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Exhibit D
Sirota Affidavit In Opposition To Injunction, Dated July 5, 2018
Index No. 652343/2018 Motion Seq. No. 11
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NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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CRESCO LABS, NEW YORK, LLC, a New York
limited liability company, Index No.: 652343/2018
Plaintiff, Hon. Charles E. Ramos
-against-
FIORELLO PHARMACEUTICALS, INC., a New York AFFIDAVIT OF
corporation, ERIC SIROTA, an individual, SUSAN ERIC SIROTA
YOSS, an individual, and JOHN DOES 1-10, IN OPPOSITION TO
INJUNCTION
Defendants.
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State of New York )
) ss
County of New York )
I, ERIC SIROTA, being duly sworn, deposes and says:
1. I am a founder, Co-Chief Executive Officer, member of the Board of Directors and
shareholder of Fiorello Pharmaceuticals, Inc., (“Fiorello” or “Defendant”) a defendant in the
above-captioned action (the “Action”) brought by Cresco Labs, New York, LLC (“CLNY” or
“Plaintiff”). CLNY is also personally suing me and Fiorello co-CEO, Susan Yoss (“Susan”), and
10 John Doe defendants. I submit this affidavit in opposition to CLNY’s application for a
preliminary injunction preventing Fiorello, Susan and me from “(i) soliciting bids for the purchase
of Fiorello’s medical marijuana license, (ii) participating in any negotiations with third parties
surrounding the license’s sale, and (iii) selling the license to any third party; and enjoining John
Does 1-10 from negotiating for the license’s purchase or actually purchasing the license.” I am
fully familiar with the facts set forth herein.
2. This is a breach of contract action arising from a letter of intent (“LOI”) to negotiate a
“Definitive Agreement” by which CLNY and its parent entity Cresco Labs LLC (“Cresco”) might
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acquire 100% of the stock of Fiorello from its 17 shareholders. The draft LOI attached to CLNY’s
Complaint in this Action was never signed and certain provisions were changed. A true and correct
copy of the actual LOI, dated February 14, 2018, is attached hereto as Exhibit A.
3. I signed, and Susan initialed, the LOI solely in our capacities as officers of Fiorello.
Any agreements that might have been reached would be submitted and subject to approval by the
entirety of Fiorello’s board of directors and all of its 17 shareholders. It is not Fiorello but those
shareholders, none of whom are party to the LOI, who are the actual sellers. Susan and I
collectively do not own a majority of Fiorello’s stock. Nor could we compel any such transaction
by Fiorello’s shareholders. Other than Fiorello’s board members, none of the shareholders of
Fiorello authorized the LOI or knew its terms when executed. None of those other Fiorello
shareholders even had a copy of the LOI until April when Cresco breached the confidentiality
agreement by contacting and providing a copy of the LOI to a shareholder to put pressure on
Fiorello’s Board of Directors. The LOI has no representations by Fiorello, and no lock up of the
votes of Susan and I, or of the Fiorello Board.
4. CLNY is a shell company, wholly owned by Cresco, with no assets or operations and
which did not exist until March 14, a full month after the LOI was executed. Although the
Complaint describes CLNY as “a nationwide leader in the development and sale of medical
cannabis products … operat[ing] in multiple states and through a variety of well-known brand
names,” that is a description of Cresco, not CLNY. Cresco is not a party to this action.
5. The LOI reflected the parties’ intention to move quickly or not at all so that if no deal
were struck Fiorello could proceed with developing its business either on its own or with another
entity. The LOI, by its terms, required the parties to execute the “Definitive Agreement” “at the
earliest possible date but no later than thirty (30) business days from [February 14,]” i.e. on March
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29, 2018, unless extended by mutual agreement of the parties. Ex. A, p. 4. During that period,
Fiorello agreed to refrain from exploring other opportunities.
6. The “Closing,” “Good Faith Payment,” “Due Diligence,” “Definitive Agreement,” and
“Confidentiality” Provisions acknowledge the possibility that the stock acquisition proposed in the
LOI might not be consummated and the limited time frame during which the parties would be
bound. The LOI was never intended to bind the parties for an indefinite period. Further, the LOI
left a number of material issues open for negotiation.
7. Demonstrating the preliminary nature of the LOI is that:
a. The LOI recognized that the proposed deal was complex, requiring negotiation of, and
agreement to, a definitive stock purchase agreement (“SPA”), promissory note
(“Note”), guaranty, management oversight agreement (“MOA”), and consulting
agreement, as well as all of the exhibits, schedules and ancillary agreements thereto.
b. The LOI explicitly made the acquisition subject to approval by the New York
Department of Health (“DOH”), and by the Parties’ respective boards of directors and
shareholders/members.
c. The LOI did not bind any of Fiorello’s 17 Shareholders to sell their shares to Cresco
and they did not agree to do so. Fiorello’s Shareholders are not parties to the LOI and
are not controlled by the parties to the LOI.
d. The LOI also did not provide any process for obtaining Shareholder agreement to sell,
did not address the information that would be provided to Shareholders to assist them
in evaluating the offer, and did not address the possibility that less than 100% of the
Shareholders would agree to sell.
e. The LOI also did not bind the boards of directors of any party. Fiorello’s Board of
Directors (the “Board”) was required by their fiduciary duties and the New York
Business Corporation Law (“BCL”) to assess the fairness of the proposed transaction
and to make full and fair disclosure of all relevant facts including intervening facts and
information. Unsolicited bids by others received before shareholder approval would
have to be disclosed.
f. DOH approval was not automatic; it is an involved, deliberative process, requiring
significant disclosure by Cresco and approval is wholly within DOH control and the
outcome is uncertain.
g. Many material issues were left open by the LOI, including but not limited to, the
valuation of Cresco stock to be exchanged for Fiorello stock and the tax structure of
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the transaction – both issues that had substantial impact on the actual value that could
be realized by Fiorello’s Shareholders.
h. The terms and form of the notes and guarantee.
8. Notwithstanding the many open issues and the limited term of the LOI, CLNY, by
its application for an injunction, seeks to obtain the benefit of a bargain that was never made – to
force Fiorello’s Shareholders to sell their stock to Cresco on terms that are plainly unfair to them
and to which they would never agree in view of intervening events. Nor could the Board consistent
with its fiduciary duties, approve such a transaction. Although Cresco frames its requested
injunction in terms of requiring Fiorello to negotiate with Cresco in “good faith,” the real effect of
such an injunction would be to thwart a far better transaction that Fiorello’s shareholders already
have approved and to impair Fiorello’s ability to obtain financing, halt its development, and
threaten its relationship with the DOH and potentially its license.
