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NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021
Exhibit J
Affirmation of Eric Sirota in Support of Fiorello’s Motion for Summary Judgment, Dated
June 29, 2021
Index No. 652343/2018 Motion Seq. No. __
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NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
----------------------------------------------------------X
CRESCO LABS, NEW YORK, LLC, a New
York limited liability company, and CRESCO Index No.: 652343/2018
LABS LLC, an Illinois limited liability company, Hon. Andrew Borrok
Plaintiffs, Mot. Seq. No. 11
-against- AFFIRMATION OF
ERIC SIROTA IN
FIORELLO PHARMACEUTICALS, INC., a SUPPORT OF
New York corporation, FIORELLO’S MOTION
FOR SUMMARY
Defendant. JUDGMENT
----------------------------------------------------------X
STATE OF FLORIDA )
COUNTY OF MANATEE )
ERIC SIROTA, being duly sworn, deposes and says:
1. I was the co-CEO of Fiorello Pharmaceuticals, Inc. (“Fiorello”)
beginning in 2015 through August 2019, when I sold my stock in Fiorello to Green
Thumb Industries (“GTI”) in connection with an Amended and Restated Merger
Agreement between GTI and all of the individual shareholders of Fiorello. I have
personal knowledge of the matters set forth herein, and I make this affidavit in
support of Fiorello’s motion for summary judgment.
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Introduction
2. I previously filed an affidavit in this matter in opposition to Plaintiff
Cresco Labs, New York, LLC’s failed motion for a preliminary injunction, among
other things, to enjoin a transaction with GTI. That affidavit summarized the
negotiation and terms of the letter of intent effective as of February 14, 2018 between
Plaintiffs Cresco Labs New York, LLC and Cresco Labs, LLC (together “Cresco”)
and Fiorello (the “LOI”) and Cresco’s failure to perform its obligations thereunder.
Ex. A. 1 I refer the Court to my July 5, 2018 affidavit in opposition to preliminary
injunction (Ex. D) and will now focus on the issues relevant to the exclusivity clause
of the LOI.
3. Fiorello did not breach the exclusivity clause and had no negotiations
about a potential transaction with any other party during the 30 business-day period.
The documentary record demonstrates this unequivocally. When Fiorello received
an unsolicited letter of intent from Liberty Health Sciences (“Liberty”) on Saturday
March 3, 2018, it responded on Tuesday, March 6 that it could not talk until the end
of March at the earliest. When, in mid-March Liberty sent a substantially similar
unsolicited proposed letter of intent, Fiorello again responded that it could not talk.
When GTI sent an unsolicited proposal in mid-March, Fiorello responded to it in the
1
This affidavit references a number of exhibits to the accompanying affirmation of Rachel Izower-
Fadde (“RIF_Aff.”). I have reviewed each of those referenced exhibits and confirm that each is a
true and correct copy of the document as described in the RIF_Aff.
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same way – that it could not talk until March 30, 2018, at the earliest. That date is
after the exclusivity clause would have expired.
4. Although Fiorello’s shareholders ultimately entered into a transaction
with GTI that closed in August 2019, based upon a renegotiated merger agreement
dated December 2018, it is not surprising that Cresco withdrew its claim against
“John Doe” for tortious interference. Fiorello did not engage in any negotiations
with GTI prior to April 2018, after the LOI expired. This is also true of Liberty.
5. In addition to there not having been any breach of the exclusivity
clause, there was never any enforceable agreement that could have resulted in the
sale of all of Fiorello’s stock to Cresco. Not only were none of Fiorello’s
shareholders party to the LOI, and not only was there no lock-up provision or other
obligation of the Fiorello directors to recommend or vote for a business combination
with Cresco, but it is clear that (i) Fiorello shareholders would not have approved
any transaction with Cresco based upon the terms of the LOI, and (ii) the New York
Department of Health (“DOH”) would not have approved any transaction with
Cresco based upon the terms of the LOI. Any possible transaction with Cresco, or
anyone else, was necessarily conditioned on both of these approvals.
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Pre-LOI Background: Fiorello’s Efforts To Raise Capital Or Find A Partner
6. Fiorello is a registered medical marijuana organization with the DOH,
licensed to manufacture and dispense medical marijuana at DOH approved facilities.
The DOH allowed Fiorello to have four dispensaries in designated counties. Upon
receiving its license in August 2017, Fiorello embarked upon two parallel paths.
One, to raise capital to become operational, and two, to consider a business
combination with a larger entity.
7. During the period between November 2017 and January 2018, Fiorello
spoke with multiple potential business partners including Cresco, Liberty, and GTI,
among others. At those meetings we discussed, among many other things, basic
terms that Fiorello would consider in connection with a potential business
combination.
8. GTI reached out to us and in May 2017 we entered into an NDA and
shared some information with GTI. In November 2017, we met GTI in Las Vegas.
GTI expressed renewed interest and made an offer in December 2017 which we
rejected as too low.
9. We had a preliminary telephone call with Liberty on January 21, 2018
that did not seem to go anywhere. At that time, we were looking for a price point in
the mid-$20 million range. Prior to the January 21 call, Fiorello and Liberty had
entered into an NDA, and Fiorello had provided Liberty with a non-confidential
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overview deck. Fiorello provided a confidential management presentation to Liberty
after the call. Participating in that call were Susan Yoss, Fiorello’s co-CEO, George
Scorsis, Liberty’s CEO, myself, and, I believe, Rene Gulliver, Liberty’s CFO. After
that telephone call we did not hear from Liberty again except as set forth below. We
had no further discussions with Liberty about a possible transaction until April 2018.
