THE STEWART REPORT HOTLINE

Subscriber Update for April 22, 2007

 

Emergency Filtration Products, Inc. (NASDAQ/BB: EMFP -  $0.30)

Early Friday morning, I got a phone call from EMFP's new CEO.  It was mostly a courtesy call - but courtesy is a good thing. That's especially true amid times of trouble because it shows character.

 

Phillip Dascher is very much aware that, through persistency of thought and the printed word, probably half of EMFP's shareholders are also subscribers to The Stewart Report. Even though Mr. Dascher is the new kid on the block, he somehow knew that I had this HotLine to write - and that it was being held up, in part, because of EMFP. Somewhere in all of this, there is probably one very long story. But, for now, it will necessarily remain as short as the Friday conversation itself.

 

The only thing Dascher could tell me, legally, is that by Monday, April 23, the Company will file an 8-K with the SEC to explain - or at least try to explain - why it will be late in reporting all of its required financial statements.  Beyond that, Phillip Dascher phoned only to tell me that he couldn't tell me anything.

 

But that in itself spoke volumes. At least, it did to me.

 

For one thing, it indicates that EMFP will become a "non-reporting" company.  This means it will be relegated to the pink sheets, where it will trade in relative obscurity until everything gets sorted out - which it now appears will not happen any time soon.

 

If you go to the Internet and pull up last Wednesday's EMFP news release, you will see the small-stock version of whatever document it was that Enron probably had to write in the early stages of the clean up.  These things are very carefully worded.  New management prepares them for the innocents, while the wrong-doers run for their attorneys, their passports . the dirtiest parts of Mexico . whatever safe haven it is that a sewer rat might hope to find.

 

Read at Your Own Risk

A word of caution:  The April 11 release will likely be the first of many.  More specific details - and far worse disclosures - still lie ahead.  If you take them at face value, you'll see a Company that has lost face.  If you take them to heart, your heart will be broken.  And, if you try to read between the lines, then you are trying too hard - simply because what's actually on the lines is clear enough. To wit:

 

When words like "irregularities" and "restatements" jump off the page. When horrific little phrases such as "absence of a defined delivery date" are printed alongside sentences saying, ".the Board of Directors retained independent counsel to conduct an independent examination of the company's books and records." Well, you just know that some real nefarious stuff has probably been committed - and that the onion is just beginning to peel.

 

This is as ugly as ugly gets - and, to reiterate, it's likely to get uglier still.

 

But, in this instance, "ugly" is a cosmetic thing. Severely cosmetic, to be sure - just shy of the bone, in fact - but essentially superficial relative to the underlying asset.

 

Before you accuse me of whitewashing, just hear me out.  In my opinion, all current complaints - which are many, with many more likely to come - describe a strictly legal problem.  They relate to an SEC reporting situation - one that rightfully requires intervention, but that doesn't truly reflect the underlying soundness of the Company.  To be sure, this is an investor relations nightmare - one that could very conceivably drive the stock lower - but, I think, not much lower than it already has.

 

What I'm saying is, if you really think about it, none of the present day "uglies" has any bearing at all on EMFP's principle asset.  That, of course, is the Company's patented technology.  This is the given.  This is the value.  This is why I've held as tightly as Velcro® to the Company that I believe owns the patented rights to a technology that is as valuable as Velcro®.  On this, I am as unwavering as is the patent office that granted these rights - and the wondrous potential of something that's so patently universal.

 

Let the bookkeepers struggle to restate bogus sales and allow the special forensic accountants to oversee everything they do.  That's fine.  Allow corporate counsel to delve into probable improprieties, and allow specially appointed SEC "Masters" to oversee the counsel decisions.  That's fine, too.  Hell, allow any and all of the other powers to put the big bite on the bad boys and toss their sorry asses in jail. 

 

It's all good and fair.  Let the system work.  But don't let it interfere with the opportunity to do some bottom fishing.  I'm almost certainly right in saying that, if you are a true contrarian - as well as an "in-your-face" kind of person with a very long-term perspective - the stock is worth buying. 

 

But, make no mistake: The operative words in that last sentence are "long term."  You must allow yourself time enough to see the eventual success of a successfully engineered product.  Think in terms of focusing on the future of a Mercedes Corp. or a Porsche Corp. while all those around you were consumed by the Nuremberg trials.

 

If you don't like that analogy, try to appreciate the dichotomy.  Philip Dascher does!  Almost sarcastically, I asked him if he liked his job.  He said, "Which one?" 

 

My inference from that response is that there's a government-slash-legal-slash-paper-form-hungry beast that has to be responded to almost daily.  That's Dascher's No. 1 job right now.  The other - and most important job to us, as shareholders - is maintaining the Company and its patented assets. Thankfully, these two tasks are reasonably independent - though they do have one commonality:

·  The hoops EMFP must jump through to appease the SEC will take time.

·  So will the product-validation requirements of the FDA - but not nearly as much.

 

As a non-invasive product that's already been tested to the moon and back by Nelson, et.al., the FDA's only real concern has to do with the shelf life of EMFP's masks. They want them to perform like new at age two. Upon hearing this, my first thought was ... well, let's just say it was not a happy thought.

 

Now, though, I understand that there's scientific equipment that can condense the aging process, enabling one year's performance to be measured in just one month.  In other words, within two months of the first date of testing, we will know if the technology has the two-year shelf life we need.  More importantly, so will the FDA!

 

More important still: Rather than perform the tests and then do a "Hail Mary" presentation before the FDA, new management correctly decided to ask the FDA how the FDA itself would like the tests to be conducted.  Their response is back.  The rules are known.  The guesswork is therefore gone.  The FDA's own testing protocol will be used.  This means that, if the product performs successfully, it's highly unlikely the results will be contested.