DOH OVERSIGHT OF THE MEDICAL MARIJUANA INDUSTRY AND THE
REQUIREMENT TO OPERATIONALIZE IN A TIMELY FASHION
9. On July 7, 2014, the New York State Compassionate Care Act (“CCA”) was signed
into law, providing the legislative basis for a legal medical marijuana industry in New York. The
New York medical marijuana industry is still in its early stage; medical marijuana products first
became available in New York for certified patients on January 1, 2016.
10. The medical marijuana industry is closely regulated and overseen by the New York
State Department of Health (“DOH”). The DOH has promulgated regulations governing the
industry and controls the issuance of licenses at all levels of the market. See generally 10
N.Y.C.R.R. 1004.
11. Licenses for the cultivation, production and sale of medical marijuana are vertically
integrated providing each registered organization (“RO”) with one manufacturing/cultivating
facility and four dispensaries. RO licenses are non-transferable. 10 N.Y.C.R.R. 1004.8 (titled
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“Registrations Non-Transferrable”). The DOH also must approve any changes in the ownership
or control of an RO. Id. at §1004.10(B)(5)
Registered organizations shall not: … change the composition of the entity which
is the registered organization, including but not limited to, a change in sole
proprietor, partner, director, stockholder, member or membership interest of the
registered organization without the prior written approval of the department[.]
12. Fiorello submitted an application to become one of the 5 initial RO’s on June 5 2015.
Fiorello put a tremendous amount of work into its over 2,000 page application. The original
process required, applicants to provide detailed information on their specific real estate facilities
and equipment to be used in the manufacture and sale of medical marijuana, architectural drawings,
specifics on leases, security and construction timelines. DOH regulations also require detailed
operating plans, company policies and procedures and quality control programs covering
everything from daily operations and record keeping, to dispensing errors, contamination incidents
and self-reporting. (10 N.Y.C.R.R. 1004.5). The first 5 RO licenses were issued in July 2015.
Although Fiorello did not receive a license, its application was well-received, earning the 7th
highest total weighted score of the 43 applications submitted.
13. In August 2016, to meet additional patient demand and increase access to medical
marijuana throughout the State, the DOH recommended expanding the number of RO licenses
from 5 to 10. On January 20, 2017, Fiorello received a letter from the DOH to assess our interest
in becoming an RO in New York State. Fiorello submitted an over 300 page “Plan of Entry”
document on February 28 2017 to the DOH for approval. On August 1, 2017, the DOH granted
five additional RO licenses, including awarding a license to Fiorello.
14. As the number of patients eligible to receive medical marijuana grows, it is common
for States that have legalized medical marijuana to increase the number of licenses. For example,
Pennsylvania is in the process of expanding the number of producer/processor licenses from 12 to
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25 and the number of dispensaries from 81 to 150. In contrast, the New York DOH has currently
issued only 10 RO licenses which allows for a total of 40 dispensaries, far fewer than Pennsylvania
and many other populous States. When in 2017 the New York DOH expanded the number of RO
licenses from 5 to 10 there were approximately 26,000 patients certified to receive medical
marijuana. Now, the number of certified patients has more than doubled to approximately 60,000.
It is expected that the DOH will continue to issue additional licenses to enhance patient access and
better address patient needs as the number of certified patients continues to increase.
15. Fiorello has been in regular contact with the DOH and has submitted a comprehensive
brand plan as well as detailed architectural and security plans for its manufacturing facility to the
DOH for review and comment. On May 31, 2018, the DOH completed a pre-construction site visit
at Fiorello’s manufacturing facility. Fiorello continues to work closely with the DOH and is in
good standing with it.
16. At the time the LOI was executed, Fiorello had a signed lease for its cultivation and
manufacturing facility and was in active negotiations for dispensary sites in Manhattan, Nassau
County and Saratoga County. We were actively working with design, engineering, architecture
and security firms to design our dispensary retail locations and our manufacturing facility. It was
a critical time for Fiorello in that we would need to immediately raise at least $5 million to continue
to operationalize our business over the next 6 months and complete phase 1 of our operating plan
or quickly secure a partner that would fund and help operationalize the business. Without the
appropriate funding or a partner that could provide appropriate funding we would be at risk of
falling behind on our operational timeline.
THE PARTIES ENTER INTO THE LETTER OF INTENT
17. In December, 2017, Cresco and Fiorello began exploring a possible transaction. On
December 19, 2017, Cresco’s CEO, Charlie Bachtell, sent me and Susan a first draft of a letter of
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intent outlining certain basic parameters for a potential deal. Between December 19 and February
14, 2018, we negotiated with Cresco and exchanged edits to the draft LOI.
18. Prior to executing the LOI, Fiorello was being pursued by other companies interested
in purchasing its shares or partnering with it.
19. Fiorello also had an unsigned commitment from a third party for $5 million in financing
to fund its phase 1 operating plans. We informed Cresco that we would accept that funding offer
if Cresco was not prepared to move forward quickly.
20. With Cresco’s assurances and the LOI’s language (a) limiting its term to 30 business
days, (b) confirming that Cresco would provide interim financing for Fiorello, and (c) conditioning
an ultimate deal on satisfactory completion of due diligence and final approval by the Parties’
boards of directors, shareholders/members, and the DOH, Fiorello put its financing commitment
on hold and the Board approved the LOI on February 9, 2018, subject to addition of an equity
option for the payment due to shareholders at closing and final legal review. On February 14, 2018,
I executed and Susan initialed the LOI as Fiorello’s co-CEOs.
KEY LOI PROVISIONS
21. The LOI Provides For A Short Period To Finalize A Deal Or Move On. The LOI set
out a limited exclusivity period during which the Parties would try to finalize a deal within the
parameters set forth in the LOI and without pursuing other options. If the Parties could not finalize
a deal within that period, the LOI would terminate and the Parties would no longer be bound by
its terms.
22. The first sentence of the LOI’s “Timing Provision” strictly limits the binding term of
the LOI to 30 business days from its February 14, 2018 effective date, this calculated to March 29.
The LOI then expired, “unless otherwise extended by mutual agreement of the parties.” It reads:
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Both Parties agree that they will each use their respective best efforts to complete
and execute the Definitive Agreement and conclude due diligence consistent with
the terms of this LOI at the earliest possible date but no later than thirty (30)
business days from the date of the execution of this LOI (unless otherwise extended
by the mutual agreement of the Parties).
Id. p. 4 (underlining added; italics in original). The Parties tried but did not agree to any extension
of the LOI.
23. The second sentence of the Timing Provision clarifies that during the 30 business days,
the Parties would not negotiate with third parties. There was no intention that exclusivity would
continue indefinitely. That would be a breach of our fiduciary duties to our shareholders. Rather,
any exclusivity was necessarily tied to the term of the LOI and expired on March 29, 2018. This
was a mutual obligation to assure that during that 30 business day period the Parties would focus
on pursuing the proposed transaction.
