##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 FORM 10-QSB x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
 or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933 AXCESS INTERNATIONAL INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    85-0294536
(I.R.S. Employer Identification No.)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
(Address, including telephone number and area code, of principal executive offices) Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes     x     No     o Number of shares of common stock outstanding on November 1, 2004: 24,798,739 Transitional Small Business Disclosure Format: Yes     o     No      x




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AXCESS INTERNATIONAL INC.
INDEX  
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at September 30, 2004 and December 31, 2003Statements of Operations for the Three Months ended September 30, 2004 and
2003 and for the Nine Months ended September 30, 2004 and 2003Statements of Cash Flows for the Nine Months ended September 30, 2004 and 2003Notes to Financial StatementsItem 2. Managements Discussion and Analysis or Plan of OperationItem 3. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESCertification Under Section 302Certification Under Section 302Certification Under Section 906Certification Under Section 906




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PART 1. FINANCIAL INFORMATION 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC. 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,156,765
    
    
    $
    2,163,977Accounts receivable  trade, net of allowance for doubtful accounts
    
    
    81,280
    
    
    
    85,248Inventory
    
    
    120,485
    
    
    
    131,515Prepaid expenses and other
    
    
    109,983
    
    
    
    148,490Total current assets
    
    
    1,468,513
    
    
    
    2,529,230Property, plant and equipment, net
    
    
    50,771
    
    
    
    61,756Intellectual property, net
    
    
    533
    
    
    
    149,704Deferred debt issuance costs
    
    
    549,130
    
    
    
    675,852Other assets
    
    
    1,628
    
    
    
    595Total assets
    
    $
    2,070,575
    
    
    $
    3,417,137LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    465,067
    
    
    $
    813,976Other accrued liabilities
    
    
    772,504
    
    
    
    802,355Notes PayableConvertible notes payable (includes $66,667 with related party in 2004)
    
    
    483,333
    
    
    
    Discount on convertible debt
    
    
    (165,836
    )
    
    
    Dividends payable
    
    
    234,327
    
    
    
    125,999Total current liabilities
    
    
    1,789,395
    
    
    
    1,742,330Note payable to stockholder
    
    
    3,933,868
    
    
    
    4,058,956Convertible notes payable (includes $13,333 and $120,000 with related party
in 2004 and 2003, respectively)
    
    
    236,667
    
    
    
    1,288,333Discount on convertible debt
    
    
    (22,553
    )
    
    
    (680,457
    )Total liabilities
    
    
    5,937,377
    
    
    
    6,409,162Stockholders deficit:Convertible preferred stock, 7,000,000 shares authorizedWith liquidation preference; 54 shares issued and outstanding in 2003
    
    
    
    
    
    
    536,623Without liquidation preference; $0.01 par value, 2,415,000 and 1,790,000
shares issued and outstanding in 2004 and 2003, respectively
    
    
    24,150
    
    
    
    17,900Common stock, $0.01 par value, 50,000,000 shares authorized in 2004 and
2003; 24,798,739 shares issued and outstanding in 2004 and 19,446,028
shares issued and outstanding in 2003
    
    
    247,988
    
    
    
    194,461Shares of common stock to be issued, 0 and 4,529,345 shares in 2004 and
2003, respectively
    
    
    
    
    
    
    45,293Non-voting convertible common stock, $0.01 par value, 2,250,000 shares
authorized; no shares issued and outstanding in 2004 or 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    149,888,942
    
    
    
    146,246,094Accumulated deficit
    
    
    (154,027,882
    )
    
    
    (150,032,396
    )Total stockholders deficit
    
    
    (3,866,802
    )
    
    
    (2,992,025
    )Total liabilities and stockholders deficit
    
    $
    2,070,575
    
    
    $
    3,417,137
 See accompanying notes to unaudited financial statements. 1




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AXCESS INTERNATIONAL INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    301,889
    
    
    $
    181,580
    
    
    $
    733,695
    
    
    $
    717,572Cost of sales
    
    
    141,313
    
    
    
    113,973
    
    
    
    364,986
    
    
    
    448,964Inventory impairment
    
    
    
    
    
    
    98,428
    
    
    
    
    
    
    
    98,428Gross profit (loss)
    
    
    160,576
    
    
    
    (30,821
    )
    
    
    368,709
    
    
    
    170,180Expenses:Research and development
    
    
    176,791
    
    
    
