 3.0% at September 30, 2014. For the three months ended September 30, 2014, the Company incurred interest expense of $0.8 million in connection with the Amended Credit Agreement, consisting of $0.7 million in interest on the Term Loans and $0.1 million of amortization of deferred financing fees. For the nine months ended September 30, 2014, the Company incurred interest expense of $2.4 million, consisting of $2.0 million in interest on the Term Loans and $0.4 million of amortization of deferred financing fees. The Company was in compliance with all financial covenants of the Amended Credit Agreement as of September 30, 2014.
Sun Well previously had a credit agreement (the "Sun Well Credit Agreement") with Wells Fargo Bank, National Association, that included a term loan of $20.0 million and a revolving line of credit for up to $5.0 million. All amounts due under the Sun Well Credit Agreement were fully repaid in 2013 and the facility was terminated in July 2013, at which time the Company recognized a loss on extinguishment of $0.5 million. For the three and nine months ended September 30, 2013, the Company incurred interest expense of $0.1 million and $0.3 million, respectively, in connection with the Sun Well Credit Agreement.

10.
Other Liabilities

“Accrued expenses and other current liabilities” consisted of the following:
 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Accrued compensation and related taxes
$
6,061

 
$
4,207

Deferred revenue
941

 
857

Insurance
1,520

 
310

Professional services
287

 
608

Accrued fuel and rig-related charges
1,163

 
889

Tax-related
341

 
385

Other
629

 
507

Total
$
10,942

 
$
7,763

 
“Other long-term liabilities” of $3.7 million and $3.8 million at September 30, 2014, and December 31, 2013, respectively, primarily represented long-term deferred compensation arrangements.
  
11.
Interest and Other Income

“Interest income, net” consisted of the following:


18



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Interest income
$
1,332

 
$
1,217

 
$
4,231

 
$
3,341

Interest expense
(778
)
 
(745
)
 
(2,468
)
 
(1,000
)
Interest income, net
$
554

 
$
472

 
$
1,763

 
$
2,341


"Other income (expense), net" consisted of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Realized gain (loss) on sale of marketable securities, net
$
(1,001
)
 
$
1,863

 
$
4,066

 
$
1,834

Realized loss on financial instrument obligation
(83
)
 

 
(752
)
 

Realized loss upon change to equity method at fair value

 

 
(568
)
 

Foreign exchange loss
(223
)
 

 
(394
)
 

Loss on extinguishment of debt

 
(463
)
 

 
(463
)
Other
8

 
67

 
(69
)
 
37

Other income (expense), net
$
(1,299
)
 
$
1,467

 
$
2,283

 
$
1,408


12.
Income Taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which requires that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Based on its history of operating losses, the Company has offset its net deferred tax assets by a full valuation allowance. Any reversal of the corresponding valuation allowance will generally result in a tax benefit being recorded in the consolidated statement of operations in the respective period.

For the three months ended September 30, 2014 and 2013, the Company recognized a provision for income taxes of $1.5 million and a benefit from income taxes of $0.3 million, respectively. The provision for income taxes in the 2014 period primarily reflects a $1.0 million valuation allowance adjustment as a result of a decrease in deferred tax liabilities related to net unrealized gains on marketable securities. The benefit from income taxes in the 2013 period primarily reflects a $0.7 million valuation allowance adjustment as a result of an increase in deferred tax liabilities related to net unrealized gains on marketable securities.

For the nine months ended September 30, 2014 and 2013, the Company recognized a benefit from income taxes of $1.1 million and $2.3 million, respectively. The benefit from income taxes in each period primarily reflects valuation allowance adjustments of $2.2 million and $2.8 million in the 2014 period and 2013 period, respectively, as a result of an increase in deferred tax liabilities related to net unrealized gains on marketable securities.

