During 2015 and 2016 the Company entered into several financing arrangements which included the issuance of convertible notes and warrants to purchase shares of common stock. As of December 31, 2015, the convertible debt and its embedded debt-like features were recorded on the face of the consolidated balance sheets within current liabilities as hybrid debt instruments. There were no such instruments outstanding as of December 31, 2016.

On July 1, 2015, the Company entered into a Securities Purchase Agreement (the “SPA”) with Pharmsynthez providing for the issuance of a minimum of a $3 million 10% Senior Secured Collateralized Convertible Promissory Note (the “SPA Note”). The SPA also provided for the issuance of certain warrants up to the amount of the SPA Note. The convertible debt and its embedded debt-like features were recorded on the face of the consolidated balance sheet within current liabilities as ahybrid debt instrument as of December 31, 2015.

On November 13, 2015, the Company entered into an Asset Purchase Agreement (the “APA”) with Pharmsynthez providing for the issuance of a minimum of a $3.5 million 10% Senior Secured Collateralized Convertible Promissory Note (the “Initial APA Note”) and the transfer to the Company of certain intellectual property rights with respect to XBIO-101 in exchange for, among others, approximately 3 million shares of our common stock. The APA also provided for the issuance of certain warrants covering up to half the amount of the Initial APA Note to purchase shares of common stock at the lesser of $6.60 per share and 120% of the price per share in the Company’s next capital raise of at least $7 million (the “Exercise Price”). During the quarter ended March 31, 2016, the Company issued $3.5 million of convertible debt as well as the associated warrants, both in connection with the Initial APA Note. The convertible debt and its embedded debt-like features were recorded within current liabilities as a hybrid debt instrument.

On April 22, 2016, Pharmsynthez converted all convertible notes in the principal amount of $6.5 million plus accrued interest of approximately $228,000, issued by the Company to Pharmsynthez in 2015 and 2016. The conversion rate was $4.95 per share. As such, the Company issued to Pharmsynthez 1,373,036 shares of common stock in connection with conversion of the convertible notes. The related embedded derivatives, which had been bifurcated from the host debt and accounted for separately, were settled by action of the conversion. Immediately preceding the conversion, the Company recognized a final mark-to-market gain of $1.8 million for the change in fair value of the compound derivative. At conversion, the Company recorded net loss on conversion of $6.2 million. Both the final mark-to-market gain and the loss on conversion were recorded in other expense in the consolidated statement of comprehensive loss for the year ended December 31, 2016.

On July 1, 2016, the Company issued a 10% Senior Secured Collateralized Convertible Promissory Notein the amount of $500,000 to Pharmsynthez, our majority shareholder, (the “Additional APA Note”). In consideration for the promissory note, the Company issued Pharmsynthez warrants (the “Warrants”) to purchase 50,505 shares of our common stock at the Exercise Price. The Note was convertible into shares of our common stock at any time at a conversion price of $4.95 per share (subject to price protection and usual and customary adjustments). The associated warrants may be exercised at any time through the five-year anniversary. The maturity date of the Additional APA Note was one year from issuance and was convertible, in whole or in part, into shares of common stock at the option of the holder, at any time and from time to time in accordance with the terms contained therein. Upon a public offering, as defined, the holder shall convert the Additional APA Note to shares of the Company’s common stock in accordance with the conversion terms contained therein.

Mr. M. Scott Maguire is the Company’s Chief Executive Officer. Mr. Maguire’s current annual salary is £330,000 pursuant to his written employment agreement with the Company. Pursuant to an unwritten arrangement between the Company and Mr. Maguire, effective January 1, 2015, the Company paid 50% of Mr. Maguire’s salary in cash and 50% was deferred and accrued. On July 1, 2016, the Company issued a 10% Junior Secured Collateralized Convertible Promissory Note in the amount of $369,958 (the “CEO Note”) and warrants to purchase 37,369 shares of our common stock at the Exercise Price to Mr. Maguire for the deferred salary accrued through June 30, 2016. The maturity date of the CEO Note was September 30, 2016. Upon a public offering, as defined, and at the option of the holder, the CEO Note may be settled in cash or by means of conversion into shares of common stock in accordance with the conversion terms contained therein. Upon completion of its public offering, the Company settled the CEO Note and the related interest of $13,176 in cash on November 7, 2016.

On August 26 and September 9, 2016, the Company issued 10% Senior Secured Collateralized Convertible Promissory Notes (the “Further APA Notes”) in the amount of $178,000 and $322,000, respectively, and warrants to purchase 50,505 shares of our common stock at the Exercise Price to Pharmsynthez. The notes were convertible into shares of our common stock at any time at a conversion price of $4.00 per share (subject to price protection and usual and customary adjustments) or would automatically be applied toward the then anticipated public offering. The maturity date of the Further APA Notes was one year from issuance and was convertible, in whole or in part, into shares of common stock at the option of the holder, at any time and from time to time in accordance with the terms contained therein. However, upon execution of an underwriting agreement following declaration of effectiveness by the Securities and Exchange Commission of the registration statement filed in connection with the Company’s contemplated public offering, the balance of the Further APA Notes would (and did) automatically convert into units of the Company’s contemplated public offering in accordance with the conversion terms contained therein.

The Additional APA Note, CEO Note and Further APA Notes (together, the “Period Notes”) shared the same principal terms and features. The Period Notes are convertible debt and included embedded debt-like features which were recorded within current liabilities as a hybrid debt instrument.

The fair value of the compound derivatives, which were embedded in the debt host instrument, were bifurcated from the Period Notes and remeasured at each report date until settled, with changes in fair value recognized in the consolidated statement of comprehensive loss as a change in fair value of derivative liability. Refer to Note 9, Fair Value Measurements, for a table showing changes in the combined compound derivative during the years ended December 31, 2016 and 2015.

The key assumptions used to calculate the estimated fair value of the compound derivative liability at each issuance date and subsequent report date included the Company’s stock price ($4.50 - $16.83), expected volatility (100% - 115%), and risk-free interest rate (0.28% - 0.68%).

Upon issuance of the Further APA Notes the offset to debt arising from the associated recording of the compound derivative liability, the warrants and the associated issuance costs exceeded the debt proceeds by $106,566. This amount was recorded as a loss in other expense in the consolidated statement of comprehensive loss for the year ended December 31, 2016, in loss on issuance of hybrid debt instruments.

On November 7, 2016, the Company closed on an approximate $10 million underwritten public offering (see Note 11, Stockholders’ Equity). In connection with the offering and pursuant to the respective terms therein, the balances of the Period Notes were settled as follows:

-     The Additional APA Note converted to shares of common stock,

-     The CEO Note was settled in cash, and

-     The Further APA Notes converted into Units which are included in the aggregate 2,424,242 offering units discussed in Note 11, Stockholders’ Equity.

Interest expense (including both debt discount amortization and coupon rate) related to the SPA Note, the Initial APA Note, and the Period Notes of approximately $727,000 and $262,000 was recognized in the consolidated statements of comprehensive loss for the twelve months ended December 31, 2016 and 2015, respectively.