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 March 31, 2017

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 registrant 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)(Zip Code)

(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 for 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
(do not check if smaller reporting company)	Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with the new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

At May 10, 2017, the issuer had 92,274,255 shares of Common Stock, $.001 par value, issued and outstanding.

TALON INTERNATIONAL, INC.

INDEX TO FORM 10-Q

PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements.	3
Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016		3
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited)		4
Consolidated Statements of Cash Flows for the Three months Ended March 31, 2017 and 2016 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 6.	Exhibits	32

2

TALON INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2017			2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,653,868		$	4,913,577
Accounts receivable, net		5,361,852			4,315,608
Inventories, net		629,268			500,482
Prepaid expenses and other current assets		902,818			702,906
Total current assets		9,547,806			10,432,573
Property and equipment, net		857,141			884,208
Intangible assets, net		4,263,325			4,266,596
Deferred income tax assets, net		5,188,952			5,224,018
Other assets		400,442			347,638
Total assets	$	20,257,666		$	21,155,033
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,240,166		$	6,378,896
Accrued expenses		2,142,014			2,972,689
Current portion of revolving line of credit from related party		75,000			-
Current portion of capital lease obligations		24,224			23,749
Total current liabilities		8,481,404			9,375,334
Revolving line of credit from related party, net of current portion, discounts and deferred financing costs		3,992,755			4,041,345
Capital lease obligations, net of current portion		30,798			37,035
Deferred income tax liabilities		3,043			3,037
Other liabilities		228,291			236,088
Total liabilities		12,736,291			13,692,839
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Common Stock, $0.001 par value, 300,000,000 shares authorized; 92,274,255 shares issued and outstanding at March 31, 2017 and December 31, 2016		92,274			92,274
Additional paid-in capital		65,092,133			65,040,432
Accumulated deficit		(57,738,366	)		(57,743,904	)
Accumulated other comprehensive income		75,334			73,392
Total stockholders’ equity		7,521,375			7,462,194
Total liabilities and stockholders’ equity	$	20,257,666		$	21,155,033

See accompanying notes to consolidated financial statements.

3

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended
	March 31,
	2017		2016
Net sales	$	11,117,534	$	11,264,632
Cost of goods sold		7,029,158		7,100,373
Gross profit		4,088,376		4,164,259
Sales and marketing expenses		1,607,566		1,502,886
General and administrative expenses		2,298,951		2,425,958
Total operating expenses		3,906,517		3,928,844
Income from operations		181,859		235,415
Interest expense, net		153,926		150,647
Income before provision for income taxes		27,933		84,768
Provision for income taxes		22,395		35,651
Net income	$	5,538	$	49,117
Basic and diluted net income per share	$	0.00	$	0.00
Weighted average number of common shares outstanding - Basic		92,274,255		92,267,831
Weighted average number of common shares outstanding - Diluted		92,931,260		93,473,691
Net income	$	5,538	$	49,117
Other comprehensive income (loss) from foreign currency translation		1,942		(498	)
Total comprehensive income	$	7,480	$	48,619

 See accompanying notes to consolidated financial statements.

4

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	5,538		$	49,117
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		80,426			72,661
Amortization of deferred financing cost and debt discounts		26,410			26,069
Stock based compensation		51,701			112,397
Deferred income taxes, net		35,073			32,940
Change in provision for bad debt		(17,346	)		(252	)
Inventory valuation provisions (recoveries), net		8,014			(1,152	)
Changes in operating assets and liabilities:
Accounts receivable		(1,022,987	)		(1,253,802	)
Inventories		(136,432	)		(127,020	)
Prepaid expenses and other current assets		(199,000	)		(66,715	)
Other assets		(51,753	)		(47,499	)
Accounts payable and accrued expenses		(985,154	)		575,812
Other liabilities		(10,139	)		2,866
Net cash used in operating activities		(2,215,649	)		(624,578	)
Cash flows from investing activities:
Acquisitions of property and equipment		(48,563	)		(83,294	)
Net cash used in investing activities		(48,563	)		(83,294	)
Cash flows from financing activities:
Payment of capital leases		(5,762	)		(5,323	)
Net cash used in financing activities		(5,762	)		(5,323	)
Net effect of foreign currency exchange translation on cash		10,265			2,585
Net decrease in cash and cash equivalents		(2,259,709	)		(710,610	)
Cash and cash equivalents at beginning of period		4,913,577			2,852,315
Cash and cash equivalents at end of period	$	2,653,868		$	2,141,705

See accompanying notes to consolidated financial statements.

5

TALON INTERNATIONAL, INC.

          
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Supplemental disclosures of cash flow information:
	Three Months Ended March 31,
	2017			2016
Cash received (paid) during the period for:
Interest paid	$	(127,948	)	$	(8,902	)
Interest received	$	432		$	436
Income tax paid, net (principally foreign)	$	-		$	11,220
Non-cash financing activities:
Interest accrued on revolving line of credit from related party	$	-		$	116,112
Effect of foreign currency translation on net assets	$	1,942		$	(498	)

See accompanying notes to consolidated financial statements.

6

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Certain information and footnote disclosures normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations, although the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”) believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 

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, 2016, 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 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 the Company’s historical experience, for issues not yet identified. Bad debt expense (recoveries), net for the three months ended March 31, 2017 and 2016 were $(17,371) and $(252), respectively.

Fair Value Measurements

Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” defines fair value 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 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—Include 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.

7

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s financial instruments include cash and cash equivalents, and revolving line of credit from related party. In accordance with ASC 820, the Company measures its cash equivalents at fair value. The Company has determined that the book value of the financial instruments is representative of their fair values. The Company’s cash equivalents are classified within Level 1 and valued primarily using quoted market prices utilizing market observable inputs.At March 31, 2017 and December 31, 2016, 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 $662,319 and $1,125,000, respectively.

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 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.

The Company applies Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment” to determine whether an impairment is required.  The 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 ASC 350-30. The Company completed the required assessment as of December 31, 2016, and noted no impairment. On an ongoing basis, the Company monitors for interim triggering events and noted no triggering events that would result in impairment as of March 31, 2017.

From time to time the Company makes investments in product and technical opportunities that are complimentary to or enhancements to its apparel accessories business.  During the three months ended March 31, 2017 and 2016, the Company made no investments in property rights. As of March 31, 2017 and December 31, 2016 the Company had accumulated investments of $38,738 for intellectual property rights complimentary to the Company’s Talon Zipper products, which were not yet in service.

8

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets as of March 31, 2017 and December 31, 2016 are as follows:

	March 31,			December 31,
	2017			2016
Tradename - Talon trademark	$	4,110,751		$	4,110,751
Intellectual property rights		217,459			217,459
Less: Accumulated amortization (10 to 17 years)		(64,885	)		(61,614	)
Intellectual property rights, net		152,574			155,845
Intangible assets, net	$	4,263,325		$	4,266,596

Amortization expense for intangible assets was $3,271 for the three months ended March 31, 2017 and 2016.

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 quality assurance costs, 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 and other sales and product development 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, net – Interest expense reflects the cost of borrowings, amortization of deferred financing costs and amortization of debt discounts. Interest expense for the three months ended March 31, 2017 and 2016 totaled $154,359 and $151,083, respectively. Interest income consists of earnings from cash held in interest bearing accounts. Interest income for each of the three months ended March 31, 2017 and 2016 was less than $1,000.

 Foreign Currency Translation

The Company’s reporting currency is US dollars. 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 was a cumulative foreign currency translation gain of $75,334 and $73,392 as of March 31, 2017 and December 31, 2016, respectively.

9

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Comprehensive Income

Comprehensive income consists of net income and unrealized income (loss) 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.

The Company reports comprehensive income in accordance with Topic 220 “Comprehensive Income”, and uses the option provided under ASU 2011-05 “Presentation of Comprehensive Income” to present the total of comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement.

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, 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.

Presentation

In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform to the current year presentation.

Note 3.     New Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323).” This ASU responds to SEC staff announcements made in 2016 as it relates to the disclosure of the future impact of the effects of the new FASB guidance on revenue, leases and credit losses on financial instruments in accordance with Staff Accounting Bulletin 74. This ASU was effective upon issuance in January 2017. Management has adopted ASU 2017-03 effective for the first quarter of 2017. The adoption of ASU 2017-03 did not have a material impact to the Company’s consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements (Topic 606): Revenue from Contracts with Customers.” This ASU provides amendments to ASC 606, “Revenue from Contracts with Customers”, allow entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes twelve additional technical corrections and improvements to the new revenue standard. The effective date and transition requirements are the same as those in ASC 606. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

10

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2016, the FASB issued ASU No. 2016-19, “Technical Corrections and Improvements”. This ASU clarifies guidance, corrects errors and makes minor improvements affecting a variety of topics in the Accounting Standards Codification. Most of the amendments are not expected to have a significant effect on practice, but some of them could change practice for some entities. Transition guidance and a delayed effective date are provided for amendments that the FASB deemed more substantive. The other amendments are effective immediately. Management has implemented as necessary and is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes” (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU provides amendments to specific statement of cash flows classification issues. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (Topic 326), which replaces the incurred loss impairment methodology in current generally accepted accounting principles (“GAAP”) with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted for the fiscal years, and interim periods within those fiscal years, beginning December 15, 2018. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements. Management does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The updated accounting guidance simplifies the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Management has adopted this guidance for the first quarter of 2017. As required by the update, on a prospective basis, the Company will recognize excess tax benefits related to share-based payments in the provision for income taxes in the consolidated statements of income. Also, on a prospective basis, cash flows related to excess tax benefits recognized on stock-based compensation expense will be classified as an operating activity in the Company's consolidated statements of cash flows. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. Management elected to continue estimating stock-based compensation award forfeitures in determining the amount of compensation cost to be recognized each period.

11

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2016, the FASB issued ASU No. 2016-02 “Leases” (Topic 842). The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. In accordance with this standard, the Company will be establishing a right-of-use asset and an offsetting lease liability. Once adopted, management expects to report higher assets and liabilities as a result of including additional lease information on the consolidated balance sheet.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, to reduce the complexity in accounting for inventory. This ASU requires entities to measure inventory at the lower of cost and net realizable value, replacing the market value approach that required floor and ceiling considerations.  This guidance for public entities is effective for fiscal years beginning after December 15, 2016, with early adoption permitted.  Management has adopted this guidance effective for the first quarter of 2017. The adoption of ASU 2015-11 did not have a material impact to the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The effective date for the ASU 2014-09 is deferred by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” to annual reporting periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new standard will replace most existing revenue recognition guidance in U.S. GAAP. The standard permits the use of either the retrospective or cumulative effect transition method. Management intends to adopt this standard in the first quarter of 2018 and has not yet selected a transition method. As a result of adoption, management anticipates expanding the consolidated financial statement disclosures in order to comply with the ASU. Management does not expect a material impact on results of operations, cash flows or financial position.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.    Net Income Per Share

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

	Net income		Shares		Per Share Amount
Three Months Ended March 31, 2017:
Basic net income:
Net income	$	5,538		92,274,255	$	0.00
Effect of Dilutive Securities -
Options		-		657,005		0.00
Diluted net income per share	$	5,538		92,931,260	$	0.00
Three Months Ended March 31, 2016:
Basic net income:
Net income	$	49,117		92,267,831	$	0.00
Effect of Dilutive Securities -
Options		-		1,205,860		0.00
Diluted net income per share	$	49,117		93,473,691	$	0.00

For the three months ended March 31, 2017, options to purchase 1,841,667 shares of common stock exercisable between $0.04 and $0.10 per share, were outstanding and included in the computation of diluted net income per share. Options to purchase 7,976,600 shares of common stock exercisable between $0.10 and $1.33 per share and warrants to purchase 3,250,000 shares of common stock exercisable between $0.14 and $0.18 per share, were outstanding, but were not included in the computation of diluted net income per share applicable to common stockholders because they would have an antidilutive effect on the net income per share.