13.    Stock Benefit Plans

The Company grants equity-based awards to employees under its 2004 Equity Incentive Plan, as amended (the “2004 Plan”), and grants equity-based awards to non-employee directors under its 2006 Director Plan, as amended (the "2006 Plan", and together with the “2004 Plan”, the "Equity Plans"). Stock-based compensation expense by type of award, all of which was recognized as a component of "Selling, general, and administrative expenses" in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, was as follows:
 

19



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Stock options
$

 
$
25

 
$
36

 
$
76

Restricted stock
622

 
277

 
2,269

 
1,903

Total stock-based compensation
$
622

 
$
302

 
$
2,305

 
$
1,979


Restricted stock activity in the Equity Plans during the nine months ended September 30, 2014, was as follows:

 
Amount
 
(in thousands)
Non-vested stock, January 1, 2014
142

Awarded
24

Vested
(21
)
Forfeited
(12
)
Non-vested stock, September 30, 2014
133


The Company did not grant any stock options during the nine months ended September 30, 2014.

14.
Net Income (Loss) Per Share

Basic net income (loss) attributable to Steel Excel per share of common stock is computed by dividing net income (loss) attributable to Steel Excel by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to Steel Excel gives effect to all potentially dilutive common shares outstanding during the period.

Amounts used in the calculation of basic and diluted net income (loss) per share of common stock for the three and nine months ended September 30, 2014 and 2013, were as follows:


20



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share data)
Numerators:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(945
)
 
$
3,047

 
$
11,852

 
$
7,496

Non-controlling interest
(238
)
 
(178
)
 
99

 
(122
)
Net income (loss) from continuing operations attributable to Steel Excel Inc.
$
(1,183
)
 
$
2,869

 
$
11,951

 
$
7,374

 
 
 
 
 
 
 
 
Loss from discontinued operations, net of taxes
$

 
$
(888
)
 
$

 
$
(1,477
)
Non-controlling interest

 
489

 

 
954

Loss from discontinued operations, net of taxes, attributable to Steel Excel Inc.
$

 
$
(399
)
 
$

 
$
(523
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to Steel Excel Inc.
$
(1,183
)
 
$
2,470

 
$
11,951

 
$
6,851

 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
11,437

 
12,529

 
11,769

 
12,736

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock-based awards

 
17

 
21

 
18

Diluted weighted average common shares outstanding
11,437

 
12,546

 
11,790

 
12,754

 
 
 
 
 
 
 
 
Basic income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(0.10
)
 
$
0.23

 
$
1.02

 
$
0.58

Loss from discontinued operations, net of taxes
$

 
$
(0.03
)
 
$

 
$
(0.04
)
Net income (loss)
$
(0.10
)
 
$
0.20

 
$
1.02

 
$
0.54

 
 
 
 
 
 
 
 
Diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(0.10
)
 
$
0.23

 
$
1.01

 
$
0.58

Loss from discontinued operations, net of taxes
$

 
$
(0.03
)
 
$

 
$
(0.04
)
Net income (loss)
$
(0.10
)
 
$
0.20

 
$
1.01

 
$
0.54


The number of shares used in the calculation of diluted earnings (loss) per share for the three months ended September 30, 2014, excluded 23,000 incremental shares related to restricted stock awards.  Such incremental shares were excluded from the calculation of diluted earnings (loss) per share due to their anti-dilutive effect on the loss from continuing operations.

15.
Accumulated Other Comprehensive Income

Changes in the components of "Accumulated other comprehensive income" were as follows:
 
 
 
 
 
Unrealized
Gains on
Securities
 
Cumulative
Translation
Adjustment
 
Total
 
 
 
 
(in thousands)
Balance, January 1, 2014
 
 
 
$
6,921

 
$
(405
)
 
$
6,516

Current period other comprehensive income
 
 
 
4,134

 
30

 
4,164

Balance, September 30, 2014
 
 
 
$
11,055

 
$
(375
)
 
$
10,680


16.
Segment Information


21



The Company currently reports its business in two reportable segments - Energy and Sports. The Company measures profit or loss of its segments based on operating income (loss).

