What part are you stuck on? You said you were going to prove me wrong. In the specific instance you gave, the lender lent $125k with a 10% straight interest for a term of 1 year. The lender gets convertible notes in return based on the value of the stock 10 days before requesting the stock. This alone should cover the lender's risk as once the lender requests an amount of shares, it has 10 days to dump stock and get the price down. When the price goes down, the lender is entitled to more shares. But that is all a year away unless the company defaults.
In the mean time, the lender likely will short the stock regularly and cover as needed. In this particular example, the lender likely started shorting at .003 (yes, before the deal was signed). When the price got down to .002, the lender was entitled to 62mil shares. Up from 41mil at .003. When the price got to .001, the lender was entitled to 125mil shares or triple the original shares. If they sit on both the ask and the bid with large holdings, they can make even more money. Imagine an endless supply of stock at the ask even though maybe 15mil shares are displayed, but 40mil shares are at the bid. Retail may think there is support and buy at the ask. The lender is shorting more than what is needed. Yet the ask never disappears. Eventually the bid is hit and some of the short gets covered. The lender eventually pulls it's support of the bid and the process continues at a lower price - meaning more shares will eventually be owed. We have seen this exact thing happen regularly and with greater volume lately. A few days ago, 120mil shares were sold at the ask and 30mil at the bid, yet the price went down slightly.
Now the biggest risk of shorting a penny stock is that it doesn't take much for the stock to rise by even 1000%. Going from .0012 to a penny is no big deal - the stock is at a penny... but it could be devestating for a shorter with a large short position. So the tools of the lender is toxic financing (not unlike this deal with no fixed price for the stock but rather an endless supply of stock if the price goes low enough. Also a warrant in case the stock jumps in value. The warrant holder cannot sell the warrant under normal conditions, but they can use it to convert to stock - yes, with a legend - and then use the certificates to cover a short position. I am aware that you will say you need to wait a year. Ok, fine. They wait a year though it isn't needed. Even if they were to wait a year, the shorter can close their position if caught unaware and they believe that the price will continue to increase and suffer a short term loss. As the stock starts to cool, they short again - not unlike how a market maker handles an unexpected turn when they are caught under the gun. Then after the year is up, if the stock is still up they can cash in on the stock from the warrants and likely make more money. The warrants become an insurance similar to a covered call. My favorite part with this is that the warrants were written at .002 when the price of the stock on signing day was .0026. In the money instantly.
With the referenced loan, I would bet that the lender already got his initial investment back from shorting agressively and playing the spread on the way down.
Market Data 
Markets 
AI