For the three months ended March 31, 2016, options to purchase 2,891,667 shares of common stock exercisable between $0.04 and $0.11 per share per share, were outstanding and included in the computation of diluted net income per share. Options to purchase 9,748,600 shares of common stock exercisable between $0.14 and $1.33 per share and warrants to purchase 3,250,000 shares of common stock exercisable between $0.14 and $0.18 per share, were outstanding, but were not included in the computation of diluted net income per share applicable to common stockholders because they would have an antidilutive effect on the net income per share.

Note 5.      Accounts Receivable

Accounts receivable are included on the consolidated balance sheets, net of the allowance for doubtful accounts. The allowance for doubtful accounts at March 31, 2017 and December 31, 2016 was $22,953 and $40,299, respectively.

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.     Inventories

Inventories are stated at the lower of cost, determined using the first-in, first-out basis, and net realizable 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 net realizable value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Net realizable value of inventory is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Inventories consist of the following:

	March 31,			December 31,
	2017			2016
Finished goods	$	700,789		$	563,989
Less: Reserves		(71,521	)		(63,507	)
Total inventories	$	629,268		$	500,482

Note 7.     Accrued Expenses

Accrued expenses are included on the consolidated balance sheets. Accrued expenses consist of the following:

	March 31,		December 31,
	2017		2016
Accrued payroll and related expenses	$	828,913	$	1,532,734
Accrued commissions		409,084		557,369
Accrued rebates		216,675		316,287
Taxes payable		215,724		184,232
Accrued expenses		335,416		268,330
Other		136,202		113,737
Total accrued expenses	$	2,142,014	$	2,972,689

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.     Credit Facilities, Long Term Obligations and Related Party Transactions

Revolving Line of Credit from Related Party

On August 10, 2015, the Company entered into a loan and reimbursement agreement (“Loan Agreement”) with Princess Investment Holdings Inc. (“Princess Investment”). Princess Investment may be deemed an affiliate of Kutula Holdings, Ltd., a significant stockholder of the Company, which also has the contractual right to designate a director to the Company’s Board of Directors. Pursuant to the Loan Agreement, Princess Investment agreed to make available to the Company a loan of up to $3,000,000 (“Revolving Line of Credit”). Advances under the Loan Agreement accrued interest initially on the unpaid principal balance at an annual rate of 12.5%. Accrued interest on the Revolving Line of Credit was payable monthly beginning September 1, 2015, and the principal amount was payable in monthly installments beginning September 1, 2016 and continuing through the maturity date of August 10, 2018. Pursuant to the Loan Agreement, the Company issued Princess Investment warrants to purchase 1,000,000 shares of the Company’s common stock. The warrants are exercisable immediately upon issuance for a five-year period at an exercise price of $0.18 per share and include a “cashless” exercise option. On August 11, 2015, the Company received an advance from Princess Investment under the Loan Agreement in the amount of $1,500,000, of which $1,440,278 was used to pay off the Term Loan Payable to MUFG Union Bank N.A. on August 12, 2015. The Company borrowed an additional $500,000 through December 21, 2015, and had an outstanding balance of $2,000,000 under the Revolving Line of Credit from Princess Investment at December 21, 2015.

On December 21, 2015, the Company entered into an amended and restated credit agreement (the “Princess Investment Credit Agreement”) with Princess Investment, which amended the existing Loan Agreement, dated August 10, 2015, with Princess Investment to, among other things, increase the borrowing availability under the Loan Agreement from $3,000,000 to $6,000,000 and extend the maturity date of the loan to December 21, 2020 (the “Maturity Date”). The Princess Investment Credit Agreement requires the Company to comply with certain financial covenants, including a requirement not to incur a loss after taxes (as calculated in accordance with GAAP) of more than $1,000,000 in the aggregate for any two consecutive fiscal quarters, not to incur a loss after taxes for any three consecutive fiscal quarters and not to incur a loss after taxes for any trailing twelve month period ending at the end of any fiscal quarter. For the three months ended March 31, 2017, the Company was in compliance with all covenants.

Princess Investment will make advances under the Revolving Line of Credit from time to time as requested by the Company. The Company may prepay the Revolving Line of Credit at any time, and amounts prepaid may be re-borrowed through November 21, 2020. Under the amended terms, the Revolving Line of Credit will accrue interest on the unpaid principal balance at an annual rate of 11.5%. Interest on the Revolving Line of Credit for the period from December 21, 2015 through December 1, 2016 accrued and was added to principal on December 1, 2016, and thereafter interest will be payable monthly in arrears. No principal payments will be due during the period ending December 31, 2017. Thereafter, principal will be payable $25,000 per month during the twelve months ended December 31, 2018, $35,000 per month during the twelve months ended December 31, 2019 and $50,000 per month during the twelve months ended December 31, 2020, with the remaining outstanding principal amount payable on the Maturity Date. The Princess Investment Credit Agreement continues to require payment of a $60,000 loan fee at maturity.

15

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The payment and performance of all the indebtedness and other obligations to Princess Investment, including all borrowings under the Princess Investment Credit Agreement, are guaranteed by the subsidiaries Talon Technologies, Inc. and Tag-It Pacific Limited pursuant to a Guaranty Agreement entered into on August 10, 2015, as amended on December 21, 2015. The payment and performance of all of the indebtedness and other obligations to Princess Investment under the Princess Investment Credit Agreement and related agreements are secured by liens on substantially all of the Company’s assets and the assets of the Company’s subsidiary guarantors pursuant to a Pledge and Security Agreement entered into on August 10, 2015, as amended on December 21, 2015.

Pursuant to the Princess Investment Credit Agreement, the Company issued to Princess Investment warrants to purchase 2,000,000 shares of its common stock. The warrants are exercisable immediately upon issuance for a five-year period at an exercise price of $0.18 per share, and include a “cashless” exercise option.

On December 23, 2015, the Company received an advance from Princess Investment under the Princess Investment Credit Agreement in the amount of $2,000,000, of which $1,622,000 was used to pay in full all indebtedness outstanding under the Commercial Credit Agreement, dated December 31, 2013, with MUFG Union Bank N.A., which indebtedness was scheduled to mature on December 31, 2015.

Upon repayment of the indebtedness under the Company’s Credit Agreement with Union Bank, Union Bank released its liens on the Company’s assets and those of the Company’s subsidiaries, Princess Investment became the only secured lender, and in addition to the Credit Agreement, the following agreements (the “Security Agreements”) terminated in accordance with their terms: Continuing Guaranties, dated December 31, 2013, executed by the Company’s current subsidiaries, Talon Technologies, Inc. and Tag-It Pacific Limited in favor of Union Bank; Security Agreements, dated December 31, 2013, executed by the Company and its current domestic subsidiary, Talon Technologies, Inc., and Union Bank; a Debenture executed by Tag-It Pacific Limited and Union Bank; an Intercreditor Agreement, dated August 10, 2015, among the Company, Princess Investment and Union Bank; and a Subordination Agreement, dated August 10, 2015, among the Company, Princess Investment and Union Bank.

After consideration of FASB ASC 480 “Distinguishing Liability and Equity” and ASC 815 “Derivatives and Hedging”, the Company concluded that the warrants issued to Princess Investment should be recorded as an equity instrument. The fair value of the first one million warrants of $130,000 issued with the debt facility at August 10, 2015 and the fair value of the additional two million warrants of $320,000 issued with this debt facility at December 21, 2015 were valued using the Black-Scholes model. The fair value of the warrants was recorded as additional paid in capital and reflected as a debt discount to the face value of the Revolving Line of Credit, which discount is amortized over the term of the Loan and recognized as additional interest costs as amortized.

At March 31, 2017 and December 31, 2016, respectively, the Company had an outstanding principal balance of approximately $4,455,643 under the Revolving Line of Credit, and as of March 31, 2017 and December 31, 2016, approximately $1,544,357 remained in available borrowings under the Revolving Line of Credit.

16

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	March 31,			December 31,
	2017			2016
$6,000,000 revolving line of credit from related party and accrued interest payable per terms under Princess Investment Credit Agreement through maturity date of December 21, 2020; interest at a rate per annum of 11.5%	$	4,455,643		$	4,455,643
Less: Debt discounts net of related amortization		(320,165	)		(342,028	)
Less: Deferred financing costs net of related amortization		(67,723	)		(72,270	)
Revolving line of credit, net of debt discounts and deferred financing costs		4,067,755			4,041,345
Less: Current portion		(75,000	)		-
Revolving line of credit, net of debt discounts, deferred financing costs and current portion	$	3,992,755		$	4,041,345

Interest expense, net, included on the Company’s Consolidated Statements of Income and Comprehensive Income is comprised as follows:

	Three Months Ended
	March 31,
	2017		2016
Revolving line of credit from related party	$	126,345	$	116,112
Amortization of deferred financing costs		4,547		4,547
Amortization of debt discounts		21,863		21,521
Total Credit Facilities related interest expense		152,755		142,180
Other interest expense, net		1,171		8,467
Interest expense, net	$	153,926	$	150,647

Capital Leases

The Company has financed purchases of furniture and fixtures through various capital lease obligations which bear interest at a rate of 8% per annum. Under these obligations, the Company is required to make monthly payments of principal and interest through May 2019.

Capital lease obligations at March 31, 2017 and December 31, 2016 were $55,022 and $60,784, respectively.

17

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.     Stockholders’ Equity

Authorized Common Stock and Preferred Stock

The Company’s Certificate of Incorporation presently authorizes 300,000,000 shares of Common Stock, having a par value of $0.001 per share.

The Company’s Certificate of Incorporation presently authorizes the issuance of 3,000,000 shares of Preferred Stock, having a par value of $0.001 per share. No shares of Preferred Stock were outstanding at March 31, 2017 or December 31, 2016.

Note 10.    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 all other non-employee parties are accounted for in accordance with the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees”.

Stock Options and Warrants

The Company’s 2008 Stock Incentive Plan authorizes up to 15,000,000 shares of common stock for issuance pursuant to awards granted to individuals under the plan.

The Company’s 2007 Stock Plan authorizes up to 2,600,000 shares of common stock for issuance pursuant to awards granted to individuals under the plan. No further awards will be granted under the 2007 Stock Plan.

The Board of Directors, who determines the recipients and terms of the awards granted, administers the Company’s stock plans. 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 of Directors from immediate to 4 years of continuous service and have 10 year contractual terms.

No options were granted during the three months ended March 31, 2017. During the three months ended March 31, 2016, 4,205,000 options were granted.

Stock-based compensation expense for the three months ended March 31, 2017 and 2016 totaled $51,701 and $112,397, respectively.

As of March 31, 2017, the Company had $490,958 of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the remaining weighted average period of 2.43 years. As of March 31, 2016, unamortized stock-based compensation expense related to options issued to employees and directors was $819,925, which was to be recognized over the weighted average period of approximately 3.27 years.

