Exhibit 10.3
 
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
 
 
KNOW LABS, INC.
 
FORM OF 8.0% SUBORDINATED CONVERTIBLE NOTE
 
Original Issue Date:[_________________________]      
  Principal Amount: $[__________________]

 
THIS 8.0% SUBORDINATED CONVERTIBLE NOTE (this “Note ”) is issued, dated, and
effective as of the Original Issue Date set forth above by Know Labs, Inc., a
Nevada corporation (the “Company”), having its principal place of business at
500 Union Street, Suite 810, Seattle, WA 98101, to [________________________]
(together with its successors and permitted assigns, the “Holder”), pursuant to
exemptions from registration under the Securities Act of 1933, as amended (the
“Securities Act”). The Company promises to pay the aggregate unpaid Principal
Amount under this Note set forth above (the “Principal Amount”) to the Holder on
the earlier of: (1) mandatory and automatic conversion of this Note into the
next financing for the Company, provided such financing yields gross proceeds to
the Company of at least $10 million as set forth below under “Mandatory
Conversion” (a “Qualified Financing”) or (2) the one (1) year anniversary of
this Note (the “Maturity Date”), and to pay interest to the Holder on the
aggregate unconverted and then outstanding Principal Amount in accordance with
the provisions of this Note.
 
This Note is subject to the following additional provisions:
 
Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Note (a) capitalized terms not otherwise defined
herein shall have the meanings set forth in the Securities Purchase Agreement
and (b) the following terms shall have the following meanings:
 
“Bankruptcy Event” means any of the following events: (a) the Company commences
a case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction relating to the Company; (b) there is commenced
against the Company any such case or proceeding that is not dismissed within
sixty (60) days after commencement; (c) the Company is adjudicated insolvent or
bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property that is not
discharged or stayed within sixty (60) calendar days after such appointment; (e)
the Company makes a general assignment for the benefit of creditors; (f) the
Company calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (g) the Company, by any act or
failure to act, expressly indicates its consent to, approval of or acquiescence
in any of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.
 
 
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“Business Day” means any day other than a Saturday, Sunday, or a legal holiday
on which federal banks are authorized or required to be closed for the conduct
of commercial banking business.
 
“Change of Control” means any of the following events: (a) consummation of any
merger or consolidation of the Company in which the Company is not the
continuing or surviving corporation, or pursuant to which shares of the
Company’s common stock are converted into cash, securities, or other property,
if following such merger or consolidation the holders of the Company’s
outstanding voting securities immediately prior to such merger or consolidation
own less than fifty percent (50%) of the outstanding voting securities of the
surviving corporation; (b) consummation of any sale, lease, exchange or other
transfer, in one transaction or a series of related transactions of all or
substantially all of the Company’s assets; or (c) a change in ownership of the
Company’s capital stock as a result of which the owners of the Company’s
outstanding capital stock immediately prior to the change own less than fifty
percent (50%) of the Company’s outstanding capital stock following such change.
 
“Common Stock Equivalents” means any securities of the Company or its
subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
 
“Event of Default” shall have the meaning set forth in Section 5(a).
 
“Original Issue Date” means the date of the first issuance of this Note as set
forth above, regardless of any transfers of this Note and regardless of the
number of instruments which may be issued to evidence this Note.
 
“Permitted Indebtedness” means (a) the indebtedness evidenced by this Note, (b)
the indebtedness existing on the Closing Date, (c) lease obligations and
purchase money indebtedness incurred in connection with the acquisition of
capital assets and lease obligations with respect to newly acquired or leased
assets, and (d) indebtedness that is expressly subordinate to this Note pursuant
to a written subordination agreement with the Holder that is acceptable to the
Holder in its sole and absolute discretion.
 
