##### 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, 2005
 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




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##### Table of Contents



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at June 30, 2005 and December 31, 2004Statements of Operations for the Three Months ended June 30, 2005 and
2004 and for the Six Months ended June 30, 2005 and 2004Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004Notes 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-KSIGNATURES2005 Equity Incentive PlanCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




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PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30,
    
    December 31,2005
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    670,480
    
    
    $
    461,101Accounts receivable  trade, net of allowance for doubtful accounts of
$11,863 in 2005 and $8,859 in 2004
    
    
    61,848
    
    
    
    79,965Inventory, net
    
    
    213,056
    
    
    
    144,714Prepaid expenses and other
    
    
    134,137
    
    
    
    97,164Total current assets
    
    
    1,079,521
    
    
    
    782,944Property, plant and equipment, net
    
    
    35,006
    
    
    
    49,395Intellectual property, net
    
    
    
    
    
    
    133Deferred debt issuance costs
    
    
    422,407
    
    
    
    506,889Other assets
    
    
    2,691
    
    
    
    3,906Total assets
    
    $
    1,539,625
    
    
    $
    1,343,267LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    295,448
    
    
    $
    490,100Accrued liabilities
    
    
    876,805
    
    
    
    789,589Notes payable:Convertible notes payable (includes $80,000 and $66,667 with
related party in 2005 and 2004, respectively)
    
    
    613,333
    
    
    
    483,333Discounts on convertible debt
    
    
    (111,558
    )
    
    
    (289,482
    )Dividends payable
    
    
    45,310
    
    
    
    316,062Total current liabilities
    
    
    1,719,338
    
    
    
    1,789,602Notes payable to stockholders
    
    
    3,709,070
    
    
    
    3,932,092Convertible notes payable (includes $13,333 with related party in 2004)
    
    
    
    
    
    
    236,667Discount on convertible debt
    
    
    
    
    
    
    (34,084
    )Total liabilities
    
    
    5,428,408
    
    
    
    5,924,277Commitments and contingenciesStockholders deficit:Convertible preferred stock, 7,000,000 shares authorized, $0.01 par
value, 2,415,000 shares issued and outstanding in 2005 and 2004.
    
    
    24,150
    
    
    
    24,150Common stock, $.01 par value, 50,000,000 shares authorized in 2005 and
2004; 27,211,119 shares issued and outstanding in 2005 and 24,720,939
shares issued and outstanding in 2004
    
    
    272,111
    
    
    
    247,209Shares of common stock to be issued, 5,333 shares in 2005
    
    
    53
    
    
    
    Additional paid-in capital
    
    
    152,410,403
    
    
    
    149,898,600Accumulated deficit
    
    
    (156,595,500
    )
    
    
    (154,750,969
    )Total stockholders deficit
    
    
    (3,888,783
    )
    
    
    (4,581,010
    )Total liabilities and stockholders deficit
    
    $
    1,539,625
    
    
    $
    1,343,267
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Sales
    
    $
    206,818
    
    
    $
    225,129
    
    
    $
    447,976
    
    
    $
    431,807Cost of sales
    
    
    123,545
    
    
    
    124,787
    
    
    
    247,893
    
    
    
    223,673Gross profit
    
    
    83,273
    
    
    
    100,342
    
    
    
    200,083
    
    
    
    208,134Expenses:Research and development
    
    
    207,739
    
    
    
    166,534
    
    
    
    391,920
    
    
    
    351,892General and administrative
    
    
    335,520
    
    
    
    461,863
    
    
    
    690,983
    
    
    
    866,079Selling and marketing
    
    
    290,018
    
    
    
    172,162
    
    
    
    545,115
    
    
    
    346,745Depreciation and amortization
    
    
    7,911
    
    
    
    88,434
    
    
    
    16,984
    
    
    
    182,065Operating expenses
    
    
    841,188
    
    
    
    888,993
    
    
    
    1,645,002
    
    
    
    1,746,781Loss from operations
    
    
    (757,915
    )
    
    
    (788,651
    )
    
    
    (1,444,919
    )
    
    
    (1,538,647
    )Other income (expense):Interest expense
    
    
    (246,599
    )
    