10. We emphasized to all potential counterparties Fiorello’s desire and
need to move quickly. To maintain its status in good standing with DOH as a
registered organization, Fiorello needed to take affirmative steps towards beginning
operations. In this regard, we also sought to raise capital and, by the end of January
2018, secured a financing commitment from 4Front for $5 million. Also, by that
time we had leased space for a manufacturing facility and identified locations and
had begun to negotiate leases for certain dispensary locations. Fiorello was
concerned that it could not be focused on a business combination in lieu of
developing its business for an extended period because it could imperil its ability to
become operational within the requirements of DOH and thereby jeopardize
Fiorello’s standing as a registered organization.
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The LOI Period: Cresco Repeatedly Breached The LOI.
11. The LOI reflected the need to proceed quickly in two ways. First, under
the Timing section, the parties had only 30 business days from February 14, the
effective date and when Cresco executed the LOI, to complete and execute the
“Definitive Agreement,” inclusive of the purchase and sale agreement, the
promissory notes, the management oversight agreement (MOA), the guaranty, the
exchange agreements to, among other things, assure a tax free exchange, an agreed
mechanism to obtain the approval and joinder of the Fiorello shareholders, the
consulting agreements, and all other necessary and ancillary agreements to complete
the contemplated transaction. (See definition of “Definitive Agreement” in LOI.)
Second, the LOI contemplated a closing of the Definitive Agreement to be on or
about April 15, 2018. And no closing could happen without approval by the boards
of directors/managers of both Cresco and Fiorello; the shareholders/members of both
Cresco and Fiorello; and the DOH.
12. Execution risk was a significant concern for Fiorello regarding the
negotiation of a Definitive agreement with Cresco arising from two things. First,
there was difficulty in negotiating the LOI. Those negotiations were quite
challenging and lasted from mid-December 2017 through February 14, 2018.
13. Second, once Fiorello signed the LOI, Cresco seemed to lose focus and
did not do the actual work necessary to finalize a transaction. For instance, the LOI
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required Cresco, upon executing the LOI, to pay to Fiorello $500,000 and promptly
to provide a due diligence list. Although Cresco executed the LOI on its effective
date, it did not pay the $500,000 then due to Fiorello. Finally, a week later, and only
after Fiorello inquired, Cresco said they would not pay the money unless it was
subject to an escrow agreement and paid to an agreed escrow agent. There was no
such provision in the LOI, but Fiorello agreed. Fiorello’s counsel drafted an escrow
agreement and, when Cresco could not identify an escrow agent, agreed to serve in
that capacity. Cresco finally paid the $500,000 on March 1, 2018. Despite Fiorello’s
repeated emphasis on moving quickly, Cresco did not provide the payment until two
weeks after the execution of the LOI.
14. Cresco also did not promptly send a due diligence list as the LOI
required until March 1, 2018, two weeks into the 30 business days, squandering 1/3
of the exclusivity period. That list was mostly in the nature of a generic legal due
diligence request and was not specific to the nature of Fiorello’s business. As such,
Fiorello took the initiative to provide additional materials beyond the initial request
further supplementing the due diligence materials it had provided even prior to the
LOI’s execution. By March 10 Fiorello had populated a Dropbox with nearly all of
the due diligence materials Cresco had requested along with many additional
materials Fiorello thought helpful to Cresco and had provided access to Cresco.
Cresco initially claimed that they reviewed the materials in a timely fashion. Even
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Cresco’s CEO, Bachtell, claimed in an April 4 email that Cresco had “completed our
due diligence weeks ago.” Exhibit GG is a true and correct copy of an email chain
including that April 4, 2018 email I received from Bachtell. Nevertheless, Cresco’s
counsel, even after the LOI expired, was still asking for people to be given access to
the due diligence Dropbox and said that they needed more time for due diligence.
Exs. E(F) (April 5, 2018 attaching Cresco’s proposed schedule including for
completed due diligence by April 13).
15. Not until March 8, 2018, the 15th business day after the LOI’s effective
date, did Cresco send a draft purchase and sale agreement. (An earlier draft sent on
March 1 was withdrawn by Cresco on March 2.) This was just the first of many
documents that needed to be negotiated for a final deal. By then, one half of the total
time provided for by the LOI had elapsed. Although Cresco explicitly told us that it
wanted to retain control of and would draft all transaction documents, halfway
through the exclusivity period Cresco had not forwarded drafts of any of the other
documents essential to a proposed Definitive Agreement.
16. At the same time, Cresco completely ignored its obligation to provide
financing to Fiorello in connection with an MOA as to the use of such funds. The
LOI provided that the Parties “shall enter into a Management Oversight Agreement
… for that period of time running from the date the LOI is executed until the Closing
Date in exchange for providing to be determined funding to Fiorello during such
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period.” We requested such financing and a draft agreement several times, but never
received a response. Two of my requests for the draft agreements are reflected in
emails I sent to Cresco’s CEO, Charles Bachtell. On February 12, 2018, I wrote to
Bachtell: “Please let us know how you would like to proceed regarding diligence
and the execution of the management oversight and definitive agreements.” I then
followed up on February 18, 2018: “Now that the LOI is signed, please let us know
how you want to move forward with diligence and the management oversight and
definitive agreements.” Exhibit X is a true and correct copy of that email chain.
17. Cresco apparently had no intention of providing such financing unless
and until Cresco and Fiorello entered into a Definitive Agreement. That is contrary
to the LOI, which expressly required that financing be provided during the LOI
period to allow Fiorello to continue with its efforts to become operational.
18. Meanwhile, also at Cresco’s request, Fiorello abandoned or postponed
its lease negotiations, strategic alliances, and other steps it had taken towards
becoming operational. Exhibit Y is a true and correct copy of a March 11, 2018
email exchange I had with Bachtell. The 6:03 email from Bachtell is an example of
Cresco’s directions on these matters. Starved for financing, Fiorello had no choice
but to put operations on hold while it waited to receive drafts from Cresco. During
this period, Fiorello continued to have regular contact with DOH, populate its due
diligence Dropbox with post-March 10th developments, prepare the schedules that
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would be required as exhibits to the contemplated merger agreement and consult
with tax counsel about how to fashion a tax-free exchange and other issues pertinent
to the contemplated transaction with Cresco.
