EXHIBIT 10.1

AMENDMENT AND EXCHANGE AGREEMENT
This Amendment and Exchange Agreement (the “Exchange Agreement”) is entered into
as of the 4th day of October, 2018, by and among Innovate Biopharmaceuticals
Inc., a Delaware corporation with offices located at 8480 Honeycutt Rd, Suite
120, Raleigh, NC 27615 (the “Company”), and the undersigned holder of the
Existing Note (as defined below) (the “Holder”), with reference to the following
facts:
A. In accordance with that certain Note Purchase Agreement, dated as of January
29, 2018 (as amended prior to the date hereof, the “Note Purchase Agreement”),
by and among the Company and the Holder, the Company, among other things, issued
to the Holder a senior note (the “Existing Note”).
B. The Company has duly authorized the issuance to the Holder of a new senior
convertible note in the form attached hereto as Exhibit A in exchange for the
Existing Note, convertible into shares of Common Stock (as defined below) (as
converted, the “New Conversion Shares”), with an aggregate amount of principal
as set forth on the signature page of the Holder attached hereto (the “New
Note”, and together with the New Conversion Shares, the “New Securities”).
C. Each of the Company and the Holder desire to effectuate such exchange on the
basis and subject to the terms and conditions set forth in this Exchange
Agreement.
D. The exchange of the Existing Note for the New Note is being made in reliance
upon the exemption from registration provided by Section 3(a)(9) of the
Securities Act of 1933, as amended (the “Securities Act”).
E. Capitalized terms used but not otherwise defined herein shall have the
meaning as set forth in the Note Purchase Agreement (as amended hereby).
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1.    EXCHANGE OF SECURITIES.
On the Effective Date (as defined below), pursuant to Section 3(a)(9) of the
Securities Act, the Holder hereby agrees to convey, assign and transfer the
Existing Note to the Company in exchange for which the Company agrees to issue
the New Note to the Holder as follows (such transactions in this Section 1, the
“Exchange”):
(a)    In exchange for the Existing Note, on the date hereof the Company shall
deliver or cause to be delivered to the Holder (or its designee) the New Note at
the address for delivery set forth on the signature page of the Holder.
(b)    The Holder shall deliver or cause to be delivered to the Company (or its
designee) the Existing Note as soon as commercially practicable following the
date hereof. Immediately following the delivery of the New Note to the Holder
(or its designee), the Existing Note shall be cancelled.

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(c)    The Company and the Holder shall execute and/or deliver such other
documents and agreements as are customary and reasonably necessary to effectuate
the Exchange.
2.    AMENDMENTS TO TRANSACTION DOCUMENTS.
(a)    Ratifications. Except as otherwise expressly provided herein, the Note
Purchase Agreement and each other Transaction Document, is, and shall continue
to be, in full force and effect and is hereby ratified and confirmed in all
respects, except that on and after the Effective Date: (i) all references in the
Note Purchase Agreement to “this Agreement”, “hereto”, “hereof”, “hereunder” or
words of like import referring to the Note Purchase Agreement shall mean the
Note Purchase Agreement as amended by this Exchange Agreement, and (ii) all
references in the other Transaction Documents, to the “Note Purchase Agreement”,
“thereto”, “thereof”, “thereunder” or words of like import referring to the Note
Purchase Agreement shall mean the Note Purchase Agreement as amended by this
Exchange Agreement.
(b)    Amendments to Transaction Documents. On and after the Effective Date,
each of the Transaction Documents are hereby amended as follows:
(i)    The defined term “Note” is hereby amended to include the New Securities.
(ii)     The defined term “Transaction Documents” is hereby amended to include
this Exchange Agreement.
(iii)    Section 5 of the Note Purchase Agreement is hereby amended and restated
as “[Intentionally Omitted]”
3.    COMPANY REPRESENTATIONS AND WARRANTIES.
(a)    Organization and Qualification. Each of the Company and each of its
Subsidiaries are entities duly organized and validly existing and in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authority to own their properties and to carry on their
business as now being conducted and as presently proposed to be conducted. Each
of the Company and each of its Subsidiaries is duly qualified as a foreign
entity to do business and is in good standing in every jurisdiction in which its
ownership of property or the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not reasonably be expected to have a
Material Adverse Effect (as defined below). As used in this Exchange Agreement,
“Material Adverse Effect” means any material adverse effect on (i) the business,
properties, assets, liabilities, operations (including results thereof),
condition (financial or otherwise) or prospects of the Company or any
Subsidiary, individually or taken as a whole, (ii) the transactions contemplated
hereby or in any of the other Exchange Documents or (iii) the authority or
ability of the Company or any of its Subsidiaries to perform any of their
respective obligations under any of the Exchange Documents (as defined below).
Other than the Persons (as defined below) listed in the SEC Documents (as
defined below), the Company has no Subsidiaries. “Subsidiaries” means any Person
in which the Company, directly or indirectly, (I) owns any of the outstanding
capital stock or holds any equity or similar interest of such Person or (II)
controls or operates all or any part of the business, operations or
administration of such Person, and each of the foregoing, is individually
referred to

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herein as a “Subsidiary.” For purposes of this Exchange Agreement, (x) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other
entity and any Governmental Entity or any department or agency thereof and (y)
“Governmental Entity” means any nation, state, county, city, town, village,
district, or other political jurisdiction of any nature, federal, state, local,
municipal, foreign, or other government, governmental or quasi-governmental
authority of any nature (including any governmental agency, branch, department,
official, or entity and any court or other tribunal), multi-national
organization or body; or body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature or instrumentality of any of the foregoing,
including any entity or enterprise owned or controlled by a government or a
public international organization or any of the foregoing. “Exchange Documents”
means, collectively, this Exchange Agreement, the New Note, the Irrevocable
Transfer Agent Instructions (as defined below) and each of the other agreements
and instruments entered into or delivered by any of the parties hereto in
connection with the transactions contemplated hereby and thereby, as may be
amended from time to time.
(b)    Authorization and Binding Obligation. The Company has the requisite power
and authority to enter into and perform its obligations under this Exchange
Agreement, the New Note and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by the Exchange
Documents and to consummate the Exchange (including, without limitation, the
issuance of the New Note in accordance with the terms hereof and thereof). The
execution and delivery of the Exchange Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the New Note and the reservation
for issuance and issuance of New Conversion Shares issuable upon conversion of
the New Note has been duly authorized by the Company’s board of directors and no
further filing, consent, or authorization is required by the Company, its board
of directors or its stockholders. This Exchange Agreement and the other Exchange
Documents have been duly executed and delivered by the Company, and constitute
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as such enforceability
may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of applicable creditors’ rights and
remedies and except as rights to indemnification and to contribution may be
limited by federal or state securities laws.
(c)    No Conflict. The execution, delivery and performance of the Exchange
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the New Note and reservation for issuance and issuance of the New Conversion
Shares) will not (i) result in a violation of the Certificate of Incorporation
(as defined below) or any other organizational documents of the Company or any
of its Subsidiaries, any capital stock of the Company or any of its Subsidiaries
or Bylaws (as defined below) of the Company or any of its Subsidiaries, (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including foreign, federal and state securities laws and
regulations and the rules and regulations of the Nasdaq Capital Market

