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Since going public in 2014, Blue Line Protection Group (web site) (BLPG) has undergone an operational transformation that will bring about several advancements in the legal cannabis industry and its operating results.  Blue Line Protection Group provides consulting, armed security, compliance and investigations, transportation and secure vaulting services to banks, businesses and government entities who need to protect their assets, licenses and clients. Blue Line serves banks and credit unions by providing currency processing and transportation solutions, and its risk mitigation services help financial institutions serving cash-intensive industries comply with federal “know your customer” mandates. As of Q1 2016, some 84% of Blue Line’s revenues were derived from its armed protection and transportation services with 6% of total revenues coming from its compliance services business segment.  But times, they are a changing, and this report will aim to disclose the potential future that lies ahead for revenue and profit growth for Blue Line Protection Group.

The legal marijuana industry is growing at an exceptional pace with sales totaling over $700mm in 2014 and $5.4bn in 2015.  Blue Line Protection Group benefitted from servicing the Colorado network of retail cannabis sales that grew to $996mm in Colorado last year.  It’s very clear that as voters in more states embrace legalized marijuana sales, the burgeoning cannabis industry has gone from a curiosity to a bona fide booming market. After growing legal cannabis sales by leaps and bounds in 2015, the market is expected to grow by a whopping 25% this year and reach $6.7 billion in total U.S. sales.

Blue Line Protection Group - chart of week

An ArcView Market Research report titled “The State of Legal Marijuana Markets” includes the prediction that the legal cannabis market will see a whopping $21.8 billion in total annual sales by 2020.

“I think that we are going to see in 2016 this next wave of investors, the next wave of business operators, and people who’ve sort of been watching or dipping their toe in, really starting to swing for the fences and take it really seriously,” ArcView CEO Troy Dayton said in an interview.

With sales for the cannabis industry booming and legalization of recreational cannabis sales now extended to four participating states, and more to legalize in the future, Blue Line Protection Group has taken steps to solidify itself as a leading service provider to the industry.  As noted within, one of the biggest revenue drivers for Blue Line over the last several years has centered on protection and assisting with maintaining legal operating compliance for participating cannabis retail sale operators known as dispensaries.  The cannabis industry has largely been a cash-intensive industry and as such comes with a host of risks. Securing cash and cannabis-related product assets has been one of the biggest risks and headaches for dispensaries throughout the industry since decriminalization began. Blue Line’s armed guard, transportation, vaulting and general cash processing services have helped cannabis retail operators secure their businesses. The company offers a fully integrated approach to managing the movement of cannabis and cash from growers through dispensaries via armed and armored transport, money processing, vaulting and related credit.  Money processing services generally include counting, sorting and wrapping currency. Presently, Blue Line is the largest legal cannabis protection services company in the state of Colorado.  They will be expanding their operation to include a new facility to service the Nevada region in the near-term. By early 2017, Blue Line will have satellite operations in Illinois, Oregon, Washington, California and Arizona.

Given the rate of growth in the legal cannabis industry that will likely grow further and regionally across North America, Blue Line has adjusted to these growth rates in several ways.  Firstly, the company has brought in a new CEO, Daniel Allen, more capable of advancing the Blue Line Protection Group business in accordance with the forecasted growth for the industry. All of the company’s operations and revenue since 2014 have derived from the state of Colorado and generally centered on the business operation of providing security and transport services.  With more states adopting legalized cannabis operations and sales, Blue Line will be expanding its business operations in a more scalable manner and will include the state of Nevada. In March 2015, the wholly owned Nevada subsidiary, BLPG, Inc., was granted licenses to provide services in Nevada. Additionally, Blue Line has received an investment from Hypur Ventures, a Delaware limited partnership (“Hypur Ventures”) and entered into an ISV (Integrated Software Vendor) agreement with Hypur, Inc.  This newly established relationship with Hypur is launching imminently and this is where the Blue Line Protection Group business finds itself entering a new era of growth and opportunity that is unparalleled, even in the cannabis industry.  The details of this strategic relationship will be explored further in this analysis, but first let’s take a closer look at what areas of the Blue Line Protection Group business are designated for future growth.