19. In addition, Cresco waited until March 22, 2018, when the exclusivity
period had almost expired, to schedule a call to discuss a number of DOH related
questions, including “[h]ow do we structure the Fiorello/Cresco transaction so as to
accommodate the NYDOH in its approval of the deal?” The following day, I
forwarded Cresco’s questions to the DOH. Exhibit Z is true and correct copies of an
email of Cresco’s calendar invite to me and others for the March 22 call, in which I
participated together with my March 23 email to the DOH. Given the late timing of
this request, we did not receive a response back from DOH before the exclusivity
period had ended.
Fiorello Did Not Breach The LOI.
20. At no time during the exclusivity period, however, did Fiorello discuss
a transaction with any other party. Fiorello, however, did receive unsolicited letters
of intent from Liberty and GTI.
21. The exclusivity clause is extremely narrow. It provides as relevant:
“the Parties agree that they will not discuss or enter into any transaction with any
third-party involving (a) the sale of a majority equity stake in, or all or substantially
all of the assets of Fiorello….” There was no prohibition of discussions, but only
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discussions to enter into a particular type of transaction. Fiorello had expressly
rejected an earlier draft which provided for “exclusive dealings” in favor of this
narrower language.
22. The communications with Liberty were as follows.
23. After the preliminary telephone call with Liberty in January 2018, we
had no communication with Liberty again until, suspiciously, February 15, 2018 –
the date we executed the LOI. On that date, Scorsis reached out by email and then
called to touch base. I told him we had entered into a letter of intent with another
party and could not talk about a transaction. He nevertheless said that he was going
to be in New York on February 22 and would like to meet us in person just to get
better acquainted. Because I was interested in continuing in the medical marijuana
field regardless of what might eventually happen with Cresco, I agreed. Both Susan
and I were extremely suspicious that Liberty reached out on the very day that we
executed the LOI. We immediately believed this had something to do with Cresco,
whom we suspected was in conversations with Liberty.
24. On February 22, Susan and I met with Scorsis and Gulliver. At this
meet and greet of less than an hour, we discussed general market conditions, general
product development, and in particular, the Olympics, especially the curling
competition. We did not discuss any transaction concerning a sale of the assets or
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equity of Fiorello. We did not discuss price or any terms or anything pertaining to
any sort of transaction. The meeting ended cordially.
25. On Friday, March 2, 2018, I received a text from Scorsis saying that
he was sending an unsolicited letter of intent, which he sent by email the following
day. Exhibits AA and BB, respectively, are true and correct copies of the text
messages between Scorsis and myself, which includes the 3/2/2018 text, and the
3/3/2018 email and attached proposal received from Scorsis. By this time, our
suspicions had been confirmed because, earlier that day, when Cresco’s CEO
Charlie Bachtell was with us on a due diligence visit, we heard him speaking about
Liberty. We also found it quite suspicious that Scorsis reached out to us regarding
an unsolicited offer from Liberty the evening after our due diligence field trip with
Cresco concluded, and that the cash portion of the Liberty offer was $22.5 million,
the exact amount of the base consideration in the Cresco LOI. On Tuesday, March
6, we responded to Liberty by telling them that Fiorello could not consider it until
the end of March at the earliest. Exhibit CC is a copy of Fiorello’s response to
Liberty’s March 3 letter of intent.
26. I had other contact with Scorsis in March but limited to friendly
exchanges. He was interested in my pharmaceutical background and my experience
at Pfizer and, when we had met in February, we hit it off on a personal level. At no
time in February or March 2018, however, did we discuss any business transaction.
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27. On March 16, without prior notice, Liberty again sent virtually the
same proposal to us. Exhibit DD is a true and correct copy of the 3/16/2018 cover
email from Liberty and attached proposal. We did not discuss the proposal with
anyone at Liberty and we again responded that we could not discuss any potential
transaction. Scorsis responded to my text message by saying that the proposal
already had expired according to its terms on March 17. This exchange is reflected
in the text chain, Ex. AA.
28. The pricing of both the March 3 and March 16 proposals were
consistent with the price range we had in mind in January 2018 and with the publicly
available information about medical marijuana transactions in New York. I believed
the Cresco pricing was better because of the contingency payment of up to $10
million in the event of adult legalization in New York. That, in fact, occurred on
March 31, 2021, which would have resulted, if the transaction were approved, in the
full contingency payment based on the August 2019 closing date with GTI.
29. At no time after January 2018 until April 2018 did we have any
discussions with Liberty about a sale of a majority equity stake in Fiorello.
30. Also in mid-March 2018, GTI reached out to Fiorello. There were no
discussions with GTI of any transaction during the LOI period. Nevertheless, on
March 20, 2018, Ben Kovler, GTI’s CEO, sent me an unsolicited letter of intent from
GTI. We received it, discussed it among the Board of Directors, and responded by
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text on March 22, 2018 that we could not discuss any transaction with GTI until at
least March 30. Exhibits EE and FF are true and correct copies of (a) Kovler’s
March 20, 2018 email and the attached offer and (b) text messages I exchanged with
Kovler. At no time between January 2018 and April 2018 did we discuss with GTI
any sale of a majority stake of Fiorello.
31. Throughout the exclusivity period, we did not engage in any
negotiations with any party other than Cresco. Throughout the exclusivity period,
we worked toward completing a transaction with Cresco and were anxious to do so,
despite Cresco’s repeated displays of bad faith. This was in part because, at Cresco’s
insistence, we had put our business on hold. We had abandoned our lease
negotiations for dispensary locations, foregone other sources of funding, and
postponed potential business partnerships. But by March 29, what we considered
the 30th business day, we were far from having an agreed purchase and sale
agreement and extremely far from having the necessary attendant documents that
collectively could constitute a Definitive Agreement.