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(the “Principal Market”) and including all applicable federal laws, rules and
regulations) applicable to the Company or any of its Subsidiaries or by which
any property or asset of the Company or any of its Subsidiaries is bound or
affected except, in the case of clause (ii) or (iii) above, to the extent such
violations that would not reasonably be expected to have a Material Adverse
Effect.
(d)    No Consents. Neither the Company nor any Subsidiary is required to obtain
any consent from, authorization or order of, or make any filing or registration
with (other than the filing with the Securities and Exchange Commission (the
“SEC”) of a Form D with the SEC, any other filings as may be required by any
state securities agencies, filing of UCC financing statements and approval by
the Principal Market of a listing of additional shares application in respect of
the New Conversion Shares as required by Section 5(d) hereof), any court,
governmental agency or any regulatory or self-regulatory agency or any other
Person in order for it to execute, deliver or perform any of its respective
obligations under or contemplated by the Exchange Documents, in each case, in
accordance with the terms hereof or thereof. All consents, authorizations,
orders, filings and registrations which the Company or any Subsidiary is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Effective Date, and neither the Company nor any of
its Subsidiaries are aware of any facts or circumstances which might prevent the
Company or any of its Subsidiaries from obtaining or effecting any of the
registration, application or filings contemplated by the Exchange Documents.
Except as disclosed in the SEC Documents, the Company is not in violation of the
requirements of the Principal Market and has no knowledge of any facts or
circumstances which would reasonably lead to delisting or suspension of the
Common Stock in the foreseeable future.
(e)    Securities Law Exemptions. Assuming the accuracy of the representations
and warranties of the Holder contained herein, the offer and issuance by the
Company of the New Securities is exempt from registration under the Securities
Act pursuant to the exemption provided by Section 3(a)(9) thereof.
(f)    Status of Note; Issuance of New Securities. The issuance of the New Note
has been duly authorized and upon issuance in accordance with the terms of the
Exchange Documents shall be validly issued, fully paid and non-assessable and
free from all Liens. Upon issuance or conversion in accordance with the New
Note, the New Conversion Shares, when issued, will be validly issued, fully paid
and nonassessable and free from all Liens with respect to the issue thereof,
with the holders being entitled to all rights accorded to a holder of Common
Stock. By virtue of Rule 3(a)(9) under the Securities Act, the New Note will
have a Rule 144 holding period that will be deemed to have commenced as of
January 29, 2018, the date of the original issuance of the Existing Note to the
Holder. As of the Effective Date, the Company shall have reserved from its duly
authorized capital stock not less than 200% of the maximum number of New
Conversion Shares issuable upon conversion of the New Notes (assuming for
purposes hereof that (x) the New Notes are convertible at the initial Alternate
Conversion Price (as defined in the New Notes), and (y) any such conversion
shall not take into account any limitations on the conversion of the New Notes
set forth in the New Notes).
(g)    Transfer Taxes. On the Effective Date, all share transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the issuance of the New Note to be exchanged with the Holder hereunder will
be, or will have been, fully paid or

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provided for by the Company, and all laws imposing such taxes will be or will
have been complied with.
(h)    SEC Documents; Financial Statements. During the two (2) years prior to
the date hereof, the Company has timely filed all reports, schedules, forms,
proxy statements, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the 1934 Act (all of the
foregoing filed prior to the date hereof, including without limitation, Current
Reports on Form 8-K filed by the Company with the SEC whether required to be
filed or not (but excluding Item 7.01 thereunder), and all exhibits and
appendices included therein (other than Exhibits 99.1 to Form 8-K) and financial
statements, notes and schedules thereto and documents incorporated by reference
therein being hereinafter referred to as the “SEC Documents”). The Company has
delivered or has made available to the Holder or its representatives true,
correct and complete copies of each of the SEC Documents not available on the
EDGAR system. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto as in effect as of the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles (“GAAP”), consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may exclude footnotes or may be condensed or summary statements)
and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments which will not be material, either
individually or in the aggregate). No other information provided by or on behalf
of the Company to the Holder which is not included in the SEC Documents
(including, without limitation, information in the disclosure schedules to this
Exchange Agreement) contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements therein not
misleading, in the light of the circumstance under which they are or were made.
The Company is not currently contemplating to amend or restate any of the
financial statements (including, without limitation, any notes or any letter of
the independent accountants of the Company with respect thereto) included in the
SEC Documents (the “Financial Statements”), nor is the Company currently aware
of facts or circumstances which would require the Company to amend or restate
any of the Financial Statements, in each case, in order for any of the
Financials Statements to be in compliance with GAAP and the rules and
regulations of the SEC. The Company has not been informed by its independent
accountants that they recommend that the Company amend or restate any of the
Financial Statements or that there is any need for the Company to amend or
restate any of the Financial Statements.
(i)    Absence of Certain Changes. Except as set forth in the SEC Documents,
since the date of the Company’s most recent audited financial statements
contained in a Form 10-K, there has been no material adverse change and no
material adverse development in the business, assets, liabilities, properties,
operations (including results thereof), condition (financial or

