##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
    
    85-0294536(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
 o þ
  o þ




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##### 



AXCESS INTERNATIONAL INC.
INDEX
  
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at June 30, 2006 and December 31, 2005Statements of Operations for the Three Months and Six Months ended June 30, 2006 and 2005Statements of Cash Flows for the Six Months ended June 30, 2006 and 2005Notes to Financial StatementsItem 2. Managements Discussion and Analysis or Plan of OperationItem 3. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESStock Purchase AgreementCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,222,602
    
    
    $
    236,869Accounts receivable  trade, net of allowance for doubtful accounts of
$17,095 and $17,389 for 2006 and 2005, respectively.
    
    
    123,695
    
    
    
    141,200Inventory, net
    
    
    281,198
    
    
    
    112,270Prepaid expenses and other
    
    
    67,298
    
    
    
    72,628Total current assets
    
    
    1,694,793
    
    
    
    562,967Property, plant and equipment, net
    
    
    22,144
    
    
    
    29,387Deferred debt issuance costs
    
    
    253,444
    
    
    
    337,926Other assets
    
    
    3,096
    
    
    
    2,699Total assets
    
    $
    1,973,477
    
    
    $
    932,979LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    137,704
    
    
    $
    252,155Accrued liabilities
    
    
    1,027,266
    
    
    
    959,149Notes payable:Convertible notes payable (includes $80,000 with related parties in 2005)
    
    
    
    
    
    
    396,666Discounts on convertible debt
    
    
    
    
    
    
    (5,520
    )Dividends payable
    
    
    370,473
    
    
    
    208,780Total current liabilities
    
    
    1,535,443
    
    
    
    1,811,230Notes payable to stockholders
    
    
    3,473,660
    
    
    
    3,709,071Total liabilities
    
    
    5,009,103
    
    
    
    5,520,301Commitments and contingencies (Notes 1 and 2)Stockholders deficit:Convertible preferred stock, 10,000,000 and 7,000,000 shares authorized in
2006 and 2005, respectivelyWith liquidation preference; no shares issued and outstanding in 2006
and 2005, respectively;
    
    
    
    
    
    
    Without liquidation preference; $0.01 par value, 6,323,550 and 3,371,495
shares issued and outstanding in 2006 and 2005, respectively
    
    
    63,235
    
    
    
    33,715Common stock, $.01 par value, 70,000,000 and 50,000,000 shares authorized
in 2006 and 2005, respectively; 28,205,138 shares issued and outstanding
in 2006 and 27,437,111 shares issued and outstanding in 2005
    
    
    282,052
    
    
    
    274,371Shares of common stock to be issued, 5,333 shares as of December 31, 2005
    
    
    
    
    
    
    53Non-voting convertible common stock, $.01 par value, 0 and 2,250,000 shares
authorized in 2006 and 2005, respectively; no shares issued and outstanding
in 2006 or 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    156,710,890
    
    
    
    153,436,725Accumulated deficit
    
    
    (160,091,803
    )
    
    
    (158,332,186
    )Total stockholders deficit
    
    
    (3,035,626
    )
    
    
    (4,587,322
    )Total liabilities and stockholders deficit
    
    $
    1,973,477
    
    
    $
    932,979
  1




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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    354,475
    
    
    $
    206,818
    
    
    $
    808,038
    
    
    $
    447,976Cost of sales
    
    
    189,215
    
    
    
    123,545
    
    
    
    463,845
    
    
    
    247,893Gross profit
    
    
    165,260
    
    
    
    83,273
    
    
    
    344,193
    
    
    
    200,083Expenses:Research and development
    
    
    259,898
    
    
    
    207,739
    
    
    
    863,587
    
    
    
    391,920General and administrative
    
    
    503,695
    
    
    
    335,520
    
    
    
    965,105
    
    
    
    690,983Selling and marketing
    
    
    298,112
    
    
    
    290,018
    
    
    
    564,357
    
    
    
    545,115Depreciation and amortization
    
    
    4,291
    
    
    
    7,911
    
    
    
    9,117
    
    
    
    16,984Operating expenses
    
    
    1,065,996
    
    
    
    841,188
    
    
    
    2,402,166
    
    
    