Segment information relating to the Company's results of continuing operations was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Revenues
 
 
 
 
 
 
 
Energy
$
49,701

 
$
25,162

 
$
140,767

 
$
78,272

Sports
8,882

 
6,258

 
14,899

 
8,260

Total revenues
$
58,583

 
$
31,420

 
$
155,666

 
$
86,532

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Energy
$
8,551

 
$
2,007

 
$
21,923

 
$
8,626

Sports
1,146

 
975

 
(896
)
 
(318
)
Total segment operating income
9,697

 
2,982

 
21,027

 
8,308

Corporate and other business activities
(3,517
)
 
(2,033
)
 
(10,878
)
 
(6,657
)
Interest income, net
554

 
472

 
1,763

 
2,341

Other income (expense), net
(1,299
)
 
1,467

 
2,283

 
1,408

Income from continuing operations before income taxes and equity method income
$
5,435

 
$
2,888

 
$
14,195

 
$
5,400

 
 
 
 
 
 
 
 
Depreciation and amortization expense:
 
 
 
 
 
 
 
Energy
$
5,519

 
$
4,386

 
$
16,924

 
$
13,923

Sports
431

 
150

 
1,203

 
438

Total depreciation and amortization expense
$
5,950

 
$
4,536

 
$
18,127

 
$
14,361


Segment information related to the Company's assets was as follows:
 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Sports
$
19,344

 
$
20,495

Energy
256,416

 
244,401

Corporate and other business activities
276,249

 
273,798

Total assets
$
552,009

 
$
538,694

 
17.
Related Party Transactions

Steel Partners Holdings L.P. ("SPLP") beneficially owned approximately 57.9% of the Company’s outstanding common stock as of September 30, 2014. The power to vote and dispose of the securities held by SPLP is controlled by Steel Partners Holdings GP Inc. (“SPH GP”). Warren G. Lichtenstein, the Chairman of the Board of Directors and President of the Company's Sports segment, is also the Executive Chairman of SPH GP. Certain other affiliates of SPH GP hold positions with the Company, including Jack L. Howard, as Vice Chairman and principal executive officer, James F. McCabe, Jr., as Chief Financial Officer, and Leonard J. McGill, as Vice President, General Counsel, and Secretary. Each of Warren G. Lichtenstein and Jack L. Howard is compensated with cash compensation and equity awards or equity-based awards in amounts that are consistent with the Company’s Non-employee Director Compensation Policy.

Effective January 1, 2014, the services provided by SP Corporate Services LLC (“SP Corporate”), an affiliate of SPLP, were expanded, with the Company paying SP Corporate $8.0 million annually for such services. In October 2014, the annual service fee was increased to $8.2 million to include fees for executive services provided by SP Corporate to the Company's

22



Sports business. The services agreement with SP Corporate and subsequent amendments were approved by a committee of the Company’s independent directors. In addition, the Company reimburses SP Corporate and other SPLP affiliates for certain expenses incurred on the Company’s behalf. During the three months ended September 30, 2014 and 2013, the Company incurred expenses of $2.2 million and $1.0 million, respectively, related to services provided by SP Corporate and reimbursements of expenses incurred on its behalf by SP Corporate and its affiliates. During the nine months ended September 30, 2014 and 2013, the Company incurred expenses of $6.6 million and $3.0 million, respectively, related to services provided by SP Corporate and reimbursements of expenses incurred on its behalf by SP Corporate and its affiliates. The Company owed SP Corporate and its affiliates $0.2 million at September 30, 2014.

In October 2013, iGo contracted with SP Corporate to provide certain executive, other employee, and corporate services for a fixed annual fee of $0.4 million. In addition, iGo will reimburse SP Corporate for reasonable and necessary business expenses incurred on iGo’s behalf. The services agreement was approved by the independent directors of iGo.

At September 30, 2014, the Company held $15.2 million of short-term deposits at WebBank, an affiliate of SPLP. For the three months ended September 30, 2014 and 2013, the Company recorded interest income of $23,000 and $21,000, respectively, on such deposits. For the nine months ended September 30, 2014 and 2013, the Company recorded interest income of $65,000 and $69,000, respectively.

