How will the pre‑funded warrants affect the company’s capital structure and potential dilution?

Answer

1. What the pre‑funded warrants are and how they work

• Quantity – Sana is issuing 1,492,537 pre‑funded warrants.
  
• Exercise price – Each warrant can be used to purchase one share of common stock at a $0.0001 per‑share exercise price.
  
• Public‑offering price – The warrant itself is sold to investors for $3.3499 (i.e., the $3.35 per‑share price less the $0.0001 exercise price).
  
• Cash‑in‑advance – Because the warrant is “pre‑funded,” the investor pays the $3.3499 up‑front; the company receives cash immediately, but the underlying common‑share is not issued until the warrant is exercised (which will be essentially at the same price, $0.0001).

Thus, the company receives cash now for the warrants, but the new common shares will only be created later when the warrants are exercised.

2. Impact on Sana’s capital structure

3. Potential dilution – quantitative view

*The % of total post‑offering shares depends on Sana’s pre‑offering share count, which isn’t disclosed in the release. The table shows the relative size of the dilution sources.

Key dilution take‑aways

1. Pre‑funded warrants alone would increase the share base by ≈ 1.5 million shares – roughly a 7 % upward adjustment to the primary offering size and a potentially modest but non‑trivial dilution for existing shareholders.
   
2. Combined with the underwriters’ option, the maximum dilution could be ≈ 3.36 million additional shares, pushing the total incremental shares to ≈ 5 million (≈ 23 % of the primary offering).
   
3. Because the warrants are priced at essentially the same level as the common shares, the cash proceeds per share are identical; the dilution is therefore “fair‑value” dilution – shareholders receive the same amount of capital per share as they would have from a straight common‑stock issuance.
   
4. In diluted‑EPS calculations, both the warrants and the underwriters’ option are treated as potential common shares and will be added to the denominator, reducing EPS until the shares are actually issued.
   

4. Strategic rationale & practical consequences

5. Bottom‑line for shareholders

• Immediate effect: The pre‑funded warrants do not dilute existing shareholders today; they simply increase cash on the balance sheet.
  
• Future effect: When the warrants are exercised, 1,492,537 new common shares will be added, diluting each existing shareholder’s ownership percentage and reducing per‑share metrics (e.g., EPS, book value per share).
  
• Combined dilution risk: The underwriters’ 30‑day option adds a further up‑to‑3,358,208 shares, meaning the maximum potential dilution from the entire transaction could be ≈ 5 million shares (≈ 23 % of the primary offering size).
  
• Net capital‑structure change: Cash assets rise by roughly $5 million from the warrants plus $75 million from the common‑stock offering, while total equity (share count) will expand by the amount of shares that are eventually issued, leading to a larger balance‑sheet equity base but a lower ownership stake for each pre‑existing share.

In summary, the pre‑funded warrants give Sana an immediate cash infusion with no current dilution, but they create a significant “potential dilution” that will materialize once the warrants are exercised, expanding the capital base and slightly weakening existing shareholders’ proportional ownership. The overall dilution impact should be evaluated together with the underwriters’ option, which could increase the total new share count by up to ≈ 5 million shares.