##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
(State or other jurisdiction of incorporation or
    
    85-0294536
(I.R.S. Employer Identification No.)organization)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:
1Balance Sheets at September 30, 2008 and December 31, 2007 (unaudited)
1Statements of Operations for the Three Months and Nine Months ended September 30, 2008 and 2007 (unaudited)
2Statements of Cash Flows for the Nine Months ended September 30, 2008 and 2007 (unaudited)
3Notes to Financial Statements (unaudited)
4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
13Item 3. Quantitative and Qualitative Disclosures about Market Risk
17Item 4. Controls and Procedures
17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
18Item 1A. Risk Factors
18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
18Item 3. Defaults Upon Senior Securities
19Item 4. Submission of Matters to a Vote of Security Holders
19Item 5. Other Information
19Item 6. Exhibits and Reports on Form 8-K
19SIGNATURES
20EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    223,426
    
    
    $
    59,089Accounts receivable  trade, net of allowance for
doubtful accounts of $25,176 and $32,363 for 2008
and 2007, respectively
    
    
    196,659
    
    
    
    257,957Inventory, net
    
    
    128,888
    
    
    
    193,405Prepaid expenses and other
    
    
    60,486
    
    
    
    77,506Total current assets
    
    
    609,459
    
    
    
    587,957Property, plant and equipment, net
    
    
    24,232
    
    
    
    12,003Deferred debt issuance costs
    
    
    20,313
    
    
    
    30,421Other assets
    
    
    66,009
    
    
    
    56,438Total assets
    
    $
    720,013
    
    
    $
    686,819LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    831,862
    
    
    $
    172,278Accrued liabilities
    
    
    1,489,222
    
    
    
    1,309,979Deferred revenue
    
    
    25,710
    
    
    
    42,060Notes payable (includes $795,273 and $150,000
with a related party in 2008 and 2007,
respectively)
    
    
    947,273
    
    
    
    150,000Dividends payable
    
    
    223,517
    
    
    
    125,991Total current liabilities
    
    
    3,517,584
    
    
    
    1,800,308Notes payable (includes $393,787 with a related
party in 2008 and 2007)
    
    
    2,706,346
    
    
    
    2,858,346Debt discount
    
    
    (2,955
    )
    
    
    Total liabilities
    
    
    6,220,975
    
    
    
    4,658,654Commitments and contingencies (Notes 1 and 2)Stockholders deficit:Convertible preferred stock, 10,000,000 shares
authorized in 2008 and 2007. Without liquidation
preferences; $0.01 par value, 6,125,198 and
6,860,116 shares issued and outstanding in 2008
and 2007, respectively
    
    
    61,252
    
    
    
    68,601Common stock, $.01 par value, 70,000,000 shares
authorized in 2008 and 2007; 31,204,931 shares
issued and outstanding in 2008 and 29,304,927
shares issued and outstanding in 2007
    
    
    312,050
    
    
    
    293,050Shares of common stock to be issued 25,000 shares
as of December 31, 2007
    
    
    
    
    
    
    250Additional paid-in capital
    
    
    165,345,188
    
    
    
    162,947,266Accumulated deficit
    
    
    (171,219,452
    )
    
    
    (167,281,002
    )Total stockholders deficit
    
    
    (5,500,962
    )
    
    
    (3,971,835
    )Total liabilities and stockholders deficit
    
    $
    720,013
    
    
    $
    686,819
  1




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    511,190
    
    
    $
    281,656
    
    
    $
    1,175,022
    
    
    $
    2,963,437Cost of sales
    
    
    250,898
    
    
    
    136,871
    
    
    
    615,494
    
    
    
    1,280,977Gross profit
    
    
    260,292
    
    
    
    144,785
    
    
    
    559,528
    
    
    
    1,682,460Expenses:Research and development
    
    
    451,274
    
    
    
    397,074
    
    
    
    1,858,962
    
    
    
    2,691,499General and administrative
    
    
    359,703
    
    
    
    419,110
    
    
    
    1,105,511
    
    
    
    1,277,294Selling and marketing
    
    
    298,855
    
    
    
    319,957
    
    
    
    942,597
    
    
    
    1,231,734Depreciation and amortization
    
    
    2,979
    
    
    
    3,488
    
    
    
    9,941
    
    
    
    12,016Operating expenses
    
    
    1,112,811
    
    
    
    1,139,629
    
    
    
    3,917,011
    
    
    
    5,212,543Loss from operations
    
    
    (852,519
    )
    
    
    (994,844
    )
    
    
    (3,357,483
    )
    
    
    (3,530,083
    )Other income (expense):Interest expense
    
    
    (102,512
    )
    
    
    (81,545
    )
    
    
    (397,071
    )
    
