THIS CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS.
 
NO SALE OR DISPOSITION OF THIS NOTE OR THE SECURITIES ISSUED UPON CONVERSION
HEREOF MAY BE EFFECTED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT IN COMPLIANCE WITH RULE 144 THEREUNDER OR ANOTHER
EXEMPTION THEREFROM AND APPLICABLE STATE SECURITIES LAWS, TOGETHER WITH AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE PAYOR, THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT.
 
JUNIOR CONVERTIBLE UNSECURED PROMISSORY NOTE
 
$_________________
April __, 2008

 
For value received, MORLEX, INC., a Colorado corporation (the “Company”),
promises to pay to ______________ or his registered assigns (the “Holder”) the
principal sum set forth above (the “Principal Amount”), together with interest
thereon as set forth below.
 
This note (the “Note”) is issued as part of a series of similar notes
(collectively, the “Notes”) to be issued pursuant to the terms of that certain
Note Purchase Agreement dated as of April __, 2008 (the “Agreement”) between the
Company and the Holder, a copy of which is available for inspection at the
office of the Company. This Note is subject to the limitations on disposition
set forth in the Agreement. The following is a statement of the rights of the
Holder and the conditions to which this Note and all of the other Notes issued
or issuable by Company pursuant to the Agreement or similar agreements entered
into as of the date hereof are subject, to which the Company and the Holder, by
their respective issuance and acceptance of this Note, agree.
 
1. Definitions. Defined terms used herein but not otherwise defined shall have
the respective meanings ascribed to them in the Agreement. As used in this Note,
the following capitalized terms have the following meanings:
 
“Additional Shares of Company Common Stock” shall mean shares of Company Common
Stock issued by the Company after the date hereof, except:
 

 
(i)
Options to purchase shares of Company Common Stock or shares of Company Common
Stock, issued to directors, officers, employees or consultants of the Company,
as an incentive for performance pursuant to any stock option plan, stock grant
plan or stock purchase plan approved by the Company Board;

 
 

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(ii)
Shares of Company Common Stock, warrants or other equity securities of the
Company issued for consideration other than cash pursuant to a merger,
consolidation, acquisition, or similar business combination of the Company
approved by the Company’s Board;

 

 
(iii)
Shares of Company Common Stock, warrants or other equity securities of the
Company issued pursuant to any loan or leasing arrangement, real property
leasing arrangement or debt financing from a bank or similar financing
institution approved by the Company Board;

 

 
(iv)
Shares of Common Stock issuable upon conversion of any Note or conversion or
exchange of, any other security by its terms convertible into or exchangeable
for shares of Company Common Stock, or upon exchange of the preferred stock of
any subsidiary of the Company into Company Common Stock; or

 

 
(v)
Shares of Company Common stock issued upon any stock dividend, stock split,
stock distribution or other similar recapitalization.

 
“Automatic Conversion Date” shall mean the 5th day following the occurrence of a
Liquidity Event.
 
“Automatic Conversion Notice” is defined in Section 4(b) hereof.
 
“Business Day” shall mean any day other than a Saturday, a Sunday or a day on
which commercial banks in New York, New York are required or authorized to be
closed.
 
“Company Board” shall mean the board of directors of the Company.
 
“Conversion Date” shall mean the Automatic Conversion Date or the date on which
the Holder elects to convert this Note pursuant to Section 5 hereof.
 
“Conversion Price” shall initially be equal to $0.75. The Conversion Price shall
be subject to adjustment as provided herein.
 
“Conversion Shares” is defined in Section 4(a) hereof.
 
“Default” is defined in Section 8 hereof.
 
“Liquidity Event” shall mean (i) an underwritten public offering of Company
Common Stock pursuant to an effective registration statement under the
Securities Act resulting in aggregate proceeds to the Company (net of
underwriting discounts and commissions) of not less than $7,500,000 or (ii) a
private placement of Company Common Stock resulting in aggregate proceeds to the
Company, together with the proceeds from the issuance of these Notes, of not
less than $5,000,000.
 
“Maturity Date” is defined in Section 2 hereof.

 
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“Notice of Conversion” is defined in Section 6(a) hereof.
 
“Person” shall be construed in its broadest sense and shall mean any natural
person, firm, corporation, partnership, limited liability company, association,
trust, joint stock company, joint venture, unincorporated organization or other
entity.
 
