##### 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 June 30, 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
(State or other jurisdiction of incorporation or 
organization)
    
    85-0294536
(I.R.S. Employer Identification No.)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
  o o o þ
  o þ
 30,204,931




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##### 



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at June 30, 2008 and December 31, 2007 (unaudited)Statements of Operations for the Three Months and Six Months ended June 30, 2008 and 2007 (unaudited)Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007 (unaudited)Notes 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-KSIGNATURESForm of Stock Purchase AgreementSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    224,008
    
    
    $
    59,089Accounts receivable  trade, net of allowance for doubtful accounts of
$17,285 and $32,363 for 2008 and 2007, respectively
    
    
    132,995
    
    
    
    257,957Inventory, net
    
    
    165,124
    
    
    
    193,405Prepaid expenses and other
    
    
    71,829
    
    
    
    77,506Total current assets
    
    
    593,956
    
    
    
    587,957Property, plant and equipment, net
    
    
    11,382
    
    
    
    12,003Deferred debt issuance costs
    
    
    21,875
    
    
    
    30,421Other assets
    
    
    66,009
    
    
    
    56,438Total assets
    
    $
    693,222
    
    
    $
    686,819LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    702,084
    
    
    $
    172,278Accrued liabilities
    
    
    1,410,990
    
    
    
    1,309,979Deferred revenue
    
    
    23,712
    
    
    
    42,060Notes payable (includes $745,273 and $150,000 with a related party in
2008 and 2007, respectively)
    
    
    847,273
    
    
    
    150,000Dividends payable
    
    
    183,634
    
    
    
    125,991Total current liabilities
    
    
    3,167,693
    
    
    
    1,800,308Notes payable (includes $393,787 with a related party in 2008 and 2007)
    
    
    2,756,346
    
    
    
    2,858,346Debt discount
    
    
    (16,429
    )
    
    
    Total liabilities
    
    
    5,907,610
    
    
    
    4,658,654Commitments and contingencies (Notes 1 and 2)Stockholders deficit:Convertible preferred stock, 10,000,000 shares authorized in 2008 and
2007. Without liquidation preferences; $0.01 par value, 6,125,231 and
6,860,116 shares issued and outstanding in 2008 and 2007, respectively
    
    
    61,252
    
    
    
    68,601Common stock, $.01 par value, 70,000,000 shares authorized in 2008 and
2007; 30,204,931 shares issued and outstanding in 2008 and 29,304,927
shares issued and outstanding in 2007
    
    
    302,050
    
    
    
    293,050Shares of common stock to be issued 25,000 shares as of December 31, 2007
    
    
    
    
    
    
    250Additional paid-in capital
    
    
    164,649,065
    
    
    
    162,947,266Accumulated deficit
    
    
    (170,226,755
    )
    
    
    (167,281,002
    )Total stockholders deficit
    
    
    (5,214,388
    )
    
    
    (3,971,835
    )Total liabilities and stockholders deficit
    
    $
    693,222
    
    
    $
    686,819
  1




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##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    487,345
    
    
    $
    1,658,758
    
    
    $
    663,831
    
    
    $
    2,681,781Cost of sales
    
    
    258,868
    
    
    
    482,621
    
    
    
    364,595
    
    
    
    1,144,107Gross profit
    
    
    228,477
    
    
    
    1,176,137
    
    
    
    299,236
    
    
    
    1,537,674Expenses:Research and development
    
    
    536,098
    
    
    
    1,169,091
    
    
    
    1,407,687
    
    
    
    2,294,425General and administrative
    
    
    358,372
    
    
    
    449,022
    
    
    
    745,808
    
    
    
    858,184Selling and marketing
    
    
    317,693
    
    
    
    339,180
    
    
    
    643,743
    
    
    
    911,777Depreciation and amortization
    
    
    2,670
    
    
    
    4,020
    
    
    
    6,962
    
    
    
    8,528Operating expenses
    
    
    1,214,833
    
    
    