18.
Supplemental Cash Flow Information

Cash paid for interest and income taxes and non-cash investing and financing activities for the nine months ended September 30, 2014 and 2013, was as follows:

 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Interest paid
$
2,092

 
$
539

Income taxes paid, net of refunds
$
151

 
$
1,594

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Reclassification of available-for-sale securities to equity method investment
$
27,647

 
$

Securities received in exchange for financial instrument obligations
$
19,341

 
$

Contribution of advances by non-controlling interest
$
268

 
$

Restricted stock awards surrendered to satisfy tax withholding obligations upon vesting
$
14

 
$

  
19.
Stock Split

In June 2014, following stockholder approval and authorization from its board of directors, the Company effected a 1-for-500 reverse stock split (the "Reverse Split"), immediately followed by a 500-for-1 forward stock split (the "Forward Split", and together with the Reverse Split, the "Reverse/Forward Split"), of its common stock effective as of the close of business on June 18, 2014. As a result of the Reverse Split, stockholders holding fewer than 500 shares received a cash payment for all of their outstanding shares based on a per share price equal to the closing price of the Company’s common stock on June 18, 2014, the effective date of the Reverse/Forward Split. Stockholders holding 500 or more shares as of the effective date of the Reverse/Forward Split did not receive any payments for fractional shares resulting from the Reverse Split, and therefore the total number of shares held by such holders did not change as a result of the Reverse/Forward Split. 

In connection with the Reverse Split, the Company paid $10.1 million in July 2014 for 295,659 shares of common stock and the return of 1,388 non-vested restricted stock awards previously awarded to employees.



23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. See Item I Part 1A in the Company’s annual report on Form 10-K for the year ended December 31, 2013, for a description of certain factors that might cause such a difference.

Steel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments - Energy and Sports. The Energy segment focuses on providing drilling and production services to the oil and gas industry. The Sports segment provides event-based sports services and other health-related services. The Company also continues to identify other new business acquisition opportunities.

In June 2013, the Company acquired 80% of the outstanding common stock of UK Elite Soccer, Inc. ("UK Elite"). UK Elite is included in the Company's Sports segment. In 2014, UK Elite acquired the business 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 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. (“Black Hawk Inc.”), a provider of drilling and production services to the oil and gas industry. Black Hawk Ltd. is included in the Company's Energy segment. The fair values of the assets and liabilities of Black Hawk Inc. recognized at December 31, 2013, were provisional pending further analysis and valuations. In 2014, the Company recorded measurement period adjustments to reflect revised fair values of the assets and liabilities of Black Hawk Inc. The Company's balance sheet at December 31, 2013, has been revised to reflect such measurement period adjustments as if they were recorded at the acquisition date.

In July 2013, Steel Energy Services Ltd. ("Steel Energy"), a wholly-owned subsidiary of the Company, entered into a credit agreement, as amended (the "Amended Credit Agreement") that provided for a borrowing capacity of $105.0 million consisting of a $95.0 million secured term loan and up to $10.0 million in revolving loans.

In November 2013 the Company shut down the operations of Ruckus Sports LLC (“Ruckus”), an obstacle course and mass-participation events company that was controlled by the Company through its representation on the Ruckus board, after it did not meet operational and financial expectations. Ruckus, which was acquired in January 2013, is reported as a discontinued operation in the Company’s consolidated financial statements.

In June 2014, following stockholder approval and authorization from its board of directors, the Company effected a 1-for-500 reverse stock split (the "Reverse Split"), immediately followed by a 500-for-1 forward stock split (the "Forward Split", and together with the Reverse Split, the "Reverse/Forward Split"), of its common stock effective as of the close of business on June 18, 2014. In connection with the Reverse Split, the Company paid $10.1 million in July 2014 for 295,659 shares of common stock and the return of 1,388 non-vested restricted stock awards previously awarded to employees.

The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto.

