Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2010**

 

**or**

 

**o****         TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from             to              .**

 

**COMMISSION FILE NUMBER: 0-11933**

 

**AXCESS INTERNATIONAL INC.**

(Exact name of small business issuer asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **85-0294536**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |

 

#### **16650 WestgroveDrive, Suite 600**Addison, Texas 75001(972) 407-6080

(Address, including telephone number and area code, of principalexecutive offices)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the proceeding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated file and “Smaller reporting company” in Rule 12b-2of the Exchange Act:

 

| Large accelerated filer o | Accelerated filer o         |
|---------------------------|-----------------------------|
|                      |                        |
| Non-accelerated filer o   | Smaller reporting company x |

 

Indicateby check mark weather the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Numberof shares of common stock outstanding on May 3, 2010: 34,596,170

 

 

 

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**AXCESS INTERNATIONAL INC.**

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |   |
|                                   | Item 1.  Financial Statements: |
|                                   |   |   |
|                                   |   | Balance  Sheets at March 31, 2010 and December 31, 2009 (unaudited) |
|                                   |   |   |
|                                   |   | Statements  of Operations for the Three Months ended March 31, 2010 and 2009  (unaudited) |
|                                   |   |   |
|                                   |   | Statements  of Cash Flows for the Three Months ended March 31, 2010 and 2009  (unaudited) |
|                                   |   |   |
|                                   |   | Notes  to Financial Statements (unaudited) |
|                                   |   |   |
|                                   | Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |
|                                   |   |   |
|                                   | Item  3. Quantitative and Qualitative Disclosures about Market Risk |
|                                   |   |   |
|                                   | Item 4.  Controls and Procedures |
|                                   |   |   |
| **PART II.  OTHER INFORMATION**   |
|                                   |   |   |
|                                   | Item 1. Legal  Proceedings |
|                                   |   |   |
|                                   | Item 1A. Risk  Factors |
|                                   |   |   |
|                                   | Item  2. Unregistered Sales of Equity Securities and Use of Proceeds |
|                                   |   |   |
|                                   | 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 |
|                                   |   |   |
| **SIGNATURES**                         |

 

