Marijuana MSO Parallel faces financial hurdles after $1.9B SPAC deal collapses

Image of contract being torn in half

In February 2021, chewing gum heir William “Beau” Wrigley Jr. and his Parallel marijuana company seemed on the verge of completing a $1.9 billion deal to go public through a special purpose acquisition company (SPAC) backed by music mogul Scooter Braun.

The blockbuster transaction – combining multistate operator Parallel and Braun’s Ceres Acquisition Corp. – was promoted in Parallel’s presentation to investors as bringing together two “industry titans.”

But the merger collapsed without explanation last September, and, soon after, Wrigley stepped down as CEO.

Now, Wrigley, Atlanta-based Parallel and some of its top executives face litigationincluding a lawsuit in U.S. District Court in southern Florida by investors alleging securities fraud, mismanagement and misrepresentation.

Among other things, the three disgruntled investment groups accuse Wrigley of deliberately letting the SPAC deal “die on the vine” when it was clear the merged company would fail to live up to expectations.

They also accuse Wrigley of spending their investment on servicing debt rather than on company operations.

The plaintiffs are seeking a minimum of $25 million in damages plus expenses.

But in a recent motion to dismiss, Parallel and other defendants reject the allegations, saying the case doesn’t involve fraud but rather “disappointed investors.”

The collapse of the Ceres-Parallel deal and the ensuing fallout underscore the overly ambitious expansion plans of some cannabis companies as well as the boom and bust of SPACs.

In Parallel’s case, court filings, investor presentations and other disclosures reflect a company that trumpeted lofty ambitions but struggled under the weight of massive debt and unrealized growth projections.

For example:

  • In August 2021, Parallel – which also does business in some states as Surterra Wellness – projected its 2022 revenue would be $618 million. But by January of this year, the company had slashed that projection by 40%, to $362 million.
  • Parallel struggled to have enough cash to avoid defaulting on $350 million in debt.
  • Even before the SPAC deal was announced, Parallel had posted net losses of $263 million in 2019 and $140 million in 2020.

After the Scooter Braun deal unraveled, court filings indicate that Parallel told the investors it was pursuing a sale of the company that would be completed by mid-2022. That also hasn’t materialized.

Parallel declined to comment to MJBizDaily about the litigation, its current financial condition and whether the company is for sale.

Despite its financial challenges, industry experts see Parallel as being a potentially desirable acquisition target.

When the SPAC transaction was announced in February 2021, Parallel had long held the No. 2 sales position in Florida’s mammoth medical marijuana market, behind Florida-based MSO Trulieve Cannabis.

The company also boasted operations or licenses in Massachusetts, Nevada, Pennsylvania and Texas.

“Parallel has an attractive footprint which includes the highly coveted Florida market,” Matt Karnes, founder of New York-based Green Wave Advisors, told MJBizDaily via email.

But its struggle to service its debts “raises concern around its liquidity and, perhaps, even its ability to continue as an ongoing concern,” Karnes added.

It’s difficult to know exactly the current status of Parallel’s financial health and its debt payments because the company is privately held.

Lofty projections

Circle back to February 2021, when Wrigley struck the mammoth deal with Braun to take Parallel public through a transaction that valued the company at nearly $2 billion.

Under the terms of the transaction, Braun’s Ceres would buy Wrigley’s Parallel and then Parallel would take Ceres’ stock listing on Canada’s NEO Exchange.

The combined public company was expected to have a $430 million cash balance at closing that included $120 million held by Ceres, according to a news release announcing the deal.

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Parallel at the time forecasted $447 million in 2021 revenue. That included $102 million in earnings before interest, taxes, depreciation and amortization (EBITDA).

EBITDA is considered an alternative measurement of a company’s overall financial performance versus the more widely used net income.

According to an investor presentation in October 2021, Parallel had a total of 42 stores – 39 in Florida, two in Massachusetts and one in Nevada – as well as licenses in Pennsylvania and Texas.

The SPAC deal was expected to close by the summer. But it was scrapped in September 2021 without explanation.

For one thing, the SPAC market had cooled as regulations tightened and the economic climate softened with interest rates rising.

But Reuters – citing anonymous sources – reported that “several investors had lost confidence in Parallel’s ability to deliver on lofty financial projections it provided in February when the merger was announced.”

Along with those aggressive financial projections, Parallel said at the time that it planned to more than double its retail outlets, from 42 to 86, within two years, according to a February 2021 investor presentation.

