Preview
FILED: NEW YORK COUNTY CLERK 01/10/2022 06:59 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 450 RECEIVED NYSCEF: 01/10/2022
Exhibit DE_244
Motion Sequence 13: Exhibit O to Affirmation of Rachel Izower-Fadde in
Support of Motion to Preclude Documents Withheld from Discovery
Index No. 652343/2018 Motion Sequence 11
FILED: NEW YORK COUNTY CLERK 12/14/2021
01/10/2022 11:15
06:59 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 244
450 RECEIVED NYSCEF: 12/14/2021
01/10/2022
Exhibit O
Affidavit of Andrew Scott Davidson, Dated September 24, 2021, with Excerpts of Exhibit
72 Thereto (Duff & Phelps Expert Report, Dated September 24, 2021)
Index No. 652343/2018 Motion Seq. No. __
FILED: NEW YORK COUNTY CLERK 12/14/2021
01/10/2022 11:15
06:59 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 244
450 RECEIVED NYSCEF: 12/14/2021
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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 :
LABS, LLC, an Illinois limited liability : Index No. 652343/2018
company, :
: Hon. Andrew Borrok
:
Plaintiffs/Counterclaim Defendants, :
:
v. :
:
:
FIORELLO PHARMACEUTICALS, INC., a :
New York corporation, :
:
Defendant/Counterclaimant. :
----------------------------------------------------------- X
AFFIDAVIT OF ANDREW SCOTT DAVIDSON
I, Andrew Scott Davidson, hereby declare and state as follows:
1. I am a Managing Director in the Toronto office of Duff & Phelps Canada Limited.
I have 30 years of experience in performing business valuations and providing financial advisory
services and expert testimony. My work has previously involved assignments in the cannabis
industry and I have previously provided services in relation to breach of contract and lost profits
claims.
2. I was retained by Plaintiffs Cresco Labs, LLC, a private Illinois company, and
Cresco Labs New York, LLC, a private New York company (collectively, “Cresco”), to make
observations and comments, from a business and financial perspective, concerning normal
business practices regarding the use of exclusivity agreements in preliminary agreements, such as
letters of intent. In addition, I performed an accounting of Cresco’s financial loss as well as an
accounting of defendant Fiorello Pharmaceuticals, Inc.’s profits. A true and accurate copy of my
1
FILED: NEW YORK COUNTY CLERK 12/14/2021
01/10/2022 11:15
06:59 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 244
450 RECEIVED NYSCEF: 12/14/2021
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Report, which contains my conclusions and other information required by New York Commercial
Division Rule 13, is attached hereto as Exhibit 72.
3. I affirm to the Court that the statements and findings contained in my Report are
true under penalties of perjury.
SWORN by Andrew Scott Davidson at the
City of Toronto, in the Province of Ontario,
before me at the City of Toronto, in the
Province of Ontario, on September 24, 2021
in accordance with O. Reg. 431/20,
Administering Oath or Declaration Remotely.
__________________________________ __________________________________
Commissioner for Taking Affidavits Andrew Scott Davidson
(or as may be)
2
FILED: NEW YORK COUNTY CLERK 12/14/2021
01/10/2022 11:15
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NYSCEF DOC. NO. 244
450 RECEIVED NYSCEF: 12/14/2021
01/10/2022
EXHIBIT 72
Duff & Phelps Expert Report, dated September 24,
2021
Index No. 652343/2018
FILED: NEW YORK COUNTY CLERK 12/14/2021
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NYSCEF DOC. NO. 244
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Cresco Labs New September 24, 2021
York, LLC and Cresco
Labs, LLC v. Fiorello
Pharmaceuticals, Inc.
et al
Expert Report
FILED: NEW YORK COUNTY CLERK 12/14/2021
01/10/2022 11:15
06:59 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 244
450 RECEIVED NYSCEF: 12/14/2021
01/10/2022
Cresco’s Acquisition of Gloucester Street Capital, LLC (“Gloucester”) (the
“Mitigating Acquisition”)
4.38 Gloucester is the parent company of Valley.33 Valley possesses one of the 10
licenses issued by the state of New York that permits the operation of a medical
cannabis business in the state of New York.