    
    (245,991
    )Gain on vendor settlements
    
    
    2,216
    
    
    
    
    
    
    
    4,534
    
    
    
    25,799Other income (expense), net
    
    
    (100,296
    )
    
    
    (81,545
    )
    
    
    (392,537
    )
    
    
    (220,192
    )Net loss
    
    
    (952,815
    )
    
    
    (1,076,389
    )
    
    
    (3,750,020
    )
    
    
    (3,750,275
    )Preferred stock dividend requirements:Recurring
    
    
    (39,883
    )
    
    
    (79,728
    )
    
    
    (188,430
    )
    
    
    (239,163
    )2006C Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )2007 Preferred equity offering
    
    
    
    
    
    
    (2,050,000
    )
    
    
    
    
    
    
    (2,050,000
    )2008 Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    (558,686
    )
    
    
    2008B Preferred equity offering
    
    
    (171,984
    )
    
    
    
    
    
    
    (171,984
    )
    
    
    Preferred stock dividend requirements
    
    
    (211,867
    )
    
    
    (2,129,728
    )
    
    
    (919,100
    )
    
    
    (4,289,163
    )Net loss applicable to common stock
    
    $
    (1,164,682
    )
    
    $
    (3,206,117
    )
    
    $
    (4,669,120
    )
    
    $
    (8,039,438
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.16
    )
    
    $
    (0.28
    )Weighted average shares of common stock outstanding
    
    
    30,813,627
    
    
    
    28,874,100
    
    
    
    29,932,137
    
    
    
    28,760,562
  2




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (3,750,020
    )
    
    $
    (3,750,275
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    9,941
    
    
    
    12,016Amortization of financing discount and issuance costs, net
    
    
    7,153
    
    
    
    126,724Gain on vendor settlements and statutory write-off of payables
    
    
    71
    
    
    
    (2,857
    )Warrants issued for services
    
    
    (7,612
    )
    
    
    Stock based compensation expense
    
    
    547,655
    
    
    
    485,243Changes in operating assets and liabilities:Accounts receivable
    
    
    61,298
    
    
    
    88,183Inventory
    
    
    64,517
    
    
    
    155,202Prepaid expenses and other
    
    
    17,020
    
    
    
    (38,923
    )Other assets
    
    
    (9,571
    )
    
    
    (51,787
    )Accounts payable and accrued expenses
    
    
    1,080,784
    
    
    
    264,347Net cash used by operating activities
    
    
    (1,978,764
    )
    
    
    (2,712,127
    )Cash flow from investing activities:Capital expenditures
    
    
    (22,170
    )
    
    
    (6,405
    )Net cash used by investing activities
    
    
    (22,170
    )
    
    
    (6,405
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    1,519,998
    
    
    
    3,577,500Net proceeds from exercise of employee options
    
    
    
    
    
    
    13,101Principal payments on financing agreements
    
    
    (100,000
    )
    
    
    (246,784
    )Borrowings on financing agreements
    
    
    745,273
    
    
    
    Net cash provided by financing activities
    
    
    2,165,271
    
    
    
    3,343,817Net change in cash and cash equivalents
    
    
    164,337
    
    
    
    625,285Cash and cash equivalents, beginning of period
    
    
    59,089
    
    
    
    347,361Cash and cash equivalents, end of period
    
    $
    223,426
    
    
    $
    972,646Supplemental Disclosure of Non-Cash Investing and Financing Activities:Warrants issued as a debt discount
    
    $
    258,377
    
    
    $
    Accrued preferred stock dividends
    
    
    188,430
    
    
    
    239,163Conversion of preferred shares into common stock
    
    
    7,351
    
    
    
    650Conversion of accrued dividends into common stock
    
    
    90,904
    
    
    
    330,960
  3




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Description of Business and Going Concern
       (b) Company Organization
   4




---



##### Table of Contents



(c) Basis of presentation
   (d) Critical Accounting Policies and Estimates
  (e) Accounting for Uncertainty in Income Taxes
     (f) Inventory
  5




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    21,560
    
    
    $
    13,853Work-in-process
    
    
    109
    
    
    
    104Finished goods
    
    
    107,219
    
    
    
    179,448$
    128,888
    
    
    $
    193,405
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product cost
    
    $
    245,625
    
    
    $
    136,871
    
    
    $
    580,222
    
    
    $
    1,280,977Warranty expense
    
    
    5,273
    
    
    
    
    
    
    
    35,272
    
    
    
    Inventory impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    250,898
    
    
    $
    136,871
    
    
    $
    615,494
    
    
    $
    1,280,977
 (g) Stock-Based Compensation
 Share-Based Payment
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development expense
    
    $
    63,698
    
    
    $
    43,937
    
    
    $
    202,721
    
    
    $
    123,485General and administrative expense
    
    
    70,712
    
    
    
