preferred shares proposal a proposal (with someone elses cash)
A lender invests $20M in RCG through preferred stocks helping the struggling company raise capital. The preferred stock, a fixed-value security just like a bond, would pay an annual dividend, say 6%. The 280M share $20M deal implies that the preferred shares are fixed at 7.1428c/sh. (The other numbers are round numbers.) The deal includes warrants at 7.1428c. They are in the money once the market climbs above 7.1428c or roughly book value.
A few years down the road, at say 15c/sh, the lender exercises the warrants to buy 280M of common shares. Recall that the exercise price of the warrants is much lower at 7.1428c/sh. The lender pays $20M for the warrants by selling $20M of preferred shares.
The lender pockets a profit of 15c - 7.1428c plus 6% per year.
The lender transitions from being fixed security holder to a common shareholder and rides the stock price higher with production.
Unlike earlier private placements ...
1. In the early stages the lender is a preferred share holder and is first in line as a creditor.
2. the lender gets paid 6% while the company gets on it's feet
Mutual trust is an important factor.