Look How Close Groupon Is to Going Bankrupt

It's not news that Groupon (GRPN) lost money in the second half of 2011 -- no one expected it to become suddenly profitable. But it is interesting that the daily deal company is becoming more unprofitable, and doing so faster. Groupon is losing so much money, so quickly, that the $750 million it expects to raise through its IPO may not be enough to keep the company afloat. Here are the basics for the second half of 2011:

Revenues: $1.5 billion
Net revenues (after revenues are split with merchants): $611 million
Total operating expenses: $831 million
Total net loss after other items: $255 million

OK, so Groupon doesn't make money yet. That's no crime if, as the company says, it plans to reduce its expenses once it has gotten out of launch mode. In the meantime, however, Groupon is racking up debts. These aren't the kind of long-term, predictable debts that can be refloated, like loans or bonds. These are the "due in 30 or 60 days" kind. On Groupon's balance sheet, it lists these liabilities:

Merchant payable: $392 million (up from $162 million)
Accounts payable: $50 million (down from $58 million
Accrued expenses: $165 million (up from $98 million)
Due to "related parties": $264,000 (down from $13 million)
Taxes owed: $13 million
Other: $62 million
Total of the above: $680 million

Groupon only has $409 million in cash and tangible assets that can be sold for cash. The shortfall is $271 million. If the $750 million the IPO generates is used to clear those debts then Groupon is left with $479 million. That sounds great, except that Groupon has historically burned cash at a greater amount than its IPO will raise after its debts are paid: It has an accumulated deficit of $625 million. If Groupon continued to lose $255 million every six months, then it would be back to square one after the IPO in only 11 months. (It could be quicker than that because Groupon is still growing fast, and growing its losses just as fast.)
$295 million in unpaid bills
How might Groupon get around this? Doubtless the company would point to its positive cashflow. Groupon has an increasing amount of cash on hand despite its losses because it books its revenues immediately and then delays paying its bills to merchants who offer Groupons and other suppliers. Here's how that worked out in the first half:

Accrued merchant payable: $217 million (up from $18.7 million)
Accrued other expenses: $75 million (up from $3 million).
Sale of stock: $510 million (up from $135 million)
Total cashflow generated including other items: $106 million

Obviously, the spit-take here occurs when you notice that despite selling more than half a billion dollars in equity to insider investors, the company only managed to keep $106 million in the bank. And it still owes $295 million in accrued bills due.

Because Groupon looks like a Ponzi scheme -- it always needs a greater amount of new money coming in to pay off its old debts -- I previously assumed Groupon's plan was that the IPO would generate a cushion of cash on which the company could float for several years until it sorts its business model out. Yet if Groupon collected that IPO cash today, it would barely cover its bills. There are, on paper, three alternatives for Groupon:

Immediately reduce operating expenses by more than 27 percent and become profitable.
Sell even more stock after the IPO.
Go bankrupt.

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