Finding 2022-001: Financial Conditions Criteria The Organization has engaged The Pun Group, LLP to perform the audit of the Organization?s financial statements for the year ended June 30, 2022. Our responsibility as auditors is to express an opinion on the Organization?s 2022 financial statements and to determine whether the financial statements are fairly presented, in all material respects, in accordance with accounting principles generally accepted in the United States of America. As part of our audit, we are required to consider conditions and events which indicate that there is a substantial doubt about the Organization?s ability to continue as a going concern within one year after the date that the financial statements are issued. Condition Since suspending public performances in March 2020 and throughout the 2020-2021 fiscal year, the Organization dealt with the repercussions of the COVID-19 pandemic. Except for a few ticketed online performances, no significant earned revenue was generated during this period. Anticipating this drop in income, the Organization took proactive measures early in the pandemic, including significantly reducing staff, program services, general and administrative costs, and fundraising expenses. Decisions over personnel included reducing payroll costs, restructuring staff assignments, and furloughing employees. In addition, the Organization became eligible for and/or received the following government assistance: In February 2021, additional funding through the federal PPP Loan program was received totaling $393,000. The portion of the loan that does not qualify for forgiveness or any additional amount that the Organization chooses to maintain as a loan, is required to be repaid within 5 years at 1% interest. In August 2021, forgiveness of a second PPP loan was applied for, and was granted in October 2021. In May 2021, the Organization applied for a grant through the U.S. Small Business Administration?s (SBA) Shuttered Venue Operators Grant (SVOG) in the amount of $938,054. The application was approved by the SBA, and the requested funds were received in July 2021. In August 2021, the Organization applied for a second grant through the SBA?s SVOG in the amount of $645,527. The application was approved by the SBA, and the requested funds were received in September 2021. In November of 2022, the Organization applied for an Employee Retention Credit (ERC) of $322,564. The credit had not been received as of July 2023. However, the Organization believes it has met the criteria to be eligible for the ERC and will receive the funds within the next few months once the amounts are released by the Internal Revenue Service. Despite these measures and government support, the Organization continues to suffer losses from operations such that there is substantial doubt about the Organization?s ability to continue as a going concern. The Organization?s ability to continue is dependent upon management?s plans to raise additional funds, cut costs, and achieve an excess of revenue over expenses on an annual basis. The financial statements do not include any adjustments that might be necessary if the Organization is not able to continue as a going concern. Theatre for Children, Inc. dba B Street Theatre Schedule of Findings and Questioned Costs (Continued) For the Year Ended June 30, 2022 41 Section II ? Financial Statement Findings (Continued) Finding 2022-001: Financial Conditions (Continued) Cause The ongoing COVID-19 pandemic in the last 3 years and economic inflationary pressures have caused significant challenges to the financial health of the Organization, raising substantial doubt about its ability to continue as a going concern. The pandemic has forced the Organization to either close or significantly reduce its operations due to social distancing measures and lockdown restrictions. This has resulted in a drastic decline in ticket sales and other revenue streams. Even with the easing of restrictions, customer confidence is not yet fully restored, leading to lower patronage. The increasing cost of goods and services, due to inflation, has further strained the financial position of the Organization. Rising costs of utilities, rent, maintenance, and wages, while revenue is decreasing, have resulted in an unsustainable financial situation. The Organization's operational costs are growing faster than its ability to increase ticket prices or generate other forms of income. Effect In cases where there is substantial doubt about an entity?s ability to continue to operate, there are two primary considerations that auditors are required to address. The first consideration is the disclosure of the issue in the audit opinion. This additional paragraph is considered a modification and informs the reader that there is substantial doubt about the entities ability to continue. The second consideration is the impact of the going concern on the financial statement data, including disclosures. For the financial statements to be accurate, staff must be able to rely on arm?s length agreements to accurately report and properly classify transactions and balances, and facts surrounding the going concern must be adequately disclosed in the financial statements. For that to occur, measurement and classification must be determinable. Recommendation We recommend the Organization address the going concern issue including, but not limited to the following areas: Cost Management and Efficiency: Review all areas of expenditure for potential cost reductions without compromising the quality of the theatrical experience. This might include renegotiating lease agreements or supplier contracts, optimizing utility usage, and streamlining administrative processes. Debt Restructuring: Consult with financial advisors or lenders to explore possibilities for debt restructuring, refinancing, or forgiveness to help alleviate the immediate financial burden. Engage Donors and Sponsors: Increase efforts to secure funding through donations, grants, and sponsorships. This might include running targeted fundraising campaigns, applying for arts and culture grants, or seeking corporate sponsorships. Leverage Government Assistance: Seek government relief packages or subsidies intended to support businesses affected by the COVID-19 pandemic. Ensure all possible government support options are explored and utilized. Theatre for Children, Inc. dba B Street Theatre Schedule of Findings and Questioned Costs (Continued) For the Year Ended June 30, 2022 42 Section II ? Financial Statement Findings (Continued) Finding 2022-001: Financial Conditions (Continued) Recommendation (Continued) Maintenance and Capital Expenditure Planning: Develop a strategic plan for the phased execution of necessary maintenance and capital expenditures. This might involve prioritizing the most critical tasks, seeking cost-effective solutions, and scheduling the work during periods of minimal disruption. Financial Planning and Forecasting: Implement a robust financial planning and forecasting process to enable proactive management of the Organization's financial position. This should include scenario planning to help prepare for and manage potential future shocks.