10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2013.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 1-13669

TALON INTERNATIONAL, INC.

(Exact Name of Issuer as Specified in its Charter)

Delaware	95-4654481
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

21900 Burbank Boulevard, Suite 270

Woodland Hills, California 91367

(Address of Principal Executive Offices)

(818) 444-4100
(Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [X]   No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer [ ]  Accelerated filer [ ]  Non-accelerated filer [ ]  Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

At Aug 9, 2013, the issuer had 91,913,217 shares of Common Stock, $.001 par value, issued and outstanding.

TALON INTERNATIONAL, INC.

INDEX TO FORM 10-Q

PARTI         FINANCIAL INFORMATION			Page
Item 1.		Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012		3
	Consolidated Statements of Operations and Comprehensive Income fo rthe Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)		4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)		5
	Notes to Consolidated Finanacial Statements (Unaudited)		7
Item 2.		Management's Discussion and Analysisof Financial Condition and Results of Operations	28
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.		Controls and Procedures	37
PART II        OTHER INFORMATION
Item 1.		Legal Proceedings	37
Item 1A.		Risk Factors	38
Item 6.		Exhibits	39

2

TALON INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2013			December 31, 2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,506,088		$	8,927,333
Accounts receivable, net		4,511,580			3,635,136
Inventories, net		933,397			730,503
Prepaid expenses and other current assets		532,636			456,460
Total current assets		17,483,701			13,749,432
Property and equipment, net		850,266			763,770
Intangible assets, net		4,273,652			4,279,943
Other assets		390,821			182,671
Total assets	$	22,998,440		$	18,975,816
Liabilities, Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	9,609,871		$	7,866,662
Accrued expenses		2,551,896			2,023,535
Current portion of capital lease obligations		1,585			3,247
Total current liabilities		12,163,352			9,893,444
Deferred income taxes		1,017,755			945,543
Other liabilities		42,423			186,051
Total liabilities		13,223,530			11,025,038
Commitments and contingencies (Note 10)
Series B Convertible Preferred Stock, $0.001 par value; 407,160 shares authorized, issued and outstanding		25,777,657			23,979,216
Stockholders’ Equity (Deficit):
Series A Preferred Stock, $0.001 par value; 250,000 shares authorized; no shares issued or outstanding		-			-
Common Stock, $0.01 par value, 100,000,000 shares authorized;24,900,808 and 23,400,808 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		24,901			23,401
Additional paid-in capital		58,708,444			58,458,731
Accumulated deficit		(74,833,425	)		(74,578,052	)
Accumulated other comprehensive income		97,333			67,482
Total stockholders’ equity (deficit)		(16,002,747	)		(16,028,438	)
Total liabilities, preferred stock and stockholders’ equity (deficit)	$	22,998,440		$	18,975,816

See accompanying notes to consolidated financial statements.

3

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net sales	$	16,640,964		$	13,179,849		$	26,780,714		$	21,925,799
Cost of goods sold		11,089,124			8,821,120			18,052,796			14,796,314
Gross profit		5,551,840			4,358,729			8,727,918			7,129,485
Sales and marketing expenses		1,532,493			1,166,549			2,796,485			2,263,472
General and administrative expenses		2,430,748			2,217,822			4,133,957			4,365,481
Total operating expenses		3,963,241			3,384,371			6,930,442			6,628,953
Income from operations		1,588,599			974,358			1,797,476			500,532
Interest expense (income), net		(197	)		19,723			575			41,760
Income before provision for income taxes		1,588,796			954,635			1,796,901			458,772
Provision for (benefit from) income taxes, net		326,081			283,501			253,833			(6,732	)
Net income	$	1,262,715		$	671,134		$	1,543,068		$	465,504
Series B Preferred Stock Liquidation Preference Increase		(899,220	)		(775,190	)		(1,798,441	)		(1,550,380	)
Income (loss) applicable to Common Shareholders	$	363,495		$	(104,056	)	$	(255,373	)	$	(1,084,876	)
Per share amounts:
Net income per share	$	0.05		$	0.03		$	0.06		$	0.02
Available to Preferred Shareholders		(0.04	)		(0.03	)		(0.07	)		(0.07	)
Basic net income (loss) per share applicable to Common Shareholders	$	0.01		$	0.00		$	(0.01	)	$	(0.05	)
Weighted average number of common shares outstanding – Basic		24,900,808			21,900,808			24,652,189			21,752,456
Weighted average number of common shares outstanding – Diluted		27,521,480			21,900,808			24,652,189			21,752,456
Net income	$	1,262,715		$	671,134		$	1,543,068		$	465,504
Other comprehensive income from foreign currency translation		31,142			29,320			29,851			13,686
Total comprehensive income	$	1,293,857		$	700,454		$	1,572,919		$	479,190

See accompanying notes to consolidated financial statements.

4

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	1,543,068		$	465,504
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		249,608			272,460
(Gain) from disposal of equipment		(1,832	)		(47,323	)
Amortization of deferred financing cost		-			15,000
Stock based compensation		251,213			258,714
Deferred income taxes, net		72,211			179,214
Bad debt expense, net		20,859			13,374
Inventory valuation provisions, net		19,158			17,536
Changes in operating assets and liabilities:
Accounts receivable		(882,945	)		(276,813	)
Inventories		(221,964	)		231,786
Prepaid expenses and other current assets		(72,364	)		(309,948	)
Other assets.		(207,385	)		12,714
Accounts payable and accrued expenses		2,230,827			1,636,159
Other liabilities		(143,628	)		(197,667	)
Net cash provided by operating activities		2,856,826			2,270,710
Cash flows from investing activities:
Acquisitions of intangibles		-			(155,940	)
Proceeds from sale of equipment		1,832			168
Acquisitions of property and equipment		(327,976	)		(122,683	)
Net cash (used in) investing activities		(326,144	)		(278,455	)
Cash flows from financing activities:
Payment of notes payable to related parties		-			(240,957	)
Payment of other notes payable		-			(66,675	)
Payment of capital leases		(1,662	)		(2,976	)
Net cash (used in) financing activities		(1,662	)		(310,608	)
Net effect of foreign currency exchange translation on cash		49,735			(6,400	)
Net increase in cash and cash equivalents		2,578,755			1,675,247
Cash and cash equivalents at beginning of period		8,927,333			5,749,341
Cash and cash equivalents at end of period	$	11,506,088		$	7,424,588

See accompanying notes to consolidated financial statements.

5

 TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Supplemental disclosures of cash flow information:

	Six Months Ended June 30,
	2013			2012
Cash received (paid) during the period for:
Interest paid	$	(2,672	)	$	(188,436	)
Interest received	$	2,097		$	1,703
Income tax paid, net (principally foreign)	$	(58,858	)	$	(162,205	)
Non-cash financing activities:
Series B preferred stock liquidation preference increase	$	(1,798,441	)	$	(1,550,380	)
RSU’s settlement in common stock	$	1,500		$	900
Interest accrued on notes payable	$	-		$	1,540
Effect of foreign currency translation on net assets	$	29,851		$	13,686
Non-cash investing activities:
Equipment exchanged for manufacturing services	$	-		$	47,379
Capital lease terminations	$	-		$	9,802

See accompanying notes to consolidated financial statements.

6

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.     Presentation of Interim Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”), are considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2012. The balance sheet as of December 31, 2012 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

Note 2.     Summary of Significant Accounting Policies

A complete description of the Company’s Significant Accounting Policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and should be read in conjunction with these unaudited consolidated financial statements. The Significant Accounting Policies noted below are only those policies that have changed materially or have supplemental information included for the periods presented here.

Allowance for Accounts Receivable Doubtful Accounts

The Company is required to make judgments as to the collectability of accounts receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts and that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified. Bad debt expense (recovery), net on accounts receivable for the three and six months ended June 30, 2013 was $20,749 and $20,859, respectively. Bad debt expense, net on accounts receivable for the three and six months ended June 30, 2012 was $14,031 and $13,374, respectively

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

7

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities. The book value of the financial instruments is representative of their fair values. In accordance with this guidance, the Company measures its cash equivalents at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At June 30, 2013 and December 31, 2012, cash equivalents consisted of money market funds measured at fair value on a recurring basis; fair value of the Company’s money market funds was approximately $987,000 and $2,230,000, respectively.

The Company adopted the Financial Accounting Standards Board (“FASB”) staff position that delayed the guidance on fair value measurements for non-financial assets and non-financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Intangible Assets

Intangible assets consist of the Talon trade name acquired in a purchase business combination, patents, licenses, intellectual property rights and technology. Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other”. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives using the straight-line method, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.

In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment.”  The updated guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not, defined as a likelihood of more than 50%, that an indefinite-lived intangible asset is impaired.  If it is determined that it is more likely than not that an impairment exists, then the company is required to estimate the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASU 350-30. The updated guidance was effective for annual and interim indefinite lived intangibles asset impairment tests performed for fiscal years, and interim periods within those years, beginning after September 15, 2012.  Early adoption was permitted as of a date before July 27, 2012. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. We completed the required assessment at June 30, 2013 and December 31, 2012, and noted no impairment. Consequently, no impairment charges were recorded.

8

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On April 2, 2002, the Company entered into an Exclusive License and Intellectual Property Rights Agreement (the “License Agreement”) with Pro-Fit Holdings Limited (“Pro-Fit”). The License Agreement granted the Company the exclusive rights to sell or sublicense waistbands manufactured under patented technology developed by Pro-Fit for garments manufactured anywhere in the world for sale in the United States market and to all United States brands. The License Agreement had an indefinite term that extended for the duration of the trade secrets and patented technology licensed under the License Agreement. The Company recorded an intangible asset of $612,500, which has been fully amortized.

During the quarter ended March 31, 2012 the Company completed the acquisition from Pro-Fit and related parties of all U.S. patents, applications, trademarks, rights and technology associated with the stretch waistband technology that was formerly exclusively licensed under the License Agreement, and the License Agreement was terminated. During the quarter ended June 30, 2012 the Company also acquired other intellectual property related to accessory components used with a variety of apparel products. The total purchase price and related fees for all intangibles acquired in 2012 totaled $178,722, and is amortized based on the estimated useful lives between 10 and 17 years. Amortization expense for intangible assets was $3,271 and $6,291 for the three and six months ended June 30, 2013, respectively. Amortization expense for intangible assets was $2,890 for the three and six months ended June 30, 2012.

Intangible assets as of June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013			December 31, 2012
Tradename	$	4,110,751		$	4,110,751
Intellectual property rights and exclusive license		178,722			178,722
Accumulated amortization		(15,821	)		(9,530	)
Intellectual property rights, net		162,901			169,192
Intangible assets, net	$	4,273,652		$	4,279,943

Convertible Preferred Stock

Subsequent to June 30, 2013 the Company entered into a Securities Redemption Agreement (the “Redemption Agreement”) with CVC California, LLC (“CVC”). Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a promissory note in the principal amount of $5,800,000 (the “Promissory Note”). See Note 12.

The Company classifies its conditionally redeemable convertible preferred shares, which were subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity in the mezzanine section of the consolidated balance sheets, in accordance with the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock.

9

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company evaluated the conversion option of its convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.

The convertible preferred shares, which were redeemable preferred securities, are reported at their current liquidation preference amount. Redeemable securities initially are recorded at their fair value minus the BCF and minus preferred stock issuance costs, and then are subsequently adjusted for changes in the preferred stock value in accordance with the following guidelines:

● When an equity instrument is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), then changes in the redemption value are recognized as they occur, and the carrying amount of the instrument is adjusted to equal the current redemption value. An increase in the carrying amount of the instrument reduces income available to common shareholders in the calculation of earnings per share.

● When the liquidation preference increases on preferred shares it is added to the preferred stock carrying amount, and reduces income available to common shareholders in the calculation of earnings per share.

Classification of Expenses

Costs of Goods Sold – Cost of goods sold primarily includes expenses related to inventory purchases, customs, duty, freight, overhead expenses and reserves for obsolete inventory. Overhead expenses primarily consist of warehouse and operations salaries, and other warehouse expense.

Sales and Marketing Expenses – Sales and marketing expenses primarily include sales salaries and commissions, travel and entertainment, marketing, advertising, royalty expense, and other sales related costs. Marketing and advertising efforts are expensed as incurred.

General and Administrative Expenses – General and administrative expenses primarily include administrative salaries, employee benefits, professional service fees, facility expenses, information technology costs, investor relations, travel and entertainment, depreciation and amortization, bad debts and other general corporate expenses.

Interest Expense (Income), net – Interest expense reflects the cost of borrowing. Interest expense for the three and six months ended June 30, 2013 totaled $1,451 and $2,672 respectively. Interest expense for the three and six months ended June 30, 2012 totaled $21,042 and $43,463, respectively. Interest income consists of earnings from cash held in interest bearing accounts. For the three and six months ended June 30, 2013 the Company recorded interest income of $1,648 and $2,097, respectively. For the three and six months ended June 30, 2012 the Company recorded interest income of $1,319 and $1,703, respectively.

10

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Foreign Currency Translation

The Company has operations and holds assets in various foreign countries. The local currency is the functional currency for the Company’s subsidiaries in China and India. Assets and liabilities are translated at end-of-period exchange rates while revenues and expenses are translated at the average exchange rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income until the translation adjustments are realized. Included in accumulated other comprehensive income were a cumulative foreign currency translation gain of $97,333 and $67,482 at June 30, 2013 and December 31, 2012, respectively.

Comprehensive Income

Comprehensive income consists of net income and unrealized income on foreign currency translation adjustments. The foreign currency translation adjustment represents the net currency translation gains and losses related to our China and India subsidiaries, which have not been reflected in the net income for the periods presented.

In the first quarter of 2012 we adopted FASB ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) and ASU 2011-12, “Comprehensive Income (Topic 220)”, which amended ASC Topic 220, “Comprehensive Income”, and was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company chose the option provided by ASU 2011-05 to present the total of comprehensive income (loss), the components of net income (loss) and the components of other comprehensive income (loss) in a single continuous statement. Adoption of the guidance did not have any impact on our results of operations or financial condition.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year.  The accounting estimates that require the Company’s most significant, difficult and subjective judgments include the valuation allowance for accounts receivable and inventory, and the assessment of recoverability of long-lived assets and intangible assets, stock-based compensation and the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions). Actual results could differ materially from the Company’s estimates.

11

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3. Net Income (Loss) Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations:

	Net income (loss)			Shares		Per Share Amount
Three Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,262,715			24,900,808	$	0.05
Series B Preferred Stock Liquidation Preference Increase		(899,220	)		-		(0.04	)
Income (loss) applicable to Common Shareholders		363,495			24,900,808		0.01
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			2,620,672		-
Diluted net income (loss) applicable to Common Shareholders	$	363,495			27,521,480	$	0.01
Three Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	671,134			21,900,808	$	0.03
Series B Preferred Stock Liquidation Preference Increase		(775,190	)		-		(0.03	)
Income (loss) applicable to Common Shareholders		(104,056	)		21,900,808		0.00
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(104,056	)		21,900,808	$	0.00

12

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

	Net income (loss)			Shares		Per Share Amount
Six Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,543,068			24,652,189	$	0.06
Series B Preferred Stock Liquidation Preference Increase		(1,798,441	)		-		(0.07	)
Income (loss) applicable to Common Shareholders		(255,373	)		24,652,189		(0.01	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(255,373	)		24,652,189	$	(0.01	)

Six Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	465,504		21,752,456	$	0.02
Series B Preferred Stock Liquidation Preference Increase		(1,550,380	)	-		(0.07	)
Income (loss) applicable to Common Shareholders		(1,084,876	)	21,752,456		(0.05	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-		-		-
Diluted net income (loss) applicable to Common Shareholders	$	(1,084,876	)	21,752,456	$	(0.05	)

For the three months ended June 30, 2013, options to purchase 420,000 shares of common stock exercisable between $0.04 and $0.06 per share and RSU’s to settle for 7,057,000 common shares were included in the computation of diluted net income (loss) per share. Options to purchase 5,664,600 shares of common stock exercisable between $0.05 and $5.23 per share, and Series B Preferred Stock convertible into 40,716,000 shares of common stock were outstanding but were not included in the computation of diluted net income (loss) per share applicable to common shareholders because they would have an antidilutive effect on the net income (loss) per share.

13

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, the Company raised $5,500,000 of new equity capital through the offer and sale, in a Private Placement transaction, of 61,111,109 shares of common stock at a price of $0.09 per share. Additionally, on July 12, 2013 4,745,600 shares of common stock were issued to reporting persons in settlement of previously vested restricted stock units pursuant to an existing deferral election. As a result of the Redemption Agreement, the net income applicable to Preferred Shareholders noted above, which was $0.04 and $0.07 for the three and six months ended June 30, 2013, respectively, becomes available to Common Shareholders.

For the three months ended June 30, 2012, options to purchase 6,372,100 shares of common stock exercisable between $0.04 and $5.23 per share, RSU’s to settle for 10,057,000 common shares and Series B Preferred Stock to be converted into 40,716,000 shares of common stock were outstanding, but were not included in the computation of diluted net income (loss) per share because they would have an antidilutive effect on the net income (loss) per share.

Note 4.     Accounts Receivable

Accounts receivable are included on the consolidated balance sheets net of the allowance for doubtful accounts. The allowance for doubtful accounts at June 30, 2013 and December 31, 2012 was $23,351 and $1,093, respectively.

Note 5. Inventories

Inventories are stated at the lower of cost, determined using the first-in, first-out basis, or market value and are all categorized as finished goods. The costs of inventory include the purchase price, inbound freight and duties, conversion costs and certain allocated production overhead costs. Inventory valuation reserves are recorded for damaged, obsolete, excess and slow-moving inventory. The Company uses estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved depending on the type of product and the length of time the product has been included in inventory. Reserve adjustments are made for the difference between the cost of the inventory and the estimated market value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Market value of inventory is estimated based on the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this inventory.