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otherwise) or prospects of the Company or any of its Subsidiaries. Since the
date of the Company’s most recent audited financial statements contained in a
Form 10-K, neither the Company nor any of its Subsidiaries has (i) declared or
paid any dividends, (ii) sold any assets, individually or in the aggregate,
outside of the ordinary course of business or (iii) except as disclosed in the
SEC Documents, made any capital expenditures, individually or in the aggregate,
outside of the ordinary course of business. Neither the Company nor any of its
Subsidiaries has taken any steps to seek protection pursuant to any law or
statute relating to bankruptcy, insolvency, reorganization, receivership,
liquidation or winding up, nor does the Company or any Subsidiary have any
knowledge or reason to believe that any of their respective creditors intend to
initiate involuntary bankruptcy proceedings or any actual knowledge of any fact
which would reasonably lead a creditor to do so. The Company and its
Subsidiaries, individually and on a consolidated basis, are not as of the date
hereof, and after giving effect to the transactions contemplated hereby to occur
on the date hereof, will not be Insolvent (as defined). For purposes of this
Section 3(i), “Insolvent” means, (i) with respect to the Company and its
Subsidiaries, on a consolidated basis, (A) the present fair saleable value of
the Company’s and its Subsidiaries’ assets is less than the amount required to
pay the Company’s and its Subsidiaries’ total Indebtedness (as defined below),
(B) the Company and its Subsidiaries are unable to pay their debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (C) the Company and its Subsidiaries
intend to incur or believe that they will incur debts that would be beyond their
ability to pay as such debts mature; and (ii) with respect to the Company and
each Subsidiary, individually, (A) the present fair saleable value of the
Company’s or such Subsidiary’s (as the case may be) assets is less than the
amount required to pay its respective total Indebtedness, (B) the Company or
such Subsidiary (as the case may be) is unable to pay its respective debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (C) the Company or such Subsidiary
(as the case may be) intends to incur or believes that it will incur debts that
would be beyond its respective ability to pay as such debts mature. Neither the
Company nor any of its Subsidiaries has engaged in any business or in any
transaction, and is not about to engage in any business or in any transaction,
for which the Company’s or such Subsidiary’s remaining assets constitute
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.
(j)    No Undisclosed Events, Liabilities, Developments or Circumstances. Except
as set forth in the SEC Documents, no event, liability, development or
circumstance has occurred or exists, or is reasonably expected to exist or occur
with respect to the Company, any of its Subsidiaries or any of their respective
businesses, properties, liabilities, prospects, operations (including results
thereof) or condition (financial or otherwise), that (i) would be required to be
disclosed by the Company under applicable securities laws on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by the
Company of its Common Stock and which has not been publicly announced, (ii)
would reasonably expected to have a material adverse effect on the Holder’s
investment hereunder or (iii) would reasonably be expected to have a Material
Adverse Effect.
(k)    Conduct of Business; Regulatory Permits. Neither the Company nor any of
its Subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation, any certificate of designation, preferences or
rights of any other outstanding series of preferred stock of the Company or any
of its Subsidiaries or Bylaws or their organizational charter, certificate of
formation, memorandum of association, articles of association, Certificate of
Incorporation or

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bylaws, respectively. Except as set forth in the SEC Documents, neither the
Company nor any of its Subsidiaries is in violation of any judgment, decree or
order or any statute, ordinance, rule or regulation applicable to the Company or
any of its Subsidiaries, and neither the Company nor any of its Subsidiaries
will conduct its business in violation of any of the foregoing, except in all
cases for possible violations which could not, individually or in the aggregate,
have a Material Adverse Effect. Except as set forth in the SEC Documents,
without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market and has no knowledge of any facts or circumstances that could reasonably
lead to delisting or suspension of the Common Stock by the Principal Market in
the foreseeable future. During the two years prior to the date hereof, (i) the
Common Stock has been listed or designated for quotation on the Principal
Market, (ii) trading in the Common Stock has not been suspended by the SEC or
the Principal Market and (iii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension
or delisting of the Common Stock from the Principal Market. The Company and each
of its Subsidiaries possess all certificates, authorizations and permits issued
by the appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit. There is no agreement,
commitment, judgment, injunction, order or decree binding upon the Company or
any of its Subsidiaries or to which the Company or any of its Subsidiaries is a
party which has or would reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company or any
of its Subsidiaries, any acquisition of property by the Company or any of its
Subsidiaries or the conduct of business by the Company or any of its
Subsidiaries as currently conducted other than such effects, individually or in
the aggregate, which have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company or any of its Subsidiaries.
(l)    Transactions With Affiliates. Except as set forth in the SEC Documents,
no current or former employee, partner, director, officer or stockholder (direct
or indirect) of the Company or its Subsidiaries, or any associate, or, to the
knowledge of the Company, any affiliate of any thereof, or any relative with a
relationship no more remote than first cousin of any of the foregoing, is
presently, or has ever been, (i) a party to any transaction with the Company or
its Subsidiaries (including any contract, agreement or other arrangement
providing for the furnishing of services by, or rental of real or personal
property from, or otherwise requiring payments to, any such director, officer or
stockholder or such associate or affiliate or relative Subsidiaries (other than
for ordinary course services as employees, consultants, officers or directors of
the Company or any of its Subsidiaries)) or (ii) the direct or indirect owner of
an interest in any corporation, firm, association or business organization which
is a competitor, supplier or customer of the Company or its Subsidiaries (except
for a passive investment (direct or indirect) in less than 5% of the common
stock of a company whose securities are traded on or quoted through an Eligible
Market), nor does any such Person receive income from any source other than the
Company or its Subsidiaries which relates to the business of the Company or its
Subsidiaries or should properly accrue to the Company or its Subsidiaries. No
employee, officer, stockholder or director of the Company or any of its
Subsidiaries or member of his or her immediate family is indebted to the Company
or its Subsidiaries, as the case may be, nor is the Company or any of its
Subsidiaries indebted (or committed to make loans or extend or guarantee credit)
to any of them, other than (i) for payment of salary for services rendered, (ii)
reimbursement for reasonable expenses incurred on behalf of the Company, and
(iii)