    164,054
    
    
    
    528,683
    
    
    
    458,199General and administrative
    
    
    324,970
    
    
    
    375,360
    
    
    
    1,191,049
    
    
    
    965,828Selling and marketing
    
    
    238,278
    
    
    
    65,450
    
    
    
    585,022
    
    
    
    203,984Depreciation and amortization
    
    
    11,129
    
    
    
    103,511
    
    
    
    193,195
    
    
    
    336,462Operating expenses
    
    
    751,168
    
    
    
    708,375
    
    
    
    2,497,949
    
    
    
    1,964,473Loss from operations
    
    
    (590,592
    )
    
    
    (739,196
    )
    
    
    (2,129,240
    )
    
    
    (1,794,293
    )Other income (expense):Interest expense
    
    
    (157,012
    )
    
    
    (268,395
    )
    
    
    (814,565
    )
    
    
    (794,387
    )Gain in vendor settlements
    
    
    9,304
    
    
    
    
    
    
    
    162,056
    
    
    
    Other
    
    
    40
    
    
    
    887
    
    
    
    6,549
    
    
    
    140,980Other expense, net
    
    
    (147,668
    )
    
    
    (267,508
    )
    
    
    (645,960
    )
    
    
    (653,407
    )Net loss
    
    
    (738,260
    )
    
    
    (1,006,704
    )
    
    
    (2,775,200
    )
    
    
    (2,447,700
    )Preferred stock dividend requirements
    
    
    (81,735
    )
    
    
    (101,401
    )
    
    
    (217,746
    )
    
    
    (775,750
    )Net loss applicable to common stock
    
    $
    (819,995
    )
    
    $
    (1,108,105
    )
    
    $
    (2,992,946
    )
    
    $
    (3,223,450
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.18
    )Weighted average shares of common stock
outstanding
    
    
    24,691,500
    
    
    
    19,419,597
    
    
    
    23,535,807
    
    
    
    17,964,124
 See accompanying notes to unaudited financial statements. 2




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AXCESS INTERNATIONAL
INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,775,200
    )
    
    $
    (2,447,700
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    193,195
    
    
    
    336,462Amortization of financing discount and issuance costs
    
    
    618,790
    
    
    
    348,449Shares issued for services rendered
    
    
    65,000
    
    
    
    80,000Gain on vendor settlements
    
    
    (162,056
    )
    
    
    Loss on disposal of assets
    
    
    
    
    
    
    13,139Inventory impairment
    
    
    
    
    
    
    98,428Changes in operating assets and liabilities:Accounts receivable
    
    
    3,968
    
    
    
    10,380Inventory
    
    
    11,030
    
    
    
    12,809Prepaid expenses and other
    
    
    38,507
    
    
    
    (109,922
    )Other assets
    
    
    (1,032
    )
    
    
    20,789Accounts payable
    
    
    (186,853
    )
    
    
    (239,117
    )Other liabilities
    
    
    120,127
    
    
    
    324,858Net cash used by operating activities
    
    
    (2,074,524
    )
    
    
    (1,569,043
    )Cash flow from investing activities:Capital expenditures
    
    
    (33,040
    )
    
    
    Net cash used by investing activities
    
    
    (33,040
    )
    
    
    Cash flow from financing activities:Borrowings under financing agreements
    
    
    
    
    
    
    305,000Principal payments on financing agreements
    
    
    (125,088
    )
    
    
    18,149Net proceeds from issuance of common stock from employees options
    
    
    25,440
    
    
    
    52,276Net proceeds from issuance of common and preferred stock
    
    
    1,200,000
    
    
    
    1,460,625Net cash provided by financing activities
    
    
    1,100,352
    
    
    
    1,836,050Net increase (decrease) in cash and cash equivalents
    
    
    (1,007,212
    )
    
    
    267,007Cash and cash equivalents, beginning of period
    
    
    2,163,977
    
    
    
    33,249Cash and cash equivalents, end of period
    
    $
    1,156,765
    
    
    $
    300,256Supplemental information:Cash paid during the period for interest
    
    $
    
    
    
    $
    3,078Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    568,333
    
    
    $
    Conversions of accrued interest into common stock
    
    
    149,978
    
    
    
    Conversions of preferred stock into common stock
    
    
    536,623
    
    
    
    Conversion of accrued dividends into common stock
    
    
    109,417
    
    
    
