Filed by sedaredgar.com - Lexcon Technologies Inc.

EX-99.1 5 exhibit99-1.htm FINANCIAL STATEMENTS Filed by sedaredgar.com - Lexcon Technologies Inc. - Exhibit

PARAGON TONER, INC.

FINANCIAL STATEMENTS

AS OF AND FOR THE SIX MONTHS ENDED

JUNE 30, 2009 AND 2008

WITH

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

PARAGON TONER, INC.

FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

CONTENTS	PAGE
Independent Accountants’ Review Report	3
Financial Statements:
Balance Sheets	4
Statements of Operations	6
Statements of Changes in Stockholder’s Equity	7
Statements of Cash Flows	8
Notes to Financial Statements	10

INDEPENDENT ACCOUNTANS’ REVIEW REPORT

To the Board of Directors
Paragon Toner, Inc.
La Mirada, CA

We have reviewed the accompanying balance sheets of Paragon Toner, Inc. (an S corporation, the “Company”) as of June 30, 2009 and 2008, and the related statements of operations, changes in stockholder’s equity, and cash flows for the six months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of the Company.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles in the United States of America.

Los Angeles, California
September 25, 2009

PARAGON TONER, INC.

BALANCE SHEETS

AS OF JUNE 30, 2009 AND 2008

ASSETS

		2009			2008
Current assets:

Cash and cash equivalents (Note 2)	$	115,128		$	55,149
Accounts receivable, net (Note 2)		870,917			522,087
Inventory (Notes 2 and 3)		423,474			661,738
Note receivable (Note 4)		15,000			-
Total current assets		1,424,519			1,238,974

Due from related parties (Note 5)		343,380			228,150

Property and equipment (Note 2):

Automobile		34,092			34,092
Furniture & fixture		53,388			53,388
Leasehold improvement		5,060			5,060
Machinery and equipment		433,469			433,469
		526,009			526,009
Less: Accumulated depreciation		(355,382	)		(272,696	)
Net property and equipment		170,627			253,313

Other assets:

Website, net of amortization (Note 10)		22,519			38,049
Security deposits		20,748			20,748
Other assets		-			540
Total other assets		43,267			59,337

Total Assets	$	1,981,793		$	1,779,774

See accompanying notes to financial statements.
4

PARAGON TONER, INC.

BALANCE SHEETS

AS OF JUNE 30, 2009 AND 2008

LIABILITIES AND STOCKHOLDER’S EQUITY

		2009		2008
Current liabilities:

Accounts payable	$	665,150	$	634,255
Line of credit (Note 6)		600,000		540,265
Current portion of notes payable (Note 7)		60,809		93,859
Current portion of capital lease obligations (Note 8)		30,526		32,680
Accrued expenses		12,860		99,159
Total current liabilities		1,369,345		1,400,218
Long term liabilities:

Notes payable, net of current portion (Note 7)		31,357		92,166
Capital lease obligations, net of current portion (Note 8)		38,608		69,134
Deferred rent (Note 2)		60,420		40,478
Convertible bonds payable (Note 9)		199,220		-
Total long term liabilities		329,605		201,778

Total liabilities		1,698,950		1,601,996

Stockholder’s equity:

Common stock - no par value
1,000,000 shares authorized,
12,900 shares issued and outstanding		129,000		129,000
Retained earnings		153,843		48,778
Total stockholder’s equity		282,843		177,778

Total liabilities and stockholder’s equity	$	1,981,793	$	1,779,774

See accompanying notes to financial statements.
5

PARAGON TONER, INC.

STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

		2009			2008
Net sales	$	2,975,031		$	4,028,082
Cost of goods sold:
Beginning inventory		458,936			655,117
Purchases		1,456,449			2,175,992
Direct labor		438,299			593,022
Manufacturing overhead		198,788			197,325
Freight, supplies and other costs		19,673			57,085
		2,572,145			3,678,541
Less: Ending inventory		(423,474	)		(661,738	)
Total cost of goods sold		2,148,671			3,016,803
Gross profits		826,360			1,011,279
Selling, general and administrative expenses (Note 13)		578,131			1,008,994
Income from operations		248,229			2,285
Other income (expenses):
Interest expense		(23,545	)		(34,442	)
Net other expense		(23,545	)		(34,442	)
Income (loss) before income tax provision		224,684			(32,157	)
Provision for income taxes (Note 2)		3,883			3,218
Net income (loss)	$	220,801		$	(35,375	)

See accompanying notes to financial statements.
6

PARAGON TONER, INC.

STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

	Common Stock
								Total
					Retained			Stockholder’s
	Shares		Amounts		Earnings			Equity

Balance at January 1, 2008	12,900	$	129,000	$	218,757		$	347,757

Distributions to stockholder for the six months ended June 30, 2008	-		-		(134,604	)		(134,604	)

Net loss for the six months ended June 30, 2008	-		-		(35,375	)		(35,375	)

Balance at June 30, 2008	12,900	$	129,000	$	48,778		$	177,778

Balance at January 1, 2009	12,900	$	129,000	$	(10,648	)	$	118,352

Distributions to stockholder for the six months ended June 30, 2009	-		-		(56,310	)		(56,310	)

Net income for the six months ended June 30, 2009	-		-		220,801			220,801

Balance at June 30, 2009	12,900	$	129,000	$	153,843		$	282,843

See accompanying notes to financial statements.
7

PARAGON TONER, INC.

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

		2009			2008
Cash flows from operating activities:
Net income (loss)	$	220,801		$	(35,375	)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Bad debt expense		-			247,793
Depreciation and amortization		52,042			47,059
Provision for inventory obsolescence		-			9,005
(Increase) decrease in:
Accounts receivable		(406,127	)		(61,805	)
Inventory		35,461			(15,626	)
Increase (decrease) in:
Accounts payable		172,345			71,721
Accrued expenses		(36,575	)		2,065
Deferred rent		2,435			(2,604	)
Total adjustments		(180,419	)		297,608
Net cash provided by operating activities		40,382			262,233
Cash flows from investing activities:
Acquisition of property		-			(13,004	)
Increase in due from related parties		(67,930	)		(107,355	)
Increase in note receivable		(15,000	)		-
Net cash used in investing activities		(82,930	)		(120,359	)
Cash flows from financing activities:
Net proceeds from line of credit		-			45,000
Net payments on notes payable		(48,422	)		(43,832	)
Payments on capital lease obligations		(17,075	)		(16,548	)
Proceeds from convertible bonds payable		199,220			-
Distributions to stockholder		(56,310	)		(83,449	)
Net cash provided by (used in) financing activities		77,413			(98,829	)
Net increase in cash		34,865			43,045
Cash at beginning of the period		80,263			12,104
Cash at end of the period	$	115,128		$	55,149

(continued)

See accompanying notes to financial statements.
8

PARAGON TONER, INC.

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

		2009		2008
Supplemental disclosures:
Cash paid during the period:
Income taxes	$	2,249	$	4,276
Interest expense	$	23,545	$	34,442

Noncash financing activities:
Conversion of due to related parties to distributions to
Stockholder	$	-	$	51,155

See accompanying notes to financial statements.
9

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 1 - Nature of Business

Paragon Toner, Inc. (the “Company”) was incorporated in the State of California on January 27, 2004. The Company is engaged primarily in manufacturing, and distributing compatible toners, which are sold primarily to customers in the United States.

Note 2 - Summary of Significant Accounting Policies

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates are primarily used for depreciation of property and equipment, amortization of intangible assets, allowances for doubtful accounts and inventory valuation. Actual results could differ from those estimates.

Revenue recognition

The Company recognizes revenues from product sales when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. Revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the Company’s revenue arrangements are FOB (free on board) destination. Revenue is recorded net of customer returns, allowances and discounts that occur under arrangements established with customers.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be categorized as cash and cash equivalents.

Allowance for doubtful accounts

The allowance for doubtful accounts is computed based upon the management’s estimate of uncollectible accounts and historical experience. The Company performs ongoing credit evaluations of its customers to estimate potential credit losses. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible. The allowance for doubtful accounts is $0 and $247,793 as of June 30, 2009 and 2008, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 2 - Summary of Significant Accounting Policies (continued)

Inventory

Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Appropriate consideration is given to obsolescence, slow moving items and other factors in evaluating net realizable value.