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for other standard employee benefits made generally available to all employees
or executives (including stock option agreements outstanding under any stock
option plan approved by the board of directors of the Company).
(m)    Equity Capitalization.
(i)    Definitions:
(1)    “Common Stock” means (x) the Company’s shares of common stock, $0.0001
par value per share, and (y) any capital stock into which such common stock
shall have been changed or any share capital resulting from a reclassification
of such common stock.
(2)    “Preferred Stock” means (x) the Company’s blank check preferred stock,
$0.0001 par value per share, the terms of which may be designated by the board
of directors of the Company in a certificate of designations and (y) any capital
stock into which such preferred stock shall have been changed or any share
capital resulting from a reclassification of such preferred stock (other than a
conversion of such preferred stock into Common Stock in accordance with the
terms of such certificate of designations).
1.Authorized and Outstanding Capital Stock.  As of the date hereof, the
authorized capital stock of the Company consists of (A) three hundred fifty
million (350,000,000) shares of Common Stock, of which, 25,983,538 are issued
and outstanding as of the date hereof and 9,547,419 of which are reserved for
issuance pursuant to Convertible Securities (as defined below), in each case
exercisable or exchangeable for, or convertible into, shares of Common Stock,
and (B) ten million (10,000,000) shares of Preferred Stock, none of which are
issued and outstanding.  No shares of Common Stock are held in the treasury of
the Company.
(ii)    Valid Issuance; Available Shares; Affiliates. All of such outstanding
shares are duly authorized and have been, or upon issuance will be, validly
issued and are fully paid and nonassessable. Schedule 3(m)(iii) sets forth the
number of shares of Common Stock that are (A) reserved for issuance pursuant to
Convertible Securities (other than the New Note) and (B) that are, as of the
date hereof, owned by Persons who are “affiliates” (as defined in Rule 405 of
the 1933 Act and calculated based on the assumption that only officers,
directors and holders of at least 10% of the Company’s issued and outstanding
Common Stock are “affiliates” without conceding that any such Persons are
“affiliates” for purposes of federal securities laws) of the Company or any of
its Subsidiaries. “Convertible Securities” means any capital stock or other
security of the Company or any of its Subsidiaries that is at any time and under
any circumstances directly or indirectly convertible into, exercisable or
exchangeable for, or which otherwise entitles the holder thereof to acquire, any
capital stock or other security of the Company (including, without limitation,
Common Stock) or any of its Subsidiaries.
(iii)    Existing Securities; Obligations. Except as disclosed in the SEC
Documents: (A) none of the Company’s or any Subsidiary’s shares, interests or
capital stock is subject to preemptive rights or any other similar rights or
Liens suffered or permitted by the Company or any Subsidiary; (B) there are no
outstanding options, warrants, scrip, rights

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to subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, or exercisable or exchangeable for,
any shares, interests or capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares, interests or capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares, interests or
capital stock of the Company or any of its Subsidiaries; (C) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act;
(D) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (E) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the New Securities; and (F) neither the Company nor
any Subsidiary has any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement.
(n)    Organizational Documents. The Company has made available to the Holder
true, correct and complete copies of the Company’s Certificate of Incorporation,
as amended and as in effect on the date hereof (the “Certificate of
Incorporation”), and the Company’s bylaws, as amended and as in effect on the
date hereof (the “Bylaws”), and the terms of all Convertible Securities and the
material rights of the holders thereof in respect thereto.
(o)    Indebtedness and Other Contracts. Neither the Company nor any of its
Subsidiaries, (i) except as disclosed in the SEC Documents, has any outstanding
debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness of the Company or
any of its Subsidiaries or by which the Company or any of its Subsidiaries is or
may become bound, (ii) is a party to any contract, agreement or instrument,
except as disclosed in the SEC Documents, the violation of which, or default
under which, by the other party(ies) to such contract, agreement or instrument
could reasonably be expected to result in a Material Adverse Effect, (iii) has
any financing statements securing obligations in any amounts filed in connection
with the Company or any of its Subsidiaries, except as disclosed in the SEC
Documents; (iv) is in violation of any term of, or in default under, any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the aggregate,
in a Material Adverse Effect, or (v) is a party to any contract, agreement or
instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect. Neither the Company nor any of its Subsidiaries have any
liabilities or obligations required to be disclosed in the SEC Documents which
are not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its Subsidiaries’ respective businesses and
which, individually or in the aggregate, do not or could not have a Material
Adverse Effect. For purposes of this Exchange Agreement: (x) “Indebtedness” of
any Person means, without duplication (A) all indebtedness for borrowed money,
(B) all obligations issued, undertaken or assumed as the deferred purchase price
of property or services (including, without limitation, “capital leases” in
accordance with GAAP) (other than trade payables entered into in the ordinary
course of business consistent

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with past practice), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease, (G)
all indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (H) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above; and (y) “Contingent Obligation” means, as to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to any Indebtedness, lease, dividend or other obligation of another
Person if the primary purpose or intent of the Person incurring such liability,
or the primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such liability
(p)    Litigation. There is no action, suit, arbitration, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board, other
Governmental Entity, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company’s or its Subsidiaries’
officers or directors that would reasonably be expected to have a Material
Adverse Effect on the Company or its Subsidiaries, whether of a civil or
criminal nature or otherwise, in their capacities as such, except as disclosed
in the SEC Documents. No director, officer or employee of the Company or any of
its subsidiaries has willfully violated 18 U.S.C. §1519 or engaged in spoliation
in reasonable anticipation of litigation. Without limitation of the foregoing,
there has not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the SEC involving the Company, any of its
Subsidiaries or any current or former director or officer of the Company or any
of its Subsidiaries. The SEC has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
under the 1933 Act or the 1934 Act. Neither the Company nor any of its
Subsidiaries is subject to any order, writ, judgment, injunction, decree,
determination or award of any Governmental Entity.
(q)    Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided the Holder or its agents or counsel with any
information that constitutes or would reasonably be expected to constitute
material, non-public information concerning the Company or any of its
Subsidiaries, other than the existence of the transactions contemplated by this
Exchange Agreement and the other Exchange Documents. The Company understands and
confirms that the Holder will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the Holder
regarding the Company and its Subsidiaries, their businesses and the
transactions contemplated hereby, including the schedules to