32. Cresco admitted the same, including in emails exchanged between
Cresco’s and Fiorello’s transactional counsels, Exs. E ¶¶5-13, 24-25; E(D); E(E);
E(F); H(3) 149:6-20, 150:7-9, 151:2-24; V. Even Bachtell admitted that he knew
Fiorello had put its business on hold and had acted in good faith. Exhibit GG is a
true and correct copy of his April 5, 2018 email acknowledging those things.
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33. On March 30, 2018, we contacted Liberty and GTI to tell them that we
were now free to talk. On April 1, we had a very preliminary meeting with GTI
where we just communicated that any potential deal would have to include payment
of existing Fiorello liabilities but did not discuss any particular terms. Thereafter,
on April 3, 2018, we entered into NDAs with each of Liberty and GTI. They each
made certain preliminary due diligence requests. Liberty did not pursue the matter.
GTI did and we had our first substantive discussion with GTI about a possible
transaction on April 15, 2018. At the same time, we continued to negotiate with
Cresco, provided additional due diligence, including proprietary materials, granted
additional access to Cresco representatives to the document Dropbox, and tried to
resolve our concerns that Cresco had breached its confidentiality obligations. All to
no avail with Cresco.
Fiorello Confirms That Cresco Breached The LOI’s Confidentiality Provisions.
34. Our concerns that Cresco had violated its confidentiality obligations
were based upon three things. First, our suspicions regarding the nature of the
relationship between Cresco and Liberty. Second, our suspicions that Cresco had
made disclosures regarding the LOI to financial advisors or to raise capital that was
strictly prohibited. We had expressly deleted an exception to confidentiality that
would have allowed Cresco to provide information about the LOI to “potential
financiers” from an early draft of the LOI because we did not want the information
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to become public and we did not want the potential deal reflected in the LOI to be
used for attracting investors. Third, an interview of Bachtell that was published in a
trade press on April 3 indicated to us that he, as CEO of Cresco, had revealed enough
information so that industry people would be able to identify Fiorello as a
counterparty to Cresco. This too was a potential breach of confidentiality.
Fiorello’s Shareholders Would Not Have Approved The Proposed Deal With
Cresco.
35. As a practical matter, no deal with Cresco on the financial terms
contained in the LOI would ever have been approved even if we had successfully
resolved all open issues and reached a Definitive Agreement. This is for two
reasons. First, it is clear that Fiorello’s shareholders would not have approved any
such deal. See the accompanying affidavit of Jonathan Canarick. Second, it is certain
that DOH would not have approved any such deal. See the accompanying
affirmation of Jerome T. Levy.
36. When the LOI expired, we told Cresco that we would continue to
negotiate with them under a new letter of intent. Among other things, we were
unwilling to renew the exclusivity period. Moreover, we first wanted Cresco to
provide information addressing our above concerns about confidentiality. Cresco
was unwilling to provide that information but insisted that it was ready to proceed
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and believed that it could complete due diligence and finalize all open matters and
necessary documents in an additional three weeks.
37. Even had the parties agreed and adhered to that schedule, the earliest
a Definitive Agreement could have been finalized would have been the end of April.
Not only was this well past the contemplated closing date of April 15, but by then
market conditions had begun to change.
38. On April 12, 2018, New York Governor Cuomo laid out groundwork
for adult marijuana legalization. He stated that legalization was inevitable. This
reflected in part the perception that New Jersey was on the cusp of legalization. On
May 15, 2018, the New York City Comptroller, Scott Singer, issued a financial
report outlining the tax benefits of adult legalization. Manhattan District Attorney
Cy Vance announced a non-prosecution policy for possession of small amounts of
marijuana, a position supported by NYC Mayor De Blasio.
39. These announcements directly impacted the market value of medical
marijuana companies. I began to rethink the advisability of selling at all. I came to
believe that Fiorello had far greater value and that we should begin operations
without entering into any business combination and therefore ourselves realize the
anticipated benefits of adult legalization. Ultimately, after much discussion, the
other Board Members disagreed with me, almost entirely because of Cresco’s
litigation threats and ultimately this lawsuit, which Cresco commenced on May 11,
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2018. The Board was also concerned, based upon the advice of our financial advisor,
Ackrell Capital, that it would be difficult to obtain financing in the highly regulated
and restricted financial markets for marijuana companies, especially in light of
Cresco’s threats. We therefore believed that we had no choice but to enter into a
business combination that would protect the Fiorello shareholders. GTI offered that
protection at a much higher purchase price.
40. Fiorello hired Ackrell Capital in early May 2018, in part to provide the
Board with guidance as to Fiorello’s value. The work Ackrell performed served to
inform our evaluation of the various proposals we received and the fairness of the
transaction that we presented to Fiorello’s shareholders for their approval. As
members of Fiorello’s board, we understood that it was an imperative as part of our
fiduciary duties to fully and fairly disclose to shareholders not only the terms of any
proposed transaction, but also the transaction’s context and background, as well as
any other offers or expression of interest by other potential counterparties.
41. The report and advice we received from Ackrell Capital in the early
part of May 2018 was to the effect that the LOI’s base financial terms were
inadequate and undervalued Fiorello and even with the contingency payment for
adult legalization were at the low end of the market. Exhibit HH is a true and correct
copy of the “Enterprise Valuation” summary page from the materials Ackrell Capital
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provided to Fiorello’s Board. This became increasingly apparent throughout May
and June.
42. Andrew Stone and Jonathan Canarick, who co-managed NYS Pharma,
an investment group which had veto power on any business combination that would
result in a change of control, opposed any transaction under the terms of the LOI.