14

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Inventories consist of the following:

	June 30, 2013			December 31, 2012
Finished goods	$	1,212,591		$	991,635
Less reserves		(279,194	)		(261,132	)
Total inventories	$	933,397		$	730,503

Note 6.     Debt Facility

 The Company originally entered into a Revolving Credit and Term Loan Agreement (the “Loan Agreement”) on June 27, 2007 with Bluefin Capital, LLC (“Bluefin”). Bluefin subsequently assigned its rights and obligations under the Loan Agreement to an affiliate, CVC.  On July 30, 2010, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with CVC in which the Company issued to CVC shares of the Company’s Series B Preferred Stock in payment of all of the outstanding obligations owed by the Company to CVC under the Loan Agreement, (see Note 7). All of the outstanding obligations owed to CVC under the Loan Agreement that became due and payable on July 30, 2010, in the amount of $16,706,685, were converted into Series B Preferred Stock pursuant to the Recapitalization Agreement. These obligations consisted of outstanding borrowings and accrued interest of $11,548,098 under term notes, and $5,158,587 under a revolving credit note.

In connection with the Recapitalization Agreement, the Loan Agreement (now fully paid and expired) was amended to extend the maturity date from July 30, 2010 until July 31, 2012, reduce the maximum borrowings available under the Revolver to $3,000,000, and amend various additional terms and conditions of the Loan Agreement. The Company paid CVC a non-refundable fee in the amount of $60,000 in consideration of CVC entering into the July 2010 amendment and making this facility available and paid a $50,000 commitment fee during the third quarter of 2011 to ensure the availability of the revolver through July 31, 2012. Upon execution of the amendment, CVC waived all prior events of default under the Loan Agreement. Borrowings under the Loan Agreement were secured by all of the Company’s assets.

On July 31, 2012, with no borrowings outstanding, the Loan Agreement expired along with all performance covenants, obligations and liens against any assets of the Company.

On July 12, 2013 the Company entered into a Redemption Agreement with CVC pursuant to the Company’s Series B Convertible Preferred Stock held by CVC. In accordance with the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. See Note 12.

The interest expense for the three months ended June 30, 2012 was $20,000, and composed of amortization of deferred financing costs of $7,500 and commitment fee expense of $12,500. The interest expense for the six months ended June 30, 2012 was $40,000, and composed of amortization of deferred financing costs of $15,000 and commitment fee expense of $25,000.

15

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7.     Series B Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Subsequent Preferred Stock Redemption and Private Placement of Common Stock

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 previously outstanding shares of Series B Preferred Stock (described below) for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. Together with the entry into the Redemption Agreement, the Stockholder’s Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company was terminated. In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, the Company raised $5,500,000 of new equity capital through the offer and sale, in a Private Placement transaction, of 61,111,109 shares of common stock at a price of $0.09 per share. The closing of the Private Placement was expressly conditioned upon the contemporaneous closing of the transactions under the Redemption Agreement. See Note 12.

Series B Convertible Preferred Stock

On July 30, 2010, the Company entered into the Recapitalization Agreement with CVC, pursuant to which the Company issued to CVC an aggregate of 407,160 shares of a newly created series of the Company’s preferred stock, designated Series B Convertible Preferred Stock, $0.001 par value per share in payment of an aggregate of $16,706,685 owed by the Company to CVC under the Loan Agreement. Certain rights, preferences, privileges and restrictions previously provided to the Series B Preferred Stock are summarized below.

The Series B Preferred Stock had the following rights, preferences, privileges and restrictions:

● The Series B Preferred Stock ranked senior to the common stock and to any other preferred stock unless such preferred stock was created and issued on a senior or pari passu basis in accordance with the Company’s certificate of incorporation.

● Each share of Series B Preferred Stock was convertible into 100 shares of the Company’s common stock (subject to adjustment for stock splits, reverse stock split, etc.) at any time and from time to time at each holder’s option, unless the Series B Preferred Stock was exchanged for its Liquidation Preference as noted below.

● Upon the liquidation, dissolution or winding up of the Company, each share of Series B Preferred Stock was entitled to receive upon the surrender and cancellation of such shares (and prior to any distribution to holders of other equity securities), an amount equal to $41.033 per share plus all accrued dividends (the “Liquidation Preference”). A merger, consolidation, share exchange or other reorganization resulting in a change in control of the Company, or any sale of all or substantially all of the Company’s assets, would be deemed a liquidation and winding up for purposes of the Company’s obligation to pay the Liquidation Preference.

16

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

● The Series B Preferred Stock Liquidation Preference increased at the rate of 16% per annum, compounded annually, in the form of a dividend accrual on the Liquidation Preference. The dividend however was only payable in connection with the payment of the Liquidation Preference upon the liquidation, dissolution or winding up of the Company, and in each case in exchange for the surrender of the Series B Preferred Stock. No portion of the Liquidation Preference or the associated accrued dividends were convertible into common stock, nor was any portion of the Liquidation Preference or the accrued dividends payable on shares of Series B Preferred Stock in the event of or following the conversion of such shares into common stock.

● The Company had the right, at any time upon not less than thirty (30) days’ prior written notice to the holders of Series B Preferred Stock, to redeem the Series B Preferred Stock in whole (but not in part) for a price equal to the then-applicable Liquidation Preference. The holders of Series B Preferred Stock had the option, exercisable at any time and from time to time commencing on July 31, 2016, to require the Company to redeem any or all of the Series B Preferred Stock held by such holders, at the then-applicable Liquidation Preference amount.

● The Series B Preferred Stock voted with the common stock as a single class on all matters submitted or required to be submitted to a vote of the Company’s stockholders, with each share of Series B Preferred Stock having a number of votes equal to the number of shares of common stock that may be acquired upon conversion thereof as of the applicable date of determination. Additionally, the Series B Preferred Stock had the right to vote as a separate class with respect to certain matters affecting the Series B Preferred Stock, including but not limited to (a) the creation or issuance of any other class or series of preferred stock, (b) any amendments with respect to the rights, powers, preferences and limitations of the Series B Preferred Stock, (c) paying dividends or distributions in respect of or redeem the Company’s common stock or any other junior securities; and (d) certain affiliate transactions. Any such vote required the affirmative vote or consent of a majority of the outstanding shares of Series B Preferred Stock.

As long as the outstanding Series B Preferred Stock represented 35% or more of the voting shares of the Company, on an as-converted to common stock basis, then (a) our Board of Directors consisted of not more than seven members, (b) the holders of Series B Preferred Stock had the right to elect three directors if the Board had five or fewer total directors, and four directors if the Board had six or seven directors (the directors elected by the Series B Preferred Stock were referred to as the “Series B Directors”), and (c) those members serving on the Board who were not elected by holders of the Series B Preferred Stock had the right to designate all remaining directors. At least two of the Series B Directors had to be, and remain at all times while serving as a director, an independent director that qualified for service on the audit committee of a corporation with securities listed on the Nasdaq Stock Market as provided in Nasdaq Marketplace Rule 5605(c)(2) (or any successor thereto). Once the outstanding shares of Series B Preferred Stock represent less than 35% of the voting shares on an as-converted to common stock basis, then the entire Board will thereafter be elected by all stockholders having voting rights, voting as a single class.

17

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The conversion of the term notes, revolver and related interest and fees into the Series B Preferred Stock (fair value of $17,277,600 as of July 30, 2010) was considered to be debt extinguishment according to the FASB ASC No.405 “Liabilities” and FASB ASC No. 470-50 “Debt, Modifications and Extinguishments” (“ASC 470-50”). Per ASC 470-50 a loss on extinguishment of debt of $570,915 was recorded on July 30, 2010 and is included in the Consolidated Statement of Operations for the year ended December 31, 2010. The loss on extinguishment is equal to the difference between fair value of the preferred stock and the fair value of the debt extinguished at the transaction date. The fair value of the Series B Preferred Stock on the issuance date was determined by the Company and independent valuation specialists using the option pricing valuation model.  

The Company applied the guidance enumerated in FASB ASC No. 480 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock. The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within the control of the Company, as temporary equity in the mezzanine section of the consolidated balance sheet. The Series B Preferred Stock is redeemable at the option of the holders after the sixth anniversary of issuance, which is not within the control of the Company.

The Company determined that there are no embedded features that would require separate reporting as derivative instruments. Therefore, the Company evaluated the conversion option of the convertible preferred shares under FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF if the fair value of the instrument is lower than the fair value of shares of the common stock it is convertible into on the issuance date.  The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital. The Company has recorded a BCF value of $1,283,343 in connection with the issuance of the Series B Preferred Stock on July 30, 2010.

The Series B Preferred Stock was initially recorded at the fair value of $17,277,600 as of July 30, 2010, reduced by the BCF ($1,283,343) as stated above and stock issuance costs ($190,744), for a net value of $15,803,513 as of July 30, 2010. The value of the Series B Preferred Stock was adjusted as follows as a consequence of its redemption features and the following approach was implemented by the Company:

● The Series B Preferred Stock was not redeemable as of June 30, 2013, but it was probable that the preferred stock could become redeemable due to the redemption option available to the preferred stock holders on July 30, 2016. Changes in the redemption value were recognized immediately as they occurred, and the carrying amount of the instrument was adjusted to equal the redemption value at the end of each reporting period. This method viewed the end of the reporting period as if it were also the redemption date for the Series B Preferred Stock. Accordingly, the adjustment of $903,172 to record the preferred stock at its redemption value (“Original issue discount”) was charged against the preferred stock carrying value and retained earnings during the year ended December 31, 2010. In addition, the resulting increase in the carrying amount of the Series B Preferred Stock reduced the income applicable to common shareholders reported in the calculation of earnings per share.

● The annual 16% liquidation preference increase on outstanding preferred shares was accrued each reporting period as an addition to the carrying value of the preferred stock and reduced the income applicable to common shareholders reported in the calculation of earnings per share.

18

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes Series B Preferred Stock activity:

Series B Preferred Stock as of December 31, 2012	$	23,979,216
Series B Preferred Stock liquidation preference increase for the three months ended March 31, 2013		899,221
Series B Preferred Stock as of March 31, 2013		24,878,437
Series B Preferred Stock liquidation preference increase for the three months ended June 30, 2013		899,220
Series B Preferred Stock as of June 30, 2013	$	25,777,657

Common Stock

Stockholders Agreement

Concurrently with the execution of the Recapitalization Agreement, on July 30, 2010, the Company entered into a Stockholders Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company (“Messrs. Schnell and Dyne”), pursuant to which:

● CVC agreed that in connection with any director nominees to be submitted to holders of the Company’s common stock for election at a stockholders’ meeting, a committee of our Board comprised solely of directors then serving on the Board who were not elected or appointed by holders of Series B Preferred Stock, acting by majority vote, would have the right to designate all of the Board’s nominees for director to be elected by holders of the Company’s Common Stock.

● CVC agreed that in connection with any election of directors submitted to the Company’s stockholders for election at a stockholders’ meeting, CVC would attend the stockholders’ meeting, in person or by proxy, and vote (or cause to be voted) all of CVC’s shares of the Company’s voting stock in favor of the Board’s nominees for director.

● Messrs. Schnell and Dyne granted CVC a right of first refusal with respect to any shares of the Company’s voting securities that Messrs. Schnell and Dyne proposed to sell in a private placement transaction, and agreed to provide CVC with advance notice of their intent to sell the Company’s voting securities in any public sale transaction.

● CVC granted Messrs. Schnell and Dyne a tag-along right, providing Messrs. Schnell and Dyne with the right to sell their shares of the Company’s voting securities in a transaction where CVC is selling its shares of the Company’s voting securities.

● Messrs. Schnell and Dyne agreed with CVC to vote their shares of Talon voting stock in favor of a merger or consolidation of the Company into or with another corporation or any share exchange, business combination or other such transaction in which the Company was a constituent party, or any sale of all or substantially all of the Company’s assets (a “Triggering Transaction”), in each case to the extent such transaction was first approved by CVC.

19

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

● CVC agreed not to sell or otherwise transfer its shares of the Company’s voting securities, or to vote its shares of the Company’s voting securities in favor of any Triggering Transaction, at any time on or before July 31, 2011, other than in connection with a transaction that was approved by a majority of the Company’s voting shares (where, in calculating such majority, the votes attributable to CVC’s shares of the Company’s voting securities were excluded in the numerator but included in the denominator).

● The Company provided CVC with a preemptive right, pursuant to which CVC would have the right, subject to certain exceptions set forth in the Stockholders Agreement, to acquire in a subsequent issuance of securities by the Company a number of offered securities that will allow CVC to maintain its percentage ownership of the Company’s voting securities.

● CVC agreed with Messrs. Schnell and Dyne that in connection with a Triggering Transaction, CVC, and any other holder of Series B Preferred Stock and shares of common stock acquired upon conversion thereof, would pay to Messrs. Schnell and Dyne a portion (beginning at 5% and increasing to 10%) of the sales proceeds payable in the Triggering Transaction to CVC or such other holder in respect of such Series B Preferred Stock or conversion shares. Each of Messrs. Schnell and Dyne’s right to receive such portion of the sales proceeds was conditional upon the Triggering Transaction occurring (i) while employed by the Company or (ii) within 12 months following termination of employment with the Company for any reason other than termination of employment for “cause” or termination of employment by Messrs. Schnell or Dyne without “good reason” (as such terms are defined in their respective employment agreements).

Pursuant to the Redemption Agreement entered into on July 12, 2013, the Stockholders Agreement has been terminated. See Note 12.

Note 8.     Stock-Based Compensation

The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Options issued to consultants are accounted for in accordance with the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees”.

Stock Options

The Company’s 2008 Stock Incentive Plan, as amended in November 2010, which was approved by the Company’s stockholders, authorizes up to 4,810,000 shares of common stock that may be issued pursuant to awards granted under the plan.

The Company’s 2007 Stock Plan was approved by the Company’s stockholders in 2007, and replaced the 1997 Stock Plan. The 2007 Stock Plan authorizes up to 2,600,000 shares of common stock for issuance pursuant to awards granted to individuals under the plan.

On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan, which authorized the granting of a variety of stock-based incentive awards.

20

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Board of Directors, who determines the recipients and terms of the award granted, administers the Company’s stock plan. Awards under the Company’s stock plans are generally granted with an exercise price equal to the average market price of the Company’s stock for the five trading days following the date of approval of the grant. Those option awards generally vest over periods determined by the Board from immediate to 4 years of continuous service and have 10 year contractual terms.

Options to purchase 0 and 630,000 shares of common stock were granted under the Stock Incentive Plans during the three and six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013, the Company had $45,859 of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the weighted average period of 1.9 years. As of June 30, 2012, unamortized stock-based compensation expense related to options issued to employees and directors was $109,753, which was to be recognized over the weighted average period of approximately 2.2 years.

The following table summarizes the activity in the Company’s share based plans during the six months ended June 30, 2013.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		-		$	-
Options outstanding - March 31, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		(287,500	)	$	0.87
Options outstanding - June 30, 2013		6,084,600		$	0.18

Restricted Stock Units (RSU’s)

On July 30, 2010, the Company awarded each of Lonnie Schnell and Larry Dyne a restricted stock unit award (an “RSU Award”) for 5,778,500 shares of the Company’s common stock. Each RSU Award vested 50% on August 30, 2011, and vests 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date, subject to partial acceleration of vesting as part of the executives’ severance benefits and full acceleration of vesting upon a change in control of the Company. As of July 30, 2010, the RSU’s were valued at $2,263,384, which was reduced by the fair value of the options surrendered by the employees in connection with these grants.

21

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On August 30, 2010, Messrs. Schnell and Dyne elected to defer the settlement in common shares of 5,434,200 RSU’s beyond the vesting dates. On August 30, 2011, based on the deferral schedules, 600,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.10 per share. On January 30, 2012, based on the deferral schedules, 900,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.05 per share. On July 30, 2012 1,500,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.04 per share. On January 30, 2013 1,500,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.04 per share.

Subsequent to June 30, 2013, on July 12, 2013, 4,745,600 shares of common stock were issued upon settlement of previously vested restricted stock units pursuant to the deferral elections.At the time of the issuance of shares the intrinsic value of these RSU’s was $0.06 per share.On July 30, 2013 1,155,700 common shares were issued upon settlement of vested units pursuant to the deferral elections. At the time of the issuance of shares the intrinsic value of these RSU’s was $0.25 per share.

As of June 30, 2013, the Company had $263,927 of unamortized stock-based compensation expense related to RSU’s, which will be recognized over the remaining weighted average period of seven months.

The following table summarizes RSU’s activity:

	Number of RSU’s									Weighted Average Grant date
	Unvested			Vested			Total			value per RSU
RSU’s outstanding – December 31, 2012		3,467,100			5,089,900			8,557,000		$	0.196
Common stock vested		(1,155,700	)		1,155,700			-		$	0.196
Common stock issued		-			(1,500,000	)		(1,500,000	)	$	0.196
RSU’s outstanding – March 31, 2013 and June 30, 2013		2,311,400			4,745,600			7,057,000		$	0.196

Note 9.      Income taxes

Provision for income taxes for the three months ended June 30, 2013 and 2012 was $326,081 and $283,501, respectively. Provision for (benefit from) income taxes for the six months ended June 30, 2013 and 2012 was $253,833 and $(6,732), respectively. The provision from income taxes for the six months ended June 30, 2013 included the benefit of the elimination of a tax liability of $135,177 recorded in 2007 in connection with a tax position that could have been subject to reversal upon a regulatory review. At March 31, 2013 the time limit for regulatory assessment of the tax position expired and the liability was removed. The benefit from income taxes for the six months ended June 30, 2012 included the elimination of a tax liability of $196,423 also recorded in 2007, for which the time limit for regulatory review had expired.

22

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

U.S. deferred income tax benefits and a portion of foreign income tax benefits, were fully reserved and not recorded in the net deferred tax assets primarily because there is not sufficient evidence to determine that the Company will be able to utilize its net operating loss carryforwards to offset future taxable income.

