##### 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 SEPTEMBER 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
(State or other jurisdiction of incorporation or 
organization)
    
    85-0294536
(I.R.S. Employer Identification No.)
 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. Consolidated Financial Statements:Balance Sheets at September 30, 2006 and December 31, 2005Statements of Operations for the Three Months and Nine Months ended September
30, 2006 and 2005Statements of Cash Flows for the Nine Months ended September 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-KSIGNATURESCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906Press Release




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    238,050
    
    
    $
    236,869Accounts
receivable - trade, net of allowance for doubtful accounts of
$17,095 and $17,389 for 2006 and 2005, respectively.
    
    
    189,765
    
    
    
    141,200Inventory, net
    
    
    472,309
    
    
    
    112,270Prepaid expenses and other
    
    
    123,608
    
    
    
    72,628Total current assets
    
    
    1,023,732
    
    
    
    562,967Property, plant and equipment, net
    
    
    20,675
    
    
    
    29,387Deferred debt issuance costs
    
    
    211,204
    
    
    
    337,926Other assets
    
    
    3,096
    
    
    
    2,699Total assets
    
    $
    1,258,707
    
    
    $
    932,979LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    181,386
    
    
    $
    252,155Accrued liabilities
    
    
    1,082,133
    
    
    
    959,149Notes payable:Convertible notes payable (includes $80,000 with related parties in 2005)
    
    
    
    
    
    
    396,666Discounts on convertible debt
    
    
    
    
    
    
    (5,520
    )Dividends payable
    
    
    56,859
    
    
    
    208,780Total current liabilities
    
    
    1,320,378
    
    
    
    1,811,230Notes payable to stockholders
    
    
    3,365,500
    
    
    
    3,709,071Total liabilities
    
    
    4,685,878
    
    
    
    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; 28,657,313 shares issued and outstanding
in 2006 and 27,437,111 shares issued and outstanding in 2005
    
    
    286,573
    
    
    
    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
    
    
    157,270,169
    
    
    
    153,436,725Accumulated deficit
    
    
    (161,047,148
    )
    
    
    (158,332,186
    )Total stockholders deficit
    
    
    (3,427,171
    )
    
    
    (4,587,322
    )Total liabilities and stockholders deficit
    
    $
    1,258,707
    
    
    $
    932,979
  1




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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    369,621
    
    
    $
    204,711
    
    
    $
    1,177,659
    
    
    $
    652,687Cost of sales
    
    
    197,379
    
    
    
    109,797
    
    
    
    661,224
    
    
    
    357,689Gross profit
    
    
    172,242
    
    
    
    94,914
    
    
    
    516,435
    
    
    
    294,998Expenses:Research and development
    
    
    245,888
    
    
    
    177,221
    
    
    
    1,109,476
    
    
    
    569,141General and administrative
    
    
    444,010
    
    
    
    341,286
    
    
    
    1,409,115
    
    
    
    1,032,269Selling and marketing
    
    
    291,838
    
    
    
    237,752
    
    
    
    856,195
    
    
    
    782,867Depreciation and amortization
    
    
    4,463
    
    
    
    5,734
    
    
    
    13,580
    
    
    
    22,718Operating expenses
    
    
    986,199
    
    
    
    761,993
    
    
    
    3,388,366
    
    
    
    2,406,995Loss from operations
    
    
    (813,957
    )
    
    
    (667,079
    )
    
    
    (2,871,931
    )
    
    
    (2,111,997
    )Other income (expense):Interest expense
    
    
    (86,994
    )
    
    
    (193,785
    )
    
    
    (269,629
    )
    
    
    (605,522
    )Gain in vendor settlements
    
    
    27,343
    
    
    
    75,144
    
    
    
    70,027
    
    
    
    248,960Other
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    Other expense, net
    
    
    (59,651
    )
    
    
    (118,641
    )
    
    
    400,398
    
    
    
    (356,562
    )Net loss
    
    
    (873,608
    )
    
    
    (785,720
    )
    
    
    (2,471,533
    )
    
    
    (2,468,559
    )Preferred stock dividend requirements:Recurring
    
    
    (81,735
    )
    
    
    (81,735
    )
    
    
    (243,428
    )
    
    
    (243,428
    )Warrant inducement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,060,397
    )2005 Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    (1,489,245
    )
    
    
    2006 Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    (645,020
    )
    
    
    Preferred stock dividend requirements
    
    
    (81,735
    )
    
    
    (81,735
    )
    
    
    (2,377,693
    )
    
    
    (2,303,825
    )Net loss applicable to common stock
    
    $
    (955,343
    )
    
    $
    (867,455
    )
    
    $
    (4,849,226
    )
    
    $
    (4,772,384
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.17
    )
    
    $
    (0.18
    )Weighted average shares of common stock outstanding
    
    
    28,516,329
    
    
    
    27,288,181
    
    
    
    28,218,656
    
    
    
    26,654,901
  2




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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (2,471,533
    )
    
    $
    (2,468,559
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    13,580
    
    
    
    22,718Amortization of financing discount and issuance costs
    
    
    132,243
    
    
    
    434,992Gain on vendor settlements and statutory write-off of payables
    
    
    (70,000
    )
    
    
    (248,960
    )Gain on sale of intellectual property
    
    
    (600,000
    )
    
    
    Stock based compensation expense
    
    
    538,564
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (48,565
    )
    
    
    (16,246
    )Inventory
    
    
    (360,039
    )
    
    
    (59,667
    )Prepaid expenses and other
    
    
    (50,980
    )
    
