Imagine water is a legal substance only in your own home, say, in Colorado somewhere. Imagine that outside the confines of your humble abode, water possession is considered a crime. Anyone inside your house, however, is free to buy, sell, and drink water. In such a case, the very first thing you should be concerned about is home security, because you'll need a lot of it. Huge price differentials are created by anti water laws all around you. That means people can make huge profits taking water from you and selling it in places where it is illegal and therefore much more expensive. In such a case, your home has become a target for potential water thieves from all around the country specifically because you have the only legal supply.
Granted, water is an extreme example and I am certainly not comparing cannabis with water, but the economic reasoning applies just as well. If any economic good is legal in one place but illegal in another place, the legal place becomes a big fat open target for criminals looking for an easy supply to export to higher priced illegal areas. The problem is even more exacerbated in the purgatory no-man's-land of legal/illegal status that cannabis occupies in states like Colorado and Washington, where medical as well as recreational use have been legalized but only on the state level. While legal according to state law, cannabis is still illegal on a federal level, making it impossible for companies in the industry to make use of basic financial services regulated by the feds. The banking system is, after all, super centralized and controlled with an iron fist at the federal level (by the "Federal" Reserve no less) and no bank wants to be on bad terms with federal authorities, which consider marijuana to be an illegal substance.
As a result, you have the double target of an industry operating almost entirely in cash together with a substance with abnormally large price differentials right across state lines. Many pot legalization advocates argue that legalization will lead to lower crime rates, and rightfully so. But most overlook the fact that a serious security apparatus is needed to secure both the cash and the product in order to actually lower said crime rates in practice.
Enter Blue Line Protection Group (OTCPK:BLPG), the only publicly traded security company specifically serving the legal cannabis industry, with 52 clients in Colorado, 5 in Nevada and 7 more pending license approval by the Nevadan authorities. Blue Line provides both security from criminals, as well as security from law enforcement and regulators, otherwise known as compliance services. In the illicit drug industry, this type of security is provided by heavily armed gangs financed by kingpins, the type you see in drug smuggling Hollywood movies that supervise huge transports of cash and product across borders. These transport scenes are where much of the drug-related crime happens. Thanks to companies like Blue Line, these services are now legitimate and sanctioned.
Blue Line is staffed and led by ex-law enforcement officials, many of whom have spent their careers busting the drug trade, that is up until joining Blue Line and protecting it. Its vice president of operations is the former chief of police of Aurora, Colorado, trained in risk and violence assessment with the United States Secret Service. Its vice president of sales has 21 years of law enforcement experience. Aside from the irony involved, the resumes of Blue Line executive staff are crucial for the compliance side of the business as well. Having been part of law enforcement for so long, Blue line has both the connections and the extensive knowledge of the state regulatory apparatus necessary to guide its clients to regulatory safety in the minefield of the cash-only sort of legal, sort of illegal cannabis business.
Blue Line's business model is a monthly charge of anywhere between $2,000 and $14,000 a month to handle cash and product transports, regulatory compliance, and round-the-clock security for its clients. Just yesterday (July 1), it announced a new service of opening specialized banking services for its clients at dedicated credit unions in Washington and Colorado interested in serving the legal cannabis industry.
Blue Line reported $51,000 in revenue in its first quarter in operation. Now with 53 clients in Colorado and Nevada, its next quarterly revenues should come in at well over $100K. Blue Line has no research and development costs and overall very low overhead aside from the salaries it pays its guards and runners. The path to profitability is simply a matter of economies of scale. It is unclear what the magic number is at this point since the company has only been in operation for one quarter, but as the quarters progress and earnings come in, potential investors can start to narrow down how many cannabis clients Blue Line needs to be net positive.
In the meantime the cash clock looks as follows. In March 2014, Blue Line did an initial equity financing of 13,068,454 shares for a total of $1,213,462 (page 11) which is recorded on its balance sheet as net receivables. In its first quarter of operation, the company recorded a net loss of $61,000. As preliminary as these numbers are, this gives Blue Line roughly 5 years of cash, but this number will likely fall as its expenses ramp up together with its client base. In other words, its bottom line will probably get worse before it gets better, which conservatively puts its cash clock at somewhere between 2 and 3 years.
The big question is, what happens until then?
Risks and Outlook
There are many reasons to be cautious about Blue Line and startup companies like it. Marijuana security has up to now been a criminal industry, so we simply can't crunch the numbers behind it with any sort of accuracy. The best we can do is ask drug runners and their kingpin bosses how it works in states where pot is illegal, but that's a bit of a loopy idea and it only applies to illicit pricing anyway, not the legalized form of the industry where entirely different numbers apply. On the negative side, its filings are riddled with going concern issues, law enforcement concerns, including worries about what happens if the feds suddenly get in a bad mood, override state law and decide to arrest their clients, and other risks factors almost never mentioned in the filings of companies that don't operate in legal/illegal cash-only regulatory purgatory.
Despite all this, however, one thing is certain. There is and there will continue to be a fundamental need for exceptional security in the legal marijuana industry as long as it continues to occupy a legal grey area. The federal government in all likelihood will not legalize marijuana any time soon, so this grey area will persist for some time.
As a newcomer to the world of publicly traded cannabis stocks, Blue Line did not participate in the marijuana mini bubble that peaked and burst in March. (The company has been conducting business for a quarter, but has only been trading in its current form since May.) The catalyst for this bubbly ebullience was undoubtedly the official opening of the first recreational pot stores in Colorado on January 1. Like a moth to the flame, this cannabis stock high is likely to repeat upon legalization by California, New Jersey, or Maryland, three states with legalization bills being considered.
A recent initiative in California for 2014 failed when its primary funder suddenly died, but advocates are hopeful that 2016 will be the year of full recreational legalization for the biggest state in the Union, which also happened to be the first state to make it illegal back in 1907. New Jersey may follow as 57% of residents there support full legalization and a bill has been introduced, though Governor Christie has vowed not to sign any bill. He'll have to leave office before any progress is made there. In Maryland, right next door to the nerve center of the federal government, a majority support full legalization as well and a bill has already been signed decriminalizing it, with another introduced this year for full legalization. A move in any one of these three states could be huge for Blue Line, as the more legislative dissonance there is between state borders and states and the federal government, the more security is needed for the legal cannabis.
The possibility of further growth also exists in a potential partnering of Blue Line with public companies involved in the grow part of the industry. One candidate is CannaVEST (CANV), based in Las Vegas, where Blue Line already has clients signed up. As Blue Line increase its presence in Nevada protecting the medical cannabis industry, a bigger name like CannaVEST could boost BLPG stock in the eyes of the pot stocks investment community.
Like any new industry, the initial months of investment in the legal cannabis industry have proven to be topsy-turvy as pot stocks have bubbled and burst. Blue Line could be a smarter pick for those interested in pot stocks going forward, simply because its security and compliance services are essential to any company in this industry straddling the grey line of legal purgatory. With something between 2 and 3 years of cash on its books based on current numbers, there is plenty of time for Blue Line Protection Group to run up against any number of possible catalysts in the near future, including state legalizations in 2016, possible partnerships going forward, or perhaps even an earlier than expected report of its first profit in the coming quarters. With 53 clients and 7 in the pipeline, it certainly has a good head start.
Disclosure: The author is long BLPG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.