    Preferred stock dividends accrued
    
    
    217,746
    
    
    
    300,895
 See accompanying notes to unaudited financial statements. 3




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AXCESS 
 NOTES TO FINANCIAL STATEMENTS
 (Unaudited)
 (1) Summary of Significant Accounting Policies (a) Description of Business The Company provides advanced security and asset management systems, which
locate, identify, track, monitor and protect assets. The main applications of
the Companys systems are security video through closed circuit television
(called CCTV), personnel and vehicle access control, and automatic asset
tracking and protection. The Company provides solutions in the recently
identified homeland security markets such as air and ground transportation,
water treatment facilities, oil and gas, power plants, as well as in the
markets for data centers, retail / convenience stores, education, healthcare,
and corporate offices. AXCESS utilizes two patented and integrated
technologies: network-based radio frequency identification (RFID) and tagging
and streaming video. Both application and browser-based software options
deliver critical real-time information tailored to each end user via the
enterprise network or Internet, also providing custom alerts in the form of
streaming video, e-mail, or messages delivered to wireless devices. The Companys business plan for 2004 is predicated principally upon the
successful marketing of its RFID and digital video products. During the nine
months ending September 30, 2004, operating activities utilized approximately
$2.1 million of cash. During 2003 and the second quarter of 2004 we raised a
net of $4.4 million and $1.2 million, respectively, for additional working
capital through three exempt Preferred Stock offerings. The future results of operations and financial condition of the Company
will be impacted by the following factors, among others: changes from
anticipated levels of sales, access to capital, future national or regional
economic and competitive conditions, changes in relationships with customers,
difficulties in developing and marketing new products, marketing existing
products, customer acceptance of existing and new products, validity of
patents, technological change, dependence on key personnel, availability of key
component parts, dependence on third party manufacturers, vendors, contractors,
product liability, casualty to or other disruption of the production
facilities, delays and disruptions in the shipment of the Companys products,
and the ability of the Company to meet its stated business goals. If the Companys losses or lack of operating capital continue, the Company
will have to obtain funds to meet its cash requirements through business
alliances, such as strategic or financial transactions with third parties, the
sale of securities or other financing arrangements, or the Company may be
required to curtail its operations, seek a merger partner, or seek protection
under federal bankruptcy laws. Any of the foregoing may be on terms that are
unfavorable to the Company or disadvantageous to existing stockholders. In
addition, no assurance may be given that the Company will be successful in
raising additional funds or entering into business alliances. (b) Company Organization and Basis of Presentation The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company has received working capital in various forms from Amphion
Ventures, L. P. and affiliates of Amphion Ventures, L. P. including Amphion
Partners, Amphion Investments LLC, Antiope Partners, VennWorks LLC (formerly
incuVest LLC), Amphion Capital Management, and NVW, LLC (collectively, the
Amphion Group). Following the conversion of the 2003 preferred stock held by
the Amphion Group into common stock in 2003, the Amphion Group owns
approximately 69% of the outstanding voting stock of the Company. (c) Inventory Inventory is valued at the lower of cost or market using the first-in,
first-out method. Inventory was comprised of the following at September 30,
2004 and December 31, 2003: September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    58,930
    
    
    $
    36,682Work-in-process
    
    
    
    
    
    
    10,513Finished goods
    
    
    61,555
    
    
    
    84,320$
    120,485
    
    
    $
    131,515




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(d) Stock Options The Company accounts for its stock-based compensation plan under
Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued
to Employees. The pro forma information below is based on provisions of
Statement of Financial Accounting Standard (FAS) No. 123, Accounting for
Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based
CompensationTransition and Disclosure, issued in December 2002. The Company does not have a history of paying cash dividends and none have
been assumed in estimating the fair value of its options. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because, among other things, changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable measure of
the fair value of its employee stock options. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting periods. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (819,995
    )
    
    $
    (1,108,105
    )
    
    $
    (2,992,946
    )
    
    $
    (3,223,450
    )Less: fair value of employee stock compensation
    
    
    (167,488
    )
    
    
    (103,310
    )
    
    
    (384,541
    )
    
    
    (327,938
    )Pro forma net loss attributed to common stock
    
    
    (987,483
    )
    
    
    (1,211,415
    )
    
    
    (3,377,487
    )
    
    
    (3,551,388
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.18
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )
    
