When everyone is looking for gold, it's a good time to be in the pick and shovel business.

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The legalization of recreational marijuana in Canada cemented the arrival of a fledgling industry, one that is exploding with potential. ArcView Market Research estimates that the entire legal market in North America will reach a staggering $20 billion by 2022. Such analysis is particularly bullish on Canadian-based marijuana companies' growth prospects, with the Canadian cannabis market projected to reach $9.2 billion by 2025.

Despite these positive proclamations, the industry has had its fair share of challenges since legalization just over a year ago. Most notably, the sector has experienced chronic product shortages and, as a result, frustrated consumers. On top of this, in Canada, all three provinces vastly underperformed in terms of setting up legal retail stores. Understandably, against this volatile backdrop, investors are increasingly squeamish, with pot stocks limping into the year-end.

Canada's difficulty stocking shelves is similar to the experience of Colorado, where it took three years for supply to catch up to demand. However, this cannabis shortfall is not the only supply-side issue facing the industry. CEO of Aurora Cannabis, Terry Booth, warns that Canadian companies will soon see "carnage" among companies that have high production costs per gram of pot grown.

While some analysts now argue that supply has finally caught up with demand, legal sales satisfy just a fraction of total consumption; black markets are a huge factor here. Such analysis also fails to factor in the fact that Canada is adding edibles, extracts, and topicals to the list of legal cannabis products. This "second-wave" of legalization, coined Cannabis 2.0, means consumers should expect continued "missteps, delays, and frustration". This prediction comes from Jennifer Lee, Deloitte Canada's cannabis national leader, who also concludes that it will be a minimum of 24-months before the industry normalizes.

Pot 2.0 is Forecast to Bring More Shortages

Cam Battley, the chief corporate officer of Aurora Cannabis, noted on recent earnings call that the business is "going to prioritize vape pens and edibles, and that's based upon our research of consumer demand in the U.S." Strong consumer demand for and interest in alternative cannabis products—especially edibles and wellness-related products—suggests that Cannabis 2.0 will, in time, prove to be a steady source of revenue growth for Canada's cannabis sector.

Just how much potential is there for the industry? In California, with a market slightly bigger than Canada's, vape pens helped extracts capture 37% of market share—higher even than dry flower, which represented 33%. Edibles are a long way behind concentrates or dry flower, with only 7% of market share—but that's still 7% of a massive market.

The problem is that there are not enough companies producing extracts. This lack of production is partly due to a backlog at the government agency, Health Canada. This agency is tasked with overseeing cannabis regulations and is currently dealing with a waitlist of 614 applications.

Companies are doing the best that they can under the circumstances. Canopy co-founder turned Auxly Cannabis CEO Chuck Rifici said last week, "We've made a very conscious effort to delay revenue" to make sure they can stockpile as much extracted concentrate as they can.

The Pick and Shovel Business is the Answer

How can companies and investors alike respond to the confluence of Cannabis 2.0 and product shortages? Mark Twain is credited with coining the adage:

"When everyone is looking for gold, it's a good time to be in the pick and shovel business."

Twain was not waxing lyrically. Research has shown it wasn't the miners who got rich off the California Gold Rush but the businessmen selling them their tools.

The cannabis industry is no different. There are several ways in which producers can grow better crops, process plants more effectively, and deliver products to various stakeholders more efficiently.

Investors have taken note of this. Marijuana investing remains risky, but it's possible to seek safety (and profits) by focusing on the ancillary firms that provide infrastructure services for growing pot companies in either the recreational or medicinal segments.

Given the convergence of Cannabis 2.0, the desperate need for highly purified extracts, and downward price pressure, Sixth Wave has entered the pick and shovel business. It’s developed a two-phase post-processing extraction technology to simplify the production of high-purity tetrahydrocannabinol (THC) isolate and cannabidiol (CBD) distilled oil, which are vital ingredients in the array of Cannabis 2.0 products. The company's patent-pending nanotechnology uses a highly selective molecular imprinting technique that outperforms existing technologies.

The technology and process lower CAPEX and OPEX by increasing the total recovery of the selected cannabinoids. Moreover, with no specialized training required, unlimited scaling ability, no costly media replacement, and losses associated with existing technology virtually eliminated, it's an essential value-add product for companies involved in the cultivation and processing of cannabis.

The Ancillary Market: It’s Not Only about the Cultivators.

Given the significant challenges facing the cannabis industry, the ancillary market will be vital in moving forward. Ongoing supply issues in Canada and competition with the still-thriving black market has caused many risk-averse investors to flee for the hills.

While the cannabis green rush has seen the focus placed on cultivators, when you're looking into which companies to support, consider looking into the ancillary market as well. Sometimes the real action isn't out on the field, it's happening on the sidelines.

By redoubling investment in innovative technologies like Affinity, the cannabis industry can help overcome some of its most pressing and costly challenges, unlocking its next phase of growth.

Join Cannabis Tech’s, Kristina Etter on Wednesday, January 15th for a live webcast with Sixth Wave’s CEO, Dr. Jonathan Gluckman to learn more about this disruptive technology!