Other tax liabilities were principally associated with foreign withholdings and funds transfers, and income tax payable from our Hong Kong operation. Other tax liabilities as of June 30, 2013 and December 31, 2012, respectively amounted to $371,161 and $111,235, and were included in Accrued Expenses.

Current income taxes receivable were associated with foreign and domestic prepayments and totaled $185,195 and $178,043, respectively, as of June 30, 2013 and December 31, 2012.

Long term deferred income tax liabilities totaled $1,017,755 and $945,543 as of June 30, 2013 and December 31, 2012, respectively. The deferred income tax liability is primarily a tax basis difference related to the Company’s indefinite lived intangible asset.

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with its Preferred Shareholder and completed a Private Placement transaction in which it sold 61,111,109 shares of Common stock. As consequence of these transactions the Company is currently evaluating the application of I.R.C. Section 382 concerning changes in ownership and the potential limitations on the Company’s utilization of the net operating loss carryforwards to offset future taxable income.

Note 10.     Commitments and Contingencies

The Company currently has pending claims and complaints that arise in the ordinary course of the Company’s business. The Company believes that it has meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on the Company’s consolidated financial position or results of operations if adversely determined against the Company.

In November 2002, the FASB issued Topics of the FASB ASC 460-10, “Guarantees” (“ASC 460-10”) and FASB ASC 850-10, “Related Party Disclosures” (”ASC 850-10”). The following is a summary of the Company’s agreements that it has determined are within the scope of ASC 460-10 and ASC 850-10:

● In accordance with the bylaws of the Company, and indemnification agreements entered into with the members of the board of directors and executive officers, the Company’s officers and directors are indemnified for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director. The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its bylaws and indemnification agreements is unlimited. However, the Company has a director and officer liability insurance policy that reduces its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of the indemnification provisions of its bylaws and indemnification agreements is minimal and therefore, the Company has not recorded any related liabilities.

23

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

● The Company enters into indemnification provisions under its agreements with investors and its agreements with other parties in the normal course of business, typically with suppliers, customers and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights, and generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has not recorded any related liabilities.

Note 11.      Segment Reporting and Geographic Information

The Company manufactures and distributes a full range of zipper, trim and waistband items to manufacturers of fashion apparel, specialty retailers and mass merchandisers. The Company’s organization is based on divisions representing the major product lines, and the Company’s operating decisions use these divisions to assess performance, allocate resources and make other operating decisions. Within these product lines there is not enough difference between the types of products to justify segmented reporting by product type or to account for these products separately. The net revenues and operating margins for the three primary product groups are as follows:

	Three Months ended June 30, 2013
	Talon		Trim		Tekfit			Consolidated
Net sales	$	9,501,836	$	7,133,419	$	5,709		$	16,640,964
Cost of goods sold		6,641,230		4,441,343		6,551			11,089,124
Gross profit (loss)	$	2,860,606	$	2,692,076	$	(842	)		5,551,840
Operating expenses									3,963,241
Income from operations								$	1,588,599

	Three Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	6,887,780	$	6,288,016	$	4,053		$	13,179,849
Cost of goods sold		4,936,172		3,862,935		22,013			8,821,120
Gross profit (loss)	$	1,951,608	$	2,425,081	$	(17,960	)		4,358,729
Operating expenses									3,384,371
Income from operations								$	974,358

24

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

	Six Months ended June 30, 2013
	Talon		Trim		Tekfit		Consolidated
Net sales	$	15,302,362	$	11,463,363	$	14,989	$	26,780,714
Cost of goods sold		10,772,664		7,271,493		8,639		18,052,796
Gross profit	$	4,529,698	$	4,191,870	$	6,350		8,727,918
Operating expenses								6,930,442
Income from operations							$	1,797,476

	Six Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	11,344,095	$	10,576,700	$	5,004		$	21,925,799
Cost of goods sold		8,139,997		6,633,948		22,369			14,796,314
Gross profit (loss)	$	3,204,098	$	3,942,752	$	(17,365	)		7,129,485
Operating expenses									6,628,953
Income from operations								$	500,532

The Company distributes its products internationally and has reporting requirements based on geographic regions. Revenues are attributed to countries based upon customer delivery locations and the net book value of long-lived assets (consisting of property and equipment and intangible) is attributed to countries based on the location of the assets, as follows:

Sales:	Three Months Ended June 30,				Six Months Ended June 30,
Country / Region	2013		2012		2013		2012
United States	$	1,363,298	$	967,002	$	2,445,385	$	1,868,271
Hong Kong		4,114,398		3,553,258		7,114,449		7,104,882
China		5,378,163		4,069,915		7,886,939		5,644,422
Bangladesh		833,906		696,247		1,471,206		1,140,441
Other		4,951,199		3,893,427		7,862,735		6,167,783
Total	$	16,640,964	$	13,179,849	$	26,780,714	$	21,925,799

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

	June 30, 2013		December 31, 2012
Long-lived Assets:
United States	$	4,584,715	$	4,551,101
Hong Kong		446,813		419,268
China		92,390		73,344
Total	$	5,123,918	$	5,043,713

 

Note 12.      Subsequent Events

The Company evaluated subsequent events after the balance sheet date of June 30, 2013 through the date of the filing of this report and noted the following:

Preferred Stock Redemption and Private Placement of Common Stock

Preferred Stock Redemption

On July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased from CVC all of the 407,160 previously outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC by the Company of a Promissory Note in the principal amount of $5,800,000.

The redemption of the preferred shares eliminated the Company’s preferred stock liquidation preference obligation of $25.9 million, which had entitled the preferred shareholders to payment of the preference amount before payment to the common stockholders. The liquidation preference was scheduled to increase to $40.7 million at the time the preferred shares became mandatorily redeemable in 2016. The Company now has only common shares outstanding.

The Promissory Note accrues interest in the amount of 1% per annum, is due and payable in full on January 12, 2014, and includes discounts for early repayments that decrease over time. The Promissory Note further requires mandatory prepayments equal to a specified portion of the proceeds received by the Company with respect to future secured debt financing transactions, as well as customary default provisions.

In connection with the redemption in full of the Series B Preferred Stock, Mark Hughes resigned from the Company’s Board of Directors effective July 12, 2013.

As a result of the redemption, on July 12, 2013 4,745,600 shares of common stock were issued to the Company’s executive management team upon settlement of previously vested RSU’s pursuant to the 2010 deferral elections.

In addition, pursuant to the Redemption Agreement, the Stockholders Agreement was terminated effective July 12, 2013.

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Private Placement of Common Stock

In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, on July 12, 2013 the Company raised $5,500,000 of new equity capital through the offer and sale, in a private placement transaction, of 61,111,109 shares of the Company’s common stock at a price of $0.09 per share (the “Private Placement”). The closing of the Private Placement was expressly conditioned upon the contemporaneous closing of the transactions under the Redemption Agreement. The closing price of the Company's common stock was $0.058 per share on Friday, July 12, 2013, the last trading day prior to public announcement of the equity financing and redemption transactions.

At the closing of the Private Placement, the Company entered into a series of Subscription Agreements, each dated July 12, 2013 (the “Subscription Agreements”) with each of the purchasers in the Private Placement (collectively, the “Private Placement Purchasers”).

The Subscription Agreement entered into with Kutula Holdings Ltd. (“Kutula”), the lead investor in the Private Placement, grants Kutula the right to nominate one member of the Company’s Board of Directors, so long as Kutula continues to hold at least 15,500,000 of the shares (as adjusted for stock splits and the like) purchased pursuant to its Subscription Agreement, subject to certain disclosure requirements and other limitations.

In connection with the Subscription Agreements, the Company also entered into a Registration Rights Agreement dated July 12, 2013 with the Private Placement Purchasers (the “Registration Rights Agreement“). The Registration Rights Agreement provides for demand registration rights, such that upon the demand of holders of at least 25% of the shares issued in the Private Placement and subject to certain conditions, the Company will file a Form S-1 registration statement covering the shares issued in the Private Placement and requested to be included in such registration. The Registration Rights Agreement also provides certain piggyback rights, in which the holders of shares acquired in the Private Placement have the right to include those shares in a Company-initiated registration.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements

Overview

This report and other documents we file with the Securities and Exchange Commission contain forward looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business or others on our behalf, our beliefs and our management’s assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. We describe our respective risks, uncertainties, and assumptions that could affect the outcome or results of operations below. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward looking statements. Reference is made in particular to forward looking statements regarding projections or estimates concerning our business, including adequate liquidity to fund our operations and meet our other cash requirements, ability to refinance existing indebtedness, demand for our products and services, mix of revenue streams, ability to control or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development efforts, general outlook of our business and industry, international businesses, and competitive position.

The following management’s discussion and analysis is intended to assist the reader in understanding our consolidated financial statements. This management’s discussion and analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes.

Talon International, Inc. designs, manufactures, sells and distributes apparel zippers, specialty waistbands and various apparel trim products to manufacturers of fashion apparel, specialty retailers and mass merchandisers. We sell and market these products under various branded names including Talon and Tekfit. We operate the business globally under three product groups.

We pursue the global expansion of our business through the establishment of Talon owned sales and distribution locations, and strategic manufacturing relationships. The manufacturing arrangements, in combination with Talon owned and affiliated facilities under the Talon brand, improve our time-to-market throughout the world by sourcing, finishing and distributing to apparel manufacturers in their local markets.

Our primary business focus is on serving as an outsourced apparel zipper and trims supplier, product design and development, sampling and sourcing department for the most demanding brands and retailers. We believe that design differentiation among brands and retailers is a critical marketing tool for our customers. By assisting our customers in the design, development, sampling and sourcing of all trim components, we generally achieve higher margins for our products, create long-term relationships with our customers, grow our sales to a particular customer by serving a larger proportion of their brands and better differentiate our sales and services from those of our competitors. We are expanding our business globally, to better serve our apparel customers in the field, in addition to our brand and retail customer. We believe we can lead the industry in apparel accessories by having strong relationships with our brand and retail customers and having a distributed service organization to serve our factory customers globally.

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Our Tekfit business provides manufacturers with patented technology, manufacturing know-how, equipment and materials required to produce a stretchable waistband. Sales of this product in the last few years have been limited by a licensing dispute. However, we entered into a Settlement Agreement and Release in March 2012 that included an unconditional release from all lawsuits, claims, and liabilities and resulted in our obtaining full ownership to all U.S. patents technology rights and intellectual property.. Accordingly, following settlement of the dispute we began to actively expand our marketing and selling efforts of this unique product and brand within the industry. 

Recent Developments

 On July 12, 2013, we entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, we repurchased from CVC all of the 407,160 outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000.

The Promissory Note accrues interest in the amount of 1% per annum, is due and payable in full on January 12, 2014, and includes discounts for early repayments that decrease over time. The Promissory Note further requires mandatory prepayments equal to a specified portion of the proceeds received by the Company with respect to future secured debt financing transactions, as well as customary default provisions. We are in the process of pursuing additional debt financing in order to repay the Promissory Note on or prior to its maturity date.

In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, on July 12, 2013 we raised $5,500,000 of new equity capital through the offer and sale, in a Private Placement transaction, of 61,111,109 shares of our common stock at a price of $0.09 per share. The closing of the Private Placement was expressly conditioned upon the contemporaneous closing of the transactions under the Redemption Agreement.

The redemption of the preferred shares removed our liquidation preference obligation of $25.9 million, which entitled the preferred shareholders to payment of the preference amount before payment to the common stockholders. The liquidation preference was scheduled to increase to $40.7 million at the time the preferred shares became mandatorily redeemable in 2016. The removal of this obligation results in an immediate benefit to common stockholders of approximately $6.9 million net of related costs of the transaction, and also eliminates the obligation to redeem the Series B Preferred Stock in the future. Talon now has only common shares outstanding.

Seasonality

We typically experience seasonal fluctuations in sales volume consistent with the purchase demands of the apparel industry. In most years, these seasonal fluctuations result in lower sales volumes for our business in the first and fourth quarters of each year due to the seasonal buying patterns by the majority of our customers. The apparel retailers typically experience higher sales volumes during the second and third quarters associated with back-to-school sales efforts and in the fourth quarter in connection with year-end holiday purchases. Sales of our products typically precede the retail sales patterns by 90 to 150 days. Backlogs of sales orders are not considered material in the industries in which we compete with, which reduces the predictability of our sales and reinforces the volatility of these cyclical buying patterns on our sales volume.

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Results of Operations

The following table sets forth selected statements of operations data shown as a percentage of net sales for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		66.6			66.9			67.4			67.5
Gross profit		33.4			33.1			32.6			32.5
Sales and marketing expenses		9.2			8.9			10.4			10.3
General and administrative expenses		14.6			16.8			15.5			19.9
Interest expense (income), net		0.0			0.1			0.0			0.2
Provision for (benefit from) income taxes, net		2.0			2.2			0.9			0.0
Net income (loss)		7.6	%		5.1	%		5.8	%		2.1	%

Sales

For the three and six months ended June 30, 2013 and 2012, sales by geographic region based on the location of the customer as a percentage of sales were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
Region	2013			2012			2013			2012
United States		8.2	%		7.3	%		9.1	%		8.5	%
Hong Kong		24.7			27.0			26.6			32.4
China		32.3			30.9			29.5			25.7
Bangladesh		5.0			5.3			5.5			5.2
Other		29.8			29.5			29.3			28.2
		100.0	%		100.0	%		100.0	%		100.0	%

Sales for the three months ended June 30, 2013 were $16,641,000, an increase of $3,461,000 or 26.3% compared to the same period in 2012. Sales for the six months ended June 30, 2013 were $26,781,000, an increase of $4,855,000 or 22.1% compared to the same period in 2012. The increases in both periods reflected sales growth to our Specialty Retail Branded customers in both our Zippers and Trims segments, and sales to new specialty apparel customers in both segments.

Gross Profit

Gross profit for the three months ended June 30, 2013 was $5,552,000 and 33.4% of sales, reflecting an increase of $1,193,000 as compared to the same period in 2012. Gross profit for the six months ended June 30, 2013 was $8,728,000 and 32.6% of sales, reflecting an increase of $1,598,000 as compared to the same period in 2012. The increase in gross profit for the three and six months ended June 30, 2013 as compared to the same period in 2012 was principally attributable to greater overall sales volumes, partially offset by higher manufacturing support, freight and duty costs.

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A recap of the change in gross profit for the three and six months ended June 30, 2013 as compared with the same period in 2012 is as follows:

	Three Months Ended June 30, 2013 compared to same period in 2012						Six Months Ended June 30, 2013 compared to same period in 2012
	$(1)			%(1)			$(1)			%(1)
Gross profit changes as a result of:
Higher sales volumes		1,437,000			33.0			2,004,000			28.1
Improved mix of products		(3,000	)		(0.1	)		9,000			0.1
Higher freight and duty costs		(98,000	)		(2.3	)		(138,000	)		(1.9	)
Higher manufacturing overhead costs		(143,000	)		(3.4	)		(277,000	)		(4.0	)
Gross profit change		1,193,000			27.2			1,598,000			22.3

(1) Represents the amount or percentage, as applicable, of change in each item in the three and six months ended June 30, 2013 period as compared to the same period in 2012.

Sales and marketing expenses

Sales and marketing expenses for the three months ended June 30, 2013 totaled $1,532,000, an increase of $366,000 as compared to same period in 2012. Sales and marketing expenses for the six months ended June 30, 2013 totaled $2,796,000, an increase of $533,000 as compared to same period in 2012. Sales expenses increased mainly due to our continued investment in strengthening our internal sales force in the U.S., Europe and Asia during 2012, and increased sales commissions associated with the higher volumes. The increased sales and marketing efforts are designed to expand our presence in select product markets within the U.S., Europe and Asia where we see significant growth potential.

General and administrative expenses

General and administrative expenses for the three months ended June 30, 2013 totaled $2,431,000, or 14.6% of sales, which was an increase of $213,000 as compared to the same period in 2012. The increase resulted mainly from higher net compensation costs of $330,000 and other cost increases of $29,000, offset by lower legal fees of $146,000 following settlement earlier this year of a legal dispute regarding protection of our trademark filings.

General and administrative expenses for the six months ended June 30, 2013 totaled $4,134,000, or 15.4% of sales, which was a reduction of $232,000 as compared to the same period in 2012. The reduction resulted mainly from receipt of a settlement of $350,000 for a previous legal dispute regarding intellectual property rights, lower legal fees of $234,000 associated with our efforts to protect worldwide trademark filings, and other cost reductions of $90,000, offset by higher net compensation costs of $442,000.

Interest expense and interest income

Interest expense for the three and six months ended June 30, 2013 was $2,000 and $3,000, respectively, as compared to interest expense for the three and six months ended June 30, 2012 of $21,000 and $44,000, respectively. Interest income for the three and six months ended June 30, 2013 was 2,000 as compared to interest income for the three and six months ended June 2012 of $1,000 and $2,000 respectively.

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A brief summary of interest expense and interest income is presented below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Amortization of deferred financing costs	$	-		$	8,000					$	15,000
Other interest expense		2,000			13,000			3,000			29,000
Interest expense		2,000			21,000			3,000			44,000
Interest income		(2,000	)		(1,000	)		(2,000	)		(2,000	)
Interest expense, net	$	-		$	20,000		$	1,000		$	42,000

Income taxes 

Provision for income taxes, for the three months ended June 30, 2013 and 2012 was $326,000 and $284,000, respectively. Provision for (benefit from) income taxes, for the six months ended June 30, 2013 and 2012 was $254,000 and $(7,000), respectively. The benefit from income taxes for the six months ended June 30, 2013 included the elimination of a tax liability of $135,177, recorded in 2007, for a tax position that could have been subject to reversal upon a regulatory review. At March 31, 2013 the time limit for regulatory assessment of the tax position expired and the liability was removed. The benefit from income taxes for the six months ended June 30, 2012 included the elimination of a tax liability of $196,423 also recorded in 2007, for which the time limit for regulatory review had expired.

