Eastman Kodak handed five former executives stock worth millions of dollars this July in exchange for options they did not own, raising questions about the company’s controls just months after a proposed $765m loan from the Trump administration put it in the limelight.

The company said internal “deficiencies” allowed five former officers and employees to exercise 300,000 options they had previously forfeited, according to a filing with the Securities and Exchange Commission. Kodak said it took a $5.1m expense in the third quarter related to the options.

Errors in the accounts of other current and former employees could have resulted in additional “inappropriate exercises”, it warned.

Kodak said it would seek to recover $3.9m from the five former executives for the fair value of the shares, as well as the right to retain $3m worth of withholding taxes on behalf of the ex-employees. Kodak added that it could not be certain its claims would succeed.

David Bullwinkle, Kodak’s chief financial officer, told investors on Tuesday that the company’s “controls were inadequate with regard to the timely input and verification of master data updates for equity grants and therefore, resulted in errors or misstatements in employee equity account balances”.

Kodak did not respond to a request for comment.

Mr Bullwinkle did not clarify when in July the options had been exercised or whether executives had sold the shares. Kodak announced on July 28 that it was nearing a deal with the US government to become a manufacturer of generic drug ingredients that could be used to treat coronavirus.

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That announcement briefly sent its stock soaring 15-fold over three days at the end of July, transforming the value of insiders’ holdings and drawing scrutiny of stock deals by Jim Continenza, Kodak’s chairman and chief executive; Philippe Katz, a board member who had bought shares in June; and George Karfunkel, a director who donated 3m shares on July 29 to a Jewish congregation he had founded.

Line chart of Kodak share price ($) showing Kodak shares surged on the news it was in line for a $765m loan...
Column chart of Kodak daily equity trading volume (m) showing ...and investors piled in, making Kodak one of the most traded stocks

Kodak’s application was later put on hold by the US International Development Finance Corporation (DFC), the government agency with which it had been negotiating the possible $765m loan. Senator Elizabeth Warren was among several congressional Democrats to raise questions about a process she described as “opaque”.

Details of the options had not been disclosed in an 88-page report issued in September by Akin Gump, the law firm engaged by a special committee of Kodak’s board to review more than 60,000 electronic communications surrounding its loan application. That review raised concerns about Eastman Kodak’s governance but found no evidence of insider trading.

News of the options came as Kodak delivered third-quarter results that showed the depths of its financial challenges. Revenues fell by $63m year on year to $252m, while net losses ballooned from $5m to $445m.

On a call with Wall Street analysts in which executives allowed no questions, Mr Continenza said he still had “tremendous confidence that we are on the right track to restoring Kodak to its rightful place as an iconic global brand”.

It would continue to pursue plans to expand its pharmaceutical business regardless of whether or not it received the potential DFC loan, he said, but “the scale and speed of the expansion will depend on the availability of capital and our assessment of the business opportunity at various production levels”.

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As it has in previous quarters, the company warned in a regulatory filing that its debts and history of negative cash flow “raise substantial doubt about Kodak’s ability to continue as a going concern”.

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Via Financial Times