They were opposed to the sale price as too low and to the staggered terms of
payment. In response to their objections, we pressed Cresco to provide adequate
security but, in view of the legal restrictions on marijuana companies, Fiorello’s
shareholders were concerned that Cresco may not have funding available when the
installment payments came due and that whatever security Cresco might provide
would be unenforceable or inadequate to cover the installment payments. The
difficulty cannabis companies face in securing funding is a known industry problem
particularly because cannabis is still illegal on the federal level so fi
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FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 Exhibit J Affirmation of Eric Sirota in Support of Fiorello’s Motion for Summary Judgment, Dated June 29, 2021 Index No. 652343/2018 Motion Seq. No. __ FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ----------------------------------------------------------X CRESCO LABS, NEW YORK, LLC, a New York limited liability company, and CRESCO Index No.: 652343/2018 LABS LLC, an Illinois limited liability company, Hon. Andrew Borrok Plaintiffs, Mot. Seq. No. 11 -against- AFFIRMATION OF ERIC SIROTA IN FIORELLO PHARMACEUTICALS, INC., a SUPPORT OF New York corporation, FIORELLO’S MOTION FOR SUMMARY Defendant. JUDGMENT ----------------------------------------------------------X STATE OF FLORIDA ) COUNTY OF MANATEE ) ERIC SIROTA, being duly sworn, deposes and says: 1. I was the co-CEO of Fiorello Pharmaceuticals, Inc. (“Fiorello”) beginning in 2015 through August 2019, when I sold my stock in Fiorello to Green Thumb Industries (“GTI”) in connection with an Amended and Restated Merger Agreement between GTI and all of the individual shareholders of Fiorello. I have personal knowledge of the matters set forth herein, and I make this affidavit in support of Fiorello’s motion for summary judgment. FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 Introduction 2. I previously filed an affidavit in this matter in opposition to Plaintiff Cresco Labs, New York, LLC’s failed motion for a preliminary injunction, among other things, to enjoin a transaction with GTI. That affidavit summarized the negotiation and terms of the letter of intent effective as of February 14, 2018 between Plaintiffs Cresco Labs New York, LLC and Cresco Labs, LLC (together “Cresco”) and Fiorello (the “LOI”) and Cresco’s failure to perform its obligations thereunder. Ex. A. 1 I refer the Court to my July 5, 2018 affidavit in opposition to preliminary injunction (Ex. D) and will now focus on the issues relevant to the exclusivity clause of the LOI. 3. Fiorello did not breach the exclusivity clause and had no negotiations about a potential transaction with any other party during the 30 business-day period. The documentary record demonstrates this unequivocally. When Fiorello received an unsolicited letter of intent from Liberty Health Sciences (“Liberty”) on Saturday March 3, 2018, it responded on Tuesday, March 6 that it could not talk until the end of March at the earliest. When, in mid-March Liberty sent a substantially similar unsolicited proposed letter of intent, Fiorello again responded that it could not talk. When GTI sent an unsolicited proposal in mid-March, Fiorello responded to it in the 1 This affidavit references a number of exhibits to the accompanying affirmation of Rachel Izower- Fadde (“RIF_Aff.”). I have reviewed each of those referenced exhibits and confirm that each is a true and correct copy of the document as described in the RIF_Aff. 2 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 same way – that it could not talk until March 30, 2018, at the earliest. That date is after the exclusivity clause would have expired. 4. Although Fiorello’s shareholders ultimately entered into a transaction with GTI that closed in August 2019, based upon a renegotiated merger agreement dated December 2018, it is not surprising that Cresco withdrew its claim against “John Doe” for tortious interference. Fiorello did not engage in any negotiations with GTI prior to April 2018, after the LOI expired. This is also true of Liberty. 5. In addition to there not having been any breach of the exclusivity clause, there was never any enforceable agreement that could have resulted in the sale of all of Fiorello’s stock to Cresco. Not only were none of Fiorello’s shareholders party to the LOI, and not only was there no lock-up provision or other obligation of the Fiorello directors to recommend or vote for a business combination with Cresco, but it is clear that (i) Fiorello shareholders would not have approved any transaction with Cresco based upon the terms of the LOI, and (ii) the New York Department of Health (“DOH”) would not have approved any transaction with Cresco based upon the terms of the LOI. Any possible transaction with Cresco, or anyone else, was necessarily conditioned on both of these approvals. 3 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 Pre-LOI Background: Fiorello’s Efforts To Raise Capital Or Find A Partner 6. Fiorello is a registered medical marijuana organization with the DOH, licensed to manufacture and dispense medical marijuana at DOH approved facilities. The DOH allowed Fiorello to have four dispensaries in designated counties. Upon receiving its license in August 2017, Fiorello embarked upon two parallel paths. One, to raise capital to become operational, and two, to consider a business combination with a larger entity. 7. During the period between November 2017 and January 2018, Fiorello spoke with multiple potential business partners including Cresco, Liberty, and GTI, among others. At those meetings we discussed, among many other things, basic terms that Fiorello would consider in connection with a potential business combination. 8. GTI reached out to us and in May 2017 we entered into an NDA and shared some information with GTI. In November 2017, we met GTI in Las Vegas. GTI expressed renewed interest and made an offer in December 2017 which we rejected as too low. 9. We had a preliminary telephone call with Liberty on January 21, 2018 that did not seem to go anywhere. At that time, we were looking for a price point in the mid-$20 million range. Prior to the January 21 call, Fiorello and Liberty had entered into an NDA, and Fiorello had provided Liberty with a non-confidential 4 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 overview deck. Fiorello provided a confidential management presentation to Liberty after the call. Participating in that call were Susan Yoss, Fiorello’s co-CEO, George Scorsis, Liberty’s CEO, myself, and, I believe, Rene Gulliver, Liberty’s CFO. After that telephone call we did not hear from Liberty again except as set forth below. We had no further discussions with Liberty about a possible transaction until April 2018. 