Stock Analysis & Ideas

Mind Medicine Stock (NASDAQ:MNMD): Investors Just Got a Dose of Reality

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Mind Medicine may seem like a high-conviction wager on the emerging psychedelics market. However, cautious investors should consider the implications of a ballooning pool of circulating shares – and the company’s desperation in resorting to a quick-and-dirty capital-raising tactic.

At first glance, Mind Medicine (NASDAQ:MNMD) might look like a potential winner in the alternative medicines field. Yet, I am bearish on Mind Medicine stock because the company is in terrible financial shape. Already operating without profits, Mind Medicine just made a capital-raising move that isn’t putting the company’s investors in a good mood.

Mind Medicine, also sometimes known as MindMed, is a clinical-stage biopharmaceutical company that develops an array of psychedelic medicines to treat mental health disorders. A number of psychedelic substances are still illegal on a federal level in the U.S. However, Mind Medicine pursues psychedelic medicine science anyway, in the hope that regulators will ease the legal restrictions on these substances.

As an example, Mind Medicine recently completed a large-scale clinical trial in which the test subjects were dosed with LSD to treat generalized anxiety disorder. Mind Medicine CEO and Director Robert Barrow called this a “major milestone” for his company and for the patients.

Maybe he’s right about that, but investors can’t focus entirely on visions of progress in alternative medicine. There are financial issues to consider – not to mention the strategy that Mind Medicine is using to raise capital, which could have unfortunate implications for the current shareholders.

Mind Medicine Stock Surged, but That’s in the Rearview Mirror Now

As you may recall, the meme stock trade that started in 2021 had a brief resurgence earlier this year. Among the short squeeze targets was Mind Medicine, whose shares rose so quickly that even the Wall Street Journal published an article about it. Yet, meme stock trades aren’t known for lasting very long, and the short squeeze opportunity with Mind Medicine has already come and gone. Indeed, anyone who went long on Mind Medicine stock after August 18 is holding a heavy bag today.

After the short squeeze came and went, reality set in, and Mind Medicine’s investors had to wake up and realize that this isn’t a profitable business. The company is advancing some medicines that are considered controlled substances on a federal level in the U.S. This means that Mind Medicine might not turn a profit for a long time.

The company’s fiscal issues are fully apparent in Mind Medicine’s second-quarter 2022 results. As it turned out, Mind Medicine incurred a $17 million net earnings loss during that quarter. Furthermore, the company’s balance of cash and cash equivalents dwindled from $133.5 million as of December 31, 2021, to $105.7 million as of June 30, 2022.

Mind Medicine’s Reverse Share Split Doesn’t Bode Well for the Company

With the company’s cash and equivalents balance diminishing and profits remaining elusive, Mind Medicine has unfortunately resorted to some quick-and-dirty tactics to keep investors interested. Among these tactics is a reverse share split, which really isn’t a positive sign for this struggling company.

Sometimes, a company’s stock price will drop sharply, to the point where delisting might become a possibility. A surface-level fix for this is a reverse split, in which the company will basically reduce the number of shares by combining the existing shares. The result will be fewer, higher-priced shares of the stock.

It doesn’t improve the company’s financial problems, but it does suddenly raise the share price. Thus, Mind Medicine’s 1-for-15 reverse share split gave the company a quick stock-price pump without actually increasing the company’s value to the investors.

Oftentimes, it’s a sign of desperation when companies resort to this tactic. Besides, as we’ll discuss in a moment, reverse share splitting isn’t the only corner-cutting strategy that Mind Medicine has implemented lately.

Investors Reacted Negatively to Mind Medicine Announcing a Massive Share Sale

Midday on September 28, Mind Medicine stock was down by around 50%. This might look like an overreaction to the company’s announcement that Mind Medicine plans to issue new shares and warrants. However, the trading community’s negative response is quite understandable when we delve into the details.

On September 27, Mind Medicine announced a proposed offering of common shares, along with warrants which give the right to purchase common shares. Later that day, the company disclosed its intention to issue to the public 7,058,823 common shares and the same number of warrants.

Granted, Mind Medicine expects to generate gross proceeds of $30 million from the sale of these shares and warrants. Yet, this will inflate the pool of circulating shares, and the law of supply and demand dictates that the share price is likely to go down as a result.

Traders anticipated this by dumping their Mind Medicine stock shares, and who could blame them? No one wants to be the last bag holder as traders run for the exits, knowing that a massive share-dilution event is imminent.

Is MNMD Stock a Buy?

Turning to Wall Street, MNMD has a Strong Buy consensus rating, although this could certainly change soon, based on four Buys assigned in the past three months. The average Mind Medicine price target is $32.88, implying 961% upside potential.

Conclusion: Should You Consider Mind Medicine Stock?

The investing community is trying to tell you something: Don’t even think about buying Mind Medicine stock. The company’s cheap tactics aren’t fooling anyone, including sophisticated traders. So, don’t consider the dumpage in Mind Medicine stock as a dip-buying opportunity. Instead, stand by and let the market pronounce its judgment on this seemingly promising but indisputably unprofitable business.

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