Results of Operations

The net revenues and operating income by reportable segment for the three and nine months ended September 30, 2014 and 2013, were as follows:


24



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Energy net revenues
$
49,701

 
$
25,162

 
$
140,767

 
$
78,272

Sports net revenues
8,882

 
6,258

 
14,899

 
8,260

Consolidated net revenues
$
58,583

 
$
31,420

 
$
155,666

 
$
86,532

 
 
 
 
 
 
 
 
Energy operating income
$
8,551

 
$
2,007

 
$
21,923

 
$
8,626

Sports operating income (loss)
1,146

 
975

 
(896
)
 
(318
)
Corporate and other business activities
$
(3,517
)
 
$
(2,033
)
 
$
(10,878
)
 
$
(6,657
)
Consolidated operating income
$
6,180

 
$
949

 
$
10,149

 
$
1,651


Three months ended September 30, 2014, compared to three months ended September 30, 2013

Net revenues for the three months ended September 30, 2014, increased by $27.2 million as compared to the 2013 period. Net revenues from the Company's Energy segment increased by $24.5 million primarily as a result of $19.9 million in revenues from Black Hawk Ltd., which business was acquired in December 2013, and an increase in revenues of $4.6 million in the Energy segment's other operations due primarily to an increase in rig utilization for snubbing services and an increase in revenues from flow back services related to new equipment purchased in 2014. Net revenues in the Company's Sports segment increased by $2.6 million from an increase of $2.3 million in revenues from UK Elite primarily as a result of an increase in services provided and operating the businesses acquired in 2014 and an increase in revenues of $0.3 million in the segment's baseball operations.

Gross profit for the three months ended September 30, 2014, increased by $9.9 million as compared to the 2013 period, and as a percentage of revenue increased to 30.7% in the third quarter of 2014 from 25.7% in the comparable 2013 period. Gross profit in the Energy segment increased by $8.8 million and as a percentage of revenue increased to 27.9% in the third quarter of 2014 from 20.2% in the comparable 2013 period. Gross profit in the Energy segment increased as a result of $6.0 million in gross profit from Black Hawk Ltd. and an increase in gross profit of $2.7 million in the Energy segment's other operations due primarily to the increase in revenues. Gross profit in the Sports segment in the 2014 period increased by $1.1 million primarily as a result of an increase of $0.9 million in gross profit from UK Elite resulting from the increase in revenues and an increase in gross profit of $0.2 million in the segment's baseball operations.

SG&A expenses in the third quarter 2014 increased by $4.4 million as compared to the comparable 2013 period. SG&A expenses in the Energy segment increased by $2.1 million partially as a result of $0.9 million of costs incurred at Black Hawk Ltd. in the 2014 period. SG&A expenses in the Energy segment's other operations increased $1.2 million as a result of the increase in revenues, business development costs incurred, and the reversal of a contingent consideration liability associated with a prior period acquisition and certain credits received related to insurance in the 2013 period with no comparable benefits recognized in the current period. SG&A expenses in the Sports segment increased by $0.8 million primarily as a result of additional costs incurred at UK Elite associated with the increase in revenues in the period. SG&A expenses in corporate and other business activities increased by $1.5 million primarily as a result of increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in the 2014 period. 

Operating income in the third quarter 2014 was $6.2 million as compared to $0.9 million in the 2013 period. Operating income in the Energy segment increased by $6.5 million as a result of $4.5 million in operating income from Black Hawk Ltd. and an increase in operating income of $2.0 million in the Energy segment's other operations. Operating income in the Sports segment increased by $0.2 million primarily due to the operating results of UK Elite. The operating loss from Corporate and other business activities increased by $1.5 million from increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in the 2014 period.

Amortization of intangibles in the third quarter 2014 increased by $0.3 million as compared to the comparable 2013 period as a result of amortization expense on the intangible assets recognized in connection with the businesses acquired by Black Hawk Ltd. and UK Elite, partially offset by a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

Net interest income of $0.6 million in the third quarter 2014 increased by $0.1 million as compared to the 2013 period primarily as a result of an increase in interest income on investments.

25




Other expense of $1.3 million in the third quarter 2014 primarily represented realized losses on the sale of marketable securities of $1.0 million and a foreign exchange loss of $0.2 million.

The Company recognized a provision for income taxes of $1.5 million and a benefit from income taxes of $0.3 million for the three months ended September 30, 2014 and 2013, respectively. The provision for income taxes in the 2014 period primarily reflects a valuation allowance adjustment as a result of a decrease in deferred tax liabilities related to net unrealized gains on marketable securities. The benefit for income taxes in the 2013 period primarily reflects a valuation allowance adjustment as a result of an increase in deferred tax liabilities related to net unrealized gains on marketable securities.

