UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-Q

 

(Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

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: 001-12681

 

GLOBAL SELF STORAGE, INC.

(Exact name of registrant as specified in its charter) 

 

 

Maryland

 

13-3926714

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Global Self Storage, Inc.

11 Hanover Square, 12th Floor

New York, NY 10005

(212) 785-0900

(Address, including zip code, and telephone number, including area code, of Company’s principal executive offices)

John F. Ramírez, Esq.

Global Self Storage, Inc.

11 Hanover Square, 12th Floor

New York, NY 10005

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

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. x  Yes o  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). o  Yes x  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 the definitions 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

 

o

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

x

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 30, 2016, was 7,416,766.

 

 

 

 


 

Table of Contents

 

STATEMENT ON FORWARD LOOKING INFORMATION

 

3

PART I – FINANCIAL INFORMATION

 

4

 

Item 1.

Financial Statements (Unaudited).

 

4

 

Item 2.

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

 

21

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

26

 

Item 4.

Controls and Procedures.

 

26

PART II – OTHER INFORMATION

 

28

 

Item 1.

Legal Proceedings.

 

28

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

28

 

Item 3.

Defaults Upon Senior Securities.

 

28

 

Item 4.

Mine Safety Disclosures.

 

28

 

Item 5.

Other Information.

 

28

 

Item 6.

Exhibits.

 

28

SIGNATURES

 

29

Exhibit Index

 

30

 

2


 

STATEMENT ON FORWARD LOOKING INFORMATION

Certain information presented in this report contains “forward-looking statements” within the meaning of the federal securities laws. Forward looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates” or “intends,” or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including without limitation, management’s examination of historical operating trends and estimates of future earnings, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved.

All forward looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in in “Item 1A. Risk Factors” included in our most recent registration statement on Form 10. Such factors include, but are not limited to:

 

·

general risks associated with the ownership and operation of real  estate, including  changes in  demand, risks related to development of self storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in tax, real estate and zoning laws and regulations;

 

·

risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;

 

·

the impact of competition from new and existing  self storage  and  commercial  facilities  and  other storage alternatives;

 

·

difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed facilities;

 

·

risks related to our development of new facilities and/or participation in joint ventures;

 

·

risks of ongoing litigation and other legal and regulatory actions, which  may  divert management’s time  and attention, require us to pay damages and expenses or restrict the operation of our business;

 

·

the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing the environment, taxes and o u r tenant reinsurance business and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;

 

·

risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries;

 

·

changes in federal or state tax laws related to the taxation of REITs, which could impact our status as a REIT;

 

·

security breaches or a failure of our networks, systems or technology could adversely impact our business, customer and employee relationships;

 

·

difficulties in raising capital at a reasonable cost; and

 

·

economic uncertainty due to the impact of terrorism or war.

 

 

3


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

GLOBAL SELF STORAGE, INC.

CONSOLIDATED BALANCE SHEET

March 31, 2016

(Unaudited)

 

Assets

 

 

 

 

 

Self storage facilities, net

 

$

34,444,693

 

Cash and cash equivalents

 

 

3,338,816

 

Investments in securities

 

 

4,550,811

 

Accounts receivable

 

 

78,959

 

Prepaid expenses and other assets

 

 

193,875

 

Total assets

 

$

42,607,154

 

Liabilities and equity

 

 

 

 

Accounts payable and accrued expenses

 

$

565,794

 

Total liabilities

 

 

565,794

 

Commitments and contingencies

 

 

 

 

Equity

 

 

 

 

Common stock, $0.01 par value, 19,900,000 shares authorized; 7,416,766 issued and

   outstanding

 

 

74,168

 

Series A participating preferred stock, $0.01 par value, 100,000 shares authorized: zero

   shares issued and outstanding

 

 

 

Additional paid in capital

 

 

32,908,888

 

Accumulated comprehensive income

 

 

2,102,956

 

Retained earnings

 

 

6,955,348

 

Total equity

 

 

42,041,360

 

Total liabilities and equity

 

$

42,607,154

 

 

 

 

 

See notes to consolidated financial statements.