    $
    (0.20
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.62
    %
    
    
    5.00
    %
    
    
    4.67
    %
    
    
    5.00
    %Expected life
    
    
    6.5 years
    
    
    
    10.0 years
    
    
    
    6.7 years
    
    
    
    10.0 yearsExpected volatility
    
    
    134
    %
    
    
    88% - 92
    %
    
    
    129
    %
    
    
    88% - 92
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 (e) Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51(FIN 46), which
was revised and superceded by FASB Interpretation No. 46R in December 2003 (FIN
46R). FIN 46R requires the consolidation of certain variable interest
entities, as defined. FIN 46R is effective immediately for special purpose
entities and variable interest entities created after December 31, 2003, and
must be applied to other variable interest entities no later than December 31,
2004. The Company believes it has no such variable interest entities and as a
result FIN No. 46R will have no impact on its results of operations, financial
position or cash flows. (2) Contingencies Axcess is engaged in a number of lawsuits with approximately eight vendors
who claim they are owed amounts from $500 to $45,000, which aggregates in total
$111,705. We are currently defending or seeking to settle each of the vendors
claims. At September 30, 2004, we had accrued the delinquent amounts we expect
to be liable for, for the claims described in this paragraph.




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(3) Preferred Stock The Company has authorized 7,000,000 shares of convertible preferred
stock, of which shares designated in five series have been issued. Information
with respect to the series of preferred stock outstanding at each balance sheet
date is summarized below. Series I
    
    Series J
    
    2003B Series
    
    2004 SeriesNumber of shares authorized
    
    
    2,500
    
    
    
    2,500
    
    
    
    2,750,000
    
    
    
    625,000Stated value
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued and outstanding:December 31, 2003
    
    
    52
    
    
    
    2
    
    
    
    1,790,000
    
    
    
    September 30, 2004
    
    
    
    
    
    
    
    
    
    
    1,790,000
    
    
    
    625,000Conversion ratio (or
    
    2.51 into
    
    2.51 into
    
    
    1 to 1 into
    
    
    
    1 to 1 intoconversion price) of
    
    voting
    
    non-voting
    
    voting
    
    votingpreferred shares into common
    
    common
    
    common
    
    common
    
    commonstock
    
    stock
    
    stock
    
    stockLiquidation preference
    
    Stated value
    
    Stated
    
    None
    
    Noneplus
    
    value plusaccrued
    
    accrueddividends
    
    dividendsDividend rights
    
    8% per
    
    8% per
    
    7% per
    
    7% perannum,
    
    annum,
    
    annum,
    
    annum,cumulative
    
    cumulative
    
    cumulative
    
    cumulative
 (a) Series I and Series J Preferred Stock The holders of Series I Preferred Stock and Series J Preferred Stock are
entitled to receive semi-annual dividends on each such share at the annual rate
of 8% of the original issue price of each share payable in arrears, when, as
and if declared by the Companys board of directors, in cash or additional
shares of preferred stock. Shares of Series I Preferred Stock and Series J
Preferred Stock are convertible into shares of common stock at a conversion
price of $2.51 per share. During the three months ended September 30, 2004
there were no of dividends accrued for Series I Preferred Stock and Series J
Preferred Stock, respectively. Dividends payable were $0 and $95,182 for
Series I Preferred Stock at September 30, 2004 and December 31, 2003,
respectively. Dividends payable were $0 and $3,384 for Series J Preferred Stock
at September 30, 2004 and December 31, 2003, respectively. During the first quarter of 2004 all shares of the Series of Series I and
Series J preferred stock were retired or converted and there are currently no
shares outstanding. (b) Series 2003B Preferred Stock We completed a $3,132,500 exempt Preferred Stock Offering during the
fourth quarter of 2003. The Preferred Stock is designated as 2003B Preferred
and each $70,000 unit consisted of 40,000 shares of Preferred Stock bearing a
7% dividend, approximately 2,000 shares of common stock and 40,000 warrants to
purchase Axcess common stock exercisable for two years at $2.75 per share. The
offering also included an automatic conversion into Common Stock on a one for
one basis if the closing twenty-day average stock price is over $3.75. The holders of the Series 2003B Preferred Stock are entitled to receive
annual dividends on each share held at the annual rate of 7% of the original
issue price of each share payable in arrears, when, as and if declared by the
our board of directors, paid in cash or common shares at our option. During
the three months ended September 30, 2004 there were $55,269 of dividends
accrued. We have also accrued $192,040 and $27,433 of dividends payable for
Series 2003B Preferred Stock at September 30, 2004 and December 31, 2003,
respectively. As of September 30, 2004 and December 31, 2003, we had 1,790,000
shares of Series 2003B Preferred shares outstanding. In connection with the issuance of the 2003B Preferred Stock, the Company
recorded preferred stock dividend requirements of $1,782,831 based upon the
value of the of the warrants and beneficial conversion features that will be
reflected as preferred stock dividends as the underlying preferred stock
converts to common stock. As of September 30, 2004 and December 31, 2003 that
amount is reflected in accumulated deficit on the balance sheet.




