January 4, 2018

Dear Merida Limited Partner,

A happy and healthy New Year to all!

Housekeeping items first:

The LPA changes that extend Merida's initial capital date until the end of January had more than 80% consent as of Dec 31. We believe we will close the fund for existing investor add-ons by January 15th, and continue allowing future commitments to the Fund from existing investors (which would occur at a higher NAV) until January 31.

Now...to today's news which many of you have already contacted us about.

We wanted to get you something immediately, and so we have drafted this as quickly as practicable. We caution you to stay calm and see how things unfold over the next week. In a broad sense, we have always invested with a mind towards the risk of federal intervention and the shape it might take if it were to occur. We think we are well positioned as a diversified ancillary fund to weather any volatility or noise from the Attorney General and in fact, an argument could be made that even with the most draconian federal posture, Merida Capital Partners and its portfolio will be fine.

There is a binary question presented today and it's one you must agree with as a central premise to your investment in cannabis, and Merida's approach, or you would not have invested. That is: Will cannabis as an industry move forward in the future, or backwards?

We believe it moves forward regardless of one day, one speech or one action. We believe you all agree and therefore it's important to keep perspective over the next few weeks. While we are disappointed that AG Sessions would take any actions that could in any way impact either medical or adult use cannabis, we simply point out that as of this moment, it's mostly words.

The main reason we are circumspect in our response today is that Mr. Sessions simply does not wield the power on this issue he surmises, and such facts will become clear very quickly. State AGs actually control their enforcement priorities in a much more profound way than the federalFAG because the Federal AG does not control budgets, personnel or have enforcement personnel at his disposal. He has a bully pulpit, and as anyone with kids knows, that has limits.

It would not surprise us if Mr. Sessions' reaction was due to Nevada, the very recent euphoria in California and all the positive press about recreational cannabis coupled with this administration's perceived need to "do something." As always with the nascent cannabis industry, things are moving fast -- just minutes ago, the following was released on Twitter:

BREAKING -- US attorney in Colorado: No change to marijuana enforcement despite Attorney General Jeff Sessions' shift on pot policy.

We assume that California and others will follow suit. You can bet that Eric Schneiderman of NY is not a fan of this. Joan Loughnane, the Acting Deputy AG of Southern District (NY's Federal District) does not seem to be the type to take action.

The cannabis industry itself may have been positively impacted by the Cole Memo, the Ogden Memo and other executive "guidance." But the rise in cannabis and the evolution of its legality at state levels was not due to these memos, and so removing these guiding doctrines has little effect on the cannabis ecosystem.

To the extent we have broader concerns, we see perceived negativity at a federal level and a pugnacious attitude towards cannabis (in any form) as a deterrent to service providers and other "normative" supply chain providers that cannabis needs to thrive.

Just last week, I spent an hour on the phone with Congressmen Dana Rohrbacher, the architect of the Rohrbacher-Blumenauer (nee Farr) Amendment to the last three budget bills, which prevents one dollar being spent on DOJ enforcement against state-legal providers. The Congressman told me that President Trump was not paying any attention to the subject and that anything AG Sessions had previously said was his own opinion. Rep. Rohrbacher said he'd made it a priority and initiated contact with President Trump's team to begin educating them on cannabis and that he's optimistic Jared Kushner and President Trump's inner circle were very open to the conversation, thus he was taken aback by today's announcement.

We received this from Rep. Rohrbacher's office an hour ago:

Rohrabacher Blasts Attorney General’s Marijuana Policy Decision
 
WASHINGTON – Concerning Attorney General Jeff Sessions’s decision to rescind the Justice Department policy of not prosecuting marijuana cases in states that have legalized the substance, Rep. Dana Rohrabacher today released the following statement:
 
The attorney general of the United States has just delivered an extravagant holiday gift to the drug cartels. By attacking the will of the American people, who overwhelmingly favor marijuana legalization, Jeff Sessions has shown a preference for allowing all commerce in marijuana to take place in the black market, which will inevitably bring the spike in violence he mistakenly attributes to marijuana itself. He is doing the bidding of an out-of-date law enforcement establishment that wants to wage a perpetual weed war and seize private citizens’ property in order to finance its backward ambitions.
 
This is a profound misreading of the Constitution, which allows states, not the heavy-handed federal government, to determine such issues. How ironic that the attorney general has long championed states’ rights when it suits other parts of his agenda! More than that, by attacking the clear will of the American people, the attorney general contradicts President Trump’s campaign pledges to leave medical and recreational marijuana questions for the states to decide. By taking this benighted minority position, he actually places Republicans’ electoral fortunes in jeopardy.

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At Merida we feel confident that pushback like this and from people like Cory Gardner (the Senior Republican in the Senate) and others will be swift and that this speedbump will in some way help Merida in the long run. It will likely give institutions pause, which creates more room for us to continue executing our strategy without larger competitors. It gives our companies more time to grab market share or grow their businesses with less mature competition.

On the public front, there will be volatility. And yes, GrowGen and Kush will move around a lot as people try to digest the news.

We have never looked at our public companies and celebrated because we know those companies are well built, and are executing on their plans in a thoughtful way. Cowen has Kush doing $45MM this year in revenue. GrowGen has not put out guidance for 2018 yet but had $15MM in projected 2017 revenue and we think they have a huge runway of opportunity which will drive the company in 2018 and beyond.

Our private companies largely serve the regulatory oversight of cannabis. If the federal government were to intervene in cannabis, we think they would try to slow cannabis through draconian rules and enforcement and so our portfolio would greatly benefit from an environment like this (New Frontier on tax/validation, Steep Hill on testing, Lumigrow on energy usage, to name a few).

We would be far more concerned if Scotts Miracle Grow was down more than 1% today. Other large public companies with large cannabis exposure, like Waters Co. (WAT) and Thermo Fisher (TMO) are up today. Many cannabis public companies are not real from a true business perspective and so you cannot react to their movement. We own real companies that are both public and private, we think those companies thrive in environments good or bad, and will find ways to create value above and beyond their smaller, less well-capitalized competitors.

We will follow up with more information when there is more clarity as to how today's news is playing out at the state and operational level. Until then, we ask that you remain patient and calm. On February 22, 2017 we saw something like this and predicted it would be (as the saying goes) "a nothing burger."

And over the next nine months, we were right...until now.

We'll leave you with another prediction: As State AGs largely defy Sessions (just as they do on immigration), we believe President Trump or another senior official will come out and clarify what the administration's thoughts are on this are, or they will gracefully deflect and say they have worked with congresspeople like Sen. Gardner (who is threatening political armageddon for President Trump today on nominees at Judiciary) to find a modest solution that leaves the status unchanged regardless of today's Sessions statements.

Regards,

Mitch