4. Stockholders’ Equity (Deficit)

Conversion Event

The Class B, C and D units were required to automatically convert into Class A units pursuant to the Company’s Second Amended and Restated Limited Liability Company Operating Agreement, as amended (the “Operating Agreement”) upon certain defined conversion events including, but not limited to, dissolution of the Company or an underwritten IPO of the Company’s equity (each, a “Conversion Event”). The Conversion Event occurred on August 1, 2016, upon consummation of the Company’s IPO. The valuation of the Company at the Conversion Event was greater than $45.8 million, which resulted in the Class B and C units receiving $41.7 million of the proceeds of the Conversion Event in the form of equivalent Class A units. The Class D units converted into Class A units such that the holders thereof received $4.2 million of such proceeds. The proceeds in excess of $45.8 million were shared ratably by the other holders of Class A units.

Class A Units

Class A units represented the Company’s common stock equivalents. At December 31, 2016, Kadmon I, LLC (“Kadmon I”) held approximately 12.1% of the total outstanding common stock of the Company. Kadmon I was a Delaware limited liability company that was formed in August 2009 and was an affiliate of the Company (Note 19). Kadmon I’s funds were raised through a private offering of 80% of Kadmon I’s total membership interests, the other 20% being owned by certain other members, including members of the Company’s board of directors and an executive officer at the time of such offering.

Once each Kadmon I investor has received aggregate distributions equal to four times the amount of their initial investment, their collective ownership percentage in additional distributions would have decreased from 80% to 50%, and the collective ownership percentage for the members of the Company’s board of directors, an executive officer and members in Kadmon I, and certain other members who received units would have increased from 20% to 50%. The change in ownership percentages would have required the Company to evaluate whether such changes would result in additional compensation expense. Kadmon I investors had never received any distributions. Accordingly, no additional compensation expense was recognized. On January 23, 2017, Kadmon I, LLC was dissolved and liquidated. Upon dissolution and liquidation, all assets of Kadmon I, LLC which consists solely of the shares of common stock in Kadmon Holdings, Inc., were distributed to the members of Kadmon I, LLC.

During the year ended December 31, 2016, the Company issued 25,000 Class A units to settle third party obligations, for which the Company expensed $0.1 million related to these settlements during the year ended December 31, 2016 and issued 7,200 Class A units as the result of stock option exercises. The Company also recorded an expense of $3.0 million during the year ended December 31, 2016 related to the 1,500,000 Class A units issued in an advisory agreement entered into in April 2015.

The Class A units converted into common stock at the Conversion Event resulting in no Class A units outstanding at December 31, 2017.

Class B Unit

The Class B unit did not participate in distributions from the Company, did not have any preferences in relation to the Class A units, was non‑voting, and was non‑redeemable. The only right afforded to the Class B unit was the right to convert into Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). The Class B unit converted into common stock at the Conversion Event resulting in no Class B units outstanding at December 31, 2017.

Class C Unit

The Class C unit did not participate in distributions from the Company, does not have any preferences in relation to the Class A units, is non‑voting, and is non‑redeemable. The only right afforded to the Class C unit was the right to convert into Class A units pursuant to the Operating Agreement (see “Conversion Event”). The Class C unit converted into common stock at the Conversion Event resulting in no Class C units outstanding at December 31, 2017.

Class D Units

The Class D units did not participate in distributions from the Company, did not have any preferences in relation to the Class A units, were non‑voting, and were non‑redeemable. The only right afforded to the Class D unit was the right to convert into Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). The Class D units converted into common stock at the Conversion Event resulting in no Class D units outstanding at December 31, 2017.