Nine months ended September 30, 2014, compared to nine months ended September 30, 2013

Net revenues for the nine months ended September 30, 2014, increased by $69.1 million as compared to the 2013 period. Net revenues from the Company's Energy segment increased by $62.5 million primarily as a result of $55.9 million in revenues from Black Hawk Ltd. and an increase in revenues of $6.6 million in the Energy segment's other operations due primarily to an increase in rig utilization for snubbing services and an increase in revenues from flow back services related to new equipment purchased in 2014. Net revenues in the Company's Sports segment increased by $6.6 million primarily as a result of $5.5 million in revenues from UK Elite, which was acquired in June 2013, and an increase in revenues of $1.0 million in the segment's baseball operations.

Gross profit for the nine months ended September 30, 2014, increased by $20.1 million as compared to the 2013 period, and as a percentage of revenue increased slightly to 28.6% from 28.3%. Gross profit in the Energy segment increased by $17.3 million, and as a percentage of revenue increased to 26.7% in the first nine months of 2014 from 26.0% in the comparable 2013 period. Gross profit in the Energy segment increased as a result of $16.1 million in gross profit from Black Hawk Ltd. and an increase in gross profit of $1.1 million in the Energy segment's other operations. Gross profit in the Sports segment in the 2014 period increased by $2.8 million primarily as a result of $2.2 million in gross profit from UK Elite and an increase in gross profit of $0.6 million in the segment's baseball operations.

SG&A expenses in the first nine months of 2014 increased by $10.9 million as compared to the comparable 2013 period. SG&A expenses in the Energy segment increased by $3.5 million partially as a result of $2.2 million of costs incurred at Black Hawk Ltd. in the 2014 period. SG&A expenses in the Energy segment's other operations increased $1.3 million as a result of the increase in revenues, business development costs incurred, and from the reversal of a contingent consideration liability associated with a prior period acquisition and certain credits received related to insurance in the 2013 period with no comparable benefits recognized in the current period. SG&A expenses in the Sports segment increased by $3.1 million primarily as a result of costs incurred at UK Elite, including those associated with operating the businesses acquired in the current period. SG&A expenses in corporate and other business activities increased by $4.2 million primarily as a result of increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in the 2014 period. 

Operating income in the first nine months of 2014 was $10.1 million as compared to $1.7 million in the 2013 period. Operating income in the Energy segment increased by $13.3 million as a result of $12.0 million in operating income from Black Hawk Ltd. and an increase in operating income of $1.3 million in the Energy segment's other operations. The operating loss in the Sports segment increased by $0.6 million primarily due to the expected seasonal losses incurred in the first half of the current year at UK Elite with no corresponding losses in the prior year. The operating loss from Corporate and other business activities increased by $4.2 million from increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in the 2014 period.

Amortization of intangibles in the first nine months of 2014 increased by $0.7 million as compared to the comparable 2013 period as a result of amortization expense on the intangible assets recognized in connection with the businesses acquired by Black Hawk Ltd. and UK Elite, partially offset by a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

Net interest income of $1.8 million in the first nine months of 2014 decreased by $0.6 million as compared to the 2013 period primarily as a result of an increase in interest expense of $1.5 million resulting from the borrowings under the Amended Credit Agreement, partially offset by an increase in interest income on investments of $0.9 million.

Other income of $2.3 million in the first nine months of 2014 primarily represented realized gains on the sale of marketable securities of $4.1 million, partially offset by a loss of $0.8 million recognized on financial instrument obligations, a

26



loss of $0.6 million recognized upon initially accounting for an investment under the equity method of accounting at fair value, and a foreign exchange loss of $0.4 million.

The Company recognized a benefit for income taxes of $1.1 million and $2.3 million for the nine months ended September 30, 2014 and 2013, respectively. The benefit from income taxes in each period primarily reflects valuation allowance adjustments as a result of an increase in deferred tax liabilities related to unrealized gains on marketable securities.

Financial Condition

The Amended Credit Agreement provided for a borrowing capacity of $105.0 million consisting of a $95.0 million secured term loan (the “Term Loan”) and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. Borrowings under the Amended Credit Agreement, which totaled $82.6 million at September 30, 2014, are collateralized by substantially all the assets of Steel Energy and its wholly-owned subsidiaries Sun Well Service, Inc. (“Sun Well”), Rogue Pressure Services, LLC (“Rogue”), and Black Hawk Ltd., and a pledge of all of the issued and outstanding shares of capital stock of Sun Well, Rogue, and Black Hawk Ltd. Borrowings under the Amended Credit Agreement are fully guaranteed by Sun Well, Rogue, and Black Hawk Ltd. The Company was in compliance with all financial covenants of the Amended Credit Agreement as of September 30, 2014.

The Company finances its operations and capital expenditure requirements from its existing cash and marketable securities balances, which at September 30, 2014, totaled $46.7 million and $169.6 million, respectively. Working capital in the first nine months of 2014 decreased by $34.7 million due primarily to a decrease of $27.8 million from a reclassification of current available-for-sale securities to non-current equity method investments and additional equity method investments made during the period, the repayment of $9.9 million in long-term debt, and an increase of $4.6 million in accounts receivable from the timing of collections, partially offset by an increase of $2.9 million in accounts payable and accrued expenses from the timing of payments.

Cash flows from operating activities of continuing operations increased by $11.6 million in the first nine months of 2014 as compared to the 2013 period due primarily to an increase in cash generated from net income.

During the first nine months of 2014, the Company used $26.8 million of cash for investing activities. The Company made purchases of marketable securities, net of proceeds from sales and restricted cash, of $10.1 million, invested $13.6 million in property and equipment, and made other investments of $3.0 million.

During the first nine months of 2014, the Company used $30.9 million of cash for financing activities. The Company paid an aggregate of $20.4 million to acquire treasury shares and repurchase common stock in connection with the Reverse Split, made debt repayments on the Amended Credit Facility of $9.9 million, and paid $0.5 million for acquisitions net of cash acquired.

At September 30, 2014, the Company had $216.3 million in cash and marketable securities, exclusive of $20.3 million of restricted cash related to short sale transactions on certain financial instruments for which the Company has an obligation to deliver or purchase securities at a later date.

Available-for-sale securities at September 30, 2014, included short-term deposits, corporate debt and equity instruments, and mutual funds, and were recorded on the consolidated balance sheet at fair market value, with any related unrealized gain or loss reported as a component of “Accumulated other comprehensive income” in stockholders’ equity. We expect to realize the full value of all our marketable securities upon maturity or sale, as we have the intent and ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge that could adversely impact our financial results. In addition, we maintain our cash and marketable securities with certain financial institutions, in which our balances exceed the limits that are insured by the Federal Deposit Insurance Corporation. If the underlying financial institutions fail or other adverse events occur in the financial markets, our cash balances may be impacted.

We believe that our cash balances will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. We anticipate making additional acquisitions and investments, and we may be required to use a significant portion of our available cash balances for such acquisitions and investments or for working capital needs thereafter. The consummation of additional acquisitions, prevailing economic conditions, and financial, business and other factors beyond our control could adversely affect our estimates of our future cash requirements. As such, we could be required to fund our cash requirements by alternative financing. In these instances, we may seek to raise such additional funds

27



through public or private equity or debt financings or from other sources. As a result, we may not be able to obtain adequate or favorable equity financing, if needed, due in part to our shares of common stock currently trading on the OTCQB Market. Any equity financing we obtain may dilute existing ownership interests, and any debt financing could contain covenants that impose limitations on the conduct of our business. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all.

Commitments and Contingencies

Contractual Obligations

In 2014, the Company entered into short sale transactions on certain financial instruments in which the Company received proceeds from the sale of such financial instruments and incurred obligations to deliver or purchase securities at a later date. As of September 30, 2014, the Company's obligations for such transactions totaled approximately $20.3 million, consisting of market indices for $19.6 million, corporate securities for $0.5 million, and option contracts, primarily covered calls, for $0.1 million. There is no stated repayment date for the obligations related to market indices and corporate securities; the obligations related to option contracts come due within a period of no longer than four months. Such obligations are reported as "Financial instrument obligations" as a component of current liabilities in the Company's consolidated balance sheet.

There were no other material changes in the Company’s contractual obligations at September 30, 2014, as compared to those reported in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

Legal Proceedings

From time to time we are subject to litigation or claims that arise in the normal course of business. While the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, and results of operations could be materially and adversely affected.
Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), which changes the requirements for reporting discontinued operations. Pursuant to this pronouncement, the disposal of a component of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on an entity’s operations and financial results. This pronouncement also requires additional disclosures for discontinued operations and requires disclosures about disposals of individually significant components of an entity that do not qualify for discontinued operations presentation in the financial statements. ASU No. 2014-08 is effective for annual reporting periods beginning after December 15, 2014, and for interim reporting period within those years. The Company does not expect the adoption of ASU No. 2014-08 to have a material effect on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a core principle, achieved through a five-step process, that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and for interim reporting periods within those years. Upon adoption, ASU No. 2014-09 can be applied either retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. Early application is not permitted. The Company needs to evaluate the impact on its consolidated financial statements of adopting ASU No. 2014-09 and will determine the implementation method to be used.
In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718), to address diversity in accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting period within those years, with earlier adoption permitted. The Company does not expect the adoption of ASU No. 2014-12 to have a material effect on its consolidated financial statements.

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Critical Accounting Policies

The Company's critical accounting policies have not changed from those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies in our annual report on Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Vice Chairman and our Chief Financial Officer ("CFO"), we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this quarterly report on Form10-Q. Based upon that evaluation, our Vice Chairman and our CFO have concluded that the design and operation of our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our Vice Chairman and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three-month period ended September 30, 2014, which was the period covered by this quarterly report on Form 10-Q, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

A control system, no matter how well conceived and operated, can only provide reasonable assurance that the objectives of the control system are met.  Because of these inherent limitations, no evaluation of our disclosure controls and procedures or our internal control over financial reporting will provide absolute assurance that misstatements due to error or fraud will not occur.

PART II. OTHER INFORMATION
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 16, 2013, and June 24, 2014, the Company's Board of Directors authorized stock repurchase programs to acquire up to 200,000 shares and 500,000 shares, respectively, of the Company's common stock. Any such repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market in compliance with applicable laws and regulations.  The repurchase programs are expected to continue indefinitely, unless shortened by the Board of Directors. 

The following table summarizes, by month, the repurchases made during the three months ended September 30, 2014, under the repurchase programs.


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(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
 
 
 
Month of July 2014
 
114,791

 
$
35.01

 
114,791

 
402,999

Month of August 2014
 
14,504

 
$
32.96

 
14,504

 
388,495

Month of September 2014
 
5,650

 
$
31.04

 
5,650

 
382,845

Total
 
134,945

 
$
34.63

 
134,945

 
 




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Item 6. Exhibits

10.1*
Amendment No. 3 to the Amended and Restated Management Services Agreement between Steel Excel Inc. and SP Corporate Services LLC, dated as of January 1, 2014
31.1*
Certification of the Principal Executive Officer, Jack L. Howard, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Principal Financial Officer, James F. McCabe, Jr., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of the Principal Executive Officer, Jack L. Howard, and the Principal Financial Officer, James F. McCabe, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance Document.
101.SCH**
XBRL Taxonomy Extension Schema Document.
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.
** Furnished with this Form 10-Q. In accordance with Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Steel Excel Inc.
 
 
 
 
 
 
By:
/s/Jack L. Howard
 
 
Jack L. Howard
Vice Chairman
(Principal executive officer)
Date:
November 6, 2014
 
 
 
 
By:
/s/James F. McCabe, Jr.
 
 
 
James F. McCabe, Jr.
Chief Financial Officer
(Principal financial officer)
Date:
November 6, 2014

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