Property and equipment

Property and equipment are stated at cost. The straight-line method is used to calculate depreciation over their estimated useful lives ranging as follows:

Automobile	3 years
Furniture & fixture	5 to 7 years
Leasehold improvement	5 years
Machinery and equipment	5 years

Leasehold improvements are depreciated to expense over the shorter of the life of the improvement or the remaining lease term. Capital expenditures that enhance the value or materially extend the useful life of the related assets are reflected as additions to property and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. Upon a sale or disposition of assets, a gain or a loss is included in the statement of operations. Depreciation expense amounted to $44,032 and $39,000 for the six months ended June 30, 2009 and 2008, respectively.

Impairment of long-lived assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. In management’s opinion, no such impairment existed as of June 30, 2009 and 2008.

Accrued expenses

The Company’s accrued expenses consist of amounts payable for salaries, payroll taxes and sales taxes.

Deferred rent

The Company recognizes rent expense equal to the total of the payments and free rent received due over the lease term, divided by the number of months of the lease term applying the straight-line method. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent.

Shipping and handling

Certain shipping and handling fees are charged to customers and these are classified as revenue. The costs associated with all shipping to customers are recorded as operating expenses. Shipping expenses for the six months ended June 30, 2009 and 2008 amounted to $89,859 and $69,009, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 2 - Summary of Significant Accounting Policies (continued)

Income taxes

The Company elected to be subject to the S corporation provisions of the Internal Revenue Code for federal and state income tax purposes effective January 27, 2004. Accordingly, as an S corporation, the Company’s taxable income or losses and applicable tax credits are passed through to its shareholder and reported on shareholder’s individual income tax return. However, the State of California requires S Corporation to pay a state franchise tax (currently 1.5% on its taxable income).

Recent pronouncements

In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157. The Company expects the adoption of FSP 157-3 will not have a material impact on financial condition or results of operations.

In December 2008, the FASB provided for a deferral of the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years beginning after December 15, 2008. The Company has elected this deferral and accordingly will be required to adopt FIN 48 in its 2009 annual financial statements. Prior to adoption of FIN 48, the Company will continue to evaluate its uncertain tax positions and related income tax contingencies under Statement No. 5, Accounting for Contingencies. SFAS No. 5 requires the Company to accrue for losses it believes are probable and can be reasonably estimated.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”). FSP FAS 115-2/124-2 requires entities to separate any other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 115-2/124-2 will not have a material impact on its financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 107-1 and APB 28-1 will not have a material impact on its financial condition or results of operations.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 2 - Summary of Significant Accounting Policies (continued)

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects the adoption of FSP FAS 157-4 will not have a material impact on its financial condition or results of operations.

Note 3 - Inventory

Inventory consists of the following at June 30:

		2009			2008

Finished goods	$	128,949		$	219,628
Raw materials		329,511			479,957
		458,460			699,585
Less: Inventory reserve		(34,986	)		(37,847	)
Total	$	423,474		$	661,738

The Company recorded a reserve for slow moving and obsolete inventory of $0 and $9,005 as cost of goods sold for the six months ended June 30, 2009 and 2008, respectively. Overhead allocated to the inventory amounted to $10,436 and $10,360 for the six months ended June 30, 2009 and 2008, respectively.

Note 4 - Note receivable

The Company has $15,000 and $0 of non-interest bearing note receivable from an unrelated party as of June 30, 2009 and 2008, respectively. The note is due in lump-sum repayment on maturity date of September 22, 2009.

Note 5 - Due from related parties

Advances to family members of the stockholder are unsecured, non-interest bearing and due on demand. The Company has $343,380 and $228,150 of advances due from related parties as of June 30, 2009 and 2008, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 6 - Line of Credit

The Company has a line of credit with a bank with a maximum borrowing limit of $600,000. The outstanding balance was $600,000 and $540,265 as of June 30, 2009 and 2008, respectively. This line of credit matures on June 7, 2010 and is secured by the Company’s accounts receivable, inventory and other miscellaneous assets. Interest is accrued at the bank’s prime plus 1.00% (4.25% as of June 30, 2009).

The Company incurred interest expenses on this line of credit of $13,244 and $19,098 for the six months ended June 30, 2009 and 2008, respectively. This line of credit contains certain covenants, and in management opinion, the Company is in compliance with the covenants as of June 30, 2009.