On February 10, 2016, the Company issued warrants to purchase 250,000 shares of the Company’s common stock to an outside services company. The warrants are exercisable immediately upon issuance for a five-year period at an exercise price of $0.14 per share and include a “cashless” exercise provision. The issuance of these securities was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

18

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the activity in the Company’s share-based compensation plans and other share-based grants during the three months ended March 31, 2017.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2017		9,933,267		$	0.16
Granted		-		$	-
Exercised		-		$	-
Cancelled		(115,000	)	$	0.17
Options outstanding - March 31, 2017		9,818,267		$	0.16
Non Employees
Warrants outstanding - January 1, 2017		3,250,000		$	0.18
Granted		-		$	-
Exercised		-		$	-
Cancelled		-		$	-
Warrants outstanding - March 31, 2017		3,250,000		$	0.18

Note 11.    Income taxes

Provision for income taxes, net, for the three months ended March 31, 2017 and 2016, was $22,395 and $35,651 respectively.

Current income taxes receivable were associated with foreign and domestic prepayments net of income tax payable, and totaled $27,968 and $23,123 as of March 31, 2017 and December 31, 2016, respectively.

Current income taxes payable were principally associated with foreign withholdings, funds transfers, and income tax payable from the Company’s Asia operations. Current income taxes payable as of March 31, 2017 and December 31, 2016 totaled $112,842 and $120,187, respectively, and were included in accrued expenses.

Deferred income tax assets, net, totaled $5,188,952 and $5,224,018 as of March 31, 2017 and December 31, 2016, respectively.

Deferred income tax liabilities totaled $3,043 and $3,037 as of March 31, 2017 and December 31, 2016, respectively.

19

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12.   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 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 indemnification agreements is minimal and accordingly, the Company has not recorded any related liabilities.

Note 13.    Segment Reporting and Geographic Information

The Company manufactures and distributes a full range of zipper (Talon Zipper) and trim (Talon Trim) components, which includes stretch technology component products, to specialty retailers and mass merchandisers. The Company’s organization is based on operating divisions representing these major product lines, and the Company’s Chief Operating Decision Makers (“CODM”, identified as the Company’s executive officers with the oversight of Talon’s Board of Directors) use these divisions to assess performance, allocate resources and make other operating decisions.

20

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2015, the Company realigned how it reports its operating segments to better conform to the way management views the business. In making this determination, the Company examined how the CODM evaluates the performance of the Company and as such reconsidered the aggregation of reporting segments in accordance with the aggregation criteria under ASC 280, Segment Reporting.

As a result of this assessment, the Company has identified and realigned the reporting of its operating segments into two reporting segments (Talon Zipper and Talon Trim) and has reclassified prior period results to reflect these product categories. The Tekfit operating segment results are now aggregated and reported as part of the Trim operating segment.

Information about the assets for each of the reportable segments is not maintained by the Company and therefore is not reviewed by the CODM as assets are reviewed and assessed on a consolidated basis. As a result, information about the assets for each of the reportable segments is not included on the Company’s segment reporting footnote.

As the Company evolves, adjustments may be made as to how the Company allocates resources and analyzes performance, which can result in a change to these segments.

The net revenues and operating margins for the two reporting segments are as follows:

	Three Months Ended March 31, 2017
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	3,800,784	$	7,316,750	$	11,117,534
Cost of goods sold		2,800,279		4,228,879		7,029,158
Gross profit	$	1,000,505	$	3,087,871		4,088,376
Operating expenses						3,906,517
Income from operations					$	181,859

	Three Months Ended March 31, 2016
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	4,276,384	$	6,988,248	$	11,264,632
Cost of goods sold		3,016,409		4,083,964		7,100,373
Gross profit	$	1,259,975	$	2,904,284		4,164,259
Operating expenses						3,928,844
Income from operations					$	235,415

21

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 intangibles) is attributed to countries based on the location of the assets, as follows:

	Three Months Ended
Sales:	March 31,
Country / Region	2017		2016
United States	$	1,081,046	$	1,014,567
China		2,183,383		2,701,114
Hong Kong		2,556,725		2,812,145
Bangladesh		919,665		1,049,298
Vietnam		1,031,483		927,932
Indonesia		936,048		478,148
India		743,558		513,604
Other		1,665,626		1,767,824
Total	$	11,117,534	$	11,264,632

	March 31,		December 31,
	2017		2016
Long-lived Assets:
United States	$	4,895,722	$	4,915,383
China		154,804		164,081
Hong Kong		65,164		66,347
India		4,776		4,993
Total	$	5,120,466	$	5,150,804

Note 14.    Subsequent Events

The Company evaluated subsequent events after the balance sheet date of March 31, 2017 through the date of the filing of this report, and determined that there were no reportable subsequent events.

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

Overview

Talon International, Inc. designs, manufactures, sells and distributes apparel zippers, various apparel trim products and specialty waistbands, shirt collars and other stretch technology and apparel components to manufacturers of fashion apparel, specialty retailers and mass merchandisers. We sell and market these products under various branded names including Talon® and Tekfit®. As a result, we operate the business globally under two product groups – Talon Zipper and Talon Trim.

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, improve our time-to-market throughout the world by sourcing, finishing and distributing to apparel manufacturers in their local markets.

Our primary business is serving as an outsourced apparel zipper, trim and stretch technology material supplier. We provide product design and development, sampling and sourcing services 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 apparel components other than fabric and thread, 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 at the factory level, in addition to global brands and retailers. 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.

Our Tekfit stretch technology business provides manufacturers with Talon’s patented material stretch technology, manufacturing know-how, proprietary equipment and materials necessary to produce expandable waistbands, shirt collars and various other stretch technology apparel inner lining components. We are actively expanding our marketing and selling efforts of this unique product within the industry, including by introducing this technology to major retailers.

The adoption of new and innovative technology by major retailers, particularly where it modifies the style, design or performance of a garment, is a complicated and time-consuming process. New product innovations by major retailers can require 6 to 12 months to complete the design, marketing and manufacturing of the new item, and depending upon the seasonal aspect of the garment, introduction of the product to the market could require several additional months. Accordingly, the adoption within the retailers’ products of Tekfit technology requires significant time to accomplish. However, once adopted the production volumes continue to build as the technology is accepted across multiple styles with the retailer.

23

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. Sales of our products typically precede the retail sales patterns by approximately 90 to 150 days, with this cycle pattern closer to 75 to 90 days for our more generic products sold to mass merchandisers. The apparel retailers typically experience their highest sales volumes during the fourth quarter in association with year-end holiday purchases. Backlogs of sales orders are not considered material in the industries in which we compete, which reduces the predictability of our sales and reinforces the volatility of these cyclical buying patterns on our sales volume. Operating expenses typically follow our seasonal sales patterns fluctuating with the quarterly sales. However our first quarter is typically burdened with higher costs associated with year-end audits, legal reviews, and costs associated with SEC filings, resulting in proportionally higher costs in the first quarter. Because of these fluctuations in our sales and operating costs, results for any quarter are not necessarily indicative of the results that may be achieved for the full year.

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 March 31,
	2017			2016
Net sales		100.0	%		100.0	%
Cost of goods sold		63.2			63.0
Gross profit		36.8			37.0
Sales and marketing expenses		14.5			13.3
General and administrative expenses	20.7				21.6
Interest expense, net		1.4			1.3
Provision for income taxes		0.2			0.3
Net income		0.0	%		0.5	%

24

Sales

For the three months ended March 31, 2017 and 2016, sales by geographic region based on the customer delivery locations as a percentage of sales were as follows:

	Three Months Ended March 31,
Region	2017			2016
United States		9.7	%		9.0	%
China	19.6				24.0
Hong Kong		23.0			25.0
Bangladesh		8.3			9.3
Vietnam		9.3			8.2
Indonesia		8.4			4.2
India		6.7			4.6
Other		15.0			15.7
		100.0	%		100.0	%

Sales for the three months ended March 31, 2017 were $11,118,000 reflecting a decrease of $147,000 or 1.3% as compared to the same period in 2016. Our Talon Zipper products sales for the three months ended March 31, 2017 were $476,000 lower than the same period in 2016 due to decreased sales of $99,000 within our mass merchandising brand customers as compared to 2016, and by $377,000 in sales to our specialty retail brands customers as compared to 2016. For the three months ended March 31, 2017, sales of Talon Trim products, which consist primarily of sales to specialty retail branded customers, increased by $329,000 compared to the same period in 2016, mainly due to new stretch technology programs and customers.

Gross Profit

Gross profit for the three months ended March 31, 2017 was $4,088,000 (or 36.8% of sales) as compared to $4,164,000 (or 37.0% of sales) during the same period in 2016, reflecting a decrease of $76,000. Gross profit for our Talon Zipper products for the three months ended March 31, 2017 were $260,000 lower than the same period in 2016 primarily due to an inventory write down of certain zipper stock, lower sales volumes and higher manufacturing support costs. For the three months ended March 31, 2017 gross profit attributable to our Talon Trim products increased $184,000 due to higher sales volumes and was partially offset by a change in product mix and higher manufacturing support costs.

   A recap of the change in gross profit for the three months ended March 31, 2017, as compared to the same period in 2016, is as follows:

	Three Months Ended
	March 31, 2017
	as compared to the same period in 2016
		$(1)		%(1)
Gross profit changes as a result of:
Higher sales volumes		110,000		2.6
Change in mix of products		(74,000	)	(1.8	)
Lower freight and duty costs		8,000		0.2
Higher manufacturing overhead costs		(120,000	)	(2.9	)
Gross profit change		(76,000	)	(1.8	)

(1) Represents the amount or percentage, as applicable, of change in each item in the three month period ended March 31, 2017, as applicable, as compared to the applicable prior year period.

25

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2017 totaled $1,608,000, an increase of $105,000 as compared to the same period in 2016, mainly due to $63,000 in additional compensation costs, $32,000 in increased travel and entertainment expenses and $15,000 in additional administrative costs, offset by $14,000 in reduced facilities and related expenses.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2017 totaled $2,299,000 or 20.7% of sales, as compared to the prior year of $2,426,000 or 21.6% of sales. General and administrative expenses were lower by $127,000 during the three months ended March 31, 2017, as compared to the same period in 2016, mainly due to $244,000 in reduced professional and legal costs, offset by $167,000 in additional IT support costs.

Interest expense and interest income

Interest expense for the three months ended March 31, 2017, increased by $3,000 (to $154,000) as compared to the same period in 2016. Interest expense for the three months ended March 31, 2017 and 2016 included borrowings under our credit facility with Princess Investment Holdings, Inc. (the “Princess Investment Credit Facility”) and the related amortization of deferred financing costs and amortization of debt discounts (See Note 8 to the accompanying Notes to Consolidated Financial Statements). A brief summary of interest expense and interest income is presented below:

	Three Months Ended
	March 31,
	2017		2016
Amortization of deferred financing costs	$	5,000	$	5,000
Amortization of debt discounts		22,000		22,000
Interest expense under Credit Facilities		126,000		116,000
Other interest expense		1,000		8,000
Interest expense		154,000		151,000
Interest income		-		-
Interest expense, net	$	154,000	$	151,000

Income taxes

Provision for income taxes, net, for the three months ended March 31, 2017 and 2016, was $22,000 and $36,000, respectively.