“Volume Weighted Average Price” shall mean the daily volume weighted average
price of the Company Common Stock for such date (or the nearest preceding date)
on the primary trading market on which the Company Common Stock is then listed
or quoted as reported by Bloomberg Finance L.P. (based on a trading day from
9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time) using the VAP function or a
similar service.
 
“Voluntary Conversion Notice” is defined in Section 5(b) hereof.
 
2. Principal Repayment.
 
(a) Subject to the earlier conversion of this Note under Section 4 or 5 below,
the outstanding Principal Amount and all accrued and unpaid interest thereon
shall be due and payable by the Company on April __, 2009 (the “Maturity Date”).
 
(b) This Note may be prepaid at any time, without premium or penalty, in whole
or in part. Any prepayment of the Principal Amount shall be accompanied by a
payment of accrued and unpaid interest in respect of the outstanding Principal
Amount being prepaid.
 
3. Interest.
 
(a) Interest on the outstanding Principal Amount shall accrue commencing on the
date hereof and shall continue to accrue until the entire Principal Amount shall
have been repaid in full or converted under Section 4 or 5 of this Note, at the
rate of 10% per annum, compounded annually. Interest shall be payable on the
earlier of the Maturity Date or the Conversion Date upon conversion of this Note
pursuant to Section 4 or 5 and shall be calculated on the basis of a 366-day
year for the actual number of days elapsed.
 
(b) Interest shall be payable at the Company’s option either (i) in cash or (ii)
in the event that Company Common Stock is tradable on the Over-the-Counter
Bulletin Board, the NASDAQ Stock Market or the New York or American Stock
Exchange, by the issuance of shares of Company Common Stock. The number of
shares of Company Common Stock to be so issued shall be determined by dividing
(i) the amount of accrued but unpaid interest at such time by (ii) 90% of the
average Volume Weighted Average Price of Company Common Stock for the 10 trading
days immediately preceding (but not including) the day that is one trading day
prior to the Maturity Date or the Conversion Date, as applicable. If interest is
to be paid in cash, then such payment shall be made by wire transfer of
immediately available funds to an account at a bank designated in writing by the
Holder. In the absence of any such written designation, any such interest
payment shall be deemed made on the date a check in the applicable amount
payable to the order of the Holder is received by the Holder at its last address
as shown on the registration records of the Company.

 
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4. Automatic Conversion.
 
(a) On the Automatic Conversion Date, the unpaid Principal Amount shall be
converted into the number of shares of Company Common Stock (the “Conversion
Shares”) calculated by dividing the then outstanding Principal Amount by the
then applicable Conversion Price. All Conversion Shares deliverable upon
conversion shall be duly authorized, validly issued and fully paid and
non-assessable. At the time of such conversion, the Company shall repay to the
Holder all accrued but unpaid interest on the Principal Amount in cash or shares
of Company Common Stock, in accordance with Section 3(b) hereof.
 
(b) No greater than 20 nor fewer than 5 days prior to the Automatic Conversion
Date, notice by first class mail, postage prepaid, shall be given to the Holder,
addressed to the Holder at its last address as shown on the registration records
of the Company (the “Automatic Conversion Notice”). The Automatic Conversion
Notice shall specify the date fixed for conversion, the place or places for
surrender of Notes, and the then effective Conversion Price.
 
(c) Any Automatic Conversion Notice which is mailed as herein provided shall be
conclusively presumed to have been duly given by the Company on the date
deposited in the mail, and any defect in such notice to the Holder shall not
affect the validity of the proceedings for conversion of this Note.
Notwithstanding that this Note shall not have been surrendered, this Note shall
no longer be deemed outstanding and all rights whatsoever with respect to this
Note, except the right to receive the number of full shares of Company Common
Stock to which such Person shall be entitled upon conversion hereof, shall
terminate.
 
5. Optional Conversion.
 
(a) The Holder has the right, at the Holder's option, at any time prior to the
earlier of the Automatic Conversion Date or the repayment by the Company of the
Principal Amount in full, to convert this Note, in accordance with the
provisions of Section 6 hereof, into Conversion Shares calculated by dividing
the then outstanding Principal Amount by the then applicable Conversion Price.
All Conversion Shares deliverable upon conversion shall be duly authorized,
validly issued and fully paid and non-assessable. At the time of such
conversion, the Company shall repay to the Holder all accrued but unpaid
interest on the Principal Amount in cash or shares of Company Common Stock, in
accordance with Section 3(b) hereof.
 