By executing this LOI, 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 or any subsidiary or parent entities
of Fiorello, including without limitation, any sale or other transfer of the grower
and dispensary license used or owned by Fiorello to any third-party or (b) the
purchase of any equity interest in or assets of another medical marijuana company
in the State of New York by Buyer.
24. Consistent with the importance that Fiorello put on either finalizing a deal quickly or
being free to move on to other prospects, Fiorello added a specific “Closing” Provision that
contemplated closing on or before April 15, 2018. The limited term of the LOI is also reflected in
the “Good Faith Payment” provision that gives the Cresco entities 30 (calendar) days to complete
their due diligence (March 14, 2018) or forfeit their $500,000 payment. As of the beginning of
April, Cresco still had not completed due diligence.
25. Similarly, the LOI’s “Definitive Agreement” section provided that the parties would
act promptly to conduct due diligence and negotiate and execute agreements:
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Promptly following the execution of this LOI, the Parties, together with their
authorized representatives, will in good faith prepare and execute definitive
agreements that include, but are not limited to, certain operating agreements,
investment agreements as well as any ancillary agreements as contemplated by the
paragraph entitled Further Acts, below, elaborating on the binding provisions
hereof (collectively, the “Definitive Agreement”).
Ex. A at p. 3.
26. The defined term “Definitive Agreement” included an SPA to be executed by each
Shareholder, a promissory note for each Shareholder (covering each installment payment), the
guaranty by Cresco as well as “such further documents or instruments required by the other Party
as may be reasonably necessary or desirable to affect the purposes of this LOI and carry out its
provisions.” Id. at pp. 1-3.
27. The LOI recognizes that the Shareholders, not Fiorello, are the essential parties to
the proposed transaction. Fiorello’s shareholders are the actual sellers yet none of them are party
to the LOI. The LOI’s opening paragraph describes and defines the parties as:
Fiorello Pharmaceuticals, Inc., a New York corporation (“Fiorello”) and Cresco
Labs New York, LLC, a New York limited liability company (“CLNY”), a
controlled subsidiary of Cresco Labs LLC, an Illinois limited liability company
(“Cresco”). CLNY and/or Cresco may be referred to collectively as “Buyer”.
Fiorello and Buyer may hereinafter be referred to individually as a “Party” and
collectively as the “Parties.”
Ex. A, p. 1.
28. While Cresco and CLNY are together defined as “Buyer.” Fiorello is not defined or
referred to anywhere in the LOI as “seller.” Rather, the LOI contemplated a potential acquisition
of 100% of Fiorello’s issued and outstanding stock.
29. Fiorello’s 17 common and preferred Shareholders are not under Fiorello’s control. The
Parties to the LOI could not themselves ensure that the Cresco Entities would ultimately succeed
in acquiring 100% of Fiorello’s shares. Although Susan Yoss, co-chief executive officer initialed,
and I signed the LOI, we did so as corporate officers, not as shareholders. Nor do we control a
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majority of the total stock of Fiorello.
30. Under the LOI, the Shareholders, not Fiorello, are the sellers and consequently they,
not Fiorello, would be the ultimate decision makers as to whether to engage in any proposed sale
to Cresco. See, e.g. Ex. A p. 3 (“Closing” requiring inter alia shareholder approval); See also, e.g.
Id. pp. 1-2 (providing that Shareholders – at their individual election -- will have the option of
receiving cash or Cresco stock in exchange for selling their shares).
31. Furthermore, the LOI confirmed that Cresco would only commit to a deal if it could
acquire 100% of Fiorello’s issued and outstanding shares.
Cresco, directly or through its affiliate CLNY, will commit to provide
[$22,500,000] in consideration for the acquisition of One Hundred Percent (100%)
of the issued and outstanding shares of Fiorello …
Ex. A, p. 1 (emphasis added).
32. The LOI does not contain any representation or warranty by Fiorello, Susan, or I
regarding control of the shareholders, authority from the shareholders, or anything else. On the
contrary, the LOI is clear that any agreement that might be negotiated would separately have to be
approved by Fiorello’s shareholders. The LOI does not require the Fiorello Board members as
shareholders to sell or even to recommend the contemplated transaction to the Shareholders. There
was no lock-up provision of any type.
33. The LOI Conditioned the Proposed Acquisition On Multiple Third-Party Approvals
and Completion of Satisfactory Due Diligence. Shareholder agreement was only one of several
pre-conditions for finalizing the proposed acquisition of Fiorello stock. The “Closing” section of
the LOI explicitly made closing “subject to” each of the following:
a. “the completion of the Parties’ satisfactory due diligence
b. “and the approval of
(i) “the respective Parties’ boards of directors and
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(ii) “[the respective Parties’] shareholders/members and
(iii) “the NYSDOH [New York State Department of Health].”
Ex. A, p. 3 (emphasis added).
34. Further, the requirement that the final deal documents be approved by the Parties’
respective boards of directors and shareholders/members provided the necessary opportunity for
both the Cresco and Fiorello board members to fulfill their separate fiduciary duties, such as their
fiduciary obligations under the BCL and provisions in their corporate governance documents and
shareholder agreements governing changes in control.
35. The LOI recognized that notwithstanding the Parties’ good faith efforts, they may
not be able to complete the deal. Several provisions in the LOI confirmed the Parties’
understanding that they may not be able to finalize a deal for Fiorello stock.
36. The “Good Faith Payment” Provision.
Buyer shall pay Fiorello Five Hundred Thousand Dollars ($500,000) as a good faith
payment (“Good Faith Payment”), due and payable upon the execution and
delivery of this LOI. Upon the satisfactory closing of the Definitive Agreement, the
Good Faith Payment will be credited against the Initial Payment to be paid to
Fiorello on the Closing Date. The Good Faith Payment shall be refunded to Buyer
in the event: (i) Buyer is not able to satisfactorily complete its Due Diligence review
of Fiorello within thirty (30) days of the execution of this LOI due to Fiorello’s
failure to timely provide requested customary reasonable diligence materials; or (ii)
the Parties are not able to close the Definitive Agreement for any reason other than
any illegal actions, intentional misconduct or grossly negligent conduct committed
by Buyer.
Ex. A, p. 3 (emphasis added).
37. Return of Confidential Information. The LOI also provided for the return and
destruction of confidential information the Parties obtained from each other at the end of
negotiations.
At the end of these discussions, and subject to any other agreement reached, all
copies of any documentation or records referring to or containing confidential
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information belonging to the other Party shall be returned or destroyed, to be
confirmed by a statutory declaration if so requested …
Ex. A, p. 5. This provision would be unnecessary if CLNY successfully acquired all of Fiorello’s
stock. In that event, the Parties to the agreement would effectively be the same entity as CLNY
had no other operations.