26

Liquidity and Capital Resources

The following table summarizes selected financial data at March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
Cash and cash equivalents	$	2,654,000	$	4,914,000
Total assets	$	20,258,000	$	21,155,000
Current liabilities	$	8,481,000	$	9,375,000
Long term liabilities	$	4,256,000	$	4,318,000
Stockholders’ equity	$	7,521,000	$	7,462,000

We believe that our existing cash and cash equivalents, our anticipated cash flows from our operating activities, and available borrowings from our Princess Investment Credit Facility, will be sufficient to fund our minimum working capital and capital expenditure needs for operating activities for at least the next twelve months. Approximately $1,544,000 remained in available borrowings under our Princess Investment Credit Facility as of March 31, 2017.

Cash and cash equivalents

Cash and cash equivalents decreased by $2,260,000 at March 31, 2017, as compared to December 31, 2016, principally due to $2,216,000 of cash used in operating activities, $49,000 in payments for the acquisition of property and equipment and $6,000 in capital lease principal payments.

Cash flow from operations reflects net income from operations excluding non-cash charges, changes in operating capital and the impact of seasonality. During the three months ended March 31, 2017 and 2016, net cash used in operating activities was $2,216,000 and $625,000, respectively.

The net cash used in operating activities during the three months ended March 31, 2017 and 2016 resulted principally from:

	Three Months Ended March 31,
	2017			2016
Net income before non-cash expenses	$	190,000		$	292,000
Inventory increases		(136,000	)		(127,000	)
Accounts receivable increases		(1,023,000	)		(1,254,000	)
Accounts payable and accrued expenses increases (reductions)		(985,000	)		576,000
Other increases in operating capital		(262,000	)		(112,000	)
Net cash used in operating activities	$	(2,216,000	)	$	(625,000	)

Net cash used in investing activities for the three months ended March 31, 2017 and 2016 was $49,000 and $83,000, respectively, associated mainly with the acquisition of property and equipment.

Net cash used in financing activities for the three months ended March 31, 2017 and 2016 was $6,000 and $5,000, respectively, associated with the repayment of borrowings under capital leases.

27

Facility with Princess Investment and Capital Leases

For a description of our credit facility with Princess Investment and our capital lease obligations, see Note 8 of the accompanying notes to consolidated financial statements.

Future Capital Requirements

We have satisfied our working capital requirements primarily through cash flows generated from operations and borrowings under our Credit Facilities. We continue to evaluate both debt and equity financing options to provide capital to fund our global expansion and on-going operations. The extent of our future long-term capital requirements will depend on many factors, including our results from operations, future demand for our products, the size and timing of possible acquisitions, and our expansion into foreign 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 or reduce the scope of our business in order to fund our on-going operations or to satisfy our future short-term operating requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms.

Off-Balance Sheet Arrangements

At March 31, 2017 and December 31, 2016, 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 are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Related Party Transactions

See Note 8 of accompanying notes to consolidated financial statements for a discussion of related party transactions.

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.

28

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 their collectibility. 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 allowances for doubtful accounts receivable and the bad debt expense (recoveries), net for the three months ended March 31, 2017 and 2016, are as follows:

	Three Months Ended
	March 31,
	2017			2016
Allowance for doubtful accounts receivable	$	23,000		$	57,000
Bad debt expense (recoveries), net	$	(17,000	)	$	-

● Inventories are stated at the lower of cost, determined using the first-in, first-out (“FIFO”) basis, and net realizable 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 net realizable value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Net realizable value of inventory is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. Inventory reserve is reduced following write-off of reserved inventory and increased by additions to reserve for slow moving inventory not expected to be sold.

29

● 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 will 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 11 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, which have historically been insignificant, are charged against estimated sales return allowances.

● 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 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.

New Accounting Pronouncements

See Note 3 of accompanying notes to consolidated financial statements for a discussion of new accounting pronouncements.

30

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

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 Larry Dyne, our principal executive officer, and principal financial officer, and Jamey Johns, 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. Dyne and Mr. Johns 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 March 31, 2017, 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.

31

PART II
OTHER INFORMATION

Item 1.      Legal Proceedings

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.

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, 2016. No material change to such risk factors has occurred during the three months ended March 31, 2017.

Item 6.      Exhibits

Exhibit No.	Description
31.1**	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certificate of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1***	Certificate of Chief Executive Officer and Chief Accounting 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

** Filed herewith.

*** Furnished herewith.

32

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:     May 11, 2017	/s/ Larry Dyne Larry Dyne Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
	/s/ Jamey Johns Jamey Johns Chief Accounting Officer (Principal Accounting Officer)

33

EX-31.1

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, Larry Dyne, 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: May 11, 2017	/s/ Larry Dyne
	Larry Dyne
	Chief Executive Officer and Chief Financial Officer

EX-31.2

Exhibit 31.2

Certification of CAO 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, Jamey Johns, 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: May 11, 2017	/s/ Jamey Johns
	Jamey Johns
	Chief Accounting Officer

EX-32.1

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 March 31, 2017 (the "Report") by Talon International, Inc. ("Registrant"), each of 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: May 11, 2017	/s/ Larry Dyne                                      Larry Dyne Chief Executive Officer and Chief Financial Officer
	/s/ Jamey Johns                   Jamey Johns Chief Accounting Officer

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2017	May 10, 2017
Document Information [Line Items]
Entity Registrant Name	TALON INTERNATIONAL, INC.
Entity Central Index Key	0001047881
Trading Symbol	taln
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		92,274,255
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 2,653,868	$ 4,913,577
Accounts receivable, net	5,361,852	4,315,608
Inventories, net	629,268	500,482
Prepaid expenses and other current assets	902,818	702,906
Total current assets	9,547,806	10,432,573
Property and equipment, net	857,141	884,208
Intangible assets, net	4,263,325	4,266,596
Deferred income tax assets, net	5,188,952	5,224,018
Other assets	400,442	347,638
Total assets	20,257,666	21,155,033
Current liabilities:
Accounts payable	6,240,166	6,378,896
Accrued expenses	2,142,014	2,972,689
Current portion of revolving line of credit from related party	75,000
Current portion of capital lease obligations	24,224	23,749
Total current liabilities	8,481,404	9,375,334
Revolving line of credit from related party, net of current portion, discounts and deferred financing costs	3,992,755	4,041,345
Capital lease obligations, net of current portion	30,798	37,035
Deferred income tax liabilities	3,043	3,037
Other liabilities	228,291	236,088
Total liabilities	12,736,291	13,692,839
Commitments and contingencies (Note 11)
Stockholders’ Equity:
Common Stock, $0.001 par value, 300,000,000 shares authorized; 92,274,255 shares issued and outstanding at March 31, 2017 and December 31, 2016	92,274	92,274
Additional paid-in capital	65,092,133	65,040,432
Accumulated deficit	(57,738,366)	(57,743,904)
Accumulated other comprehensive income	75,334	73,392
Total stockholders’ equity	7,521,375	7,462,194
Total liabilities and stockholders’ equity	$ 20,257,666	$ 21,155,033

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Common Stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common Stock, shares authorized (in shares)	300,000,000	300,000,000
Common Stock, shares issued (in shares)	92,274,255	92,274,255
Common Stock, shares outstanding (in shares)	92,274,255	92,274,255

XML

Consolidated Statements of Income and Comprehensive Income (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net sales	$ 11,117,534	$ 11,264,632
Cost of goods sold	7,029,158	7,100,373
Gross profit	4,088,376	4,164,259
Sales and marketing expenses	1,607,566	1,502,886
General and administrative expenses	2,298,951	2,425,958
Total operating expenses	3,906,517	3,928,844
Income from operations	181,859	235,415
Interest expense, net	153,926	150,647
Income before provision for income taxes	27,933	84,768
Provision for income taxes	22,395	35,651
Net income	$ 5,538	$ 49,117
Basic and diluted net income per share (in dollars per share)	$ 0	$ 0
Weighted average number of common shares outstanding - Basic (in shares)	92,274,255	92,267,831
Weighted average number of common shares outstanding - Diluted (in shares)	92,931,260	93,473,691
Net income	$ 5,538	$ 49,117
Other comprehensive income (loss) from foreign currency translation	1,942	(498)
Total comprehensive income	$ 7,480	$ 48,619

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities:
Net income	$ 5,538	$ 49,117
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	80,426	72,661
Amortization of deferred financing cost and debt discounts	26,410	26,069
Stock based compensation	51,701	112,397
Deferred income taxes, net	35,073	32,940
Change in provision for bad debt	(17,346)	(252)
Inventory valuation provisions (recoveries), net	8,014	(1,152)
Changes in operating assets and liabilities:
Accounts receivable	(1,022,987)	(1,253,802)
Inventories	(136,432)	(127,020)
Prepaid expenses and other current assets	(199,000)	(66,715)
Other assets	(51,753)	(47,499)
Accounts payable and accrued expenses	(985,154)	575,812
Other liabilities	(10,139)	2,866
Net cash used in operating activities	(2,215,649)	(624,578)
Cash flows from investing activities:
Acquisitions of property and equipment	(48,563)	(83,294)
Net cash used in investing activities	(48,563)	(83,294)
Cash flows from financing activities:
Payment of capital leases	(5,762)	(5,323)
Net cash used in financing activities	(5,762)	(5,323)
Net effect of foreign currency exchange translation on cash	10,265	2,585
Net decrease in cash and cash equivalents	(2,259,709)	(710,610)
Cash and cash equivalents at beginning of period	4,913,577	2,852,315
Cash and cash equivalents at end of period	2,653,868	2,141,705
Cash received (paid) during the period for:
Interest paid	(127,948)	(8,902)
Interest received	432	436
Income tax paid, net (principally foreign)		11,220
Non-cash financing activities:
Interest accrued on revolving line of credit from related party		116,112
Effect of foreign currency translation on net assets	$ 1,942	$ (498)

XML

Note 1 - Presentation of Interim Information

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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. Certain information and footnote disclosures normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations, although the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”) believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form

10

-K for the year ended

December

31,

2016.

 

XML

Note 2 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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,

2016,

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 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 the Company’s historical experience, for issues not yet identified. Bad debt expense (recoveries), net for the

three

months ended

March

31,

2017

and

2016

were

$(17,371)

and

$(252),

respectively.

Fair Value Measurements

Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”)

820,

“Fair Value Measurements and Disclosures”

defines fair value 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 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—Include

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, and revolving line of credit from related party. In accordance with ASC

820,

the Company measures its cash equivalents at fair value. The Company has determined that the book value of the financial instruments is representative of their fair values. The Company’s cash equivalents are classified within Level 

1

and valued primarily using quoted market prices utilizing market observable inputs.

At

March

31,

2017

and

December

 

31,

2016,

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

$662,319

and

$1,125,000,

respectively.

Intangible Assets

Intangible assets consist of the

Talo

n

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 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.

The Company applies Accounting Standards Update (“ASU”) 

2012

-

02,

“

Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment

” to determine whether an impairment is required.  The 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 ASC

350

-

30.

The Company completed the required assessment as of

December

31,

2016,

and noted no impairment. On an ongoing basis, the Company monitors

for interim triggering events and noted no triggering events that would result in impairment as of

March

31,

2017.

From time to time the Company makes investments in product and technical opportunities that are complimentary to or enhancements to its apparel accessories business.  During the

three

months ended

March

31,

2017

and

2016,

the Company made no investments in property rights. As of

March

31,

2017

and

December

31,

2016

the Company had accumulated investments of

$38,738

for intellectual property rights complimentary to the Company’s Talon Zipper products, which were not yet in service.