 
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“Permitted Lien” means the individual and collective reference to the following:
(a) liens existing on the Closing Date, (b) liens for taxes, assessments and
other governmental charges or levies not yet due or liens for taxes, assessments
and other governmental charges or levies being contested in good faith and by
appropriate proceedings for which adequate reserves (in the good faith judgment
of the management of the Company) have been established in accordance with GAAP;
(c) liens imposed by law which were incurred in the ordinary course of the
Company’s business, such as carriers’, warehousemen’s and mechanics’ liens,
statutory landlords’ liens, and other similar liens arising in the ordinary
course of the Company’s business, and which (x) do not individually or in the
aggregate materially detract from the value of such property or assets or
materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or
asset subject to such lien; and (d) liens incurred in connection with Permitted
Indebtedness.
 
“Securities Purchase Agreement” means the Securities Purchase Agreement, dated
as of the date hereof, between the Company and the original Holder, as amended,
modified, or supplemented from time to time in accordance with its terms.
 
Section 2.   Interest, Prepayment. 

 
a) Interest Rate. Interest shall accrue daily on the outstanding Principal
Amount of this Note at a rate per annum equal to eight percent (8.0%), and is
Payable-In- Kind (“PIK”) as set forth below.
 
b) Payment of Interest . On the Maturity Date, the Company shall pay to the
Holder any accrued but unpaid and unconverted interest hereunder on the
aggregate unconverted and then outstanding Principal Amount of this Note. The
amount of interest that has accrued on the Principal Amount hereof as of any
date may be added to and included with the Principal Amount being so converted
on any date on which a conversion is effected under Section 3 below.
 
c) Interest Calculations. Interest shall be calculated on the basis of a three
hundred sixty (360)-day year, consisting of twelve (12) thirty (30) calendar day
periods, and shall accrue daily commencing on the Original Issue Date until
payment in full of the outstanding Principal Amount, together with all accrued
and unpaid interest and other amounts which may become due hereunder, has been
made or until such Principal Amount and interest have been duly converted.
Interest hereunder will be paid to the Person in whose name this Note is
registered on the records of the Company regarding registration and transfers of
this Note.
 
d) Prepayment. This Note may be prepaid by the Company at any time following the
Original Issuance Date on seven (7) day’s prior written to the Holder.
 
Section 3.   Conversion.
 
a) Mandatory Conversion on Qualified Financing. Each Holder will be required to
convert the Note into a Qualified Financing at a conversion price per share
equal to the lower of (i) $1.00 or (ii) a twenty five percent (25%) discount to
the price per share paid by investors in such Qualified Financing. This
mandatory conversion shall be automatic and the Company will provide notice to
Holder at least seven (7) days prior to the closing of a Qualified Financing as
to the number of shares Holder would receive based on applying the discounted
pricing described above for the Principal Amount and PIK shares. In conjunction
with any conversion, Holder will become a party to and will execute appropriate
subscription and other agreements in substantially the form executed by
investors in the Qualified Financing.
 
 
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b). Other Mandatory Conversion. If the Note has not been paid or converted prior
to the Maturity Date, the outstanding Principal Amount of the Note will be
automatically converted on the Maturity Date into shares of common stock of the
Company based on the lesser of (i) $1.00 per share or (ii) any adjusted price
resulting from the application of the “Most Favored Nations Provision” set forth
below. In such event the Anti-Dilution Period, as defined below, will be
extended for a further twelve (12) months.
 
c). Payment on Change of Control. If prior to the Maturity Date, there is a
Change of Control and the Note has not previously been converted, a Holder may
elect to have the Note together with any accrued interest repaid in full at that
time in cash plus an additional ten percent (10%) on the Principal Amount of the
Note.
 