38. The LOI required Cresco to provide bridge financing to Fiorello, but it did not.
Before executing the LOI, Cresco assured Fiorello that it would provide bridge financing shortly
after execution of the LOI. The LOI section titled “Management Oversight Agreement” provides:
The Parties shall enter into a Management Oversight Agreement by which Buyer
will oversee the management and operations of Fiorello 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 period. The
Management Oversight Agreement shall be negotiated in good faith between the
Parties and entered into as soon as practicable.
Ex. A, p. 3 (emphasis added).
39. The bridge funding was important to Fiorello to ensure that Fiorello would continue
actively working towards becoming operational as required by the DOH. Cresco however reneged
on this commitment – it refused to provide the bridge funding or even discuss the MOA despite
repeated requests. Moreover, Cresco instructed Fiorello to put on hold or abandon current
dispensary leases that we were in the process of being finalized and to postpone the LIU fellowship
program until at least 2019. Instead, itstrung Fiorello along, taking its time, and all the while
trying to use the passage of time to prejudice Fiorello by boxing it in so that it would be desperate
to complete a transaction with Cresco no matter the ultimate terms.
40. Cresco had done exactly this in connection with a proposed consulting agreement with
myself and Susan Yoss where after approval by the Fiorello Board, Cresco reduced the
consideration from $20,000 per month to $6,000 per month and refused to negotiate further. By
that time Fiorello had put its $5 million financing commitment on hold and had gone so far down
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the road with Cresco that it felt it had no choice but to proceed. We had the same feeling as March
29 approached. Cresco had not provided a workable draft note and in view of the many open issues
it appeared to Fiorello that Cresco was engaging in the same tactic of delay to increase pressure,
change material deal terms and force Fiorello into a deal.
MATERIAL TERMS LEFT OPEN BY THE LOI WERE NOT RESOLVED THROUGH POST-
EXECUTION NEGOTIATIONS
41. While the LOI set forth certain parameters for a potential acquisition, there were a
number of important issues that were left open for later resolution. After execution of the LOI,
the Parties were unable to resolve a number of key issues through the Definitive Agreements prior
to the expiration of the LOI on March 29. The unresolved issues at the time of the LOI expiration
included, but were not limited, to the following.
42. Valuation of Cresco stock and election by Fiorello shareholders. The LOI left for
later negotiation not only how to effectuate the purchase of 100% of Fiorello’s outstanding stock,
but also how individual shareholders could elect to take Cresco equity and based on what
information and at what valuation. Moreover, the exchange valuation, although having some
reference points, was not specific on certain issues (e.g. the meaning and duration of a “Pending
Transaction”, and whether to include the value of Fiorello). Certainly, Cresco could not just set
up a small offering at a completely unrealistic valuation, leave it open forever and thereby obtain
Fiorello’s Shares in exchange for grossly overvalued shares in Cresco. Yet, we never agreed upon
a definition of “Pending Transaction” that protected Fiorello’s shareholders from this wholly
unreasonable result. Further the exchange information wholly ignored critical tax issues which
Cresco itself characterized as “gating” issues which were unresolved on March 29.
43. Ensuring payments and remedies for defaults. The LOI did not set forth the specific
events of default beyond failure to make an installment payment or the remedies for default.
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Similarly, although the LOI indicated that Cresco would guaranty the payments to Fiorello’s
Shareholders, there are no terms set forth for the guaranty, no specifics as to what priority would
be given to the obligation to Fiorello’s Shareholders vis-à-vis other Cresco obligations or
limitations on other obligations that Cresco could assume.
44. The tax consequences of the proposed deal and structuring it to minimize negative
tax consequences was also unresolved. From the beginning we made it very clear to Cresco that
the tax impact of the ultimate deal structure on Fiorello’s Shareholders was essential to reaching a
final deal. The tax structure would be critical to the Shareholders’ decisions whether to sell their
shares and, if so, whether to take the cash or Cresco stock option.
CRESCO’S DELAYS IN PERFORMANCE
45. After execution of the LOI, it became obvious to Fiorello that Cresco was not focused
on moving forward.
46. Cresco’s “Good Faith Payment” was two weeks late (made on March 1 rather than on
February 14 as required by the LOI); and then made only after (i) Cresco insisted that the payment
be made into an escrow account – unilaterally insisting on a new term not contemplated by the
LOI; and (ii) when Cresco proved unable to arrange for an escrow agent, Fiorello’s counsel stepped
in. This delay and change caused Fiorello’s Board to be concerned about Cresco’s trust worthiness
to make future installment and contingent payments particularly as it seemed like a pattern of
behavior that came so close in time to Cresco’s last minute changes to the consulting agreement.
47. CLNY was not formed until March 14, a month after execution of the LOI, making
it apparent that Cresco was unaccountably slow at accomplishing even routine matters that were
completely within its own control.
48. Cresco delayed due diligence, including by: (i) taking two weeks to provide its due
diligence list despite Fiorello’s repeated requests; (ii)then providing only a generic legal due
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diligence list not directed at the proposed acquisition; (iii) never providing a business due diligence
list; (iv) cancelling and requiring the subsequent rescheduling of a site visit and then being
distracted with other business when the site visit ultimately occurred; and (v) delay in providing
due diligence materials to Fiorello and providing a presentation containing outdated information.
49. Despite Cresco’s lackadaisical attitude towards due diligence, Fiorello was extremely
responsive to Cresco information requests. Fiorello responded immediately upon receiving
Cresco’s due diligence list on March 1, providing due diligence materials on March 1, 2, 4 and 6.
Then, on March 9, Cresco was given access to the complete diligence drop box that included over
500 documents. Furthermore, Fiorello provided a large number of “business related” documents
that went above and beyond the diligence request made by Cresco and that contained highly
proprietary and confidential information, including all correspondence and submissions between
Fiorello and the DOH and documents pertaining to the design, operation, equipment, security,
leases and construction of our manufacturing and/or dispensary facilities.
