Honey Mag’s Sticky Situation

May 20, 2010  |  

The high valuation is more than odd, according to experts. “Think about Microsoft’s $240 million investment in Facebook in 2007,” said an executive with a venture capital firm in the digital media space who spoke on condition of anonymity. “Does the 1.6% stake transaction really mean Facebook is worth $15 billion?  If you believe this, Sahara’s market cap was $80 million when someone bought a tiny little amount of shares at $3 per share in 2008.”

The annual report undoubtedly raises many questions about the company’s spending habits. “The general and administrative costs are unusually high,” said John Doyle, managing director of Peachtree Media Advisors. The annual report shows that $5 million had gone to general and administrative costs while only $1.4 million had gone to product development. For a company that is claiming most of its efforts in the last year have gone towards the development of an innovative new social network (YouBlast), the allocation of funds seems decidedly off-kilter.

“While the company has increased its revenue generation between year-end ’08 and year-end ’09, the numbers are almost negligible relative to the increase in expenses incurred,” said Brandon Williams, a corporate litigator and a partner at Alston & Bird, LLP. “The increased expenses incurred appear to be mainly due to payroll, meaning it’s going to salaries and not necessarily product development and marketing. This is concerning as the monies raised don’t appear to be going toward revenue generating activities and development.”

The company listed their selling and marketing costs at $339,770. “Considering the company only generated $38,000 in revenue, the $339,000 that went into sales and marketing was not an efficient or effective use of capital,” said Doyle. As noted in the report, the increase is “primarily attributable to increased payroll of $96,000, advertising of $62,000 and marketing of $50,000.” YouBlast Global’s investment in a sales force could be considered aggressive considering that HoneyMag.com did not have the traffic to support such personnel.  Assuming it was meant to be a flagship property, HoneyMag.com would have benefited from a spending strategy focused on content development and user activity. The marketing and sales staff that the six figure budget afforded the company brought in essentially $38,000 over the entire year, signing their first client (Alberto Culver) in the second half of 2009.

“The company seemed to have raised most of its capital in ’08 and did not raise capital in ’09,” said Williams. “The cash on hand has gone from approximately $4 million to $300,000 between December 2008 and December 2009. A major expense that impacted the company’s cash on hand was approximately $200,000 in website development expenses. Not sure if that’s reasonable, but seems awfully costly at a glance.”

The venture capitalist who spoke on condition of anonymity agreed. Although he perceives some of the numbers to be incomprehensible, he contends that investors may have simply over-invested in the brand and the potential of marketing to the database of 18-34 year olds purchased with the Honey brand. “The investors simply may have valued the demographic, the database of 4-million targeted consumers and the “Honey” brand, more than the traffic,” he said. “Maybe YouBlast Global has been very successful in making a good future roll-up story from those a bit dubious assets.”

Regardless, YouBlast Global will need to unveil something big with the social networking product that it is betting its future and survival on to validate its fiscal strategy thus far and to turn its  business around.  With stiff competition from a well established 400 pound gorilla, Facebook, and several smaller but still formidable players like MySpace, Orkut, Ning to mention a few, YouBlast has a very challenged road ahead and based on the weak  financial state  of the company, the chances of success are dubious.

Editor’s Note: YouBlast Global declined requests for comment and John Thomas Capital Management did not return calls for comment.

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