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##### Table of Contents



(c) Series 2004 Preferred Stock During the second quarter of 2004 we raised a net of $1,200,000 of
additional working capital through an exempt Preferred Stock offering. The
Preferred Stock is designated as 2004 Preferred and consisted of 625,000 shares
of Preferred Stock bearing a 7% dividend and 357,142 warrants to purchase our
common stock exercisable for two years at $3.20 per share. The offering also
includes an automatic conversion into Common Stock on a one for one basis if
the closing twenty-day average stock price is over $4.00 or when we achieve a
full quarter of profitability. The holders of the Series 2004 Preferred Stock are entitled to receive
annual dividends on each share held at the annual rate of 7% of the original
issue price of each share payable in arrears, when, as and if declared by our
board of directors, paid in cash of common shares at our option. During the
three months ended September 30, 2004 there were $26,466 of dividends accrued
and $42,288 of dividends payable as of September 30, 2004 for Series 2004
Preferred Stock. As of September 30, 2004 we have 625,000 shares of Series 2004
Preferred shares outstanding. In connection with the issuance of the 2004 Preferred Stock, we recorded
preferred stock dividend requirements of approximately $1,002,540 based upon
the value of the warrants and beneficial conversion features that will be
reflected as preferred stock dividends as the underlying preferred stock
converts to common stock. (4) Convertible Notes Payable On July 30, 2002, the Company entered into a bridge financing agreement
with ten accredited investors for the sale and issuance of 10 units to the
investors for an aggregate purchase price of $1,000,000. Each unit consists of
a convertible promissory note in the amount of $100,000 and 25,000 shares of
the Companys common stock. Each investor has agreed to not sell more than
one-third of the common stock comprising the units during any calendar month.
The convertible promissory notes comprising the units bear interest at an
annual rate of 7% and mature on July 30, 2005. On each of July 30, 2003, July
30, 2004 and July 30, 2005, the investors have the option to convert one-third
of the principal amount of the notes into common stock of the Company. The
conversion price of the notes is initially 65% of the average closing price of
a share of the Companys common stock for the 20 trading days preceding the
given anniversary date of the notes. The maximum conversion price shall be
$4.00 per share and the minimum conversion price shall be $1.00 per share. The
conversion price will be subject to adjustment from time to time to reflect any
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or similar change in the Companys shares of common
stock. The Company without premium or penalty may prepay the notes in whole or
in part. During the three months ended September 30, 2004, two holders elected to
convert $183,333 of their notes plus $11,518 of accrued interest into 135,313
shares of Axcess common stock. On January 17, 2003, Axcess entered into a bridge financing agreement with
ten accredited investors for the sale and issuance of 3.05 units to the
investors for an aggregate purchase price of $305,000. Each unit consists of
a convertible promissory note in the amount of $100,000 and 50,000 shares of
our common stock. By agreement, each investor may not sell more than one-third
of the common stock comprising the units during any calendar month. The
convertible promissory notes comprising the units bear interest at an annual
rate of 7% and mature on January 31, 2006. On each of January 31, 2004, January
31, 2005 and January 31, 2006, the investors have the option to convert
one-third of the principal amount of the notes into common stock of Axcess. The
conversion price of the notes is initially 65% of the average closing price of
a share of our common stock for the twenty (20) trading days preceding the
given anniversary date of the notes. The maximum conversion price shall be
$2.00 per share and the minimum conversion price shall be $0.50 per share. The
conversion price will be subject to adjustment from time to time to reflect any
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or similar change in our shares of common stock. The
notes may be prepaid in whole or in part by us without premium or penalty. (5) Significant Customers During the three months ended September 30, 2004 we had two customers that
accounted for 52% of the overall revenue, one customer accounted for 48% of the
RFID product sales and four customers account for 100% of the digital video
product sales. During the three months ended September 30, 2003 the Company
had three customers that accounted for 46% of the overall revenue, three
customers accounted for 64% of the digital video product sales and three
customers accounted for 62% of the RFID product sales.