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**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                            | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                                                       |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $                        | 129,941    |                        | $          | 65,534 |   |
| Accounts receivable - trade, net of allowance for  doubtful accounts of $24,715 for 2010 and 2009, respectively.                                                                                                      |       | 20,119                   |       | 142,213                     |       |
| Inventory, net                                                                                                                                                                                                        |       | 84,362                   |       | 83,387                      |       |
| Prepaid expenses and other                                                                                                                                                                                            |       | 41,300                   |       | 46,631                      |       |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Total current assets                                                                                                                                                                                                  |       | 275,722                  |       | 337,765                     |       |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Property, plant and equipment, net                                                                                                                                                                                    |       | 14,059                   |       | 16,727                      |       |
| Deferred debt issuance costs                                                                                                                                                                                          |       | 10,938                   |       | 12,500                      |       |
| Other assets                                                                                                                                                                                                          |       | 37,624                   |       | 40,213                      |       |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Total assets                                                                                                                                                                                                          |       | $                        | 338,343    |                        | $          | 407,205 |   |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                                                  |       |                     |       |                        |       |
| Accounts  payable (includes $25,059 and $15,253 with related party in 2010 and 2009,  respectively)                                                                                                                   |       | $                        | 870,818    |                        | $          | 831,484 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 486,144                  |       | 331,899                     |       |
| Accrued interest                                                                                                                                                                                                      |       | 1,306,150                |       | 1,246,812                   |       |
| Deferred revenue                                                                                                                                                                                                      |       | 8,507                    |       | 9,342                       |       |
| Notes payable                                                                                                                                                                                                         |       | 162,000                  |       | 162,000                     |       |
| Dividends payable                                                                                                                                                                                                     |       | —                   |       | 31,514                      |       |
| Total current liabilities                                                                                                                                                                                             |       | 2,833,619                |       | 2,613,051                   |       |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Notes payable to stockholders (includes $2,141,213  and $1,791,213 with a related party in 2010 and 2009, respectively)                                                                                               |       | 4,598,772                |       | 4,248,772                   |       |
| Debt discount                                                                                                                                                                                                         |       | (742,085                 | )          | (682,478                    | )          |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Total liabilities                                                                                                                                                                                                     |       | 6,690,306                |       | 6,179,345                   |       |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Commitments and contingencies  (Notes 1 and 2)                                                                                                                                                                        |       |                     |       |                        |       |
| Stockholders’ deficit:                                                                                                                                                                                           |       |                     |       |                        |       |
| Convertible preferred stock, 10,000,000 shares  authorized in 2010 and 2009. Without liquidation preferences; $0.01 par  value, 4,550,201 and 4,550,211 shares issued and outstanding in 2010 and  2009, respectively |       | 45,502                   |       | 45,502                      |       |
| Common stock, $.01 par value, 70,000,000 shares  authorized in 2010 and 2009; 33,742,593 and 33,642,593 shares issued and  outstanding in 2010 and 2009, respectively.                                                |       | 337,426                  |       | 336,426                     |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 167,922,894              |       | 167,385,813                 |       |
| Shares of common to be issued                                                                                                                                                                                         |       | 829                      |       | —                      |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (174,658,614             | )          | (173,539,881                | )          |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Total stockholders’ deficit                                                                                                                                                                                      |       | (6,351,963               | )          | (5,772,140                  | )          |
|                                                                                                                                                                                                                  |       |                     |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                                      |       | $                        | 338,343    |                        | $          | 407,205 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                 |       |                                   |       |   |   |
| Sales                                                |       | $                                      | 145,289    |   | $ | 1,082,682 |   |
| Cost of sales                                        |       | 86,049                                 |       | 745,974 |   |
|                                                 |       |                                   |       |   |   |
| Gross profit                                         |       | 59,240                                 |       | 336,708 |   |
| Expenses:                                            |       |                                   |       |   |   |
| Research and development                             |       | 343,677                                |       | 309,359 |   |
| General and administrative                           |       | 485,034                                |       | 324,453 |   |
| Selling and marketing                                |       | 247,586                                |       | 394,559 |   |
| Depreciation and amortization                        |       | 5,257                                  |       | 4,664 |   |
|                                                 |       |                                   |       |   |   |
| Operating expenses                                   |       | 1,081,554                              |       | 1,033,035 |   |
|                                                 |       |                                   |       |   |   |
| Loss from operations                                 |       | (1,022,314                             | )          | (696,327 | ) |
|                                                 |       |                                   |       |   |   |
| Other income (expense):                              |       |                                   |       |   |   |
| Interest expense                                     |       | (96,418                                | )          | (107,361 | ) |
| Gain on vendor settlements                           |       | —                                 |       | 43,810 |   |
|                                                 |       |                                   |       |   |   |
| Other income (expense), net                          |       | (96,418                                | )          | (63,551 | ) |
|                                                 |       |                                   |       |   |   |
| Net loss                                             |       | (1,118,732                             | )          | (759,878 | ) |
|                                                 |       |                                   |       |   |   |
| Preferred  stock dividend requirements:              |       | —                                 |       | (47,466 | ) |
|                                                 |       |                                   |       |   |   |
| Net loss applicable to common stock                  |       | $                                      | (1,118,732 | ) | $ | (807,344 | ) |
|                                                 |       |                                   |       |   |   |
| Basic and diluted net loss per share                 |       | $                                      | (0.03      | ) | $ | (0.03 | ) |
|                                                 |       |                                   |       |   |   |
| Weighted average shares of common stock  outstanding |       | 33,689,260                             |       | 31,211,006 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                    | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                                         |       |                                   |       |   |   |
| Net loss                                                                                      |       | $                                      | (1,118,732 | ) | $ | (759,878 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) by operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                                 |       | 5,257                                  |       | 4,664 |   |
| Amortization of financing discount and issuance  costs, net                                   |       | (58,044                                | )          | 5,179 |   |
| Gain on vendor settlements and statutory write-off  of payables                               |       | —                                 |       | 43,810 |   |
| Stock based compensation expense                                                              |       | 412,270                                |       | 148,758 |   |
| Changes in operating assets and liabilities:                                                  |       |                                   |       |   |   |
| Accounts receivable                                                                           |       | 122,094                                |       | (4,605 | ) |
| Inventory                                                                                     |       | (975                                   | )          | 60,876 |   |
| Prepaid expenses and other                                                                    |       | 5,331                                  |       | (330,480 | ) |
| Other assets                                                                                  |       | —                                 |       | — |   |
| Accounts payable and accrued expenses                                                         |       | 347,206                                |       | 944,163 |   |
| Net cash provided by (used in) operating  activities                                          |       | (285,593                               | )          | 112,487 |   |
|                                                                                          |       |                                   |       |   |   |
| Cash flow from investing activities:                                                          |       |                                   |       |   |   |
| Capital expenditures                                                                          |       | —                                 |       | — |   |
| Net cash used in investing activities                                                         |       | —                                 |       | — |   |
|                                                                                          |       |                                   |       |   |   |
| Cash flow from financing activities:                                                          |       |                                   |       |   |   |
| Principal payments on financing agreements                                                    |       | —                                 |       | (160,000 | ) |
| Borrowings on financing agreements                                                            |       | 350,000                                |       | 160,000 |   |
| Net cash provided by financing activities                                                     |       | 350,000                                |       | — |   |
|                                                                                          |       |                                   |       |   |   |
| Net change in cash and cash equivalents                                                       |       | 64,407                                 |       | 112,487 |   |
| Cash and cash equivalents, beginning of period                                                |       | 65,534                                 |       | 51,392 |   |
| Cash and cash equivalents, end of period                                                      |       | $                                      | 129,941    |   | $ | 163,879 |   |
|                                                                                          |       |                                   |       |   |   |
| Supplemental  Disclosure of Non-Cash Investing and Financing Activities:                      |       |                                   |       |   |   |
| Warrants  issued as a debt discount                                                           |       | $                                      | 95,124     |   | $ | 49,874 |   |
| Accrued preferred stock dividends                                                             |       | —                                 |       | 47,466 |   |
| Conversion of preferred shares into common stock                                              |       | —                                 |       | 100 |   |
| Conversion of accrued dividends into common stock                                             |       | 31,515                                 |       | 1,913 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**(1)****                                ****Summaryof Significant Accounting Policies**

 

**(a) Description of Business and Going Concern**

 

TheCompany is a leading provider of patented Radio Frequency Identification (“RFID”)and Real Time Location Systems (“RTLS”) solutions that locate, track, monitor,count and protect people, assets, and vehicles, thereby improving productivity,security and access to real-time intelligence. The Company’s multiuse, single-system solutions include active, dual andsemi-active RFID tags, activators and readers that support automatic monitoringand tracking applications, such as electronic asset protection and assetmanagement, and automatic personnel and vehicle access control.  Axcess’ web-based software provides a suiteof management tools that include reporting, display, decision and controlfunctions that enable productivity, security and local positioning.

 

The Company’s business plan for 2010 ispredicated principally upon the successful marketing of its RFID products.During the first three months of 2010, operations utilized approximately$286,000 of cash. The Company anticipates that its existing working capitalresources and revenues from operations will not be adequate to satisfy itsfunding requirements for all of 2010.We are currently experiencing decliningliquidity, losses from operations and negative operating cash flows, which makeit difficult for us to meet our current cash requirements, including paymentsto vendors, and may jeopardize our ability to continue as a going concern. Managementis attempting to obtain equity financing for use in the Company’s operations.In addition, management is trying to expand the Company’s sales and obtainprofitable operations.

 

Our auditors have included an explanatory paragraph intheir audit opinion with respect to our consolidated financial statements at December 31,2009. The paragraph states that our recurring losses from operations andresulting continued dependence on access to external financing raisesubstantial doubts about our ability to continue as a going concern.Furthermore, the factors leading to and the existence of the explanatoryparagraph may adversely affect our relationship with customers and suppliersand have an adverse effect on our ability to obtain financing.

 

Thefuture results of operations and financial condition of the Company will beimpacted by the following factors, among others: changes from anticipatedlevels of sales, access to capital, future national or regional economic andcompetitive conditions, changes in relationships with customers, difficultiesin developing and marketing new products, marketing existing products, customeracceptance of existing and new products, validity of patents, technologicalchange, dependence on key personnel, availability of key component parts,dependence on third party manufacturers, vendors, contractors, productliability, casualty to or other disruption of the production facilities, delaysand disruptions in the shipment of the Company’s products, and the ability ofthe Company to meet its stated business goals.