As mentioned earlier in this broad-scale analysis of the Blue Line Protection Group business, scalability has been hard to come by for the company.  The armed guard security business is one with very little profit margin and a high degree of liability.  News headlines have been littered with stories of armed guards being slain in the line of duty, servicing the cannabis industry.  Additionally, this business operation comes with very few barriers to entry and as such doesn’t lend itself to long-term profitability and/or viability. Lastly, moving such a business operation from state to state as decriminalization of recreational marijuana pushes forward is capital intensive.  And for all of these reasons, when Daniel Allen set forth to right size and look to scale the business of Blue Line Protection Group he analyzed the aspects of the business that could be scaled and developed through strategic relationships. In a June 1, 2016 Letter to Shareholders Mr. Allen detailed the aspects of the business that would not only be scalable, but also be able to drive top and bottom-line performance to the benefit of the company and its shareholders.

We’ve identified very specific areas where we provide our clients access to the requisite services: stable banking relationships, cash management and vaulting services, real time tracking of cash and product, fully electronic payment platform, physical compliance audits, and licensing services, just to name a few. These services, along with others, are strong top- and bottom-line revenue drivers for the business and are completely scalable.” 

One of the biggest problems facing the cannabis industry is that while certain states have legalized the selling of medicinal and/or recreational marijuana, the Federal Government does not recognize the operations as being legal as it centers on the selling of a Schedule 1 drug.  As such, most banking and financial institutions are not able or willing to “bank” the cannabis industry participants, even in legalized states.  The result is that 70% of cannabis companies don’t have a bank account. The few banks that do take on marijuana clients do not advertise what they’re doing. And this is where Blue Line’s ISV (Integrated Software Vendor) certification with Hypur comes into play.

Hypur extends the reach of traditional banking systems by providing financial institutions with the technology software solutions they need to provide banking services to cash-intensive businesses safely and profitably. Bringing legitimate businesses and transactions back into the banking system makes it easier to differentiate them from those with bad intentions.
Blue Line Protection Group -Hypur

Hypur’s software products, which were designed specifically to address the unique regulatory challenges presented by cash-intensive businesses, provide unprecedented transparency and accountability for financial institutions and regulators while offering legitimacy, safety and convenience for businesses and their customers. Hypur was founded by banking, financial compliance and software entrepreneurs in 2014.  The firm is led by Founder/Chairman/CEO Christopher E. Galvin, and his leadership team brings a wealth of banking, payments, financial, legal, marketing, technology and management experience to the company.

As a certified Hypur integrated software vendor (ISV), Blue Line is now able to provide an electronic platform for consumer payments and regulatory compliance  tracking. Blue Line’s mobile tablet-based compliance investigations platform, providing location inspection and inventory verification assessments for financial institutions, is now certified through Hypur’s “fintech” infrastructure.

In short, Hypur’s technology helps U.S. banks and credit unions serve cash-intensive businesses and their customers safely and profitably.  The legalized marijuana industry is a very cash-intensive business, and no team of industry professionals understands the banking hurdles that have besieged the marijuana industry better than Hypur.  For example, John Vardaman, who serves Hypur as Executive Vice President & General Counsel, brings fifteen years of senior federal government experience working on some of the most challenging issues facing the financial services industry. With his expertise from the regulatory side of the issue, John is ideally suited to advance Hypur’s mission of making it feasible for financial institutions to service high-risk industries in a manner consistent with their compliance obligations. First at the Department of the Treasury and then at the Department of Justice, John played an instrumental part in devising federal policy for enforcing Bank Secrecy Act (BSA) and anti-money laundering (AML) laws. Notably, John was actively involved in drafting DOJ guidance regarding financial crimes related to state legalization of marijuana, one of the few policies on the enforcement of federal law with respect to marijuana-related businesses. John was also instrumental in devising DOJ policy regarding the enforcement of laws governing the structuring of financial transactions.