(b) In order to exercise its right pursuant to the terms of this Note to convert
all or any portion of this Note for shares of Company Common Stock, the Holder
shall deliver to the Company, by facsimile transmission, at least 10 days prior
to the date on which the Holder wishes to effect such conversion, a written
notice (the “Voluntary Conversion Notice”) which shall specify the date fixed
for conversion.
 
6.  Conversion Procedures.
 
(a) As promptly as practicable after the Conversion Date, the Holder shall
surrender this Note at the place designated in the Automatic Conversion Notice
or as otherwise specified by the Company, duly endorsed. The Holder shall also
submit a notice (the “Notice of Conversion”) specifying the name or names (with
address(es)) in which a certificate or certificates evidencing shares of Company
Common Stock are to be issued. The surrender of this Note and the delivery of
the Notice of Conversion are the only procedures required of the Holder upon
conversion of this Note. No additional legal opinion or other information or
instructions shall be required of the Holder solely in connection with the
conversion of this Note.

 
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(b) The Company will make a notation of the date that a Notice of Conversion is
received, which date of receipt shall be deemed to be the date of receipt for
purposes hereof.
 
(c) The Company shall, or shall direct its transfer agent to, within 10 days
after such deposit of any Note accompanied by a Notice of Conversion and
compliance with any conditions herein contained, deliver to the Person for whose
account such Note was so surrendered, certificates evidencing the number of full
shares of Company Common Stock which such Person is entitled as aforesaid,
subject to Section 7.
 
(d) Such conversion shall be deemed to have been made as of the Conversion Date,
and the Person or Persons entitled to receive Company Common Stock deliverable
upon conversion of such Note shall be treated for all purposes as the record
holder or holders of such Company Common Stock on such date and the Note shall
no longer be deemed outstanding and all rights whatsoever in respect thereof
(including the right to receive interest thereon) shall terminate except the
right to receive the number of full shares of Company Common Stock to which such
Person shall be entitled upon conversion hereof; provided, however, that the
Company shall not be required to issue any certificates representing shares of
Company Common Stock (x) until such Note has been received at the place
designated in the Conversion Notice and (y) if such Note is received while the
stock transfer books of the Company are closed for any purpose, but such
certificate shall be issued immediately upon the reopening of such books as if
the Note had been received on the date of such reopening.
 
7. Adjustments to Conversion Price.
 
(a) In the event that the Company shall at any time or from time to time after
the date hereof, and for a period of one year following the date hereof, issue
Additional Shares of Company Common Stock without consideration or for a
consideration per share less than the then applicable Conversion Price, then the
Conversion Price shall be reduced concurrently with such issue or deemed issue
of the Additional Shares of Company Common Stock to be equal to the
consideration per share of such Additional Shares of Company Common Stock
received by the Company in such issuance; provided that if such issuance or
deemed issuance was without consideration, then the Company shall be deemed to
have received an aggregate of $0.001 of consideration for all such Additional
Shares of Company Common Stock issued or deemed to be issued.
 
(b) In the event of changes in the outstanding Company Common Stock by reason of
stock dividends or other distributions, split-ups, recapitalizations,
subdivisons, reclassifications, combinations or exchanges of shares,
separations, reorganizations, liquidations, or the like, the number, class and
kind of shares available upon conversion of this Note in the aggregate and the
applicable Conversion Price shall be correspondingly adjusted to give the Holder
upon conversion for the same aggregate Conversion Price, the total number, class
and kind of shares as the Holder would have owned had this Note been converted
prior to the event and had the Holder continued to hold such shares until after
the event requiring adjustment. The form of this Note need not be changed
because of any adjustment in the number of shares issuable upon conversion of
this Note. Immediately upon any adjustment in the number, class or kind of
shares subject to this Note and/or the Conversion Price pursuant to this Section
6, the Company shall prepare and furnish to the Holder a certificate signed by
its chief financial officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, the Conversion Price after giving effect to such
adjustment and the number, class and kind of shares then issuable upon
conversion of this Note.