10. We emphasized to all potential counterparties Fiorello’s desire and need to move quickly. To maintain its status in good standing with DOH as a registered organization, Fiorello needed to take affirmative steps towards beginning operations. In this regard, we also sought to raise capital and, by the end of January 2018, secured a financing commitment from 4Front for $5 million. Also, by that time we had leased space for a manufacturing facility and identified locations and had begun to negotiate leases for certain dispensary locations. Fiorello was concerned that it could not be focused on a business combination in lieu of developing its business for an extended period because it could imperil its ability to become operational within the requirements of DOH and thereby jeopardize Fiorello’s standing as a registered organization. 5 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 The LOI Period: Cresco Repeatedly Breached The LOI. 11. The LOI reflected the need to proceed quickly in two ways. First, under the Timing section, the parties had only 30 business days from February 14, the effective date and when Cresco executed the LOI, to complete and execute the “Definitive Agreement,” inclusive of the purchase and sale agreement, the promissory notes, the management oversight agreement (MOA), the guaranty, the exchange agreements to, among other things, assure a tax free exchange, an agreed mechanism to obtain the approval and joinder of the Fiorello shareholders, the consulting agreements, and all other necessary and ancillary agreements to complete the contemplated transaction. (See definition of “Definitive Agreement” in LOI.) Second, the LOI contemplated a closing of the Definitive Agreement to be on or about April 15, 2018. And no closing could happen without approval by the boards of directors/managers of both Cresco and Fiorello; the shareholders/members of both Cresco and Fiorello; and the DOH. 12. Execution risk was a significant concern for Fiorello regarding the negotiation of a Definitive agreement with Cresco arising from two things. First, there was difficulty in negotiating the LOI. Those negotiations were quite challenging and lasted from mid-December 2017 through February 14, 2018. 13. Second, once Fiorello signed the LOI, Cresco seemed to lose focus and did not do the actual work necessary to finalize a transaction. For instance, the LOI 6 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 required Cresco, upon executing the LOI, to pay to Fiorello $500,000 and promptly to provide a due diligence list. Although Cresco executed the LOI on its effective date, it did not pay the $500,000 then due to Fiorello. Finally, a week later, and only after Fiorello inquired, Cresco said they would not pay the money unless it was subject to an escrow agreement and paid to an agreed escrow agent. There was no such provision in the LOI, but Fiorello agreed. Fiorello’s counsel drafted an escrow agreement and, when Cresco could not identify an escrow agent, agreed to serve in that capacity. Cresco finally paid the $500,000 on March 1, 2018. Despite Fiorello’s repeated emphasis on moving quickly, Cresco did not provide the payment until two weeks after the execution of the LOI. 14. Cresco also did not promptly send a due diligence list as the LOI required until March 1, 2018, two weeks into the 30 business days, squandering 1/3 of the exclusivity period. That list was mostly in the nature of a generic legal due diligence request and was not specific to the nature of Fiorello’s business. As such, Fiorello took the initiative to provide additional materials beyond the initial request further supplementing the due diligence materials it had provided even prior to the LOI’s execution. By March 10 Fiorello had populated a Dropbox with nearly all of the due diligence materials Cresco had requested along with many additional materials Fiorello thought helpful to Cresco and had provided access to Cresco. Cresco initially claimed that they reviewed the materials in a timely fashion. Even 7 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 Cresco’s CEO, Bachtell, claimed in an April 4 email that Cresco had “completed our due diligence weeks ago.” Exhibit GG is a true and correct copy of an email chain including that April 4, 2018 email I received from Bachtell. Nevertheless, Cresco’s counsel, even after the LOI expired, was still asking for people to be given access to the due diligence Dropbox and said that they needed more time for due diligence. Exs. E(F) (April 5, 2018 attaching Cresco’s proposed schedule including for completed due diligence by April 13). 15. Not until March 8, 2018, the 15th business day after the LOI’s effective date, did Cresco send a draft purchase and sale agreement. (An earlier draft sent on March 1 was withdrawn by Cresco on March 2.) This was just the first of many documents that needed to be negotiated for a final deal. By then, one half of the total time provided for by the LOI had elapsed. Although Cresco explicitly told us that it wanted to retain control of and would draft all transaction documents, halfway through the exclusivity period Cresco had not forwarded drafts of any of the other documents essential to a proposed Definitive Agreement. 16. At the same time, Cresco completely ignored its obligation to provide financing to Fiorello in connection with an MOA as to the use of such funds. The LOI provided that the Parties “shall enter into a Management Oversight Agreement … for that period of time running from the date the LOI is executed until the Closing Date in exchange for providing to be determined funding to Fiorello during such 8 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 period.” We requested such financing and a draft agreement several times, but never received a response. Two of my requests for the draft agreements are reflected in emails I sent to Cresco’s CEO, Charles Bachtell. On February 12, 2018, I wrote to Bachtell: “Please let us know how you would like to proceed regarding diligence and the execution of the management oversight and definitive agreements.” I then followed up on February 18, 2018: “Now that the LOI is signed, please let us know how you want to move forward with diligence and the management oversight and definitive agreements.” Exhibit X is a true and correct copy of that email chain. 17. Cresco apparently had no intention of providing such financing unless and until Cresco and Fiorello entered into a Definitive Agreement. That is contrary to the LOI, which expressly required that financing be provided during the LOI period to allow Fiorello to continue with its efforts to become operational. 18. Meanwhile, also at Cresco’s request, Fiorello abandoned or postponed its lease negotiations, strategic alliances, and other steps it had taken towards becoming operational. Exhibit Y is a true and correct copy of a March 11, 2018 email exchange I had with Bachtell. The 6:03 email from Bachtell is an example of Cresco’s directions on these matters. Starved for financing, Fiorello had no choice but to put operations on hold while it waited to receive drafts from Cresco. During this period, Fiorello continued to have regular contact with DOH, populate its due diligence Dropbox with post-March 10th developments, prepare the schedules that 9 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 would be required as exhibits to the contemplated merger agreement and consult with tax counsel about how to fashion a tax-free exchange and other issues pertinent to the contemplated transaction with Cresco. 