##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
    
    85-0294536(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007Unaudited Statements of Operations for the Three Months ended March 31, 2008 and 2007Unaudited Statements of Cash Flows for the Three Months ended March 31, 2008 and 2007Notes to Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




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PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    400
    
    
    $
    59,089Accounts receivable  trade, net of allowance for
doubtful accounts of $30,498 and $32,363 for 2008
and 2007, respectively.
    
    
    89,723
    
    
    
    257,957Inventory, net
    
    
    181,815
    
    
    
    193,405Prepaid expenses and other
    
    
    63,423
    
    
    
    77,506Total current assets
    
    
    335,361
    
    
    
    587,957Property, plant and equipment, net
    
    
    9,806
    
    
    
    12,003Deferred debt issuance costs
    
    
    46,446
    
    
    
    30,421Other assets
    
    
    55,875
    
    
    
    56,438Total assets
    
    $
    447,488
    
    
    $
    686,819LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    768,748
    
    
    $
    172,278Accrued liabilities
    
    
    1,350,403
    
    
    
    1,309,979Deferred revenue
    
    
    23,148
    
    
    
    42,060Notes payable (includes $628,000 and $150,000
with a related party in 2008 and 2007,
respectively)
    
    
    628,000
    
    
    
    150,000Dividends payable
    
    
    202,946
    
    
    
    125,991Total current liabilities
    
    
    2,973,245
    
    
    
    1,800,308Notes payable (includes $393,787 with a related
party in 2008 and 2007)
    
    
    2,858,346
    
    
    
    2,858,346Total liabilities
    
    
    5,831,591
    
    
    
    4,658,654Commitments and contingencies (Notes 1(h) and 2)Stockholders deficit:Convertible preferred stock, 10,000,000 shares
authorized in 2008 and 2007. Without
liquidation preferences; $0.01 par value,
6,750,111 and 6,860,116 shares issued and
outstanding in 2008 and 2007, respectively
    
    
    67,501
    
    
    
    68,601Common stock, $.01 par value, 70,000,000 shares
authorized in 2008 and 2007; 29,489,927 shares
issued and outstanding in 2008 and 29,304,927
shares issued and outstanding in 2007.
    
    
    294,900
    
    
    
    293,050Shares of common stock to be issued, 25,000
shares as of December 31, 2007
    
    
    
    
    
    
    250Additional paid-in capital
    
    
    163,246,484
    
    
    
    162,947,266Accumulated deficit
    
    
    (168,992,988
    )
    
    
    (167,281,002
    )Total stockholders deficit
    
    
    (5,384,103
    )
    
    
    (3,971,835
    )Total liabilities and stockholders deficit
    
    $
    447,488
    
    
    $
    686,819
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Sales
    
    $
    176,486
    
    
    $
    1,023,023Cost of sales
    
    
    105,727
    
    
    
    661,486Gross profit
    
    
    70,759
    
    
    
    361,537Expenses:Research and development
    
    
    871,590
    
    
    
    1,125,334General and administrative
    
    
    387,435
    
    
    
    409,163Selling and marketing
    
    
    326,050
    
    
    
    572,596Depreciation and amortization
    
    
    4,292
    
    
    
    4,508Operating expenses
    
    
    1,589,367
    
    
    
    2,111,601Loss from operations
    
    
    (1,518,608
    )
    
    
    (1,750,064
    )Other income (expense):Interest expense, net
    
    
    (116,494
    )
    
    
    (83,328
    )Gain in vendor settlements
    
    
    71
    
    
    
    23,141Other expense, net
    
    
    (116,423
    )
    
    
    (60,187
    )Net loss
    
    
    (1,635,031
    )
    
    
    (1,810,251
    )Preferred stock dividend requirements:Recurring
    
    
    (76,955
    )
    
    
    (80,573
    )2006C Preferred equity offering
    
    
    
    
    
    
    (2,000,000
    )Preferred stock dividend requirements
    
    
    (76,955
    )
    
    
    (2,080,573
    )Net loss applicable to common stock
    
    $
    (1,711,986
    )
    
    $
    (3,890,824
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.14
    )Weighted average shares of common stock outstanding
    
    
    29,388,883
    
    
    
    28,667,849
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,635,031
    )
    
    $
    (1,810,251
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    4,292
    
    
    
    4,508Amortization of financing discount and issuance costs, net
    
    
    (16,025
    )
    
    
    42,241Gain on vendor settlements and statutory write-off of payables
    
    
    71
    
    
    
    (2,857
    )Warrants issued for services
    
    
    (15,791
    )
    
    
    Stock based compensation expense
    
    
    223,617
    
    
    
    165,318Changes in operating assets and liabilities:Accounts receivable
    
    
    168,234
    
    
    