 

Ifthe Company’s losses or lack of operating capital continue, the Company willhave to obtain funds to meet its cash requirements through business alliances,such as strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or the Company may be required tocurtail its operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tothe Company or disadvantageous to existing stockholders. In addition, noassurance may be given that the Company will be successful in raisingadditional funds or entering into business alliances.

 

**(b) Company Organization**

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its majority-owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

The Company hasreceived working capital in various forms from Amphion Ventures, L. P. andaffiliates of Amphion Ventures, L. P. including Amphion Partners, AmphionInvestments LLC, Antiope Partners LLC, VennWorks LLC (formerly incuVest LLC),Amphion Capital Management LLC, Amphion Innovations plc, Amphion Innovations USInc. and NVW, LLC (collectively, the “Amphion Group”). The Amphion Group ownsapproximately 49% of the outstanding voting common stock of the Company.

 

**(c) Basis of presentation**

 

The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Asdiscussed below, the Company makes significant assumptions in

 

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recording its allowance for doubtful accounts,inventory valuation, impairment of long-lived assets, warranty costs, thevaluation allowance for deferred tax assets, the value of components of equityand debt instruments and stock based compensation expense. Actual results coulddiffer from those estimates, and the differences may be significant.

 

The accompanying unaudited financialstatements as of March 31, 2010 and for the three months ended March 31,2010 and 2009, respectively, have been prepared in accordance with generallyaccepted accounting principles for interim financial information. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for audited financial statements. In the opinionof management, the interim information includes all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of theresults for the interim periods. The footnote disclosures related to theinterim financial information included herein are also unaudited. Suchfinancial information should be read in conjunction with the consolidatedfinancial statements and related notes thereto as of December 31, 2009 andfor the year then ended included in our annual report on Form 10-K for thefiscal year ended December 31, 2009.

 

**(d) Use of Estimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. As discussed below, the Company makes significantassumptions in recording its allowance for doubtful accounts, inventoryvaluation, and impairment of long-lived assets, warranty costs, the valuationallowance for deferred tax assets and the value of the components of equity anddebt instruments. Actual results could differ from those estimates, and thedifferences may be significant.

 

**(e) Inventory**

 

Inventory is valued at the lower of cost or market using the first-in,first-out method. Inventory, net of valuation allowance of $8,392 at March 31,2010 and December 31, 2009, respectively, comprised of the following:

 
| ** **      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 36,072     |                        | $          | 37,838 |   |
| Work-in-process |       | 99                       |       | 104                         |       |
| Finished goods  |       | 48,191                   |       | 45,445                      |       |
|            |       | $                        | 84,362     |                        | $          | 83,387 |   |

 

The components of costof sales are summarized as follows:

 
| ** **            | ** ** | **Three Months Ended********March 31,** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Product  cost         |       | $                                            | 85,882     |   | $ | 741,217 |   |
| Warranty  expense     |       | 167                                          |       | 4,757 |   |
| Inventory  impairment |       | —                                       |       | — |   |
| Total                 |       | $                                            | 86,049     |   | $ | 745,974 |   |

 

**(f) Stock-Based Compensation**

 

ASCTopic 718, *Compensation — Stock Compensation*requires the cost of all share-based payments to employees, includinggrants of employee stock options, to be recognized in the consolidatedfinancial statements based on the grant date fair value of those awards. In accordance with ASC Topic 718, this cost is recognized over the period forwhich an employee is required to provide service in exchange for theaward.  Stock based compensation expense for 2010 and 2009 was $412,270and $148,758, respectively which was recorded in operating expenses.  This expense decreased net profit per shareby $0.012 and $0.005 for 2010 and 2009, respectively.  The Company did not recognize a tax benefitfrom the stock compensation expense because the Company considers it is morelikely than not the related deferred tax assets, which have been reduced by afull valuation allowance, will not be realized.

 

TheBlack-Scholes option-pricing model was used to estimate the option fairvalue.  The option pricing model requiresa number of assumptions, of which the most significant are, expected stockprice volatility, risk-free interest rate and the expected option term (theamount of time from the grant date until the options are exercised orexpire).  Expected volatility wascalculated based upon actual historical stock price movements over the mostrecent periods at the time of the grants equal to the expected option term,which is consistent with ASC Topic 718.

 

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The following table illustrates the effecton operating expenses:

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Research  and development expense   |       | $                                      | 111,030    |   | $ | 51,147 |   |
| General  and administrative expense |       | 225,497                                |       | 70,525 |   |
| Selling  and marketing expense      |       | 75,743                                 |       | 27,086 |   |
| Total                               |       | $                                      | 412,270    |   | $ | 148,758 |   |

 

**(g) StockOptions and Warrants**

 

Underthe Company’s 2005 Equity Incentive Plan, the Company may grant up to 5,000,000shares of common stock to its employees. The exercise price of each option isnot less than the market price of the Company’s stock on the date of grant andan option’s maximum term is ten years. Options are generally granted each year and have various vestingrequirements. Options granted typically vest over a four-year period.  Shares issued upon stock options exercisedare issued as new shares.  During thethree months ended March 31, 2010, the Company made no grants under thestock option plan.

 

Asof March 31, 2010 the Company had 165,900 options outstanding from the1991 Equity Plan, 120,000 from the Directors plan, 1,519,961 from the 2001Equity plan and 515,000 issued as inducements to hire.  In total the Company had 2,320,861 employeeoptions outstanding from plans other than the 2005 Equity Incentive Plan.