d). Most Favored Nations Provision. If the Note has not been paid or converted
prior to the Maturity Date, and if at any time or from time to time prior to
January 31, 2020 (the “Anti- Dilution Period”) the Company issues any additional
securities (a “New Issuance”) (including, but not limited to, any class of
shares, preferred stock, warrants, rights to subscribe for shares, convertible
debt or other securities convertible into any share class, referred to below
collectively as “Securities”) for a consideration per share, after giving effect
to, and net of, commissions, fees and other expenses, that is less, or which on
conversion or exercise of the underlying security is less, than the conversion
price of the Holder (as adjusted for changes resulting from any forward or
reverse share splits, stock dividends and similar events) (a “Down Round
Price”), the Company shall issue additional Securities to Holder at no
additional cost in an amount that it would have received at the Down Round
Price, rounded up to the next whole share, on a full ratchet basis at no
additional consideration (“Holder’s Down Round Issuances"). In the event that a
New Issuance is made at a Down Round Price and includes both equity securities
and rights to acquire additional securities (whether in the form of warrants,
options or other rights) (the “Rights”), then as part of any full ratchet
adjustment the Company shall also include, within the Holder’s Down Round
Issuances, that number of Rights which Holder would have acquired had it
participated in the New Issuance.
 
Section 4. Negative Covenants. As long as any portion of this Note remains
outstanding, unless the Holder shall have otherwise given prior written consent,
the Company shall not, and shall not permit any of its subsidiaries (whether or
not a subsidiary on any Closing Date) to, directly or indirectly:
 
a) other than Permitted Indebtedness, enter into, create, incur, assume,
guarantee, or suffer to exist any indebtedness for borrowed money of any kind,
including but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;
 
b) other than Permitted Liens, enter into, create, incur, assume, or suffer to
exist any liens of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
 

 
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c) repay, repurchase, or offer to repay, repurchase or otherwise acquire more
than a de minimis number of shares of its Common Stock or Common Stock
Equivalents other than repurchases of Common Stock or Common Stock Equivalents
of departing employees of the Company, provided that such repurchases shall not
exceed an aggregate of $150,000 for all employees during the term of this Note;
 
d) pay cash dividends or distributions on Common Stock of the Company;
 
e) enter into any transaction with any Affiliate of the Company which would be
required to be disclosed in any public filing with the Commission, unless such
transaction is expressly approved by a majority of the disinterested directors
of the Company (even if less than a quorum otherwise required for board
approval); or
 
f)  enter into any agreement with respect to any of the foregoing.
 
Section 5. Events of Default.  

 
a)   “Event of Default” means, wherever used herein, any of the following events
(whatever the reason for such event and whether such event shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body), provided that an event specified in item i, ii, iii, or vii
below will not become an Event of Default unless and until it is not cured, if
possible to cure, within the earlier to occur of (i) five (5) Business Days
after notice of such failure sent by the Holder or by any other Holder and (ii)
ten (10) Business Days after the Company has become or should have become aware
of such failure:
 
i. any default in the payment of (A) the Principal Amount of this Note or (B)
interest, and other amounts owing to the Holder of this Note, as and when the
same shall become due and payable;
 
ii. the Company shall fail to observe or perform any other covenant or agreement
contained in this Note;
 
iii. a default or event of default shall occur under any of the Transaction
Documents (subject to any grace or cure period provided in the applicable
Transaction Document);
 
iv. any representation or warranty made in the Transaction Documents shall be
untrue or incorrect in any material respect as of the date when made or deemed
made;
 
v.     the Company shall be subject to a Bankruptcy Event;
 
vi.   the Company shall default on any of its obligations under any mortgage,
credit agreement, or other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be
secured or evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that (A) involves an obligation
greater than $100,000, whether such indebtedness now exists or shall hereafter
be created and (B) results in such indebtedness becoming or being declared due
and payable prior to the date on which it would otherwise become due and
payable;
 
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vii. if at any time commencing six (6) months from the date hereof the Company
is not subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, or has failed to file all reports
required to be filed thereunder during the then preceding twelve (12) months;
 
viii. any monetary judgment, writ or similar final process shall be entered or
filed against the Company, any subsidiary or any of their respective property or
other assets for more than $100,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded, or unstayed for a period of forty-five
(45) calendar days; provided, however, that any judgment which is covered by
insurance or an indemnity from a creditworthy party (such creditworthiness as
reasonably determined by the Holder) shall not be included in calculating the
amount of such judgment, writ, or final process so long as the Company provides
the Holder a written statement from such insurer or indemnity provider (which
written statement shall be reasonably satisfactory to the Holder) to the effect
that such judgment is covered by insurance or an indemnity and the Company will
receive the proceeds of such insurance or indemnity within forty-five (45)
calendar days of the issuance of such judgment.
 