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During the nine months ended September 30, 2004 we had one customer that
account for 17% of the overall revenue, three customers account for 64% of the
digital video product sales and two customers account for 30% of the RFID
product sales. During the nine months ended June 30, 2003 we had three
customers that accounted for 34% of the overall revenue, three customers
accounted for 70% of the digital video product sales and two customers
accounted for 28% of the RFID product sales. 
 Item 2. Managements Discussion and Analysis or Plan of Operation. Forward-Looking Statements This quarterly report on Form 10-QSB includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the Securities Act), and Section 21E of the Securities Exchange Act of 1934,
as amended, which can be identified by the use of forward-looking terminology
such as, may, expect, could, plan, seek, anticipate, estimate, or
continue or the negative thereof or other variations thereon or comparable
terminology. These forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
referred 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s current expectations or
beliefs as well as assumptions made by, and information currently available to,
management. A variety of factors could cause actual results to differ materially from
those anticipated in the Companys forward-looking statements, including the
following factors: changes from anticipated levels of sales, access to capital,
future national or regional economic and competitive conditions, changes in
relationships with customers, difficulties in developing and marketing new
products, marketing existing products, customer acceptance of existing and new
products, validity of patents, technological change, dependence on key
personnel, availability of key component parts, dependence on third party
manufacturers, vendors, contractors, product liability, casualty to or other
disruption of the production facilities, 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 and other cautionary
statements and factors that could cause actual results to differ from the
Companys forward-looking statements, please refer to the Companys filings
with the Securities and Exchange Commission, especially Item 1. Description
of Business (including the Risk Factors section of Item 1) and Item 6.
Managements Discussion and Analysis or Plan of Operation of the Companys
2003 Annual Report on Form 10-KSB. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect managements analysis only as of the date hereof. The
Company does not undertake any obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission. Recent Developments: Going Concern and Liquidity Problems Our auditors have included an explanatory paragraph in their audit opinion
with respect to our consolidated financial statements at December 31, 2003. The
paragraph states that our recurring losses from operations and resulting
continued dependence on access to external financing raise substantial doubts
about our ability to continue as a going concern. Furthermore, the factors
leading to and the existence of the explanatory paragraph may adversely affect
our relationship with customers and suppliers and have an adverse effect on our
ability to obtain financing. We do not have sufficient working capital to sustain our operations. We
have been unable to generate sufficient revenues to sustain our operations. We
will have to obtain funds to meet our cash requirements through business
alliances, such as strategic or financial transactions with third parties, the
sale of securities or other financing arrangements, or we may be required to
curtail our operations, seek a merger partner, or seek protection under federal
bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to
us or disadvantageous to existing stockholders. In addition, no assurance may
be given that we will be successful in raising additional funds or entering
into business alliances. Liquidity and Capital Resources Since inception, we have utilized the proceeds from a number of public and
private sales of our equity securities, the exercise of options and warrants
and more recently, convertible debt, short-term bridge loans from stockholders
and preferred equity offerings to meet our working capital requirements. At
September 30, 2004, we had a working capital deficit of $320,882.