4.39 On or about October 24, 2018, Cresco (and itsaffiliates) entered into a merger
agreement to acquire 100% of the outstanding Class A Units of Gloucester. The
consideration pursuant to this transaction are as follows:34
a. $32.5 million of cash;
b. 13,466,667 new units of Cresco stock;
c. 4,000,000 Cresco warrants; and,
d. $10 million of deferred cash, payable to Gloucester shareholders as 75% of
Cresco’s operating cashflows earned in New York annually for the 5 years
following the closing date, to a maximum of $10 million. If the amount paid to
Gloucester shareholders is less than $10 million after the 5 years, Cresco will
make a final payment to bring deferred cash consideration paid to a total of
$10 million.
4.40 The merger agreement dated October 24, 2018 was revised a number of times
before the transaction ultimately closed on or about October 8, 2019. Total
35
consideration in this transaction was $129.6 million, as follows:
a. $18.8 million of cash;
b. $48.9 million of equity whereby Cresco issued 8,660,000 proportionate voting
shares (“PVS”);
c. $5.4 million of warrants, convertible into 2,000,000 PVS of Cresco;
d. $26.0 million of deferred cash consideration;
e. $20.3 million of contingent consideration36; and,
33In certain circumstances we also refer to Valley and Gloucester collectively as Valley.
34CRES00010869.
35Cresco’s December 31, 2019 financial statements.
36Pursuant to the contingent share escrow agreement dated October 8, 2019, up to 13,333.335 Cresco
shares were to be allocated for release from escrow to Gloucester shareholders if Adult Use
Legalization was obtained prior to December 31, 2021. The agreement also provided for the release of
Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al
September 24, 2021 Page 17 of 36
FILED: NEW YORK COUNTY CLERK 12/14/2021
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f. $10.1 million for the settlement of a loan receivable.
4.41 We observe that the contingent consideration referenced above included Cresco
shares that would be issued if Adult Legalization occurred prior to December 31,
2021. Said another way, the Mitigating Acquisition included contingent
consideration based on Adult Legalization.
4.42 In connection with the Mitigation Acquisition, Cresco incurred $2.0 million of
transaction costs.37
4.43 Cresco alleges that the higher purchase price of Valley (compared to the
purchase price contemplated in the LOI with Fiorello) was a direct result of:
a. The significant increase in the value of medical cannabis companies with a
New York license during the period the LOI, and the No Shop Provision, were
in effect;38 and,
b. The diminished supply of New York license holders available for Cresco to
purchase. Based on our analysis above, Cresco was essentially limited to
one likely acquisition target (Valley).
Comparison of Fiorello’s and Valley’s New York Licenses
4.44 Though otherwise very similar, the New York licenses held by Fiorello and Valley
differ in terms of the locations of the four dispensaries permitted under each
license.
4.45 Populations (in 2018) of the counties to which the dispensary locations pertain
are as follows:
13,333.335 Cresco shares released based on whether additional dispensaries would be awarded to
Valley by certain timeframes.
37 Cresco’s December 31, 2019 financial statements.
38 SoC.
Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al
September 24, 2021 Page 18 of 36
FILED: NEW YORK COUNTY CLERK 12/14/2021
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NYSCEF DOC. NO. 244
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$12.78/share 48 . Applying this price per share to the 1,700,000 shares yields
equity consideration of $21.7 million.49
6.27 Given the above, we have concluded that Cresco would have had to issue $21.7
million of equity (or equivalent) to the vendors of Fiorello in place of the
contingent consideration clause to obtain approval from the NYSDOH in
Scenario 2.
6.28 Based on the above, we have calculated the But For Purchase Price under
Scenario 1 to be $32.5 million and Scenario 2 to be $44.2 million, as follows:
But For Purchase Price
in US$ 000s
Scenario 1 Scenario 2
Cash Consideration $ 10,000 $ 10,000
Promissory Note 12,500 12,500
Contingent Payment per LOI 10,000 -
Notional Equity Consideration (In Lieu
of Contingent Payment per LOI) - 21,726
But For Purchase Price $ 32,500 $ 44,226
Cresco’s Financial Loss
6.29 Based on the above analysis, we have calculated Cresco’s Financial Loss to be
as follows (refer to Schedule 2 for further details)50:
48Quoted in $USD.