Intangible assets as of

March

31,

2017

and

December

31,

2016

are as follows:

	March 31,			December 31,
	2017			2016
Tradename - Talon trademark	$	4,110,751		$	4,110,751
Intellectual property rights		217,459			217,459
Less: Accumulated amortization (10 to 17 years)		(64,885	)		(61,614	)
Intellectual property rights, net		152,574			155,845
Intangible assets, net	$	4,263,325		$	4,266,596

Amortization expense for intangible assets was

$3,271

for the

three

months ended

March

31,

2017

and

2016.

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 quality assurance costs, 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 and other sales and product development 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, net

– Interest expense reflects the cost of borrowings, amortization of deferred financing costs and amortization of debt discounts. Interest expense for the

three

months ended

March

31,

2017

and

2016

totaled

$154,359

and

$151,083,

respectively. Interest income consists of earnings from cash held in interest bearing accounts. Interest income for each of the

three

months ended

March

31,

2017

and

2016

was less than

$1,000.

Foreign Currency Translation

The Company’s reporting currency is US dollars. 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 was a cumulative foreign currency translation gain of

$75,334

and

$73,392

as of

March

31,

2017

and

December

31,

2016,

respectively.

Comprehensive Income

Comprehensive income consists of net income and unrealized income (loss) 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.

The Company reports comprehensive income in accordance with Topic

220

“

Comprehensive Income”

, and uses the option provided under ASU

2011

-

05

“

Presentation of Comprehensive Income

” to present the total of comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement.

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, 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.

Presentation

In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform to the current year presentation.

XML

Note 3 - New Accounting Pronouncements

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

Note

3.

     New Accounting Pronouncements

In

January

2017,

the FASB issued ASU No.

2017

-

03,

“Accounting Changes and Error Corrections (Topic

250)

and Investments – Equity Method and Joint Ventures (Topic

323).”

This ASU responds to SEC staff announcements made in

2016

as it relates to the disclosure of the future impact of the effects of the new FASB guidance on revenue, leases and credit losses on financial instruments in accordance with Staff Accounting Bulletin

74.

This ASU was effective upon issuance in

January

2017.

Management has adopted ASU

2017

-

03

effective for the

first

quarter of

2017.

The adoption of ASU

2017

-

03

did not have a material impact to the Company’s consolidated financial statements.

In

December

2016,

the FASB issued ASU No.

2016

-

20,

 “

Technical Corrections and Improvements

(Topic

606):

Revenue from Contracts with Customers

.” This ASU provides amendments to ASC

606,

“

Revenue from Contracts with Customers

”

, allow entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. It also makes

twelve

additional technical corrections and improvements to the new revenue standard. The effective date and transition requirements are the same as those in ASC

606.

Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In

December

2016,

the FASB issued ASU No.

2016

-

19,

 “

Technical Corrections and Improvements”

. This ASU clarifies guidance, corrects errors and makes minor improvements affecting a variety of topics in the Accounting Standards Codification. Most of the amendments are not expected to have a significant effect on practice, but some of them could change practice for some entities. Transition guidance and a delayed effective date are provided for amendments that the FASB deemed more substantive. The other amendments are effective immediately. Management has implemented as necessary and is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In

October

2016,

the FASB issued ASU No.

2016

-

16,

 “

Income Taxes”

(Topic

740):

Intra-Entity Transfers of Assets Other Than Inventory

.” This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.

The guidance is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2017.

Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In

August

2016,

the FASB issued ASU No.

2016

-

15,

 “

Statement of Cash Flows

(Topic

230):

Classification of Certain Cash Receipts and Cash Payments

.” This ASU provides amendments to specific statement of cash flows classification issues. The guidance is effective for annual periods beginning after

December

15,

2017,

and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements.

In

June

2016,

the FASB issued ASU No.

2016

-

13,

“

Financial Instruments – Credit Losses

” (Topic

326),

which replaces the incurred loss impairment methodology in current generally accepted accounting principles (“GAAP”) with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2019,

with early adoption permitted for the fiscal years, and interim periods within those fiscal years, beginning

December

15,

2018.

Management is currently evaluating the impact of this accounting standard on the Company’s consolidated financial statements. Management does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In

March

2016,

the FASB issued ASU No.

2016

-

09,

“

Compensation-Stock Compensation

(Topic

718):

Improvements to Employee Share-Based Payment Accounting.

”

The updated accounting guidance simplifies the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after

December

15,

2016,

and interim periods within those annual periods. Management has adopted this guidance for the

first

quarter of

2017.

As required by the update, on a prospective basis, the Company will recognize excess tax benefits related to share-based payments in the provision for income taxes in the consolidated statements of income. Also, on a prospective basis, cash flows related to excess tax benefits recognized on stock-based compensation expense will be classified as an operating activity in the Company's consolidated statements of cash flows. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. Management elected to continue estimating stock-based compensation award forfeitures in determining the amount of compensation cost to be recognized each period.

In

February

2016,

the FASB issued ASU No.

2016

-

02

“Leases” (Topic

842).

The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. It is effective for fiscal years commencing after

December

15,

2018

and early adoption is permitted. In accordance with this standard, the Company will be establishing a right-of-use asset and an offsetting lease liability. Once adopted, management expects to report higher assets and liabilities as a result of including additional lease information on the consolidated balance sheet.

In

July

2015,

the FASB issued ASU

2015

-

11,

 “

Simplifying the Measurement of Inventory

”

, to reduce the complexity in accounting for inventory. This ASU requires entities to measure inventory at the lower of cost and net realizable value, replacing the market value approach that required floor and ceiling considerations.  This guidance for public entities is effective for fiscal years beginning after

December

 

15,

2016,

with early adoption permitted.  Management has adopted this guidance effective for the

first

quarter of

2017.

The adoption of ASU

2015

-

11

did not have a material impact to the Company’s consolidated financial statements.

In

May

2014,

the FASB issued ASU

2014

-

09,

“Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue recognition standard provides a

five

-step analysis of transactions to determine when and how revenue is recognized. The effective date for the ASU

2014

-

09

is deferred by ASU No.

2015

-

14,

“Revenue from Contracts with Customers (Topic

606):

Deferral of the Effective Date,” to annual reporting periods beginning after

December

15,

2017.

Earlier application is permitted only as of annual reporting periods beginning after

December

15,

2016,

including interim reporting periods within that reporting period. The new standard will replace most existing revenue recognition guidance in U.S. GAAP. The standard permits the use of either the retrospective or cumulative effect transition method. Management intends to adopt this standard in the

first

quarter of

2018

and has not yet selected a transition method. As a result of adoption, management anticipates expanding the consolidated financial statement disclosures in order to comply with the ASU. Management does not expect a material impact on results of operations, cash flows or financial position.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.

XML

Note 4 - Net Income Per Share

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

N

ote

4.

   

Net Income Per Shar

e

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

	Net income		Shares		Per Share Amount
Three Months Ended March 31, 2017:
Basic net income:
Net income	$	5,538		92,274,255	$	0.00
Effect of Dilutive Securities -
Options		-		657,005		0.00
Diluted net income per share	$	5,538		92,931,260	$	0.00
Three Months Ended March 31, 2016:
Basic net income:
Net income	$	49,117		92,267,831	$	0.00
Effect of Dilutive Securities -
Options		-		1,205,860		0.00
Diluted net income per share	$	49,117		93,473,691	$	0.00

For the

three

months ended

March

31,

2017,

options to purchase

1,841,667

shares of common stock exercisable between

$0.04

and

$0.10

per share, were outstanding and included in the computation of diluted net income per share. Options to purchase

7,976,600

shares of common stock exercisable between

$0.10

and

$1.33

per share and warrants to purchase

3,250,000

shares of common stock exercisable between

$0.14

and

$0.18

per share, were outstanding, but were not included in the computation of diluted net income per share applicable to common stockholders because they would have an antidilutive effect on the net income per share.

For the

three

months ended

March

31,

2016,

options to purchase

2,891,667

shares of common stock exercisable between

$0.04

and

$0.11

per share per share, were outstanding and included in the computation of diluted net income per share. Options to purchase

9,748,600

shares of common stock exercisable between

$0.14

and

$1.33

per share and warrants to purchase

3,250,000

shares of common stock exercisable between

$0.14

and

$0.18

per share, were outstanding, but were not included in the computation of diluted net income per share applicable to common stockholders because they would have an antidilutive effect on the net income per share.

XML

Note 5 - Accounts Receivable

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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

Note

5.

      Accounts Receivable

Accounts receivable are included on the consolidated balance sheets, net of the allowance for doubtful accounts. The allowance for doubtful accounts at

March

31,

2017

and

December

31,

2016

was

$22,953

and

$40,299,

respectively.

XML

Note 6 - Inventories

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

Note

6.

     Inventories

Inventories are stated at the lower of cost, determined using the

first

-in,

first

-out basis, and net realizable 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 net realizable value, if lower, and charged to operations in the period in which the facts that give rise to these adjustments become known. Net realizable value of inventory is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Inventories consist of the following:

	March 31,			December 31,
	2017			2016
Finished goods	$	700,789		$	563,989
Less: Reserves		(71,521	)		(63,507	)
Total inventories	$	629,268		$	500,482

XML

Note 7 - Accrued Expenses

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Accrued Liabilities, Disclosure [Text Block]

Note

7.

     Accrued Expenses

Accrued expenses are included on the consolidated balance sheets. Accrued expenses consist of the following:

	March 31,		December 31,
	2017		2016
Accrued payroll and related expenses	$	828,913	$	1,532,734
Accrued commissions		409,084		557,369
Accrued rebates		216,675		316,287
Taxes payable		215,724		184,232
Accrued expenses		335,416		268,330
Other		136,202		113,737
Total accrued expenses	$	2,142,014	$	2,972,689

XML

Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

8.

     Credit Facilities, Long Term Obligations and Related Party Transactions

Revolving Line of Credit from Related Party

On

August

10,

2015,

the Company entered into a loan and reimbursement agreement (“Loan Agreement”) with Princess Investment Holdings Inc. (“Princess Investment”). Princess Investment

may

be deemed an affiliate of Kutula Holdings, Ltd., a significant stockholder of the Company, which also has the contractual right to designate a director to the Company’s Board of

Directors. Pursuant to the Loan Agreement, Princess Investment agreed to make available to the Company a loan of up to

$3,000,000

(“Revolving Line of Credit”). Advances under the Loan Agreement accrued interest initially on the unpaid principal balance at an annual rate of

12.5%.

Accrued interest on the Revolving Line of Credit was payable monthly beginning

September

1,

2015,

and the principal amount was payable in monthly installments beginning

September

1,

2016

and continuing through the maturity date of

August

10,

2018.

Pursuant to the Loan Agreement, the Company issued Princess Investment warrants to purchase

1,000,000

shares of the Company’s common stock. The warrants are exercisable immediately upon issuance for a

five

-year period at an exercise price of

$0.18

per share and include a “cashless” exercise option. On

August

11,

2015,

the Company received an advance from Princess Investment under the Loan Agreement in the amount of

$1,500,000,

of which

$1,440,278

was used to pay off the Term Loan Payable to MUFG Union Bank N.A. on

August

12,

2015.

The Company borrowed an additional

$500,000

through

December

21,

2015,

and had an outstanding balance of

$2,000,000

under the Revolving Line of Credit from Princess Investment at

December

21,

2015.