 

Thefollowing table summarizes employee stock options outstanding and changesduring the three months ended March 31, 2010:

 
| ** **                                              | ** ** | **Outstanding Options** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Options outstanding at  December 31, 2009          |       | 6,361,417               |       | $ | 1.38 |   |   |   |   |   |
| Options granted                                         |       | —                  |       | — |   |   |   |   |   |
| Options exercised                                       |       | —                  |       | — |   |   |   |   |   |
| Options forfeited                                       |       | (131,556                | )          | 5.50 |   |   |   |   |   |
| Options outstanding at  March 31, 2010             |       | 6,229,861               |       | 1.73 |   | 6.26 |   | $ | 62,700 |   |
|                                                    |       |                    |       |   |   |   |   |   |   |
| Options exercisable at  March 31, 2010             |       | 3,771,111               |       | 1.60 |   | 6.26 |   | $ | 62,700 |   |
|                                                    |       |                    |       |   |   |   |   |   |   |
| Options available for grants  as of March 31, 2010 |       | 1,091,000               |       |   |   |   |   |   |   |
|                                                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Theoptions outstanding at March 31, 2010 have exercise prices as indicated inthe table below:

 
| **Option Price**   | ** ** | **Number of  Options** | ** ** | **Weighted Average  Remaining Life** | ** ** | **Intrinsic Value of  Vested Unexercised  Options** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|
| $0.00 - $1.00      |       | 2,627,000              |       | 7.93                                 |       | $                                                   | 62,700     |   |
| $1.01 - $2.00      |       | 3,116,961              |       | 5.65                                 |       |                                                |       |
| $2.01 – $3.00 |       | 200,000                |       | 1.97                                 |       |                                                |       |
| $3.01 - $4.00      |       | 165,900                |       | 0.78                                 |       |                                                |       |
| $4.01 - $5.00      |       | 20,000                 |       | 1.17                                 |       |                                                |       |
| $5.01 - $6.25      |       | 100,000                |       | 0.17                                 |       |                                                |       |
| Total              |       | 6,229,861              |       | 6.26                                 |       | $                                                   | 62,700     |   |

 

TheCompany has issued warrants to purchase common stock in connection withissuance of notes payable to stockholders and preferred stock. The followingtable summarizes warrants outstanding at March 31, 2010:

 

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| ** **                                 | ** ** | **WARRANTS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
|--------------------------------------------|------------|--------------|------------|----------------------------------------|------------|
| Warrants  outstanding at beginning of year |       | 11,826.436   |       | $                                      | 1.48       |   |
| Warrants  issued                           |       | 350,000      |       | 0.75                                   |       |
| Warrants exercised                         |       | —       |       | —                                 |       |
| Warrants expired unexercised               |       | (1,658,173   | )          | 1.50                                   |       |
| Warrants  outstanding at end of year       |       | 10,518,263   |       | 1.46                                   |       |
|                                            |            |              |            |                                        |            |  |

 

Thewarrants outstanding at March 31, 2010 have exercise prices as indicatedin the table below.

 
| **Strike Price** | ** ** | **Number of  Warrants** | ** ** | **Weighted Average  Remaining Life** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------------------|------------|
| $0.00 - $1.00    |       | 2,453,474               |       | 4.53                                 |       |
| $1.01 - $2.00    |       | 8,064,789               |       | 1.83                                 |       |
| Total            |       | 10,518,263              |       | 2.46                                 |       |

 

During the three monthsended March 31, 2010 the Company issued an additional 350,000 warrants inconjunction with various debt agreements. The warrant had a strike price of $0.75 and they expire on December 31,2014.  TheCompany estimates the fair market value of the warrant using Black-ScholesValuation Model.  Key assumptions used toestimate the fair market value of the warrants include the exercise price of$0.75, the expected term (five years), the expected volatility of the Company’sstock over the warrants expected term (ranging from 93% to 97%) and risk freeinterest rate (ranging from 3.59% to 3.88%).

 

**(2)****                            ****Contingencies**

 

Fromtime to time we may be named in claims arising in the ordinary course ofbusiness. Currently, no material legal proceedings, government actions,administrative actions, investigations or claims are pending against us orinvolve us that, in the opinion of our management, could reasonably be expectedto have a material adverse effect on our business and financial condition.

 

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $48,999. We are currentlydefending or seeking to settle each of the vendor’s and customer claims.  At March 31, 2010, we accrued $31,999,which represents the delinquent amounts we expect to be liable for, for theclaims described in this paragraph.

 

OnMarch 31, 2008, Axcess entered into an agreement with the developer of ournext generation RFID product, the Dot, whereby Axcess has agreed to pay aminimum commercialization fee of one million dollars over the next sixyears.  The amount is still contingent onthe supplier completing the testing and certifying the product is within all ofthe original specifications.  The testingis ongoing but the product has not passed all of the preliminary testing and weare still evaluating the impact on the product. As of March 31, 2010 Axcess has not signed off on the completion ofthe product and Innovison has issued a letter of termination for failure topay. We currently have accrued $392,808 for services that have been completed;however, we have not accrued the remainder for services that have not beencompleted.

 

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**(3)****                                ****PreferredStock**

 

TheCompany has authorized 10,000,000 shares of convertible preferred stock, ofwhich shares designated in three series are currently outstanding. Informationwith respect to the series of preferred stock outstanding at each balance sheetdate is summarized below.

 
| ** **                                                              | ** ** | **Series  2005**                | ** ** | **Series  2006**                | ** ** | **Series  2006B**               | ** ** | **Series  2006C**                    | ** ** | **Series  2007**                     | ** ** | **Series  2008**                     | ** ** | **Series  2008B**                    | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| Number of shares authorized                                             |       | 2,750,000                       |       | 1,200,000                       |       | 750,000                         |       | 200                                  |       | 205                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Stated value                                                            |       | $                               | 0.01       |                            | $          | 0.01                            |       | $                                    | 0.01       |                                 | $          | 0.01                                 |       | $                                    | 0.01       |   | $ | 0.01 |   | $ | 0.01 |   |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Number of shares issued and Outstanding                                 |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| December 31, 2009                                                  |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 185                                  |       | 120                                  |       | 80                                   |       |
| March 31, 2010                                                     |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 175                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Conversion 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 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 stock |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Liquidation preference                                                  |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Dividend rights                                                         |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                         |            |                                 |            |                                 |            |                                 |            |                                      |            |                                      |            |                                      |            |                                      |            |  |  |  |  |  |  |  |

 

*(a)**                                    **Series 2005Preferred Stock*

 

On December 30,2005, the Company raised $813,021 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005Preferred and consists of 956,495 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $0.85.  In addition, the Company issued 956,495warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Eachwarrant will be callable by the Company if and when the Company’s common stockshare price exceeds $3.00 per share for at least twenty (20) consecutivetrading days.  The Company used theproceeds for general working capital.