    
    (16,261
    )Other assets
    
    
    (397
    )
    
    
    1,215Accounts payable and accrued expenses
    
    
    142,323
    
    
    
    245,783Net cash used by operating activities
    
    
    (2,774,804
    )
    
    
    (2,104,985
    )Cash flow from investing activities:Capital expenditures
    
    
    (4,868
    )
    
    
    (7,491
    )Proceeds for sale of intellectual property
    
    
    600,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    595,132
    
    
    
    (7,491
    )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
    
    
    7,680
    
    
    
    22,040Principal payments on financing agreements
    
    
    (343,571
    )
    
    
    (223,021
    )Net cash provided by financing activities
    
    
    2,180,853
    
    
    
    1,732,794Net change in cash and cash equivalents
    
    
    1,181
    
    
    
    (379,682
    )Cash and cash equivalents, beginning of period
    
    
    236,869
    
    
    
    461,101Cash and cash equivalents, end of period
    
    $
    $238,050
    
    
    $
    81,419Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    $396,667
    
    
    $
    290,000Conversions of accrued interest into common stock
    
    
    20,110
    
    
    
    49,257Conversion of accrued dividends into common stock
    
    
    395,349
    
    
    
    432,446Preferred stock dividends accrued
    
    
    243,428
    
    
    
    243,429
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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
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    37,037
    
    
    $
    10,887Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    435,163
    
    
    
    101,274$
    472,309
    
    
    $
    112,270




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(d) Stock-Based Compensation
 Adoption of SFAS 123R
 Share-Based Payment
   Pro-Forma Stock Compensation Expense for the Three Months and Nine Months Periods Ended September
30, 2005
  Three
    
    
    NineMonths
    
    
    MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (867,455
    )
    
    $
    (4,772,384
    )Less: fair value of employee stock compensation
    
    
    (158,935
    )
    
    
    (531,383
    )Pro forma net loss attributed to common stock
    
    
    (1,026,390
    )
    
    
    (5,303,767
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.03
    )
    
    $
    (0.18
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.20
    )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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Research and development expense
    
    $
    32,424
    
    
    $
    27,545
    
    
    $
    110,514
    
    
    $
    85,702General and administrative expense
    
    
    93,728
    
    
    
    105,903
    
    
    
    324,162
    
    
    
    340,963Selling and marketing expense
    
    
    37,139
    
    
    
    25,487
    
    
    
    103,888
    
    
    
    104,718Total
    
    $
    163,291
    
    
    $
    158,935
    
    
    $
    538,564
    
    
    $
    531,383
 Stock Options for the Nine Month Ended September 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
    
    
    (19,200
    )
    
    
    0.40Options forfeited
    
    
    (164,412
    )
    
    
    1.47Options outstanding at September 30, 2006
    
    
    4,466,873
    
    
    
    1.83
    
    
    
    6.77
    
    
    $
    424,294Options exercisable at September 30, 2006
    
    
    2,647,869
    
    
    
    2.19
    
    
    
    6.09
    
    
    $
    424,294Options available for grants as of
September 30, 2006
    
    
    3,568,000
   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
    
    
    695,400
    
    
    
    6.30
    
    
    $
    0.40
    
    
    
    695,400
    
    
    $
    0.40$1.01 - $2.00
    
    
    2,520,258
    
    
    
    8.32
    
    
    
    1.40
    
    
    
    738,754
    
    
    
    1.81$2.01  $3.00
    
    
    789,375
    
    
    
    3.97
    
    
    
    2.64
    
    
    
    751,875
    
    
    
    2.53$3.01 - $4.00
    
    
    193,840
    
    
    
    4.08
    
    
    
    3.88
    
    
    
    193,840
    
    
    
    3.88$4.01 - $5.00
    
    
    20,000
    
    
    
    4.67
    
    
    
    4.55
    
    
    
    20,000
    
    
    
    4.55$5.01 - $6.25
    
    
    248,000
    
    
    
    3.48
    
    
    
    5.80
    
    
    
    248,000
    
    
    
    5.80Total
    
    
    4,466,873
    
    
    
    6.77
    
    
    
    1.83
    
    
    
    2,647,869
    
    
    
    2.19




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##### Table of Contents



(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
    
    
    
    September 30, 2006
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    2,708,550
    
    
    
    1,200,000Conversion ratio (or
conversion price) of
preferred shares into
    
    
    1 to 1 intovotingcommonstock
    
    
    
    1 to 1 intovotingcommonstock
    
    
    
    1 to 1 intovotingcommonstock
    
    
    
    1 to 1 intovotingcommonstockLiquidation preference
    
    None
    
    None
    
    None
    
    NoneDividend rights
    
    7% perannum,cumulative
    
    7% perannum,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
   Liquidity and Capital Resources




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##### Table of Contents



2006 Preferred Equity
  2005 Preferred Equity
  Patent Sale
  Sales and Marketing Initiatives




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##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Sales and Gross Profit
 Operating Expenses




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##### Table of Contents



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
   Warrants
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description31.1
    
    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
2002.99.1
    
    On November 15, 2006 the Company issued a press release
that announced operating results for its third quarter and
nine months ended September 30, 2006.
 
 (b)
    
    Reports on Form 8-K: Date
    
    Description09/21/06
    
    On September 21, 2006, the Company issued a press release
giving certain guidance stating that its annual revenue
for fiscal year 2006 will substantially exceed its 2005
fiscal year revenues.11/13/06
    
    8-K disclosing that on November 9, 2006 the Company
closed on an Unsecured Convertible Note, between the
Company and Amphion Innovations plc.




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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)