Blue Line’s solutions are unparalleled in the cannabis industry and provide the industry with a “water shed” moment: The cannabis industry can finally provide financial institutions with the assurances of legal operations and cash tracking practices on the part of cannabis business owners.  Blue Line’s ISV certification with Hypur will serve to elevate industry standards through solving the issues that have plagued the industry to date.

Banking and financial institutions haven’t had the resources or technology needed to work with cash-intensive businesses in the past. Making sure a client is compliant under the state law is a daunting task for the bank. It can take as much as 20 hours to sift through piles of paperwork and legal documents to open a legal marijuana banking account.  Hypur’s SaaS (Software-as-a-Solution) products eliminate an enormous amount of labor-intensive work and enables banking institutions to streamline the process in accordance with all regulatory laws. The guesswork that banking institutions were faced with in the past is mitigated by Hypur’s product solutions. For banking institutions aiming to participate in the lucrative cannabis industry, Hypur’s technology enables the banks to know their customer’s customer (KYCC).  Hypur’s Commerce solution tracks the source of every dollar coming into a cannabis bank account.  Blue Line’s ISV agreement with Hypur and its ability to vault and deposit the cash directly to the Federal Reserve on behalf of each financial institution, creates a chain of cash custody and a level of transparency that financial institutions have not had access to previously.

“Here’s where the money came from and here’s how much cash you should expect coming through your door at any given point. We allow banks to know a given transaction is a legitimate transaction between a consumer and that merchant,” explained Michael Sinnwell, chief operating officer and co-founder of Hypur. “We call it Know Your Customer’s Customer. Banks know their customer but now they have an idea of their customer’s customer to make sure it’s not laundered funds.”

Blue Line Protection Group has garnered a strong industry reputation for servicing the legalized cannabis industry over the last couple of years and generated strong revenues in doing so.  Having said that, the services provided by Blue Line haven’t brought with them scalable solutions that deliver greater gross profit margins for shareholders. Within the interest of BLPG shareholders and the long-term growth of the Blue Line Protection Group business, the more recent actions taken by the company help to ensure greater profitability going forward. Blue Line’s certification with Hypur aims to deliver a more scalable solution to already existing Blue Line customers and new banking relationships.  Hypur is actively working with several banking institutions that will employ Hypur’s product solutions and begin banking legalized cannabis businesses in several states in the coming months. The first banking institution will begin operating with Hypur solutions in August of 2016, with several other markets to follow. Blue Line’s ISV agreement with Hypur affords Blue Line greater ability to scale the aspects of its cash management and vaulting, real time tracking of cash and product, fully electronic payment platform, physical compliance audits, and licensing services like never before.

Blue Line has extensive services that directly and physically touch the cannabis retail operator from the point-of-sale to the transporting, securing and vaulting of cash and cannabis assets of the retail operator. Blue Line has operated the physical solutions of ensuring that their clients maintain compliance and licensure to operate.  But it is within the physical operations that Blue Line has not been able to identify to banking institutions the reliability of compliance or deliver verifiable transactions from the cannabis operator to their customer in a more profitable manner. The banks have needed a “window” into the cash operations of the cannabis business operators and a secure delivery system from the operator to the banking institution.

As part of this developing business relationship and integration between the two entities, Hypur Ventures has invested directly into Blue Line Protection Group.  Per Blue Line Protection Group’s 8-Q filing, Hypur has acquired 10,000,000 shares of the Company’s preferred stock at a purchase price of $0.05 per share for gross proceeds of $500,000.  The shares of Preferred Stock are convertible into shares of the Company’s common stock. The Preferred Stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. Hypur Ventures’ long-term intentions and confidence are made very clear with this capital commitment and that commitment is extended further with the following:  Hypur Ventures has an option to purchase up to an additional 10,000,000 shares of Preferred Stock at a price of $0.05 per share.