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this Exchange Agreement, furnished by or on behalf of the Company or any of its
Subsidiaries is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. Each press release issued by the Company or any of its
Subsidiaries during the twelve (12) months preceding the date of this Exchange
Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, liabilities,
prospects, operations (including results thereof) or conditions (financial or
otherwise), which, under applicable law, rule or regulation, requires public
disclosure at or before the date hereof or announcement by the Company but which
has not been so publicly announced or disclosed.
(r)    No Event of Default. The Company represents and warrants to the Holder
that after giving effect to the terms of this Exchange Agreement no Event of
Default (as defined in the New Note) shall have occurred and be continuing as of
the date hereof.
4.    HOLDER REPRESENTATION AND WARRANTIES.
(a)    Organization; Authority. The Holder is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by this Exchange Agreement and
otherwise to carry out its obligations hereunder.
(b)    Reliance on Exemptions. The Holder understands that the New Note is being
offered and exchanged in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and the Holder’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Holder set forth herein and in the Exchange Documents
in order to determine the availability of such exemptions and the eligibility of
the Holder to acquire the New Note.
(c)    Transfer or Resale. The Holder understands that: (i) the New Securities
have not been and are not being registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (A) subsequently registered thereunder, (B) the Holder shall have
delivered to the Company (if requested by the Company) an opinion of counsel, in
a form reasonably acceptable to the Company, to the effect that such New
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) the Holder
provides the Company with reasonable assurance that such New Securities can be
sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated
under the Securities Act (or a successor rule thereto) (collectively, “Rule
144”); (ii) any sale of the New Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144, and further, if Rule 144 is
not applicable, any resale of the New Securities under circumstances in which
the seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC promulgated

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thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the New Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder. Notwithstanding the foregoing, the New Securities may be pledged in
connection with a bona fide margin account or other loan or financing
arrangement secured by the New Securities and such pledge of New Securities
shall not be deemed to be a transfer, sale or assignment of the New Securities
hereunder, and the Holder effecting a pledge of New Securities shall not be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Exchange Agreement, the New Note or any
other Exchange Document, including, without limitation, this Section 4(c).
(d)    No Governmental Review. The Holder understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the New Note or the
fairness or suitability of the investment in the New Note nor have such
authorities passed upon or endorsed the merits of the offering of the New Note.
(e)    Validity; Enforcement. This Exchange Agreement has been duly and validly
authorized, executed and delivered on behalf of the Holder and shall constitute
the legal, valid and binding obligations of the Holder enforceable against the
Holder in accordance with their respective terms, except as such enforceability
may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.
(f)    No Conflicts. The execution, delivery and performance by the Holder of
this Exchange Agreement, and the consummation by the Holder of the transactions
contemplated hereby will not (A) result in a violation of the organizational
documents of the Holder or (B) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Holder is a
party, or (C) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws) applicable to
the Holder, except in the case of clauses (B) and (C) above, for such conflicts,
defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
ability of the Holder to perform its obligations hereunder.
(g)    Investment Risk; Sophistication. The Holder is acquiring the New Note
hereunder in the ordinary course of its business. The Holder has such knowledge,
sophistication, and experience in business and financial matters so as to be
capable of evaluation of the merits and risks of the prospective investment in
the New Note, and has so evaluated the merits and risk of such investment. The
Holder is an “accredited investor” as defined in Regulation D under the
Securities Act.
(h)    Ownership of Existing Note. The Holder owns the Existing Note free and
clear of any Liens (other than the obligations pursuant to this Exchange
Agreement, liens in the ordinary course of business (e.g. bone fide margin
account liens) and applicable securities laws).
5.    Covenants.

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(a)    Form D and Blue Sky. The Company shall file a Form D with respect to the
New Securities as required under Regulation D and to provide a copy thereof to
the Holder promptly after such filing. The Company shall, on or before the
Effective Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for, or to, qualify the New Securities
pursuant to this Exchange Agreement under applicable securities or “Blue Sky”
laws of the states of the United States (or to obtain an exemption from such
qualification), and shall provide evidence of any such action so taken to the
Holder on or prior to the Effective Date. Without limiting any other obligation
of the Company under this Exchange Agreement, the Company shall timely make all
filings and reports relating to the offer and sale of the New Securities
required under all applicable securities laws (including, without limitation,
all applicable federal securities laws and all applicable “Blue Sky” laws), and
the Company shall comply with all applicable foreign, federal, state and local
laws, statutes, rules, regulations and the like relating to the Exchange.
(b)    Reporting Status. Until the later of the date on which no unpaid or
unconverted principal of the New Note remains outstanding and the Holder shall
have sold all of the New Conversion Shares (the “Reporting Period”), the Company
shall timely file all reports required to be filed with the SEC pursuant to the
1934 Act, and the Company shall not take any deliberate actions to terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would no longer require or otherwise
permit such termination.
(c)    Financial Information. The Company agrees to send the following to the
Holder during the Reporting Period (i) unless the following are filed with the
SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) business day after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, any interim
reports or any consolidated balance sheets, income statements, stockholders’
equity statements and/or cash flow statements for any period other than annual,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the Securities Act, (ii) unless the
following are either filed with the SEC through EDGAR or are otherwise widely
disseminated via a recognized news release service (such as PR Newswire), on the
same day as the release thereof, facsimile copies of all press releases issued
by the Company or any of its Subsidiaries and (iii) unless the following are
filed with the SEC through EDGAR, copies of any notices and other information
made available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
(d)    Listing. The Company shall promptly secure the listing or designation for
quotation (as the case may be) of all of the New Conversion Shares upon each
national securities exchange and automated quotation system, if any, upon which
the Common Stock is then listed or designated for quotation (as the case may be)
(subject to official notice of issuance) and shall maintain such listing or
designation for quotation (as the case may be) of all New Conversion Shares from
time to time issuable under the terms of the Exchange Documents on such national
securities exchange or automated quotation system. The Company shall maintain
the Common Stock’s listing or authorization for quotation (as the case may be)
on the Principal Market, The New York Stock Exchange, the NYSE American, the
Nasdaq Global Market or the Nasdaq Global Select Market (each, an “Eligible
Market”). Neither the Company nor any of its Subsidiaries shall take any action
which could be reasonably expected to result in the delisting or suspension of
the Common Stock

