Prior to the proposed acquisition of Liberty Health Sciences ($LHS), Ayr Strategies ($AYR.A) put together financing to fund their acquisitions announced through the fall.

They announced a raise of $75MM in debt from a lending group in early December at 12.5%. This was upsized to $110MM a week later. I haven’t heard often of ‘over-allotments’ on strictly debt instruments, but hey, what’s in-demand is what’s presented. (They also had some sort of issue with their OTC ticker, since resolved).

And with this, $AYR.A’s CEO Jonathan Sandelman confidently declares that they’re ‘fully financed‘:

That’s a bold statement. Because if true, $AYR.A presents a cheaper position relative to other MSO’s via capital structure. This claim isn’t coming out of the sky…….I’ll be doing the math on their qualifying transaction and laying it out. I’m very interested in $AYR.A’s ‘make-whole’ provisions. Share optionality isn’t much present, but incremental cash payment potential is.

Now, business sorts will tell you that (in general) earn-outs are ‘good’. They’ll say they’re good for the vendor: they get upside if their assets perform. The buyer? They get a cheaper price that only increases if the buy delivers. They won’t have to care about paying for the earn-outs says the analysts, because the assets will generate payments ‘as they go’.

That’s the common thinking anyway. And it’s an ok pitch – provided the models were accurate upfront, they hold over time, and that the world doesn’t change much from the moment the deal was signed. If you’re thinking to yourself that that’s an array of fairly big assumptions to bridge, you’d be right.

I’ve been mentioning earn-outs lately.

A great real-life example of earn-outs impacting a company exist in TerrAscend ($TER), who just the other day announced that they financed additional payments required for the Ilera acquisition by printing $120MM of 4 year secured paper at 12.875% (that’s $60MM in interest). $TERs refer to the underlying businesses as doing the heavy lifting to earn their stripes (natch), but, my concerns are around how long the assets will keep ripping it up. Or if original deal’s earn-outs held high premiums – it was (and continues to be) a gold rush on the ground in many states. I want to know if the capital cost of the assets is lower than the RoR on those assets.

Assuming they are able to execute, $AYR.A would be a serious presence stateside. Next time, we’ll be looking at how they’ve built their shop, and we’ll strip Note 14 down to its’ bones.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds position in only $LHS.