    
    (334,830
    )
    
    
    (411,737
    )
    
    
    (657,553
    )Gain in vendor settlements
    
    
    65,106
    
    
    
    64,509
    
    
    
    173,816
    
    
    
    152,751Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,509Other expense, net
    
    
    (181,493
    )
    
    
    (270,321
    )
    
    
    (237,921
    )
    
    
    (498,293
    )Net loss
    
    
    (939,408
    )
    
    
    (1,058,972
    )
    
    
    (1,682,840
    )
    
    
    (2,036,940
    )Preferred stock dividend requirements:Recurring
    
    
    (80,847
    )
    
    
    (70,490
    )
    
    
    (161,694
    )
    
    
    (136,011
    )Warrant inducement
    
    
    
    
    
    
    
    
    
    
    (2,060,397
    )
    
    
    Preferred stock dividend requirements
    
    
    (80,847
    )
    
    
    (70,490
    )
    
    
    (2,222,091
    )
    
    
    (136,011
    )Net loss applicable to common stock
    
    $
    (1,020,255
    )
    
    $
    (1,129,462
    )
    
    $
    (3,904,931
    )
    
    $
    (2,172,951
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.09
    )Weighted average shares of common stock outstanding
    
    
    26,930,819
    
    
    
    24,303,151
    
    
    
    26,333,012
    
    
    
    22,951,611
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (1,682,840
    )
    
    $
    (2,036,940
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    16,984
    
    
    
    182,065Amortization of financing discount and issuance costs
    
    
    296,488
    
    
    
    522,570Shares issued for services rendered
    
    
    
    
    
    
    65,000Gain on vendor settlements
    
    
    (173,816
    )
    
    
    (152,751
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    18,117
    
    
    
    7,579Inventory
    
    
    (68,342
    )
    
    
    15,141Prepaid expenses and other
    
    
    (36,973
    )
    
    
    3,500Other assets
    
    
    1,215
    
    
    
    Accounts payable and accrued expenses
    
    
    112,413
    
    
    
    (81,809
    )Net cash used by operating activities
    
    
    (1,516,754
    )
    
    
    (1,475,645
    )Cash flow from investing activities:Capital expenditures
    
    
    (2,461
    )
    
    
    (29,589
    )Net cash used by investing activities
    
    
    (2,461
    )
    
    
    (29,589
    )Cash flow from financing activities:Net proceeds from issuance of common stock from warrants
    
    
    1,933,775
    
    
    
    1,200,000Net proceeds from issuance of common stock from employee options
    
    
    17,840
    
    
    
    13,120Principal payments on financing agreements
    
    
    (223,021
    )
    
    
    (122,624
    )Net cash provided by financing activities
    
    
    1,728,594
    
    
    
    1,090,496Net change in cash and cash equivalents
    
    
    209,379
    
    
    
    (414,738
    )Cash and cash equivalents, beginning of period
    
    
    461,101
    
    
    
    2,163,977Cash and cash equivalents, end of period
    
    $
    670,480
    
    
    $
    1,749,239Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    106,666
    
    
    $
    384,999Conversions of accrued interest into common stock
    
    
    46,031
    
    
    
    138,461Conversions of preferred stock into common stock
    
    
    
    
    
    
    536,623Conversion of accrued dividends into common stock
    
    
    432,446
    
    
    
    109,417Preferred stock dividends accrued
    
    
    161,694
    
    
    
    136,011
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AXCESS
 
 NOTES TO 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 31,2005
    
    2004Raw materials
    
    $
    55,828
    
    
    $
    56,701Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    157,119
    
    
    
    87,904$
    213,056
    
    
    $
    144,714




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(d) Stock Options
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (1,020,255
    )
    
    $
    (1,129,462
    )
    
    $
    (3,904,931
    )
    
    $
    (2,172,951
    )Less: fair value of employee stock compensation
    
    
    (172,613
    )
    
    
    (136,629
    )
    
    
    (373,176
    )
    
    
    (217,053
    )Pro forma net loss attributed to common stock
    
    
    (1,192,868
    )
    
    
    (1,266,091
    )
    
    
    (4,278,107
    )
    
    
    (2,390,004
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.09
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %Expected life
    