Note 7 - Notes Payable

As of June 30, the Company has long term notes payable as follows;

		2009			2008

A note payable to a bank, due in monthly installments of $3,143, including interest at the bank’s prime plus 1.25% (4.50% as of June 30, 2009). The note matures in May 2011, and is collateralized by substantially all the assets of the Company. The note is subject to various restrictive covenants, including maintenance of financial ratios at all times.	$	64,426		$	95,529

A note payable to a bank, due in monthly installments of $3,249, including interest at the bank’s prime plus 1.25% (4.50% as of June 30, 2009). The note matures in November 2009, and is collateralized by substantially all the assets of the Company.		15,265			50,504

A note payable to a bank, due in monthly installments of $2,476, including interest at the bank’s prime plus 2.00% (5.25% as of June 30, 2009). The note matures in May 2011, and is collateralized by substantially all bank accounts of the Company.		12,475			39,992

Total notes payable		92,166			186,025

Less: Current portion		(60,809	)		(93,859	)

Notes payable, net of current	$	31,357		$	92,166

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 7 - Notes Payable (continued)

Maturities of notes payable are as follows for the years ending December 31:

Years ending December 31,		Amount

2009	$	44,170
2010		33,820
2011		14,176

Total	$	92,166

Total interest expenses from the notes payable were $2,857 and $5,548 for the six months ended June 30, 2009 and 2008, respectively.

Note 8 - Capital Lease Obligations

The Company entered into numerous capital lease agreements with leasing companies to purchase certain equipment and transportation vehicles. As of June 30, these assets are carried as follows:

		2009			2008

Equipment	$	162,889		$	162,889
Transportation vehicles		32,800			32,800
Less: Accumulated depreciation		(141,490	)		(112,307	)
	$	54,199		$	83,382

The related future minimum lease payments under the capital lease obligations are as follows at June 30:

		2009			2008
Total minimum lease payments	$	87,345		$	136,535
Less: Amount representing interest		(18,211	)		(34,721	)
Present value of net minimum lease payments		69,134			101,814
Less: Current portion		(30,526	)		(32,680	)
Capital lease obligations, net of current portion	$	38,608		$	69,134

Maturities of capital lease obligations are as follows for the years ending December 31:

Years ending December 31,		Amount

2009	$	18,685
2010		21,888
2011		20,447
2012		8,114
Total	$	69,134

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 8 - Capital Lease Obligations (continued)

Total interest expenses from the capital lease obligations were $7,444 and $9,796 for the six months ended June 30, 2009 and 2008, respectively.

Note 9 - Convertible Bonds Payable

The Company has convertible bonds payable of $199,220 and $0 as of June 30, 2009 and 2008, respectively. The principal and any accrued but unpaid interest under the convertible notes will be due and payable upon demand by the holders at anytime after May 13, 2010. The bonds are convertible into the Company's common stock at a conversion price of $155 per stock at any time upon demand. The maximum number of shares that could be issued is 1,297 shares.

Note 10 - Capitalized Website Costs

The Company amortizes its website over the estimated useful life of three years. Amortizable intangible assets are tested for impairment when impairment indicators are present, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. No impairment of website costs has been identified during the periods presented. The carrying amount and accumulated amortization related to the website costs are as follows as of June 30:

		2009			2008
Gross balance	$	46,589		$	46,589
Less: Accumulated amortization		(24,070	)		(8,540	)

Net balance	$	22,519		$	38,049

Estimated aggregate amortization expense for each of the succeeding years is as follows:

Years ending December 31,		Amount

2009	$	7,765
2010		14,754
Total	$	22,519

Total amortization expenses were $7,765 for the both six months ended June 30, 2009 and 2008.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 11 - Commitments and Contingencies

The Company leases its warehouse and office from a non-affiliate. Future minimum rental payments under these leases as of June 30, 2009 are as follows:

Years ending December 31,		Amount

2009	$	134,686
2010		273,235
2011		279,619
2012		23,301
Total	$	710,841

Rent expenses amounted to $125,462 and $127,605 for the six months ended June, 30, 2009 and 2008, respectively. The Company allocated $114,933 and $119,210 of rent expenses to cost of goods sold for the six months ended June 30, 2009 and 2008, respectively.

Note 12 - Concentration of Credit Risk

Beginning December 19, 2008, the Federal Deposit Insurance Company (FDIC) began the “Transaction Account Guarantee Program”. Under that program, through December 31, 2013, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC's general deposit insurance rules. The general deposit insurance limit was also raised from $100,000 to $250,000 through December 31, 2009. As of June 30, 2009, The Company had no balances above this limit.