Class E Redeemable Convertible Units

One series of Class E redeemable convertible units, the Class E Series E‑1 units (the “Class E redeemable convertible units”), was authorized. The Company was able to issue Class E redeemable convertible units with an aggregate Class E original issue price of up to $85 million, calculated in accordance with the terms of the Operating Agreement, of any series without being subject to preemptive rights. The Class E redeemable convertible units had voting rights and powers equal to the Class A units on an as‑if converted basis, had a liquidation preference for liquidating distributions and participated in distributions from the Company on an as‑converted basis on non‑liquidating distributions. In the case of a qualified IPO, the Class E redeemable convertible units automatically converted into Class A units at a conversion price of the lower of 85% of the value of Class A units (or the price per share of common stock of the corporate successor to the Company) or $11.50 per unit. Prior to a qualified IPO, the Class E redeemable convertible units could be converted at $11.50 per unit. A qualified IPO was defined as an offering of the Company’s equity interests with gross proceeds to the Company of at least $75 million. At any time after December 31, 2017, Class E redeemable convertible units were redeemable for cash at the option of the holders of at least 80% of all Class E redeemable convertible units at a redemption price equal to 125% of the liquidation preference. After January 1, 2016 all Class E redeemable convertible units began to accrue a liquidation preference (payable in connection with such liquidating distribution from the Company) at a rate of 5% per annum, compounding annually, with such liquidation preference rate increasing by 100 basis points every six months to a maximum of 10%. Redemption was subject to the Company’s ability to make such payment under then‑existing debt obligations.

Based on the terms of the Class E redeemable convertible units, the fair value of the Class E redeemable convertible units issued was classified as mezzanine capital on the Company’s consolidated balance sheet. The Company accreted changes in the redemption value of the Class E redeemable convertible units to paid‑in capital using the interest method, as the Company did not have available retained earnings, from the date of issuance to the earliest redemption date.

During the year ended December 31, 2016, the Company raised $5.5 million in gross proceeds, with no transaction costs, through the issuance of 478,266 Class E redeemable convertible units. Dr. Harlan W. Waksal, the Company’s President and Chief Executive Officer, certain entities affiliated with GoldenTree Asset Management LP, Bart M. Schwartz, Esq., the Company’s Chairman of the board of directors, and D. Dixon Boardman, a member of the Company’s board of directors subscribed for 86,957, 43,479, 21,740 and 21,740 Class E redeemable convertible units, respectively.

The Company calculated a deemed dividend on the Class E redeemable convertible units of $13.4 million in August 2016, which equals a 15% discount to the IPO price of the Company’s common stock of $12.00 per share upon conversion to common stock at the Conversion Event, a beneficial conversion feature. The Class E redeemable convertible units converted into common stock at the Conversion Event resulting in no Class E redeemable convertible units outstanding at December 31, 2017.

5% Convertible Preferred Stock

Our certificate of incorporation permitted the Company’s board of directors to issue up to 10,000,000 shares of preferred stock from time to time in one or more classes or series. Concurrently with the closing of the Company’s IPO and pursuant to the terms of the exchange agreement entered into with the holders of the Company’s Senior Convertible Term Loan, the Company issued to such holders 30,000 shares of 5% convertible preferred stock, designated as the convertible preferred stock. Each share of convertible preferred stock was issued for an amount equal to $1,000 per share, which is referred to as the original purchase price. Shares of convertible preferred stock with an aggregate original purchase price and initial liquidation preference of $30.0 million were issued to the holders of the Senior Convertible Term Loan in exchange for an equivalent principal amount of the Senior Convertible Term Loan pursuant to the terms of an exchange agreement dated as of June 8, 2016, between the Company and those holders, which is referred to as the exchange agreement.

The shares of 5% convertible preferred stock are entitled to receive dividends, when and as declared by the board of directors and to the extent of funds legally available for the payment of dividends, at an annual rate of 5% of the sum of the original purchase price per share of 5% convertible preferred stock plus any dividend arrearages. Dividends on the 5% convertible preferred stock shall, at the Company’s option, either be paid in cash or added to the stated liquidation preference amount for purposes of calculating dividends at the 5% annual rate (until such time as the Company declares and pays the missed dividend in full and in cash, at which time that dividend will no longer be part of the stated liquidation preference amount). Dividends shall be payable annually on June 30 of each year and shall be cumulative from the most recent dividend payment date on which the dividend has been paid or, if no dividend has ever been paid, from the original date of issuance of the 5% convertible preferred stock and shall accumulate from day to day whether or not declared until paid.

