CIM GROUP, INC. 10-Q

Item 1A. Risk Factors Except as set forth below, there have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020. Risks Related to Real Estate Assets We have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations, including borrowings and proceeds from asset sales, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our common stock. Additionally, distributions at any point in time may not reflect the current performance of our properties or our current operating cash flows. To the extent that cash flows from operations have been or are insufficient to fully cover our distributions to our stockholders, we have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations. Such sources may include borrowings, proceeds from asset sales or the sale of our securities. We have no limits on the amounts we may use to pay distributions from sources other than cash flows from operations. The payment of distributions from sources other than cash provided by operating activities may reduce the amount of proceeds available for acquisitions and operations or cause us to incur additional interest expense as a result of borrowed funds, and may cause subsequent holders of our common stock to experience dilution. This may negatively impact the value of our common stock. Because the amount we pay in distributions may exceed our earnings and our cash flows from operations, distributions may not reflect the current performance of our properties or our current operating cash flows. To the extent distributions exceed cash flows from operations, distributions may be treated as a return of our stockholders’ investment and could reduce their basis in our common stock. A reduction in a stockholder’s basis in our common stock could result in the stockholder recognizing more gain upon the disposition of his or her shares, which, in turn, could result in greater taxable income to such stockholder. The following table presents distributions and the source of distributions for the periods indicated below (dollar amounts in thousands): Nine Months Ended September 30, 2021 Year Ended December 31, 2020 Amount Percent Amount Percent Distributions paid in cash $ 82,541 84 % $ 90,655 73 % Distributions reinvested 16,264 16 % 34,191 27 % Total distributions $ 98,805 100 % $ 124,846 100 % Sources of distributions: Net cash provided by operating activities (1) $ 97,518 99 % $ 115,985 (2) 93 % Proceeds from the issuance of debt (3) 1,287 1 % 553 — % Proceeds from the issuance of common stock — — % 8,308 (4) 7 % Total sources $ 98,805 100 % $ 124,846 100 % ____________________________________ (1) Net cash provided by operating activities for the nine months ended September 30, 2021 and the year ended December 31, 2020 was $97.5 million and $106.4 million, respectively. (2) Our distributions covered by cash flows from operating activities for the year ended December 31, 2020 include cash flows from operating activities in excess of distributions from prior periods of $9.6 million. (3) Net proceeds on the credit facilities, notes payable and repurchase facilities for the nine months ended September 30, 2021 and the year ended December 31, 2020 were $584.1 million and $159.0 million, respectively. (4) In accordance with GAAP, certain real estate acquisition-related fees and expenses, such as expenses and fees incurred in connection with property acquisitions accounted for as business combinations, are expensed, and therefore reduce net cash flows from operating activities. Therefore, for consistency, proceeds from the issuance of common stock used as a source 65 Table of Contents of distributions for the year ended December 31, 2020 include the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities in those prior periods. Risks Related to the CIM Income NAV Merger Failure to complete the CIM Income NAV Merger could negatively impact our future business and financial results. If the CIM Income NAV Merger is not completed, our ongoing business could be materially adversely affected and we will be subject to a variety of risks associated with the failure to complete the CIM Income NAV Merger, including the following: • CIM Income NAV may be unable to pay us the termination payment of either $6,720,000 or $14,780,000, depending upon the date of such termination and certain other factors, and may not be able to reimburse us for expenses incurred by us in connection with the CIM Income NAV Merger of up to $2,675,000; • We may have to bear certain costs incurred by us relating to the CIM Income NAV Merger, such as legal, accounting, financial advisor, filing, printing and mailing fees; and • the diversion of our management’s focus and resources from operational matters and other strategic opportunities while working to implement the CIM Income NAV Merger. If the CIM Income NAV Merger is not completed, these risks could materially affect our business and financial results. The pendency of the CIM Income NAV Merger, including as a result of the restrictions on the operation of our business and CIM Income NAV’s business during the period between signing the Merger Agreement and the completion of the CIM Income NAV Merger, as well as the suspension of CIM Income NAV’s public offering of securities, could adversely affect the business and operations of us, CIM Income NAV, or both. In connection with the pending CIM Income NAV Merger, some business partners or vendors of each of us and CIM Income NAV may delay or defer decisions, which could negatively impact the revenues, earnings, cash flows and expenses of us and CIM Income NAV, regardless of whether the CIM Income NAV Merger is completed. In addition, due to operating covenants in the Merger Agreement, each of us and CIM Income NAV may be unable, during the pendency of the CIM Income