On

December

21,

2015,

the Company entered into an amended and restated credit agreement (the “Princess Investment Credit Agreement”) with Princess Investment, which amended the existing Loan Agreement, dated

August

10,

2015,

with Princess Investment to, among other things, increase the borrowing availability under the Loan Agreement from

$3,000,000

to

$6,000,000

and extend the maturity date of the loan to

December

21,

2020

(the “Maturity Date”). The Princess Investment Credit Agreement requires the Company to comply with certain financial covenants, including a requirement not to incur a loss after taxes (as calculated in accordance with GAAP) of more than

$1,000,000

in the aggregate for any

two

consecutive fiscal quarters, not to incur a loss after taxes for any

three

consecutive fiscal quarters and not to incur a loss after taxes for any trailing

twelve

month period ending at the end of any fiscal quarter. For the

three

months ended

March

31,

2017,

the Company was in compliance with all covenants.

Princess Investment will make advances under the Revolving Line of Credit from time to time as requested by the Company. The Company

may

prepay the Revolving Line of Credit at any time, and amounts prepaid

may

be re-borrowed through

November

21,

2020.

Under the amended terms, the Revolving Line of Credit will accrue interest on the unpaid principal balance at an annual rate of

11.5%.

Interest on the Revolving Line of Credit for the period from

December

21,

2015

through

December

1,

2016

accrued and was added to principal on

December

1,

2016,

and thereafter interest will be payable monthly in arrears.

No

principal payments will be due during the period ending

December

31,

2017.

Thereafter, principal will be payable

$25,000

per month during the

twelve

months ended

December

31,

2018,

$35,000

per month during the

twelve

months ended

December

31,

2019

and

$50,000

per month during the

twelve

months ended

December

31,

2020,

with the remaining outstanding principal amount payable on the Maturity Date. The Princess Investment Credit Agreement continues to require payment of a

$60,000

loan fee at maturity.

The payment and performance of all the indebtedness and other obligations to Princess Investment, including all borrowings under the Princess Investment Credit Agreement, are guaranteed by the subsidiaries Talon Technologies, Inc. and Tag-It Pacific Limited pursuant to a Guaranty Agreement entered into on

August

10,

2015,

as amended on

December

21,

2015.

The payment and performance of all of the indebtedness and other obligations to Princess Investment under the Princess Investment Credit Agreement and related agreements are secured by liens on substantially all of the Company’s assets and the assets of the Company’s subsidiary guarantors pursuant to a Pledge and Security Agreement entered into on

August

10,

2015,

as amended on

December

21,

2015.

Pursuant to the Princess Investment Credit Agreement, the Company issued to Princess Investment warrants to purchase

2,000,000

shares of its common stock. The warrants are exercisable immediately upon issuance for a

five

-year period at an exercise price of

$0.18

per share, and include a “cashless” exercise option.

On

December

23,

2015,

the Company received an advance from Princess Investment under the Princess Investment Credit Agreement in the amount of

$2,000,000,

of which

$1,622,000

was used to pay in full all indebtedness outstanding under the Commercial Credit Agreement, dated

December

31,

2013,

with MUFG Union Bank N.A., which indebtedness was scheduled to mature on

December

31,

2015.

Upon repayment of the indebtedness under the Company’s Credit Agreement with Union Bank, Union Bank released its liens on the Company’s assets and those of the Company’s subsidiaries, Princess Investment became the only secured lender, and in addition to the Credit Agreement, the following agreements (the “Security Agreements”) terminated in accordance with their terms: Continuing Guaranties, dated

December

31,

2013,

executed by the Company’s current subsidiaries, Talon Technologies, Inc. and Tag-It Pacific Limited in favor of Union Bank; Security Agreements, dated

December

31,

2013,

executed by the Company and its current domestic subsidiary, Talon Technologies, Inc., and Union Bank; a Debenture executed by Tag-It Pacific Limited and Union Bank; an Intercreditor Agreement, dated

August

10,

2015,

among the Company, Princess Investment and Union Bank; and a Subordination Agreement, dated

August

10,

2015,

among the Company, Princess Investment and Union Bank.

After consideration of FASB ASC

480

“

Distinguishing Liability and Equity

” and ASC

815

“

Derivatives and Hedging

”,

the Company concluded that the warrants issued to Princess Investment should be recorded as an equity instrument. The fair value of the

first

one

million warrants of

$130,000

issued with the debt facility at

August

10,

2015

and the fair value of the additional

two

million warrants of

$320,000

issued with this debt facility at

December

21,

2015

were valued using the Black-Scholes model. The fair value of the warrants was recorded as additional paid in capital and reflected as a debt discount to the face value of the Revolving Line of Credit, which discount is amortized over the term of the Loan and recognized as additional interest costs as amortized.

At

March

31,

2017

and

December

31,

2016,

respectively, the Company had an outstanding principal balance of approximately

$4,455,643

under the Revolving Line of Credit, and as of

March

31,

2017

and

December

31,

2016,

approximately

$1,544,357

remained in available borrowings under the Revolving Line of Credit

.

	March 31,			December 31,
	2017			2016
$6,000,000 revolving line of credit from related party and accrued interest payable per terms under Princess Investment Credit Agreement through maturity date of December 21, 2020; interest at a rate per annum of 11.5%	$	4,455,643		$	4,455,643
Less: Debt discounts net of related amortization		(320,165	)		(342,028	)
Less: Deferred financing costs net of related amortization		(67,723	)		(72,270	)
Revolving line of credit, net of debt discounts and deferred financing costs		4,067,755			4,041,345
Less: Current portion		(75,000	)		-
Revolving line of credit, net of debt discounts, deferred financing costs and current portion	$	3,992,755		$	4,041,345

Interest expense, net, included on the Company’s Consolidated Statements of Income and Comprehensive Income is comprised as follows:

	Three Months Ended
	March 31,
	2017		2016
Revolving line of credit from related party	$	126,345	$	116,112
Amortization of deferred financing costs		4,547		4,547
Amortization of debt discounts		21,863		21,521
Total Credit Facilities related interest expense		152,755		142,180
Other interest expense, net		1,171		8,467
Interest expense, net	$	153,926	$	150,647

Capital Leases

The Company has financed purchases of furniture and fixtures through various capital lease obligations which bear interest at a rate of

8%

per annum. Under these obligations, the Company is required to make monthly payments of principal and interest through

May

2019.

Capital lease obligations at

March

31,

2017

and

December

31,

2016

were

$55,022

and

$60,784,

respectively.

XML

Note 9 - Stockholders' Equity

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

Note

9.

     Stockholders’ Equity

Authorized Common Stock and Preferred Stock

The Company’s Certificate of Incorporation presently authorizes

300,000,000

shares of Common Stock, having a par value of

$0.001

per share.

The Company’s Certificate of Incorporation presently authorizes the issuance of

3,000,000

shares of Preferred Stock, having a par value of

$0.001

per share.

No

shares of Preferred Stock were outstanding at

March

31,

2017

or

December

31,

2016.

XML

Note 10 - Stock-based Compensation

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

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

Note

10

.

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 all other non-employee parties are accounted for in accordance with the provisions of FASB ASC

505

-

50,

“

Equity-Based Payments to Non-Employees

”.

Stock Options and Warrants

The Company’s

2008

Stock Incentive Plan authorizes up to

15,000,000

shares of common stock for issuance pursuant to awards granted to individuals under the plan.

The Company’s

2007

Stock Plan authorizes up to

2,600,000

shares of common stock for issuance pursuant to awards granted to individuals under the plan. No further awards will be granted under the

2007

Stock Plan.

The Board of Directors, who determines the recipients and terms of the awards granted, administers the Company’s stock plans. 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 of Directors from immediate to

4

years of continuous service and have

10

year contractual terms.

No

options were granted during the

three

months ended

March

31,

2017.

During the

three

months ended

March

31,

2016,

4,205,000

options were granted.

Stock-based compensation expense for the

three

months ended

March

31,

2017

and

2016

totaled

$51,701

and

$112,397,

respectively.

As of

March

31,

2017,

the Company had

$490,958

of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the remaining weighted average period of

2.43

years. As of

March

31,

2016,

unamortized stock-based compensation expense related to options issued to employees and directors was

$819,925,

which was to be recognized over the weighted average period of approximately

3.27

years.

On

February

10,

2016,

the Company issued warrants to purchase

250,000

shares of the Company’s common stock to an outside services company. The warrants are exercisable immediately upon issuance for a

five

-year period at an exercise price of

$0.14

per share and include a “cashless” exercise provision. The issuance of these securities was exempt from registration pursuant to Section

4(a)(2)

of the Securities Act of

1933,

as amended.

The following table summarizes the activity in the Company’s share-based compensation plans and other share-based grants during the

three

months ended

March

31,

2017.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2017		9,933,267		$	0.16
Granted		-		$	-
Exercised		-		$	-
Cancelled		(115,000	)	$	0.17
Options outstanding - March 31, 2017		9,818,267		$	0.16
Non Employees
Warrants outstanding - January 1, 2017		3,250,000		$	0.18
Granted		-		$	-
Exercised		-		$	-
Cancelled		-		$	-
Warrants outstanding - March 31, 2017		3,250,000		$	0.18

XML

Note 11 - Income Taxes

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

11.

    Income taxes

Provision for income taxes, net, for the

three

months ended

March

31,

2017

and

2016,

was

$22,395

and

$35,651

respectively.

Current income taxes receivable were associated with foreign and domestic prepayments net of income tax payable, and totaled

$27,968

and

$23,123

as of

March

31,

2017

and

December

31,

2016,

respectively.

Current income taxes payable were principally associated with foreign withholdings, funds transfers, and income tax payable from the Company’s Asia operations. Current income taxes payable as of

March

31,

2017

and

December

31,

2016

totaled

$112,842

and

$120,187,

respectively, and were included in accrued expenses.

Deferred income tax assets, net, totaled

$5,188,952

and

$5,224,018

as of

March

31,

2017

and

December

31,

2016,

respectively.

Deferred income tax liabilities totaled

$3,043

and

$3,037

as of

March

31,

2017

and

December

31,

2016,

respectively.

XML

Note 12 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

12.

   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 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 indemnification agreements is minimal and accordingly, the Company has not recorded any related liabilities.

XML

Note 13 - Segment Reporting and Geographic Information

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

Note

13.

    Segment Reporting and Geographic Information

The Company manufactures and distributes a full range of zipper (Talon Zipper) and trim (Talon Trim) components, which includes stretch technology component products, to specialty retailers and mass merchandisers. The Company’s organization is based on operating divisions representing these major product lines, and the Company’s Chief Operating Decision Makers (“CODM”, identified as the Company’s executive officers with the oversight of Talon’s Board of Directors) use these divisions to assess performance, allocate resources and make other operating decisions.

During

2015,

the Company realigned how it reports its operating segments to better conform to the way management views the business. In making this determination, the Company examined how the CODM evaluates the performance of the Company and as such reconsidered the aggregation of reporting segments in accordance with the aggregation criteria under ASC

280,

Segment Reporting

.

As a result of this assessment, the Company has identified and realigned the reporting of its operating segments into

two

reporting segments (Talon Zipper and Talon Trim) and has reclassified prior period results to reflect these product categories. The Tekfit operating segment results are now aggregated and reported as part of the Trim operating segment.

Information about the assets for each of the reportable segments is not maintained by the Company and therefore is not reviewed by the CODM as assets are reviewed and assessed on a consolidated basis. As a result, information about the assets for each of the reportable segments is not included on the Company’s segment reporting footnote.

As the Company evolves, adjustments

may

be made as to how the Company allocates resources and analyzes performance, which can result in a change to these segments.

