Maksud Rahimov

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International Financial Management 
Final Project
CanCan (Canada Cannabis) Corporation
By Maksud Rahimov 
20160369
Table of Contents	Comment by Anonymous: Good
· Introduction________________________________________________________3
· CBD Oil Production in Canada________________________________________3
· Product Overview___________________________________________________5
· Export to United States_______________________________________________8
· Opening Subsidiary in United States ___________________________________9
· Using the Foreign Exchange Market to Ensure Payment for Exports________10
· Conclusion_________________________________________________________12
Introduction
Cannabis has been illegal in many countries for many years. However, lately many countries including Canada has legalized production and use of marijuana in everyday life as well as in medicine. This is a business idea to produce medicinal products with cannabis in Canada, component of Cannabis Sativa, also known as Marijuana , considered a vegetable that contains several organic compounds such as THC "Tetrahydrocannabinol", CBD "Cannabidiol", CBN "Cannabinol", THCV "Tetrahydrocannabiverol", among others (Cervantes, 2007), which are used by the population for medicinal or recreational method. Currently in the world, several medicinal products have been generated with the compound THC and CBD, products that have helped the population in the treatment of diseases, especially those that imply pain in their bodies. CBD when used in a manner correct, it has great medicinal benefits for diseases such as breast cancer (reduces cancer cells and does not affect non-cancer cells) (Mcallister, Christian, Horowitz, Garcia, & Desprez, 2007), epileptic seizures (Jones et al., 2012), nausea (Parker, Mechoulam, & Schlievert, 2002), among others.
Despite the benefits this vegetable offers, it has faced great political pressure by the governments towards marijuana growers in many states of United States of America, for which most growers moved to the Canada where the political climate was less threatening and they were one of the first countries in this region to legalize marijuana. After the 1980s, various marijuana opened in Netherlands, offering a greater availability of exotic seeds of high quality cannabis, which have presented high possibilities of finding more varieties effective from a medical perspective (Clarke & Watson, 2006). In Netherland many companies generated income from selling marijuana legally, this way government also got its benefits by taxes. In other countries though marijuana was illegal, however people were still selling it illegally, which in other point doesn’t give any benefits to the government. 	Comment by Anonymous: Good
CBD Oil Production in Canada
In this project I will try to develop the business model of manufacturing different types of food supplements, medicines from cannabis and selling it in Canada and as an export country I will take United States. The company will be called CanCan (Canadian Cannabis). I took Canada as manufacturing place because as mentioned before, this country has legalized production of cannabis before many countries did and the requirements/regulations (Marijuana Medical Access Regulations/MMAR) are easy to follow. In addition, Canada has a good soil for production of cannabis (Nagasaki, 2019). Nagasaki (2019) in his article claims that most of the popular and high quality cannabis growers take place in Canada’s British Columbia, it has one of the best environment for growing cannabis. Exactly saying, the manufacturing plant will be located in Kootenay region, British Columbia, Canada. 
Talking about rules and regulations, in order to start a business in cannabis industry, in our case (producing and selling cannabis in different forms) we should obtain Cultivation, Processing and Federal Sales licenses (Trpkovich	, 2019). However, each of this licenses have their requirements on how much we can produce and sell under Excise Act, 2001. 	Comment by Anonymous: Good
Figure 1: Types of Licenses for Cannabis Business in Canada (Trpkovich, 2019)
According to Deloitte (2018) Cannabis Report Canada’s market size of cannabis is worth up to $4.3 billion. Taking it into account, even a small player in this market may have huge profits and with a good business plan, you may have success in the market. Current situation in the world with COVID-19 has increased the demand for marijuana in United States and it this industry is going to prosper further because of COVID-19, claims Holland (2020). Many sources claim that many suppliers in United States are experiencing shortages because of high demand. This is why United States was chosen as a main export country. 
Since we have chosen the industry, place for manufacturing and the main exporting country, now it is time to go with one main product that we want to manufacture. As mentioned before, there are many products that can be made from cannabis, starting from food supplements and medicines, skin care products, chocolates, beverages or just a pot for relaxation and stress. Nowadays, one the most popular and in demand product is Cannabis Oil (Fiorillo, 2020). Cannabis Oil will be the main product of CanCan Corporation for production and export to United States.
According to National Conference of State Legislatures (NCSL) (2020), Cannabis Oil is now legalized in 33 states of United States of America. Fiorillo (2020) claims that Cannabis Oil unlikely other products from cannabis have minimum amounts of THC, this means that it won’t make person as high as simple marijuana does. CBD Oil has many pros, some of them are relieving pain, anxiety nausea according to Fiorillo (2020). CBD Oil is safer, because it does not give psychedelic effects as smoking marijuana does. CBD oil, a product made with a high percentage of CBD, has a process of fairly extensive manufacturing, which starts from when this is a seed to the extraction of the oil that it generates and which will be commercialized to the public. Next, each one will be observed of the phases for the elaboration of this medicinal product and its possible market, this, with the objective of evaluating which clients are in each phase and thus be able to develop greater hypotheses about sales that can be made with the product, while a person with one of the diseases that can be helped or cured by pure CBD, are you interested in buying the product when it is already in commerce, but perhaps some company is only interested in buying the plant before carrying out its extraction, since it serves as an input for its products or services. In our case we will grow the plant and then will extract the oil from the plant, we will take care of the full cycle of CBD Oil production.	Comment by Anonymous: Good
	
