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PDFUntil early 2009, when the company secured an incredibly generous contract from the federal government, Sharps toiled in relative obscurity as a tiny outfit specializing in the disposal of used syringes and other medical waste. The company, long overshadowed by much larger players such as Waste Management (NYSE: WM) and Stericycle (Nasdaq: SRCL), was reporting meager profits – after years of posting steady losses – and trading on the lowly OTC Bulletin Board before scoring its lucrative government deal. Once it landed that $40 million contract, however, Sharps soon became a highly profitable company with massive operating margins that dwarfed those generated by its giant rivals in the fiercely competitive industry.
Sharps inked that mysterious deal, awarded outside the traditional competitive bidding process, with apparent help from some well-placed government veterans. Steven Bice spent years as a high-ranking official at the Centers for Disease Control, the source of that high-margin contract, before joining Sharps (where another powerful CDC alum already served as a consultant) as the company’s vice president of government relations.
“We were working on that contract for a long time,” Sharps spokesperson Deborah Pawlowski told TheStreetSweeper this week. But “we didn’t have it signed when (Bice) started with us … He was with us a year or so before that.”
Sharps never revealed that Bice had joined its executive team, even though he boasts the sort of impressive credentials – including a national Homeland Security Award – that most small companies love to tout. Bice carries a permanent stain on his record, however, due to a felony conviction that resulted from his involvement in a high-profile government corruption case almost two decades ago.
Regardless, Sharps clearly flourished with Bice’s arrival on the scene. Shortly after landing its transformative government deal, Sharps saw its stock price skyrocket and managed to secure a coveted listing on the Nasdaq exchange. Sharps then followed up with a public offering seven months later, company records show, with insiders selling most of that stock (priced above $9 a share) and pocketing millions of dollars worth of proceeds in the process.
By the time that Sharps issued a quarterly update four months later, however, the company’s good fortune had noticeably begun to fade. With Sharps already collecting the bulk of its government-related funds, as its contract moved into a less lucrative “maintenance” phase, the company saw its year-over-year revenue plunge by 40% and its handsome profits disappear altogether. Sharps has continued to lose money since that time.
Sharps’ stock, while now on the upswing, plummeted as a result. In late August, two weeks after reporting its latest money-lasting quarter, Sharps set a new 52-week low of $3.91 a share.
The company, led since its 1994 inception by CEO Burton Kunik, announced a surprising management change within weeks of hitting that low. Kunik suddenly decided to retire at the end of September, less than a year after pocketing more than $10 million from his lucrative stock sales, and David Tusa – an insider long connected to a veteran company director with a checkered past of his own – stepped up to fill his shoes. Following in the footsteps of Kunik and that longtime company director, Parris “Butch” Holmes, Tusa achieved millionaire status with his 2009 stock sales.
Side Effects
Meanwhile, ordinary Sharps investors – who paid as much as $13 a share for their stock last year – continue to wait for the company’s next windfall.
Although Sharps hopes to secure another lucrative government contract, experts say, that goal could prove challenging now that larger rivals know about the company’s original high-margin deal. Recently, however, Sharps has managed to give investors some fresh reason for hope.
Late last month, Walgreens (NYSE: WAG) announced that it is partnering with Sharps to offer a new program that will allow customers to return their unused medications through the mail – if they’re willing to pay $3 for a special envelope -- instead of polluting the environment by discarding those drugs themselves. Sharps’ stock, which was still languishing near a 16-month low a few weeks ago, has gained some new momentum with help from that headline news.
To some, however, Sharps looked overvalued even before the recent surge. Sharps now posts weaker results that it did when it traded at much lower prices on the Bulletin Board, they say, and the company cannot necessarily count on its Walgreens deal for much help.
In fact, critics say, that drug mail-back program appears to violate strict federal rules designed to prevent the illegal transfer of controlled substances. In an official government memo, they note, the Drug Enforcement Agency has clearly stated that so-called prescription take-back programs can operate only with constant involvement by police officers – who must request the drugs and then take custody and dispose of the medications themselves – under current rules. The DEA even warns against take-back programs (like the new joint effort between Walgreens and Sharps) that exclude controlled substances, they add, because many people don’t know what a controlled drug is.