    1,645,002Loss from operations
    
    
    (900,736
    )
    
    
    (757,915
    )
    
    
    (2,057,973
    )
    
    
    (1,444,919
    )Other income (expense):Interest expense
    
    
    (87,372
    )
    
    
    (246,599
    )
    
    
    (182,635
    )
    
    
    (411,737
    )Gain in vendor settlements
    
    
    22,296
    
    
    
    65,106
    
    
    
    42,685
    
    
    
    173,816Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    Other income (expense), net
    
    
    (65,076
    )
    
    
    (181,493
    )
    
    
    460,050
    
    
    
    (237,921
    )Net loss
    
    
    (965,812
    )
    
    
    (939,408
    )
    
    
    (1,597,923
    )
    
    
    (1,682,840
    )Preferred stock dividend requirements:Recurring
    
    
    (80,847
    )
    
    
    (80,847
    )
    
    
    (161,694
    )
    
    
    (161,694
    )Warrant inducement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,060,397
    )2005 Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    (1,489,245
    )
    
    
    2006 Preferred equity offering
    
    
    (645,020
    )
    
    
    
    
    
    
    (645,020
    )
    
    
    Preferred stock dividend requirements
    
    
    (725,867
    )
    
    
    (80,847
    )
    
    
    (2,295,959
    )
    
    
    (2,222,091
    )Net loss applicable to common stock
    
    $
    (1,691,679
    )
    
    $
    (1,020,255
    )
    
    $
    (3,893,882
    )
    
    $
    (3,904,931
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.14
    )
    
    $
    (0.15
    )Weighted average shares of common stock outstanding
    
    
    28,203,636
    
    
    
    26,930,819
    
    
    
    28,067,362
    
    
    
    26,333,012
  2




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##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (1,597,924
    )
    
    $
    (1,682,840
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    9,117
    
    
    
    16,984Amortization of financing discount and issuance costs
    
    
    90,003
    
    
    
    296,488Gain on vendor settlements and statutory write-off of payables
    
    
    (42,685
    )
    
    
    (173,816
    )Gain on sale of intellectual property
    
    
    (600,000
    )
    
    
    Stock based compensation expense
    
    
    375,272
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    17,505
    
    
    
    18,117Inventory
    
    
    (168,928
    )
    
    
    (68,342
    )Prepaid expenses and other
    
    
    5,330
    
    
    
    (36,973
    )Other assets
    
    
    (397
    )
    
    
    1,215Accounts payable and accrued expenses
    
    
    16,460
    
    
    
    112,413Net cash used by operating activities
    
    
    (1,896,247
    )
    
    
    (1,516,754
    )Cash flow from investing activities:Capital expenditures
    
    
    (1,874
    )
    
    
    (2,461
    )Proceeds for sale of intellectual property
    
    
    600,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    598,126
    
    
    
    (2,461
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    2,484,244
    
    
    
    Net proceeds from issuance of common stock from warrants
    
    
    32,500
    
    
    
    1,933,775Net proceeds from issuance of common stock from employee options
    
    
    2,521
    
    
    
    17,840Principal payments on financing agreements
    
    
    (235,411
    )
    
    
    (223,021
    )Net cash provided by financing activities
    
    
    2,283,854
    
    
    
    1,728,594Net change in cash and cash equivalents
    
    
    985,733
    
    
    
    209,379Cash and cash equivalents, beginning of period
    
    
    236,869
    
    
    
    461,101Cash and cash equivalents, end of period
    
    $
    1,222,602
    
    
    $
    670,480Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    396,667
    
    
    $
    106,666Conversions of accrued interest into common stock
    
    
    20,110
    
    
    
    46,031Conversion of accrued dividends into common stock
    
    
    
    
    
    
    432,446Preferred stock dividends accrued
    
    
    161,694
    
    
    
    161,694
  3




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##### Table of Contents



AXCESS
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Description of Business
     (b) Company Organization and Basis of Presentation
   (c) Inventory
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    38,433
    
    
    $
    10,887Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    242,656
    
    
    
    101,274$
    281,198
    
    
    $
    112,270




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##### Table of Contents



(d) Stock-Based Compensation
 Adoption of SFAS 123R
 Share-Based Payment
   Pro-Forma Stock Compensation Expense for the Three Months and Six Months Periods Ended June 30,
2005
  Three
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (1,020,255
    )
    