The 5% convertible preferred stock converts into shares of the Company’s common stock at a 20% discount to the price per share of common stock in the IPO. The Company calculated a deemed dividend on the 5% convertible preferred stock of $7.5 million in August 2016, which equals the 20% discount to the IPO price of the Company’s common stock of $12.00 per share, a beneficial conversion feature. The 5% convertible preferred stock, inclusive of accrued and unpaid dividends, is convertible into 3,351,717 and 3,191,843 shares of common stock at December 31, 2017 and 2016, respectively. The Company accrued dividends on the 5% convertible preferred stock of $1.5 million and $0.6 million for the years ended December 31, 2017 and 2016, respectively. The Company also calculated a deemed dividend of $0.4 million on the $1.5 million of accrued dividends for the year ended December 31, 2017 and $0.2 million on the $0.6 million of accrued dividends for the year ended December 31, 2016, which equals the 20% discount to the IPO price of the Company’s common stock of $12.00 per share, a beneficial conversion feature. Approximately $1.4 million of accrued dividends that were payable on June 30, 2017 was added to the stated liquidation preference amount of the 5% convertible preferred stock. The stated liquidation preference amount on the 5% convertible preferred stock totaled $31.4 million at December 31, 2017.

Common Stock

Prior to the IPO, there were no shares outstanding of the Company’s common stock, par value $0.001 per share, and no stockholders of record. The Company’s certificate of incorporation authorizes the issuance of up to 200,000,000 shares of the Company’s common stock. On August 1, 2016, the Company completed its IPO whereby it sold 6,250,000 shares of common stock at $12.00 per share. The aggregate net proceeds received by the Company from the offering were $66.0 million, net of underwriting discounts and commissions of $5.3 million and offering expenses of $3.7 million. At December 31, 2017, 78,643,954 shares of common stock were outstanding.

During the year ended December 31, 2017, the Company raised $80.4 million in gross proceeds, $75.1 million net of $5.3 million in underwriting fees, commissions and other offering costs and expenses, from the issuance of 26,775,000 shares of common stock and warrants to purchase 10,710,000 shares of common stock at an initial exercise price of $3.35 per share for a term of 5 years from the date of issuance at a combined price of $3.001 per share and accompanying warrant. The Company allocated $57.6 million to the common stock which was recorded as common stock and additional paid in capital and allocated $22.8 million to the warrants which was recorded to additional paid in capital.

The Company also raised $22.7 million in gross proceeds, $20.9 million net of $1.8 million in placement agent fees and other offering costs and expenses, from the issuance of 6,767,855 shares of common stock, at a price of $3.36 per share, and warrants to purchase 2,707,138 shares of common stock at an initial exercise price of $4.50 per share for a term of 13 months from the date of issuance. In connection with the 2017 Private Placement, the Company agreed to file a registration statement to register the shares of common stock and the shares of common stock underlying the warrants for resale. Under the agreement, the registration statement had to be filed within 30 days of the closing of the financing and declared effective within the timeline provided in the agreement. If the applicable deadlines were not met, monthly liquidated damages of 2.0% of the subscription amount (with an 8.0% cap) were due to the purchaser. The registration statement was filed on April 10, 2017 and declared effective on April 21, 2017.

Valuation

Prior to the IPO, to estimate certain expenses and record certain transactions, it was necessary for the Company to estimate the fair value of its membership units. Given the absence of a public trading market, and in accordance with the American Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately‑Held‑Company Equity Securities Issued as Compensation,” the Company exercised reasonable judgment and considered numerous objective and subjective factors to determine its best estimate of the fair value of its membership units. Factors considered included:

recent equity financings and the related valuations;

the estimated present value of the Company’s future cash flows;

industry information such as market size and growth;

market capitalization of comparable companies and the estimated value of transactions such companies have engaged in; and

macroeconomic conditions.

The Company updated the valuation of Class A units as of September 30, 2015 using a methodology consistent with prior valuations. At the time of the valuation, the Company had issued $92.0 million in second‑lien convertible debt, and it was deemed appropriate to place additional weighting on this consideration, as compared to prior valuations. The Company also considered equity raised through the issuance of $15.0 million in Class A units during 2015. The Company assigned no value to the Ribasphere products to reflect changes in market conditions that have resulted in lower sales of the Ribasphere products. As a result of the revised inputs to the analysis, the estimated fair value of each Class A unit was decreased from $39.00 to $32.50 as of September 30, 2015.