    (118,557
    )Inventory
    
    
    11,590
    
    
    
    82,996Prepaid expenses and other
    
    
    14,083
    
    
    
    (11,448
    )Other assets
    
    
    563
    
    
    
    Accounts payable and accrued expenses
    
    
    709,803
    
    
    
    1,120,397Net cash used by operating activities
    
    
    (534,594
    )
    
    
    (527,653
    )Cash flow from investing activities:Capital expenditures
    
    
    (2,095
    )
    
    
    (5,714
    )Net cash used by investing activities
    
    
    (2,095
    )
    
    
    (5,714
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    
    
    
    
    1,700,000Net proceeds from exercise of employee options
    
    
    
    
    
    
    3,760Borrowings / (principal payments) on financing agreements
    
    
    478,000
    
    
    
    (246,784
    )Net cash provided by financing activities
    
    
    478,000
    
    
    
    1,456,976Net change in cash and cash equivalents
    
    
    (58,689
    )
    
    
    923,609Cash and cash equivalents, beginning of period
    
    
    59,089
    
    
    
    347,361Cash and cash equivalents, end of period
    
    $
    400
    
    
    $
    1,270,970Supplemental Disclosure of Non-Cash Investing and Financing Activities:Warrants issued as a debt discount
    
    $
    91,892
    
    
    $
    Accrued preferred stock dividends
    
    
    76,955
    
    
    
    80,573Conversion of preferred shares into common stock
    
    
    1,100
    
    
    
    650
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AXCESS INTERNATIONAL INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Description of Business and Going Concern
     (b) Company Organization
   (c) Basis of presentation
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(d) Critical Accounting Policies and Estimates
  (e) Accounting for Uncertainty in Income Taxes
     (f) Inventory
  March 31,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    23,189
    
    
    $
    13,853Work-in-process
    
    
    94
    
    
    
    104Finished goods
    
    
    158,532
    
    
    
    179,448$
    181,815
    
    
    $
    193,405
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March 31,
    
    
    March 31,2008
    
    
    2007Product cost
    
    $
    105,618
    
    
    $
    661,486Warranty expense
    
    
    109
    
    
    
    Inventory impairment
    
    
    
    
    
    
    $
    105,727
    
    
    $
    661,486
 (g) Stock-Based Compensation
 Share-Based Payment
    March 31,
    
    
    March 31,2008
    
    
    2007Research and development expense
    
    $
    75,324
    
    
    $
    39,774General and administrative expense
    
    
    110,729
    
    
    
    93,385Selling and marketing expense
    
    
    37,564
    
    
    
    32,159Total
    
    $
    223,617
    
    
    $
    165,318
 (h) Stock Options and Warrants
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Outstanding OptionsWeighted
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    ValueOptions outstanding at January 1, 2008
    
    
    5,550,973
    
    
    $
    1.87Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    (15,000
    )
    
    
    1.50Options outstanding at March 31, 2008
    
    
    5,535,973
    
    
    
    1.87
    
    
    
    6.16
    
    
    $
    619,525Options exercisable at March 31, 2008
    
    
    3,859,598
    
    
    
    1.91
    
    
    
    6.14
    
    
    $
    910,190Options available for grants as of March 31, 2008
    
    
    2,727,000
  Intrinsic Value ofNumber of
    
    
    Weighted Average
    
    
    Vested UnexercisedOption Price
    
    Options
    
    
    Remaining Life
    
    
    Options$0.00 - $1.00
    
    
    808,500
    
    
    
    5.49
    
    
    $
    510,805$1.01 - $2.00
    
    
    3,551,258
    
    
    
    7.64
    
    
    
    108,720$2.01 - $3.00
    
    
    714,375
    
    
    
    2.06$3.01 - $4.00
    
    
    193,840
    
    
    
    2.58$4.01 - $5.00
    
    
    20,000
    
    
    
    3.17$5.01 - $6.25
    
    
    248,000
    
    
    
    1.98Total
    
    
    5,535,973
    
    
    
    6.16
    
    
    $
    619,525
  WEIGHTEDAVERAGEEXERCISEWARRANTS
    
    
    PRICEWarrants outstanding at beginning of year
    
    
    8,307,213
    
    
    $
    1.73Warrants issued
    
    
    121,891
    
    
    
    1.18Warrants exercised
    
    
    
    
    
    
    Warrants expired unexercised
    
    
    (500,000
    )
    
    
    2.00Warrants outstanding at end of year
    
    
    7,929,104
    
    
    
    1.71
  Number of
    
    
    Weighted AverageStrike Price
    
    Warrants
    
    
    Remaining Life$0.00 - $1.00
    
    
    
    
    