(b)   Acceleration Upon Event of Default. If any Event of Default occurs, the
outstanding Principal Amount of this Note, plus accrued but unpaid interest and
other amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s election (which the Holder shall not make more than the
later of thirty (30) calendar days after the date such Event of Default is cured
or otherwise resolved and the Holder is aware of such cure or resolution),
immediately due and payable in cash. If there is such an acceleration, then upon
the payment in full of the amounts due hereunder, the Holder shall promptly
surrender this Note to or as directed by the Company. In connection with such
acceleration described herein, the Holder need not provide, and the Company
hereby waives, any presentment, demand, protest, or other notice of any kind,
and the Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such acceleration may be rescinded and
annulled by Holder at any time prior to payment hereunder and the Holder shall
have all rights as a holder of the Note until such time, if any, as the Holder
receives full payment pursuant to this Section 5(b). No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
 
Section 6. Miscellaneous.   
 
a)   Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any notice of
conversion, shall be in writing and delivered in the manner and to the
address(s) set forth in the Securities Purchase Agreement.  
 

 
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b) Absolute Obligation. Except as expressly provided herein, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and accrued interest, as applicable,
on this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct debt obligation of the Company.
 
c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen, or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Note, or in lieu of or in substitution
for a lost, stolen, or destroyed Note, a new Note for the Principal Amount of
this Note so mutilated, lost, stolen, or destroyed, but only upon receipt of
evidence of such loss, theft, or destruction of such Note, and of the ownership
hereof, reasonably satisfactory to the Company.
 
d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of Nevada,
without regard to the principles of conflict of laws thereof. Each party agrees
that all legal proceedings concerning the interpretation, enforcement and
defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees, or agents) shall be commenced in the state
and federal courts sitting in Nevada (the “Nevada Courts”). Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the Nevada Courts
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of such Nevada Courts, or
such Nevada Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Note and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any other manner permitted by
applicable law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Note or the transactions
contemplated hereby. If either party shall commence an action or proceeding to
enforce any provisions of this Note, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorney’s fees and
other costs and expenses reasonably incurred in the investigation, preparation
and prosecution of such action or proceeding.
 
e) Waiver. Any waiver by the Company or the Holder of a breach of any provision
of this Note shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Note.
The failure of the Company or the Holder to insist upon strict adherence to any
term of this Note on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Note. Any waiver by the Company or the
Holder must be in writing.
 
 
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f) Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless
remain applicable to all other Persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum rate of interest permitted
under applicable law. The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of or interest on this Note as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this indenture, and the Company (to
the extent it may lawfully do so) hereby expressly waives all benefits or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay, or impeded the execution of any power herein granted to the
Holder, but will suffer and permit the execution of every such as though no such
law has been enacted.
 
g) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.
 
h) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect any of
the provisions hereof.
 
i) Series of Notes. This Note is one of a series of Notes of the Company in the
aggregate principal amount of up to Five Million Dollars as described in that
certain Confidential Private Placement Memorandum, dated January 2019, delivered
to the Holder in connection with the transactions contemplated by the
Transaction Documents. All Notes in such series shall rank equally and ratably
without preference or priority of any said Notes over any others thereof.
 

 
(signature page follows)
 
 
 
 
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a
duly authorized officer as of the date first above indicated.
 
KNOW LABS, INC.
 
 
 
 
 
By:
 
           Name: Ronald P. Erickson
           Title: Chairman
 
 
By:
 
           Name: Phillip A. Bosua
           Title: Chief Executive Officer

 
 
 
 
 
 
 
 
 
 
 
 
 
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