We are short shares of Eastman Kodak Company (KODK), a 138-year old commercial printing and imaging company whose stock has more than doubled since announcing a blockchain and cryptocurrency licensing partnership.
Fittingly for a long-time provider of motion picture film products, Kodak’s sudden rise resembles something out of the movies. A dying relic of American manufacturing licenses its brand to a blockchain project and immediately creates more than $300 million of value. Along the way, Kodak board members conveniently grant themselves shares the day before the announcement, a stock promoter with a checkered past is engaged for public relations, and a group of German copyright trolls reinvent themselves as blockchain-enabled image platform managers.
Blockchain and cryptocurrencies are exciting technologies with the potential to disrupt many industries. Their use in media rights licensing by KODAKOne will not be one of them. The use of blockchain in operating an image copyright platform accomplishes nothing. KODAKOne intends to use smart contracts and a crypto-asset to solve the problem of copyright infringement, but the business idea is flat-out silly. Cryptographically hashing an image into a blockchain doesn’t prove the provenance of intellectual property, a blockchain does not reduce the resources necessary for copyright enforcement, no photographer would rather be paid in KODAKCoins over real money, etc. KODAKOne is little more than a moribund company’s hollow attempt to chase the initial coin offering (ICO) craze. It’s a PR stunt — a distraction that will pass when the company reports earnings and reminds investors of its distressed financial position.
Unsurprisingly for such a nonsensical business concept, the team behind KODAKCoin has zero credibility. The chairman and founder of a key firm behind the ICO is a stock promoter who was previously banned from a Canadian stock exchange. KODAKOne’s executive team is unknown within the blockchain developer community. KODAKCoin is not a serious attempt to apply new technology to a real problem — it’s a last-ditch stock promotion gambit for a company hurtling toward bankruptcy.
Kodak faces significant debt maturities, tightening liquidity and restrictive debt covenants, while financials are in a free fall. The company is a sub-scale player in a highly competitive, secularly declining industry. Management has repeatedly failed to stem negative free cash flow and botched long promised asset sales. The situation is grim and this same set of circumstances bankrupted the company six years ago.
Kodak doesn’t have the luxury of hoping startup blockchain projects succeed – it’s staring at the possibility of default and a debt restructuring in the next 12 to 18 months. Potential ICO proceeds and royalty payments from KODAKOne do not change the high probability of these events. Rather than dreaming of a new economy for photographers, shareholders should be concerned about an eventual wipe-out. We view the equity as worthless, implying downside of -100%.
These technological and legal problems will render the platform unworkable. As a blockchain expert, we spoke with put it, “When the mania goes, this will go with it, and what will be left will be a dry husk of a software application that will never do what it was marketed to do.”
Kerrisdale Capital Management LLC and its affiliates (collectively “Kerrisdale”) have short positions on the stock of Eastman Kodak. Read full legal disclaimers at kerr.co/kodk-disclosures.