The net revenues and operating margins for the

two

reporting segments are as follows:

	Three Months Ended March 31, 2017
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	3,800,784	$	7,316,750	$	11,117,534
Cost of goods sold		2,800,279		4,228,879		7,029,158
Gross profit	$	1,000,505	$	3,087,871		4,088,376
Operating expenses						3,906,517
Income from operations					$	181,859

	Three Months Ended March 31, 2016
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	4,276,384	$	6,988,248	$	11,264,632
Cost of goods sold		3,016,409		4,083,964		7,100,373
Gross profit	$	1,259,975	$	2,904,284		4,164,259
Operating expenses						3,928,844
Income from operations					$	235,415

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 intangibles) is attributed to countries based on the location of the assets, as follows:

	Three Months Ended
Sales:	March 31,
Country / Region	2017		2016
United States	$	1,081,046	$	1,014,567
China		2,183,383		2,701,114
Hong Kong		2,556,725		2,812,145
Bangladesh		919,665		1,049,298
Vietnam		1,031,483		927,932
Indonesia		936,048		478,148
India		743,558		513,604
Other		1,665,626		1,767,824
Total	$	11,117,534	$	11,264,632

	March 31,		December 31,
	2017		2016
Long-lived Assets:
United States	$	4,895,722	$	4,915,383
China		154,804		164,081
Hong Kong		65,164		66,347
India		4,776		4,993
Total	$	5,120,466	$	5,150,804

XML

Note 14 - Subsequent Events

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

Note

14.

    Subsequent Events

The Company evaluated subsequent events after the balance sheet date of

March

31,

2017

through the date of the filing of this report, and determined that there were no reportable subsequent events.

XML

Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

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 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 the Company’s historical experience, for issues not yet identified. Bad debt expense (recoveries), net for the

three

months ended

March

31,

2017

and

2016

were

$(17,371)

and

$(252),

respectively.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”)

820,

“Fair Value Measurements and Disclosures”

defines fair value 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 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—Include

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, and revolving line of credit from related party. In accordance with ASC

820,

the Company measures its cash equivalents at fair value. The Company has determined that the book value of the financial instruments is representative of their fair values. The Company’s cash equivalents are classified within Level 

1

and valued primarily using quoted market prices utilizing market observable inputs.

At

March

31,

2017

and

December

 

31,

2016,

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

$662,319

and

$1,125,000,

respectively.

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

Intangible Assets

Intangible assets consist of the

Talo

n

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 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.

The Company applies Accounting Standards Update (“ASU”) 

2012

-

02,

“

Intangibles – Goodwill and Other - Testing Indefinite-lived Intangible Assets for Impairment

” to determine whether an impairment is required.  The 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 ASC

350

-

30.

The Company completed the required assessment as of

December

31,

2016,

and noted no impairment. On an ongoing basis, the Company monitors

for interim triggering events and noted no triggering events that would result in impairment as of

March

31,

2017.

From time to time the Company makes investments in product and technical opportunities that are complimentary to or enhancements to its apparel accessories business.  During the

three

months ended

March

31,

2017

and

2016,

the Company made no investments in property rights. As of

March

31,

2017

and

December

31,

2016

the Company had accumulated investments of

$38,738

for intellectual property rights complimentary to the Company’s Talon Zipper products, which were not yet in service.

Intangible assets as of

March

31,

2017

and

December

31,

2016

are as follows:

	March 31,			December 31,
	2017			2016
Tradename - Talon trademark	$	4,110,751		$	4,110,751
Intellectual property rights		217,459			217,459
Less: Accumulated amortization (10 to 17 years)		(64,885	)		(61,614	)
Intellectual property rights, net		152,574			155,845
Intangible assets, net	$	4,263,325		$	4,266,596

Amortization expense for intangible assets was

$3,271

for the

three

months ended

March

31,

2017

and

2016.

Cost of Sales, Policy [Policy Text Block]

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 quality assurance costs, 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 and other sales and product development 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, net

– Interest expense reflects the cost of borrowings, amortization of deferred financing costs and amortization of debt discounts. Interest expense for the

three

months ended

March

31,

2017

and

2016

totaled

$154,359

and

$151,083,

respectively. Interest income consists of earnings from cash held in interest bearing accounts. Interest income for each of the

three

months ended

March

31,

2017

and

2016

was less than

$1,000.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency Translation

The Company’s reporting currency is US dollars. 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 was a cumulative foreign currency translation gain of

$75,334

and

$73,392

as of

March

31,

2017

and

December

31,

2016,

respectively.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income

Comprehensive income consists of net income and unrealized income (loss) 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.

The Company reports comprehensive income in accordance with Topic

220

“

Comprehensive Income”

, and uses the option provided under ASU

2011

-

05

“

Presentation of Comprehensive Income

” to present the total of comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement.

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, 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.

Basis of Accounting, Policy [Policy Text Block]

Presentation

In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform to the current year presentation.

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Intangible Assets and Goodwill [Table Text Block]

	March 31,			December 31,
	2017			2016
Tradename - Talon trademark	$	4,110,751		$	4,110,751
Intellectual property rights		217,459			217,459
Less: Accumulated amortization (10 to 17 years)		(64,885	)		(61,614	)
Intellectual property rights, net		152,574			155,845
Intangible assets, net	$	4,263,325		$	4,266,596

XML

Note 4 - Net Income Per Share (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

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

	Net income		Shares		Per Share Amount
Three Months Ended March 31, 2017:
Basic net income:
Net income	$	5,538		92,274,255	$	0.00
Effect of Dilutive Securities -
Options		-		657,005		0.00
Diluted net income per share	$	5,538		92,931,260	$	0.00
Three Months Ended March 31, 2016:
Basic net income:
Net income	$	49,117		92,267,831	$	0.00
Effect of Dilutive Securities -
Options		-		1,205,860		0.00
Diluted net income per share	$	49,117		93,473,691	$	0.00

XML

Note 6 - Inventories (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	March 31,			December 31,
	2017			2016
Finished goods	$	700,789		$	563,989
Less: Reserves		(71,521	)		(63,507	)
Total inventories	$	629,268		$	500,482

XML

Note 7 - Accrued Expenses (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	March 31,		December 31,
	2017		2016
Accrued payroll and related expenses	$	828,913	$	1,532,734
Accrued commissions		409,084		557,369
Accrued rebates		216,675		316,287
Taxes payable		215,724		184,232
Accrued expenses		335,416		268,330
Other		136,202		113,737
Total accrued expenses	$	2,142,014	$	2,972,689

XML

Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

	March 31,			December 31,
	2017			2016
$6,000,000 revolving line of credit from related party and accrued interest payable per terms under Princess Investment Credit Agreement through maturity date of December 21, 2020; interest at a rate per annum of 11.5%	$	4,455,643		$	4,455,643
Less: Debt discounts net of related amortization		(320,165	)		(342,028	)
Less: Deferred financing costs net of related amortization		(67,723	)		(72,270	)
Revolving line of credit, net of debt discounts and deferred financing costs		4,067,755			4,041,345
Less: Current portion		(75,000	)		-
Revolving line of credit, net of debt discounts, deferred financing costs and current portion	$	3,992,755		$	4,041,345

Interest Income and Interest Expense Disclosure [Table Text Block]

	Three Months Ended
	March 31,
	2017		2016
Revolving line of credit from related party	$	126,345	$	116,112
Amortization of deferred financing costs		4,547		4,547
Amortization of debt discounts		21,863		21,521
Total Credit Facilities related interest expense		152,755		142,180
Other interest expense, net		1,171		8,467
Interest expense, net	$	153,926	$	150,647

XML

Note 10 - Stock-based Compensation (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

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

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2017		9,933,267		$	0.16
Granted		-		$	-
Exercised		-		$	-
Cancelled		(115,000	)	$	0.17
Options outstanding - March 31, 2017		9,818,267		$	0.16
Non Employees
Warrants outstanding - January 1, 2017		3,250,000		$	0.18
Granted		-		$	-
Exercised		-		$	-
Cancelled		-		$	-
Warrants outstanding - March 31, 2017		3,250,000		$	0.18

XML

Note 13 - Segment Reporting and Geographic Information (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

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

	Three Months Ended March 31, 2017
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	3,800,784	$	7,316,750	$	11,117,534
Cost of goods sold		2,800,279		4,228,879		7,029,158
Gross profit	$	1,000,505	$	3,087,871		4,088,376
Operating expenses						3,906,517
Income from operations					$	181,859

	Three Months Ended March 31, 2016
	Talon Zipper		Talon Trim		Talon Consolidated
Net sales	$	4,276,384	$	6,988,248	$	11,264,632
Cost of goods sold		3,016,409		4,083,964		7,100,373
Gross profit	$	1,259,975	$	2,904,284		4,164,259
Operating expenses						3,928,844
Income from operations					$	235,415

Revenue from External Customers by Geographic Areas [Table Text Block]

	Three Months Ended
Sales:	March 31,
Country / Region	2017		2016
United States	$	1,081,046	$	1,014,567
China		2,183,383		2,701,114
Hong Kong		2,556,725		2,812,145
Bangladesh		919,665		1,049,298
Vietnam		1,031,483		927,932
Indonesia		936,048		478,148
India		743,558		513,604
Other		1,665,626		1,767,824
Total	$	11,117,534	$	11,264,632

Long-lived Assets by Geographic Areas [Table Text Block]

	March 31,		December 31,
	2017		2016
Long-lived Assets:
United States	$	4,895,722	$	4,915,383
China		154,804		164,081
Hong Kong		65,164		66,347
India		4,776		4,993
Total	$	5,120,466	$	5,150,804

XML

Note 2 - Summary of Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended		12 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Allowance for Doubtful Accounts Receivable, Recoveries	$ 17,371	$ 252
Cash and Cash Equivalents, Fair Value Disclosure	662,319		$ 1,125,000
Finite-Lived Intangible Assets, Gross	217,459		217,459
Amortization of Intangible Assets	3,271	3,271
Interest Expense	154,359	151,083
Interest Income, Other	1,000	1,000
Accumulated Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment, Net of Tax	75,334		73,392
Goodwill and Intangible Asset Impairment	0		0
Intellectual Property [Member]
Finite-Lived Intangible Assets, Gross	38,738		$ 38,738
Payments to Acquire Intangible Assets	$ 0	$ 0

XML

Note 2 - Summary of Significant Accounting Policies - Intangible Assets (Details) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Tradename - Talon trademark	$ 4,110,751	$ 4,110,751
Intellectual property rights	217,459	217,459
Less: Accumulated amortization (10 to 17 years)	(64,885)	(61,614)
Intellectual property rights, net	152,574	155,845
Intangible assets, net	$ 4,263,325	$ 4,266,596

XML

Note 2 - Summary of Significant Accounting Policies - Intangible Assets (Details) (Parentheticals)	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Minimum [Member]
Finite Lived Intangible Assets, Useful Life (Year)	10 years	10 years
Maximum [Member]
Finite Lived Intangible Assets, Useful Life (Year)	17 years	17 years

XML

Note 4 - Net Income Per Share (Details Textual) - $ / shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,250,000	3,250,000
Warrant [Member] | Minimum [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.14	$ 0.14
Warrant [Member] | Maximum [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.18	$ 0.18
Employee And Board Member Stock Options [Member]
Incremental Common Shares Attributable to Dilutive Effect of Equity Unit Purchase Agreements	1,841,667	2,891,667
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 0.04	$ 0.04
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	$ 0.10	$ 0.11
Employee And Board Member Stock Options [Member] | Stock Compensation Plan [Member]
Incremental Common Shares Attributable to Dilutive Effect of Equity Unit Purchase Agreements	7,976,600	9,748,600
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 0.10	$ 0.14
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	$ 1.33	$ 1.33

