A £2.55 million cash call by audio social media platform Audioboom (BOOM:AIM) has been backed by a trio of directors including non-executive Roger Maddock and chairman Malcolm Wall.

The biggest investment came from non-executive director Nick Candy, representing the fourth time he has ploughed money into the cash burning business. The latest deal at 2.5p per share nearly doubles his personal stake to 80.82 million shares, worth a little more than £2.1 million at current prices.

Candy invested in Audioboom shares first at an 8.375p strike price, then subsequently at 5.88p and 3p. Whether this backing turns out to be a case of savvy averaging down or an example of the sunk cost fallacy remains to be seen.

There are a few reasons why we think investors should resist any temptation to follow them in. For one, Audioboom is in talks with a Chinese fund that could see it invest $8 million (approximately £6 million) in the company. If that funding fails to materialise it could hit wider confidence hard.

Audioboom is also mulling the acquisition of news filtering service SONR News. Investors should be aware that Candy and Audioboom’s chief executive Rob Proctor share a 27.6% stake in SONR so would stand to profit directly from a deal.

That fact that Audioboom has fallen wildly behind its profitability targets leaves another question mark hanging over its long-term future. Proctor revealed hopes to break into the black by the end of 2016 in a feature in Shares on 30 April 2015, with registered users then running at 3.6 million. That particular key performance indicator (KPI) has been dropped but another metric, total listens - the number of people who tune in to broadcasts - continues to grow rapidly, from 22.8 million at that time, to 222 million during the first half to 30 June 2016.

Maiden profit expectations have been pushed beyond the scope of current forecasts to the end of 2017. This remains a highly speculative investment and one best avoided.

THE TRADE

Buyers:

Chairman Malcolm Wall, non-executive director Roger Maddock, non-executive director Nick Candy

Consideration:

£25,000 (Wall),
£250,000 (Maddock),
£1 million (Candy)

No. of shares bought:

1 million (Wall),
10 million (Maddock),
40 million (Candy)