49While the Amended and Restated Agreement and Plan of Merger dated December 21, 2018 between
GTI and Fiorelloindicates that the adult use contingent consideration was replaced with 1.7 million
subordinate GTI shares, an earlier document entitled“Re: Amendments to Merger Agreement:
Conversion of $10,000,000 Loan” dated October 25, 2018 (and signed by representatives of both GTI
and Fiorello) appears to indicate that the adult use contingent consideration was replaced with 700,000
subordinate GTI shares. We have performed our calculations herein based on the issuance of 1.7
million subordinate GTI shares as a replacement for the adult use contingent consideration. If it were to
be found that the adult use contingent consideration was replaced by 700,000 subordinate GTI shares,
then both our quantification of Cresco’s Financial Loss and our Accounting of Fiorello’s Profits would
increase by $12.8 million from what is shown herein. Our conclusions would increase because we have
used 1.7 million subordinate GTI shares as a proxy for the dollar amount that would have been
ultimately paid by Cresco to Fiorello in order to eliminate the adult use contingent consideration in the
original LOI.
50 We note that our analysis above does not include the economic value of consulting agreements given
to Mr. Sirota and/or Ms. Yoss as part of the Anticipated Acquisition or Fiorello-GTI acquisition, or
Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al
September 24, 2021 Page 30 of 36
FILED: NEW YORK COUNTY CLERK 12/14/2021
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450 RECEIVED NYSCEF: 12/14/2021
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Cresco's Financial Loss
in US$ 000s
Scenario 1 Scenario 2
Actual Purchase Price paid by Cresco for Valley $ 129,574 $ 129,574
Less: But For Purchase Price for Fiorello (32,500) (44,226)
Financial Loss 97,074 85,348
Rounded $ 97,100 $ 85,300
7.0 Accounting of Fiorello’s Profits
Approach
7.1 We quantified an Accounting of Fiorello’s Profits in this matter arising from the
excess of the proceeds Fiorello actually received from the GTI Transaction over
the proceeds that Fiorello would have realized if it had completed the sale to
Cresco pursuant to the LOI.
7.2 We calculated the Accounting of Fiorello’s Profits in this matter as follows:
Fiorello’s Profits = C – B ; where:
C = Purchase price paid by GTI for Fiorello.
B = The But For Purchase Price, as defined above.
7.3 We have calculated an Accounting of Fiorello’s Profits under Scenario 1 and 2,
as defined above.
Details of the Accounting of Fiorello’s Profits
7.4 We calculated an Accounting of Fiorello’s Profits arising from the excess
proceeds realized by Fiorello in the GTI Transaction above what Fiorello would
have received if it had completed the sale to Cresco pursuant to the LOI.
transaction costs incurred by Cresco in connection with either the Anticipated Acquisition or the Cresco-
Valley Acquisition. We expect that were such items to be reflected then the Loss quantified by us would
be higher.
Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al
September 24, 2021 Page 31 of 36
Preview
FILED: NEW YORK COUNTY CLERK 01/10/2022 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 450 RECEIVED NYSCEF: 01/10/2022 Exhibit DE_244 Motion Sequence 13: Exhibit O to Affirmation of Rachel Izower-Fadde in Support of Motion to Preclude Documents Withheld from Discovery Index No. 652343/2018 Motion Sequence 11 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 Exhibit O Affidavit of Andrew Scott Davidson, Dated September 24, 2021, with Excerpts of Exhibit 72 Thereto (Duff & Phelps Expert Report, Dated September 24, 2021) Index No. 652343/2018 Motion Seq. No. __ FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ----------------------------------------------------------- X CRESCO LABS NEW YORK, LLC, a New : York limited liability company, and CRESCO : LABS, LLC, an Illinois limited liability : Index No. 652343/2018 company, : : Hon. Andrew Borrok : Plaintiffs/Counterclaim Defendants, : : v. : : : FIORELLO PHARMACEUTICALS, INC., a : New York corporation, : : Defendant/Counterclaimant. : ----------------------------------------------------------- X AFFIDAVIT OF ANDREW SCOTT DAVIDSON I, Andrew Scott Davidson, hereby declare and state as follows: 1. I am a Managing Director in the Toronto office of Duff & Phelps Canada Limited. I have 30 years of experience in performing business valuations and providing financial advisory services and expert testimony. My work has previously involved assignments in the cannabis industry and I have previously provided services in relation to breach of contract and lost profits claims. 