ACKRELL CAPITAL Cannabis Investment Report | December 2017 * Federal income tax law precludes a business that “consists of trafficking in” cannabis or cannabis products from deducting certain operating expenses in determining its federal income tax. As a result, businesses in the cannabis industry may have effective tax rates significantly higher than other businesses subject to federal income tax, may owe tax on taxable income that is not actual economic income generated by the business and may have tax liabilities in amounts that exceed cash reserves. * Because of CSA controls on cannabis and federal laws applicable to banks and other financial institutions, companies in the cannabis industry may not be able to open or maintain bank accounts or access products and services of traditional financial institutions, such as credit facil- ities, payment processing and insurance coverage. A lack of access to banking and other tradi- tional financial products and services increases the time, effort and expense related to ongoing operations and increases risks associated with cash transactions and the use of alternative prod- ucts and services. ¢ Trademarks used by companies to identify, distinguish or indicate the source of cannabis or related products or services that are illegal under federal law are not eligible for registration under federal trademark law, which is generally recognized as the most comprehensive trademark pro- tection available in the United States. Alternative means of protecting such trademarks may not be available or may provide protections inferior to the protection provided by federal registration. * Protections afforded under federal bankruptcy law generally are not available to companies whose assets consist of federally illegal cannabis products or proceeds therefrom or to the creditors of such companies. ¢ The federal government may pursue legal action against a state related to the state’s cannabis laws, which may result in significant c