    93,077
    
    
    
    252,152
    
    
    
    279,777Selling and marketing expense
    
    
    27,086
    
    
    
    23,787
    
    
    
    92,782
    
    
    
    81,981Total
    
    $
    161,496
    
    
    $
    160,801
    
    
    $
    547,655
    
    
    $
    485,243
 (h) Stock Options and Warrants
 6




---



##### Table of Contents



Outstanding OptionsWeighted
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    ValueOptions outstanding at January 1, 2008
    
    
    5,550,973
    
    
    $
    1.87Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    (158,000
    )
    
    
    1.82Options outstanding at September 30, 2008
    
    
    5,392,973
    
    
    
    1.87
    
    
    
    5.63
    
    
    $
    230,300Options exercisable at September 30, 2008
    
    
    3,835,223
    
    
    
    1.95
    
    
    
    5.63
    
    
    $
    230,300Options available for grants as of September 30, 2008
    
    
    2,802,000
  Intrinsic Value ofNumber of
    
    
    Weighted Average
    
    
    Vested UnexercisedOption Price
    
    Options
    
    
    Remaining Life
    
    
    Options$0.00 - $1.00
    
    
    808,000
    
    
    
    4.99
    
    
    $
    230,300$1.01 - $2.00
    
    
    3,436,258
    
    
    
    7.09$2.01 - $3.00
    
    
    701,875
    
    
    
    1.59$3.01 - $4.00
    
    
    178,840
    
    
    
    2.28$4.01 - $5.00
    
    
    20,000
    
    
    
    2.67$5.01 - $6.25
    
    
    248,000
    
    
    
    1.47Total
    
    
    5,392,973
    
    
    
    5.63
    
    
    $
    230,300
  WEIGHTEDAVERAGEEXERCISEWARRANTS
    
    PRICEWarrants outstanding at beginning of year
    
    
    8,307,213
    
    
    $
    1.73Warrants issued
    
    
    1,916,361
    
    
    
    1.42Warrants exercised
    
    
    
    
    
    
    Warrants expired unexercised
    
    
    (500,000
    )
    
    
    2.00Warrants outstanding at end of year
    
    
    9,723,574
    
    
    
    1.66
  7




---



##### Table of Contents



Number of
    
    Weighted AverageStrike Price
    
    Warrants
    
    Remaining Life$0.00 - $1.00
    
    
    67,279
    
    
    
    4.79$1.01 - $2.00
    
    
    9,656,295
    
    
    
    3.49Total
    
    
    9,723,574
    
    
    
    3.50
  (i) Revenue Recognition
 Revenue Recognition Revenue
Arrangements with Multiple Deliverables
   (2) Contingencies
  (3) Preferred Stock
  Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series2003B
    
    2004
    
    2005
    
    2006
    
    2006B
    
    2006C
    
    2007
    
    2008
    
    2008BNumber of shares
authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    2,750,000
    
    
    
    1,200,000
    
    
    
    750,000
    
    
    
    200
    
    
    
    205
    
    
    
    120
    
    
    
    80Stated value
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued 
and outstandingDec. 31, 2007
    
    
    1,685,000
    
    
    
    625,000
    
    
    
    2,649,726
    
    
    
    1,200,000
    
    
    
    700,000
    
    
    
    200
    
    
    
    190
    
    
    
    
    
    
    Sept. 30, 2008
    
    
    1,575,000
    
    
    
    
    
    
    
    2,649,726
    
    
    
    1,200,000
    
    
    
    700,000
    
    
    
    100
    
    
    
    185
    
    
    
    120
    
    
    
    662/3Conversion ratio
(or conversion
price) of preferred  shares into
 common
    
    1 to 1 into 
voting common 
stock
    
    1 to 1 into voting common stock
    
    1 to 1 into voting
 common stock
    
    1 to 1 into voting
 common stock
    
    1 to 1 into voting
 common stock
    
    1 to 10,000 into
 voting common stock
    
    1 to 10,000 into
 voting common stock
    
    1 to 10,000 into
 voting common stock
    
    1 to 10,000 into
 voting common stockLiquidation 
preference
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
    
    NoneDividend rights
    
    7% per annum,
cumulative
    
    7% per annum,
cumulative
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
 8




---



##### Table of Contents



(a) Series 2003B Preferred Stock
    (b) Series 2004 Preferred Stock
    (c) Series 2005 Preferred Stock
   9




---



##### Table of Contents



(d) Series 2006 Preferred Stock
    (e) Series 2006B Preferred Stock
     (f) Series 2006C Preferred Stock
  10




---



##### Table of Contents



(g) Series 2007 Preferred Stock
      (h) Series 2008 Preferred Stock
   (i) Series 2008B Preferred Stock
   11