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on an Eligible Market. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 5(d).
(e)    Pledge of New Securities. Notwithstanding anything to the contrary
contained in this Exchange Agreement, the Company acknowledges and agrees that
the New Securities may be pledged by the Holder in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
New Securities. The pledge of New Securities shall not be deemed to be a
transfer, sale or assignment of the New Securities hereunder, and the Holder
effecting a pledge of New Securities shall not be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Exchange Agreement or any other Exchange Document, including,
without limitation, Section 4(c) hereof; provided that the Holder and its
pledgee shall be required to comply with the provisions of Section 4(c) hereof
in order to effect a sale, transfer or assignment of New Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the New Securities may reasonably request in connection with a
pledge of the New Securities to such pledgee by the Holder.
(f)    Reservation of Shares. So long as the New Note remains outstanding, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, no less than 200% of the maximum number of
shares of Common Stock issuable upon conversion of all the unpaid amounts under
the New Note then outstanding (assuming for purposes hereof that (x) the New
Note is convertible at the Alternate Conversion Price (as defined in the New
Note) then in effect, and (y) any such conversion shall not take into account
any limitations on the conversion of the New Note set forth in the New Note),
(collectively, the “Required Reserve Amount”); provided that at no time shall
the number of shares of Common Stock reserved pursuant to this Section 5(f) be
reduced other than proportionally in connection with any conversion, exercise
and/or redemption, as applicable, of unpaid amounts under the New Note. If at
any time the number of shares of Common Stock authorized and reserved for
issuance is not sufficient to meet the Required Reserve Amount, the Company will
promptly take all corporate action necessary to authorize and reserve a
sufficient number of shares, including, without limitation, calling a special
meeting of stockholders to authorize additional shares to meet the Company’s
obligations pursuant to the Exchange Documents, in the case of an insufficient
number of authorized shares, obtain stockholder approval of an increase in such
authorized number of shares, and voting the management shares of the Company in
favor of an increase in the authorized shares of the Company to ensure that the
number of authorized shares is sufficient to meet the Required Reserve Amount.
(g)    Conduct of Business. The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except where such violations would not reasonably be
expected to result, either individually or in the aggregate, in a Material
Adverse Effect.
(h)    Dilutive Issuances. For so long as any New Note remains outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as
defined in the New Note) if the effect of such Dilutive Issuance is to cause the
Company to be required to issue upon conversion of any New Note any shares of
Common Stock in excess of that number of shares of Common Stock which the
Company may issue upon conversion of the New Note without breaching the
Company’s obligations under the rules or regulations of the Principal Market.

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(i)    Passive Foreign Investment Company. The Company shall conduct its
business, and shall cause its Subsidiaries to conduct their respective
businesses, in such a manner as will ensure that the Company will not be deemed
to constitute a passive foreign investment company within the meaning of Section
1297 of the Code.
(j)    Restriction on Redemption and Cash Dividends. So long as any amounts
under the New Note remains outstanding, the Company shall not, directly or
indirectly, redeem, or declare or pay any cash dividend or distribution on, any
securities of the Company without the prior express written consent of the
Holder.
(k)    Corporate Existence. So long as any amounts under the New Note remains
outstanding,, the Company shall not be party to any Fundamental Transaction (as
defined in the New Note) unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the New Note.
(l)    Conversion Procedures. The form of Conversion Notice (as defined in the
New Note) included in the New Note set forth the totality of the procedures
required of the Holder in order to convert the New Note. Except as provided in
Section 7(d), no additional legal opinion, other information or instructions
shall be required of the Holder to convert the New Note. The Company shall honor
conversions of the New Note and shall deliver the New Conversion Shares in
accordance with the terms, conditions and time periods set forth in the New
Note.
(m)    Closing Documents. On or prior to fourteen (14) calendar days after the
Effective Date, the Company agrees to deliver, or cause to be delivered, to the
Holder and Kelley Drye & Warren LLP a complete closing set of the executed
Exchange Documents, New Securities and any other document required to be
delivered to any party hereunder.
(n)    Disclosure of Transaction. The Company shall, on or before 8:30 a.m., New
York City time, on or prior to the first business day after the date of this
Exchange Agreement, file a Current Report on Form 8-K describing the terms of
the transactions contemplated hereby in the form required by the 1934 Act and
attaching this Exchange Agreement and the form of New Note, to the extent they
are required to be filed under the 1934 Act, that have not previously been filed
with the SEC by the Company (including, without limitation, this Exchange
Agreement) as exhibits to such filing (including all attachments, the “8-K
Filing”). From and after the filing of the 8-K Filing, the Company shall have
disclosed all material, non-public information (if any) provided up to such time
to the Holder by the Company or any of its Subsidiaries or any of their
respective officers, directors, employees, affiliates or agents, that is not
disclosed in the 8-K Filing. The Company shall not, and shall cause its
officers, directors, employees, affiliates and agents, not to, provide the
Holder with any material, nonpublic information regarding the Company before
(other than the transactions contemplated hereby) and after the filing of the
8-K Filing without the express written consent of the Holder. To the extent that
the Company delivers any material, non-public information to the Holder without
the Holder’s express prior written consent, the Company hereby covenants and
agrees that the Holder shall not have any duty of confidentiality to the
Company, any of its Subsidiaries or any of their respective officers, directors,
employees, affiliates or agent with respect to, or a duty to the to the Company,
any of its Subsidiaries or any of their respective officers, directors,
employees, affiliates or agent or not to trade on the basis of, such material,
non-public information. The Company shall not disclose the name of the Holder in
any filing,

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announcement, release or otherwise, unless such disclosure is required by law or
regulation; Holder acknowledges that such disclosure in the Company’s SEC
filings is required by law. In addition, effective upon the filing of the 8-K
Filing, the Company acknowledges and agrees that any and all confidentiality or
similar obligations under any agreement with respect to the transactions
contemplated by this Exchange Agreement or as otherwise disclosed in the 8-K
Filing, whether written or oral, between the Company, any of its Subsidiaries or
any of their respective officers, directors, affiliates, employees or agents, on
the one hand, and any of the Holder or any of their affiliates, on the other
hand, shall terminate. Neither the Company, its Subsidiaries nor the Holder
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, the Company shall be
entitled, without the prior approval of the Holder, to make a press release or
other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith or (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) the Holder shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Without the
prior written consent of the Holder (which may be granted or withheld in the
Holder’s sole discretion), except as required by applicable law, the Company
shall not (and shall cause each of its Subsidiaries and affiliates to not)
disclose the name of the Holder in any other filing, announcement, release or
otherwise.
(o)    No Integration. None of the Company, its Subsidiaries, any of their
affiliates, or any Person acting on their behalf shall, directly or indirectly,
make any offers or sales of any security (as defined in the Securities Act) or
solicit any offers to buy any security or take any other actions, under
circumstances that would require registration of any of the New Note under the
Securities Act or cause this offering of the New Note to be integrated with such
offering or any prior offerings by the Company for purposes of Regulation D
under the Securities Act.
(p)    Holding Period. For the purposes of Rule 144, the Company acknowledges
that the holding period of the New Note (and upon conversion of the New Note,
the New Conversion Shares) may be tacked onto the holding period of the Existing
Note, and the Company agrees not to take a position contrary to this Section
5(p). The Company acknowledges and agrees that (assuming the Holder is not an
affiliate of the Company) (i) upon issuance in accordance with the terms hereof,
the New Note and, upon conversion of the New Note, the New Conversion Shares,
respectively, are eligible to be resold pursuant to Rule 144, (ii) the Company
is not aware of any event reasonably likely to occur that would reasonably be
expected to result in the New Conversion Shares becoming ineligible to be resold
by the Holder pursuant to Rule 144 and (iii) in connection with any resale of
any New Conversion Shares pursuant to Rule 144, the Holder shall solely be
required to provide reasonable assurances that such New Conversion Shares are
eligible for resale, assignment or transfer under Rule 144, which shall not
include an opinion of Holder’s counsel. The Company shall be responsible for any
transfer agent fees or DTC fees or legal fees of the Company’s counsel with
respect to the removal of legends, if any, or issuance of New Conversion Shares
in accordance herewith.
(q)    Fees. On or prior to the Effective Date, the Company shall pay Kelley
Drye & Warren LLP a non-accountable amount of $20,000 in connection with the
legal fees and disbursements in connection herewith (the “Legal Fee Amount”).
The Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, transfer agent fees, DTC (as defined below) fees or
broker’s commissions (other than for Persons engaged by the