In addition to adding retail stores in existing markets, Parallel expressed confidence in winning licenses in Georgia, New Jersey and Virginia.

In Florida alone, Parallel said it would add 18 stores by 2022, bringing its total to 57.

But the company so far has added only six.

As other MSOs have aggressively expanded in Florida, Parallel has slipped from second to fifth in market share in THC milligram and flower sales, according to recent state data.

The company is still second in CBD product sales.

Pivot to private sale

As the Braun-backed SPAC deal collapsed, court filings indicate that Parallel pivoted, saying it would pursue a private sale of the company.

Three investment groups, led by Bahamas-based TradeInvest Asset Management, allege in the securities fraud lawsuit in Florida federal court that they were “fraudulently” induced to invest $25 million to support Parallel’s operating expenses until the SPAC could be completed.

But by August 2021, the plaintiffs claim, the value of the SPAC transaction had been slashed to just more than $1 billion from $1.9 billion when the deal was announced in February of that year.

Wrigley, the plaintiffs claim, “understood the company’s poor performance would translate to poor performance in the public markets. He therefore let the SPAC transaction die on the vine.”

Parallel then sold the $25 million investment “as a way to ‘bridge’ the company’s operating and capital expenditures” until an alternative sale was completed in the first half of 2022, the TradeInvest lawsuit claims.

“In reality, however, the (investment) was a bridge to nowhere. … Wrigley and his co-defendants were secretly just trying to keep the company from collapsing under the weight of its debt,” the lawsuit claims.

Instead, the plaintiffs allege, their money was used by Parallel to avoid debt defaults rather than on company operations.

The suit claims that $3 million was used to partly pay Wrigley for a $13.5 million note that Wrigley’s “family office” had issued to the company at terms “that would make a loan shark jealous.”

The so-called PE Fund note carried a $2.5 million transaction fee and 16% annual interest rate, according to the plaintiffs, who claim Wrigley improperly had an interest in both sides of the transaction.

The plaintiffs allege the same conflict of interest with another Wrigley family loan to the company.

In addition to asking for at least $25 million in damages, the plaintiffs want the court to invalidate, or declare unacceptable, the Wrigley “investment vehicles.”

In a June motion to dismiss the securities-fraud lawsuit, Parallel acknowledges its financial challenges while denying allegations of fraud and self-dealing.

“This is not a case of fraud, but of disappointed investors,” the defendants, which include Wrigley individually, say in the court filing.

“Plaintiffs are sophisticated investors in Parallel, a privately-held cannabis company. In their sweeping 164-paragraph complaint, plaintiffs take issue with the management of the business and assert various scandalous (and fictional) allegations of mismanagement and self-dealing.

“Although plaintiffs take great liberties with the facts, it is no secret that the company has suffered a series of financial setbacks recently, making it difficult for it to maintain its operations and service its debts.”

The court response by the defendants added that the “allegations, at best, represent nothing more than plaintiffs’ dissatisfaction over how the company used the money that Wrigley invested.”

The $3 million, the response indicates, was used to make a contractually required debt payment and that disclosures to the investors expressly stated that management had “broad discretion” in deciding how to use the investment.

Illinois deal

A key part of Parallel’s growth plan involved a $100 million acquisition announced in April 2021 to buy six Windy City Cannabis shops in the fast-growing Illinois recreational marijuana market.

But that deal also collapsed, and Windy City owner Steve Weisman is seeking $80 million in damages as well as potential earnouts from Wrigley and Parallel.

Performance-based earnouts would have pushed the potential total price tag to $155 million.

Weisman, according to court documents, argues that Wrigley should be personally liable for damages because Parallel essentially is Wrigley’s “alter ego.”

Parallel declined comment about the Windy City deal.

Wrigley recently filed a lawsuit in U.S. District Court in Chicago seeking to be excluded from an arbitration on the matter,  maintaining that he wasn’t a party or signatory to the agreement to purchase the Windy City stores.

And what about the new markets that Parallel planned to enter, Georgia, New Jersey and Virginia?

So far, none of those moves have come to fruition, although Surterra Wellness says on its website that it has an “active application” in New Jersey.

Karnes of GreenWave Advisors said any potential suitor will have to keep in mind concerns about Parallel’s debt and liquidity.

“That said, Parallel may be considered an attractive acquisition candidate at a distressed valuation though a vigorous due diligence process is particularly necessary given this heightened level of uncertainty and ‘red flags.’”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.