Kodak claws back millions after share award error

Eastman Kodak has recouped almost all of the $3.9m five former executives collected last year by exercising share options they were supposed to have forfeited, in an embarrassing episode that forced the film-era pioneer to overhaul its internal controls. 

Kodak has clawed back $3.6m of the proceeds and expects to collect $2m of the $3m of withholding taxes associated with the ex-employees’ trades, according to a securities filing that said it had imposed new measures to resolve the “deficiencies in controls”. 

The former executives capitalised on a steep rise in Kodak’s stock last July after it signed a letter of intent about a possible $765m US government loan to begin manufacturing generic drug ingredients. 

The shares crashed soon after the executives sold their stock, and Kodak said last September that the loan was “on hold”. It has since given up hope of receiving the money from the US International Development Finance Corporation, known as the DFC, this week’s filing with the Securities and Exchange Commission confirmed.

But the lossmaking imaging company is still dealing with the fallout from the volatile trading it witnessed in that period, which drew intense scrutiny from politicians, regulators and shareholders. Its filing confirmed it has not yet resolved investigations from the SEC, the New York attorney-general and several congressional committees. 

Although a review commissioned by independent board members found no evidence of insider trading, the company still faces lawsuits alleging violations of securities laws or breaches of fiduciary duties.

Kodak’s comments came weeks after it clinched a refinancing that will bring in at least $210m to the struggling company and push back maturities on its debt in a way that the company said would eliminate the “substantial doubt” about its ability to continue as a going concern. 

“We have fixed the balance sheet,” David Bullwinkle, Kodak’s chief financial officer, told the Financial Times. “We now have an opportunity to put that incremental liquidity to work” to advance a growth strategy focused on the company’s expertise in advanced materials, print and chemicals. 

S&P Global, the credit rating company, said the new funds would lower Kodak’s interest and dividend payments and leave it with no “catalysts for default” over the next two years. It warned, however, that the group’s capital structure remained “unsustainable without substantial improvement in operating performance”.

The regulatory, legal and financial questions hanging over the company did not deter two new investors from backing Kodak in recent weeks. 

The company agreed a new financing that includes a five-year $275m delayed-draw term loan from investment group Kennedy Lewis that carries a 12.5 per cent interest rate. Kennedy Lewis, which has worked with Kodak chair and chief executive Jim Continenza previously, also bought 1m shares and invested $25m in a new convertible note.

Kodak raised $75m through a convertible stock sale to investment firm Grand Oaks Capital, which was established by PayChex founder Tom Golisano, who is based in Kodak’s home town of Rochester, New York. Grand Oaks has agreed to purchase a further $25m of convertible shares once the investment wins regulatory approval. 

Kodak used $100m of the new funds to repurchase some of its outstanding convertible stock.

Their investments gave Kennedy Lewis and Grand Oaks the right to nominate one person each to the Kodak board. The pair are expected to put forward Golisano and Kennedy Lewis co-founder Darren Richman, according to people briefed on the matter. 

Kodak reported this week that its revenues dropped from $1.24bn to $1.03bn last year, when it cut 250 jobs and reported a $541m net loss because of one-off charges and expenses. Bullwinkle noted that it had managed to generate cash in the third and fourth quarters, saying: “We haven’t done that in a long time”. 

The company has continued to pursue its hopes of breaking into the pharmaceutical ingredients business, an expansion that the DFC loan was meant to supercharge. Kodak is using some of its newly raised cash for that work, one of the people familiar with the financing added.

“They have the capacity and they have the manufacturing knowhow,” this person said. “Yes, the government at one point was going to contract with Kodak to manufacture critical ingredients for antibiotics. That became a lightning rod politically and obviously there was no wrongdoing, but they should have understood there would be a lot of publicity around it.”

Kodak’s filing nonetheless acknowledged the damage that had been done to the value of its brand, saying it wrote down the carrying value of its trade name from $21m to $18m last year to reflect the impact of the Covid-19 pandemic.