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Holder) relating to or arising out of the transactions contemplated hereby. The
Company shall pay, and hold the Holder harmless against, any liability, loss or
expense (including, without limitation, reasonable attorneys’ fees and
out-of-pocket expenses) arising in connection with any claim relating to any
such payment.
(r)    Effective Date. Except as otherwise provided herein, this Exchange
Agreement shall be deemed effective as of such date as the Company and the
Holder shall have duly executed and delivered this Exchange Agreement (the
“Effective Date”).
(s)    No Commissions. Neither the Company nor the Holder has paid or given, or
will pay or give, to any person, any commission, fee or other remuneration,
directly or indirectly, in connection with the transactions contemplated by this
Exchange Agreement.
6.    TERMINATION.
Notwithstanding anything contained in this Exchange Agreement to the contrary,
if the Effective Date has not occurred and the Company does not deliver the New
Note to the Holder in accordance with Section 1 hereof, then, at the election of
the Holder delivered in writing to the Company at any time after the fifth (5th)
business day immediately following the date of this Exchange Agreement, this
Exchange Agreement shall be terminated and be null and void ab initio and the
Existing Note shall not be cancelled hereunder and shall remain outstanding as
if this Exchange Agreement never existed.
7.    REGISTER; TRANSFER AGENT INSTRUCTIONS; LEGEND.
(a)    Register. The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
each holder of New Securities), a register for the New Note in which the Company
shall record the name and address of the Person in whose name the New Note have
been issued (including the name and address of each transferee), the principal
amount of the New Note held by such Person, the number of New Conversion Shares
issuable pursuant to the terms of the New Note held by such Person. The Company
shall keep the register open and available at all times during business hours
for inspection of the Holder or its legal representatives.
(b)    Irrevocable Transfer Agent Instructions. The Company shall issue
irrevocable instructions to its transfer agent and any subsequent transfer agent
(as applicable, the “Transfer Agent”) in a form acceptable to each of the Holder
(the “Irrevocable Transfer Agent Instructions”) to issue certificates or credit
shares to the applicable balance accounts at The Depository Trust Company
(“DTC”), registered in the name of the Holder or its respective nominee(s), for
the New Conversion Shares in such amounts as specified from time to time by the
Holder to the Company upon conversion of the New Note. The Company represents
and warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 7(b), and stop transfer instructions to
give effect to Section 4(c) hereof, will be given by the Company to its transfer
agent with respect to the New Securities, and that the New Securities, provided
that all requirements of Rule 144 have been met, including a one year holding
period (or a six month holding period if (x) the Holder is not then an
“affiliate” of the Company (as defined in Rule 144) and (y) the Company is then
in compliance with the conditions of Rule 144(i)(2)), shall otherwise be freely
transferable on the books and records of the Company, as applicable, to

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the extent provided in this Exchange Agreement and the other Exchange Documents.
If the Holder effects a sale, assignment or transfer of the New Securities in
accordance with Section 4(c), the Company shall permit the transfer and shall
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by the Holder to effect such sale, transfer or
assignment. In the event that such sale, assignment or transfer involves New
Conversion Shares sold, assigned or transferred pursuant to an effective
registration statement or in compliance with Rule 144, the transfer agent shall
issue such shares to the Holder, assignee or transferee (as the case may be)
without any restrictive legend in accordance with Section 7(d) below. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 7(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 7(b), that the Holder shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required. The Company shall cause its counsel to issue the legal
opinion referred to in the Irrevocable Transfer Agent Instructions to the
Company’s transfer agent with respect to the removal of any legends on any of
the New Securities. Any fees (with respect to the transfer agent, counsel to the
Company or otherwise) associated with the issuance of such opinion or the
removal of any legends on any of the New Securities shall be borne by the
Company.
(c)    Legends. The Holder understands that the New Securities have been issued
(or will be issued in the case of the New Conversion Shares) pursuant to an
exemption from registration or qualification under the Securities Act and
applicable state securities laws, and except as set forth below, the New
Securities shall bear any legend as required by the “blue sky” laws of any state
and a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER
(IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE
TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

