One important item that hasn't received a lot of attention is Groupon's "Accrued Merchant Payable." If you'll indulge me, a longish thought experiment (yes, it relates to Groupon).

Imagine a sandwich shop that allowed customers to purchase future sandwiches--buy one today at a 50% discount, eat it sometime in the future. The sandwich shop would receive $3 for a sandwich for which it normally charges $6, and it would owe me a sandwich at a future date. Also assume the sandwich costs the shop $1.50 in direct costs (50% margins at a $3 price).

This proves to be a popular promotion with the shop's customers. The shop sells lots of $3 "sandwich rights," bringing in $3 in cash up front. It spends a good deal of that $3 in cash to pay ongoing expenses and to get the word out about its 50% off sandwich deal.

But then the growth of its "sandwich rights" business slows. Other sandwich shops offer a better deal--$2 for a $6 sandwich--and it begins to saturate the market of local lunch eaters, causing a slowdown in the sales of sandwich rights and the cash they've been paying the shop in advance.

Now the sandwich shop owes sandwiches to all of its rights holders, each of which costs $1.50 in cash expenses (to pay suppliers, employees, etc). However, instead of holding the cash it previously received for the sandwich futures, the shop has already spent it on marketing to other potential purchasers of sandwich futures. Clearly, if the shop doesn't have the money to pay $1.50 x # outstanding rights or can't get financing, it will go out of business. Because the shop was dependent on sales of sandwich rights to finance its growth, when the growth rate slowed, the money dried up. In essence, the shop borrowed from the future by sucking in cash today for discounts on tomorrow's sandwiches.

This is exactly what Groupon has done. Its operating cash flow includes "Accrued Merchant Payable" of nearly $291M (3/31/11). But its cash balance is about $208M (3/31/11). Because it collects cash up front from individuals and pays merchants over time (or, in its non-US operations, only when coupons are redeemed), Groupon is showered with customer cash before it must pay merchants. Roughly half of this cash eventually belongs to Groupon, while the other half is eventually owed to merchants (true, there is breakage, but if nobody redeems the coupon, that adds little value for the merchant, so significant breakage/non-redemption isn't necessarily in Groupon's long term interest).

In other words--and Groupon spells this out--if the growth rate in coupons sold to customers dives, Groupon could face a cash flow problem. It's not a ponzi/pyramid scheme exactly, but it is a highly risky financial practice to spend cash you will owe tomorrow on expenses you incur today. As long as the company grows and/or can sell shares to the public and increasing prices, it will do fine. Once the growth slows or access to capital dries up, it's vulnerable. Groupon may well outrun the cash demands it has piled up by going public. But it can't maintain these growth rates forever--remember those other sandwich shops selling similar products?--and will ultimately face the music.

Don't believe me? Here's a quote from their S1:
"Our accrued merchant payable, which primarily consists of payment obligations to our merchants, has grown, both nominally and as a percentage of revenue, as our revenue has increased, particularly the revenue from our international segment....We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs. If we offer our merchants more favorable or accelerated payment terms or our revenue does not continue to grow in the future, our operating cash flow and results of operations could be adversely impacted and we may have to seek alternative financing to fund our working capital needs."