 

Given this situation, my formal HOLD advice to subscribers is unchanged.  Obviously, this is a tricky situation - not one for the impatient, nor for the faint of heart.  Be that as it may, I've purchased 16,000 shares of EMFP since the last HotLine - and, unless I get some contra-indications from men more experienced and intelligent than myself (yes, there are a few), I'll likely pick up 10,000 or so more after this document has been in print and available to you for a couple of days.

 

Amarillo Biosciences, Inc. (NASDAQ/BB: AMAR -  $0.79)

Business Week  recently published an important piece with particular relevance to our AMAR holdings. In an article titled, "Biotech IPO's Iffy Prognosis," BW explained why it's currently a very cautious environment for initial public offerings in biotech - and yet, paradoxically, on the mergers and acquisitions side (M&A), it's a feeding frenzy. 

 

The reason is that private investors don't seem to appreciate the value of developmental-stage biotechs nearly as much as the pharmaceutical giants do.  As such, bio-IPO's are a tough sell at the retail brokerages, and aren't raising the kind of money that cash-flush titans like GlaxoSmithKline (GSK) and Merck (MRK) are willing to pay for them as private enterprises.  For them, buying existing patents - and drugs that are already in Phase II or Phase III trials - is a faster, easier way to fatten their potential product lines.  It's also a lot less expensive.

 

Granted, Amarillo Biosciences is publicly traded, not private, but it's an absolutely perfect example of the points that Business Week made. After all, if you add the cumulative time, cost and creation value of the dozen or so patents AMAR has been granted, the two or three decades of research CEO Dr. Joe Cummins has invested in developing the technology, and the nearly $40 million that investors like you and me and Japan's Hayashibara have invested in the Company .  Well, let's just say that, for Glaxo or Merck to buy a nearly turn-key package like Amarillo Biosciences for a lousy $100 million or $200 million, would be an absolute steal! 

 

And, in their minds (and mine), that's precisely what these giants are doing.  According to Business Week, "Between January 2005 and September 2006, 14 private biotech companies were acquired, with a mean deal value of $292 million." 

 

Everybody and his mother has an "If I won the Lottery" wish list, right?  Well, I'll tell you right now - straight out - mine would be to take the money and pull out the $21.4 million I'd need to personally privatize Amarillo Biosciences.  Next, I'd give Dr. Cummins' secretary Chrystal a raise, a corner office with a view and a direct line to The Stewart Report.  Her very simple instructions would be to phone me in two years, when Joe completes Phase III trials for either oral warts or Behćet's disease. 

 

When that call came, I'd simply offer the package, all neat and tidy, to one of the pharmaceutical majors - then watch them fight over it.  It would be the easiest $270.6 million profit I ever made.

 

But, since I thoroughly loathe the wholly pathetic "hope-and-pray" concept behind every single lottery ticket ever sold, it's not likely I'll ever buy one.  So, as an alternative, I'll have to continue regularly adding to my AMAR position so I can eventually earn the same 13-to-1 return on investment the old-fashioned way - by being right and owning lots of Amarillo Biosciences stock.  In the meantime, I advise all subscribers to do the same.  HOLD tightly to all of your existing AMAR shares, and also consider upping your long-term investment at current prices.

 

More Information Ahead:  I've got a major road trip scheduled over the next couple of weeks, during which I'm going to check out a couple of new companies and also pay a visit to Amarillo, Texas - home to both Stewart Report Senior Editor Larry D. Spears and Amarillo Biosciences. If I don't overdose on prime Panhandle steaks and Texas barbecue sauce, I should pick up enough new information to warrant another HotLine focusing on AMAR.  I've tentatively scheduled that for Saturday, May 19, but check the telephone HotLine in a couple of weeks for an advisory on the exact timing.  Speaking of which:

 

A Passcode Reminder: For those subscribers who prefer listening to my pithy comments rather than merely reading the printed interpretation, here's a reminder regarding the new Passcode required to access the HotLine recordings. The main 24-hour telephone number - 1-949-583-6057 - remains unchanged.  However, the new access code has been changed to "63" - as in "1963 split-window Corvette Sting Ray," the newest holder of the No. 1 space in my personal garage.

 

International Card Establishment, Inc. (NASDAQ/BB: ICRD - $0.21)

There's little new to report at this time, so continue to view ICRD as a good long-term BUY.  Short term, I also think the outlook is likely to be especially bright.  Not only do the recently published financials show a continuance of profitable growth, but CEO Bill Lopshire phoned Saturday to set up a sit-down with me, himself (of course) and other members of management - and I don't think it was to give me bad news.  The meeting date has been set for May 10, so I'll likely have much to report in the May 19 HotLine.

 

As always, thank you for subscribing, 

 

 

 

J. David Stewart

Analyst and Publisher, The Stewart Report

 

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Acting as an investor, and also as a consultant to the Company, David Stewart purchased 100,000 shares of AMAR restricted under Rule 144 and also holds 77,000 purchased in the open market. He also bought 100,000 shares of ICRD governed by Rule 144 and remain restricted, and recently purchased 52,000 additional in the open market. Stewart also owns 20,000 EMFP bought in the open market. Affiliates of The Stewart Report may also have additional long or short positions in these and other securities discussed herein, including warrants and/or options, and may buy or sell same at their own discretion. This report contains or may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the US Private Securities Litigation Reform Act of 1995. This report is intended for informational purposes only and does not have regard for or take into consideration the reader's investment objective, financial situation or suitability for this security. Consult with your financial advisor and perform your own due diligence. Copyright © The Stewart Report 2007.