50. Cresco’s draft deal documents were late and excluded entire agreements explicitly
required by the LOI. Cresco took 2 weeks to send a draft SPA that both parties immediately
agreed needed major revisions. It contained new concepts never addressed in the LOI, including
an irrelevant Net Working Capital Target, new obligations which had significant legal implications
(e.g. shareholder representative) and new ancillary agreements never discussed as part of the LOI
(e.g Contribution and Exchange Agreement) and did not include any of the exhibits essential to
the SPA. Although Cresco agreed on March 2 that it would send a revised draft SPA, it did not
do so until March 8, 2018. That draft also failed to address a host of key issues, and did not include
a draft Note. Susan and I specifically raised with Cresco on March 2 that the notes were essential
documents and needed to be drafted as soon as possible. But Cresco did not send any draft Note
15
FILED: NEW YORK COUNTY CLERK 01/06/2022
Preview
FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 Exhibit D Sirota Affidavit In Opposition To Injunction, Dated July 5, 2018 Index No. 652343/2018 Motion Seq. No. 11 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ----------------------------------------------------------------X CRESCO LABS, NEW YORK, LLC, a New York limited liability company, Index No.: 652343/2018 Plaintiff, Hon. Charles E. Ramos -against- FIORELLO PHARMACEUTICALS, INC., a New York AFFIDAVIT OF corporation, ERIC SIROTA, an individual, SUSAN ERIC SIROTA YOSS, an individual, and JOHN DOES 1-10, IN OPPOSITION TO INJUNCTION Defendants. ----------------------------------------------------------------X State of New York ) ) ss County of New York ) I, ERIC SIROTA, being duly sworn, deposes and says: 1. I am a founder, Co-Chief Executive Officer, member of the Board of Directors and shareholder of Fiorello Pharmaceuticals, Inc., (“Fiorello” or “Defendant”) a defendant in the above-captioned action (the “Action”) brought by Cresco Labs, New York, LLC (“CLNY” or “Plaintiff”). CLNY is also personally suing me and Fiorello co-CEO, Susan Yoss (“Susan”), and 10 John Doe defendants. I submit this affidavit in opposition to CLNY’s application for a preliminary injunction preventing Fiorello, Susan and me from “(i) soliciting bids for the purchase of Fiorello’s medical marijuana license, (ii) participating in any negotiations with third parties surrounding the license’s sale, and (iii) selling the license to any third party; and enjoining John Does 1-10 from negotiating for the license’s purchase or actually purchasing the license.” I am fully familiar with the facts set forth herein. 2. This is a breach of contract action arising from a letter of intent (“LOI”) to negotiate a “Definitive Agreement” by which CLNY and its parent entity Cresco Labs LLC (“Cresco”) might 1 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 acquire 100% of the stock of Fiorello from its 17 shareholders. The draft LOI attached to CLNY’s Complaint in this Action was never signed and certain provisions were changed. A true and correct copy of the actual LOI, dated February 14, 2018, is attached hereto as Exhibit A. 3. I signed, and Susan initialed, the LOI solely in our capacities as officers of Fiorello. Any agreements that might have been reached would be submitted and subject to approval by the entirety of Fiorello’s board of directors and all of its 17 shareholders. It is not Fiorello but those shareholders, none of whom are party to the LOI, who are the actual sellers. Susan and I collectively do not own a majority of Fiorello’s stock. Nor could we compel any such transaction by Fiorello’s shareholders. Other than Fiorello’s board members, none of the shareholders of Fiorello authorized the LOI or knew its terms when executed. None of those other Fiorello shareholders even had a copy of the LOI until April when Cresco breached the confidentiality agreement by contacting and providing a copy of the LOI to a shareholder to put pressure on Fiorello’s Board of Directors. The LOI has no representations by Fiorello, and no lock up of the votes of Susan and I, or of the Fiorello Board. 4. CLNY is a shell company, wholly owned by Cresco, with no assets or operations and which did not exist until March 14, a full month after the LOI was executed. Although the Complaint describes CLNY as “a nationwide leader in the development and sale of medical cannabis products … operat[ing] in multiple states and through a variety of well-known brand names,” that is a description of Cresco, not CLNY. Cresco is not a party to this action. 5. The LOI reflected the parties’ intention to move quickly or not at all so that if no deal were struck Fiorello could proceed with developing its business either on its own or with another entity. The LOI, by its terms, required the parties to execute the “Definitive Agreement” “at the earliest possible date but no later than thirty (30) business days from [February 14,]” i.e. on March 2 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 29, 2018, unless extended by mutual agreement of the parties. Ex. A, p. 4. During that period, Fiorello agreed to refrain from exploring other opportunities. 6. The “Closing,” “Good Faith Payment,” “Due Diligence,” “Definitive Agreement,” and “Confidentiality” Provisions acknowledge the possibility that the stock acquisition proposed in the LOI might not be consummated and the limited time frame during which the parties would be bound. The LOI was never intended to bind the parties for an indefinite period. Further, the LOI left a number of material issues open for negotiation. 7. Demonstrating the preliminary nature of the LOI is that: a. The LOI recognized that the proposed deal was complex, requiring negotiation of, and agreement to, a definitive stock purchase agreement (“SPA”), promissory note (“Note”), guaranty, management oversight agreement (“MOA”), and consulting agreement, as well as all of the exhibits, schedules and ancillary agreements thereto. b. The LOI explicitly made the acquisition subject to approval by the New York Department of Health (“DOH”), and by the Parties’ respective boards of directors and shareholders/members. c. The LOI did not bind any of Fiorello’s 17 Shareholders to sell their shares to Cresco and they did not agree to do so. Fiorello’s Shareholders are not parties to the LOI and are not controlled by the parties to the LOI. d. The LOI also did not provide any process for obtaining Shareholder agreement to sell, did not address the information that would be provided to Shareholders to assist them in evaluating the offer, and did not address the possibility that less than 100% of the Shareholders would agree to sell. e. The LOI also did not bind the boards of directors of any party. Fiorello’s Board of Directors (the “Board”) was required by their fiduciary duties and the New York Business Corporation Law (“BCL”) to assess the fairness of the proposed transaction and to make full and fair disclosure of all relevant facts including intervening facts and information. Unsolicited bids by others received before shareholder approval would have to be disclosed. f. DOH approval was not automatic; it is an involved, deliberative process, requiring significant disclosure by Cresco and approval is wholly within DOH control and the outcome is uncertain. g. Many material issues were left open by the LOI, including but not limited to, the valuation of Cresco stock to be exchanged for Fiorello stock and the tax structure of 3 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 the transaction – both issues that had substantial impact on the actual value that could be realized by Fiorello’s Shareholders. h. The terms and form of the notes and guarantee. 