2. I was retained by Plaintiffs Cresco Labs, LLC, a private Illinois company, and Cresco Labs New York, LLC, a private New York company (collectively, “Cresco”), to make observations and comments, from a business and financial perspective, concerning normal business practices regarding the use of exclusivity agreements in preliminary agreements, such as letters of intent. In addition, I performed an accounting of Cresco’s financial loss as well as an accounting of defendant Fiorello Pharmaceuticals, Inc.’s profits. A true and accurate copy of my 1 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 Report, which contains my conclusions and other information required by New York Commercial Division Rule 13, is attached hereto as Exhibit 72. 3. I affirm to the Court that the statements and findings contained in my Report are true under penalties of perjury. SWORN by Andrew Scott Davidson at the City of Toronto, in the Province of Ontario, before me at the City of Toronto, in the Province of Ontario, on September 24, 2021 in accordance with O. Reg. 431/20, Administering Oath or Declaration Remotely. __________________________________ __________________________________ Commissioner for Taking Affidavits Andrew Scott Davidson (or as may be) 2 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 EXHIBIT 72 Duff & Phelps Expert Report, dated September 24, 2021 Index No. 652343/2018 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 Cresco Labs New September 24, 2021 York, LLC and Cresco Labs, LLC v. Fiorello Pharmaceuticals, Inc. et al Expert Report FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 Cresco’s Acquisition of Gloucester Street Capital, LLC (“Gloucester”) (the “Mitigating Acquisition”) 4.38 Gloucester is the parent company of Valley.33 Valley possesses one of the 10 licenses issued by the state of New York that permits the operation of a medical cannabis business in the state of New York. 4.39 On or about October 24, 2018, Cresco (and itsaffiliates) entered into a merger agreement to acquire 100% of the outstanding Class A Units of Gloucester. The consideration pursuant to this transaction are as follows:34 a. $32.5 million of cash; b. 13,466,667 new units of Cresco stock; c. 4,000,000 Cresco warrants; and, d. $10 million of deferred cash, payable to Gloucester shareholders as 75% of Cresco’s operating cashflows earned in New York annually for the 5 years following the closing date, to a maximum of $10 million. If the amount paid to Gloucester shareholders is less than $10 million after the 5 years, Cresco will make a final payment to bring deferred cash consideration paid to a total of $10 million. 4.40 The merger agreement dated October 24, 2018 was revised a number of times before the transaction ultimately closed on or about October 8, 2019. Total 35 consideration in this transaction was $129.6 million, as follows: a. $18.8 million of cash; b. $48.9 million of equity whereby Cresco issued 8,660,000 proportionate voting shares (“PVS”); c. $5.4 million of warrants, convertible into 2,000,000 PVS of Cresco; d. $26.0 million of deferred cash consideration; e. $20.3 million of contingent consideration36; and, 33In certain circumstances we also refer to Valley and Gloucester collectively as Valley. 34CRES00010869. 35Cresco’s December 31, 2019 financial statements. 36Pursuant to the contingent share escrow agreement dated October 8, 2019, up to 13,333.335 Cresco shares were to be allocated for release from escrow to Gloucester shareholders if Adult Use Legalization was obtained prior to December 31, 2021. The agreement also provided for the release of Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al September 24, 2021 Page 17 of 36 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 f. $10.1 million for the settlement of a loan receivable. 4.41 We observe that the contingent consideration referenced above included Cresco shares that would be issued if Adult Legalization occurred prior to December 31, 2021. Said another way, the Mitigating Acquisition included contingent consideration based on Adult Legalization. 4.42 In connection with the Mitigation Acquisition, Cresco incurred $2.0 million of transaction costs.37 4.43 Cresco alleges that the higher purchase price of Valley (compared to the purchase price contemplated in the LOI with Fiorello) was a direct result of: a. The significant increase in the value of medical cannabis companies with a New York license during the period the LOI, and the No Shop Provision, were in effect;38 and, b. The diminished supply of New York license holders available for Cresco to purchase. Based on our analysis above, Cresco was essentially limited to one likely acquisition target (Valley). Comparison of Fiorello’s and Valley’s New York Licenses 4.44 Though otherwise very similar, the New York licenses held by Fiorello and Valley differ in terms of the locations of the four dispensaries permitted under each license. 