Car Toons Audio Inc.

Car Toons Audio Inc. (CTAI) is a young company that recently completed its initial public offering. The company designs and develops leading-edge car stereo equipment, including MP4 compatible decks, speakers, amplifiers, and subwoofers. The company is investing heavily in research and development. In order to reduce strain on cash, the management team is compensated mostly through share-based compensation in the current year. In addition, the company has raised cash through the issuance of common shares in the open market and by offering various complex financial instruments. Management believes that all cash should be diverted toward the research and development process in order for the company to become the leader in automotive stereo equipment. In addition to the stock options, management receives a bonus of 5% of net income if diluted EPS is greater than $0.10. The bonus is the only cash compensation that management receives at this stage of the companys life cycle. Management is excited because this years draft income statement (Exhibit I) shows diluted EPS in excess of $0.10, and therefore, a bonus will be paid.

Ha Exhibit / Draft Income Statement Car Toons Audio Inc. As at December 31, 2020 $44,500,740 REVENUE Cost of goods sold 23,540,891 20,959,849 $ 175,000 Gross margin EXPENSES Accounting and consulting fees Advertising and promotion Amortization Bad debt Insurance Interest on convertible bonds Legal fees Office and general expenses Rent Repairs and maintenance Research and development Travel Utilities 1,575,000 1,276,758 87,500 85,000 80,000 225,500 750,850 325,000 450,755 11,345,000 133,750 333,565 Ha Exhibit / Draft Income Statement Car Toons Audio Inc. As at December 31, 2020 $44,500,740 REVENUE Cost of goods sold 23,540,891 20,959,849 $ 175,000 Gross margin EXPENSES Accounting and consulting fees Advertising and promotion Amortization Bad debt Insurance Interest on convertible bonds Legal fees Office and general expenses Rent Repairs and maintenance Research and development Travel Utilities 1,575,000 1,276,758 87,500 85,000 80,000 225,500 750,850 325,000 450,755 11,345,000 133,750 333,565