“The law says that it is illegal for controlled substances, which make up about 12% to 13% of all prescriptions, to be given to anyone other than a member of law enforcement because law enforcement must continue to track it,” the Courier Express newspaper explained earlier this year. “If (drugs) were sent in an envelope to an incinerator, it would be possible to get the medicine from that envelope before it makes it to the incinerator.”
For its part, Sharps insisted that the DEA is “very well-versed” on the company’s new program. The company also noted that Congress recently passed a new law that, once enacted, will relax the tough restrictions on such programs down the road. Meanwhile, the company said that Walgreens has gone ahead and moved forward with the program in an effort to measure its chances of success.
“They’re testing it to see if customers want this,” Pawlowski explained. “The results of that will determine the long-term” potential.
Sharps investors, clearly longing for good news, have already started to celebrate. The company’s stock, which hovered just above $4 a few weeks ago, now fetches almost $6 a share.
With Sharps no longer enjoying a huge boost from the government, however, others see little reason to cheer.
“The company has lost money the last two quarters and – except for its stock price – now looks like it did before” it landed the big government deal, says investment strategist Peter Cohan, a frequent television stock-market commentator with no financial position (short or long) in the company. “So the stock price looks artificially inflated to me.”
Bitter Aftertaste
For much of its 12-year history as a publicly traded company, records show, Sharps looked like a typical penny stock that occasionally spiked but often traded below $1 a share. Sharps enjoyed its first big bounce in mid-1998, around the same time that Kunik – already the founding CEO of a key subsidiary – took over as chief of the entire company. The same month that Kunik rose to power, Sharps welcomed Holmes back to the company’s board.
Holmes, who spent years as a Sharp director during the company’s early days, had previously vacated his seat ahead of a looming sanction by federal regulators. At the time, Holmes served as founding CEO of a controversial company known as U.S. Long Distance (USLD). In late 2006, nine months after departing from Sharps’ board, Holmes agreed to pay $50,000 to settle charges that he had failed to properly report past USLD stock transactions to the public.
By then, Holmes had already come under scrutiny for keeping other secrets. During the late 1970s and early 1980s, Holmes twice pleaded guilty to gambling-related charges. Although the first charge ranked as a mere misdemeanor for failing to purchase a gambling stamp, the second involved a more serious crime – promotion of gambling – that required Holmes to serve 10 months of probation. Holmes was far more than a small-time gambler, a 1994 investigative report by the Dallas Morning News indicates, since the police had linked him to “a $400,000-a-week bookmaking operation that was one of the largest in Texas.”
Holmes never disclosed those gambling charges in USLD’s official filings, however, until the company announced a $100 million merger deal with another company known as Value-Added Communications. (According to the Dallas newspaper, investment bankers overseeing that stock-based merger insisted on the disclosure so that Value-Added investors would be properly informed when voting on the deal.) With that merger deal later aborted, the Dallas newspaper said, USLD decided to take advantage of its generous stock price – which fetched almost $20 a share despite all the controversy – by carrying out a public offering that, likes Sharps’ recent offering, would allow insiders to sell some stock instead.
Meanwhile, the newspaper reported, USLD had learned three months earlier that the U.S. Securities and Exchange Commission was conducting a formal investigation of suspicious stock trades that occurred before news of the doomed USLD/Value-Added deal. USLD never disclosed that probe when filing the paperwork for its stock offering, the newspaper said, waiting another month – until three days after the company shelved its planned stock sale – instead.
USLD’s stock took a big hit after that setback, the newspaper noted, losing roughly half of its value over the course of the next five months. Holmes departed from Sharps’ board a couple of years later, regulatory filings show, and gave up his job as USLD’s top executive – becoming CEO of a spinoff company known as Billing Concepts (BCI) instead – shortly after that.
A year after Holmes returned to Sharps’ boardroom, BCI landed in trouble as well. In October of 1999, BCI announced that the Federal Trade Commission had threatened to file a complaint against the company for alleged “cramming charges” on its telephone bills. BCI sold that entire business the following year, Internet records reveal, and soon went on to reinvent itself as a company called New Century Equity Holdings.
New Century wound up owning almost 10% of Sharps, company records show, and later supplied its own finance chief to serve as the new CFO – and current CEO – of the medical waste disposal company.