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(d)    Removal of Legends. Certificates evidencing New Securities shall not be
required to contain the legend set forth in Section 7(c) above or any other
legend (i) following any sale of such New Securities pursuant to Rule 144
(assuming the transferor is not an affiliate of the Company), (ii) if such New
Securities are eligible to be sold, assigned or transferred under Rule 144
(provided that the Holder provides the Company with reasonable assurances that
such New Securities are eligible for sale, assignment or transfer under Rule 144
which shall not include an opinion of the Holder’s counsel), (iii) in connection
with a sale, assignment or other transfer (other than under Rule 144), provided
that the Holder provides the Company with an opinion of counsel to the Holder,
in a generally acceptable form, to the effect that such sale, assignment or
transfer of the New Securities may be made without registration under the
applicable requirements of the Securities Act or (iv) if such legend is not
required under applicable requirements of the Securities Act (including, without
limitation, controlling judicial interpretations and pronouncements issued by
the SEC). If a legend is not required pursuant to the foregoing, the Company
shall no later than two (2) Trading Days (as defined in the New Note) (or such
earlier date as required pursuant to the 1934 Act or other applicable law, rule
or regulation for the settlement of a trade initiated on the date the Holder
delivers such legended certificate representing such New Securities to the
Company) following the delivery by the Holder to the Company or the transfer
agent (with notice to the Company) of a legended certificate representing such
New Securities (endorsed or with stock powers attached, signatures guaranteed,
and otherwise in form necessary to affect the reissuance and/or transfer, if
applicable), together with any other deliveries from the Holder as may be
required above in this Section 7(d), as directed by the Holder, either: (A)
provided that the Company’s transfer agent is participating in the DTC Fast
Automated New Securities Transfer Program and such New Securities are New
Conversion Shares, credit the aggregate number of shares of Common Stock to
which the Holder shall be entitled to the Holder’s or its designee’s balance
account with DTC through its Deposit/Withdrawal at Custodian system or (B) if
the Company’s transfer agent is not participating in the DTC Fast Automated New
Securities Transfer Program, issue and deliver (via reputable overnight courier)
to the Holder, a certificate representing such New Securities that is free from
all restrictive and other legends, registered in the name of the Holder or its
designee (the date by which such credit is so required to be made to the balance
account of the Holder’s or the Holder’s designee with DTC or such certificate is
required to be delivered to the Holder pursuant to the foregoing is referred to
herein as the “Required Delivery Date”, and the date such shares of Common Stock
are actually delivered without restrictive legend to the Holder or the Holder’s
designee with DTC, as applicable, the “Share Delivery Date”). The Company shall
be responsible for any transfer agent fees or DTC fees with respect to any
issuance of New Securities or the removal of any legends with respect to any New
Securities in accordance herewith.
(e)    Failure to Timely Deliver; Buy-In. If the Company fails, for any reason
or for no reason, to issue and deliver (or cause to be delivered) to the Holder
(or its designee) by the Required Delivery Date, if the Transfer Agent is not
participating in the DTC Fast Automated New Securities Transfer Program, a
certificate for the number of New Conversion Shares to which the Holder is
entitled and register such New Conversion Shares on the Company’s share register
or, if the Transfer Agent is participating in the DTC Fast Automated New
Securities Transfer Program, to credit the balance account of the Holder or the
Holder’s designee with DTC for such number of New Conversion Shares submitted
for legend removal by the Holder pursuant to Section 7(d) above (a “Delivery
Failure”), then, in addition to all other remedies available to the Holder, the
Company shall pay in cash to the Holder on each day after the Share Delivery
Date and during such Delivery Failure an amount equal to 2% of the product of
(A) the sum of the number of shares of Common

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Stock not issued to the Holder on or prior to the Required Delivery Date and to
which the Holder is entitled, and (B) any trading price of the Common Stock
selected by the Holder in writing as in effect at any time during the period
beginning on the date of the delivery by the Holder to the Company of the
applicable New Conversion Shares and ending on the applicable Share Delivery
Date. In addition to the foregoing, if on or prior to the Required Delivery Date
either (I) if the Transfer Agent is not participating in the DTC Fast Automated
New Securities Transfer Program, the Company shall fail to issue and deliver a
certificate to the Holder and register such shares of Common Stock on the
Company’s share register or, if the Transfer Agent is participating in the DTC
Fast Automated New Securities Transfer Program, credit the balance account of
the Holder or the Holder’s designee with DTC for the number of shares of Common
Stock to which the Holder submitted for legend removal by the Holder pursuant to
Section 7(d) above (ii) below, and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Holder of shares of Common Stock
submitted for legend removal by the Holder pursuant to Section 7(d) above that
the Holder is entitled to receive from the Company (a “Buy-In”), then the
Company shall, within two (2) Trading Days after the Holder’s request and in the
Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any, for the shares of Common Stock so purchased)
(the “Buy-In Price”), at which point the Company’s obligation to so deliver such
certificate or credit the Holder’s balance account shall terminate and such
shares shall be cancelled, or (ii) promptly honor its obligation to so deliver
to the Holder a certificate or certificates or credit the balance account of the
Holder or the Holder’s designee with DTC representing such number of shares of
Common Stock that would have been so delivered if the Company timely complied
with its obligations hereunder and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of New Conversion Shares that the Company was required to deliver to the
Holder by the Required Delivery Date multiplied by (B) the lowest Closing Sale
Price (as defined in the New Note) of the Common Stock on any Trading Day during
the period commencing on the date of the delivery by the Holder to the Company
of the applicable New Conversion Shares and ending on the date of such delivery
and payment under this clause (ii). Nothing shall limit the Holder’s right to
pursue any other remedies available to it hereunder, at law or in equity,
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock (or to electronically deliver
such shares of Common Stock) as required pursuant to the terms hereof.
Notwithstanding anything herein to the contrary, with respect to any given
Delivery Failure, this Section 7(e) shall not apply to the Holder the extent the
Company has already paid such amounts in full to the Holder with respect to such
Delivery Failure, as applicable, pursuant to the analogous sections of the New
Note, as applicable, held by the Holder.
(f)    FAST Compliance. While any New Note remains outstanding, the Company
shall maintain a transfer agent that participates in the DTC Fast Automated New
Securities Transfer Program.
8.    MISCELLANEOUS.
Section 9 of the Note Purchase Agreement is hereby incorporated by reference
herein, mutatis mutandis.

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IN WITNESS WHEREOF, Holder and the Company have executed this Exchange Agreement
as of the date set forth on the first page of this Exchange Agreement.

 
COMPANY:
 
INNOVATE BIOPHARMACEUTICALS INC.
 
 
 
By: /s/ Christopher P. Prior
 
 
 
Name: Christopher P. Prior
 
Title: Chief Executive Officer

    

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IN WITNESS WHEREOF, Holder and the Company have executed this Exchange Agreement
as of the date set forth on the first page of this Exchange Agreement.
 
HOLDER:
 
 
 
GUSTAVIA CAPITAL PARTNERS LLC
 
 
 
By: /s/ Eli Hassett
 
       Name: Eli Hassett
 
       Title: Director
 
 
 
Aggregate Principal Amount of Existing Note:
 
$
 
 
 
Aggregate Principal Amount of New Note: 
 
$
 
 
 
Delivery Information: