8-K: Clean Energy Technologies Secures Highly Dilutive Convertible Note Financing Amidst Restrictive Covenants

Clean Energy Technologies, Inc. has entered into a junior secured convertible promissory note and issued common stock for a net funding of $296,500, under terms that include significant dilution potential and stringent covenants.

Summary

• Clean Energy Technologies, Inc. (CETY) entered into a Securities Purchase Agreement (SPA) with Mast Hill Fund, L.P. on June 4, 2025.
• The Company sold a junior secured convertible promissory note with a principal amount of $335,000 and 50,000 shares of common stock for an aggregate purchase price of $301,500.
• After deducting $5,000 for Mast Hill's legal expenses, the Company received net funding of $296,500.
• The Note includes an Original Issue Discount (OID) of $33,500 and accrues guaranteed interest at 10% per annum, maturing in 12 months.
• The Note is convertible into common stock at the holder's election at a price equal to the lesser of $2.50/share or 90% of the lowest volume-weighted average price (VWAP) during the 5 trading days prior to conversion.
• Conversion is subject to a 4.99% beneficial ownership limitation, and the holder can deduct $1,750 from each conversion amount for fees.
• Proceeds from the transaction are designated for payment to Nations Interbanc, working capital, and business development, explicitly prohibiting repayment of indebtedness to officers, directors, employees, or affiliates.
• The Company is required to hold a special shareholder meeting within 60 calendar days after its common stock trades below $0.50/share to obtain approval for issuing shares in excess of the 12,370,000 'Exchange Cap' to Mast Hill.
• The Company is prohibited from entering into 'Variable Rate Transactions' or issuing common stock/equivalents below a 'Threshold Price' ($0.50) until shareholder approval for the Exchange Cap is obtained.
• The Company is also prohibited from issuing or announcing the issuance of any common stock or equivalents for 180 calendar days from the agreement date, except for the securities issued in this transaction.
• The Note is a junior secured obligation, subordinate to the Company's senior secured lender, Nations Interbanc.

Sentiment

Score: 2

Explanation: The sentiment is overwhelmingly negative due to the highly dilutive nature of the financing, the significant Original Issue Discount, the punitive default terms, and the restrictive covenants that severely limit the Company's future financial and operational flexibility. These terms suggest a company in a distressed financial position.

Positives

• The Company secured $296,500 in net funding, providing capital for working capital and business development, and for payment to Nations Interbanc.
• The financing allows the Company to continue its operations and pursue strategic initiatives.

Negatives

• The convertible note carries a significant Original Issue Discount (OID) of $33,500, meaning the Company received less cash than the principal amount of the debt.
• The conversion price is highly dilutive, set at the lesser of $2.50 or 90% of the lowest VWAP over five trading days, which can lead to substantial dilution for existing shareholders.
• The 10% guaranteed interest rate, earned in full at issuance for the first 12 months, adds to the cost of capital.
• The Company is subject to highly restrictive covenants, including prohibitions on certain types of future financings (Variable Rate Transactions) and asset sales without the holder's consent.
• Significant penalties are imposed for various events of default, including a 150% repayment premium on the outstanding principal and interest, and daily cash penalties for public information failures or delays in share issuance.
• The requirement to obtain shareholder approval for issuing shares beyond the 'Exchange Cap' (12,370,000 shares) if the stock price falls below $0.50 introduces uncertainty and potential further default triggers.
• The prohibition on issuing common stock or equivalents below the $0.50 'Threshold Price' until shareholder approval is obtained could severely limit future capital raising options.

Risks

• **Dilution Risk**: The conversion terms, particularly the 90% of lowest VWAP, expose existing shareholders to significant dilution if the stock price declines.
• **Shareholder Approval Risk**: Failure to obtain shareholder approval for the 'Exchange Cap' within 180 days of the Issue Date constitutes an Event of Default, triggering severe penalties.
• **Liquidity and Going Concern Risk**: The need for such dilutive and restrictive financing terms suggests potential underlying financial distress or challenges in securing more favorable capital.
• **Public Information Failure Risk**: The Company faces daily cash penalties (1% of Purchase Price) for failing to comply with 1934 Act reporting requirements or Rule 144 conditions, which could drain cash.
• **Delisting/Suspension Risk**: Delisting, suspension from trading, or failure to be listed on Nasdaq Capital Market are Events of Default, which could severely impact stock liquidity and investor confidence.
• **Cross-Default Risk**: An event of default under any other Company indebtedness can trigger a cross-default under this Note, accelerating repayment obligations.
• **Operational Restrictions**: Covenants restrict the Company's ability to change its business nature, sell material assets outside the ordinary course, or incur certain types of indebtedness without the holder's consent.
• **Future Financing Limitations**: The prohibition on 'Variable Rate Transactions' and issuing securities below a certain price until shareholder approval is obtained could hinder the Company's ability to raise necessary capital in the future.

Future Outlook

The Company intends to use the net proceeds for working capital and business development, and for payment to Nations Interbanc. The future issuance of shares beyond the Exchange Cap is contingent on obtaining shareholder approval, which the Company's Board and executive officers are committed to recommending and voting for. The Company is prohibited from engaging in certain dilutive financing activities or asset sales without the holder's consent, which may impact future strategic flexibility.

Management Comments

• The Company's Chief Executive Officer, Kambiz Mahdi, signed the report, indicating management's formal acknowledgment and agreement to the terms of the transaction.

Industry Context

This financing arrangement for Clean Energy Technologies, Inc. (CETY), a company in the clean energy sector, reflects a common pattern for smaller, growth-stage, or financially constrained companies seeking capital outside traditional banking channels. The highly dilutive and restrictive terms, including a significant Original Issue Discount (OID), a floating conversion price tied to market performance, and stringent covenants, are characteristic of 'toxic' or 'death spiral' financing often provided by institutional investors like Mast Hill Fund, L.P. to companies that may have limited access to more favorable equity or debt markets. Such terms are typically accepted when a company is in urgent need of capital and has few other options, highlighting potential underlying financial challenges or a high-risk business model within the competitive clean energy industry.

Comparison to Industry Standards

• The 10% guaranteed interest rate on the note is higher than typical senior secured debt for established companies but can be common for junior secured or distressed debt.
• The Original Issue Discount (OID) of $33,500 on a $335,000 principal note (10% OID) is a significant upfront cost, indicating a high-risk premium demanded by the investor, far exceeding standard corporate bond issuance costs.
• The conversion price mechanism, set at 90% of the lowest 5-day VWAP, is highly unfavorable to existing shareholders, as it guarantees conversion at a discount to recent trading prices, leading to maximum dilution. This contrasts sharply with fixed-price convertible notes or equity raises at a premium to market, which are standard for healthier companies.
• The $1,750 fee per conversion notice is an unusual and additional cost burden on the Company, not typically seen in standard financing agreements.
• The extensive list of Events of Default, including penalties like the 150% repayment premium and daily cash penalties for non-compliance (e.g., public information failures, non-public information disclosure), are far more punitive than standard loan covenants and are indicative of a lender-friendly, high-risk financing structure.
• The prohibition on 'Variable Rate Transactions' and issuing securities below a 'Threshold Price' ($0.50) until shareholder approval is obtained is a highly restrictive covenant that severely limits the Company's future financing flexibility, unlike the broader capital access typically enjoyed by well-capitalized industry peers.
• The requirement for shareholder approval for exceeding the 'Exchange Cap' and the associated default triggers are specific to Nasdaq listing rules for highly dilutive transactions, which are not typically encountered by companies raising capital on more favorable terms.

Corporate Governance

Related Party Transactions

• The proceeds from the transaction are explicitly prohibited from being used for repayment of indebtedness owed to officers, directors, or employees of the Company or their affiliates, or any loan, credit, or advance to any officers, directors, employees, or affiliates of the Company.

Stakeholder Impact

• **Shareholders**: Existing shareholders face significant potential dilution due to the convertible note's terms, especially the floating conversion price tied to market performance. The restrictive covenants and high default penalties also increase the risk profile of their investment.
• **Creditors (Nations Interbanc)**: Nations Interbanc maintains its senior secured lender position, as the new note is explicitly junior and subordinate to their claims.
• **Management/Employees**: The D&O insurance requirement offers some protection for officers and directors. However, the stringent covenants and potential financial distress implied by the financing terms could create pressure on management and impact employee morale or stability.
• **Company Operations**: The capital infusion provides immediate liquidity for working capital and business development, but the restrictive covenants may limit future operational and strategic flexibility.

Next Steps

• The Company must hold a special meeting of shareholders to obtain approval for issuing shares in excess of the 12,370,000 'Exchange Cap' to Mast Hill, particularly if the stock price falls below $0.50/share.
• The Company is required to purchase Director and Officer (D&O) insurance within 60 calendar days of the closing date.
• The Company must continue to comply with all reporting requirements of the 1934 Act to avoid daily cash penalties.
• The Company must adhere to strict covenants regarding future financings, asset sales, and related party transactions.

Key Dates

Recommendation

Keywords

Clean Energy Technologies, CETY, Convertible Note, Debt Financing, Equity Financing, Private Placement, SEC Filing, 8-K, Mast Hill Fund, Dilution, Corporate Governance, Risk Factors, Securities Purchase Agreement, Promissory Note