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5 days ago4 min read

Rani Therapeutics: Evaluating Market Reaction to Capital Offering and Dilution Effects

Summary

  • Rani Therapeutics Holdings Inc (XNAS: RANI). announced a securities purchase agreement for 3 million Class A common shares and pre-funded warrants, alongside the cancellation of 3,246,753 Series A common warrants, at a combined price of $3.00 per share.

  • The analysis evaluates the dilutive impacts from the registered offering and the warrants, estimating a total dilution and its effect on the share price, while also considering the potential return on the raised capital.

  • Based on our analysis, the implied price per share is estimated at $2.84, suggesting that the current closing price of $2.12 reflects an overreaction by the market, indicating a potential upside of approximately 34%.


Catalyst

On October 15, 2024, Rani Therapeutics Holdings Inc. (XNAS: RANI) announced that it has entered into a securities purchase agreement with a single institutional investor for the purchase and sale of 3 million shares of RANI's Class A common stock, along with pre-funded warrants to purchase 333,333 shares of common stock in a registered direct offering. Each share of common stock (or pre-funded warrant) is being sold together with one Series C common warrant at a combined purchase price of $3.00【1】.


Additionally, the company has agreed with the investor to cancel all outstanding Series A common warrants to purchase an aggregate of 3,246,753 shares of the Company's stock, which were issued on July 22, 2024【1】.


Investment Thesis


We assess the impact of the aforementioned catalyst on a per-share basis to better understand the post-disclosure price estimate. We believe there are three key factors to analyze:


  1. Dilutive Impact of Direct Registered Offering: This pertains to the dilution resulting from the direct registered offering of Class A common shares.


  1. Potential Dilution from Warrants: This involves the potential dilutive effect of the warrants issued alongside the registered offering, net of the cancelled warrants, taking into account the provided exercise price and their optionality.


  1. Prospective Return on Proceeds: This considers the expected returns from the proceeds raised through the offering.


By aggregating these impacts with the reference price (the latest closing price prior to the announcement), we arrive at our post-disclosure price estimate.


Leg 1: Dilutive impact from common shares

According to RANI's latest quarterly filing, the company has two tranches of equity securities: Class A and Class B common shares. Class B shares can be exchanged for Class A shares on a one-to-one basis【2】. Based on this structure, we estimate the current shares outstanding to be 53.4 million, as outlined below:

Based on the details of the disclosure, we estimate that the issuance of 3 million shares in the registered offering will result in a 6.40% dilution, potentially driving the share price lower by approximately $0.20. This estimate is based on our reference price, which is the closing price of RANI’s common shares on October 14, 2024.


Leg 2: Dilutive Impact from Warrants

As outlined in the press release, in addition to the common share issuance, 333,333 pre-funded warrants and 3,333,333 Series C warrants have been issued, all exercisable at $3.00 per share【1】. The company also announced the cancellation of 3,246,753 warrants issued on July 22, 2024, resulting in a net warrant issuance of 419,913【1】. The likelihood of these warrants being exercised depends on the stock’s performance over the next five years, the life of the warrants【1】. If the stock price exceeds $3.00 per share, the warrants are likely to be exercised, leading to further dilution. Conversely, if the stock remains below this threshold, the warrants will likely expire unexercised.


For the purpose of building our base case scenario, and to maintain a conservative approach, we assume that the warrants will be exercised, contributing to further dilution. We also include an alternative case with no dilution later in our analysis.


Since the warrants are dilutive on a one-for-one basis, the 419,913 additional shares from warrant exercises will increase the share count. Combined with the common stock issuance mentioned in the first leg of our analysis, the results of our assessment so far are presented below:

Total proceeds are calculated by multiplying the common share issuance by the current share price, following a method similar to the Treasury Stock Method used in financial modeling. Additionally, we include the proceeds from the warrants, calculated by multiplying the net number of warrants by the exercise price of $3.00.


Leg 3: use of Net proceeds


The per-share impact isn't solely driven by the dilution from the issuance of common shares. This is because the company now has additional capital that can be used for productive purposes. Often, the return on this capital can offset the dilutive effect, resulting in minimal or no impact on the share price. However, given RANI’s recent return on equity (ROE) trends, this optimistic scenario seems unlikely.


RANI has a short history of public disclosures and has never generated a profit from the equity invested in the business. Based on this, we assume that the equity proceeds will yield a loss, in its entirety. With approximately $7.6 million raised from the registered offering, including the exercised warrants, a 100% negative ROE would result in a $0.13 per share loss, using the post-dilution share count as the basis for the calculation.


Putting it all together:

Assuming the October 14, 2024 price accurately reflects all available information except the registered offering, we estimate an implied price per share of $2.84. This estimate accounts for the full dilutive impact of the common share issuance and the potential dilution from the accompanying warrants. Additionally, we assume that all proceeds from the offering will be fully lost.


With RANI's closing price at $2.12, we conclude that the market has overreacted to the news. This suggests a near-term price correction opportunity, with an estimated upside of $0.72 per share, or approximately 34%.

If Warrants are not exercised:


Our analysis assumes that the issued warrants will be exercised. We adopted this assumption to introduce an additional margin of safety in our analysis. However, if the share price remains below $3.00 per share throughout the life of the warrants, the warrants are unlikely to be exercised. In this scenario, the outcome would be different, and based on the same methodology outlined earlier, the results would reflect a reduced dilutive impact.


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