A significant portion of the Company’s sales and accounts receivable is concentrated in a limited number of customers. Two major customers account for 49% of total revenue and 35% of total receivable for the six months ended and as of June 30, 2009. Three major customers account for 54% of total revenue and 65% of total receivable for the six months ended and as of June 30, 2008. The Company expects that a significant portion of its sales may continue to be concentrated with a limited number of customers. The concentration of the business with a relatively small number of customers may expose the Company to a material adverse effect if one or more of large customers were to experience financial difficulty.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008

Note 13 - Schedules of Selling, General and Administrative Expenses

The selling, general and administrative expenses for the six months ended June 30 are as follows:

		2009		2008

Salaries and wages	$	338,435	$	457,059
Payroll taxes		34,930		48,108
Advertising expense		3,960		3,032
Automobile expense		8,294		6,648
Bad debt expense		-		247,793
Bank charges		10,720		10,378
Commission		-		47,021
Contribution		1,230		1,025
Depreciation and amortization		14,833		11,361
Dues and subscriptions		528		477
Freight out		89,859		69,009
Insurance		7,685		6,012
Meals and entertainment		4,269		4,508
Office expense		5,157		5,943
Penalty		3,096		6,917
Professional fees		5,900		42,350
Rent		10,529		8,395
Repair and maintenance		5,964		1,824
Supplies		12,729		10,637
Taxes and licenses		45		827
Telephone		7,857		8,576
Travel		1,887		5,928
Utilities		8,351		890
Miscellaneous		1,873		4,276
Total selling, general and admin expenses	$	578,131	$	1,008,994

PARAGON TONER, INC.

FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2008 AND 2007

WITH

INDEPENDENT AUDITORS’ REPORT

PARAGON TONER, INC.

FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

CONTENTS	PAGE
Independent Auditors’ Report	3
Financial Statements:
Balance Sheets	4
Statements of Operations	6
Statement of Changes in Stockholder’s Equity	7
Statements of Cash Flows	8
Notes to Financial Statements	10

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors
Paragon Toner, Inc.
La Mirada, CA

We have audited the accompanying balance sheets of Paragon Toner, Inc. (an S Corporation, the “Company”) as of December 31, 2008 and 2007, and the related statements of operations, changes in stockholder’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Paragon Toner, Inc. as of December 31, 2008 and 2007, and the results of its operations, changes in stockholder’s equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Los Angeles, California
August 24, 2009

PARAGON TONER, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2007

ASSETS

		2008			2007
Current assets:

Cash and cash equivalents (Note 2)	$	80,263		$	12,104
Accounts receivable, net (Note 2)		464,789			708,075
Inventory (Notes 2 and 3)		458,936			655,117
Other current assets		1,800			-
Total current assets		1,005,788			1,375,296

Due from related parties (Note 4)		273,650			171,950

Property and equipment (Note 2):

Automobile		34,092			34,092
Furniture & fixture		53,388			51,378
Leasehold improvement		5,060			5,060
Machinery and equipment		433,469			422,475
		526,009			513,005
Less: Accumulated depreciation		(311,350	)		(233,697	)
Net property and equipment		214,659			279,308

Other assets:

Website, net of amortization (Note 8)		30,284			45,814
Security deposits		20,748			20,748
Other assets		245			834
Total other assets		51,277			67,396

Total Assets	$	1,545,374		$	1,893,950

See accompanying notes to financial statements.
4

PARAGON TONER, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2007

LIABILITIES AND STOCKHOLDER’S EQUITY
		2008			2007
Current liabilities:
Accounts payable	$	492,804		$	562,534
Line of credit (Note 5)		600,000			495,265
Current portion of notes payable (Note 6)		92,592			89,268
Current portion of capital lease obligations (Note 7)		35,761			32,152
Accrued expenses		49,436			97,094
Total current liabilities		1,270,593			1,276,313
Long term liabilities:
Notes payable, net of current portion (Note 6)		47,996			140,588
Capital lease obligations, net of current portion (Note 7)		50,449			86,210
Deferred rent (Note 2)		57,984			43,082
Total long term liabilities		156,429			269,880
Total liabilities		1,427,022			1,546,193
Stockholder’s equity:
Common stock - no par value
1,000,000 shares authorized,
12,900 shares issued and outstanding		129,000			129,000
Retained earnings (accumulated deficit)		(10,648	)		218,757
Total stockholder’s equity		118,352			347,757

