Kodak Catalyst: When It Receives $0 In ICO Proceeds; Shares Overvalued – Eastman Kodak Co. (NYSE:KODK)

January 23, 2018
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Investment Thesis

Eastman Kodak’s (KODK) stock closed at $11.55 on January 22, 2018, up 373% from its announcement of January 9, 2018 announcement of a licensing deal with World Entertainment News Network (WENN) Digital.

We believe that there is a broad misperception in the market that KODK will receive proceeds from the upcoming initial coin offering (ICO) and assist the company in addressing its dire financial position.

However, we believe a major catalyst for KODK’s stock to decline significantly will be the completion of WENN Digital’s KODAKCoin offering and the realization the KODK received absolutely zero dollars in proceeds.

Focus will then turn to the continued deterioration in Kodak’s business and royalties related to the royalties to be earned by Kodak on the image rights management system which the CEO said any meaningful impact might be years off.

Kodak shares soar on cryptocurrency and ICO “news”

We wrote about KODK’s decision to jump on the cryptocurrency and blockchain bandwagon in our article dated January 11, 2018, titled “Eastman Kodak, Overvalued Following 245% Gain On Cryptocurrency Announcement.

Upon the announcement of Kodak’s licensing agreement with WENN Digital around a image rights management platform and the ancillary secure payment system involving KODAKCoin, a new “cryptocurrency;” shares of Kodak soared. In two days, shares of Kodak soared from $3.10 to $10.70.

After a sharp pullback, another press release by WENN Digital regarding the KODAKCoin offering, the shares soared again and closed at $11.55 on January 22, 2018.

ICO to provide $0 proceeds to Kodak, broad market misperception?

We believe that there is a broadly held view in the marketplace that KODK will receive proceeds from the upcoming KODAKCoin ICO. Evidence a recent “Editors Pick” article on Seeking Alpha that puts forth this argument.

With Kodak in a very dire and deteriorating financial position (see chart below), we believe that this misperception by some in the marketplace could dramatically inflate the stock price.

We believe nothing in Kodak’s and its partner’s announcements regarding its licensing agreements that involve initiatives linked to blockchain technology and cryptocurrency licensing agreements should have moved the stock of Kodak. Kodak’s CEO Jeff Clarke agrees that the stock move has been unjustified, stating when the stock had doubled to $6:

This doesn’t change the fundamentals in a way that means the stock should double.

Clarke added that benefits might be years away.

Vaporware and inexperience abounds, in our opinion

WENN Digital had recently attempted a crowdfunded ICO that failed miserably and then within a little more than a week announced its licensing agreement with Kodak. WENN Digital, was formerly WENN Media which had worked with paparazzi photographers (see www.wenn.com). See a recent article by ars TECHNICA (“We found a deleted page that reveals the paparazzi roots of Kodak Coin“) for more information regarding WENN Digital’s roots and failed RYDE coin offering.

Leveraging its recent spectacular failed coin offering and Kodak’s brand, WENN Digital will not be creating a blockchain or cryptocurrency, but instead they will use the Ethereum blockchain, which supports the “Ether” currency, while issuing a separate, original currency, the KODAKCoin.

The most recent announcement regarding KODAKCoin is that it will trade on tZERO’s Security Token Trading Platform. tZERO is a subsidiary of Overstock.com (OSTK) which has a number of money losing blockchain related ventures that it has ownership stakes in that and has been funding their development. According to WENN and tZERO, KODAKCoin will be the first third-party security token to launch on tZERO’s platform, which importantly is “under development” per the press release. By the way, no (that is zero) cryptocurrencies trade on tZERO’s platform and it has never completed a cryptocurrency trade.

The initial offering of KODAKCoin to accredited investors is anticipated to take place on January 31, 2018 and a countdown timer (like some kind of missile launch) on the KodakOne website will keep those interested . . . well, I suppose interested as I see no other purpose. See the KODAKCoin website for additional information on information on other partners.

Kodak is Overvalued After Recent Rise

Kodak’s financial performance and balance sheet have been deteriorating. 3Q17 was a particularly bad quarter and Kodak management significantly increased its estimates for cash burn for 2017.

We believe that the consummation of WENN Digital’s ICO will result in a massive contraction in KODK’s equity market capitalization on the realization (as the company has stated) that Kodak will not receive any of the proceeds.

Focus will then return to fundamental valuations of its business. At 12x EV/EBITDA, Kodak shares would be valued at $4.51. While investors may argue that no one should pay 12x EV/EBITDA for a company with declining revenues, profits, cash, and working capital; there are some positive changes going on and asset sales may better focus Kodak, reduce costs, and provide needed cash.

KODK stock would decline $7.04 to achieve the $4.51 price (or a 61% decline).

As we stated in our prior note:

More noise over the launch of the digital currency on January 31, 2018 is likely to keep valuations “virtual” as the headlines will attract “virtual shareholders” and continue distracting investors from fundamentals. However, Kodak will soon have to report earnings results and the virtual currency focused investors will see virtually no revenues from “crypto.” Sadly, some shareholders that may have held the stock for a longer time will take advantage of the stretched valuations and sell. We expect that the stock will trade in a choppy fashion as the shareholder base will surely go through turnover and upheaval.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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