    $
    (3,904,931
    )Less: fair value of employee stock compensation
    
    
    (172,613
    )
    
    
    (373,176
    )Pro forma net loss attributed to common stock
    
    
    (1,192,868
    )
    
    
    (4,278,107
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.15
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.16
    )Weighted average Black-Scholes fair value
assumptionsRisk free interest rate
    
    
    4.25
    %
    
    
    4.25
    %Expected life
    
    3 years
    
    
    3 yearsExpected volatility
    
    
    164
    %
    
    
    164
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Research and development expense
    
    $
    41,900
    
    
    $
    27,545
    
    
    $
    78,088
    
    
    $
    58,157General and administrative expense
    
    
    108,914
    
    
    
    105,903
    
    
    
    230,434
    
    
    
    235,789Selling and marketing expense
    
    
    36,224
    
    
    
    39,165
    
    
    
    66,750
    
    
    
    79,230Total
    
    $
    187,038
    
    
    $
    172,613
    
    
    $
    375,272
    
    
    $
    373,176
 Stock Options as of the Six Month Period Ended June 30, 2006
   Outstanding OptionsWeighted
    
    Weighted AverageAverage
    
    Remaining
    
    AggregateNumber of
    
    Exercise
    
    Contractual Term
    
    IntrinsicShares
    
    Price
    
    (in years)
    
    ValueOptions outstanding at January 1, 2006
    
    
    3,117,485
    
    
    $
    2.19Options granted
    
    
    1,533,000
    
    
    
    1.05Options exercised
    
    
    (6,300
    )
    
    
    0.40Options forfeited
    
    
    (16,000
    )
    
    
    1.04Options outstanding at June 30, 2006
    
    
    4,628,185
    
    
    
    1.82
    
    
    
    7.07
    
    
    $
    952,831Options exercisable at June 30, 2006
    
    
    2,691,225
    
    
    
    2.19
    
    
    
    6.46
    
    
    $
    619,321Options available for grants as of June 30, 2006
    
    
    3,483,000
   Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    Number
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Of
    
    AverageOf
    
    Contractual Term
    
    Exercise
    
    Options
    
    ExerciseRange of Exercise Price
    
    Options
    
    (in years)
    
    Price
    
    Exercisable
    
    Price$0.00 - $1.00
    
    
    708,300
    
    
    
    6.55
    
    
    $
    0.40
    
    
    
    708,300
    
    
    $
    0.40$1.01 - $2.00
    
    
    2,661,170
    
    
    
    8.58
    
    
    
    1.40
    
    
    
    761,710
    
    
    
    1.82$2.01 - $3.00
    
    
    789,375
    
    
    
    4.22
    
    
    
    2.64
    
    
    
    751,875
    
    
    
    2.53$3.01 - $4.00
    
    
    201,340
    
    
    
    4.34
    
    
    
    3.88
    
    
    
    201,340
    
    
    
    3.88$4.01 - $5.00
    
    
    20,000
    
    
    
    4.92
    
    
    
    4.55
    
    
    
    20,000
    
    
    
    4.55$5.01 - $6.25
    
    
    248,000
    
    
    
    3.73
    
    
    
    5.80
    
    
    
    248,000
    
    
    
    5.80Total
    
    
    4,628,185
    
    
    
    7.07
    
    
    
    1.82
    
    
    
    2,691,225
    
    
    
    2.19




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##### Table of Contents



June 30,
    
    June 30,2006
    
    2005Volatility
    
    
    131
    %
    
    
    Expected option term
    
    5 years
    
    
    
    Risk-free interest rate
    
    
    4.60
    %
    
    
    Expected dividend yield
    
    
    
    
    
    
    
 (2) Contingencies
  (3) Preferred Stock
  2003B
    
    Series
    
    Series
    
    SeriesSeries
    
    2004
    
    2005
    
    2006Number of shares authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    2,750,000
    
    
    
    1,200,000Stated value
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued and
outstanding:December 31, 2005
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    956,495
    
    
    
    June 30, 2006
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    2,708,550
    
    
    
    1,200,000Conversion 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 
stockLiquidation preference
    