Total liabilities and stockholder’s equity	$	1,545,374		$	1,893,950

See accompanying notes to financial statements.
5

PARAGON TONER, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

		2008			2007
Net sales	$	6,707,301		$	5,738,176
Cost of goods sold:
Beginning inventory		655,117			423,466
Purchases		3,326,728			3,450,575
Direct labor		1,012,095			873,152
Manufacturing overhead		385,367			385,734
Freight, supplies and other costs		69,953			95,047
		5,449,260			5,227,974
Less: Ending inventory		(458,936	)		(655,117	)
Total cost of goods sold		4,990,324			4,572,857
Gross profits		1,716,977			1,165,319
Selling, general and administrative expenses (Note 11)		1,588,655			1,052,709

Income from operations		128,322			112,610

Other income (expenses):
Interest expense		(66,039	)		(89,338	)
Gain on disposition of securities		-			2,521
Net other expense		(66,039	)		(86,817	)

Income before income tax provision		62,283			25,793

Provision for income taxes (Note 2)		2,249			4,276

Net income	$	60,034		$	21,517

See accompanying notes to financial statements.
6

PARAGON TONER, INC.

STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

	Common Stock

					Retained			Total
					Earnings			Stockholder’s
					(accumulated			Equity
	Shares		Amounts		deficit)

Balance at January 1, 2007	12,900	$	129,000	$	203,000		$	332,000

Distributions to stockholder for the year 2007	-		-		(5,760	)		(5,760	)

Net income for the year 2007	-		-		21,517			21,517

Balance at December 31, 2007	12,900		129,000		218,757			347,757

Distributions to stockholder for the year 2008	-		-		(289,439	)		(289,439	)

Net income for the year 2008	-		-		60,034			60,034

Balance at December 31, 2008	12,900	$	129,000	$	(10,648	)	$	118,352

See accompanying notes to financial statements.
7

PARAGON TONER, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

		2008			2007
Cash flows from operating activities:
Net income	$	60,034		$	21,517
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Bad debt expense		247,793			-
Depreciation and amortization		93,772			68,379
Provision for inventory obsolescence		6,143			28,843
(Increase) decrease in:
Accounts receivable		(4,506	)		(304,846	)
Inventory		190,039			(260,494	)
Other current assets		(1,800	)		-
Increase (decrease) in:
Accounts payable		(69,730	)		188,664
Accrued expenses		(47,659	)		63,905
Deferred rent		14,902			42,673
Total adjustments		428,954			(172,876	)
Net cash provided by (used in) operating activities		488,988			(151,359	)
Cash flows from investing activities:
Acquisition of property		(13,004	)		(84,385	)
Acquisition of website		-			(4,619	)
Increase in due from related parties		(197,855	)		(4,486	)
Net cash used in investing activities		(210,859	)		(93,490	)
Cash flows from financing activities:
Net proceeds from line of credit		104,735			277,431
Net payments on notes payable		(89,268	)		(80,170	)
Payments on capital lease obligations		(32,152	)		(28,424	)
Distributions to stockholder		(193,285	)		(5,760	)
Net cash provided by (used in) financing activities		(209,970	)		163,077
Net increase (decrease) in cash		68,159			(81,772	)
Cash at beginning of year		12,104			93,876
Cash at end of year	$	80,263		$	12,104

(continued)

See accompanying notes to financial statements.
8

PARAGON TONER, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

		2008		2007
Supplemental disclosures:
Cash paid during the year:
Income taxes	$	4,276	$	4,342
Interest expense	$	66,039	$	89,338

Noncash financing activities:
Equipment acquired by a capital lease	$	-	$	32,050
Conversion of accounts receivable to Website	$	-	$	41,938
Conversion of due to related parties to distributions to
stockholder	$	96,155	$	-

See accompanying notes to financial statements.
9

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 1 - Nature of Business

Paragon Toner, Inc. (the “Company”) was incorporated in the state of California on January 27, 2004. The Company is engaged primarily in manufacturing and distributing compatible toners.

Note 2 - Summary of Significant Accounting Policies

Use of estimates

Revenue recognition

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be categorized as cash and cash equivalents.