 

On March 14,2006, the Company raised an additional $1,489,245 of additional working capitalthrough an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005Preferred and consists of 1,752,055 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $0.85.  In addition, the Company issued 1,752,055warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Eachwarrant will be callable by the Company if and when the Company’s common stockshare price exceeds $3.00 per share for at least twenty (20) consecutivetrading days.  The Company will use theproceeds for general working capital.

 

Asof March 31, 2010 and December 31, 2009, the Company had 2,649,726shares of Series 2005 Preferred shares outstanding, respectively.

 

*(b)**                              **Series 2006 Preferred Stock*

 

On May 31, 2006, theCompany raised $1,200,000 of additional working capital through an exemptPreferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006Preferred and consists of 1,200,000 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 600,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share. Each warrant will be callable by the Company if and when the Company’s commonstock share price exceeds $5.00 per share for at least twenty (20) consecutivetrading days.  The Company used theproceeds for general working capital.

 

Asof March 31, 2010 and December 31, 2009, the Company had 1,200,000shares of Series 2006 Preferred shares outstanding.

 

*(c)**                               **Series 2006B Preferred Stock*

 

On December 1,2006, the Company raised $750,000 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006BPreferred and consists of 750,000 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 750,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share.  The Company will use the proceeds for generalworking capital.

 

$150,000of the 2006B Preferred Equity Offering was from Amphion Innovations plc, anaffiliate of the Amphion Group, our majority shareholder and $300,000 was fromRichard C.E. Morgan our chairman and an affiliate of the Amphion Group.

 

Asof March 31, 2010 and December 31, 2009, the Company had 700,000shares of Series 2006B Preferred shares outstanding.

 

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*(d)**                              **Series 2006C Preferred Stock*

 

On January 29,2007, the Company raised $2,000,000 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006CPreferred and consists of 200 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a ten thousand (10,000) to one (1) basisat $1.00.  In addition, the Companyissued 1,000,000 warrants to purchase the Company’s common stock exercisablefor five years at $2.00 per share.  The Companywill use the proceeds for general working capital.

 

Asof March 31, 2010 and December 31, 2009, the Company had 100 sharesof Series 2006C Preferred shares outstanding.

 

*(e)**                               **Series 2007 Preferred Stock*

 

Duringthe third quarter of 2007, the Company raised $2,050,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors.  ThePreferred Stock is designated as 2007 Preferred and consists of 205 shares ofPreferred Stock bearing no dividends. However, the shares are convertible into common stock on a one to tenthousand basis at $1.00.  In addition,the Company issued 1,025,000 warrants to purchase the Company’s common stockexercisable for five years at $2.00 per share. The Companyused the proceeds from the sale of the 2007 Preferred stock for general workingcapital.

 

$250,000 of the 2007Preferred Equity Offering was from Richard C.E. Morgan our chairman and anaffiliate of the Amphion Group.

 

Duringthe first quarter of 2010, one holder of the Series 2007 Preferred electedto convert his 10 shares in to 100,000 shares of Axcess Common shares.  As of March 31, 2010 and December 31,2009, the Company had 175 and 185 shares of Series 2007 Preferred sharesoutstanding, respectively.

 

*(f) Series 2008Preferred Stock*

 

On April 25, 2008,the Company raised $1,200,000 of additional working capital through an exemptPreferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors, whichhave previously invested in Axcess. The Preferred Stock is designated as 2008Preferred and consists of 120 shares of Preferred Stock bearing no dividends.However, the shares are convertible into common stock on a 1 to 10,000 basis.In addition, the Company issued 1,200,000 warrants to purchase the Company’scommon stock exercisable for five years at $1.50 per share.

 

The Company also recordedan additional preferred stock dividend of $558,686 relating to the beneficialconversion feature and the warrants that were issued in connection with the2008 Preferred Stock Equity.

 

As of March 31, 2010and December 31, 2009 the Company had 120 shares of Series 2008Preferred shares outstanding.

 

*(g) Series 2008BPreferred Stock*

 

Beginning on September 30,2008 the Company authorized the raising of $600,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors. The Preferred Stock is designated as 2008BPreferred and consists of 80 shares of Preferred Stock bearing no dividends.However, the shares are convertible into common stock on a ten thousand(10,000) to one basis. In addition, the Company issued 400,000 warrants topurchase the Company’s common stock exercisable for five years at $1.50 pershare. Each warrant will be callable by the Company if and when the Company’scommon stock share price exceeds $3.00 per share for at least twenty(20) consecutive trading days. The Company used the proceeds for generalworking capital.

 

The Company also recordedan additional preferred stock dividend of $187,501 relating to the beneficialconversion feature and the warrants that were issued in connection with the2008B Preferred Stock Equity.

 

Asof March 31, 2010 and December 31, 2009 the Company had 80 shares of Series 2008BPreferred shares outstanding.

 

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**(4)****                                ****NotesPayable**

 

Notespayable to Stockholders consist of the following:

 
| ** **                                                         | ** ** | **March 31,********2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| 5.50%  PV Proceeds Holdings, Inc., due December 31, 2011 |       | $                              | 2,464,559  |                        | $          | 2,464,559 |   |
| 5.00%  2009 Convertible notes, due December 31, 2014          |       | 1,902,426                      |       | 1,552,426                   |       |
| 5.50%  Amphion Investment LLC note, due December 31, 2011     |       | 393,787                        |       | 393,787                     |       |
| Debt  discount                                                     |       | (742,085                       | )          | (682,478                    | )          |
|                                                               |       | 4,018,687                      |       | 3,728,294                   |       |
| Less  current maturities                                           |       |                           |       |                        |       |
| PV  Proceeds Holdings, Inc                                         |       | (162,000                       | )          | (162,000                    | )          |
| Amphion  Innovations plc                                           |       | —                         |       | —                      |       |
| Non-current  notes payable to stockholders                         |       | $                              | 3,856,687  |                        | $          | 3,566,294 |   |

 

**PV Proceeds Holdings, Inc.**

 