    None
    
    None
    
    None
    
    NoneDividend rights
    
    7% per 
annum, cumulative
    
    7% per 
annum, cumulative
    
    None
    
    None
 (a) Series 2003B Preferred Stock




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##### Table of Contents



(b) Series 2004 Preferred Stock
   (c) Series 2005 Preferred Stock
      (d) Series 2006 Preferred Stock




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##### Table of Contents



(4) Significant Customers
   
 Item 2. Managements Discussion and Analysis or Plan of Operation
 Forward-Looking Statements
     Recent Developments: Going Concern and Liquidity Problems




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Liquidity and Capital Resources
     2006 Preferred Equity
  2005 Preferred Equity
  Patent Sale
  Sales and Marketing Initiatives
  1.
    
    We modified our indirect approach to more of a direct approach to gain visibility into
the sales cycle;




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##### Table of Contents



2.
    
    We continue to add integrators and partners to our sales channel;3.
    
    We have hired a new Vice President of Sales and expect to hire additional sales
personnel.
  Results of Operations
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Sales and Gross Profit
 Operating Expenses
     Other income (expenses, net)
 Net Loss
 Preferred Stock dividend requirements.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Sales and Gross Profit




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##### Table of Contents



Operating Expenses
     Other income (expenses), net
 Net Loss
 Preferred Stock dividend requirements.
 Other
 Inflation
 
 Item 3. Controls and Procedures
 Controls and Procedures




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities
  Common Stock
  2006 Preferred Equity
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Proposal to elect five directors to the board of directors to hold office until the
next annual meeting of stockholders or until their respective successors are duly elected
and qualified. The stockholders approved the proposal by the following vote:
 Director
    
    Votes For
    
    Votes Against
    
    Total VotesRichard C.E. Morgan
    
    
    19,926,335
    
    
    
    3,897
    
    
    
    19,930,232Allan Griebenow
    
    
    19,922,737
    
    
    
    7,495
    
    
    
    19,930,232Paul J. Coleman
    
    
    19,927,235
    
    
    
    2,997
    
    
    
    19,930,232Robert J. Bertoldi
    
    
    19,921,854
    
    
    
    8,378
    
    
    
    19,930,232Robert F. Hussey
    
    
    19,929,052
    
    
    
    1,180
    
    
    
    19,930,232




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##### Table of Contents



2.
    
    Proposal to ratify the board of directors appointment of Hein & Associates LLP, as the
independent registered public accountants for the year ending December 31, 2006. The
stockholders approved the proposal by the following vote:
 Votes For
    
    Votes Against
    
    Abstain
    
    Total Votes19,927,162
    
    1,385
    
    1,685
    
    19,930,232
 3.
    
    Proposal to amend and restate the Companys Certificate of Incorporation to, among
other things, increase the number of authorized Common Stock, from 50,000,000 shares to
70,000,000 shares and the authorized Preferred Stock from 7,000,000 shares to 10,000,000
shares and to eliminate the 2,250,000 shares of Non-Voting common stock. The stockholders
approved the proposal by the following vote:
 Votes For
    
    Votes Against
    
    Abstain
    
    Total Votes19,918,560
    
    9,557
    
    2,115
    
    19,930,232
 4.
    
    Proposal to ratify actions taken by our Board of Directors and Officers regarding prior
fund raising and restructuring activities of the Company. The stockholders approved the
proposal by the following vote:
 Votes For
    
    Votes Against
    
    Abstain
    
    Total Votes19,926,907
    
    3,280
    
    45
    
    19,930,232
 5.
    
    Proposal to transact such other business as may properly come before the meeting or any
adjournment thereof. The stockholders approved the proposal by the following vote:
 Votes For
    
    Votes Against
    
    Abstain
    
    Total Votes19,893,599
    
    32,688
    
    3,945
    
    19,930,232
 
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description10.1
    
    Stock Purchase agreement for the 2006 Preferred Equity 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.
 
 (b)
    
    Reports on Form 8-K: Date
    
    Description06/09/06
    
    On June 9, 2006, Axcess International Inc. filed an 8-K
announcing they closed on $1,200,000 of the 2006
Preferred Equity round and hired a new Vice President of
Sales




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##### 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)