Secret Ingredient
Tusa served as CFO at both BCI and New Century, two Holmes-led operations, before arriving on the scene at Sharps in the early 1990s. He started out as a special advisor to Sharps’ board in the fall of 2001 and, when the company’s finance chief suddenly resigned, took over as interim – and then permanent – CFO in early 2003.
After that, historical records show, Sharps spent the next several years with its stock largely trading for less than $1 a share when it traded at all. The stock finally began to spike in late 2006, rocketing to $3.50 a share by early 2007, due to proposed legislation that promised soaring demand for the company’s syringe-disposal business. After the new rules failed to generate a surge in actual contracts, however, the stock lost much of those gains and ultimately fell below $2 a share by late 2008.
During that plunge, records indicate, Bice was serving as a senior executive at MacAuley Brown – a major government contractor with more than $200 million in estimated annual revenue – and had not yet joined the Sharps management team. By the time that Bice assumed his post at MacAuley Brown, he had somehow overcome his felony conviction – a setback that might derail some government careers – and gone on to record some incredible professional achievements.
Bice first made a name for himself as assistant regional administrator for the U.S. Public Health Service office in San Francisco back in the early 1990s. But he ran into trouble in 1992, The San Francisco Chronicle reported, when he was charged – along with six other high-ranking officials in that office – with overbilling the government for travel-related expenses.
“It appears to be among the biggest public corruption cases involving a federal agency in Northern California,” the Chronicle reported at the time, “certainly in terms of the number of high-ranking officials facing government charges.
Bice pled guilty to felony corruption a few months later, the newspaper reported, and could have faced a stiff sentence – of up to 10 years in prison – for his crimes. However, the newspaper said, prosecutors recommended a probation sentence instead after Bice agreed to testify against other defendants charged in the case.
Bice was formally ordered to serve five years of probation in 2003, court documents show, and resurfaced with a prominent government job the year after that probation period was scheduled to end. In 1999, records show, the CDC launched a “National Pharmaceutical Stockpile” program and put Bice in charge of that new business.
Two years later, terrorists struck the U.S. and triggered a new sense of urgency for that program. With Bice at the helm, the newly renamed “Strategic National Stockpile” program saw its annual budget soar from $50 million to $400 million as it massively expanded in scope. Bice’s long government career reached its pinnacle in 2005, when he won the Homeland Security Medal for developing the CDC’s stockpile program and establishing an “emergency operations center” charged with monitoring the transportation of hazardous materials.
“Federal leaders certainly made the right call,” an industry newsletter declared in its coverage of the award, “when they tapped Steven Bice to lead the effort to protect our country from a public health disaster.”
Suddenly in the spotlight again – this time with fawning publicity that seemed to trigger no reminders of his old felony conviction – Bice decided to retire in 2005, his fancy award secured, and end his government service at the top of his game.
Bice had emerged from retirement within a few short years, however, landing a job as the senior executive in charge of the Medical Emergency Preparedness and Response unit at MacAuley Brown. By mid-2009, records indicate, Bice had made the curious move to Sharps – an obscure firm with a fraction of MacAuley Brown’s revenue – where he quietly assumed the post of vice president of government relations.
When questioned by TheStreetSweeper, Bice claimed that he joined Sharps after the company won its government contract – and played no role in securing the deal – even though Sharps itself estimated his arrival well ahead of that time. Bice also initially denied that he is the same Steven Bice convicted of felony corruption until, when pressed further, he finally admitted that he and that Steven Bice are in fact one and the same.
Bice departed from Sharps, as quietly as he arrived, earlier this year. Meanwhile, Internet searches indicate, Sharps never formally announced – or even discreetly disclosed – the appointment of this decorated government veteran. In fact, without bios published by outside sources, Sharps could have effectively concealed Bice’s position at the company altogether.
Temporary Fix
Initially, Sharps shared few details about its big government contract as well.
In February of 2009, Sharps simply announced that it had landed a major contract with an unnamed government agency that would generate $40 million worth of revenue for the company. For more than a year, Sharps portrayed that contract – involving the mere disposal of medical waste -- as a top-secret deal with strict terms that could not be discussed by the company.