19. In addition, Cresco waited until March 22, 2018, when the exclusivity period had almost expired, to schedule a call to discuss a number of DOH related questions, including “[h]ow do we structure the Fiorello/Cresco transaction so as to accommodate the NYDOH in its approval of the deal?” The following day, I forwarded Cresco’s questions to the DOH. Exhibit Z is true and correct copies of an email of Cresco’s calendar invite to me and others for the March 22 call, in which I participated together with my March 23 email to the DOH. Given the late timing of this request, we did not receive a response back from DOH before the exclusivity period had ended. Fiorello Did Not Breach The LOI. 20. At no time during the exclusivity period, however, did Fiorello discuss a transaction with any other party. Fiorello, however, did receive unsolicited letters of intent from Liberty and GTI. 21. The exclusivity clause is extremely narrow. It provides as relevant: “the Parties agree that they will not discuss or enter into any transaction with any third-party involving (a) the sale of a majority equity stake in, or all or substantially all of the assets of Fiorello….” There was no prohibition of discussions, but only 10 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 discussions to enter into a particular type of transaction. Fiorello had expressly rejected an earlier draft which provided for “exclusive dealings” in favor of this narrower language. 22. The communications with Liberty were as follows. 23. After the preliminary telephone call with Liberty in January 2018, we had no communication with Liberty again until, suspiciously, February 15, 2018 – the date we executed the LOI. On that date, Scorsis reached out by email and then called to touch base. I told him we had entered into a letter of intent with another party and could not talk about a transaction. He nevertheless said that he was going to be in New York on February 22 and would like to meet us in person just to get better acquainted. Because I was interested in continuing in the medical marijuana field regardless of what might eventually happen with Cresco, I agreed. Both Susan and I were extremely suspicious that Liberty reached out on the very day that we executed the LOI. We immediately believed this had something to do with Cresco, whom we suspected was in conversations with Liberty. 24. On February 22, Susan and I met with Scorsis and Gulliver. At this meet and greet of less than an hour, we discussed general market conditions, general product development, and in particular, the Olympics, especially the curling competition. We did not discuss any transaction concerning a sale of the assets or 11 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 equity of Fiorello. We did not discuss price or any terms or anything pertaining to any sort of transaction. The meeting ended cordially. 25. On Friday, March 2, 2018, I received a text from Scorsis saying that he was sending an unsolicited letter of intent, which he sent by email the following day. Exhibits AA and BB, respectively, are true and correct copies of the text messages between Scorsis and myself, which includes the 3/2/2018 text, and the 3/3/2018 email and attached proposal received from Scorsis. By this time, our suspicions had been confirmed because, earlier that day, when Cresco’s CEO Charlie Bachtell was with us on a due diligence visit, we heard him speaking about Liberty. We also found it quite suspicious that Scorsis reached out to us regarding an unsolicited offer from Liberty the evening after our due diligence field trip with Cresco concluded, and that the cash portion of the Liberty offer was $22.5 million, the exact amount of the base consideration in the Cresco LOI. On Tuesday, March 6, we responded to Liberty by telling them that Fiorello could not consider it until the end of March at the earliest. Exhibit CC is a copy of Fiorello’s response to Liberty’s March 3 letter of intent. 26. I had other contact with Scorsis in March but limited to friendly exchanges. He was interested in my pharmaceutical background and my experience at Pfizer and, when we had met in February, we hit it off on a personal level. At no time in February or March 2018, however, did we discuss any business transaction. 12 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 27. On March 16, without prior notice, Liberty again sent virtually the same proposal to us. Exhibit DD is a true and correct copy of the 3/16/2018 cover email from Liberty and attached proposal. We did not discuss the proposal with anyone at Liberty and we again responded that we could not discuss any potential transaction. Scorsis responded to my text message by saying that the proposal already had expired according to its terms on March 17. This exchange is reflected in the text chain, Ex. AA. 28. The pricing of both the March 3 and March 16 proposals were consistent with the price range we had in mind in January 2018 and with the publicly available information about medical marijuana transactions in New York. I believed the Cresco pricing was better because of the contingency payment of up to $10 million in the event of adult legalization in New York. That, in fact, occurred on March 31, 2021, which would have resulted, if the transaction were approved, in the full contingency payment based on the August 2019 closing date with GTI. 29. At no time after January 2018 until April 2018 did we have any discussions with Liberty about a sale of a majority equity stake in Fiorello. 30. Also in mid-March 2018, GTI reached out to Fiorello. There were no discussions with GTI of any transaction during the LOI period. Nevertheless, on March 20, 2018, Ben Kovler, GTI’s CEO, sent me an unsolicited letter of intent from GTI. We received it, discussed it among the Board of Directors, and responded by 13 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 text on March 22, 2018 that we could not discuss any transaction with GTI until at least March 30. Exhibits EE and FF are true and correct copies of (a) Kovler’s March 20, 2018 email and the attached offer and (b) text messages I exchanged with Kovler. At no time between January 2018 and April 2018 did we discuss with GTI any sale of a majority stake of Fiorello. 31. Throughout the exclusivity period, we did not engage in any negotiations with any party other than Cresco. Throughout the exclusivity period, we worked toward completing a transaction with Cresco and were anxious to do so, despite Cresco’s repeated displays of bad faith. This was in part because, at Cresco’s insistence, we had put our business on hold. We had abandoned our lease negotiations for dispensary locations, foregone other sources of funding, and postponed potential business partnerships. But by March 29, what we considered the 30th business day, we were far from having an agreed purchase and sale agreement and extremely far from having the necessary attendant documents that collectively could constitute a Definitive Agreement. 32. Cresco admitted the same, including in emails exchanged between Cresco’s and Fiorello’s transactional counsels, Exs. E ¶¶5-13, 24-25; E(D); E(E); E(F); H(3) 149:6-20, 150:7-9, 151:2-24; V. Even Bachtell admitted that he knew Fiorello had put its business on hold and had acted in good faith. Exhibit GG is a true and correct copy of his April 5, 2018 email acknowledging those things. 