8. Notwithstanding the many open issues and the limited term of the LOI, CLNY, by its application for an injunction, seeks to obtain the benefit of a bargain that was never made – to force Fiorello’s Shareholders to sell their stock to Cresco on terms that are plainly unfair to them and to which they would never agree in view of intervening events. Nor could the Board consistent with its fiduciary duties, approve such a transaction. Although Cresco frames its requested injunction in terms of requiring Fiorello to negotiate with Cresco in “good faith,” the real effect of such an injunction would be to thwart a far better transaction that Fiorello’s shareholders already have approved and to impair Fiorello’s ability to obtain financing, halt its development, and threaten its relationship with the DOH and potentially its license. DOH OVERSIGHT OF THE MEDICAL MARIJUANA INDUSTRY AND THE REQUIREMENT TO OPERATIONALIZE IN A TIMELY FASHION 9. On July 7, 2014, the New York State Compassionate Care Act (“CCA”) was signed into law, providing the legislative basis for a legal medical marijuana industry in New York. The New York medical marijuana industry is still in its early stage; medical marijuana products first became available in New York for certified patients on January 1, 2016. 10. The medical marijuana industry is closely regulated and overseen by the New York State Department of Health (“DOH”). The DOH has promulgated regulations governing the industry and controls the issuance of licenses at all levels of the market. See generally 10 N.Y.C.R.R. 1004. 11. Licenses for the cultivation, production and sale of medical marijuana are vertically integrated providing each registered organization (“RO”) with one manufacturing/cultivating facility and four dispensaries. RO licenses are non-transferable. 10 N.Y.C.R.R. 1004.8 (titled 4 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 “Registrations Non-Transferrable”). The DOH also must approve any changes in the ownership or control of an RO. Id. at §1004.10(B)(5) Registered organizations shall not: … change the composition of the entity which is the registered organization, including but not limited to, a change in sole proprietor, partner, director, stockholder, member or membership interest of the registered organization without the prior written approval of the department[.] 12. Fiorello submitted an application to become one of the 5 initial RO’s on June 5 2015. Fiorello put a tremendous amount of work into its over 2,000 page application. The original process required, applicants to provide detailed information on their specific real estate facilities and equipment to be used in the manufacture and sale of medical marijuana, architectural drawings, specifics on leases, security and construction timelines. DOH regulations also require detailed operating plans, company policies and procedures and quality control programs covering everything from daily operations and record keeping, to dispensing errors, contamination incidents and self-reporting. (10 N.Y.C.R.R. 1004.5). The first 5 RO licenses were issued in July 2015. Although Fiorello did not receive a license, its application was well-received, earning the 7th highest total weighted score of the 43 applications submitted. 13. In August 2016, to meet additional patient demand and increase access to medical marijuana throughout the State, the DOH recommended expanding the number of RO licenses from 5 to 10. On January 20, 2017, Fiorello received a letter from the DOH to assess our interest in becoming an RO in New York State. Fiorello submitted an over 300 page “Plan of Entry” document on February 28 2017 to the DOH for approval. On August 1, 2017, the DOH granted five additional RO licenses, including awarding a license to Fiorello. 14. As the number of patients eligible to receive medical marijuana grows, it is common for States that have legalized medical marijuana to increase the number of licenses. For example, Pennsylvania is in the process of expanding the number of producer/processor licenses from 12 to 5 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 25 and the number of dispensaries from 81 to 150. In contrast, the New York DOH has currently issued only 10 RO licenses which allows for a total of 40 dispensaries, far fewer than Pennsylvania and many other populous States. When in 2017 the New York DOH expanded the number of RO licenses from 5 to 10 there were approximately 26,000 patients certified to receive medical marijuana. Now, the number of certified patients has more than doubled to approximately 60,000. It is expected that the DOH will continue to issue additional licenses to enhance patient access and better address patient needs as the number of certified patients continues to increase. 15. Fiorello has been in regular contact with the DOH and has submitted a comprehensive brand plan as well as detailed architectural and security plans for its manufacturing facility to the DOH for review and comment. On May 31, 2018, the DOH completed a pre-construction site visit at Fiorello’s manufacturing facility. Fiorello continues to work closely with the DOH and is in good standing with it. 16. At the time the LOI was executed, Fiorello had a signed lease for its cultivation and manufacturing facility and was in active negotiations for dispensary sites in Manhattan, Nassau County and Saratoga County. We were actively working with design, engineering, architecture and security firms to design our dispensary retail locations and our manufacturing facility. It was a critical time for Fiorello in that we would need to immediately raise at least $5 million to continue to operationalize our business over the next 6 months and complete phase 1 of our operating plan or quickly secure a partner that would fund and help operationalize the business. Without the appropriate funding or a partner that could provide appropriate funding we would be at risk of falling behind on our operational timeline. THE PARTIES ENTER INTO THE LETTER OF INTENT 17. In December, 2017, Cresco and Fiorello began exploring a possible transaction. On December 19, 2017, Cresco’s CEO, Charlie Bachtell, sent me and Susan a first draft of a letter of 6 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 intent outlining certain basic parameters for a potential deal. Between December 19 and February 14, 2018, we negotiated with Cresco and exchanged edits to the draft LOI. 18. Prior to executing the LOI, Fiorello was being pursued by other companies interested in purchasing its shares or partnering with it. 19. Fiorello also had an unsigned commitment from a third party for $5 million in financing to fund its phase 1 operating plans. We informed Cresco that we would accept that funding offer if Cresco was not prepared to move forward quickly. 20. With Cresco’s assurances and the LOI’s language (a) limiting its term to 30 business days, (b) confirming that Cresco would provide interim financing for Fiorello, and (c) conditioning an ultimate deal on satisfactory completion of due diligence and final approval by the Parties’ boards of directors, shareholders/members, and the DOH, Fiorello put its financing commitment on hold and the Board approved the LOI on February 9, 2018, subject to addition of an equity option for the payment due to shareholders at closing and final legal review. On February 14, 2018, I executed and Susan initialed the LOI as Fiorello’s co-CEOs. KEY LOI PROVISIONS 21. The LOI Provides For A Short Period To Finalize A Deal Or Move On. The LOI set out a limited exclusivity period during which the Parties would try to finalize a deal within the parameters set forth in the LOI and without pursuing other options. If the Parties could not finalize a deal within that period, the LOI would terminate and the Parties would no longer be bound by its terms. 