    1,961,313
    
    
    
    2,804,200
    
    
    
    4,072,914Loss from operations
    
    
    (986,356
    )
    
    
    (785,176
    )
    
    
    (2,504,964
    )
    
    
    (2,535,240
    )Other income (expense):Interest expense
    
    
    (178,066
    )
    
    
    (81,118
    )
    
    
    (294,560
    )
    
    
    (164,444
    )Gain on vendor settlements
    
    
    2,247
    
    
    
    2,659
    
    
    
    2,318
    
    
    
    25,799Other income (expense), net
    
    
    (175,819
    )
    
    
    (78,459
    )
    
    
    (292,242
    )
    
    
    (138,645
    )Net loss
    
    
    (1,162,175
    )
    
    
    (863,635
    )
    
    
    (2,797,206
    )
    
    
    (2,673,885
    )Preferred stock dividend requirements:Recurring
    
    
    (71,592
    )
    
    
    (78,861
    )
    
    
    (148,547
    )
    
    
    (159,435
    )2006C Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )2008 Preferred equity offering
    
    
    (558,686
    )
    
    
    
    
    
    
    (558,686
    )
    
    
    Preferred stock dividend requirements
    
    
    (630,278
    )
    
    
    (78,861
    )
    
    
    (707,233
    )
    
    
    (2,159,435
    )Net loss applicable to common stock
    
    $
    (1,792,453
    )
    
    $
    (942,496
    )
    
    $
    (3,504,439
    )
    
    $
    (4,833,320
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )
    
    $
    (0.17
    )Weighted average shares of common stock outstanding
    
    
    29,574,213
    
    
    
    28,737,469
    
    
    
    29,486,548
    
    
    
    28,702,852
  2




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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,797,206
    )
    
    $
    (2,673,885
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    6,962
    
    
    
    8,528Amortization of financing discount and issuance costs, net
    
    
    (7,883
    )
    
    
    84,481Gain on vendor settlements and statutory write-off of payables
    
    
    71
    
    
    
    (2,857
    )Warrants issued for services
    
    
    (10,604
    )
    
    
    Stock based compensation expense
    
    
    386,159
    
    
    
    324,512Changes in operating assets and liabilities:Accounts receivable
    
    
    124,962
    
    
    
    63,500Inventory
    
    
    28,281
    
    
    
    143,867Prepaid expenses and other
    
    
    5,677
    
    
    
    (34,868
    )Other assets
    
    
    (9,571
    )
    
    
    Accounts payable and accrued expenses
    
    
    829,140
    
    
    
    756,301Net cash used by operating activities
    
    
    (1,444,012
    )
    
    
    (1,330,421
    )Cash flow from investing activities:Capital expenditures
    
    
    (6,341
    )
    
    
    (6,405
    )Net cash used by investing activities
    
    
    (6,341
    )
    
    
    (6,405
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    1,019,999
    
    
    
    1,700,000Net proceeds from exercise of employee options
    
    
    
    
    
    
    8,840Principal payments on financing agreements
    
    
    (100,000
    )
    
    
    (246,784
    )Borrowings on financing agreements
    
    
    695,273
    
    
    
    Net cash provided by financing activities
    
    
    1,615,272
    
    
    
    1,462,056Net change in cash and cash equivalents
    
    
    164,919
    
    
    
    125,230Cash and cash equivalents, beginning of period
    
    
    59,089
    
    
    
    347,361Cash and cash equivalents, end of period
    
    $
    224,008
    
    
    $
    472,591Supplemental Disclosure of Non-Cash Investing and Financing Activities:Warrants issued as a debt discount
    
    $
    91,892
    
    
    $
    Accrued preferred stock dividends
    
    
    76,955
    
    
    
    159,435Conversion of preferred shares into common stock
    
    
    1,100
    
    
    
    650
  3




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##### Table of Contents



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
  4




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(d) Critical Accounting Policies and Estimates
  (e) Accounting for Uncertainty in Income Taxes
     (f) Inventory
  June 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    27,164
    