OnJuly 28, 1999, the Company acquired substantially all of the assets of PVProceeds Holdings, Inc. (formerly “Prism Video”), a privately heldcorporation, and agreed to pay $4,000,000 to PV Proceeds Holdings, Inc. onDecember 31, 2002. The balance of the indebtedness under the PV ProceedsHoldings, Inc. note issued was due in full by the Company on December 31,2002 and was in default during 2003 until extended by PV Proceeds Holdings, Inc.  The note payable had an original face amountof $4,000,000 and was collateralized by the Company’s note receivable fromAmphion Ventures, LP (“Amphion Ventures”). Pursuant to the Asset PurchaseAgreement between Axcess and PV Proceeds Holdings, Inc., Axcess assignedPV Proceeds Holdings, Inc. all payments of principal to be made by AmphionVentures under the note receivable until the balance of the note receivable waspaid in full or the balance due under the note payable to PV Proceeds Holdings, Inc.was paid in full, whichever occurred first. In addition, the shares of commonstock, which PV Proceeds Holdings, Inc. may acquire upon conversion ofpreferred stock or by exercise of the warrant, were subject to a three-yearlockup from the date of the closing, which could be reduced to two years uponthe occurrence of certain events. The warrant was exercisable on or before July 28,2004.

 

Axcess reached anAgreement to Amend Purchase Note and Payment Term with PV Proceeds Holdings, Inc.  PV Proceeds consented to a five-yearextension of the note with an interest rate of 5% per annum from January 1,2003 payable in full at maturity of December 31, 2007.  As further consideration for entering intothe agreement Axcess granted to PV Proceeds Holdings, Inc. a warrant topurchase up to 500,000 shares of common stock of Axcess.  The warrants had an exercise price of $2.00per share and expired on the earlier of February 14, 2008 or forty-fivedays after the principal and all accrued interest are paid.  Axcess has also agreed to reduce theprincipal amount due first for 10% of equity proceeds and second 20% ofproceeds from options exercised.  Axcess also recorded deferred debt issuancecosts of $689,932 for the value of the warrants, which were amortized over thelife of the loan.  The deferred debtissuance costs were fully amortized as of December 31, 2007.

 

Axcessreached an Agreement with PV Proceeds Holdings, Inc. to extend thematurity of the note from December 31, 2007 to December 31,2011.  Axcess agreed to pay a $25,000extension fee and to increase the interest rate from 5.0% to 5.5%. Theextension fee is reflected as deferred debt issuance cost and amortized asinterest expense over the life of the extension.  As of December 31, 2009 the balance is$12,500.  Axcess has also agreed to reduce the principal amountdue by 10% of any equity proceeds and 20% of all proceeds from options andwarrants exercised and as a result owe $162,000 at December 31, 2009.  As of December 31, 2009 no payment hasbeen issued in connection with the Series 2008 or 2008B Preferred Equityofferings. During 2009 and 2008, there were $135,551 and $136,128 of interestexpensed for the PV Proceeds Holdings note. Accrued interest for the PV Proceeds Holdings note were $1,144,133 and$1,110,710 at March 31, 2010 and December 31, 2009,respectively.  The balance as of March 31,2010 was $2,464,559.

 

**Amphion Investment LLC**

 

Axcess entered into a6.75% demand note with Amphion Investments, LLC, dated January 25, 2002.The borrowings are unsecured.  The notewas due December 31, 2007, Axcessreached an Agreement with Amphion Investments LLC to extend the maturity of thenote to December 31, 2011.  Axcessagreed to increase the interest rate from 5.0% to 5.5%.  During 2009 and 2008, there were $21,658and $21,718 of interest expensed for the Amphion Investment LLC note.  Accrued interest for the Amphion Investmentnote were $129,200 and $123,859 at March 31, 2010 and December 31,2009, respectively.  As of March 31, 2010 the outstanding amountis $393,787.

 

**2009 Convertible Note**

 

Starting on October 29,2009 through March 31, 2010, Axcess entered into certain convertible noteswith several institutional or otherwise accredited investors including AmphionInnovations plc, an affiliate of the Amphion Group, our majorityshareholder.  The aggregate principal ofthe notes is $1,902,426 and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent perannum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into3,804,852 common shares of Axcess at the option of each of the holders.   As part of the consideration for theConvertible Notes, Axcess also issued to the note

 

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holders warrants topurchase an aggregate of 1,902,426 common shares with an exercise price of$0.75. The warrants expire on December 31, 2014.

 

A portion of the newConvertible Notes was issued for the conversion and retirement of olderconvertible notes currently held by Amphion Innovations plc. The principal ofthe notes converted was $1,038,273 and had accrued interest of $79,153.  As of March 31, 2010, total due toAmphion Innovations plc is $1,442,426. Amphion has not funded the remaining $175,000 that has been committed.

 

Accrued interest for the2009 Convertible notes were $32,817 and $12,242 at March 31, 2010 and December 31,2009, respectively.  As of March 31, 2010 the outstanding amountis $1,902,426.

 

**(5)****                                ****Significant Customers**

 

During the three months ended March 31, 2010, the Company had fourcustomers that accounted for 57% of our revenue.  During the three months ended March 31,2009 the Company had one customer that accounted for 74% of our revenue.

 

**(6)****                                ****Recent Accounting Pronouncements**

 

In September 2009, the FASB ratified anamendment to accounting standards addressing revenue recognition forarrangements with multiple revenue-generating activities. The amendmentaddresses how revenue should be allocated to separate elements that couldimpact the timing of revenue recognition. The amendment is effective for us ona prospective basis for revenue arrangements entered into or materiallymodified on or after January 1, 2011, and earlier application ispermitted. We may elect, but are not required, to apply the standardsretrospectively to all prior periods. We are currently evaluating the impactthis amendment may have on our consolidated financial position and results ofoperations.

 

**(7)****                                ****Subsequent Events**

 

Since March 31,2010, Axcess has continued to enter into certain 2009 convertible notes withseveral institutional or otherwise accredited investors including AmphionInnovations plc, an affiliate of the Amphion Group, our majorityshareholder.  The aggregate additionalprincipal of the notes is $470,000 issued and is unsecured (the “ConvertibleNotes”).  The Convertible Notes have afive percent per annum simple interest rate and will become due on December 31,2014.  The Convertible Notes areconvertible into 940,000 common shares of Axcess at the option of each of theholders.   As part of the considerationfor the Convertible Notes, Axcess also issued to the note holders warrants topurchase an aggregate of 470,000 common shares with an exercise price of $0.75.The warrants expire on December 31, 2014.