“The government contract that we have is a sensitive government contract,” Tusa, then serving as CFO, stated during a quarterly conference call in August of 2009. “We’re not allowed to disclose the name of the agency, and we would request you to respect that confidentiality later when we take your calls.”
By early 2010, however, an analyst at William Blair – which managed the public offering that allowed insiders to sell their stock – had issued a report naming Sharps’ government partner as none other than the CDC. As previously noted, Bice spent years holding a top-level post at the CDC before secretly joining the Sharps management team. Bice’s former head of logistics at the CDC, Wayne Williams, wound up as a consultant for the company as well.
For a while, at least, that contract reshaped the entire company. In the February 2010 report that disclosed the CDC’s involvement, William Blair estimated that Sharps’ government business – previously immaterial – accounted for almost three-quarters of the company’s total revenue. With Sharps still posting record numbers as a result of that government deal, William Blair confidently reiterated its outperform rating on the company’s stock.
Sharps reported dismal results the following quarter, however, as the lucrative government contract moved into its less generous maintenance phase. Total revenue, which reached $16 million the previous quarter, had plummeted 78% to just $3.64 million in the span of three short months. After reporting a nice operating profit of $8.44 million one quarter earlier – as an estimated 50% of its government-generated revenue dropped straight to the bottom line -- the company had suddenly ended its profitable run by posting a $975,000 loss instead.
The next quarter looked even worse. This time, the company – which had posted positive operating margins even before winning its big government contract – was now reported negative margins, with year-over-year operating leverage swinging from 16.5% to -38.2%, for the first time in years.
By the time that Sharps reported those ugly numbers this August, Kunik had mysteriously faded from the scene due to a reported “death in the family.” He announced his retirement as CEO four weeks later, with the stock hovering near a 52-week low, while revealing plans to end his longtime service on the company’s board as well.
Kunik officially departed from Sharps at the end of September, leaving behind a company that – just a year-and-a-half earlier – had looked poised for lasting success.
Elusive Cure
Back then, Sharps was proudly announcing its shift from the Bulletin Board to the prestigious Nasdaq exchange. Sharps officially made that move in May of last year, touting increased “visibility and liquidity” for the company’s stock, and Kunik quickly dumped some of his shares the very next day.
Together with Tusa, Kunik sold additional stock at more than $9 a share – almost double the price recorded for his earlier sale – a few months later. With the stock soaring to an all-time high of $13 a share by October of last year, Sharps quickly moved forward with plans for a public offering that would allow company insiders to sell millions of shares all at once.
Sharps itself filed the paperwork to sell just 500,000 shares, with the proceeds headed back to the company, while “certain of its stockholders” – including corporate insiders -- arranged to sell more than five times that amount in transactions that would fatten their own bank accounts. Eight days after the original offering, Sharps executives took advantage of a smaller follow-on offering by selling additional stock as well. In little more than a week, records show, three Sharps insiders – Kunik, Tusa and Holmes – by themselves managed to pocket almost $20 million (roughly half the value of the entire government contract) by selling high-priced company stock.
By then, Sharps had reaped most of the outsized profits from the initial phase of its government contract and was fast approaching the less generous maintenance phase of that project instead. In fact, the quarter after those stock offerings, the company started losing money again.
Although Sharps has since launched a pilot program with the Department of Veteran Affairs (finally identified in an 8-k filing this June as the funder of its CDC contract), the company has yet to land another sweetheart deal like the one that suddenly – if temporarily -- transformed its operations. At this point, with insiders enriched by a government contract that delivered only fleeting rewards to the company itself, some stock-market experts wonder how Sharps ever landed that lucrative deal at all.
As a longtime follower of government contractors – who penned an entire book on Boeing (NYSE: BA) – Cohan, for one, questions whether taxpayers got their money’s worth when footing that $40 million bill.
“To me, that 50% profit margin looks awfully high,” he says. “In theory, when the government is spending taxpayer money, it should at least hold a competitive-bidding process.
“It should request proposals and compare the bids,” he adds. “And then the best price should win.”
* Note: No member of TheStreetSweeper’s staff or advisory board has ever taken a financial position in Sharps Compliance (SMED) or received any compensation from others who have positions in the stock. As editor of the site, Melissa Davis will never take a position in any of the stocks that she covers. To contact Ms. Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
