| THE STEWART REPORT HOTLINE |
(Approximate Transcript of David Stewart’s Audio Message to Subscribers)Friday, February 9, 2006(Next HotLine Scheduled for Wednesday, March 7, 2007)
There’s new information to report on all three of our Stewart Report companies, so I’m not going to spend a lot of time on philosophical observations today. Instead, I’ll just get right to it, starting with … Amarillo Biosciences, Inc. (Nasdaq/BB: AMAR – $0.74) – On Thursday, Feb. 8, Amarillo announced that open enrollment has begun for its Phase 2 study of the use of orally administered interferon alpha in the treatment of oral warts in HIV-positive patients. That’s really not news to us – the study was discussed in our recent Special Report on AMAR, as well as in an earlier HotLine. However, it is an important study from the standpoint that, if the Company gets any FDA approval, it’s just one more event that would put the stock on the map – and at a price well above anything we’ve seen previously. So, this is very significant – even if the disease itself is small. Of course, no disease is small to those who have it, and that’s especially the case with this one. Apparently these warts, which develop on the interior of mouth, are very, very painful. They affect your ability to eat and, when they move outside onto the face, it’s not very attractive, either. Anyway, they’re moving ahead in setting up the six clinical testing sites. San Francisco, with its large gay population and related high incidence of HIV-positive patients, is one, of course, with the others in Chicago, Boston, Dallas, Baltimore and New York City. Amarillo did say as well that, if any Stewart Report members know of anyone afflicted with the disease who might be interested in participating in the trials, they should contact Martin Cummins, AMAR’s Vice President for Clinical and Regulatory Affairs, at 1-806-376-1741, ext. 14, or by e-mailing mcummins@ amarbio.com. A total of 80 test patients are being sought for the study, which is scheduled to last for 24 weeks. Of course, they don’t get everyone enrolled on the same day, so they don’t finish in precisely 24 weeks, but the faster they can get people signed up, the sooner they’ll have results to forward to the FDA – which is good not only for the Company, but for us as investors as well. The big news: Dr. Joseph Cummins, Amarillo President, and Dr. Manfred Beilharz, a valued AMAR research partner and board member from the University of Western Australia, are leaving almost immediately for Germany. Their mission: To present the Company to European investors. This is significant because, while a lot of people don’t realize it, the investment community is far different in Europe than it is in America. They don’t have the “middle class” type of investment community that America is fortunate enough to have. Here, nearly everybody is a market participant, if only through an IRA, 401k or whatever. Over there, it’s the moneyed class, not the middle class, that drives the markets. That’s why, when you do see volume in Germany, where AMAR is also listed, it’s big, big volume. That’s because they only have big investors and they bring big, big money when they start buying. I’m sure Joe will be presenting the Company to some very erudite, very wealthy and well-heeled kind of people – and that’s another point worth mentioning. Joe is a very persuasive speaker and does a superb job of selling the Company. Plus, he knows how to target the audience. I mean, I’ve seen him take the, “aw, shucks, I’m from Texas,” approach when it was called for – and I’ve also seen him talk to Wall Street pros with as much precision and polish as any Fortune 500 CEO. The other power point is that, regardless of the style of his presentation, it’s always imminently obvious that he truly believes what he is saying about oral interferon and AMAR’s technology for applying it. So, I’m sure he’s going to do a very, very good job of presenting the Company to these European investors. Then there’s Dr. Bielharz. I spent a lot of time getting to know him at AMAR’s annual meeting this past June and we got along really well. He’s very intelligent, very well-educated and has a wonderful sense of humor, as well as a kind of mindful arrogance about him – and I do mean that as a compliment. So, with his credentials and his experience in Australia with his Nobel Prize-winning lab, I think he’ll add a lot of credibility and impact to the presentations they’ll be making in Europe. The stock closed at 74 cents on Friday, and the volume has been fairly light the past two days. However, I think that will pick up as these meetings take place. I still very much see this as a remarkable long-term BUY – and it won’t even be that long term if the Bird Flu continues to pop up here and there as it has. We just recently saw news of 180,000 turkeys being slaughtered in Great Britain, so it seems Bird Flu might be inching its way closer to the industrialized nations. And, even if Bird Flu doesn’t get as bad as many fear, there’s no doubt that a massive pandemic is overdue. If Bird Flu isn’t the trigger, then it will be something else. It’s just the historical standard – nature’s ultimate way of correcting ecological imbalances. Being invested in AMAR is a way we can profit from this inevitable crisis since oral interferon is looking more and more like an efficient and cost-effective way of delivering a means of surviving it. Emergency Filtration Products, Inc. (Nasdaq/BB: EMFP – $0.75). This one I’m going to cover in retrospect first. On Jan., EMFP named Philip Dascher as the new CEO and that Doug Beplate – EMFP’s founder and President – could relegate his activities towards what he does best. Clearly, that’s working as an inventor and a scientist and an engineer. He’ll continue to work on developing new products and winning FDA approval for the products EMFP already has. So in no way was it a slam at Doug at all; in fact, quite the opposite. Doug has done a wonderful job of growing this thing from zero to where it is now. He’s moved the Company to a place where it really does need a new type of leadership – with a sophisticated, entrepreneurial businessman in charge, rather than a scientist. To that end, Dascher has the talents we now need. Thus, I thought the announcement was a positive and would result in positive price action. The market thought otherwise. EMFP went down eight cents that day. Maybe that’s just because it’s easier for me to see the kind of guy Dascher really is. He’s actually a bit unusual in that he doesn’t have the kind of Glaxo-Smith Kline credentials – the kind of Fortune 500 background that, say, some of Amarillo Bio’s board members have. The fact of the matter is, however, that this guy has founded and built five very successful companies in his career. The first was a set of three companies he started back in the 1970s and grew from scratch to $80 million in annual sales. Pretty good-sized companies. Then, he sold his interest in those companies in 1979 and, for a while, went into a sort of semi-retirement. Six years later, in 1985, he came back and started two more companies. Sales of those he grew to, I think, $48 million annual and, again, sold his interest. That was in 1996 and he went back to semi-retirement. I don’t know what he does in retirement – maybe he hits a lot of golf balls, maybe he spends time with his family, whatever – but now he’s decided he needs a new challenge. He’s interested in business again and he sees the potential in EMFP and wants to make the company work. Remember, too, that he’s not after a big salary or anything. He’s the kind of guy who works mostly for stock. He’s smart, he plays on his abilities and he plays on the Company’s assets and he’s delighted to have EMFP to work with. He’s determined to make things work out for this Company, and if he does – and makes it big for himself – then he’ll make it big for us, too. So, having Dascher in this position, where he’ll be the best person for this job, and having Doug Beplate in his position, where he’s already known to be the best guy in designing filtration products, will be just a dynamite combination for the Company – and for us as shareholders. Dascher evidenced this in his first official public statement after becoming CEO. He said, and I quote: “The first order of business will be to finalize FDA approval for our nano-mask products as the necessary pre-requisite to differentiate us from our competitors.” Now if that isn’t the understatement of the century, then I don’t know what is. The filter technology in this mask – in addition to the nano-technology – will mean that EMFP will be the only game in town for serious protection from just about any kind of contamination except for serin nerve gas, which requires a biohazard suit. That’s a fact – and as soon as it becomes a “legal” fact with FDA approval, it means this stock will go through the roof. Nobody will be able to touch it. That’s not all that’s going on at EMFP either. Two days after the Dascher announcement, on Feb. 2, the Company announced that it was going to be raising $1.65 million from two investors – with $750,000 of the money already banked and two more investments totaling $900,000 coming in March and May – to fund operations while continuing to work on the FDA approval. This was a bit weird, but I thought it was a definite positive overall. Again, however, the market disagreed. The stock went down a couple of cents on about a third of a million shares – pretty heavy volume – and this piqued my curiosity. The announcement didn’t say who the two investors were, so I checked into it. Now I know who the investors are – and I think you’ll be impressed when you find out who they are, because we know both of them. The first was Doug Beplate, EMFP’s president, who bought 292,000 shares. If you do the math, you see that he increased his percentage stake in the Company by 9.7 percent. And, the other investor? That was Josiah Austin out of Dallas – a wealthy, wealthy investor who’s also a director of the Company and has been for a while. He was so pleased to see Dascher taking the reins that he said, “Okay, with the last batch of money, we had some difficulties, but since we’ve got Dascher on board, I’ll throw in some more money and we’ll keep moving ahead.” Now this guy is not stupid. You don’t get to be that rich by making the same mistake twice. You typically make the right decision a hell of a lot more often than not – and he thinks investing in EMFP is definitely the right decision. In fact, he thinks it’s so right that this latest cash infusion purchased 1,168,452 added shares, upping his stake in the Company by 16.5 percent – to somewhere between 7 million and 8 million shares total. So, we have new management, new money – and people putting in the new money who are obviously comfortable with both the new management and the prospects for FDA approval for our products, which have the potential to dominate the market once that approval is garnered. All of that paints a picture of wonderful prospects for us. Rest assured, as well, that the new stock purchases just described are legitimate – not some kind of sweetheart deal where Company insiders sell themselves stock at reduced prices just to reap a big personal profit once the sales restrictions are lifted. Both of these guys paid an average price of just over 51 cents a share for the restricted stock – well above the average for shares of this type. In fact, over the years I’ve been in the business, I’ve found that the sales price of restricted 144 shares is typically around 50 percent of the current market price – compensation for the fact you can’t sell for at least one year and face other complications. In other words, buying restricted stock is something of a risky proposition because you can’t sell in a hurry. In this case, that would have meant a price of around 37 or 38 cents a share. Thus, for Doug and Mr. Austin to pay just over 51 cents indicates a strong belief in the Company’s long-term prospects since they’ll have to hold for at least a year – plus, I’m sure neither of them would want to put up that much cash for less than a potential triple in the stock price. They’ve made a serious bet on the future of EMFP – and I suggest you do the same. If you see some weakness in the stock, use it as an opportunity to BUY – and buy aggressively. I don’t want to mislead you because I definitely do think there will be weakness in the stock in the weeks ahead. For example, in March, when the next set of numbers comes out, I think those numbers may well be fairly ugly – and the stock could respond poorly. If so, that could be your opportunity to load up at a bargain price. After that, you’re going to see an upturn in the Company fortunes and, if the FDA approval comes through … well, it’ll be Katy bar the door. So, EMFP remains a BUY on weakness. Lastly, let’s take a quick look at International Card Establishment, Inc. (Nasdaq/BB: ICRD – $0.19). Over the past year, ICRD has undergone a clinical effort to turn cash flow positive – and they did so. They reduced the employee head count, they sold some unprofitable divisions, they closed some offices and merged others, they cut expenses – and they did it all with absolute surgical precision. After they did that – cut back on the expense side – they got rid of all long-term debt … I believe around $2.2 million, from memory. They got a million-dollar credit line at very favorable terms – prime, plus three. And the final thing they did was to have all executive-level management personnel take large cuts in salary. They’re working now mostly for stock, to be earned on a performance basis. As stockholders, what better relationship could you have with management than that? To culminate this, they issued a news release on Tuesday, Feb. 6, titled, “International Card Establishment Recaps Progress in 2006,” which essentially covers everything I just listed for you. But, more importantly, it was a wonderful forward-looking blueprint of what they intend to do and how they intend to grow the Company now that they have a really pristine platform to work from. The biggest difference from the past is that they’re not going to go the “growth-by-acquisition” route because, frankly, they just don’t have the money to play that game – and they know it. Plus, even if they did have the money, I don’t think they’d want to use it that way right now for the simple reason that the bank-card market is out of whack. As a parallel, right now I’m an apartment renter rather than a homeowner because I know that the Orange County real estate market has gone nuts. If I had $20 million in the bank, I’d still be a renter, waiting for prices to come back to more sensible levels before I reinvest. And that’s really how the acquisition arena stands right now relative to the bank card business. Everything is very, very overpriced – and, even if you did find something that looked like a great deal, you still couldn’t know for sure because these businesses are very difficult to look inside of to evaluate the quality of the accounts. It’s all very convoluted. Plus, a lot of the smaller businesses are privately owned and, quite often, the numbers are a little “funny” – meaning you could have trouble with the SEC on merger approval, etc. ICRD looked at a number of these operations and finally said, “Let’s not go this way any more. Let’s just grow our Company organically.” So, what they’re doing is working with other operations like Monster.com and CareerBuilder and the like to attract and hire experienced salespeople from other professions – maybe pulling back some people who were semi-retired or whatever – and training them to go out and work the bank-card industry. There’s a lot of money for salespeople in bank and loyalty cards, so the incentive is there – if you’re the type of person who can work with very little salary, but great commissions. In fact, if you know anyone who’s between jobs right now, you might suggest they give ICRD a call. ICRD firmly believes that if they attract the right people and train them well for the specialized market, some of them will turn into really great producers. This will obviously help the Company’s revenues tremendously – but, ironically, under normal conditions, it could also be a problem. As with stock brokers, if your salespeople are successful – if they build a big “book” of clients – your competitors take notice and try to hire them away, and bring their books with them. To offset this danger, ICRD is offering incentives not just in pure commissions but in stock as well – sort of like putting “golden handcuffs” on their best salespeople. This will not only keep the experienced and successful sales force in the Company fold, but it will also encourage them to sell even harder so their shares will increase in value – taking our shares higher along with them. In other words, they’ve set up a win/win situation for all involved. As for the long term, the Company made one very positive statement in the release – though I’m a bit miffed that they weren’t more specific about the timeline. Anyway, here’s the quote: “As a result of these 2006 changes, ICRD should be able to grow the business from current revenue levels in excess of $10 million per year up to three times that level of business – or $30 million in revenues – with minimal incremental cost.” I agree that the tripling is very do-able, after talking with management, and that it can be done with very little incremental cost. That’s because the ads for the salesmen don’t cost that much, training them doesn’t cost that much and they really don’t cost the Company anything in ongoing employee commissions unless they actually make sales and earn money for the Company. I just wish they’d have been more specific in stating how long they think it will take to triple those revenues – and I’ll try to pin management down on those projections the next time I talk to them. Regardless of the exact timeline, the triple will occur – and the stock will probably do the same before the end of the year. If you don’t own it already, it’s a super BUY at this level. After all, what is the downside? You’re paying 19 cents for a Company that’s not losing money; that is profitable. In fact, I think everyone is going to be surprised when the fourth quarter numbers are released and we see just how much money the Company did make this past year. If there was a stock I was going to buy right now for the short term – without in any way stealing the fire from Amarillo Biosciences right now – it would be ICRD, simply because I do think the numbers due out in March are going to be such a surprise. I think a double – with the stock going from 19 cents to around 40 cents – is easily within the realm of possibility. As always, thank you for subscribing. |