Allowance for doubtful accounts

The allowance for doubtful accounts is computed based upon the management’s estimate of uncollectible accounts and historical experience. The Company performs ongoing credit evaluations of its customers to estimate potential credit losses. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible. As a result, the Company wrote off $247,793 and $0 of uncollectible amount for the years ended December 31, 2008 and 2007, respectively. The allowance for doubtful accounts is $0 at, both, December 31, 2008 and 2007.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 2 - Summary of Significant Accounting Policies (continued)

Inventory

Property and equipment

Property and equipment are stated at cost. The straight-line method is used to calculate depreciation over their estimated useful lives ranging as follows:

Automobile	3 years
Furniture & fixture	5 to 7 years
Leasehold improvement	5 years
Machinery and equipment	5 years

Leasehold improvements are depreciated to expense over the shorter of the life of the improvement or the remaining lease term. Capital expenditures that enhance the value or materially extend the useful life of the related assets are reflected as additions to property and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. Upon a sale or disposition of assets, a gain or a loss is included in the statement of operations. Depreciation expense amounted to $77,653 and $67,046 for the years ended December 31, 2008 and 2007, respectively.

Impairment of long-lived assets

Accrued expenses

The Company’s accrued expenses consist of amounts payable for salaries, payroll taxes and sales taxes.

Deferred rent

Shipping and handling

Certain shipping and handling fees are charged to customers and these are classified as revenue. The costs associated with all shipping to customers are recorded as operating expenses. Shipping expenses for the years ended December 31, 2008 and 2007 amounted to $157,450 and $93,014, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 2 - Summary of Significant Accounting Policies (continued)

Income taxes

Recent pronouncements

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 clarifies how Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This statement also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. Management is currently evaluating the effect of adopting this statement, but does not believe that SFAS 163 will have an effect on the Company’s financial condition or results of operations.

In June 2008, the FASB issued an exposure draft of a proposed amendment to SFAS 133. As proposed, this amendment would make several significant changes to the way in which entities account for hedging activities involving derivative instruments. The FASB has not yet issued the final statement.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 2 - Summary of Significant Accounting Policies (continued)

Note 3 - Inventory

Inventory consists of the following at December 31:

		2008			2007

Finished goods	$	170,717		$	136,303
Raw materials		323,205			547,657
		493,922			683,960
Less: Inventory reserve		(34,986	)		(28,843	)
Total	$	458,936		$	655,117

The Company recorded a reserve for slow moving and obsolete inventory of $6,143, and $28,843 as cost of goods sold in 2008 and 2007, respectively. Overhead allocated to the inventory amounted to $20,079 and $21,564 for the years ended December 31, 2008 and 2007, respectively.

Note 4 - Due from related parties

Advances to family members of the stockholder are unsecured, non-interest bearing and due on demand. The Company has $273,650 and $171,950 of advances due from related parties as of December 31, 2008 and 2007, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 5 - Line of Credit

The Company has a line of credit with a bank with a maximum borrowing limit of $600,000. The outstanding balance was $600,000 and $495,265 as of December 31, 2008 and 2007, respectively. This line of credit matures on June 7, 2010 and is secured by the Company’s accounts receivable, inventory and other miscellaneous assets. Interest is accrued at the bank’s prime plus 1.00% (4.25% as of December 31, 2008).

The Company incurred interest expenses on this line of credit of $35,296 and $45,855 for the years ended December 31 2008 and 2007, respectively. This line of credit contains certain covenants, and in management opinion, the Company is in compliance with the covenants as of December 31, 2008.

Note 6 - Notes Payable

As of December 31, the Company has long term notes payable as follows;

		2008			2007

A note payable to a bank, due in monthly installments of $3,143, including interest at the bank’s prime plus 1.25% (4.50% as of December 31, 2008). The note matures in May 2011, and is collateralized by substantially all the assets of the Company. The note is subject to various restrictive covenants, including maintenance of financial ratios at all times.	$	80,331		$	109,946

A note payable to a bank, due in monthly installments of $3,249, including interest at the bank’s prime plus 1.25% (4.50% as of December 31, 2008). The note matures in November 2009, and is collateralized by substantially all the assets of the Company.		33,182			67,112

A note payable to a bank, due in monthly installments of $2,476, including interest at the bank’s prime plus 2.00% (5.25% as of December 31, 2008). The note matures in May 2011, and is collateralized by substantially all bank accounts of the Company.		27,075			52,798

Total notes payable		140,588			229,856

Less: Current portion		(92,592	)		(89,268	)

Notes payable, net of current	$	47,996		$	140,588

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 6 - Notes Payable (continued)

Maturities of notes payable are as follows for the years ending December 31:

Years ending December 31,		Amount

2009	$	92,592
2010		33,820
2011		14,176

Total	$	140,588

Total interest expenses from the notes payable were $11,410 and $26,709 for the years ended December 31, 2008 and 2007, respectively.