    
    $
    13,853Work-in-process
    
    
    89
    
    
    
    104Finished goods
    
    
    137,871
    
    
    
    179,448$
    165,124
    
    
    $
    193,405
  5




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product cost
    
    $
    228,978
    
    
    $
    482,621
    
    
    $
    334,596
    
    
    $
    1,144,107Warranty expense
    
    
    29,890
    
    
    
    
    
    
    
    29,999
    
    
    
    Inventory impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    258,868
    
    
    $
    482,621
    
    
    $
    364,595
    
    
    $
    1,144,107
 (g) Stock-Based Compensation
 Share-Based Payment
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development expense
    
    $
    63,698
    
    
    $
    39,774
    
    
    $
    139,022
    
    
    $
    79,548General and administrative expense
    
    
    70,712
    
    
    
    93,385
    
    
    
    181,440
    
    
    
    186,770Selling and marketing expense
    
    
    28,132
    
    
    
    26,035
    
    
    
    65,697
    
    
    
    58,194Total
    
    $
    162,542
    
    
    $
    159,194
    
    
    $
    386,159
    
    
    $
    324,512
 (h) Stock Options and Warrants
   6




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##### Table of Contents



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
    
    
    (130,000
    )
    
    
    1.46Options outstanding at June 30, 2008
    
    
    5,420,973
    
    
    
    1.88
    
    
    
    5.85
    
    
    $
    457,705Options exercisable at June 30, 2008
    
    
    3,902,098
    
    
    
    1.90
    
    
    
    5.66
    
    
    $
    562,125Options available for grants as of June 30, 2008
    
    
    2,802,000
  Intrinsic Value ofNumber of
    
    
    Weighted Average
    
    
    Vested UnexercisedOption Price
    
    Options
    
    
    Remaining Life
    
    
    Options$0.00 - $1.00
    
    
    808,500
    
    
    
    5.24
    
    
    $
    556,175$1.01 - $2.00
    
    
    3,436,258
    
    
    
    7.34
    
    
    
    5,950$2.01 - $3.00
    
    
    714,375
    
    
    
    1.81$3.01 - $4.00
    
    
    193,840
    
    
    
    2.34$4.01 - $5.00
    
    
    20,000
    
    
    
    2.92$5.01 - $6.25
    
    
    248,000
    
    
    
    1.73Total
    
    
    5,420,973
    
    
    
    5.85
    
    
    $
    562,125
  WEIGHTEDAVERAGEEXERCISEWARRANTS
    
    
    PRICEWarrants outstanding at beginning of year
    
    
    8,307,213
    
    
    $
    1.73Warrants issued
    
    
    1,512,218
    
    
    
    1.42Warrants exercised
    
    
    
    
    
    
    Warrants expired unexercised
    
    
    (500,000
    )
    
    
    2.00Warrants outstanding at end of year
    
    
    9,319,431
    
    
    
    1.67
  Number of
    
    Weighted AverageStrike Price
    
    Warrants
    
    Remaining Life$0.00 - $1.00
    
    
    32,300
    
    
    
    4.96$1.01 - $2.00
    
    
    9,287,131
    
    
    
    3.69Total
    
    
    9,319,431
    
    
    
    3.69
  7




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##### Table of Contents



(i) Revenue Recognition
 Revenue Recognition Revenue
Arrangements with Multiple Deliverables
   (2) Contingencies
  (3) Preferred Stock
  Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series
    
    Series2003B
    
    2004
    
    2005
    
    2006
    
    2006B
    
    2006C
    
    2007
    
    2008Number of shares authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    2,750,000
    
    
    
    1,200,000
    
    
    
    750,000
    
    
    
    200
    
    
    
    205
    
    
    
    120Stated value
    
    $
    0.01
    
    
    $
    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
    
    
    
    190
    
    
    
    June 30, 2008
    
    
    1,575,000
    
    
    