Deferred income tax assets, net are not reflected in our financial position, since there is not sufficient evidence to ensure that it is more likely than not that we will be able to utilize our domestic U.S. operating loss carry forwards (as well as a portion of our foreign net operating loss carry forwards) to offset future taxable income, and consequently the tax benefit of these losses is offset by a full valuation reserve.

Liquidity and Capital Resources 

The following table summarizes selected financial data at:

	June 30, 2013			December 31, 2012
Cash and cash equivalents	$	11,506,000		$	8,927,000
Total assets	$	22,998,000		$	18,976,000
Current liabilities	$	12,163,000		$	9,893,000
Long term liabilities	$	1,061,000		$	1,132,000
Preferred stock	$	25,778,000		$	23,979,000
Stockholders’ equity (deficit)	$	(16,003,000	)	$	(16,028,000	)
Total equity and preferred stock	$	9,775,000		$	7,951,000

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Subsequent to June 30, 2013, on July 12, 2013, we entered into a Redemption Agreement and in connection with this used $7.5 million of our cash on hand, in addition to $5.5 million of proceeds from the sale of shares of common stock, to repurchase all of the outstanding preferred shares. In addition to the cash purchase price, we also issued the previously holder of the preferred shares a Promissory Note in the principal amount of $5.8 million that matures in January 2014. We expect to refinance all or part of the $5.8 million Promissory Note issued in connection with the Redemption Agreement prior to its maturity in January 2014. However, there can be no assurance that we will be able to obtain additional debt financing on favorable terms.

Assuming we are able to refinance the $5.8 million Promissory Note, we believe that our remaining cash and cash equivalents and our anticipated cash flows from our operating activities will be sufficient to fund our minimum working capital and capital expenditure needs for operating activities for at least the next twelve months.

Cash and cash equivalents

Cash and cash equivalents increased by $2,579,000 at June 30, 2013 as compared to December 31, 2012, principally due to cash used in operating activities of $2,857,000, and the acquisition of property and equipment of $328,000.

Cash provided by operating activities is our primary recurring source of funds, and reflects the net income from operations excluding non-cash charges, and changes in operating capital. The six months ended June 30, 2013 and 2012 reflected net cash provided by operating activities of $2,857,000 and $2,271,000, respectively.

The net cash used in operating activities during the six months ended June 30, 2013 and 2012 resulted principally from:

	Six Months Ended June 30,
	2013			2012
Net income before non-cash expenses	$	2,154,000		$	1,174,000
Reduced (increased) inventory		(222,000	)		232,000
(Increased) accounts receivable		(883,000	)		(277,000	)
Increased accounts payable and accrued expenses		2,231,000			1,636,000
Other increases in operating capital		(423,000	)		(494,000	)
Cash provided by operating activities	$	2,857,000		$	2,271,000

Net cash (used in) investing activities for the six months ended June 30, 2013 and 2012 was $(326,000), and $(278,000), respectively, due to acquisition of intangibles in 2012 of $156,000 and acquisition of property and equipment of $328,000 and $123,000, respectively, offset by proceeds from sale of equipment in amount of $2,000 and $168, respectively.

Net cash (used in) financing activities for the six months ended June 30, 2013 and 2012 was $(2,000) and $(311,000), respectively, reflecting payment of notes payable to related parties and other notes payable in the amount of $241,000 and $67,000, respectively during 2012, and repayment of borrowings under capital leases during 2013 and 2012 of $2,000 and $3,000, respectively.

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We have financed equipment purchases through capital lease obligations. Our equipment financing obligation as of June 30, 2013 was approximately $2,000 and bore interest at rate of 15.4% per annum. Under these obligations, we are required to make monthly payments of principal and interest through November 2013.

We have satisfied our working capital requirements primarily through cash flows generated from operations and borrowings under our credit facility. As we continue to expand globally with our apparel manufacturing in offshore locations, our customers are substantially all foreign-based and foreign-owned entities. We continue to evaluate both financing and equity options to provide capital to refinance our outstanding short-term debt and, if needed, to fund our expansion and on-going operations. If we experience greater than anticipated reductions in sales, we may need to borrow or raise additional capital, or further reduce the scope of our business in order to fund our on-going operations or to satisfy our future short-term operating requirements. The extent of our future long-term capital requirements will depend on many factors, including our results of operations, future demand for our products, the size and timing of possible acquisitions, and our expansion into foreign markets. Our need for additional long-term financing may include the integration and expansion of our operations to exploit our rights under our Talon and Tekfit trade names, and the expansion of our operations in the Asian and European markets. If our cash from operations is less than anticipated or our working capital requirements and capital expenditures are greater than we expect, we may need to raise debt or equity financing in order to provide for our operations.

Contractual Obligations and Off-Balance Sheet Arrangements 

The following summarizes our contractual obligations at June 30, 2013:

	Payments Due by Period ($)
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 years
Capital lease obligations	$	2,000	$	2,000	$	-	$	-	$	-
Operating leases		3,169,000		1,005,000		2,121,000		43,000
Total Obligations	$	3,171,000	$	1,007,000	$	2,121,000	$	43,000	$	-

At June 30, 2013 and December 31, 2012, we did not have any relationships with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we do not have any of the risks associated with financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Related Party Transactions

During the three and six months ended June 30, 2013, there were no transactions to which we were or will be a party, and in which any director, executive officer, or shareholder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

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Application of Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions for the reporting period and as of the financial statement date. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expense. Actual results could differ from those estimates.

Critical accounting policies are those that are important to the portrayal of our financial condition and results, and which require us to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

● Accounts receivable balances are evaluated on a continual basis and allowances are provided for potentially uncollectible accounts based on management’s estimate of the collectability of customer accounts. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known.

● The net bad debt expense, net and allowances for the three and six months ended June 30, 2013 and 2012 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Bad debt expense, net	$	21,000	$	14,000	$	21,000	$	13,000
Allowance for doubtful accounts, Accounts receivable	$	23,000	$	63,000	$	23,000	$	63,000

● Inventories are stated at the lower of cost, determined using the first-in, first-out (“FIFO”) basis, or market value and are all substantially finished goods. The costs of inventory include the purchase price, inbound freight and duties, conversion costs and certain allocated production overhead costs. Inventory is evaluated on a continual basis and reserve adjustments are made based on management’s estimate of future sales value, if any, of specific inventory items. Inventory reserves are recorded for damaged, obsolete, excess, impaired and slow-moving inventory. We use estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved for depending on the type of product and the length of time the product has been included in inventory. Reserve adjustments are made for the difference between the cost of the inventory and the estimated market value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Market value of inventory is estimated based on the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory. Inventory reserve is reduced following legacy inventory sale and write-off of reserved inventory and increased by additions to reserve for slow moving inventory.

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● We record deferred tax assets and liabilities arising from temporary timing differences between recorded net income and taxable net income when and if we believe that future earnings will be sufficient to realize the tax benefit. For those jurisdictions where the expiration date of tax benefit carry-forwards or the projected taxable earnings indicate that realization is not likely, a valuation allowance is provided. If we determine that we may not realize all of our deferred tax assets in the future, we will make an adjustment to the carrying value of the deferred tax asset, which would be reflected as an income tax expense. Conversely, if we determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would be required to reverse the valuation allowance, which would be reflected as an income tax benefit. A deferred income tax liability related to indefinite lived intangibles should not be offset against deferred income tax assets. We believe that our estimate of deferred tax assets and liabilities and determination to record a valuation allowance against such assets are critical accounting estimates because they are subject to, among other things, an estimate of future taxable income, which is susceptible to change and dependent upon events that may or may not occur, and because the impact of recording a valuation allowance may be material to the assets reported on the balance sheet and results of operations. See Note 9 in the accompanying Notes to Consolidated Financial Statements.

● Sales are recognized when persuasive evidence of an arrangement exists, product title has passed, pricing is fixed or determinable and collection is reasonably assured. Sales resulting from customer buy-back agreements, or associated inventory storage arrangements are recognized upon delivery of the products to the customer, the customer’s designated manufacturer, or upon notice from the customer to destroy or dispose of the goods. Sales, provisions for estimated sales returns, and the cost of products sold are recorded at the time title transfers to customers. Actual product returns are charged against estimated sales return allowances, which returns have been insignificant.

● We are currently involved in various lawsuits, claims and inquiries, most of which are routine to the nature of the business and in accordance with FASB ASC 450, “Contingencies”. We accrue estimates of the probable and estimable losses for the resolution of these claims. The ultimate resolution of these claims could affect our future results of operations for any particular quarterly or annual period should our exposure be materially different from our earlier estimates or should liabilities be incurred that were not previously accrued. We believe that we have meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on our consolidated financial position or results of operations if adversely determined against us.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

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Item 4.     Controls and Procedures

Evaluation of Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

As of the end of the period covered by this report, management, with the participation of Lonnie D. Schnell, our principal executive officer and principal financial officer, and James E. Reeder, our principal accounting officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, Mr. Schnell and Mr. Reeder concluded that these disclosure controls and procedures were effective as of the end of the period covered in this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2013, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1.      Legal Proceedings

On May 7, 2012, we filed a lawsuit against Adidas America, Inc. in the U.S. District Court for the Central District of California asserting claims of trademark infringement, unfair competition, deceptive trade practices and related claims, under both U.S. and California law.  The claims arose out of Adidas's use of the “Techfit” name for its apparel, which we asserted infringed our previously registered Tekfit trademark.   On May 21, 2012, Adidas then filed a counterclaim against Talon seeking cancellation of our Tekfit U.S. trademark registrations and recovery of legal fees.  On January 15, 2013, we received a cash settlement from Adidas and both parties dismissed all related actions with prejudice and ensured that future use of their trademarks would not create confusion to the consumer.  

We currently have pending various claims and complaints that arise in the ordinary course of our business. We believe that we have meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on our consolidated financial condition if adversely determined against us.  

37

Item 1A.          Risk Factors

Risk factors are contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Except as set forth below, no material change to such risk factors has occurred during the six months ended June 30, 2013.

Following the repurchase of all our previously outstanding shares of Series B Preferred Stock from CVC California LLC on July 12, 2013, we issued CVC a promissory note. The following risk factor applies after that date.

If we are unable to refinance our short-term debt on favorable terms prior to maturity, we may be required to utilize our cash reserves or obtaining alternative financing.

As partial consideration for the repurchase of all our previously outstanding shares of Series B Preferred Stock form CVC California LLC, we issued CVC a promissory note in the principal amount of $5.8 million which is due and payable in January 2014. We are currently seeking additional debt financing to allow us to refinance and repay the promissory note on or prior to its maturity date. If we are unable to obtain additional debt financing on terms that we deem acceptable, we may have to use a significant portion of our current and anticipated cash to repay the CVC promissory note. In such event, our liquidity may be adversely affected. If we do not have sufficient cash or debt financing to repay the promissory note when due, we may be forced to pursue alternative debt or equity financing structures, which could have an adverse effect on our capital structure and the market price for our common stock.

38

Item 6.     Exhibits

Exhibit No.	Description
10.13	Securities Redemption Agreement dated July 12, 2013 among Talon International, Inc., CVC California, LLC, Lonnie D. Schnell and Larry Dyne. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2013.
10.14	$5,800,000 Promissory Note dated July 12, 2013 issued by Talon International, Inc. in favor of CVC California, LLC. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2013.
10.15	Subscription Agreement dated July 12, 2013 between Talon International, Inc. and Kutula Holdings Ltd. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2013.
10.16	Form of Subscription Agreement dated July 12, 2013. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2013.
10.17	Registration Rights Agreement dated July 12, 2013 among Talon International, Inc., Kutula Holdings Ltd., Perrtech Pty Limited, Zipper Holdings, LLC, Fairways Investments, LLC and Manifest Capital, LLC. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2013.
31.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation

* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purpose of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 12, 2013	/s/ Lonnie D. Schnell
	Lonnie D. Schnell
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)
	/s/ James E. Reeder
	James E. Reeder
	Vice President, Corporate Controller
	(Principal Accounting Officer)

40

EX-31

Exhibit 31.1

Certification of CEO and CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Lonnie D. Schnell, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Talon International, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 12, 2013	/s/ Lonnie D. Schnell
	Lonnie D. Schnell
	Chief Executive Officer and Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2013 (the "Report") by Talon International, Inc. ("Registrant"), the undersigned hereby certifies that:

1. to the best of my knowledge, the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.

 

Dated: August 12, 2013	/s/ Lonnie D. Schnell
	Lonnie D. Schnell
	Chief Executive Officer and Chief Financial Officer

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Note 11 - Segment Reporting and Geographic Information

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

Note 11.      Segment Reporting and Geographic Information

The Company manufactures and distributes a full range of zipper, trim and waistband items to manufacturers of fashion apparel, specialty retailers and mass merchandisers. The Company’s organization is based on divisions representing the major product lines, and the Company’s operating decisions use these divisions to assess performance, allocate resources and make other operating decisions. Within these product lines there is not enough difference between the types of products to justify segmented reporting by product type or to account for these products separately. The net revenues and operating margins for the three primary product groups are as follows:

	Three Months ended June 30, 2013
	Talon		Trim		Tekfit			Consolidated
Net sales	$	9,501,836	$	7,133,419	$	5,709		$	16,640,964
Cost of goods sold		6,641,230		4,441,343		6,551			11,089,124
Gross profit (loss)	$	2,860,606	$	2,692,076	$	(842	)		5,551,840
Operating expenses									3,963,241
Income from operations								$	1,588,599

	Three Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	6,887,780	$	6,288,016	$	4,053		$	13,179,849
Cost of goods sold		4,936,172		3,862,935		22,013			8,821,120
Gross profit (loss)	$	1,951,608	$	2,425,081	$	(17,960	)		4,358,729
Operating expenses									3,384,371
Income from operations								$	974,358

	Six Months ended June 30, 2013
	Talon		Trim		Tekfit		Consolidated
Net sales	$	15,302,362	$	11,463,363	$	14,989	$	26,780,714
Cost of goods sold		10,772,664		7,271,493		8,639		18,052,796
Gross profit	$	4,529,698	$	4,191,870	$	6,350		8,727,918
Operating expenses								6,930,442
Income from operations							$	1,797,476

	Six Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	11,344,095	$	10,576,700	$	5,004		$	21,925,799
Cost of goods sold		8,139,997		6,633,948		22,369			14,796,314
Gross profit (loss)	$	3,204,098	$	3,942,752	$	(17,365	)		7,129,485
Operating expenses									6,628,953
Income from operations								$	500,532

The Company distributes its products internationally and has reporting requirements based on geographic regions. Revenues are attributed to countries based upon customer delivery locations and the net book value of long-lived assets (consisting of property and equipment and intangible) is attributed to countries based on the location of the assets, as follows:

Sales:	Three Months Ended June 30,				Six Months Ended June 30,
Country / Region	2013		2012		2013		2012
United States	$	1,363,298	$	967,002	$	2,445,385	$	1,868,271
Hong Kong		4,114,398		3,553,258		7,114,449		7,104,882
China		5,378,163		4,069,915		7,886,939		5,644,422
Bangladesh		833,906		696,247		1,471,206		1,140,441
Other		4,951,199		3,893,427		7,862,735		6,167,783
Total	$	16,640,964	$	13,179,849	$	26,780,714	$	21,925,799

	June 30, 2013		December 31, 2012
Long-lived Assets:
United States	$	4,584,715	$	4,551,101
Hong Kong		446,813		419,268
China		92,390		73,344
Total	$	5,123,918	$	5,043,713

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Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net sales	$ 16,640,964	$ 13,179,849	$ 26,780,714	$ 21,925,799
Cost of goods sold	11,089,124	8,821,120	18,052,796	14,796,314
Gross profit	5,551,840	4,358,729	8,727,918	7,129,485
Sales and marketing expenses	1,532,493	1,166,549	2,796,485	2,263,472
General and administrative expenses	2,430,748	2,217,822	4,133,957	4,365,481
Total operating expenses	3,963,241	3,384,371	6,930,442	6,628,953
Income from operations	1,588,599	974,358	1,797,476	500,532
Interest expense (income), net	(197)	19,723	575	41,760
Income before provision for income taxes	1,588,796	954,635	1,796,901	458,772
Provision for (benefit from) income taxes, net	326,081	283,501	253,833	(6,732)
Net income	1,262,715	671,134	1,543,068	465,504
Series B Preferred Stock Liquidation Preference Increase	(899,220)	(775,190)	(1,798,441)	(1,550,380)
Income (loss) applicable to Common Shareholders	363,495	(104,056)	(255,373)	(1,084,876)
Per share amounts:
Net income per share (in Dollars per share)	$ 0.05	$ 0.03	$ 0.06	$ 0.02
Available to Preferred Shareholders (in Dollars per share)	$ (0.04)	$ (0.03)	$ (0.07)	$ (0.07)
Basic net income (loss) per share applicable to Common Shareholders (in Dollars per share)	$ 0.01	$ 0.00	$ (0.01)	$ (0.05)
Weighted average number of common shares outstanding – Basic (in Shares)	24,900,808	21,900,808	24,652,189	21,752,456
Weighted average number of common shares outstanding – Diluted (in Shares)	27,521,480	21,900,808	24,652,189	21,752,456
Other comprehensive income from foreign currency translation	31,142	29,320	29,851	13,686
Total comprehensive income	$ 1,293,857	$ 700,454	$ 1,572,919	$ 479,190

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Note 4 - Accounts Receivable

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4.     Accounts Receivable

Accounts receivable are included on the consolidated balance sheets net of the allowance for doubtful accounts. The allowance for doubtful accounts at June 30, 2013 and December 31, 2012 was $23,351 and $1,093, respectively.