XML

Note 4 - Net Income Per Share - Reconciliation of the Numerators and Denominators of the Basic and Diluted Net Income Per Share (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net income	$ 5,538	$ 49,117
Weighted average number of common shares outstanding - Basic (in shares)	92,274,255	92,267,831
Per share amount basic (in dollars per share)	$ 0	$ 0
Options (in shares)	657,005	1,205,860
Diluted net income per share	$ 5,538	$ 49,117
Diluted net income per share (in shares)	92,931,260	93,473,691
Diluted net income per share (in dollars per share)	$ 0	$ 0

XML

Note 5 - Accounts Receivable (Details Textual) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Allowance for Doubtful Accounts Receivable, Current	$ 22,953	$ 40,299

XML

Note 6 - Inventories - Inventories (Details) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Finished goods	$ 700,789	$ 563,989
Less: Reserves	(71,521)	(63,507)
Total inventories	$ 629,268	$ 500,482

XML

Note 7 - Accrued Expenses - Accrued Expenses (Details) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Accrued payroll and related expenses	$ 828,913	$ 1,532,734
Accrued commissions	409,084	557,369
Accrued rebates	216,675	316,287
Taxes payable	215,724	184,232
Accrued expenses	335,416	268,330
Other	136,202	113,737
Total accrued expenses	$ 2,142,014	$ 2,972,689

XML

Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions (Details Textual) - USD ($)						3 Months Ended	4 Months Ended
	Feb. 10, 2016	Dec. 23, 2015	Aug. 12, 2015	Aug. 11, 2015	Aug. 10, 2015	Mar. 31, 2017	Dec. 21, 2015	Dec. 31, 2016
Capital Lease Obligation Interest Rate						8.00%
Capital Lease Obligations						$ 55,022		$ 60,784
Line of Credit [Member] | Princess Investment Holdings Inc [Member]
Long-term Debt, Gross						$ 4,455,643		$ 4,455,643
Debt Instrument, Interest Rate, Stated Percentage						11.50%		11.50%
Line of Credit Facility, Remaining Borrowing Capacity						$ 1,544,357		$ 1,544,357
Princess Investment Warrant [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	250,000
ClassOfWarrantOrRightWarrantTerm	5 years				5 years
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.14
Princess Investment Holdings Inc [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights						2,000,000
ClassOfWarrantOrRightWarrantTerm						5 years
Class of Warrant or Right, Exercise Price of Warrants or Rights						$ 0.18
Proceeds from Related Party Debt		$ 2,000,000
Warrants and Rights Outstanding					$ 130,000		$ 320,000
Princess Investment Holdings Inc [Member]
Subordinated Debt Maximum Indebtedness							6,000,000
Debt Instrument, Interest Rate During Period					12.50%
Class of Warrant or Right, Number of Securities Called by Warrants or Rights					1,000,000
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 0.18
Proceeds from Related Party Debt				$ 1,500,000
Long-term Debt, Gross							2,000,000
Financial Covenant Loss after Taxes Maximum							$ 1,000,000
Debt Instrument, Interest Rate, Stated Percentage							11.50%
Long Term Debt Maturities Monthly Repayments of Principal in Year Two						$ 25,000
Long Term Debt Maturities Monthly Repayments of Principal in Year Three						35,000
Long Term Debt Maturities Monthly Repayments of Principal in Year Four						50,000
Long Term Debt Maturities, Monthly Repayments of Principal in Next Twelve Months						0
Princess Investment Holdings Inc [Member] | Permission From Union Bank Lender To Borrow From Princess Investment Holdings [Member]
Subordinated Debt Maximum Indebtedness					$ 3,000,000
Princess Investment Holdings Inc [Member] | Additional Advance [Member]
Proceeds from Related Party Debt							$ 500,000
Princess Investment Holdings Inc [Member] | Paid Upon Maturity [Member] | Loan Fee [Member]
Payments of Financing Costs						$ 60,000
Union Bank [Member] | Term Loan Payable [Member]
Repayments of Notes Payable			$ 1,440,278
Union Bank [Member] | Princess Investment Holdings Inc [Member]
Debt Instrument, Periodic Payment		$ 1,622,000

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Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions - Revolving Line of Credit (Details) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Less: Current portion	$ (75,000)
Revolving line of credit, net of debt discounts, deferred financing costs and current portion	3,992,755	4,041,345
Line of Credit [Member] | Princess Investment Holdings Inc [Member]
$6,000,000 revolving line of credit from related party and accrued interest payable per terms under Princess Investment Credit Agreement through maturity date of December 21, 2020; interest at a rate per annum of 11.5%	4,455,643	4,455,643
Less: Debt discounts net of related amortization	(320,165)	(342,028)
Less: Deferred financing costs net of related amortization	(67,723)	(72,270)
Revolving line of credit, net of debt discounts and deferred financing costs	4,067,755	4,041,345
Less: Current portion	(75,000)
Revolving line of credit, net of debt discounts, deferred financing costs and current portion	$ 3,992,755	$ 4,041,345

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Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions - Revolving Line of Credit (Details) (Parentheticals) - Line of Credit [Member] - Princess Investment Holdings Inc [Member] - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Revolving Term Loan, Face Amount	$ 6,000,000	$ 6,000,000
Revolving Term Loan, Interest Rate	11.50%	11.50%

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Note 8 - Credit Facilities, Long Term Obligations and Related Party Transactions - Interest Expense Included in Consolidated Statements of Operations (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Amortization of deferred financing costs	$ 4,547	$ 4,547
Amortization of debt discounts	21,863	21,521
Total Credit Facilities related interest expense	152,755	142,180
Interest expense, net	153,926	150,647
Miscellaneous [Member]
Interest expense, net	1,171	8,467
Term Loan Payable [Member]
Debt Interest Expense	$ 126,345	$ 116,112

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Note 9 - Stockholders' Equity (Details Textual) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Common Stock, Shares Authorized	300,000,000	300,000,000
Common Stock, Par or Stated Value Per Share	$ 0.001	$ 0.001
Preferred Stock, Shares Authorized	3,000,000
Preferred Stock, Par or Stated Value Per Share	$ 0.001
Preferred Stock, Shares Outstanding	0	0

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Note 10 - Stock-based Compensation (Details Textual) - USD ($)			3 Months Ended
	Feb. 10, 2016	Aug. 10, 2015	Mar. 31, 2017	Mar. 31, 2016	Nov. 08, 2013
Allocated Share-based Compensation Expense			$ 51,701	$ 112,397
Princess Investment Warrant [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	250,000
ClassOfWarrantOrRightWarrantTerm	5 years	5 years
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.14
Options Issued To Employees And Directors [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			0	4,205,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized			$ 490,958	$ 819,925
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			2 years 156 days	3 years 98 days
2008 Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized					15,000,000
2007 Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized			2,600,000
The 2007 and 2008 Stock Incentive Plans [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			4 years
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term			10 years

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Note 10 - Stock-based Compensation - Stock-based Compensation - Stock Options (Details) - $ / shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Princess Investment Warrant [Member] | Non-Employee [Member]
Granted (in shares)
Granted, weighted average exercise price (in dollars per share)
Exercised (in shares)
Exercised, weighted average exercise price (in dollars per share)
Cancelled (in shares)
Cancelled, weighted average exercise price (in dollars per share)
Warrants outstanding (in shares)	3,250,000
Warrants outstanding, weighted average exercise price (in dollars per share)	$ 0.18
Warrants outstanding (in shares)	3,250,000
Warrants outstanding, weighted average exercise price (in dollars per share)	$ 0.18
Options Issued To Employees And Directors [Member]
Options outstanding (in shares)	9,933,267
Options outstanding, weighted average exercise price (in dollars per share)	$ 0.16
Granted (in shares)	0	4,205,000
Granted, weighted average exercise price (in dollars per share)
Exercised (in shares)
Exercised, weighted average exercise price (in dollars per share)
Cancelled (in shares)	(115,000)
Cancelled, weighted average exercise price (in dollars per share)	$ 0.17
Options outstanding (in shares)	9,818,267
Options outstanding, weighted average exercise price (in dollars per share)	$ 0.16

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Note 11 - Income Taxes (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Income Tax Expense (Benefit)	$ 22,395	$ 35,651
Deferred Tax Assets, Net of Valuation Allowance	5,188,952		$ 5,224,018
Deferred Tax Liabilities, Net, Noncurrent	3,043		3,037
Prepaid Expenses and Other Current Assets [Member]
Income Taxes Receivable	27,968		23,123
Accrued Expenses [Member]
Accrued Income Taxes, Current	$ 112,842		$ 120,187

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Note 13 - Segment Reporting and Geographic Information (Details Textual)	3 Months Ended
	Mar. 31, 2017
Number of Reportable Segments	2

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Note 13 - Segment Reporting and Geographic Information - Net Revenues and Operating Margins (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net sales	$ 11,117,534	$ 11,264,632
Cost of goods sold	7,029,158	7,100,373
Gross profit	4,088,376	4,164,259
Operating expenses	3,906,517	3,928,844
Income from operations	181,859	235,415
Operating Segments [Member]
Net sales	11,117,534	11,264,632
Cost of goods sold	7,029,158	7,100,373
Gross profit	4,088,376	4,164,259
Operating expenses	3,906,517	3,928,844
Income from operations	181,859	235,415
Talon Zippers [Member] | Operating Segments [Member]
Net sales	3,800,784	4,276,384
Cost of goods sold	2,800,279	3,016,409
Gross profit	1,000,505	1,259,975
Talon Trim [Member] | Operating Segments [Member]
Net sales	7,316,750	6,988,248
Cost of goods sold	4,228,879	4,083,964
Gross profit	$ 3,087,871	$ 2,904,284

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Note 13 - Segment Reporting and Geographic Information - Revenues by Delivery Locations (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Sales - Geographic Regions	$ 11,117,534	$ 11,264,632
Geography Eliminations [Member] | UNITED STATES
Sales - Geographic Regions	1,081,046	1,014,567
Geography Eliminations [Member] | CHINA
Sales - Geographic Regions	2,183,383	2,701,114
Geography Eliminations [Member] | HONG KONG
Sales - Geographic Regions	2,556,725	2,812,145
Geography Eliminations [Member] | BANGLADESH
Sales - Geographic Regions	919,665	1,049,298
Geography Eliminations [Member] | VIET NAM
Sales - Geographic Regions	1,031,483	927,932
Geography Eliminations [Member] | INDONESIA
Sales - Geographic Regions	936,048	478,148
Geography Eliminations [Member] | INDIA
Sales - Geographic Regions	743,558	513,604
Geography Eliminations [Member] | Other Geographical Area [Member]
Sales - Geographic Regions	$ 1,665,626	$ 1,767,824

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Note 13 - Segment Reporting and Geographic Information - Long-lived Assets By Location (Details) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Long-lived assets - geographical	$ 5,120,466	$ 5,150,804
Geography Eliminations [Member] | UNITED STATES
Long-lived assets - geographical	4,895,722	4,915,383
Geography Eliminations [Member] | CHINA
Long-lived assets - geographical	154,804	164,081
Geography Eliminations [Member] | HONG KONG
Long-lived assets - geographical	65,164	66,347
Geography Eliminations [Member] | INDIA
Long-lived assets - geographical	$ 4,776	$ 4,993