Document:

Blueprint

 

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.

 

  

1

 

 

“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.

 

 

2

 

 

“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.

 

  

3

 

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;

  

  

4

 

 

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;

 

5

 

 

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.   

 

  

6

 

 

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.

 

  

7

 

 

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)

 

 

 

  

8

 

 

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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