Your audit firm is currently auditing Jacks Bistro, a subsidiary of Martha Jem Ltd. Jacks Bistro provides free internet access to its customers who agree to provide their personal information to Jacks who sells this information to various marketing firms. When Jacks was established two years ago, it estimated that it would need 40,000 customers to break even. Though the company has experienced more-than-expected demand it can only provide services to 30,000 customers at the present time, due to technological problems. This has reduced the price that third parties are prepared to pay for subscriber information, as they need a certain volume of each type of consumer to justify their marketing efforts. Jacks is the third-largest of five providers in the industry. The two biggest providers are each about 35 per cent larger than Jacks. Both are seeking to rapidly expand their customer base. Over the past few months, Jacks has been negotiating to acquire one of its smaller rivals. This would give Jacks access to the rivals software which has the capacity to support another 32,000 users, and give it access to more subscribers.

In response to the concerns of Jacks directors regarding its financial situation, Martha Jem Ltd. has agreed to lend some money to Jacks should it need urgent financial assistance. However, Martha Jems management has made it clear that this assistance will only be provided if Jacks is in serious danger of becoming insolvent.

Jacks directors are all young experts with backgrounds in the computer and technology industries, and all have equity share in the business. Recently the board split into two factions, and relations among the board members are now less than harmonious. The CFO is concerned that key business decisions are being delayed because the board is not focused on the business. Unresolved issues include a proposed additional capital injection from each of Jacks directors to see the company through its present situation.

Required:

List the factors that indicate that Jacks Bistro may have a going concern problem. For each factor, identify any related mitigating factors.