Product Overview 
This stage consists of buying the seeds to be used from the Canadian cannabis growers, the country where the CBD (Cannabidiol) seeds have a high quality, that is, the seed has a high content of the CBD compound and a minimum content of other common substances in marijuana, such like THC, CBN, THCV, etc. Furthermore, the seeds are both feminized (genetically females) as self-flowering (Easy and fast flowering process (8 to 10 weeks), (Royal Queen Seeds Community, 2017). In Colombia, the marijuana seeds with which companies that need this work input, they generally have all the compounds quite mixed, that is, they have high components of CBD, THC, CBN, THCV in their seeds and it is very difficult to remove a leaf with a high percentage of CBD in its formulation (Royal Queen Seeds Community, 2017). Also, the seeds come male and female and their flowering process is longer and riskier. It is important for the business to obtain seeds with a high CBD component, since it does not contain psychotropic effects, it also seems to significantly limit the negative effects. They are generally used for recreational purposes produced by THC. This is why it seems so theuse of CBD as a medicinal tool is striking, since numerous scientific studies recent recognized important therapeutic properties such as analgesics (anti pain), anti inflammatory, anti bacterial, anti epileptic, anxiolytic, anti diabetic, among others (Shop, 2017).	Comment by Anonymous: Good
Figure 2: Reasons U.S adults tried CBD Oil (Kopf, 2019)
While producing a product we should know our customer segment. Customer Segments defines the various groups of people or organizations that the company sets as its goal embrace and serve. Customers are at the heart of any business, given that without(profitable) customers, no company can survive long. To satisfy better for these customers, the company can group them in different markets with common needs, common behaviors or other attributes. A business model can define one or several large or small client segments, but you must make an informed decision about what segments for service and which segments to ignore; After the decision is made, it is developed business around a deep understanding of needs customer specific (Osterwalder & Pigneur, 2010). 
	Comment by Anonymous: Good
Figure 3: Overview of stages of production (Deloitte, 2016)
In 2016, Deloitte made a research about Modelling the Cost of Medical Cannabis. In our project, we will use the stages according to Deloitte report. CanCan Corporation will be located in Kootenay, British Columbia, Canada. 2 ac land will be bought for around $102,000 CAD (Point 2 Homes, 2020). Should be highlighted that the land we are talking about has a very good soil which is essential for growing cannabis. To grow cannabis we should have machinery or in other words equipment, warehouse and according to Kendall (2018) this is the list of essential machinery for growing and supplying medical marijuana: 
Marijuana Growing Tents	Comment by Anonymous: Give them bullet points
Medical Marijuana Grow Lights 
Monitor Marijuana Growth 
Medical Marijuana Extractor 
Overall, for growing equipment there will be spent around $212,142 CAD (Luketa, 2019). For build out, improvement of the land and building there will be spent $84,000 CAD (Cannabis Business Plan, 2019). Cannabis is very sensitive to lights, therefore there are special lighting system for growing cannabis, purchasing of such lighting systems will cost $169,000 CAD (Cannabis Business Plan, 2019). For alarm and security system there will spent $63,000 CAD. For licensing and legal fees, there will be spent around $75,000 CAD (Cannabis Business Plan), this depends on the production level, but we can not predict precisely our future harvest in the beginning of the project. Overall, direct costs for the first month of the business will be around $280,000 CAD. We will also have administrative expenses of $70,473 CAD. Other expenses including salaries in the beginning will be $140,000 CAD monthly. When it comes to electricity, cannabis industry consumes it mostly for lighting, there will be two stages of lighting: Vegetative stage 720 hours (40 days of 18/6 schedule) and Flowering stage 720 hours (60 days of 12/12 schedule) claims Cannabis Business Plan (2019). Annual electricity cost for lighting will be $36,331 CAD, if we include fans and other machinery then total electricity cost will be $64,931 CAD. Water cost will be approximately $600 CAD annually. 
While growing cannabis, plants should be reach of nutrients, those growing solutions are also needed, there will be spent around $6,000 yearly for nutrients . Lab testing will be held to check the plants and the harvest overall, annually there will be spent around $7,500 CAD for lab testing (Cannabis Business Plan, 2019). Packaging transport and storage will cost $5,000 CAD quarterly inside the Canada. 
Export to United States 
	Popularity of CBD Oil and its high demand in United States forced our company to export its product to this country. Currently, amid COVID-19 the popularity of cannabis products increased in United States. 
Figure 4: Adult Use Cannabis Sales in United States 2020 vs 2019 (Forbes, 2020)
Figure 1 shows how COVID-19 impacted the sales of cannabis in United States. During isolation more and more people started to buy marijuana and products that are made from marijuana. Many suppliers experiencing shortages, as mentioned before and this is the best time to enter the market and find customers. Also, taking into account that cannabis products are legalized in many states of USA, this is the best country to start the export with. In addition the transportation cost, it is the nearest one and the transportation cost is one of the cheapest. 
Opening Subsidiary in United States 
On the second year of the operation of the business, it is time to open a subsidiary in United States. We have chosen California as a location for the subsidiary company, there will be rented a Dispensary with a warehouse solely for our own products. For opening a Dispensary, firstly CanCan Corporation has to pay $1,000 USD for Dispensary License in California (Cohen, 2017). 	Comment by Anonymous: Good
 