    3 years
    
    

    2 years
    
    

    3 years
    
    
    2 yearsExpected volatility
    
    
    164
    %
    
    
    175
    %
    
    
    164
    %
    
    
    175
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 (e) Recent Accounting Pronouncements
 Accounting for Stock-Based Compensation.
 (2) Contingencies




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(3) Preferred Stock
  2003B
    
    SeriesSeries
    
    2004Number of shares authorized
    
    
    2,750,000
    
    
    
    625,000Stated value
    
    $
    0.01
    
    
    $
    0.01Number of shares issued and outstanding:December 31, 2004
    
    
    1,790,000
    
    
    
    625,000June 30, 2005
    
    
    1,790,000
    
    
    
    625,000Conversion ratio (or
conversion price) of
preferred shares into
common
    
    
    1 to 1 into voting common stock
    
    
    
    1 to 1 into voting common stockLiquidation preference
    
    None
    
    NoneDividend rights
    
    7% per annum, cumulative
    
    7% per annum, cumulative
 (a) Series 2003B Preferred Stock
   (b) Series 2004 Preferred Stock




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(4) Convertible Notes Payable
     (5) Significant Customers
   Forward-Looking Statements




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




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Warrants Exercised
   Sales and Marketing Initiatives
  1.
    
    We were able to secure a number of important reference accounts in 2004;2.
    
    We grew the integrator channel;3.
    
    We began our thrust into Supply Chain tagging.
  Results of Operations
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Sales and Gross Profit
   Operating Expenses




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Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Sales and Gross Profit
   Operating Expenses




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Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Other
 Inflation
 
 Item 3. Controls and Procedures
 Controls and Procedures




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities
  Common Stock
     Warrants Exercised
  Warrants
  2005 Equity Incentive Plan
   Purpose.
 Eligibility.
 Administration.




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##### Table of Contents



Awards.
     Award Agreements.
    Table of Contents  Exercise of Awards
   Restrictions.
    Table of Contents  Termination and Forfeiture.
 Adjustments.
  Discontinuance or Amendment of the Plan.
    Table of Contents  Certain Federal Income Tax Aspects
  Withholding.
 Non-qualified Stock Options.
   Incentive Stock Options.
    Table of Contents  Restricted Stock.
  Resales by Participants
    
    
    in accordance with the provisions of Rule 144 of the Securities Act (except that such
affiliate is not required to meet the two-year holding period requirement of Rule 144 if
such Common Stock is acquired upon exercise of an option while a registration statement
covering the issuance of such shares is in effect) or some other exemption from
registration under the Securities Act;
    
    pursuant to an exemption from the registration requirements of the Securities Act; or
    
    pursuant to an effective registration statement.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    WithheldRichard C.E. Morgan
    
    
    18,452,122
    
    
    
    25,969Allan Griebenow
    
    
    18,452,122
    
    
    
    25,234Paul J. Coleman, Jr.
    
    
    18,456,400
    
    
    
    21,691Robert J. Bertoldi
    
    
    18,452,907
    
    
    
    25,184Robert F. Hussey
    
    
    18,457,835
    
    
    
    20,256
    Table of Contents  TotalTotal number of shares voted in favor:
    
    
    18,465,301Total number of shares voted against:
    
    
    9,258Total number of abstentions:
    
    
    3,532Total number of broker non-votes:
    
    
    0
  TotalTotal number of shares voted in favor:
    
    
    18,407,117Total number of shares voted against:
    
    
    60,404Total number of abstentions:
    
    
    10,570Total number of broker non-votes:
    
    
    0
  TotalTotal number of shares voted in favor:
    
    
    18,423,792Total number of shares voted against:
    
    
    45,294Total number of abstentions:
    
    
    9,005Total number of broker non-votes:
    
    
    0
 
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description10.1
    
    Axcess International Inc. 2005 Equity Incentive Plan. *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. *
 
 *

    Filed herewith(b)
    Reports on Form 8-K: Date
    
    DescriptionJuly 18, 2005
    
    8-K disclosing a press release that announced the
results of the annual meeting and the departure of our
vice president of marketing.
    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)
 August 15, 2005