22. The first sentence of the LOI’s “Timing Provision” strictly limits the binding term of the LOI to 30 business days from its February 14, 2018 effective date, this calculated to March 29. The LOI then expired, “unless otherwise extended by mutual agreement of the parties.” It reads: 7 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 Both Parties agree that they will each use their respective best efforts to complete and execute the Definitive Agreement and conclude due diligence consistent with the terms of this LOI at the earliest possible date but no later than thirty (30) business days from the date of the execution of this LOI (unless otherwise extended by the mutual agreement of the Parties). Id. p. 4 (underlining added; italics in original). The Parties tried but did not agree to any extension of the LOI. 23. The second sentence of the Timing Provision clarifies that during the 30 business days, the Parties would not negotiate with third parties. There was no intention that exclusivity would continue indefinitely. That would be a breach of our fiduciary duties to our shareholders. Rather, any exclusivity was necessarily tied to the term of the LOI and expired on March 29, 2018. This was a mutual obligation to assure that during that 30 business day period the Parties would focus on pursuing the proposed transaction. By executing this LOI, 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 or any subsidiary or parent entities of Fiorello, including without limitation, any sale or other transfer of the grower and dispensary license used or owned by Fiorello to any third-party or (b) the purchase of any equity interest in or assets of another medical marijuana company in the State of New York by Buyer. 24. Consistent with the importance that Fiorello put on either finalizing a deal quickly or being free to move on to other prospects, Fiorello added a specific “Closing” Provision that contemplated closing on or before April 15, 2018. The limited term of the LOI is also reflected in the “Good Faith Payment” provision that gives the Cresco entities 30 (calendar) days to complete their due diligence (March 14, 2018) or forfeit their $500,000 payment. As of the beginning of April, Cresco still had not completed due diligence. 25. Similarly, the LOI’s “Definitive Agreement” section provided that the parties would act promptly to conduct due diligence and negotiate and execute agreements: 8 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 Promptly following the execution of this LOI, the Parties, together with their authorized representatives, will in good faith prepare and execute definitive agreements that include, but are not limited to, certain operating agreements, investment agreements as well as any ancillary agreements as contemplated by the paragraph entitled Further Acts, below, elaborating on the binding provisions hereof (collectively, the “Definitive Agreement”). Ex. A at p. 3. 26. The defined term “Definitive Agreement” included an SPA to be executed by each Shareholder, a promissory note for each Shareholder (covering each installment payment), the guaranty by Cresco as well as “such further documents or instruments required by the other Party as may be reasonably necessary or desirable to affect the purposes of this LOI and carry out its provisions.” Id. at pp. 1-3. 27. The LOI recognizes that the Shareholders, not Fiorello, are the essential parties to the proposed transaction. Fiorello’s shareholders are the actual sellers yet none of them are party to the LOI. The LOI’s opening paragraph describes and defines the parties as: Fiorello Pharmaceuticals, Inc., a New York corporation (“Fiorello”) and Cresco Labs New York, LLC, a New York limited liability company (“CLNY”), a controlled subsidiary of Cresco Labs LLC, an Illinois limited liability company (“Cresco”). CLNY and/or Cresco may be referred to collectively as “Buyer”. Fiorello and Buyer may hereinafter be referred to individually as a “Party” and collectively as the “Parties.” Ex. A, p. 1. 28. While Cresco and CLNY are together defined as “Buyer.” Fiorello is not defined or referred to anywhere in the LOI as “seller.” Rather, the LOI contemplated a potential acquisition of 100% of Fiorello’s issued and outstanding stock. 29. Fiorello’s 17 common and preferred Shareholders are not under Fiorello’s control. The Parties to the LOI could not themselves ensure that the Cresco Entities would ultimately succeed in acquiring 100% of Fiorello’s shares. Although Susan Yoss, co-chief executive officer initialed, and I signed the LOI, we did so as corporate officers, not as shareholders. Nor do we control a 9 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 majority of the total stock of Fiorello. 30. Under the LOI, the Shareholders, not Fiorello, are the sellers and consequently they, not Fiorello, would be the ultimate decision makers as to whether to engage in any proposed sale to Cresco. See, e.g. Ex. A p. 3 (“Closing” requiring inter alia shareholder approval); See also, e.g. Id. pp. 1-2 (providing that Shareholders – at their individual election -- will have the option of receiving cash or Cresco stock in exchange for selling their shares). 31. Furthermore, the LOI confirmed that Cresco would only commit to a deal if it could acquire 100% of Fiorello’s issued and outstanding shares. Cresco, directly or through its affiliate CLNY, will commit to provide [$22,500,000] in consideration for the acquisition of One Hundred Percent (100%) of the issued and outstanding shares of Fiorello … Ex. A, p. 1 (emphasis added). 32. The LOI does not contain any representation or warranty by Fiorello, Susan, or I regarding control of the shareholders, authority from the shareholders, or anything else. On the contrary, the LOI is clear that any agreement that might be negotiated would separately have to be approved by Fiorello’s shareholders. The LOI does not require the Fiorello Board members as shareholders to sell or even to recommend the contemplated transaction to the Shareholders. There was no lock-up provision of any type. 33. The LOI Conditioned the Proposed Acquisition On Multiple Third-Party Approvals and Completion of Satisfactory Due Diligence. Shareholder agreement was only one of several pre-conditions for finalizing the proposed acquisition of Fiorello stock. The “Closing” section of the LOI explicitly made closing “subject to” each of the following: a. “the completion of the Parties’ satisfactory due diligence b. “and the approval of (i) “the respective Parties’ boards of directors and 10 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 (ii) “[the respective Parties’] shareholders/members and (iii) “the NYSDOH [New York State Department of Health].” Ex. A, p. 3 (emphasis added). 34. Further, the requirement that the final deal documents be approved by the Parties’ respective boards of directors and shareholders/members provided the necessary opportunity for both the Cresco and Fiorello board members to fulfill their separate fiduciary duties, such as their fiduciary obligations under the BCL and provisions in their corporate governance documents and shareholder agreements governing changes in control. 35. The LOI recognized that notwithstanding the Parties’ good faith efforts, they may not be able to complete the deal. Several provisions in the LOI confirmed the Parties’ understanding that they may not be able to finalize a deal for Fiorello stock. 36. The “Good Faith Payment” Provision. Buyer shall pay Fiorello Five Hundred Thousand Dollars ($500,000) as a good faith payment (“Good Faith Payment”), due and payable upon the execution and delivery of this LOI. Upon the satisfactory closing of the Definitive Agreement, the Good Faith Payment will be credited against the Initial Payment to be paid to Fiorello on the Closing Date. The Good Faith Payment shall be refunded to Buyer in the event: (i) Buyer is not able to satisfactorily complete its Due Diligence review of Fiorello within thirty (30) days of the execution of this LOI due to Fiorello’s failure to timely provide requested customary reasonable diligence materials; or (ii) the Parties are not able to close the Definitive Agreement for any reason other than any illegal actions, intentional misconduct or grossly negligent conduct committed by Buyer. Ex. A, p. 3 (emphasis added). 37. Return of Confidential Information. The LOI also provided for the return and destruction of confidential information the Parties obtained from each other at the end of negotiations. At the end of these discussions, and subject to any other agreement reached, all copies of any documentation or records referring to or containing confidential 11 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 information belonging to the other Party shall be returned or destroyed, to be confirmed by a statutory declaration if so requested … Ex. A, p. 5. This provision would be unnecessary if CLNY successfully acquired all of Fiorello’s stock. In that event, the Parties to the agreement would effectively be the same entity as CLNY had no other operations. 