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Note 8 - Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		-		$	-
Options outstanding - March 31, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		(287,500	)	$	0.87
Options outstanding - June 30, 2013		6,084,600		$	0.18

Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity [Table Text Block]

	Number of RSU’s									Weighted Average Grant date
	Unvested			Vested			Total			value per RSU
RSU’s outstanding – December 31, 2012		3,467,100			5,089,900			8,557,000		$	0.196
Common stock vested		(1,155,700	)		1,155,700			-		$	0.196
Common stock issued		-			(1,500,000	)		(1,500,000	)	$	0.196
RSU’s outstanding – March 31, 2013 and June 30, 2013		2,311,400			4,745,600			7,057,000		$	0.196

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Note 12 - Subsequent Events

6 Months Ended

Jun. 30, 2013

Subsequent Events [Abstract]

Subsequent Events [Text Block]

Note 12.      Subsequent Events

The Company evaluated subsequent events after the balance sheet date of June 30, 2013 through the date of the filing of this report and noted the following:

Preferred Stock Redemption and Private Placement of Common Stock

Preferred Stock Redemption

On July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased from CVC all of the 407,160 previously outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC by the Company of a Promissory Note in the principal amount of $5,800,000.

The redemption of the preferred shares eliminated the Company’s preferred stock liquidation preference obligation of $25.9 million, which had entitled the preferred shareholders to payment of the preference amount before payment to the common stockholders. The liquidation preference was scheduled to increase to $40.7 million at the time the preferred shares became mandatorily redeemable in 2016. The Company now has only common shares outstanding.

The Promissory Note accrues interest in the amount of 1% per annum, is due and payable in full on January 12, 2014, and includes discounts for early repayments that decrease over time. The Promissory Note further requires mandatory prepayments equal to a specified portion of the proceeds received by the Company with respect to future secured debt financing transactions, as well as customary default provisions.

In connection with the redemption in full of the Series B Preferred Stock, Mark Hughes resigned from the Company’s Board of Directors effective July 12, 2013.

As a result of the redemption, on July 12, 2013 4,745,600 shares of common stock were issued to the Company’s executive management team upon settlement of previously vested RSU’s pursuant to the 2010 deferral elections.

In addition, pursuant to the Redemption Agreement, the Stockholders Agreement was terminated effective July 12, 2013.

Private Placement of Common Stock

In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, on July 12, 2013 the Company raised $5,500,000 of new equity capital through the offer and sale, in a private placement transaction, of 61,111,109 shares of the Company’s common stock at a price of $0.09 per share (the “Private Placement”). The closing of the Private Placement was expressly conditioned upon the contemporaneous closing of the transactions under the Redemption Agreement. The closing price of the Company's common stock was $0.058 per share on Friday, July 12, 2013, the last trading day prior to public announcement of the equity financing and redemption transactions.

At the closing of the Private Placement, the Company entered into a series of Subscription Agreements, each dated July 12, 2013 (the “Subscription Agreements”) with each of the purchasers in the Private Placement (collectively, the “Private Placement Purchasers”).

The Subscription Agreement entered into with Kutula Holdings Ltd. (“Kutula”), the lead investor in the Private Placement, grants Kutula the right to nominate one member of the Company’s Board of Directors, so long as Kutula continues to hold at least 15,500,000 of the shares (as adjusted for stock splits and the like) purchased pursuant to its Subscription Agreement, subject to certain disclosure requirements and other limitations.

In connection with the Subscription Agreements, the Company also entered into a Registration Rights Agreement dated July 12, 2013 with the Private Placement Purchasers (the “Registration Rights Agreement“). The Registration Rights Agreement provides for demand registration rights, such that upon the demand of holders of at least 25% of the shares issued in the Private Placement and subject to certain conditions, the Company will file a Form S-1 registration statement covering the shares issued in the Private Placement and requested to be included in such registration. The Registration Rights Agreement also provides certain piggyback rights, in which the holders of shares acquired in the Private Placement have the right to include those shares in a Company-initiated registration.

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Note 9 - Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended			0 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Jul. 12, 2013 Subsequent Event [Member] Private Placement [Member] Common Stock [Member]
Note 9 - Income Taxes (Details) [Line Items]
Income Tax Expense (Benefit)	$ 326,081	$ 283,501	$ 253,833	$ (6,732)
Unrecognized Tax Benefits, Reduction Resulting from Lapse of Applicable Statute of Limitations			135,177	196,423
Accrued Income Taxes, Current	371,161		371,161		111,235
Income Taxes Receivable	185,195		185,195		178,043
Deferred Tax Liabilities, Net, Noncurrent	$ 1,017,755		$ 1,017,755		$ 945,543
Stock Issued During Period, Shares, New Issues (in Shares)						61,111,109

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Note 2 - Summary of Significant Accounting Policies (Details) - Intangible Assets (USD $)	Jun. 30, 2013	Dec. 31, 2012	Mar. 31, 2012
Intangible Assets [Abstract]
Tradename	$ 4,110,751	$ 4,110,751
Intellectual property rights and exclusive license	178,722	178,722	612,500
Accumulated amortization	(15,821)	(9,530)
Intellectual property rights, net	162,901	169,192
Intangible assets, net	$ 4,273,652	$ 4,279,943

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Note 2 - Summary of Significant Accounting Policies (Details) (USD $)	3 Months Ended		6 Months Ended				0 Months Ended				6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Mar. 31, 2012	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Short-term Debt [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Cash [Member]	Dec. 31, 2012 Pro-Fit [Member]	Jun. 30, 2013 Pro-Fit [Member] Minimum [Member]	Jun. 30, 2013 Pro-Fit [Member] Maximum [Member]	Jun. 30, 2013 Money Market Funds [Member]	Dec. 31, 2012 Money Market Funds [Member]
Note 2 - Summary of Significant Accounting Policies (Details) [Line Items]
Provision for Doubtful Accounts	$ 20,749	$ 14,031	$ 20,859	$ 13,374
Cash and Cash Equivalents, Fair Value Disclosure													987,000	2,230,000
Finite-Lived Intangible Assets, Gross	178,722		178,722		178,722	612,500				178,722
Finite-Lived Intangible Asset, Useful Life											10 years	17 years
Amortization of Intangible Assets	3,271		6,291	2,890
Stock Redeemed or Called During Period, Shares (in Shares)								407,160
Stock Redeemed or Called During Period, Value (in Dollars)								18,800,000
Payments for Repurchase of Redeemable Convertible Preferred Stock							5,800,000		13,000,000
Interest Expense	1,451	21,042	2,672	43,463
Interest Income, Other	1,648	1,319	2,097	1,703
Accumulated Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment, Net of Tax	$ 97,333		$ 97,333		$ 67,482

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Note 7 - Series B Convertible Preferred Stock and Stockholders' Equity (Deficit) (Details) - Series B Preferred Stock Activity (USD $)	3 Months Ended			6 Months Ended		18 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Dec. 31, 2012	Jul. 30, 2010
Series B Preferred Stock Activity [Abstract]
Series B Preferred Stock Balance	$ 25,777,657	$ 24,878,437		$ 25,777,657		$ 25,777,657	$ 23,979,216	$ 15,803,513
Series B Preferred Stock liquidation preference increase	$ (899,220)	$ 899,221	$ (775,190)	$ (1,798,441)	$ (1,550,380)	$ (1,550,380)

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Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	$ 16,640,964	$ 13,179,849	$ 26,780,714	$ 21,925,799
United States [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	1,363,298	967,002	2,445,385	1,868,271
Hong Kong [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	4,114,398	3,553,258	7,114,449	7,104,882
China [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	5,378,163	4,069,915	7,886,939	5,644,422
Bangladesh [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	833,906	696,247	1,471,206	1,140,441
Other Region [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Delivery Locations [Line Items]
Sales - Geographic Regions	$ 4,951,199	$ 3,893,427	$ 7,862,735	$ 6,167,783

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Note 5 - Inventories (Details) - Inventories (USD $)	Jun. 30, 2013	Dec. 31, 2012
Inventories [Abstract]
Finished goods	$ 1,212,591	$ 991,635
Less reserves	(279,194)	(261,132)
Total inventories	$ 933,397	$ 730,503

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Note 11 - Segment Reporting and Geographic Information (Tables)

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	Three Months ended June 30, 2013
	Talon		Trim		Tekfit			Consolidated
Net sales	$	9,501,836	$	7,133,419	$	5,709		$	16,640,964
Cost of goods sold		6,641,230		4,441,343		6,551			11,089,124
Gross profit (loss)	$	2,860,606	$	2,692,076	$	(842	)		5,551,840
Operating expenses									3,963,241
Income from operations								$	1,588,599

	Three Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	6,887,780	$	6,288,016	$	4,053		$	13,179,849
Cost of goods sold		4,936,172		3,862,935		22,013			8,821,120
Gross profit (loss)	$	1,951,608	$	2,425,081	$	(17,960	)		4,358,729
Operating expenses									3,384,371
Income from operations								$	974,358

	Six Months ended June 30, 2013
	Talon		Trim		Tekfit		Consolidated
Net sales	$	15,302,362	$	11,463,363	$	14,989	$	26,780,714
Cost of goods sold		10,772,664		7,271,493		8,639		18,052,796
Gross profit	$	4,529,698	$	4,191,870	$	6,350		8,727,918
Operating expenses								6,930,442
Income from operations							$	1,797,476

	Six Months ended June 30, 2012
	Talon		Trim		Tekfit			Consolidated
Net sales	$	11,344,095	$	10,576,700	$	5,004		$	21,925,799
Cost of goods sold		8,139,997		6,633,948		22,369			14,796,314
Gross profit (loss)	$	3,204,098	$	3,942,752	$	(17,365	)		7,129,485
Operating expenses									6,628,953
Income from operations								$	500,532

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

Sales:	Three Months Ended June 30,				Six Months Ended June 30,
Country / Region	2013		2012		2013		2012
United States	$	1,363,298	$	967,002	$	2,445,385	$	1,868,271
Hong Kong		4,114,398		3,553,258		7,114,449		7,104,882
China		5,378,163		4,069,915		7,886,939		5,644,422
Bangladesh		833,906		696,247		1,471,206		1,140,441
Other		4,951,199		3,893,427		7,862,735		6,167,783
Total	$	16,640,964	$	13,179,849	$	26,780,714	$	21,925,799

Schedule of Disclosure on Geographic Areas, Long-Lived Assets in Individual Foreign Countries by Country [Table Text Block]

	June 30, 2013		December 31, 2012
Long-lived Assets:
United States	$	4,584,715	$	4,551,101
Hong Kong		446,813		419,268
China		92,390		73,344
Total	$	5,123,918	$	5,043,713

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Supplemental Disclosures of Cash Flow Information (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Interest paid	$ (2,672)	$ (188,436)
Interest received	2,097	1,703
Income tax paid, net (principally foreign)	(58,858)	(162,205)
Series B preferred stock liquidation preference increase	(1,798,441)	(1,550,380)
RSU’s settlement in common stock	1,500	900
Interest accrued on notes payable		1,540
Effect of Foreign Currency Translation on Net Assets [Member]
Other significant noncash transaction	29,851	13,686
Equipment Exchanged for Manufacturing Services [Member]
Other significant noncash transaction		47,379
Capital Lease Terminations [Member]
Other significant noncash transaction		$ 9,802

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Note 2 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

Note 2.     Summary of Significant Accounting Policies

A complete description of the Company’s Significant Accounting Policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and should be read in conjunction with these unaudited consolidated financial statements. The Significant Accounting Policies noted below are only those policies that have changed materially or have supplemental information included for the periods presented here.

Allowance for Accounts Receivable Doubtful Accounts

The Company is required to make judgments as to the collectability of accounts receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts and that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified. Bad debt expense (recovery), net on accounts receivable for the three and six months ended June 30, 2013 was $20,749 and $20,859, respectively. Bad debt expense, net on accounts receivable for the three and six months ended June 30, 2012 was $14,031 and $13,374, respectively

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities. The book value of the financial instruments is representative of their fair values. In accordance with this guidance, the Company measures its cash equivalents at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At June 30, 2013 and December 31, 2012, cash equivalents consisted of money market funds measured at fair value on a recurring basis; fair value of the Company’s money market funds was approximately $987,000 and $2,230,000, respectively.

The Company adopted the Financial Accounting Standards Board (“FASB”) staff position that delayed the guidance on fair value measurements for non-financial assets and non-financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Intangible Assets

Intangible assets consist of the Talon trade name acquired in a purchase business combination, patents, licenses, intellectual property rights and technology. Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other”. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives using the straight-line method, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.

In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment.”  The updated guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not, defined as a likelihood of more than 50%, that an indefinite-lived intangible asset is impaired.  If it is determined that it is more likely than not that an impairment exists, then the company is required to estimate the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASU 350-30. The updated guidance was effective for annual and interim indefinite lived intangibles asset impairment tests performed for fiscal years, and interim periods within those years, beginning after September 15, 2012.  Early adoption was permitted as of a date before July 27, 2012. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. We completed the required assessment at June 30, 2013 and December 31, 2012, and noted no impairment. Consequently, no impairment charges were recorded.

On April 2, 2002, the Company entered into an Exclusive License and Intellectual Property Rights Agreement (the “License Agreement”) with Pro-Fit Holdings Limited (“Pro-Fit”). The License Agreement granted the Company the exclusive rights to sell or sublicense waistbands manufactured under patented technology developed by Pro-Fit for garments manufactured anywhere in the world for sale in the United States market and to all United States brands. The License Agreement had an indefinite term that extended for the duration of the trade secrets and patented technology licensed under the License Agreement. The Company recorded an intangible asset of $612,500, which has been fully amortized.

During the quarter ended March 31, 2012 the Company completed the acquisition from Pro-Fit and related parties of all U.S. patents, applications, trademarks, rights and technology associated with the stretch waistband technology that was formerly exclusively licensed under the License Agreement, and the License Agreement was terminated. During the quarter ended June 30, 2012 the Company also acquired other intellectual property related to accessory components used with a variety of apparel products. The total purchase price and related fees for all intangibles acquired in 2012 totaled $178,722, and is amortized based on the estimated useful lives between 10 and 17 years. Amortization expense for intangible assets was $3,271 and $6,291 for the three and six months ended June 30, 2013, respectively. Amortization expense for intangible assets was $2,890 for the three and six months ended June 30, 2012.

Intangible assets as of June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013			December 31, 2012
Tradename	$	4,110,751		$	4,110,751
Intellectual property rights and exclusive license		178,722			178,722
Accumulated amortization		(15,821	)		(9,530	)
Intellectual property rights, net		162,901			169,192
Intangible assets, net	$	4,273,652		$	4,279,943

Convertible Preferred Stock

Subsequent to June 30, 2013 the Company entered into a Securities Redemption Agreement (the “Redemption Agreement”) with CVC California, LLC (“CVC”). Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a promissory note in the principal amount of $5,800,000 (the “Promissory Note”). See Note 12.

The Company classifies its conditionally redeemable convertible preferred shares, which were subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity in the mezzanine section of the consolidated balance sheets, in accordance with the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock.

The Company evaluated the conversion option of its convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.

The convertible preferred shares, which were redeemable preferred securities, are reported at their current liquidation preference amount. Redeemable securities initially are recorded at their fair value minus the BCF and minus preferred stock issuance costs, and then are subsequently adjusted for changes in the preferred stock value in accordance with the following guidelines:

● When an equity instrument is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), then changes in the redemption value are recognized as they occur, and the carrying amount of the instrument is adjusted to equal the current redemption value. An increase in the carrying amount of the instrument reduces income available to common shareholders in the calculation of earnings per share.

● When the liquidation preference increases on preferred shares it is added to the preferred stock carrying amount, and reduces income available to common shareholders in the calculation of earnings per share.

Classification of Expenses

Costs of Goods Sold – Cost of goods sold primarily includes expenses related to inventory purchases, customs, duty, freight, overhead expenses and reserves for obsolete inventory. Overhead expenses primarily consist of warehouse and operations salaries, and other warehouse expense.

Sales and Marketing Expenses – Sales and marketing expenses primarily include sales salaries and commissions, travel and entertainment, marketing, advertising, royalty expense, and other sales related costs. Marketing and advertising efforts are expensed as incurred.

General and Administrative Expenses – General and administrative expenses primarily include administrative salaries, employee benefits, professional service fees, facility expenses, information technology costs, investor relations, travel and entertainment, depreciation and amortization, bad debts and other general corporate expenses.

Interest Expense (Income), net – Interest expense reflects the cost of borrowing. Interest expense for the three and six months ended June 30, 2013 totaled $1,451 and $2,672 respectively. Interest expense for the three and six months ended June 30, 2012 totaled $21,042 and $43,463, respectively. Interest income consists of earnings from cash held in interest bearing accounts. For the three and six months ended June 30, 2013 the Company recorded interest income of $1,648 and $2,097, respectively. For the three and six months ended June 30, 2012 the Company recorded interest income of $1,319 and $1,703, respectively.

Foreign Currency Translation

The Company has operations and holds assets in various foreign countries. The local currency is the functional currency for the Company’s subsidiaries in China and India. Assets and liabilities are translated at end-of-period exchange rates while revenues and expenses are translated at the average exchange rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income until the translation adjustments are realized. Included in accumulated other comprehensive income were a cumulative foreign currency translation gain of $97,333 and $67,482 at June 30, 2013 and December 31, 2012, respectively.

Comprehensive Income

Comprehensive income consists of net income and unrealized income on foreign currency translation adjustments. The foreign currency translation adjustment represents the net currency translation gains and losses related to our China and India subsidiaries, which have not been reflected in the net income for the periods presented.

In the first quarter of 2012 we adopted FASB ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) and ASU 2011-12, “Comprehensive Income (Topic 220)”, which amended ASC Topic 220, “Comprehensive Income”, and was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company chose the option provided by ASU 2011-05 to present the total of comprehensive income (loss), the components of net income (loss) and the components of other comprehensive income (loss) in a single continuous statement. Adoption of the guidance did not have any impact on our results of operations or financial condition.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year.  The accounting estimates that require the Company’s most significant, difficult and subjective judgments include the valuation allowance for accounts receivable and inventory, and the assessment of recoverability of long-lived assets and intangible assets, stock-based compensation and the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions). Actual results could differ materially from the Company’s estimates.