4.45 Populations (in 2018) of the counties to which the dispensary locations pertain are as follows: 13,333.335 Cresco shares released based on whether additional dispensaries would be awarded to Valley by certain timeframes. 37 Cresco’s December 31, 2019 financial statements. 38 SoC. Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al September 24, 2021 Page 18 of 36 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 $12.78/share 48 . Applying this price per share to the 1,700,000 shares yields equity consideration of $21.7 million.49 6.27 Given the above, we have concluded that Cresco would have had to issue $21.7 million of equity (or equivalent) to the vendors of Fiorello in place of the contingent consideration clause to obtain approval from the NYSDOH in Scenario 2. 6.28 Based on the above, we have calculated the But For Purchase Price under Scenario 1 to be $32.5 million and Scenario 2 to be $44.2 million, as follows: But For Purchase Price in US$ 000s Scenario 1 Scenario 2 Cash Consideration $ 10,000 $ 10,000 Promissory Note 12,500 12,500 Contingent Payment per LOI 10,000 - Notional Equity Consideration (In Lieu of Contingent Payment per LOI) - 21,726 But For Purchase Price $ 32,500 $ 44,226 Cresco’s Financial Loss 6.29 Based on the above analysis, we have calculated Cresco’s Financial Loss to be as follows (refer to Schedule 2 for further details)50: 48Quoted in $USD. 49While the Amended and Restated Agreement and Plan of Merger dated December 21, 2018 between GTI and Fiorelloindicates that the adult use contingent consideration was replaced with 1.7 million subordinate GTI shares, an earlier document entitled“Re: Amendments to Merger Agreement: Conversion of $10,000,000 Loan” dated October 25, 2018 (and signed by representatives of both GTI and Fiorello) appears to indicate that the adult use contingent consideration was replaced with 700,000 subordinate GTI shares. We have performed our calculations herein based on the issuance of 1.7 million subordinate GTI shares as a replacement for the adult use contingent consideration. If it were to be found that the adult use contingent consideration was replaced by 700,000 subordinate GTI shares, then both our quantification of Cresco’s Financial Loss and our Accounting of Fiorello’s Profits would increase by $12.8 million from what is shown herein. Our conclusions would increase because we have used 1.7 million subordinate GTI shares as a proxy for the dollar amount that would have been ultimately paid by Cresco to Fiorello in order to eliminate the adult use contingent consideration in the original LOI. 50 We note that our analysis above does not include the economic value of consulting agreements given to Mr. Sirota and/or Ms. Yoss as part of the Anticipated Acquisition or Fiorello-GTI acquisition, or Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al September 24, 2021 Page 30 of 36 FILED: NEW YORK COUNTY CLERK 12/14/2021 01/10/2022 11:15 06:59 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 244 450 RECEIVED NYSCEF: 12/14/2021 01/10/2022 Cresco's Financial Loss in US$ 000s Scenario 1 Scenario 2 Actual Purchase Price paid by Cresco for Valley $ 129,574 $ 129,574 Less: But For Purchase Price for Fiorello (32,500) (44,226) Financial Loss 97,074 85,348 Rounded $ 97,100 $ 85,300 7.0 Accounting of Fiorello’s Profits Approach 7.1 We quantified an Accounting of Fiorello’s Profits in this matter arising from the excess of the proceeds Fiorello actually received from the GTI Transaction over the proceeds that Fiorello would have realized if it had completed the sale to Cresco pursuant to the LOI. 7.2 We calculated the Accounting of Fiorello’s Profits in this matter as follows: Fiorello’s Profits = C – B ; where: C = Purchase price paid by GTI for Fiorello. B = The But For Purchase Price, as defined above. 7.3 We have calculated an Accounting of Fiorello’s Profits under Scenario 1 and 2, as defined above. Details of the Accounting of Fiorello’s Profits 7.4 We calculated an Accounting of Fiorello’s Profits arising from the excess proceeds realized by Fiorello in the GTI Transaction above what Fiorello would have received if it had completed the sale to Cresco pursuant to the LOI. transaction costs incurred by Cresco in connection with either the Anticipated Acquisition or the Cresco- Valley Acquisition. We expect that were such items to be reflected then the Loss quantified by us would be higher. Duff & Phelps | Cresco Labs, LLC et al v. Fiorello Pharmaceuticals Inc., et al September 24, 2021 Page 31 of 36