---



##### Table of Contents



(4) Notes Payable
 PV Proceeds Holdings, Inc.
  Amphion Investment LLC
  Convertible Note
  Balance as ofSeptember 30,Date of Note
    
    2008
    
    
    Due Date
    
    
    Interest RateDecember 17, 2007
    
    $
    50,000
    
    
    January 15, 2008
    
    
    5.0
    %January 14, 2008
    
    
    150,000
    
    
    February 15, 2008
    
    
    5.0
    %February 20, 2008
    
    
    150,000
    
    
    March 15, 2008
    
    
    5.0
    %February 28, 2008
    
    
    60,000
    
    
    March 31, 2008
    
    
    5.0
    %March 14, 2008
    
    
    63,000
    
    
    April 15, 2008
    
    
    5.0
    %March 25, 2008
    
    
    55,000
    
    
    April 30, 2008
    
    
    5.0
    %April 1, 2008
    
    
    85,273
    
    
    May 1, 2008
    
    
    5.0
    %April 7, 2008
    
    
    22,000
    
    
    May 1, 2008
    
    
    5.0
    %April 15, 2008
    
    
    110,000
    
    
    May 15, 2008
    
    
    5.0
    %July 30, 2008
    
    
    50,000
    
    
    August 31, 2008
    
    
    5.0
    %Total
    
    $
    795,273
  12




---



##### Table of Contents



(5) Significant Customers
   (6) Recent Accounting Pronouncements
    (7) Subsequent Event
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  13




---



##### Table of Contents



Recent Developments: Going Concern and Liquidity Problems
   Liquidity and Capital Resources
    14




---



##### Table of Contents



Amphion Convertible Note
  Balance as ofSeptember 30,Date of Note
    
    2008
    
    
    Due Date
    
    
    Interest RateDecember 17, 2007
    
    $
    50,000
    
    
    January 15, 2008
    
    
    5.0
    %January 14, 2008
    
    
    150,000
    
    
    February 15, 2008
    
    
    5.0
    %February 20, 2008
    
    
    150,000
    
    
    March 15, 2008
    
    
    5.0
    %February 28, 2008
    
    
    60,000
    
    
    March 31, 2008
    
    
    5.0
    %March 14, 2008
    
    
    63,000
    
    
    April 15, 2008
    
    
    5.0
    %March 25, 2008
    
    
    55,000
    
    
    April 30, 2008
    
    
    5.0
    %April 1, 2008
    
    
    85,273
    
    
    May 1, 2008
    
    
    5.0
    %April 7, 2008
    
    
    22,000
    
    
    May 1, 2008
    
    
    5.0
    %April 15, 2008
    
    
    110,000
    
    
    May 15, 2008
    
    
    5.0
    %July 30, 2008
    
    
    50,000
    
    
    August 31, 2008
    
    
    5.0
    %Total
    
    $
    795,273
  Sales and Marketing Initiatives
  1.
    
    We continue to focus on replicating our past success;2.
    
    We continue to add integrators and partners to our sales channel;3.
    
    We continue to improve our professional skill sets and resources to grow the business.
 15




---



##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Sales and Gross Profit
 Operating Expenses
 16




---



##### Table of Contents



Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Other
 Inflation
 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
  
 Item 4. Controls and Procedures
 Controls and Procedures
     17




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  2008B Preferred Offering
    Warrants
  2006C Preferred Equity
  18




---



##### Table of Contents



2004 Preferred Equity
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description10.1
    
    Form of Stock Purchase agreement for the 2008B Preferred Equity Offering. *10.2
    
    Form of Voting Common Stock Purchase Warrant between the Company and
certain investors of the exempt 2008B Preferred Stock Offering. *31.1
    
    Certification of our President, Chief Executive Officer and Principal
Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of our Vice President, Chief Financial Officer, Secretary and
Principal Accounting and Financial Officer, under Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of our President, Chief Executive Officer and Principal
Executive Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of our Vice President, Chief Financial Officer, Secretary and
Principal Accounting and Financial Officer, under Section 906 of the
Sarbanes-Oxley Act of 2002.
  Date
    
    DescriptionOctober 28, 2008
    
    Axcess International Inc. announced closing of its
2008B Preferred Equity financing round. Incorporated
herein by reference is Exhibit 3.1Certificate of
Designation of Series 2008B Preferred Stock of Axcess
International, Inc.
 
 *
    
    Filed herewith 19




---



##### Table of Contents



SIGNATURES
  AXCESS INTERNATIONAL INC.,
Registrant/s/ ALLAN GRIEBENOWAllan Griebenow Director, President andChief Executive Officer (Principal Executive Officer)/s/ ALLAN L. FRANKAllan L. FrankChief Financial Officer and Secretary
(Principal Accounting and Financial Officer)  20