38. The LOI required Cresco to provide bridge financing to Fiorello, but it did not. Before executing the LOI, Cresco assured Fiorello that it would provide bridge financing shortly after execution of the LOI. The LOI section titled “Management Oversight Agreement” provides: The Parties shall enter into a Management Oversight Agreement by which Buyer will oversee the management and operations of Fiorello 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 period. The Management Oversight Agreement shall be negotiated in good faith between the Parties and entered into as soon as practicable. Ex. A, p. 3 (emphasis added). 39. The bridge funding was important to Fiorello to ensure that Fiorello would continue actively working towards becoming operational as required by the DOH. Cresco however reneged on this commitment – it refused to provide the bridge funding or even discuss the MOA despite repeated requests. Moreover, Cresco instructed Fiorello to put on hold or abandon current dispensary leases that we were in the process of being finalized and to postpone the LIU fellowship program until at least 2019. Instead, itstrung Fiorello along, taking its time, and all the while trying to use the passage of time to prejudice Fiorello by boxing it in so that it would be desperate to complete a transaction with Cresco no matter the ultimate terms. 40. Cresco had done exactly this in connection with a proposed consulting agreement with myself and Susan Yoss where after approval by the Fiorello Board, Cresco reduced the consideration from $20,000 per month to $6,000 per month and refused to negotiate further. By that time Fiorello had put its $5 million financing commitment on hold and had gone so far down 12 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 the road with Cresco that it felt it had no choice but to proceed. We had the same feeling as March 29 approached. Cresco had not provided a workable draft note and in view of the many open issues it appeared to Fiorello that Cresco was engaging in the same tactic of delay to increase pressure, change material deal terms and force Fiorello into a deal. MATERIAL TERMS LEFT OPEN BY THE LOI WERE NOT RESOLVED THROUGH POST- EXECUTION NEGOTIATIONS 41. While the LOI set forth certain parameters for a potential acquisition, there were a number of important issues that were left open for later resolution. After execution of the LOI, the Parties were unable to resolve a number of key issues through the Definitive Agreements prior to the expiration of the LOI on March 29. The unresolved issues at the time of the LOI expiration included, but were not limited, to the following. 42. Valuation of Cresco stock and election by Fiorello shareholders. The LOI left for later negotiation not only how to effectuate the purchase of 100% of Fiorello’s outstanding stock, but also how individual shareholders could elect to take Cresco equity and based on what information and at what valuation. Moreover, the exchange valuation, although having some reference points, was not specific on certain issues (e.g. the meaning and duration of a “Pending Transaction”, and whether to include the value of Fiorello). Certainly, Cresco could not just set up a small offering at a completely unrealistic valuation, leave it open forever and thereby obtain Fiorello’s Shares in exchange for grossly overvalued shares in Cresco. Yet, we never agreed upon a definition of “Pending Transaction” that protected Fiorello’s shareholders from this wholly unreasonable result. Further the exchange information wholly ignored critical tax issues which Cresco itself characterized as “gating” issues which were unresolved on March 29. 43. Ensuring payments and remedies for defaults. The LOI did not set forth the specific events of default beyond failure to make an installment payment or the remedies for default. 13 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 Similarly, although the LOI indicated that Cresco would guaranty the payments to Fiorello’s Shareholders, there are no terms set forth for the guaranty, no specifics as to what priority would be given to the obligation to Fiorello’s Shareholders vis-à-vis other Cresco obligations or limitations on other obligations that Cresco could assume. 44. The tax consequences of the proposed deal and structuring it to minimize negative tax consequences was also unresolved. From the beginning we made it very clear to Cresco that the tax impact of the ultimate deal structure on Fiorello’s Shareholders was essential to reaching a final deal. The tax structure would be critical to the Shareholders’ decisions whether to sell their shares and, if so, whether to take the cash or Cresco stock option. CRESCO’S DELAYS IN PERFORMANCE 45. After execution of the LOI, it became obvious to Fiorello that Cresco was not focused on moving forward. 46. Cresco’s “Good Faith Payment” was two weeks late (made on March 1 rather than on February 14 as required by the LOI); and then made only after (i) Cresco insisted that the payment be made into an escrow account – unilaterally insisting on a new term not contemplated by the LOI; and (ii) when Cresco proved unable to arrange for an escrow agent, Fiorello’s counsel stepped in. This delay and change caused Fiorello’s Board to be concerned about Cresco’s trust worthiness to make future installment and contingent payments particularly as it seemed like a pattern of behavior that came so close in time to Cresco’s last minute changes to the consulting agreement. 47. CLNY was not formed until March 14, a month after execution of the LOI, making it apparent that Cresco was unaccountably slow at accomplishing even routine matters that were completely within its own control. 48. Cresco delayed due diligence, including by: (i) taking two weeks to provide its due diligence list despite Fiorello’s repeated requests; (ii)then providing only a generic legal due 14 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 290 RECEIVED NYSCEF: 01/06/2022 diligence list not directed at the proposed acquisition; (iii) never providing a business due diligence list; (iv) cancelling and requiring the subsequent rescheduling of a site visit and then being distracted with other business when the site visit ultimately occurred; and (v) delay in providing due diligence materials to Fiorello and providing a presentation containing outdated information. 49. Despite Cresco’s lackadaisical attitude towards due diligence, Fiorello was extremely responsive to Cresco information requests. Fiorello responded immediately upon receiving Cresco’s due diligence list on March 1, providing due diligence materials on March 1, 2, 4 and 6. Then, on March 9, Cresco was given access to the complete diligence drop box that included over 500 documents. Furthermore, Fiorello provided a large number of “business related” documents that went above and beyond the diligence request made by Cresco and that contained highly proprietary and confidential information, including all correspondence and submissions between Fiorello and the DOH and documents pertaining to the design, operation, equipment, security, leases and construction of our manufacturing and/or dispensary facilities. 50. Cresco’s draft deal documents were late and excluded entire agreements explicitly required by the LOI. Cresco took 2 weeks to send a draft SPA that both parties immediately agreed needed major revisions. It contained new concepts never addressed in the LOI, including an irrelevant Net Working Capital Target, new obligations which had significant legal implications (e.g. shareholder representative) and new ancillary agreements never discussed as part of the LOI (e.g Contribution and Exchange Agreement) and did not include any of the exhibits essential to the SPA. Although Cresco agreed on March 2 that it would send a revised draft SPA, it did not do so until March 8, 2018. That draft also failed to address a host of key issues, and did not include a draft Note. Susan and I specifically raised with Cresco on March 2 that the notes were essential documents and needed to be drafted as soon as possible. But Cresco did not send any draft Note 15 FILED: NEW YORK COUNTY CLERK 01/06/2022