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.

10



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.

11



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.

12



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.

13



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  

14



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  

15



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.

16



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.

17



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  

18



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

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. 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.

10



PARAGON TONER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
 

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 $77,653 and $67,046 for the years ended December 31, 2008 and 2007, 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 December 31, 2008 and 2007.

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 years ended December 31, 2008 and 2007 amounted to $157,450 and $93,014, respectively.

11



PARAGON TONER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
 

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 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.

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 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.

12



PARAGON TONER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
 

Note 2 - Summary of Significant Accounting Policies (continued)

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 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 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.

13



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  

14



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  

15



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

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 December 31:

    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.

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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.

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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  

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