Note 7 - Capital Lease Obligations

The Company entered into numerous capital lease agreements with leasing companies to purchase certain equipment and transportation vehicles. As of December 31, these assets are carried as follows:

		2008			2007

Equipment	$	162,889		$	162,889
Transportation vehicles		32,800			32,800
Less: Accumulated depreciation		(126,502	)		(98,113	)
	$	69,187		$	97,576

The related future minimum lease payments under the capital lease obligations are as follows at December 31:

		2008			2007
Total minimum lease payments	$	111,940		$	163,449
Less: Amount representing interest		(25,730	)		(45,062	)
Present value of net minimum lease payments		86,210			118,362
Less: Current portion		(35,761	)		(32,152	)
Capital lease obligations, net of current portion	$	50,449		$	86,210

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 7 - Capital Lease Obligations (continued)

Maturities of capital lease obligations are as follows for the years ending December 31:

Years ending December 31,		Amount

2009	$	35,761
2010		21,888
2011		20,447
2012		8,114
Total	$	86,210

Total interest expenses from the capital lease obligations were $19,333 and $16,774 for the years ended December 31, 2008 and 2007, respectively.

Note 8 - Capitalized Website Costs

		2008			2007
Gross balance	$	46,589		$	46,589
Less: Accumulated amortization		(16,305	)		(775	)

Net balance	$	30,284		$	45,814

Estimated aggregate amortization expense for each of the succeeding years is as follows:

Years ending December 31,		Amount

2009	$	15,530
2010		14,754
Total	$	30,284

Total amortization expenses were $15,530 and $775 for the years ended December 31, 2008 and 2007, respectively.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 9 - Commitments and Contingencies

The Company leases its warehouse and office from a non-affiliate. Future minimum rental payments under these leases as of December 31, 2008 are as follows:

Years ending December 31,		Amount

2009	$	268,724
2010		273,235
2011		279,619
2012		23,301
Total	$	844,879

Rent expenses amounted to $254,777 and $261,894 for the years ended December 31, 2008 and 2007, respectively. The Company allocated $238,015 and $245,047 of rent expenses to cost of goods sold for the years ended December 31, 2008 and 2007, respectively.

Note 10 - Concentration of Credit Risk

Beginning December 19, 2008, the Federal Deposit Insurance Company (FDIC) began the “Transaction Account Guarantee Program”. Under that program, through December 31, 20013, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC's general deposit insurance rules. The general deposit insurance limit was also raised from $100,000 to $250,000 through December 31, 2009. As of December 31, 2008, The Company had no balances above this limit.

A significant portion of the Company’s sales and accounts receivable is concentrated in a limited number of customers. Three major customers account for 44% and 40% of total revenue and 55% and 58% of total receivable for the years ended and as of December 31, 2008 and 2007, respectively. The Company expects that a significant portion of its sales may continue to be concentrated with a limited number of customers. The concentration of the business with a relatively small number of customers may expose the Company to a material adverse effect if one or more of large customers were to experience financial difficulty.

PARAGON TONER, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

Note 11 - Schedules of Selling, General and Administrative Expenses

The selling, general and administrative expenses for the years ended December 31 are as follows:

		2008		2007

Salaries and wages	$	789,164	$	681,423
Payroll taxes		72,991		62,374
Advertising expense		6,584		123
Automobile expense		14,911		8,236
Bad debts		247,793		-
Bank charges		20,518		10,454
Commission		47,021		61,139
Contribution		2,537		-
Depreciation and amortization		29,739		2,290
Dues and subscriptions		1,028		2,475
Freight out		157,450		93,014
Insurance		15,912		18,864
Meals and entertainment		9,700		7,112
Office expense		9,788		9,200
Penalty		6,917		1,740
Professional fees		52,700		12,350
Rent		16,762		16,848
Repair and maintenance		5,325		1,513
Supplies		32,362		25,629
Taxes and licenses		827		2,513
Telephone		14,486		11,791
Travel		16,140		18,470
Utilities		1,905		2,120
Miscellaneous		16,095		3,031
Total selling, general and admin expenses	$	1,588,655	$	1,052,709