 
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(c) In the event the Company shall issue on more than one date Additional Shares
of Company Common Stock that are a part of one transaction or a series of
related transactions and that would result in an adjustment to the Conversion
Price pursuant to the terms of subsection (a) above, then, upon the final such
issuance, the Conversion Price shall be readjusted to give effect to all such
issuances as if they occurred on the date of the first such issuance (and
without additional giving effect to any adjustments as a result of such
subsequent issuances within such period).
 
8. Fractional Shares. No fractional shares of Company Common Stock shall be
issuable upon conversion of this Note, but a payment in cash will be made in
respect of any fraction of a share which would otherwise be issuable upon the
surrender of this Note, or portion hereof, for conversion calculated at the
Conversion Price.
 
9.  Default. Unless this Note has been converted in accordance with the terms of
Section 4 or 5 above, the entire outstanding Principal Amount and all accrued
but unpaid interest on this Note shall become fully due and payable on the
Maturity Date. The occurrence of any of the following shall constitute a
“Default” under this Note: (a) default in any payment by the Company of the
Principal Amount and accrued interest hereunder when due or (b) material breach
by the Company of any obligation, covenant or other agreement herein or in the
Agreement, which is not cured within 20 Business Days after written notice to
the Company thereof.
 
10. Rights of the Holder Upon a Default. In the event of any Default hereunder,
all amounts payable hereunder shall, at the Holder’s option but without notice
or demand, become immediately due and payable, and the Holder shall thereupon
have all rights and remedies provided hereunder and in any other agreement
between the Holder and the Company or otherwise available at law or in equity.
 
11. Waiver of Default. No failure or delay on the part of the Holder to insist
on strict performance of the Company’s obligations hereunder or to exercise any
remedy hereunder shall constitute a waiver of the Holder’s rights in that or any
other instance. No waiver of any Holder’s rights shall be effective unless in
writing, and any waiver of any Default or any instance of non-compliance shall
be limited to its express terms and shall not extend to any other Default or
instance or non-compliance.
 
12. Subordination. This Note shall be subordinate and rank junior in right of
payment to any indebtedness of the Company evidenced by any loan agreement,
credit agreement or any other agreement entered into by the Company subsequent
to the date hereof which by its terms is not subordinated to any other
indebtedness of the Company.

 
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13. Notices. Any notice, request or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or mailed by registered or certified mail, postage prepaid,
or by recognized overnight courier or personal delivery at the respective
addresses of the parties as set forth in the Agreement. Any party hereto may by
notice so given change its address for future notice hereunder. Notice shall
conclusively be deemed to have been given when received.
 
14. Governing Law. THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
ENTERED INTO WITHIN SUCH STATE.
 
14. Waiver and Amendment. Any provision of this Note may be amended, waived or
modified upon the written consent of the Company and the Holder.
 
15. Severability. In case any provision contained herein (or part thereof) shall
for any reason be held to be valid, illegal or unenforceable in any respect,
such invalidity, illegality or other unenforceability shall not affect any other
provision (or the remaining part of the affected provision) hereof, but this
Note shall be construed as if such invalid, illegal or unenforceable provision
(or part thereof) had never been contained herein, but only to the extent that
such provision is invalid, illegal or unenforceable.
 
16. Successors and Assigns. This Note shall be binding upon the Company’s
successors and assigns and shall inure to the benefit of the Holder’s
successors, endorsers and assigns.
 
17. Usury. In the event any interest (including any Conversion Shares issued
pursuant to Section 4 hereof) paid on this Note is deemed to be in excess of the
then legal maximum rate, then that portion of the interest payment representing
an amount in excess of the then legal maximum rate shall be deemed a payment of
the Principal Amount and applied against the Principal Amount of this Note.
 
18. Titles and Subtitles. The titles and subtitles used in this Note are used
for convenience only and are not to be considered in construing or interpreting
this Note.
 
19. Counterparts. This Note may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. For the purposes of executing this Note, (i) a
document signed and transmitted by facsimile or telecopier shall be treated as
an original document; (ii) the signature of any party on such document shall be
considered as an original signature; and (iii) the document transmitted shall
have the same effect as a counterpart thereof containing original signatures. No
party may raise as a defense to the enforcement of this Note that a facsimile or
telecopier was used to transmit any signature of a party to this Note.

 
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IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name
this ____ day of April, 2008.
 
MORLEX, INC.
   
By:
 
Name:
 
Title:
 

 
 

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