 

 

4


 

GLOBAL SELF STORAGE, INC.

STATEMENT OF ASSETS AND LIABILITIES (Predecessor Basis)

December 31, 2015

(Unaudited)

 

Assets

 

 

 

 

Investments, at value

 

 

 

 

Wholly owned subsidiaries (cost $27,749,573 )

 

$

34,624,573

 

Unaffiliated issuers (cost $5,974,192)

 

 

7,809,137

 

 

 

 

42,433,710

 

Cash

 

 

29,763

 

Dividends receivable

 

 

14,403

 

Other assets

 

 

12,320

 

Total assets

 

 

42,490,196

 

Liabilities

 

 

 

 

Accounts payable and accrued expenses

 

 

139,025

 

Due to affiliates

 

 

64,649

 

Total liabilities

 

 

203,674

 

Net Assets

 

$

42,286,522

 

Net Asset Value Per Share

 

 

 

 

(applicable to 7,416,766 shares outstanding: 20,000,000 shares of $.01 par value

   authorized )

 

$

5.70

 

Net Assets Consist of

 

 

 

 

Paid in capital

 

$

32,983,056

 

Undistributed net investment income

 

 

593,521

 

Net unrealized appreciation on investments

 

 

8,709,945

 

 

 

$

42,286,522

 

 

See notes to consolidated financial statements.

 

 

5


 

GLOBAL SELF STORAGE, INC.

(Unaudited)

 

STATEMENT OF OPERATIONS (Predecessor Basis)

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF OPERATIONS (Successor Basis)

 

 

 

 

(Unaudited)

 

For the Period

 

 

 

 

(Unaudited)

 

For the Period

 

 

 

January 1, 2016

 

 

 

 

 

 

January 19, 2016

 

 

 

through

 

 

 

 

 

 

through

 

 

 

January 18, 2016

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Income

 

 

 

 

 

 

 

Revenues

 

 

 

 

Dividends

 

 

 

 

 

 

 

Rental income

 

$

893,936

 

Unaffiliated issuers

 

$

5,165

 

 

 

 

Other property related income

 

 

31,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment income

 

 

5,165

 

 

 

 

Total revenues

 

 

925,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Expenses

 

 

 

 

Compensation and benefits

 

 

39,109

 

 

 

 

Property operations

 

 

434,797

 

Auditing

 

 

6,570

 

 

 

 

General and administrative

 

 

311,481

 

Occupancy and other office expenses

 

 

4,091

 

 

 

 

Depreciation and amortization

 

 

169,967

 

Directors

 

 

2,070

 

 

 

 

 

 

 

 

 

Bookkeeping and pricing

 

 

1,440

 

 

 

 

Total expenses

 

 

916,245

 

Custodian

 

 

720

 

 

 

 

 

 

 

 

 

Insurance

 

 

720

 

 

 

 

Operating income

 

 

8,983

 

Transfer agent

 

 

630

 

 

 

 

 

 

 

 

 

Stockholder communications

 

 

360

 

 

 

 

Other income

 

 

 

 

Registration

 

 

77

 

 

 

 

Dividend and interest income

 

 

40,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

 

55,787

 

 

 

 

Net income

 

$

49,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

 

(50,622

)

 

 

 

Earnings per share - basic and diluted

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized and Unrealized Gain (Loss)

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

7,416,766

 

Net unrealized depreciation

 

 

 

 

 

 

 

 

 

 

 

 

Unaffiliated issuers

 

 

(22,605

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net .unrealized loss

 

 

(22,605

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in net assets resulting from operations

 

$

(73,227

)

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

6


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Successor Basis)

For the Period January 19, 2016 through March 31, 2016

(Unaudited)

 

Net income

 

$

49,121

 

Other comprehensive income

 

 

 

 

Unrealized gain on investment securities available-for-sale

 

 

290,616

 

Comprehensive income

 

$

339,737

 

 

See notes to consolidated financial statements.

 

 

7


 

GLOBAL SELF STORAGE, INC.

STATEMENT OF OPERATIONS (Predecessor Basis)

Three Months Ended March 31, 2015

(Unaudited)

 

Investment Income

 

 

 

 

Dividends

 

 

 

 

Unaffiliated issuers

 

$

39,002

 

Total investment income

 

 

39,002

 

Expenses

 

 

 

 

Compensation and benefits

 

 

194,660

 

Occupancy and other office expenses

 

 

154,335

 

Registration

 

 

62,560

 

Legal

 

 

18,000

 

Bookkeeping and pricing

 

 

17,250

 

Directors

 

 

14,250

 

Auditing

 

 

10,350

 

Stockholder communications

 

 

5,520

 

Custodian

 

 

4,050

 

Insurance

 

 

2,700

 

Transfer agent

 

 

2,700

 

Other

 

 

450

 

Total expenses

 

 

486,825

 

Net investment loss

 

 

(447,823

)

Realized and Unrealized Gain (Loss)

 

 

 

 

Net realized gain on investments in unaffiliated issuers

 

 

900,368

 

Net unrealized appreciation (depreciation)

 

 

 

 

Wholly owned subsidiaries

 

 

1,145,000

 

Unaffiliated issuers

 

 

(278,832

)

Net realized and unrealized gain

 

 

1,766,536

 

Net increase in net assets resulting from operations

 

$

1,318,713

 

 

See notes to consolidated financial statements.

 

 

8


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Period January 19, 2016 through March 31, 2016

(Unaudited)

 

Net assets to allocate to stockholders' equity at January 18, 2016

 

$

42,213,295

 

 

 

 

 

 

Common stock, par value

 

 

 

 

Allocated balance as of January 18, 2016; 7,416,766 shares, $0.01 par value

   (Predecessor Basis)

 

 

74,168

 

Balance as of March 31, 2016 (7,416,766 shares, $0.01 par value)

 

 

74,168

 

 

 

 

 

 

Paid in capital

 

 

 

 

Allocated balance as of January 18, 2016 (Predecessor Basis)

 

 

32,908,888

 

Balance as of March 31, 2016

 

 

32,908,888

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

Unrealized gain on available for sale securities as of January 18, 2016 (Predecessor Basis)

 

 

1,812,340

 

Unrealized gain on available for sale securities

 

 

290,616

 

Balance as of March 31, 2016

 

 

2,102,956

 

 

 

 

 

 

Retained earnings

 

 

 

 

Allocated balance as of January 18, 2016 (Predecessor Basis)

 

 

9,230,239

 

Reclassification of unrealized gain on available for sale securities (Predecessor Basis)

 

 

(1,812,340

)

Transitional adjustment for net unrealized gain of wholly owned subsidiaries

   (Predecessor Basis)

 

 

(6,875,000

)

Fair value adjustment of wholly owned subsidiaries on the effective date of the change in status

 

 

7,967,086

 

Combined accumulated deficit of wholly owned subsidiaries prior to the change in status

 

 

(1,121,668

)

Net income

 

 

49,121

 

Dividends

 

 

(482,090

)

Balance as of March 31, 2016

 

 

6,955,348

 

 

 

 

 

 

Total stockholders' equity as of March 31, 2016

 

$

42,041,360

 

 

See notes to consolidated financial statements.

 

 

9


 

GLOBAL SELF STORAGE, INC.

(Unaudited)

 

GLOBAL SELF STORAGE, INC.

 

STATEMENT OF CASH FLOWS (Predecessor Basis)

 

For the Period January 1, 2016 through January 18, 2016

 

(Unaudited)

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

Net decrease in net assets resulting from operations

 

$

(73,227

)

Adjustments to reconcile decrease in net assets resulting from operations

 

 

 

 

to net cash provided by (used in) operating activities:

 

 

 

 

Unrealized depreciation of investments

 

 

22,605

 

Net sales of short term investments

 

 

96,448

 

Decrease in dividends receivable

 

 

9,232

 

Decrease in other assets

 

 

715

 

Decrease in accrued expenses

 

 

(69,986

)

Increase in due to affiliates

 

 

14,213

 

 

 

 

 

 

Net cash provided by operating activities

 

 

-

 

 

 

 

 

 

Cash

 

 

 

 

Beginning of period, December 31, 2015

 

 

29,763

 

 

 

 

 

 

End of period, January 18, 2016

 

$

29,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLOBAL SELF STORAGE, INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Successor Basis)

 

For the Period January 19, 2016 through March 31, 2016

 

(Unaudited)

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

Net income

 

$

49,121

 

Adjustments to reconcile net income to net cash provided by (used in) operating

   activities

 

 

 

 

Depreciation and amortization

 

 

201,369

 

Cash from wholly owned subsidiaries consolidated upon change of status

 

 

298,003

 

Combined results of operations of wholly owned subsidiaries prior to the change in status

 

 

15,816

 

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

 

12,389

 

Prepaid expenses and other assets

 

 

(32,194

)

Accounts payable and accrued expenses

 

 

(41,282

)

Net cash provided by operating activities

 

 

503,222

 

Cash flows from investing activities

 

 

 

 

Proceeds from sale of investments

 

 

3,526,337

 

Construction in progress

 

 

(229,793

)

Purchase of property and equipment

 

 

(8,623

)

Net cash used in investing activities

 

 

3,287,921

 

Cash flows from financing activities

 

 

 

 

Dividends paid

 

 

(482,090

)

Net cash used in financing activities

 

 

(482,090

)

Net decrease in cash and cash equivalents

 

 

3,309,053

 

Cash and cash equivalents, January 18, 2016

 

 

29,763

 

Cash and cash equivalents, March 31, 2016

 

$

3,338,816

 

 

10


 

See notes to consolidated financial statements.

 

 

11


 

GLOBAL SELF STORAGE, INC.

STATEMENT OF CASH FLOWS (Predecessor Basis)

For the Three Months Ended March 31, 2015

(Unaudited)

 

Cash Flows From Operating Activities

 

 

 

 

Net increase in net assets resulting from operations

 

$

1,318,713

 

Adjustments to reconcile increase in net assets resulting from operations to net cash

   provided by (used in) operating activities:

 

 

 

 

Unrealized appreciation of investments

 

 

(866,169

)

Net realized gain on sales of investment securities

 

 

(900,368

)

Capital invested in wholly-owned subsidiaries

 

 

(450,000

)

Proceeds from sales of investment securities

 

 

900,368

 

Net sales of short term investments

 

 

283,891

 

Decrease in due from subsidiaries

 

 

3,372

 

Increase in dividends receivable

 

 

(4

)

Decrease in other assets

 

 

1,991

 

Increase in accrued expenses

 

 

169,423

 

Increase in due to affiliates

 

 

20,559

 

Net cash provided by operating activities

 

 

481,776

 

Cash Flows from Financing Activities

 

 

 

 

Cash distributions paid

 

 

(482,090

)

Net cash used in financing activities

 

 

(482,090

)

Net change in cash

 

 

(314

)

Cash

 

 

 

 

Beginning of period, December 31, 2014

 

 

29,754

 

End of period, March 31, 2015

 

$

29,440

 

 

See notes to consolidated financial statements.

 

 

12


 

GLOBAL SELF STORAGE, INC.

SCHEDULE OF PORTFOLIO INVESTMENTS

December 31, 2015

(Unaudited)

 

Member

 

 

 

 

 

 

 

Equity Interest

 

 

 

 

Value

 

 

 

 

 

WHOLLY OWNED SUBSIDIARIES (81.88%)

 

 

 

 

 

 

 

 

Real Estate Owned (81.82%)

 

 

 

 

 

 

 

 

Self Storage Properties (81.82%)

 

 

 

 

 

100

%

 

SSG Bolingbrook LLC (a) (b)

 

$

6,100,000

 

 

100

%

 

SSG Dolton LLC (a) (b)

 

 

5,900,000

 

 

100

%

 

SSG Merrillville LLC (a) (b)

 

 

5,700,000

 

 

100

%

 

SSG Rochester LLC (a) (b)

 

 

5,950,000

 

 

100

%

 

SSG Sadsbury LLC (a) (b)

 

 

5,700,000

 

 

100

%

 

SSG Summerville I LLC (a) (b)

 

 

3,400,000

 

 

100

%

 

SSG Summerville II LLC (a) (b)

 

 

1,850,000

 

 

 

 

 

Total real estate owned (Cost $27,725,000)

 

 

34,600,000

 

 

 

 

 

Other (0.06%)

 

 

 

 

 

100

%

 

SSG Operations LLC (a) (b) (Cost $24,573)

 

 

24,573

 

 

 

 

 

Total wholly owned subsidiaries (Cost $27,749,573)

 

 

34,624,573

 

Shares

 

 

COMMON STOCKS (7.34%)

 

 

 

 

 

 

 

 

Real Estate Investment Trusts (7.34%)

 

 

 

 

 

 

 

 

Diversified (1.58%)

 

 

 

 

 

2,700

 

 

Public Storage

 

 

668,790

 

 

 

 

 

Industrial (5.76%)

 

 

 

 

 

24,000

 

 

CubeSmart

 

 

734,880

 

 

12,000

 

 

Extra Space Storage, Inc.

 

 

1,058,520

 

 

6,000

 

 

Sovran Self Storage, Inc.

 

 

643,860

 

 

 

 

 

 

 

 

2,437,260

 

 

 

 

 

Total common stocks (Cost $ 1,360,102)

 

 

3,106,050

 

 

 

 

 

PREFERRED STOCKS (2.79%)

 

 

 

 

 

 

 

 

Real Estate Investment Trusts (2.79%)

 

 

 

 

 

 

 

 

Industrial (0.93%)

 

 

 

 

 

15,000

 

 

CubeSmart 7.75%, Series A

 

 

392,250

 

 

 

 

 

Retail (1.86%)

 

 

 

 

 

15,000

 

 

Pennsylvania Real Estate Investment Trust, 8.25%, Series A

 

 

387,150

 

 

15,000

 

 

Realty Income Corp., 6.625%, Series F

 

 

397,350

 

 

 

 

 

 

 

 

784,500

 

 

 

 

 

Total preferred stocks (Cost $1,087,753)

 

 

1,176,750

 

 

 

 

 

OTHER (0%)

 

 

 

 

 

2

 

 

RMR Asia Pacific Fund Fractional shares (b) (Cost $0)

 

 

0

 

 

 

 

 

SHORT TERM INVESTMENT (8.34%)

 

 

 

 

 

3,526,337

 

 

SSgA Money Market Fund, 7 day annualized yield 0.01% (Cost $3,526,337)

 

 

3,526,337

 

 

 

 

 

Total investments (Cost $33,723,765) (100.35%)

 

 

42,433,710

 

 

 

 

 

Liabilities in excess of other assets (-0.35%)

 

 

(147,188

)

 

 

 

 

Net assets (100.00%)

 

$

42,286,522

 

 

 

(a)

Controlled affiliate.

 

(b)

Illiquid and/or restricted security that has been fair valued.

 

LLC

Limited Liability Company

 

See notes to consolidated financial statements.

 

 

13


 

GLOBAL SELF STORAGE, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. ORGANIZATION

Global Self Storage, Inc. (the “Company”) is a self-administered and self-managed REIT, formed as a Maryland corporation and is focused on the ownership, operation, acquisition, development and redevelopment of self storage facilities (“stores”). The Company stores are located in the Northeast, Mid-Atlantic and Mid-West regions of the United States. The Company was formerly registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a non-diversified, closed end management investment company. The Securities and Exchange Commission’s (“SEC”) order approving the Company’s application to deregister from the 1940 Act was granted on January 19, 2016. Accordingly, effective January 19, 2016, the Company changed its name to Global Self Storage, Inc. from Self Storage Group, Inc., changed its SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (from an investment company under the 1940 Act), and listed its common stock on the Nasdaq Capital Market (“NASDAQ”) under the symbol “SELF

The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “IRC”). To the extent the Company continues to qualify as a REIT, it will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to its stockholders.

The Company invests in self storage facilities by acquiring stores through its wholly owned subsidiaries. At March 31, 2016, the Company owned and operated 7 stores. The Company operates primarily in one segment: rental operations.

 

 

2. BASIS OF PRESENTATION

Upon deregistration as an investment company, the Company's status changed to an operating company from an investment company since it no longer met the assessment of an investment company under ASC 946. The Company discontinued applying the guidance in ASC 946 and began to account for the change in status prospectively by accounting for its investments in accordance with other GAAP Topics as of the date of the change in status.

The Company financial statements for the period subsequent to the deregistration are prepared on a consolidated basis to include the financial position, results of operations, and cash flows of the Company and its wholly-owned subsidiaries, rather than by the investment company fair valuation approach. This change in status and the concomitant accounting policies affect the comparability of the financial statements for directly presenting corresponding items for 2016 and 2015. As such, for the three months ended March 31, 2016, the consolidated statements of operations and cash flows have been presented on the Predecessor Basis of accounting as an investment company from January 1, 2016 through January 18, 2016, and on the current basis of accounting as a REIT from January 19, 2016 through March 31, 2016. Similarly, separate statements of operations and cash flows are presented on the Predecessor Basis of accounting as an investment company for the three months ended March 31, 2015. The consolidated balance sheet at March 31, 2016 has been presented on the correct basis of accounting as a REIT and at March 31, 2015 the statement of assets and liabilities has been presented on the Predecessor Basis of accounting as an investment company.

The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. All material intercompany balances and transactions have been eliminated in consolidation. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016, are not necessarily indicative of results that may be expected for the year ending December 31, 2016. The statement of assets and liabilities as of December 31, 2015 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form N-CSR for the year ended December 31, 2015, as filed with the SEC.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses primarily consist of property tax accruals, unearned rental income, and trade payables.

14


 

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments, and may include money market fund shares, purchased with an original maturity of three months or less. The carrying amount reported on the balance sheet for cash and cash equivalents approximates fair value.

Income Taxes

The Company has elected to be treated as a REIT under the IRC. In order to maintain its qualification as a REIT, among other things, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income which meets certain criteria and is distributed annually to stockholders. The Company plans to continue to operate so that it meets the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If the Company were to fail to meet these requirements, it would be subject to federal income tax. The Company is subject to certain state and local taxes.

The Company recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The Company has reviewed its tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on federal, state, and local income tax returns for open tax years (2013 – 2015), or is expected to be taken in the Company’s 2016 tax returns.

Investments in Securities

Investments in equity securities that have readily determinable fair values are accounted for as available-for-sale. Available-for-sale securities are measured at fair value. Gains or losses from changes in the fair value of available-for-sale securities are recorded in accumulated other comprehensive income, until the investment is sold or otherwise disposed of, or until the investment is determined to be other-than-temporarily impaired, at which time the cumulative gain or loss previously reported in equity is included in income. The specific identification method is used to determine the realized gain or loss on investments sold or otherwise disposed.

Fair value is determined using a valuation hierarchy generally by reference to an active trading market, using quoted closing or bid prices. Judgment is used to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

The Company periodically evaluates the carrying value of investment in securities for impairment. The Company considers, among other factors, the duration and extent of any decline in fair value, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, and recent events specific to the issuer or industry. If the decline in value is determined to be other-than-temporary, the carrying value of the security is written down to fair value through the income statement.

Real Estate Assets

Real estate assets are carried at the appreciated value as of January 19, 2016, the effective date of the change in status. Purchases subsequent to the effective date of the change in status are carried at cost, less accumulated depreciation. Direct and allowable internal costs associated with the development, construction, renovation, and improvement of real estate assets are capitalized. Property taxes, and other costs associated with development incurred during the construction period are capitalized. The construction period begins when expenditures for the real estate assets have been made and activities that are necessary to prepare the asset for its intended use are in progress. The construction period ends when the asset is substantially complete and ready for its intended use.

Expenditures for maintenance and repairs are charged to expense as incurred. Major replacements and betterments that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 39 years.

Revenue and Expense Recognition

Revenues from stores, which is primarily composed of rental income earned pursuant to month-to-month leases for storage space, as well as associated late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. Ancillary revenues from sales of merchandise and tenant insurance and other income are recognized when earned.

15


 

The Company accrues for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. Cost of operations and general and administrative expense are expensed as incurred.

Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and certain portions of accounts receivable including rents receivable from our tenants.  Cash and cash equivalents are on deposit with highly rated commercial banks.

Evaluation of Asset Impairment

The Company evaluates its real estate assets for impairment each quarter.  If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from management’s estimates.

 

Recently Issued Accounting Standards

 

   In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The standard is effective on January 1, 2017, however early adoption is permitted.  The Company is in the process of evaluating the impact of this new guidance.

 

    In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, however early adoption is permitted.  The Company is in the process of evaluating the impact of this new guidance.

 

    In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends the current business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, as opposed to having to revise prior period information.  The standard also requires additional disclosure about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as there have been no measurement-period adjustments recorded.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, an update to the accounting standard relating to the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a

16


 

recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability. In the event that there is not an associated debt liability recorded in the consolidated financial statements, the debt issuance costs will continue to be recorded on the consolidated balance sheet as an asset until the debt liability is recorded.  The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as the update only related to changes in financial statement presentation.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The new standard became effective for the Company on January 1, 2016. As discussed under Basis of Presentation above, the adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as none of its existing consolidation conclusions were changed.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard will be effective for the Company beginning on January 1, 2018, however early application beginning on January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements and related disclosures.

 

 

3. CHANGE IN STATUS

Prior to the January 19, 2016 change in status as a registered investment company, the Company recorded its investment in the self storage facilities at fair value and recorded the changes in the fair value as an unrealized gain or loss. Upon the effective date of the deregistration of the Company as a registered investment company, the fair value accounting as a registered investment company was no longer applicable to the Company, rather the Company began presenting on a consolidated basis, the underlying assets and liabilities of the self storage facilities. The Company’s initial carrying value of the net assets of the self storage facilities is the fair value on the effective date of the change in status determined as follows:

 

Fair value of self storage properties on the effective date of the

   change in status

 

 

 

 

 

$

34,624,573

 

Total net assets of the combined self storage properties

 

 

 

 

 

 

 

 

Property plant and equipment - self storage

 

$

26,410,719

 

 

 

 

 

Cash and cash equivalents

 

 

464,585

 

 

 

 

 

Accounts receivable

 

 

87,103

 

 

 

 

 

Prepaid expenses and other assets

 

 

206,146

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(511,066

)

 

 

26,657,487

 

Adjustment to record the fair value of the net assets of the self

   storage properties on the effective date of the change in

   status

 

 

 

 

 

$

7,967,086

 

 

 

4. INVESTMENTS IN SECURITIES

 

Investments in securities as of March 31, 2016 consisted of the following:

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Value

 

Investment securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common and preferred stocks

 

$

2,447,855

 

 

$

2,108,791

 

 

$

(5,835

)

 

$

4,550,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment in securities

 

$

2,447,855

 

 

$

2,108,791

 

 

$

(5,835

)

 

$

4,550,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

5. SELF STORAGE FACILITIES

The carrying value of the Company’s real estate assets is summarized as follows:

 

Self storage facilities, at cost:

 

 

 

 

Beginning balance

 

$

23,668,445

 

Capital expenditures for office remodeling and equipment acquisition

 

 

8,622

 

Ending balance

 

 

23,677,067

 

 

 

 

 

 

Land

 

 

 

 

Beginning balance

 

 

2,661,000

 

Ending balance

 

 

2,661,000

 

 

 

 

 

 

Accumulated depreciation:

 

 

 

 

Beginning balance

 

 

-

 

Depreciation expense

 

 

(201,369

)

Ending balance

 

 

(201,369

)

 

 

 

 

 

Construction in progress:

 

 

 

 

Beginning balance

 

 

111,116

 

Current development

 

 

229,793

 

Ending balance

 

 

340,909

 

 

 

 

 

 

Fair value adjustment due to the change in status

 

 

7,967,086

 

Total real estate facilities at March 31, 2016

 

$

34,444,693

 

 

The real estate assets as of March 31, 2016, have been adjusted to reflect the appreciated fair value of the self storage facilities as of the date of the change in status from an investment company.  

 

Construction in progress as of March 31, 2016 consists of the expansion project in Bolingbrook, IL which, when completed, will add approximately 45,000 leasable square feet of climate-controlled and traditional storage units, for an aggregate cost of approximately $2,400,000.

 

 

6. FAIR VALUE MEASUREMENTS

GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2016 and December 31, 2015:

 

March 31, 2016

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in securities

 

$

4,550,811

 

 

$

 

 

$

 

 

$

4,550,811

 

Total assets at fair value

 

$

4,550,811

 

 

$

 

 

$

 

 

$

4,550,811

 

18


 

 

December 31, 2015

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments, at value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly owned subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage facilities

 

$

 

 

$

 

 

$

34,600,000

 

 

$

34,600,000

 

Other

 

 

 

 

 

 

 

 

24,573

 

 

 

24,573

 

Common stocks

 

 

3,106,050

 

 

 

 

 

 

 

 

 

3,106,050

 

Preferred stocks

 

 

1,176,750

 

 

 

 

 

 

 

 

 

1,176,750

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Short term investments

 

 

3,526,337

 

 

 

 

 

 

 

 

 

3,526,337

 

Total assets at fair value

 

$

7,809,137

 

 

$

 

 

$

34,624,573

 

 

$

42,433,710

 

 

7.  INVESTMENTS IN WHOLLY OWNED SUBSIDIARIES

 

The following summary sets forth the Company’s membership equity ownership including membership equity capital additions and reductions, cash dividends received by the Company, and the value of each wholly owned subsidiary as recorded in the schedule of portfolio investments as of and for the year ended December 31, 2015.

 

 

 

Beginning

 

 

Membership Equity

 

 

Ending

 

 

 

 

 

 

 

 

 

 

 

Equity Intertest

 

 

Gross

 

 

Gross

 

 

Equity Intertest

 

 

Dividend

 

 

Value

 

 

 

Percentage

 

 

Additions

 

 

Reductions

 

 

Percentage

 

 

Income

 

 

December 31, 2015

 

SSG Bolingbrook LLC

 

 

100

%

 

$

-

 

 

$

-

 

 

 

100

%

 

$

-

 

 

$

6,100,000

 

SSG Dolton LLC

 

 

100

%

 

 

-

 

 

 

-

 

 

 

100

%

 

 

-

 

 

 

5,900,000

 

SSG Merrillville LLC

 

 

100

%

 

 

-

 

 

 

-

 

 

 

100

%

 

 

-

 

 

 

5,700,000