Figure 5: Cannabis legalization map, USA (Business Insider, 2018)
It should be mentioned that it is legal to sell marijuana and product from cannabis in California, however the license fee is $18,000 (Cohen, 2017). For the rent Dispensary with the warehouse in San Francisco $90,000 USD annually. Annual wages for the Dispensary and the warehouse workers total will be $280,000 USD. There will be a marketing campaign across the state of California, marketing will cost $32,000 USD. In the first year of operating in California, 10,000 kg of CBD Oil will be exported to United States. The subsidiary will be operating more like a distributor in United States, with a huge warehouse and Dispensary, where people can come and try our products. Price for CBD Oil will be $3 per 1kg, yes this will be big bottles of CBD Oil. 
	Drastic sales growth in cannabis industry was seen during 2019-2021 (IBIS World, 2019). In second year of operation in United Sates, according to different sources there will be high demand on cannabis products and we have increased the export from 10,000 to 13,000. Also, the salaries have increased 3.1 percent. If we stay positive and use average forecast on cannabis sales from IBIS World, we will increase our sales from $3 million USD annually to $7.1 million USD just in the next year of operation in United States and Canada. 
	Cash Flow for next five years looks as follows:	Comment by Anonymous: Where is required rate of return part? You also missed the transaction, economic and translation exposures. What about exit strategy? 
	Cash Flows for the next 5 years
	 
	USD
	 
	 
	CAD
	CF0 = 
	467 991
	 
	CF0 = 
	659 142
	CF1 = 
	1 181 703
	 
	CF1 = 
	1 723 417
	CF2 =
	5 453 933
	 
	CF2 =
	7 276 215
	CF3 =
	13 734 084
	 
	CF3 =
	18 430 486
	CF4 =
	33 399 450
	 
	CF4 =
	45 081 979
	CF5 =
	80 071 312
	 
	CF5 =
	108 705 761
Figure 6: CanCan Corporation Cash Flow for next 5 years.
Using the Foreign Exchange Market to Ensure Payment for Exports
	Comment by Anonymous: It seems that you messed up with the sequence. 
Since the company started operating in another country, it has to take into account all the regulations, political risk, currency risk of that country. Foreign exchange risk is one of the main risks in our case. Choosing a good bank with a good bid-ask spread is one of the solutions for the company. When operating in United States while the headquarters in Canada, we have to convert USD to CAD at the end of the day. Each company wants to convert currency with highest benefit for the company, so in this case company should chose the bank which operates in both countries and has minimum bid-ask spread among other banks. In our case, CanCan Corporation will work with TD Bank. The bid-ask spread for CAD and USD is 3,67 in TD Bank as of April 26th, 2020. 
So what exactly the bid-ask spread has to do with the currency? In our case this is the commission that the bank charges when we convert USD to CAD (Ganti,2020). Forward contract means that we can purchase or sell a commodity with specified price on future time (Dhir, 2020). It can be used for speculation as well as hedging. In our case with forward contracts, CanCan Corporation can make an agreement with the bank on specific exchange rate for the future date. 	Comment by Anonymous: What about forecasted exchange rates? 
Figure 7: CAD – USD exchange rate (1y). (Trading Economies (2020))
Figure 7 shows how the rate was growing against CAD during 1 year. Trading Economies (2020) shows that United States Dollar appreciated by more than 14% in the last 4 years. When starting a subsidiary in the U.S we should take this into account.
Conclusion 
Overall, from preparing this project I understood how big cannabis industry will be in 
upcoming years. Right now is the best time to start investing in this industry. One of the main skills for investor is to forecast sales and how much work he has put to generate it. It should be mentioned that the forecasts given in excel file are results collected data from many credible sources and in my opinion the project is feasible, however I agree that it needs improvement when it comes to application.	Comment by Anonymous: It's not a complete project. You missed many parts. 
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