In discussing Hypur Ventures’ investment and Hypur’s ISV agreement with Christopher E. Galvin, the Chairman informed me that Hypur Ventures has every intention to invest upwards of $1mm in additional capital in Blue Line Protection Group in the back half of 2016. With several banking contracts that secure service and platform implementation for a period of three years already in-hand, Galvin believes that the Blue Line Protection Group will be able to grow revenues exponentially in the coming years.

“Blue Line had a good business, but it was difficult to scale and scale profitably because it was largely a physical operation, with high overhead costs for labor, buildings, and vehicles. Competing in that business requires a lot of capital and staying power and transporting that business model to new states requires even more capital to set up shop and do business. It’s just very difficult to scale and a very competitive business to operate and would become that much more competitive with the industry growing. Blue Line has a strong foundation and we have a platform that can deliver scale at little cost because at the heart of the Hypur service is a software solution that the banks have been longing for. We developed that solution for the cannabis operators and the banks and any cash-intensive business to utilize over the last 2 years.  We have a tremendous lead into a very lucrative segment of the cannabis industry and have secured 3–year contracts, with more to come.  The banks are actually helping with the integration and implementation of Hypur.  For any of our banking customers it is just so easy for them to implement and profit from a huge industry.” 

Once a Hypur member financial institution gives a cannabis business a bank account, that business is encouraged to have its consumers sign up for a free Hypur profile to start using it to “pay cash digitally.” Hypur Commerce enables a direct bank-to-bank electronic funds transfer, meaning a customer pays directly from their bank account to the merchant’s bank account at the member financial institution. All consumer transactions made with Hypur are made transparent to the member financial institution to ensure all sales are verified and validated. The sheer mobility of this software has not been available to the cannabis industry in the past.

Almost 30% of cannabis companies have a bank account, but no cannabis company can accept debit or credit cards because companies like Visa and MasterCard will not give the industry merchant accounts until federal law changes. For this reason, Blue Line’s armed cash pick-up and delivery service emerged in Colorado to bring millions in cash to entrepreneur’s homes, private vaults, or banks or local Federal Reserve for the ones with bank accounts. When banks utilize Hypur Commerce, the bank knows exactly how much money is coming and where each bill came from when a Blue Line armored truck pulls up to the bank.

Blue Line will be providing the physical services of securing and transporting assets and implementing the tracking and compliance related services.  For every $1 secured and/or transported by Blue Line from the cannabis business operator to the financial institution or Federal Reserve, Blue Line will assign a fee rate or basis points.  Some of the contracted financial institutions already signed on with Hypur will require Blue Line to secure and transports tens of millions of dollars every single month. In Colorado, already signed contracts require Blue Line to service the security and pick-up of some $30mm monthly. Newly signed contracts will require Blue line to perform the same services for Arizona. In California, Blue Line will pick-up close to $100mm monthly come 2017. In the back half of 2016, Blue Line will be servicing cannabis business operators and financial institutions by securing and transporting some $100mm in cash on a monthly basis. The most astounding aspect of this growth in operations, which is leading to greater profits, is the minimal new client acquisition cost.  This is the greatest benefit of Blue Line’s ISV agreement with Hypur, as it allows for Blue Line to scale its business more profitably.

The addition of banking services will come at a time when Blue Line is already growing revenues from its core security and compliance services business segments.  Additionally, it should be noted that Blue Line’s armed security business is being revamped to rely less on armed security guards and more on 24-hour surveillance camera and sensory systems. Blue Line has already secured relationships to ensure the smooth transition of this business segment that will generate greater gross profit margins for the company while its cannabis business operators enjoy enhanced security systems. Again, Mr. Allen is demonstrating with this action plan the need to scale business operations and it is far more cost efficient and reliable to scale 24-hour surveillance service operations than armed guard service operations.