14 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 33. On March 30, 2018, we contacted Liberty and GTI to tell them that we were now free to talk. On April 1, we had a very preliminary meeting with GTI where we just communicated that any potential deal would have to include payment of existing Fiorello liabilities but did not discuss any particular terms. Thereafter, on April 3, 2018, we entered into NDAs with each of Liberty and GTI. They each made certain preliminary due diligence requests. Liberty did not pursue the matter. GTI did and we had our first substantive discussion with GTI about a possible transaction on April 15, 2018. At the same time, we continued to negotiate with Cresco, provided additional due diligence, including proprietary materials, granted additional access to Cresco representatives to the document Dropbox, and tried to resolve our concerns that Cresco had breached its confidentiality obligations. All to no avail with Cresco. Fiorello Confirms That Cresco Breached The LOI’s Confidentiality Provisions. 34. Our concerns that Cresco had violated its confidentiality obligations were based upon three things. First, our suspicions regarding the nature of the relationship between Cresco and Liberty. Second, our suspicions that Cresco had made disclosures regarding the LOI to financial advisors or to raise capital that was strictly prohibited. We had expressly deleted an exception to confidentiality that would have allowed Cresco to provide information about the LOI to “potential financiers” from an early draft of the LOI because we did not want the information 15 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 to become public and we did not want the potential deal reflected in the LOI to be used for attracting investors. Third, an interview of Bachtell that was published in a trade press on April 3 indicated to us that he, as CEO of Cresco, had revealed enough information so that industry people would be able to identify Fiorello as a counterparty to Cresco. This too was a potential breach of confidentiality. Fiorello’s Shareholders Would Not Have Approved The Proposed Deal With Cresco. 35. As a practical matter, no deal with Cresco on the financial terms contained in the LOI would ever have been approved even if we had successfully resolved all open issues and reached a Definitive Agreement. This is for two reasons. First, it is clear that Fiorello’s shareholders would not have approved any such deal. See the accompanying affidavit of Jonathan Canarick. Second, it is certain that DOH would not have approved any such deal. See the accompanying affirmation of Jerome T. Levy. 36. When the LOI expired, we told Cresco that we would continue to negotiate with them under a new letter of intent. Among other things, we were unwilling to renew the exclusivity period. Moreover, we first wanted Cresco to provide information addressing our above concerns about confidentiality. Cresco was unwilling to provide that information but insisted that it was ready to proceed 16 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 and believed that it could complete due diligence and finalize all open matters and necessary documents in an additional three weeks. 37. Even had the parties agreed and adhered to that schedule, the earliest a Definitive Agreement could have been finalized would have been the end of April. Not only was this well past the contemplated closing date of April 15, but by then market conditions had begun to change. 38. On April 12, 2018, New York Governor Cuomo laid out groundwork for adult marijuana legalization. He stated that legalization was inevitable. This reflected in part the perception that New Jersey was on the cusp of legalization. On May 15, 2018, the New York City Comptroller, Scott Singer, issued a financial report outlining the tax benefits of adult legalization. Manhattan District Attorney Cy Vance announced a non-prosecution policy for possession of small amounts of marijuana, a position supported by NYC Mayor De Blasio. 39. These announcements directly impacted the market value of medical marijuana companies. I began to rethink the advisability of selling at all. I came to believe that Fiorello had far greater value and that we should begin operations without entering into any business combination and therefore ourselves realize the anticipated benefits of adult legalization. Ultimately, after much discussion, the other Board Members disagreed with me, almost entirely because of Cresco’s litigation threats and ultimately this lawsuit, which Cresco commenced on May 11, 17 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 2018. The Board was also concerned, based upon the advice of our financial advisor, Ackrell Capital, that it would be difficult to obtain financing in the highly regulated and restricted financial markets for marijuana companies, especially in light of Cresco’s threats. We therefore believed that we had no choice but to enter into a business combination that would protect the Fiorello shareholders. GTI offered that protection at a much higher purchase price. 40. Fiorello hired Ackrell Capital in early May 2018, in part to provide the Board with guidance as to Fiorello’s value. The work Ackrell performed served to inform our evaluation of the various proposals we received and the fairness of the transaction that we presented to Fiorello’s shareholders for their approval. As members of Fiorello’s board, we understood that it was an imperative as part of our fiduciary duties to fully and fairly disclose to shareholders not only the terms of any proposed transaction, but also the transaction’s context and background, as well as any other offers or expression of interest by other potential counterparties. 41. The report and advice we received from Ackrell Capital in the early part of May 2018 was to the effect that the LOI’s base financial terms were inadequate and undervalued Fiorello and even with the contingency payment for adult legalization were at the low end of the market. Exhibit HH is a true and correct copy of the “Enterprise Valuation” summary page from the materials Ackrell Capital 18 FILED: NEW YORK COUNTY CLERK 12/14/2021 11:15 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 239 RECEIVED NYSCEF: 12/14/2021 provided to Fiorello’s Board. This became increasingly apparent throughout May and June. 42. Andrew Stone and Jonathan Canarick, who co-managed NYS Pharma, an investment group which had veto power on any business combination that would result in a change of control, opposed any transaction under the terms of the LOI. They were opposed to the sale price as too low and to the staggered terms of payment. In response to their objections, we pressed Cresco to provide adequate security but, in view of the legal restrictions on marijuana companies, Fiorello’s shareholders were concerned that Cresco may not have funding available when the installment payments came due and that whatever security Cresco might provide would be unenforceable or inadequate to cover the installment payments. The difficulty cannabis companies face in securing funding is a known industry problem particularly because cannabis is still illegal on the federal level so fi