The latest documents in the privately-owned Parallel Cannabis (formerly Surterra Wellness) lawsuit lay bare the issues surrounding the company’s debt and its inability to pay those debts causing defaults.
The court documents filed on Friday outline a plan by Parallel’s then CEO Beau Wrigley and his family fund called the PE Fund to create a new level of debt that would jump ahead of the Senior debt holders (some of whom are filing the lawsuit). That money would then pay the debt owed and avoid default. However, there were many problems with the plan and those issues are outlined in the latest complaint.
To set the stage, investors that buy debt in a company are also ranked in order of priority in case the company runs into trouble. In the case of Parallel, Senior noteholders come first, followed by Junior noteholders – there are no common shareholders since the company is still private. Had it become a public company those shareholders would be the last in the line to collect any money.
Super Senior Debt
The investors in the case, John and Ultima Morgan, TGHI II LLC, Prime Overseas Investments and Enterprises Ltd., and Techview Investments Ltd. complain that in 2021 while Wrigley was preparing the company to go public with a Special Purpose Acquisition Corp. called Ceres Acquisition Corp., it was actually having trouble paying its debts. The complaint says, “Wrigley did not wish to reveal that the Company had missed its projections so badly that it could not pay a debt Wrigley had just secretly negotiated a few months earlier. This need for secrecy was exacerbated because Wrigley was simultaneously planning to refinance [redacted] of other debt, all the while trying to close a SPAC transaction so he could access the public markets to cash out his controlling stock interest.”
The investors claim that Wrigley wanted to create a new tranche of Super Senior Notes to be senior to their first-lien Senior Notes. The same collateral backing their investment would now be used to back the new debt. The investors say they didn’t give their approval to be pushed back down the line of repayments and that their approval was required. They also say that the Collateral Documents would need to be changed and that the current debt holders have covenants that state no more debt can be incurred. Essentially saying the company couldn’t create the Super Senior debt.
While the amount of debt that Parallel was saddled with is consistently redacted, there are a couple of footnotes that show “$18 million was owed to the former owner (R. Jake) Bergmann as part of a confidential settlement the company could not afford. There may also be up to $107 million of consideration owed for the company’s acquisition of a company known as Windy City.” The complaint also says that Parallel borrowed money from the PE Fund in June 2021 to pay off Bergmann.
Junior Note Default
The case states that Parallel failed to make its payments for the Junior debt in September 2021. The investors say they weren’t notified of the default within the required five days. They suggest they didn’t learn of the situation until a call on November 15, 2021, and that PE Fund claimed to have also just learned of the default in that call. However, the complaint alleges that the machinations by PE Fund during the summer (when it tried to create the Super Senior debt) showed that it knew it was in trouble which was why it was trying to create new sources of debt. The case alleges eight defaults occurred during Wrigley’s tenure at the company, including the default caused by PE Fund in the June 2021 Transaction. Wrigley resigned shortly after the November call.
In addition to the hoped-for Super Senior Notes, Parallel issued a series of convertible promissory notes (the “GH Notes”) between January and May of 2021 to a Wrigley-controlled investment vehicle—Green Health Endeavors. The investors say the company did not conduct any arm’s length negotiation for the financing terms of the GH Notes, nor did the company explore any other financing options available. “Furthermore, upon information and belief, the GH Notes were issued in January 2021 but were not approved by the disinterested directors and shareholders.” The complaint went on to say, “Wrigley’s own employee, James “Jay” Holmes, negotiated the terms of the GH Notes on behalf of Green Health Endeavors while simultaneously sitting on the board and serving as an officer of the Company, in both roles reporting directly to Wrigley as his boss.” The investors also allege that the GH Notes should never have been issued because it violated the agreement to the original noteholders that the company wouldn’t incur any more debt.
In sum, if the company went under, the holders of the Super Senior Notes would have pushed the other lenders out of the way and been able to take over the company. “In that sense, the Scheme is a paradigmatic “loan-to-own” scheme developed by a corporate insider—who is not only the largest existing secured creditor, but also the controlling shareholder—to take the Company at a fire sale, while leaving all innocent third parties holding the bag without any recourse.”
Despite the inability to pay its debt or close the SPAC transaction to go public, the company continues to operate in several states. Even though some of this information is redacted in the court documents, according to Cannabiz Media, Surterra/Parallel has 44 active licenses in Florida, three licenses in Pennsylvania under the Goodblend name, and one Goodblend license in Texas. It has 11 active licenses under the NETA (New England Treatment Access) name in Massachusetts. It has nine active licenses in Nevada under the names Parallel Brands, Cookies and D.H. Aldebaran.
Nine license applications in Pennsylvania were denied, along with one denial in New Jersey and two denials in Georgia.
Illinois Deal Is Off
Curaleaf (OTC: CURLF) agreed to buy Grassroots in Illinois and along with that deal, the company noted three Illinois medical dispensary licenses and six adult-use dispensary licenses owned by former affiliates of Grassroots (the “Illinois Assets”) were sold to Parallel in April 2021. The transaction though is subject to regulatory approval, which it doesn’t appear to have received. In a securities filing by Curaleaf, it wrote “Under the terms of the transaction, the purchase price for the Illinois asset consists of a $100,000 base price to be paid $60,000 in cash and $40,000 in Parallel stock, plus earnouts of up to an additional $55,000 payable through 2023. The Company has received from Parallel a $10,000 deposit, which is refundable under limited circumstances and will be applied to the base purchase price for the Illinois Assets at closing.”
On February 25, 2022, Curaleaf wrote in its annual report that it had “received correspondence from Parallel’s attorneys indicating that it will not be in a position to complete the acquisition of the Illinois Assets due to lack of financing and seeking to terminate its agreement to purchase the Illinois Assets. The Company has asserted that Parallel’s actions have constituted material breaches of its agreement with Parallel and is exploring its options.”