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Note 5 - Inventories

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

Note 5. Inventories

Inventories are stated at the lower of cost, determined using the first-in, first-out basis, or market value and are all categorized as finished goods. The costs of inventory include the purchase price, inbound freight and duties, conversion costs and certain allocated production overhead costs. Inventory valuation reserves are recorded for damaged, obsolete, excess and slow-moving inventory. The Company uses estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved depending on the type of product and the length of time the product has been included in inventory. Reserve adjustments are made for the difference between the cost of the inventory and the estimated market value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Market value of inventory is estimated based on the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this inventory.

Inventories consist of the following:

	June 30, 2013			December 31, 2012
Finished goods	$	1,212,591		$	991,635
Less reserves		(279,194	)		(261,132	)
Total inventories	$	933,397		$	730,503

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Note 3 - Net Income (Loss) per Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 3. Net Income (Loss) Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations:

	Net income (loss)			Shares		Per Share Amount
Three Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,262,715			24,900,808	$	0.05
Series B Preferred Stock Liquidation Preference Increase		(899,220	)		-		(0.04	)
Income (loss) applicable to Common Shareholders		363,495			24,900,808		0.01
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			2,620,672		-
Diluted net income (loss) applicable to Common Shareholders	$	363,495			27,521,480	$	0.01
Three Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	671,134			21,900,808	$	0.03
Series B Preferred Stock Liquidation Preference Increase		(775,190	)		-		(0.03	)
Income (loss) applicable to Common Shareholders		(104,056	)		21,900,808		0.00
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(104,056	)		21,900,808	$	0.00

	Net income (loss)			Shares		Per Share Amount
Six Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,543,068			24,652,189	$	0.06
Series B Preferred Stock Liquidation Preference Increase		(1,798,441	)		-		(0.07	)
Income (loss) applicable to Common Shareholders		(255,373	)		24,652,189		(0.01	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(255,373	)		24,652,189	$	(0.01	)

Six Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	465,504		21,752,456	$	0.02
Series B Preferred Stock Liquidation Preference Increase		(1,550,380	)	-		(0.07	)
Income (loss) applicable to Common Shareholders		(1,084,876	)	21,752,456		(0.05	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-		-		-
Diluted net income (loss) applicable to Common Shareholders	$	(1,084,876	)	21,752,456	$	(0.05	)

For the three months ended June 30, 2013, options to purchase 420,000 shares of common stock exercisable between $0.04 and $0.06 per share and RSU’s to settle for 7,057,000 common shares were included in the computation of diluted net income (loss) per share. Options to purchase 5,664,600 shares of common stock exercisable between $0.05 and $5.23 per share, and Series B Preferred Stock convertible into 40,716,000 shares of common stock were outstanding but were not included in the computation of diluted net income (loss) per share applicable to common shareholders because they would have an antidilutive effect on the net income (loss) per share.

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, the Company raised $5,500,000 of new equity capital through the offer and sale, in a Private Placement transaction, of 61,111,109 shares of common stock at a price of $0.09 per share. Additionally, on July 12, 2013 4,745,600 shares of common stock were issued to reporting persons in settlement of previously vested restricted stock units pursuant to an existing deferral election. As a result of the Redemption Agreement, the net income applicable to Preferred Shareholders noted above, which was $0.04 and $0.07 for the three and six months ended June 30, 2013, respectively, becomes available to Common Shareholders.

For the three months ended June 30, 2012, options to purchase 6,372,100 shares of common stock exercisable between $0.04 and $5.23 per share, RSU’s to settle for 10,057,000 common shares and Series B Preferred Stock to be converted into 40,716,000 shares of common stock were outstanding, but were not included in the computation of diluted net income (loss) per share because they would have an antidilutive effect on the net income (loss) per share.

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Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Long-Lived Asset Location (USD $)	Jun. 30, 2013	Dec. 31, 2012
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Long-Lived Asset Location [Line Items]
Long-lived Assets - Geographic Region	$ 5,123,918	$ 5,043,713
United States [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Long-Lived Asset Location [Line Items]
Long-lived Assets - Geographic Region	4,584,715	4,551,101
Hong Kong [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Long-Lived Asset Location [Line Items]
Long-lived Assets - Geographic Region	446,813	419,268
China [Member]
Note 11 - Segment Reporting and Geographic Information (Details) - Revenues By Long-Lived Asset Location [Line Items]
Long-lived Assets - Geographic Region	$ 92,390	$ 73,344

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Note 3 - Net Income (Loss) per Share (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended	1 Months Ended	0 Months Ended				3 Months Ended	1 Months Ended			3 Months Ended	6 Months Ended	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Jul. 12, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member] Common Stock [Member]	Jul. 30, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Short-term Debt [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Cash [Member]	Jul. 12, 2013 Subsequent Event [Member] Private Placement [Member] Common Stock [Member]	Jun. 30, 2013 Restricted Stock Units (RSUs) [Member] Employee And Board Member Stock Options [Member]	Jan. 30, 2013 Restricted Stock Units (RSUs) [Member]	Jul. 30, 2012 Restricted Stock Units (RSUs) [Member]	Aug. 30, 2011 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2012 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2012 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2013 Series B Convertible Preferred Stock [Member]	Jun. 30, 2012 Series B Convertible Preferred Stock [Member]	Jun. 30, 2012 Employee Stock Option [Member]	Jun. 30, 2013 Employee And Board Member Stock Options [Member]
Note 3 - Net Income (Loss) per Share (Details) [Line Items]
Incremental Common Shares Attributable to Dilutive Effect of Share-based Payment Arrangements																				420,000
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit (in Dollars per share)											$ 0.04								$ 0.04	$ 0.05
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit (in Dollars per share)											$ 0.06								$ 5.23	$ 5.23
Incremental Common Shares Attributable to Dilutive Effect of Equity Unit Purchase Agreements											7,057,000
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount															10,057,000		40,716,000	40,716,000	6,372,100	5,664,600
Stock Redeemed or Called During Period, Shares								407,160
Stock Redeemed or Called During Period, Value (in Dollars)								$ 18,800,000
Payments for Repurchase of Redeemable Preferred Stock (in Dollars)							5,800,000		13,000,000
Proceeds from Issuance of Common Stock (in Dollars)										$ 5,500,000
Stock Issued During Period, Shares, New Issues (in Shares)										61,111,109
Sale of Stock, Price Per Share (in Dollars per share)										$ 0.09
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures (in Shares)					4,745,600	1,155,700						1,500,000	1,500,000	600,000		900,000
Preferred Stock Liquidation Preference Increase and Other Adjustments Per Share (in Dollars per share)	$ (0.04)	$ (0.03)	$ (0.07)	$ (0.07)

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Note 6 - Debt Facility (Details) (USD $)	3 Months Ended			6 Months Ended		0 Months Ended
	Jun. 30, 2012	Sep. 30, 2011	Sep. 30, 2010	Jun. 30, 2012	Jul. 30, 2010	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Short-term Debt [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Cash [Member]	Jul. 30, 2010 Recapitalization Agreement [Member]
Note 6 - Debt Facility (Details) [Line Items]
Long-term Debt, Current Maturities					$ 16,706,685				$ 16,706,685
Notes Payable					11,548,098
Line of Credit Facility, Amount Outstanding					5,158,587
Line of Credit Facility, Maximum Borrowing Capacity					3,000,000
Payments of Financing Costs			60,000
Line of Credit Facility, Commitment Fee Amount		50,000
Stock Redeemed or Called During Period, Shares (in Shares)							407,160
Stock Redeemed or Called During Period, Value							18,800,000
Payments for Repurchase of Redeemable Convertible Preferred Stock						5,800,000		13,000,000
Payments for Repurchase of Redeemable Preferred Stock						5,800,000		13,000,000
Interest Expense, Debt	20,000			40,000
Amortization of Financing Costs	7,500			15,000
Debt Related Commitment Fees and Debt Issuance Costs	$ 12,500			$ 25,000

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Note 8 - Stock-Based Compensation (Details) - Summary Of RSU’s Activity (USD $)	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Note 8 - Stock-Based Compensation (Details) - Summary Of RSU’s Activity [Line Items]
Outstanding - Weighted Average Grant date value per RSU (in Dollars per share)	$ 0.196	$ 0.196
Common stock vested (in Dollars per share)	$ 0.196
Common stock issued (in Dollars per share)	$ 0.196
Unvested [Member]
Note 8 - Stock-Based Compensation (Details) - Summary Of RSU’s Activity [Line Items]
Outstanding - Number of RSU's	2,311,400	3,467,100
Common stock vested	(1,155,700)
Vested [Member]
Note 8 - Stock-Based Compensation (Details) - Summary Of RSU’s Activity [Line Items]
Outstanding - Number of RSU's	4,745,600	5,089,900
Common stock vested	1,155,700
Common stock issued	(1,500,000)
Total [Member]
Note 8 - Stock-Based Compensation (Details) - Summary Of RSU’s Activity [Line Items]
Outstanding - Number of RSU's	7,057,000	8,557,000
Common stock issued	(1,500,000)

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Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Series B Convertible Preferred Stock par value (in Dollars per share)	$ 0.001	$ 0.001
Series B Convertible Preferred Stock shares authorized	407,160	407,160
Series B Convertible Preferred Stock shares issued	407,160	407,160
Series B Convertible Preferred Stock shares outstanding	407,160	407,160
Series A Preferred Stock, par value (in Dollars per share)	$ 0.001	$ 0.001
Series A Preferred Stock, shares authorized	250,000	250,000
Series A Preferred Stock, shares issued	0	0
Series A Preferred Stock, shares outstanding	0	0
Common Stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Common Stock, shares authorized	100,000,000	100,000,000
Common Stock, shares issued	24,900,808	23,400,808
Common Stock,shares outstanding	24,900,808	23,400,808

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Note 8 - Stock-Based Compensation

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 8.     Stock-Based Compensation

The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Options issued to consultants are accounted for in accordance with the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees”.

Stock Options

The Company’s 2008 Stock Incentive Plan, as amended in November 2010, which was approved by the Company’s stockholders, authorizes up to 4,810,000 shares of common stock that may be issued pursuant to awards granted under the plan.

The Company’s 2007 Stock Plan was approved by the Company’s stockholders in 2007, and replaced the 1997 Stock Plan. The 2007 Stock Plan authorizes up to 2,600,000 shares of common stock for issuance pursuant to awards granted to individuals under the plan.

On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan, which authorized the granting of a variety of stock-based incentive awards.

The Board of Directors, who determines the recipients and terms of the award granted, administers the Company’s stock plan. Awards under the Company’s stock plans are generally granted with an exercise price equal to the average market price of the Company’s stock for the five trading days following the date of approval of the grant. Those option awards generally vest over periods determined by the Board from immediate to 4 years of continuous service and have 10 year contractual terms.

Options to purchase 0 and 630,000 shares of common stock were granted under the Stock Incentive Plans during the three and six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013, the Company had $45,859 of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the weighted average period of 1.9 years. As of June 30, 2012, unamortized stock-based compensation expense related to options issued to employees and directors was $109,753, which was to be recognized over the weighted average period of approximately 2.2 years.

The following table summarizes the activity in the Company’s share based plans during the six months ended June 30, 2013.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		-		$	-
Options outstanding - March 31, 2013		6,372,100		$	0.21
Granted		-		$	-
Cancelled		(287,500	)	$	0.87
Options outstanding - June 30, 2013		6,084,600		$	0.18

Restricted Stock Units (RSU’s)

On July 30, 2010, the Company awarded each of Lonnie Schnell and Larry Dyne a restricted stock unit award (an “RSU Award”) for 5,778,500 shares of the Company’s common stock. Each RSU Award vested 50% on August 30, 2011, and vests 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date, subject to partial acceleration of vesting as part of the executives’ severance benefits and full acceleration of vesting upon a change in control of the Company. As of July 30, 2010, the RSU’s were valued at $2,263,384, which was reduced by the fair value of the options surrendered by the employees in connection with these grants.

On August 30, 2010, Messrs. Schnell and Dyne elected to defer the settlement in common shares of 5,434,200 RSU’s beyond the vesting dates. On August 30, 2011, based on the deferral schedules, 600,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.10 per share. On January 30, 2012, based on the deferral schedules, 900,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.05 per share. On July 30, 2012 1,500,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.04 per share. On January 30, 2013 1,500,000 common shares were issued upon settlement of a portion of vested units under the RSU Awards. At the time of the issuance the intrinsic value of these shares was $0.04 per share.

Subsequent to June 30, 2013, on July 12, 2013, 4,745,600 shares of common stock were issued upon settlement of previously vested restricted stock units pursuant to the deferral elections. At the time of the issuance of shares the intrinsic value of these RSU’s was $0.06 per share. On July 30, 2013 1,155,700 common shares were issued upon settlement of vested units pursuant to the deferral elections. At the time of the issuance of shares the intrinsic value of these RSU’s was $0.25 per share.

As of June 30, 2013, the Company had $263,927 of unamortized stock-based compensation expense related to RSU’s, which will be recognized over the remaining weighted average period of seven months.

The following table summarizes RSU’s activity:

	Number of RSU’s									Weighted Average Grant date
	Unvested			Vested			Total			value per RSU
RSU’s outstanding – December 31, 2012		3,467,100			5,089,900			8,557,000		$	0.196
Common stock vested		(1,155,700	)		1,155,700			-		$	0.196
Common stock issued		-			(1,500,000	)		(1,500,000	)	$	0.196
RSU’s outstanding – March 31, 2013 and June 30, 2013		2,311,400			4,745,600			7,057,000		$	0.196

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net income	$ 1,543,068	$ 465,504
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	249,608	272,460
(Gain) from disposal of equipment	(1,832)	(47,323)
Amortization of deferred financing cost		15,000
Stock based compensation	251,213	258,714
Deferred income taxes, net	72,211	179,214
Bad debt expense, net	20,859	13,374
Inventory valuation provisions, net	19,158	17,536
Changes in operating assets and liabilities:
Accounts receivable	(882,945)	(276,813)
Inventories	(221,964)	231,786
Prepaid expenses and other current assets	(72,364)	(309,948)
Other assets.	(207,385)	12,714
Accounts payable and accrued expenses	2,230,827	1,636,159
Other liabilities	(143,628)	(197,667)
Net cash provided by operating activities	2,856,826	2,270,710
Cash flows from investing activities:
Acquisitions of intangibles		(155,940)
Proceeds from sale of equipment	1,832	168
Acquisitions of property and equipment	(327,976)	(122,683)
Net cash (used in) investing activities	(326,144)	(278,455)
Cash flows from financing activities:
Payment of notes payable to related parties		(240,957)
Payment of other notes payable		(66,675)
Payment of capital leases	(1,662)	(2,976)
Net cash (used in) financing activities	(1,662)	(310,608)
Net effect of foreign currency exchange translation on cash	49,735	(6,400)
Net increase in cash and cash equivalents	2,578,755	1,675,247
Cash and cash equivalents at beginning of period	8,927,333	5,749,341
Cash and cash equivalents at end of period	$ 11,506,088	$ 7,424,588

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Consolidated Balance Sheets (Current Period Unaudited) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$ 11,506,088	$ 8,927,333
Accounts receivable, net	4,511,580	3,635,136
Inventories, net	933,397	730,503
Prepaid expenses and other current assets	532,636	456,460
Total current assets	17,483,701	13,749,432
Property and equipment, net	850,266	763,770
Intangible assets, net	4,273,652	4,279,943
Other assets	390,821	182,671
Total assets	22,998,440	18,975,816
Liabilities, Preferred Stock and Stockholders’ Equity (Deficit)
Accounts payable	9,609,871	7,866,662
Accrued expenses	2,551,896	2,023,535
Current portion of capital lease obligations	1,585	3,247
Total current liabilities	12,163,352	9,893,444
Deferred income taxes	1,017,755	945,543
Other liabilities	42,423	186,051
Total liabilities	13,223,530	11,025,038
Commitments and contingencies (Note 10)
Series B Convertible Preferred Stock, $0.001 par value; 407,160 shares authorized, issued and outstanding	25,777,657	23,979,216
Stockholders’ Equity (Deficit):
Series A Preferred Stock, $0.001 par value; 250,000 shares authorized; no shares issued or outstanding	0	0
Common Stock, $0.01 par value, 100,000,000 shares authorized;24,900,808 and 23,400,808 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively	24,901	23,401
Additional paid-in capital	58,708,444	58,458,731
Accumulated deficit	(74,833,425)	(74,578,052)
Accumulated other comprehensive income	97,333	67,482
Total stockholders’ equity (deficit)	(16,002,747)	(16,028,438)
Total liabilities, preferred stock and stockholders’ equity (deficit)	$ 22,998,440	$ 18,975,816

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Note 3 - Net Income (Loss) per Share (Details) - Reconciliation of the Numerators and Denominators of the Basic and Diluted Net Income/Loss Per Share (USD $)	3 Months Ended			6 Months Ended		18 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013
Basic net income (loss) per share:
Net income (loss) (Numerator) - net income/loss (in Dollars)	$ 1,262,715		$ 671,134	$ 1,543,068	$ 465,504	$ 465,504
Shares (Denominator) - net income/loss (in Shares)	24,900,808		21,900,808	24,652,189		21,752,456
Per Share Amount - net income/loss	$ 0.05		$ 0.03	$ 0.06	$ 0.02	$ 0.02
Net income (loss) (Numerator) - Series B Preferred Stock Liquidation Preference Increase (in Dollars)	(899,220)	899,221	(775,190)	(1,798,441)	(1,550,380)	(1,550,380)
Per Share Amount - Series B Preferred Stock Liquidation Preference Increase	$ (0.04)		$ (0.03)	$ (0.07)		$ (0.07)
Net income (loss) (Numerator) - Income (loss) applicable to Common Shareholders (in Dollars)	363,495		(104,056)	(255,373)		(1,084,876)
Shares (Denominator) - Income (loss) applicable to Common Shareholders (in Shares)	24,900,808		21,900,808	24,652,189	21,752,456	21,752,456
Per Share Amount - Income (loss) applicable to Common Shareholders	$ 0.01		$ 0.00	$ (0.01)		$ (0.05)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs (in Shares)	2,620,672
Net income (loss) (Numerator) - Diluted net income (loss) applicable to Common Shareholders (in Dollars)	$ 363,495		$ (104,056)	$ (255,373)	$ (1,084,876)	$ (1,084,876)
Shares (Denominator) - Diluted net income (loss) applicable to Common Shareholders (in Shares)	27,521,480		21,900,808	24,652,189	21,752,456	21,752,456
Per Share Amount - Diluted net income (loss) applicable to Common Shareholders	$ 0.01			$ (0.01)	$ 0.00	$ (0.05)