    
    $1.01 - $2.00
    
    
    7,929,104
    
    
    
    3.36Total
    
    
    7,929,104
    
    
    
    3.36
  (i) Revenue Recognition
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Revenue
Recognition Revenue Arrangements with
Multiple Deliverables
   (2) Contingencies
  (3) Preferred Stock
  Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series2003B
    
    2004
    
    2005
    
    2006
    
    2006B
    
    2006C
    
    2007Number of shares authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    2,750,000
    
    
    
    1,200,000
    
    
    
    750,000
    
    
    
    200
    
    
    
    205Stated value
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued
and outstandingDecember 31, 2007
    
    
    1,685,000
    
    
    
    625,000
    
    
    
    2,649,726
    
    
    
    1,200,000
    
    
    
    700,000
    
    
    
    200
    
    
    
    190March 31, 2008
    
    
    1,575,000
    
    
    
    625,000
    
    
    
    2,649,726
    
    
    
    1,200,000
    
    
    
    700,000
    
    
    
    200
    
    
    
    185Conversion ratio (or
conversion price) of
preferred shares into
common
    
    
    1 to 1 into voting
common stock
    

    
    
    1 to 1 into voting
common stock
    
    
    
    1 to 1 into voting
common stock
    
    
    
    1 to 1 into voting
common stock
    
    
    
    1 to 1 into voting
common stock
    
    
    
    1 to 10,000 into
voting common stock
    
    
    
    1 to 10,000 into
voting common stockLiquidation preference
    
    None
    
    None
    
    None
    
    None
    
    None
    
    None
    
    NoneDividend rights
    
    
    7% per annum,
cumulative
    
    
    
    7% per annum,
cumulative
    
    
    None
    
    None
    
    None
    
    None
    
    None
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(a) Series 2003B Preferred Stock
    (b) Series 2004 Preferred Stock
    (c) Series 2005 Preferred Stock
     9




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(d) Series 2006 Preferred Stock
    (e) Series 2006B Preferred Stock
     (f) Series 2006C Preferred Stock
    (g) Series 2007 Preferred Stock
 10




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(4) Notes Payable
 PV Proceeds Holdings, Inc.
  Amphion Investment LLC
  Convertible Note
  Balance as ofDate of Note
    
    March 31, 2008
    
    
    Due Date
    
    Interest RateDecember 17, 2007
    
    $
    150,000
    
    
    January 15, 2008
    
    
    5.0%January 14, 2008
    
    
    150,000
    
    
    February 15, 2008
    
    
    5.0%February 20, 2008
    
    
    150,000
    
    
    March 15, 2008
    
    
    5.0%February 28, 2008
    
    
    60,000
    
    
    March 31, 2008
    
    
    5.0%March 14, 2008
    
    
    63,000
    
    
    April 15, 2008
    
    
    5.0%March 25, 2008
    
    
    55,000
    
    
    April 30, 2008
    
    
    5.0%Total
    
    $
    628,000
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(5) Significant Customers
  (6) Subsequent Event
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
     Recent Developments: Going Concern and Liquidity Problems
  12




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Liquidity and Capital Resources
     Amphion Convertible Note
  Balance as of MarchDate of Note
    
    31, 2008
    
    
    Due Date
    
    Interest RateDecember 17, 2007
    
    $
    150,000
    
    
    January 15, 2008
    
    
    5.0%January 14, 2008
    
    
    150,000
    
    
    February 15, 2008
    
    
    5.0%February 20, 2008
    
    
    150,000
    
    
    March 15, 2008
    
    
    5.0%February 28, 2008
    
    
    60,000
    
    
    March 31, 2008
    
    
    5.0%March 14, 2008
    
    
    63,000
    
    
    April 15, 2008
    
    
    5.0%March 25, 2008
    
    
    55,000
    
    
    April 30, 2008
    
    
    5.0%Total
    
    $
    628,000
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Sales and Marketing Initiatives
  1.
    
    We continue to focus on replicating our past success;2.
    
    We continue to add integrators and partners to our sales channel;3.
    
    We continue to improve our professional skill sets and resources to grow the business.
  Results of Operations
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Other
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Inflation
 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
  
 Item 4. Controls and Procedures
 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
  Warrants
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2003B Preferred Equity
  2007 Preferred Equity
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description31.1
    
    Certification of our President, Chief Executive Officer and
Principal Executive Officer, under Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of our Vice President, Chief Financial Officer,
Secretary and Principal Accounting and Financial Officer,
under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of our President, Chief Executive Officer and
Principal Executive Officer, under Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of our Vice President, Chief Financial Officer,
Secretary and Principal Accounting and Financial Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002.
 16




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

(Principal Accounting and Financial Officer)