 

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

 

**Forward-Looking Statements**

 

This quarterly report on Form 10-Q includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended, which can be identified by the use of forward-lookingterminology such as, “may,” “expect,” “could,” “plan,” “seek,” “anticipate,” “estimate,”or “continue” or the negative thereof or other variations thereon or comparableterminology.

 

These forward-looking statements are subject to various risks anduncertainties that could cause actual results to differ materially from thosereferred to in the forward-looking statements and are made pursuant to the “safe-harbor”provisions of the Private Securities Litigation Reform Act of 1995.  These statements are made based on management’scurrent expectations or beliefs as well as assumptions made by, and informationcurrently available to, management.

 

A variety of factors could cause actual results to differ materiallyfrom those anticipated in the Company’s forward-looking statements, includingthe following factors: changes fromanticipated levels of sales, access to capital, future national or regionaleconomic and competitive conditions, changes in relationships with customers,difficulties in developing and marketing new products, marketing existingproducts, customer acceptance of existing and new products, validity ofpatents, technological change, dependence on key personnel, availability of keycomponent parts, dependence on third party manufacturers, vendors, contractors,product liability, casualty to or other disruption of the productionfacilities, delays and disruptions in the shipment of the Company’s product,and the ability of the Company to meet its stated business goals.  For a detailed discussion of these andother cautionary

 

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statements and factors that could cause actual results to differ fromthe Company’s forward-looking statements, please refer to the Company’s filingswith the Securities and Exchange Commission, especially “Item 1. Description ofBusiness” (including the “Risk Factors” section of Item 1) and “Item 6.Management’s Discussion and Analysis of Plan of Operation” of the Company’s2009 Annual Report on Form 10-K.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. The Company does not undertake any obligation to publicly revisethese forward-looking statements to reflect events or circumstances that ariseafter the date hereof. Readers should carefully review the risk factorsdescribed in other documents the Company files from time to time with theSecurities and Exchange Commission.

 

##### **Recent Developments:  Going Concern and Liquidity Problems**

##### ** **

We do not have sufficient working capital to sustain ouroperations.  We have been unable togenerate sufficient revenues to sustain our operations. We will have to obtainfunds to meet our cash requirements through business alliances, such asstrategic or financial transactions with third parties, the sale of securitiesor other financing arrangements, or we may be required to curtail our operations,seek a merger partner, or seek protection under federal bankruptcy laws. Any ofthe foregoing may be on terms that are unfavorable to us or disadvantageous toexisting stockholders. In addition, no assurance may be given that we will besuccessful in raising additional funds or entering into business alliances.

 

Our auditors have included an explanatory paragraph intheir audit opinion with respect to our consolidated financial statements at December 31,2009. The paragraph states that our recurring losses from operations andresulting continued dependence on access to external financing raisesubstantial doubts about our ability to continue as a going concern.Furthermore, the factors leading to and the existence of the explanatoryparagraph may adversely affect our relationship with customers and suppliersand have an adverse effect on our ability to obtain financing.

 

##### **Liquidity and Capital Resources**

##### ** **

Since inception, we have utilized the proceeds from anumber of public and private sales of our equity securities, the exercise ofoptions, convertible debt, and short-term bridge loans from stockholders tomeet our working capital requirements. At March 31, 2010, we had a workingcapital deficit of $2,557,897.

 

Our operations are not profitable in 2010. Our cashincreased $64,407 during the three months ended March 31, 2010. We fundedoperations with convertible notes.  Noassurance can be given that such activities will continue to be available toprovide funding to us.  Our business planfor 2010 is predicated principally upon the successful marketing of our RFIDproducts. We anticipate that our existing working capital resources andrevenues from operations will not be adequate to satisfy our fundingrequirements throughout 2010.

 

Our working capital requirements will depend upon manyfactors, including the extent and timing of our product sales, our operatingresults, the status of competitive products, and actual expenditures andrevenues compared to our business plan. We are currently experiencing decliningliquidity, modest profits from operations and small positive cash flows, whichmake it difficult for us to meet our current cash requirements, includingpayments to vendors, and may jeopardize our ability to continue as a goingconcern. We intend to address our liquidity problems by controlling costs,seeking additional funding (through capital raising transactions and businessalliances) and maintaining focus on revenues and collections.

 

If our losses continue, we will have to obtainfunds to meet our cash requirements through business alliances, such asstrategic or financial transactions with third parties, the sale of securitiesor other financing arrangements, or we may be required to curtail ouroperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to us ordisadvantageous to existing stockholders. In addition, no assurance may begiven that we will be successful in raising additional funds or entering intobusiness alliances.

 

**Results of Operations**

** **

##### **Three Months Ended March 31,2010 Compared to Three Months Ended March 31, 2009**

##### ** **

*Sales and Gross Profit*. Sales for the three monthsended March 31, 2010 were $145,289 and for the three months ended March 31,2009 were $1,082,682.  Cost of sales forthe three months ended March 31, 2010 were $86,049 and for the threemonths ended March 31, 2009 were $745,974. The gross profit for the three months ended March 31, 2010 was$59,240 and $336,708 for the three months ended March 31, 2009. Themajority of the decrease in sales is a result of the Trinidad Port of SpainContract awarded in January 2009. The gross margin percent for the three months ended March 31, 2010was 41% compared to 31% for the same period in 2009.  The higher gross

 

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marginpercent was a result of the timing of the services provided in the TrinidadPort of Spain Contract.  We continue toexpect the margin will continue to be stable in the 40% to 50% range.

 

*Operating Expenses*. Operating expenses were$1,081,554 for the three months ended March 31, 2010 and $1,033,035 forthe three months ended March 31, 2009. Overall operating expenses were basically flat over the period.  The increase relates to the non-cash stockcompensation expense from option grant that was completed at the end of the2009 and the majority of the increase is for non cash items.

 

Researchand development expenses were $343,677 for the three months ended March 31,2010 and $309,359 for the three months ended March 31, 2009.  The majority of the increase relates to thenon-cash stock compensation expense from option grant that was completed at theend of the 2009 offset by a reduction in prototype development.