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Note 7 - Series B Convertible Preferred Stock and Stockholders' Equity (Deficit) (Tables)

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Schedule Of Preferred Stock Activitiy [Table Text Block]

Series B Preferred Stock as of December 31, 2012	$	23,979,216
Series B Preferred Stock liquidation preference increase for the three months ended March 31, 2013		899,221
Series B Preferred Stock as of March 31, 2013		24,878,437
Series B Preferred Stock liquidation preference increase for the three months ended June 30, 2013		899,220
Series B Preferred Stock as of June 30, 2013	$	25,777,657

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Note 11 - Segment Reporting and Geographic Information (Details) - Net Revenues and Operating Margins (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting Information [Line Items]
Net sales	$ 16,640,964	$ 13,179,849	$ 26,780,714	$ 21,925,799
Cost of goods sold	11,089,124	8,821,120	18,052,796	14,796,314
Gross profit (loss)	5,551,840	4,358,729	8,727,918	7,129,485
Operating expenses	3,963,241	3,384,371	6,930,442	6,628,953
Income/loss from operations	1,588,599	974,358	1,797,476	500,532
Talon [Member]
Segment Reporting Information [Line Items]
Net sales	9,501,836	6,887,780	15,302,362	11,344,095
Cost of goods sold	6,641,230	4,936,172	10,772,664	8,139,997
Gross profit (loss)	2,860,606	1,951,608	4,529,698	3,204,098
Trim [Member]
Segment Reporting Information [Line Items]
Net sales	7,133,419	6,288,016	11,463,363	10,576,700
Cost of goods sold	4,441,343	3,862,935	7,271,493	6,633,948
Gross profit (loss)	2,692,076	2,425,081	4,191,870	3,942,752
Tekfit [Member]
Segment Reporting Information [Line Items]
Net sales	5,709	4,053	14,989	5,004
Cost of goods sold	6,551	22,013	8,639	22,369
Gross profit (loss)	$ (842)	$ (17,960)	$ 6,350	$ (17,365)

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Note 8 - Stock-Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended		1 Months Ended	6 Months Ended		1 Months Ended						6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Jul. 12, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member] Common Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member]	Jul. 30, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member]	Jun. 30, 2013 Options Issued To Employees And Directors [Member]	Jun. 30, 2012 Options Issued To Employees And Directors [Member]	Jul. 30, 2013 Restricted Stock Units (RSUs) [Member]	Jan. 30, 2013 Restricted Stock Units (RSUs) [Member]	Jul. 30, 2012 Restricted Stock Units (RSUs) [Member]	Aug. 30, 2011 Restricted Stock Units (RSUs) [Member]	Aug. 30, 2010 Restricted Stock Units (RSUs) [Member]	Jul. 30, 2010 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2013 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2012 Restricted Stock Units (RSUs) [Member]	Nov. 19, 2010 The 2008 Stock Plan [Member]	Jul. 31, 2007 The 2007 Stock Plan [Member]
Note 8 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized																		4,810,000	2,600,000
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term			10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0	630,000	0	630,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)								$ 45,859	$ 109,753	$ 263,927
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition								1 year 328 days	2 years 73 days							7 years
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period															5,778,500
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instrument Other Than Options, Grant Date Value (in Dollars)															$ 2,263,384
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other Than Options, Shares Deferred In Period														5,434,200
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures (in Shares)					4,745,600		1,155,700				1,500,000	1,500,000	600,000				900,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Intrinsic Value, Amount Per Share (in Dollars per share)						$ 0.06				$ 0.25	$ 0.04	$ 0.04	$ 0.10				$ 0.05

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Note 8 - Stock-Based Compensation (Details) - Stock Options (Options Issued To Employees And Directors [Member], USD $)	3 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012
Options Issued To Employees And Directors [Member]
Employees and Directors
Number of Shares Outstanding	6,084,600	6,372,100	6,372,100
Weighted Average Exercise Price Outstanding (in Dollars per share)	$ 0.18	$ 0.21	$ 0.21
Number of Shares - Cancelled	(287,500)
Weighted Average Exercise Price - Cancelled (in Dollars per share)	$ 0.87

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Note 7 - Series B Convertible Preferred Stock and Stockholders' Equity (Deficit)

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Note 7.     Series B Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Subsequent Preferred Stock Redemption and Private Placement of Common Stock

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with CVC. Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 previously outstanding shares of Series B Preferred Stock (described below) for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. Together with the entry into the Redemption Agreement, the Stockholder’s Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company was terminated. In order to provide additional funds necessary for the redemption of the Series B Preferred Stock, the Company raised $5,500,000 of new equity capital through the offer and sale, in a Private Placement transaction, of 61,111,109 shares of common stock at a price of $0.09 per share. The closing of the Private Placement was expressly conditioned upon the contemporaneous closing of the transactions under the Redemption Agreement. See Note 12.

Series B Convertible Preferred Stock

On July 30, 2010, the Company entered into the Recapitalization Agreement with CVC, pursuant to which the Company issued to CVC an aggregate of 407,160 shares of a newly created series of the Company’s preferred stock, designated Series B Convertible Preferred Stock, $0.001 par value per share in payment of an aggregate of $16,706,685 owed by the Company to CVC under the Loan Agreement. Certain rights, preferences, privileges and restrictions previously provided to the Series B Preferred Stock are summarized below.

The Series B Preferred Stock had the following rights, preferences, privileges and restrictions:

● The Series B Preferred Stock ranked senior to the common stock and to any other preferred stock unless such preferred stock was created and issued on a senior or pari passu basis in accordance with the Company’s certificate of incorporation.

● Each share of Series B Preferred Stock was convertible into 100 shares of the Company’s common stock (subject to adjustment for stock splits, reverse stock split, etc.) at any time and from time to time at each holder’s option, unless the Series B Preferred Stock was exchanged for its Liquidation Preference as noted below.

● Upon the liquidation, dissolution or winding up of the Company, each share of Series B Preferred Stock was entitled to receive upon the surrender and cancellation of such shares (and prior to any distribution to holders of other equity securities), an amount equal to $41.033 per share plus all accrued dividends (the “Liquidation Preference”). A merger, consolidation, share exchange or other reorganization resulting in a change in control of the Company, or any sale of all or substantially all of the Company’s assets, would be deemed a liquidation and winding up for purposes of the Company’s obligation to pay the Liquidation Preference.

● The Series B Preferred Stock Liquidation Preference increased at the rate of 16% per annum, compounded annually, in the form of a dividend accrual on the Liquidation Preference. The dividend however was only payable in connection with the payment of the Liquidation Preference upon the liquidation, dissolution or winding up of the Company, and in each case in exchange for the surrender of the Series B Preferred Stock. No portion of the Liquidation Preference or the associated accrued dividends were convertible into common stock, nor was any portion of the Liquidation Preference or the accrued dividends payable on shares of Series B Preferred Stock in the event of or following the conversion of such shares into common stock.

● The Company had the right, at any time upon not less than thirty (30) days’ prior written notice to the holders of Series B Preferred Stock, to redeem the Series B Preferred Stock in whole (but not in part) for a price equal to the then-applicable Liquidation Preference. The holders of Series B Preferred Stock had the option, exercisable at any time and from time to time commencing on July 31, 2016, to require the Company to redeem any or all of the Series B Preferred Stock held by such holders, at the then-applicable Liquidation Preference amount.

● The Series B Preferred Stock voted with the common stock as a single class on all matters submitted or required to be submitted to a vote of the Company’s stockholders, with each share of Series B Preferred Stock having a number of votes equal to the number of shares of common stock that may be acquired upon conversion thereof as of the applicable date of determination. Additionally, the Series B Preferred Stock had the right to vote as a separate class with respect to certain matters affecting the Series B Preferred Stock, including but not limited to (a) the creation or issuance of any other class or series of preferred stock, (b) any amendments with respect to the rights, powers, preferences and limitations of the Series B Preferred Stock, (c) paying dividends or distributions in respect of or redeem the Company’s common stock or any other junior securities; and (d) certain affiliate transactions. Any such vote required the affirmative vote or consent of a majority of the outstanding shares of Series B Preferred Stock.

As long as the outstanding Series B Preferred Stock represented 35% or more of the voting shares of the Company, on an as-converted to common stock basis, then (a) our Board of Directors consisted of not more than seven members, (b) the holders of Series B Preferred Stock had the right to elect three directors if the Board had five or fewer total directors, and four directors if the Board had six or seven directors (the directors elected by the Series B Preferred Stock were referred to as the “Series B Directors”), and (c) those members serving on the Board who were not elected by holders of the Series B Preferred Stock had the right to designate all remaining directors. At least two of the Series B Directors had to be, and remain at all times while serving as a director, an independent director that qualified for service on the audit committee of a corporation with securities listed on the Nasdaq Stock Market as provided in Nasdaq Marketplace Rule 5605(c)(2) (or any successor thereto). Once the outstanding shares of Series B Preferred Stock represent less than 35% of the voting shares on an as-converted to common stock basis, then the entire Board will thereafter be elected by all stockholders having voting rights, voting as a single class.

The conversion of the term notes, revolver and related interest and fees into the Series B Preferred Stock (fair value of $17,277,600 as of July 30, 2010) was considered to be debt extinguishment according to the FASB ASC No.405 “Liabilities” and FASB ASC No. 470-50 “Debt, Modifications and Extinguishments” (“ASC 470-50”). Per ASC 470-50 a loss on extinguishment of debt of $570,915 was recorded on July 30, 2010 and is included in the Consolidated Statement of Operations for the year ended December 31, 2010. The loss on extinguishment is equal to the difference between fair value of the preferred stock and the fair value of the debt extinguished at the transaction date. The fair value of the Series B Preferred Stock on the issuance date was determined by the Company and independent valuation specialists using the option pricing valuation model.  

The Company applied the guidance enumerated in FASB ASC No. 480 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock. The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within the control of the Company, as temporary equity in the mezzanine section of the consolidated balance sheet. The Series B Preferred Stock is redeemable at the option of the holders after the sixth anniversary of issuance, which is not within the control of the Company.

The Company determined that there are no embedded features that would require separate reporting as derivative instruments. Therefore, the Company evaluated the conversion option of the convertible preferred shares under FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF if the fair value of the instrument is lower than the fair value of shares of the common stock it is convertible into on the issuance date.  The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital. The Company has recorded a BCF value of $1,283,343 in connection with the issuance of the Series B Preferred Stock on July 30, 2010.

The Series B Preferred Stock was initially recorded at the fair value of $17,277,600 as of July 30, 2010, reduced by the BCF ($1,283,343) as stated above and stock issuance costs ($190,744), for a net value of $15,803,513 as of July 30, 2010. The value of the Series B Preferred Stock was adjusted as follows as a consequence of its redemption features and the following approach was implemented by the Company:

● The Series B Preferred Stock was not redeemable as of June 30, 2013, but it was probable that the preferred stock could become redeemable due to the redemption option available to the preferred stock holders on July 30, 2016. Changes in the redemption value were recognized immediately as they occurred, and the carrying amount of the instrument was adjusted to equal the redemption value at the end of each reporting period. This method viewed the end of the reporting period as if it were also the redemption date for the Series B Preferred Stock. Accordingly, the adjustment of $903,172 to record the preferred stock at its redemption value (“Original issue discount”) was charged against the preferred stock carrying value and retained earnings during the year ended December 31, 2010. In addition, the resulting increase in the carrying amount of the Series B Preferred Stock reduced the income applicable to common shareholders reported in the calculation of earnings per share.

● The annual 16% liquidation preference increase on outstanding preferred shares was accrued each reporting period as an addition to the carrying value of the preferred stock and reduced the income applicable to common shareholders reported in the calculation of earnings per share.

The following table summarizes Series B Preferred Stock activity:

Series B Preferred Stock as of December 31, 2012	$	23,979,216
Series B Preferred Stock liquidation preference increase for the three months ended March 31, 2013		899,221
Series B Preferred Stock as of March 31, 2013		24,878,437
Series B Preferred Stock liquidation preference increase for the three months ended June 30, 2013		899,220
Series B Preferred Stock as of June 30, 2013	$	25,777,657

Common Stock

Stockholders Agreement

Concurrently with the execution of the Recapitalization Agreement, on July 30, 2010, the Company entered into a Stockholders Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company (“Messrs. Schnell and Dyne”), pursuant to which:

● CVC agreed that in connection with any director nominees to be submitted to holders of the Company’s common stock for election at a stockholders’ meeting, a committee of our Board comprised solely of directors then serving on the Board who were not elected or appointed by holders of Series B Preferred Stock, acting by majority vote, would have the right to designate all of the Board’s nominees for director to be elected by holders of the Company’s Common Stock.

● CVC agreed that in connection with any election of directors submitted to the Company’s stockholders for election at a stockholders’ meeting, CVC would attend the stockholders’ meeting, in person or by proxy, and vote (or cause to be voted) all of CVC’s shares of the Company’s voting stock in favor of the Board’s nominees for director.

● Messrs. Schnell and Dyne granted CVC a right of first refusal with respect to any shares of the Company’s voting securities that Messrs. Schnell and Dyne proposed to sell in a private placement transaction, and agreed to provide CVC with advance notice of their intent to sell the Company’s voting securities in any public sale transaction.

● CVC granted Messrs. Schnell and Dyne a tag-along right, providing Messrs. Schnell and Dyne with the right to sell their shares of the Company’s voting securities in a transaction where CVC is selling its shares of the Company’s voting securities.

● Messrs. Schnell and Dyne agreed with CVC to vote their shares of Talon voting stock in favor of a merger or consolidation of the Company into or with another corporation or any share exchange, business combination or other such transaction in which the Company was a constituent party, or any sale of all or substantially all of the Company’s assets (a “Triggering Transaction”), in each case to the extent such transaction was first approved by CVC.

● CVC agreed not to sell or otherwise transfer its shares of the Company’s voting securities, or to vote its shares of the Company’s voting securities in favor of any Triggering Transaction, at any time on or before July 31, 2011, other than in connection with a transaction that was approved by a majority of the Company’s voting shares (where, in calculating such majority, the votes attributable to CVC’s shares of the Company’s voting securities were excluded in the numerator but included in the denominator).

● The Company provided CVC with a preemptive right, pursuant to which CVC would have the right, subject to certain exceptions set forth in the Stockholders Agreement, to acquire in a subsequent issuance of securities by the Company a number of offered securities that will allow CVC to maintain its percentage ownership of the Company’s voting securities.

● CVC agreed with Messrs. Schnell and Dyne that in connection with a Triggering Transaction, CVC, and any other holder of Series B Preferred Stock and shares of common stock acquired upon conversion thereof, would pay to Messrs. Schnell and Dyne a portion (beginning at 5% and increasing to 10%) of the sales proceeds payable in the Triggering Transaction to CVC or such other holder in respect of such Series B Preferred Stock or conversion shares. Each of Messrs. Schnell and Dyne’s right to receive such portion of the sales proceeds was conditional upon the Triggering Transaction occurring (i) while employed by the Company or (ii) within 12 months following termination of employment with the Company for any reason other than termination of employment for “cause” or termination of employment by Messrs. Schnell or Dyne without “good reason” (as such terms are defined in their respective employment agreements).

Pursuant to the Redemption Agreement entered into on July 12, 2013, the Stockholders Agreement has been terminated. See Note 12.

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Note 4 - Accounts Receivable (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Receivables [Abstract]
Allowance for Doubtful Accounts Receivable, Current	$ 23,351	$ 1,093

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Note 12 - Subsequent Events (Details) (USD $)					0 Months Ended			0 Months Ended		1 Months Ended	0 Months Ended			1 Months Ended			6 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jul. 30, 2010	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Short-term Debt [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 30, 2016 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Cash [Member]	Jul. 12, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member] Common Stock [Member]	Jul. 30, 2013 Subsequent Event [Member] Restricted Stock Units (RSUs) [Member]	Jul. 12, 2013 Subsequent Event [Member] Private Placement [Member] Common Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Private Placement [Member]	Jul. 30, 2016 Subsequent Event [Member]	Jan. 30, 2013 Restricted Stock Units (RSUs) [Member]	Jul. 30, 2012 Restricted Stock Units (RSUs) [Member]	Aug. 30, 2011 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2012 Restricted Stock Units (RSUs) [Member]	Jul. 12, 2013 Private Placement [Member] Kutula Holdings Ltd [Member] Minimum [Member]
Note 12 - Subsequent Events (Details) [Line Items]
Stock Redeemed or Called During Period, Shares (in Shares)						407,160
Stock Redeemed or Called During Period, Value						$ 18,800,000
Payments for Repurchase of Redeemable Convertible Preferred Stock					5,800,000			13,000,000
Temporary Equity, Carrying Amount, Attributable to Parent	25,777,657	24,878,437	23,979,216	15,803,513		25,900,000	40,700,000
Debt Instrument, Interest Rate, Stated Percentage													1.00%
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures (in Shares)									4,745,600	1,155,700				1,500,000	1,500,000	600,000	900,000
Proceeds from Issuance of Common Stock											$ 5,500,000
Stock Issued During Period, Shares, New Issues (in Shares)											61,111,109
Sale of Stock, Price Per Share (in Dollars per share)											$ 0.09
Share Price (in Dollars per share)											$ 0.058
Common Stock, Shares, Outstanding (in Shares)	24,900,808		23,400,808															15,500,000
Registration Rights Agreement Private Placement Purchasers Ownership Rights Percentage												25.00%

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Note 10 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

Note 10.     Commitments and Contingencies

The Company currently has pending claims and complaints that arise in the ordinary course of the Company’s business. The Company believes that it has meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on the Company’s consolidated financial position or results of operations if adversely determined against the Company.