The potential presented in the Blue Line business model since Daniel Allen has spirited the transformation of the company is real and set in motion. All that is left for Mr. Allen and his growing team to do is execute on business objectives.  At present there are only 4 legal recreational cannabis participating states with another twenty-four states that have legalized the sale of medicinal marijuana.  Blue Line’s opportunity for exponential growth in the coming years is quite strong given the aforementioned variables and likely decriminalization of recreational marijuana in more states to come. Given the dedicated investments from Hypur Ventures and ISV certification with Hypur to drive Blue Line’s growth, it’s quite likely that in the near to mid-term, Blue Line will not only greatly reduce its debt, but also begin to generate free cash flow. As such, let’s briefly discuss some of Blue Line’s recent quarterly results.

Blue Line grew revenues by roughly 28% in Q1 2016 (see SEC filing) by advancing its industry leading customer base and increasing its prices for hourly services provided in its security business segment. In tandem with growing revenues, operating losses were less than in the period a year ago.  Having said that, the existing operating expenses combined with interest expense resulted in greater expenses year-over-year. Part of this additional expense came from Blue Line’s dedication to increasing its operating headquarters and move to a 12,000 sq. foot facility.  Having said that, the revenue growth exhibited, even before the Hypur SaaS business segment is implemented, remains strong.

Moreover, for what Blue Line is offering to the cannabis industry and all cash-intensive industries, there is very little competition. The competition that does exist hasn’t the scale or total service solutions provided by Blue Line’s ISV agreement with Hypur. Much smaller start-ups are aiming to deliver banking solutions to the cannabis industry such as Tokken and Kind Financial.  While both are offering forms of software-as-a-solution to fulfill the needs of banking the cannabis industry, neither provide the physical servicing requirements still needed within the industry to meet all the needs of the financial institutions the way Blue Line Protection Group can and presently is providing.

It is not often that investors are able to participate in an opportunity for outsized capital returns on an investment.  Furthermore, it’s not often that investors are able to participate in groundbreaking, industry moments akin to the launch of the world-wide-web/internet or single-serve coffee, that’s right, single-serve coffee.  In 2003, the first U.S. single-serve coffee machines hit retail shelves, changing the landscape of the coffee brewing world and consumer experience forever.  Green Mountain Coffee Roasters was a small-scale chain of coffee shops in the Northeast and Canada at that time. They were struggling to compete with Tim Norton’s and Starbucks back then and in a highly capital intensive, low profit margin restaurant business.  Green Mountain Coffee Roasters saw an opportunity in a small-scale hardware appliance manufacturer named Keurig and acquired the company’s coffee brewer platform and technologies. The integration of the Keurig brewer platform with the Green Mountain Coffee Roasters business model served to generate billions in revenues for Keurig Green Mountain over the next 12 years.  In 2003, shares of GMCR traded for roughly $1.50.

Blue Line Protection Group - GMCR chart

By 2015, shares had soared to over $150 a share. Great similarities are presented in the opportunity that laid before Green Mountain Coffee Roasters then and Blue Line Protection Group today.  Both have integrated technologies and platform systems that serve to grow the business and leverage existing assets.  Both companies will have delivered groundbreaking platforms to an industry in dire need of evolutionary changes. That is what is presented before investors with regards to Blue Line Protection Group’s ISV agreement with Hypur, as the partnership between these two institutions will change the landscape of the cannabis industry for years to come. We believe the Blue Line Protection Group initiatives in place today will be met with increased profits for years to come and through dedicated execution of the Blue Line business model.  Where the company found scale and profitability difficult to achieve to the benefit of shareholders in the past, Blue Line has course corrected and found the greatest path forward.

Investors are invited to discuss BLPG in the comments section below.

Seth Golden

*The research, analytics and authorship of “Banking The Cannabis Industry: A Ground Breaking Moment Comes Into Focus” is the works of Seth Golden, Market Research Analyst and Contributing Editor with Microcap  Seth Golden and Microcap currently enjoy a direct dialogue with the management team of Blue Line Protection Group and Hypur Ventures.  For investors who desire more information on the research and subject matter within this reporting, please feel free to contact us directly and at your leisure. Seth Golden can be made available upon requested, scheduled time and for the purposes of addressing any queries on the subject matter of Blue Line Protection Group business operations.

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