 

Corporate general and administrative expenses were $485,034 for thethree months ended March 31, 2010 and $324,453 for the three months ended March 31,2009.  The increase is related to thenon-cash stock compensation expense from option grant that was completed at theend of the 2009 and a slight increase in legal fees relating to patent work andincreased investor relations activity.

 

Selling and marketing expenses were $247,586 for the three months endedMarch 31, 2010 and $394,559 for the three months ended March 31,2009.  The majority of the decreaserelates to a decrease in selling expense for the Trinidad contract that waspaid in 2009.  However, we did offset aportion of the decrease with increased trade show expenses, increased non-cashstock compensation expense from option grant that was completed at the end ofthe 2009 and increased advertising expense.

 

Depreciation and amortization expenses were $5,257 for the three monthsended March 31, 2010 and $4,664 for the three months ended March 31,2009.  The increase is related toequipment that has been purchased for the development of our new product.

 

*Other expenses, net*. Other expenses, net, were$96,418 for the three months ended March 31, 2010 and $63,551 for thethree months ended March 31, 2009. Interest expense was $10,943 lowerduring the three months ended March 31, 2010, compared to the three monthsended March 31, 2009, reflecting lower expense associated with warrantsthat were issued with the convertible notes.  The gain on vendor settlements was also decreased by $43,810.

 

*Net loss*. Net loss was $1,118,732 for the three months endedMarch 31, 2010, compared to $759,878 for the three months ended March 31,2009.  The increase is mainly related toa decrease in gross margin contribution and higher non-cash stock compensationexpense.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were $0 for three months ended March 31,2010 and $47,466 for three months ended March 31, 2009.  The decrease is a result of 2003B Series preferredstock being converted to common shares leaving no dividend paying preferredshares outstanding as of December 31, 2009.

 

##### **Other**

##### ** **

*Inflation*. During the last two fiscal years inflation has nothad, and is not expected to have during this fiscal year, a material impact onthe operations and financial condition of the Company.

 

##### **Item3. Quantitative and Qualitative Disclosure about Market Risk**

##### ** **

None

 

**Item 4. Controls and Procedures**

 

##### **Controls and Procedures**

##### ** **

The Company’s chiefexecutive officer and chief financial officer are responsible forestablishing and maintaining disclosure controls and procedures for theCompany.

 

(a) Evaluation ofDisclosure Controls and Procedures

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and chief financial officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), asof March 31, 2010. Based on this evaluation, our principal executiveofficer and our chief financial officer concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures were noteffective and not adequately designed to ensure that the information requiredto be disclosed by

 

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us in the reports wesubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the applicable rules and forms andthat such information was accumulated and communicated to our chief executiveofficer and chief financial officer, in a manner that allowed for timelydecisions regarding required disclosure.

 

Based on ourevaluation, management has concluded that our internal control over financialreporting was not effective as of March 31, 2010. Management hasdetermined that (i) we are unable to maintain the proper segregation ofvarious accounting and finance duties because of our small size and limitedresources, (ii) much of the financial closing process is done off-line onelectronic spreadsheets that are maintained on individual computers and are notbacked up and (iii) based on our staffing we rely on our Chief FinancialOfficer to provide a significant amount of our compensating controls.

 

We intended to remediatethese material weaknesses during 2009 however; liquidity issues prevented usfrom making changes.  Therefore, weintend to address theses material weaknesses during the second half of 2010 asliquidity improves.  Notwithstandingthese material weaknesses, we believe that our financial conditions, results ofoperations and cash flows presented in this report of Form 10-Q are fairlypresented in all material respects.

 

(b) Changes inInternal Controls

 

During the periodended March 31, 2010, there has been no change in internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $48,999. We are currentlydefending or seeking to settle each of the vendor’s and customer claims.  At March 31, 2010, we had accrued$31,999, which represents the delinquent amounts we expect to be liable for.

 

**Item 1A. Risk Factors**

 

Not required

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

During the three months ended March 31, 2010, the Company issuedunregistered securities in connection with the transactions describedbelow.  The proceeds were used forgeneral working capital requirements. The issuance of stock was exempt from the registration requirements ofthe Securities Act, as amended by virtue of Section 4(2) thereof, astransactions not involving a public offering and an appropriate restrictivelegend was affixed to the stock certificates.

 

***Common Stock***

 

Duringthe three months ended March 31, 2010, one holder of the 2007 Series preferredshares converted his 10 shares into 100,000 Axcess Common shares.

 

During the three monthsended March 31, 2010 the Company had 131,556 options expire.

 

***Warrants***

 

During the threemonths ended March 31, 2010 the Company issued an additional 350,000warrants in conjunction with various debt offerings.  The warrants had a strike price of $0.75 andthey expire on December 31, 2014. During the quarter the Company had 1,658,173 warrants expireunexercised.

 

##### **Item 3. Defaults Upon Senior Securities**

##### ** **

None

 

##### **Item 4.** Submission of Matters to aVote of Security Holders

##### ** **

None

 

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**Item 5.Other Information**

 

None

 

**Item 6. Exhibits and Reports on Form 8-K**.

 

(a) Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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. |
| 99.1                 |       | May 14,  2009 Axcess International Reports First quarter 2010 earning results                                                                                                   |
|                 |       |                                                                                                                                                                                 |
| **Date**             | ** ** | **Description**                                                                                                                                                                      |
| 1/13/10              |       | The Company announced  they had entered into certain convertible notes with several institutional or  otherwise accredited investors.                                                |
| 3/1/10               |       | On February 26,  2010, the Company held its fourth quarter and fiscal year 2009 Earnings  Conference Call.                                                                      |
| 5/3/10               |       | On April 26, 2010,  the Company announced that the employees and officers of Axcess agreed to  take a temporary reduction in cash compensation.                                 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|               | AXCESS  INTERNATIONAL INC.,  Registrant                |
|--------------------|--------------------------------------------------------|
|               |                                                   |
|               | /s/  ALLAN GRIEBENOW                                   |
|               | Allan  Griebenow Director, President and               |
|               | Chief  Executive Officer (Principal Executive Officer) |
|               |                                                   |
|               | /s/  ALLAN L. FRANK                                    |
|               | Allan  L. Frank                                        |
|               | Chief  Financial Officer and Secretary                 |
|               | (Principal  Accounting and Financial Officer)          |
|               |                                                   |
| May 13,  2010 |                                                   |

 

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