In November 2002, the FASB issued Topics of the FASB ASC 460-10, “Guarantees” (“ASC 460-10”) and FASB ASC 850-10, “Related Party Disclosures” (”ASC 850-10”). The following is a summary of the Company’s agreements that it has determined are within the scope of ASC 460-10 and ASC 850-10:

● In accordance with the bylaws of the Company, and indemnification agreements entered into with the members of the board of directors and executive officers, the Company’s officers and directors are indemnified for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director. The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its bylaws and indemnification agreements is unlimited. However, the Company has a director and officer liability insurance policy that reduces its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of the indemnification provisions of its bylaws and indemnification agreements is minimal and therefore, the Company has not recorded any related liabilities.

● The Company enters into indemnification provisions under its agreements with investors and its agreements with other parties in the normal course of business, typically with suppliers, customers and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights, and generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has not recorded any related liabilities.

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Note 6 - Debt Facility

6 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 6.     Debt Facility

 The Company originally entered into a Revolving Credit and Term Loan Agreement (the “Loan Agreement”) on June 27, 2007 with Bluefin Capital, LLC (“Bluefin”). Bluefin subsequently assigned its rights and obligations under the Loan Agreement to an affiliate, CVC.  On July 30, 2010, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with CVC in which the Company issued to CVC shares of the Company’s Series B Preferred Stock in payment of all of the outstanding obligations owed by the Company to CVC under the Loan Agreement, (see Note 7). All of the outstanding obligations owed to CVC under the Loan Agreement that became due and payable on July 30, 2010, in the amount of $16,706,685, were converted into Series B Preferred Stock pursuant to the Recapitalization Agreement. These obligations consisted of outstanding borrowings and accrued interest of $11,548,098 under term notes, and $5,158,587 under a revolving credit note.

In connection with the Recapitalization Agreement, the Loan Agreement (now fully paid and expired) was amended to extend the maturity date from July 30, 2010 until July 31, 2012, reduce the maximum borrowings available under the Revolver to $3,000,000, and amend various additional terms and conditions of the Loan Agreement. The Company paid CVC a non-refundable fee in the amount of $60,000 in consideration of CVC entering into the July 2010 amendment and making this facility available and paid a $50,000 commitment fee during the third quarter of 2011 to ensure the availability of the revolver through July 31, 2012. Upon execution of the amendment, CVC waived all prior events of default under the Loan Agreement. Borrowings under the Loan Agreement were secured by all of the Company’s assets.

On July 31, 2012, with no borrowings outstanding, the Loan Agreement expired along with all performance covenants, obligations and liens against any assets of the Company.

On July 12, 2013 the Company entered into a Redemption Agreement with CVC pursuant to the Company’s Series B Convertible Preferred Stock held by CVC. In accordance with the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of Series B Preferred Stock for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a Promissory Note in the principal amount of $5,800,000. See Note 12.

The interest expense for the three months ended June 30, 2012 was $20,000, and composed of amortization of deferred financing costs of $7,500 and commitment fee expense of $12,500. The interest expense for the six months ended June 30, 2012 was $40,000, and composed of amortization of deferred financing costs of $15,000 and commitment fee expense of $25,000.

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Note 1 - Presentation of Interim Information

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1.     Presentation of Interim Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”), are considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2012. The balance sheet as of December 31, 2012 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

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Note 7 - Series B Convertible Preferred Stock and Stockholders' Equity (Deficit) (Details) (USD $)	3 Months Ended	6 Months Ended	12 Months Ended					0 Months Ended			0 Months Ended
	Sep. 30, 2010	Sep. 30, 2010	Dec. 31, 2010	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jul. 30, 2010	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Short-term Debt [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 30, 2016 Subsequent Event [Member] Series B Convertible Preferred Stock [Member]	Jul. 12, 2013 Subsequent Event [Member] Series B Convertible Preferred Stock [Member] Cash [Member]	Jul. 12, 2013 Subsequent Event [Member] Private Placement [Member] Common Stock [Member]
Note 7 - Series B Convertible Preferred Stock and Stockholders' Equity (Deficit) (Details) [Line Items]
Stock Redeemed or Called During Period, Shares (in Shares)									407,160
Stock Redeemed or Called During Period, Value									$ 18,800,000
Payments for Repurchase of Redeemable Convertible Preferred Stock								5,800,000			13,000,000
Proceeds from Issuance of Common Stock												5,500,000
Stock Issued During Period, Shares, New Issues (in Shares)												61,111,109
Sale of Stock, Price Per Share (in Dollars per share)												$ 0.09
Temporary Equity, Shares Issued (in Shares)				407,160		407,160	407,160
Temporary Equity, Par or Stated Value Per Share (in Dollars per share)				$ 0.001		$ 0.001	$ 0.001
Long-term Debt, Current Maturities							16,706,685
Convertible Preferred Stock, Shares Issued upon Conversion (in Shares)							100
Temporary Equity, Liquidation Preference Per Share (in Dollars per share)							$ 41.033
Preferred Stock, Dividend Rate, Percentage		16.00%	16.00%
Temporary Equity Percentage Of Voting Shares	35.00%
Gains (Losses) on Extinguishment of Debt	(570,915)
Debt Instrument, Convertible, Beneficial Conversion Feature	1,283,343
Conversion of Stock, Amount Converted	17,277,600
Payments of Stock Issuance Costs	190,744
Temporary Equity, Carrying Amount, Attributable to Parent				25,777,657	24,878,437	23,979,216	15,803,513		25,900,000	40,700,000
Preferred Stock Redemption Discount	$ 903,172
Temporary Equity, Description	CVC agreed that in connection with any director nominees to be submitted to holders of the Company's common stock for election at a stockholders' meeting, a committee of our Board comprised solely of directors then serving on the Board who were not elected or appointed by holders of Series B Preferred Stock, acting by majority vote, would have the right to designate all of the Board's nominees for director to be elected by holders of the Company's Common Stock.

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Accounting Policies, by Policy (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block]

Allowance for Accounts Receivable Doubtful Accounts

The Company is required to make judgments as to the collectability of accounts receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts and that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified. Bad debt expense (recovery), net on accounts receivable for the three and six months ended June 30, 2013 was $20,749 and $20,859, respectively.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities. The book value of the financial instruments is representative of their fair values. In accordance with this guidance, the Company measures its cash equivalents at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At June 30, 2013 and December 31, 2012, cash equivalents consisted of money market funds measured at fair value on a recurring basis; fair value of the Company’s money market funds was approximately $987,000 and $2,230,000, respectively.

The Company adopted the Financial Accounting Standards Board (“FASB”) staff position that delayed the guidance on fair value measurements for non-financial assets and non-financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Intangible Assets

Intangible assets consist of the Talon trade name acquired in a purchase business combination, patents, licenses, intellectual property rights and technology. Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other”. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives using the straight-line method, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.

In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment.”  The updated guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not, defined as a likelihood of more than 50%, that an indefinite-lived intangible asset is impaired.  If it is determined that it is more likely than not that an impairment exists, then the company is required to estimate the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASU 350-30. The updated guidance was effective for annual and interim indefinite lived intangibles asset impairment tests performed for fiscal years, and interim periods within those years, beginning after September 15, 2012.  Early adoption was permitted as of a date before July 27, 2012. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block]

Intangible Assets

Intangible assets consist of the Talon trade name acquired in a purchase business combination, patents, licenses, intellectual property rights and technology. Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other”. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives using the straight-line method, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.

In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment.”  The updated guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not, defined as a likelihood of more than 50%, that an indefinite-lived intangible asset is impaired.  If it is determined that it is more likely than not that an impairment exists, then the company is required to estimate the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with ASU 350-30. The updated guidance was effective for annual and interim indefinite lived intangibles asset impairment tests performed for fiscal years, and interim periods within those years, beginning after September 15, 2012.  Early adoption was permitted as of a date before July 27, 2012. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. We completed the required assessment at June 30, 2013 and December 31, 2012, and noted no impairment. Consequently, no impairment charges were recorded.

On April 2, 2002, the Company entered into an Exclusive License and Intellectual Property Rights Agreement (the “License Agreement”) with Pro-Fit Holdings Limited (“Pro-Fit”). The License Agreement granted the Company the exclusive rights to sell or sublicense waistbands manufactured under patented technology developed by Pro-Fit for garments manufactured anywhere in the world for sale in the United States market and to all United States brands. The License Agreement had an indefinite term that extended for the duration of the trade secrets and patented technology licensed under the License Agreement. The Company recorded an intangible asset of $612,500, which has been fully amortized.

During the quarter ended March 31, 2012 the Company completed the acquisition from Pro-Fit and related parties of all U.S. patents, applications, trademarks, rights and technology associated with the stretch waistband technology that was formerly exclusively licensed under the License Agreement, and the License Agreement was terminated. During the quarter ended June 30, 2012 the Company also acquired other intellectual property related to accessory components used with a variety of apparel products. The total purchase price and related fees for all intangibles acquired in 2012 totaled $178,722, and is amortized based on the estimated useful lives between 10 and 17 years. Amortization expense for intangible assets was $3,271 and $6,291 for the three and six months ended June 30, 2013, respectively. Amortization expense for intangible assets was $2,890 for the three and six months ended June 30, 2012.

Intangible assets as of June 30, 2013 and December 31, 2012 are as follows:

Stockholders' Equity Note, Redeemable Preferred Stock, Issue, Policy [Policy Text Block]

Convertible Preferred Stock

Subsequent to June 30, 2013 the Company entered into a Securities Redemption Agreement (the “Redemption Agreement”) with CVC California, LLC (“CVC”). Pursuant to the Redemption Agreement, the Company repurchased all of the 407,160 outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) for an aggregate purchase price of $18,800,000, which purchase price was paid by delivery of (1) $13,000,000 in cash and (2) the issuance to CVC of a promissory note in the principal amount of $5,800,000 (the “Promissory Note”). See Note 12.

The Company classifies its conditionally redeemable convertible preferred shares, which were subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity in the mezzanine section of the consolidated balance sheets, in accordance with the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock.

The Company evaluated the conversion option of its convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.

The convertible preferred shares, which were redeemable preferred securities, are reported at their current liquidation preference amount. Redeemable securities initially are recorded at their fair value minus the BCF and minus preferred stock issuance costs, and then are subsequently adjusted for changes in the preferred stock value in accordance with the following guidelines:

● When an equity instrument is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), then changes in the redemption value are recognized as they occur, and the carrying amount of the instrument is adjusted to equal the current redemption value. An increase in the carrying amount of the instrument reduces income available to common shareholders in the calculation of earnings per share.

Cost of Sales, Policy [Policy Text Block]

Costs of Goods Sold – Cost of goods sold primarily includes expenses related to inventory purchases, customs, duty, freight, overhead expenses and reserves for obsolete inventory. Overhead expenses primarily consist of warehouse and operations salaries, and other warehouse expense

Selling, General and Administrative Expenses, Policy [Policy Text Block]

Sales and Marketing Expenses – Sales and marketing expenses primarily include sales salaries and commissions, travel and entertainment, marketing, advertising, royalty expense, and other sales related costs. Marketing and advertising efforts are expensed as incurred.

General and Administrative Expenses – General and administrative expenses primarily include administrative salaries, employee benefits, professional service fees, facility expenses, information technology costs, investor relations, travel and entertainment, depreciation and amortization, bad debts and other general corporate expenses

Interest Expense, Policy [Policy Text Block]

Interest Expense (Income), net – Interest expense reflects the cost of borrowing. Interest expense for the three and six months ended June 30, 2013 totaled $1,451 and $2,672 respectively. Interest expense for the three and six months ended June 30, 2012 totaled $21,042 and $43,463, respectively. Interest income consists of earnings from cash held in interest bearing accounts.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency Translation

The Company has operations and holds assets in various foreign countries. The local currency is the functional currency for the Company’s subsidiaries in China and India. Assets and liabilities are translated at end-of-period exchange rates while revenues and expenses are translated at the average exchange rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income until the translation adjustments are realized. Included in accumulated other comprehensive income were a cumulative foreign currency translation gain of $97,333 and $67,482 at June 30, 2013 and December 31, 2012, respectively.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income

Comprehensive income consists of net income and unrealized income on foreign currency translation adjustments. The foreign currency translation adjustment represents the net currency translation gains and losses related to our China and India subsidiaries, which have not been reflected in the net income for the periods presented.

In the first quarter of 2012 we adopted FASB ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) and ASU 2011-12, “Comprehensive Income (Topic 220)”, which amended ASC Topic 220, “Comprehensive Income”, and was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company chose the option provided by ASU 2011-05 to present the total of comprehensive income (loss), the components of net income (loss) and the components of other comprehensive income (loss) in a single continuous statement. Adoption of the guidance did not have any impact on our results of operations or financial condition

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year.  The accounting estimates that require the Company’s most significant, difficult and subjective judgments include the valuation allowance for accounts receivable and inventory, and the assessment of recoverability of long-lived assets and intangible assets, stock-based compensation and the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions). Actual results could differ materially from the Company’s estimates.

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Note 9 - Income Taxes

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 9.      Income taxes

Provision for income taxes for the three months ended June 30, 2013 and 2012 was $326,081 and $283,501, respectively. Provision for (benefit from) income taxes for the six months ended June 30, 2013 and 2012 was $253,833 and $(6,732), respectively. The provision from income taxes for the six months ended June 30, 2013 included the benefit of the elimination of a tax liability of $135,177 recorded in 2007 in connection with a tax position that could have been subject to reversal upon a regulatory review. At March 31, 2013 the time limit for regulatory assessment of the tax position expired and the liability was removed. The benefit from income taxes for the six months ended June 30, 2012 included the elimination of a tax liability of $196,423 also recorded in 2007, for which the time limit for regulatory review had expired.

U.S. deferred income tax benefits and a portion of foreign income tax benefits, were fully reserved and not recorded in the net deferred tax assets primarily because there is not sufficient evidence to determine that the Company will be able to utilize its net operating loss carryforwards to offset future taxable income.

Other tax liabilities were principally associated with foreign withholdings and funds transfers, and income tax payable from our Hong Kong operation. Other tax liabilities as of June 30, 2013 and December 31, 2012, respectively amounted to $371,161 and $111,235, and were included in Accrued Expenses.

Current income taxes receivable were associated with foreign and domestic prepayments and totaled $185,195 and $178,043, respectively, as of June 30, 2013 and December 31, 2012.

Long term deferred income tax liabilities totaled $1,017,755 and $945,543 as of June 30, 2013 and December 31, 2012, respectively. The deferred income tax liability is primarily a tax basis difference related to the Company’s indefinite lived intangible asset.

Subsequent to June 30, 2013, on July 12, 2013, the Company entered into a Redemption Agreement with its Preferred Shareholder and completed a Private Placement transaction in which it sold 61,111,109 shares of Common stock. As consequence of these transactions the Company is currently evaluating the application of I.R.C. Section 382 concerning changes in ownership and the potential limitations on the Company’s utilization of the net operating loss carryforwards to offset future taxable income.

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Note 5 - Inventories (Tables)

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

	June 30, 2013			December 31, 2012
Finished goods	$	1,212,591		$	991,635
Less reserves		(279,194	)		(261,132	)
Total inventories	$	933,397		$	730,503

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Note 2 - Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Schedule of Intangible Assets and Goodwill [Table Text Block]

	June 30, 2013			December 31, 2012
Tradename	$	4,110,751		$	4,110,751
Intellectual property rights and exclusive license		178,722			178,722
Accumulated amortization		(15,821	)		(9,530	)
Intellectual property rights, net		162,901			169,192
Intangible assets, net	$	4,273,652		$	4,279,943

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 09, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	TALON INTERNATIONAL, INC.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		91,913,217
Amendment Flag	false
Entity Central Index Key	0001047881
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

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Note 3 - Net Income (Loss) per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Net income (loss)			Shares		Per Share Amount
Three Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,262,715			24,900,808	$	0.05
Series B Preferred Stock Liquidation Preference Increase		(899,220	)		-		(0.04	)
Income (loss) applicable to Common Shareholders		363,495			24,900,808		0.01
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			2,620,672		-
Diluted net income (loss) applicable to Common Shareholders	$	363,495			27,521,480	$	0.01
Three Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	671,134			21,900,808	$	0.03
Series B Preferred Stock Liquidation Preference Increase		(775,190	)		-		(0.03	)
Income (loss) applicable to Common Shareholders		(104,056	)		21,900,808		0.00
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(104,056	)		21,900,808	$	0.00

	Net income (loss)			Shares		Per Share Amount
Six Months ended June 30, 2013:
Basic net income (loss) per share:
Net income stock	$	1,543,068			24,652,189	$	0.06
Series B Preferred Stock Liquidation Preference Increase		(1,798,441	)		-		(0.07	)
Income (loss) applicable to Common Shareholders		(255,373	)		24,652,189		(0.01	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-			-		-
Diluted net income (loss) applicable to Common Shareholders	$	(255,373	)		24,652,189	$	(0.01	)

Six Months ended June 30, 2012:
Basic net income (loss) per share:
Net income (loss)	$	465,504		21,752,456	$	0.02
Series B Preferred Stock Liquidation Preference Increase		(1,550,380	)	-		(0.07	)
Income (loss) applicable to Common Shareholders		(1,084,876	)	21,752,456		(0.05	)
Effect of Dilutive Securities
Options, Preferred Stock and RSUs		-		-		-
Diluted net income (loss) applicable to Common Shareholders	$	(1,084,876	)	21,752,456	$	(0.05	)