    
    
    
    
    2,649,726
    
    
    
    1,200,000
    
    
    
    700,000
    
    
    
    200
    
    
    
    185
    
    
    
    120Conversion ratio (or
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 10,000 into
    
    
    
    1 to 10,000 into
    
    
    
    1 to 10,000 intoconversion price) of preferred shares into
common
    
    common stock
    
    

    common stock
    
    

    common stock
    
    

    common stock
    
    

    common stock
    
    
    voting common
stock
    
    
    voting common
stock
    
    
    voting common 
stockLiquidation preference
    
    None    
    
    None    
    
    None    
    
    None    
    
    None    
    
    None    
    
    None    
    
    NoneDividend rights
    
    7% per annum, cumulative
    
    
    7% per annum, cumulative
    
    
    None    
    
    None    
    
    None    
    
    None    
    
    None    
    
    None
 8




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##### Table of Contents



(a) Series 2003B Preferred Stock
    (b) Series 2004 Preferred Stock
    (c) Series 2005 Preferred Stock
     9




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##### Table of Contents



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




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##### Table of Contents



(g) Series 2007 Preferred Stock
      (h) Series 2008 Preferred Stock
   (4) Notes Payable
 PV Proceeds Holdings, Inc.
  Amphion Investment LLC
  Convertible Note
  11




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##### Table of Contents



Balance as ofDate of Note
    
    June 30, 2008
    
    
    Due Date
    
    
    Interest RateDecember 17, 2007
    
    $
    50,000
    
    
    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
    %April 1, 2008
    
    
    85,273
    
    
    May 1, 2008
    
    
    5.0
    %April 7, 2008
    
    
    22,000
    
    
    May 1, 2008
    
    
    5.0
    %April 15, 2008
    
    
    110,000
    
    
    May 15, 2008
    
    
    5.0
    %Total
    
    $
    745,273
  (5) Significant Customers
   (6) Recent Accounting Pronouncements
   (7) Subsequent Event
  12




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2008
    
    $
    38,7602009
    
    
    102,6332010
    
    
    107,2232011
    
    
    112,2292012
    
    
    127,2492013
    
    
    62,621$
    550,715
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
     Recent Developments: Going Concern and Liquidity Problems
   13




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Liquidity and Capital Resources
     Amphion Convertible Note
   Balance as ofDate of Note
    
    June 30, 2008
    
    
    Due Date
    
    
    Interest RateDecember 17, 2007
    
    $
    50,000
    
    
    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
    %April 1, 2008
    
    
    85,273
    
    
    May 1, 2008
    
    
    5.0
    %April 7, 2008
    
    
    22,000
    
    
    May 1, 2008
    
    
    5.0
    %April 15, 2008
    
    
    110,000
    
    
    May 15, 2008
    
    
    5.0
    %Total
    
    $
    745,273
  14




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##### Table of Contents



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 June 30, 2008 Compared to Three Months Ended June 30, 2007
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 15




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Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Other
 Inflation
 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
  
 Item 4. Controls and Procedures
 Controls and Procedures
   16




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  2008 Preferred Offering
    17




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Warrants
  2004 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.
    
    Description10.1
    
    Form of Stock Purchase Agreement for the 2008 Preferred Equity Offering.31.1
    
    Certification of our President, Chief Executive Officer and Principal
Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of our Vice President, Chief Financial Officer, Secretary
and Principal Accounting and Financial Officer, under Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of our President, Chief Executive Officer and Principal
Executive Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of our Vice President, Chief Financial Officer, Secretary
and Principal Accounting and Financial Officer, under Section 906 of
the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  AXCESS INTERNATIONAL INC.,
Registrant/s/ ALLAN GRIEBENOWAllan Griebenow Director, President andChief Executive Officer (Principal Executive Officer)/s/ ALLAN L. FRANKAllan L. FrankChief Financial Officer and Secretary
(Principal Accounting and Financial Officer)  19