NAV Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial. Furthermore, CIM Income NAV has suspended its public offering of securities in connection with the pending CIM Income NAV Merger, which may reduce the cash available to CIM Income NAV to fund its ongoing business and operations. In certain circumstances, either we or CIM Income NAV may terminate the Merger Agreement. Either we or CIM Income NAV may terminate the Merger Agreement if the CIM Income NAV Merger has not been consummated by the Outside Date. Also, the Merger Agreement may be terminated in certain circumstances if a final and non-appealable order is entered prohibiting the transactions contemplated by the Merger Agreement, upon a material uncured breach by the other party that would cause the closing conditions not to be satisfied, or if CIM Income NAV stockholders fail to approve the CIM Income NAV Merger or the amendment to the CIM Income NAV charter that is required to consummate the CIM Income NAV Merger (the “Charter Amendment Proposal”). In addition, at any time prior to the time CIM Income NAV stockholders approve the CIM Income NAV Merger and the Charter Amendment Proposal, CIM Income NAV has the right to terminate the Merger Agreement in order to enter into an Alternative Acquisition Agreement with respect to a Superior Proposal (as such terms are defined in the Merger Agreement). Finally, at any time prior to the time CIM Income NAV stockholders approve the Merger Proposal and the Charter Amendment Proposal, we have the right to terminate the Merger Agreement upon an Adverse Recommendation Change, upon the commencement of a tender offer or exchange offer for any shares of CIM Income NAV Common Stock that constitutes an Acquisition Proposal if the CIM Income NAV board of directors fails to recommend against acceptance of such tender offer or exchange offer or to publicly reaffirm the CIM Income NAV board of directors recommendation after being requested to do so by us or if CIM Income NAV breaches or fails to comply in any material respect with certain of its obligations regarding the solicitation of and response to Acquisition Proposals. We and CIM Income NAV each expect to incur substantial expenses related to the CIM Income NAV Merger. We and CIM Income NAV each expect to incur substantial expenses in connection with completing the CIM Income NAV Merger and integrating the properties and operations of CIM Income NAV with ours. While we and CIM Income NAV each has assumed that a certain level of transaction expenses would be incurred, there are a number of factors beyond the control of each company that could affect the total amount or the timing of such expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the CIM Income NAV Merger could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of 66 Table of Contents duplicative expenses and the realization of economies of scale and cost savings following the completion of the CIM Income NAV Merger. The CIM Income NAV Merger may be dilutive to estimated net income for our stockholders. The CIM Income NAV Merger may be dilutive to estimated net income for our stockholders, which would potentially decrease the amount of funds available to distribute to our stockholders as stockholders of the combined company following the CIM Income NAV Merger (the “Combined Company”). For instance, on a pro forma basis, assuming the CIM Income NAV Merger had been consummated on January 1, 2020, the net income per share of the Combined Company for the year ended December 31, 2020 and the six months ended June 30, 2021 would have been less than the actual net income per share of our common stock during the same periods. In approving and recommending the CIM Income NAV Merger, our Board considered, among other things, the most recent estimated per share NAV of our common stock and CIM Income NAV Common Stock as determined by our Board and the CIM Income NAV board of directors, respectively, with the assistance of their respective third-party valuation experts. The estimated per share NAV of CIM Income NAV Common Stock may not be immediately determined following the consummation of the CIM Income NAV Merger. In the event that the Combined Company completes a liquidity event after consummation of the CIM Income NAV Merger, such as a listing of its shares on a national securities exchange, a merger in which stockholders of the Combined Company receive securities that are listed on a national securities exchange, or a sale of the Combined Company for cash, the market value of the shares of the Combined Company upon consummation of such liquidity event may be significantly lower than the current estimated value considered by our Board and the estimated per share NAV that may be reflected on the account statements of stockholders of the Combined Company after consummation of the CIM Income NAV Merger. If the CIM Income NAV Merger does not qualify as a tax-free reorganization, there may be adverse tax consequences. The CIM Income NAV Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1896, as amended (the “Code”). The closing of the CIM Income NAV Merger is conditioned on the receipt by each of us and CIM Income NAV of an opinion of counsel to the effect that the CIM Income NAV Merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. However, these legal opinions will not be binding on the Internal Revenue Service or on the courts. If, for any reason, the CIM Income NAV Merger were to fail to qualify as a tax-free reorganization, then each stockholder generally would recognize gain or loss, as applicable, equal to the difference between (1) the merger consideration (i.e. the fair market value of the shares of our common stock) received by such stockholder in the CIM Income NAV Merger; and (2) such stockholder’s adjusted tax basis in our common stock. 67 Table of Contents