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Our operations generated losses in 2003 and continue to generate losses in
2004. Our cash decreased $1,007,212 during the nine months ended September 30,
2004 with operating activities using $2,074,524 of cash. We funded operations
primarily through cash on hand from borrowings and equity offerings over the
last two years. No assurance can be given that such activities will continue
to be available to provide funding to us. Our business plan for 2004 is
predicated principally upon the successful marketing of our RFID and digital
video products. We anticipate that our existing working capital resources and
revenues from operations will not be adequate to satisfy our funding
requirements in 2005. Our working capital requirements will depend upon many factors, including
the extent and timing of our product sales, our operating results, the status
of competitive products, and actual expenditures and revenues compared to our
business plan. We are currently experiencing declining liquidity, losses from
operations and negative cash flows, which makes it difficult for us to meet our
current cash requirements, including payments to vendors, and may jeopardize
our ability to continue as a going concern. We intend to address our liquidity
problems by controlling costs, seeking additional funding (through capital
raising transactions and business alliances) and maintaining focus on revenues
and collections. If our losses continue, we will have to obtain funds to meet our cash
requirements through business alliances, such as strategic or financial
transactions with third parties, the sale of securities or other financing
arrangements, or we may be required to curtail our operations, seek a merger
partner, or seek protection under federal bankruptcy laws. Any of the foregoing
may be on terms that are unfavorable to us or disadvantageous to existing
stockholders. In addition, no assurance may be given that we will be successful
in raising additional funds or entering into business alliances. Sales and Marketing Initiatives In the past our sales volume has not been sufficient to sustain our
operations. During the nine months ended September 30, 2004 we were able,
through the recent financing, to initiate a new marketing emphasis, which is
intended by us to build sales, primarily of our RFID products. Our marketing
team has implemented the following sales strategies:  1.
    
    A marketing communications program to create brand awareness in the
security systems integration space;2.
    
    The hiring of two additional sales personnel and one marketing
administrative assistant;3.
    
    An assessment of the non-security market for active RFID. While there can be no assurance that our efforts will be successful, we
believe that these strategies will assist us in our goal of becoming
profitable. Results of Operations Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 Sales and Gross Profit. Sales for the three months ended September 30,
2004 were $301,889 and for the three months ended September 30, 2003 were
$181,580. Cost of sales for the three months ended September 30, 2004 were
$141,313 and for the three months ended September 30, 2003 were $113,973. The
company also recorded a charge of $98,428 for inventory impairment during the
three months ended September 30, 2003. The impairment was a result of the
change in strategy to contract manufacturing. The amount reflects items that
have not been able to be used by the contract manufacturer in the building of
additional products. The gross profit (loss) for the three months ended
September 30, 2004 was $160,576 and ($30,821) for the three months ended
September 30, 2003. The increase in sales was a result of the increase sales
and marketing activity initiated during 2004. The margin improvement is driven
by a shift in the product mix and continued improvement in margins based on the
shift to contract manufacturers. Radio frequency identification (RFID) product sales were $251,788 for the
three months ended September 30, 2004 and $134,020 for the three months ended
September 30, 2003. Cost of sales was $113,375 for the three months ended
September 30, 2004 and $88,344 for the three months ended September 30, 2003.
The company also recorded a charge of $23,422 for inventory impairment during
the three months ended September 30, 2003. The impairment was as a result of
the change in strategy to contract manufacturing. The amounts reflect items
that have not been able to be used by the contract manufacturer in the building
of additional products. As a result, gross profits from RFID products were
$138,413 for the three months ended September 30, 2004 and $22,254 for the
three months ended September 30, 2003. Sales are continuing to increase based
on the increased exposure in the marketplace. The margin improvement is a
result of the product mix shift and continued improvement based on the shift to
contract manufacturers.




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##### Table of Contents



Digital video product sales were $50,101 for the three months ended
September 30, 2004 and $47,560 for the three months ended September 30, 2003.
Cost of sales was $27,938 for the three months ended September 30, 2004 and
$25,629 for the three months ended September 30, 2003. The company also
recorded a charge of $75,006 for inventory impairment during the three months
ended September 30, 2003. The impairment was a result of the change in
strategy to contract manufacturing. The amounts reflect items that have not
been able to be used by the contract manufacturer in the building of additional
products. As a result, gross profit (loss) from digital video products were
$22,163 for the three months ended September 30, 2004 and ($53,075) for the
three months ended September 30, 2003. We continue to focus on the RFID
product line as a result the sales have not increased. The margin has been
steady as a result of the product mix. Operating Expenses. Operating expenses were $751,168 for the three months
ended September 30, 2004 and $708,375 for the three months ended September 30,
2003. This increase was due to increased salaries, increased advertising,
additional research and development and the hiring of outside professional
services companies. Research and development expenses were $176,791 for the three months ended
September 30, 2004 and $164,054 for the three months ended September 30, 2003.
The increase is a result of increased salaries from the recession of the pay
reduction implemented during 2003, some additional contract labor relating to
certain RFID software development and a slight increase in health insurance
offset by a decrease in prototyping of additional tag form factors and the
completion of testing for Canadian certification. Corporate general and administrative expenses were $324,970 for the three
months ended September 30, 2004 and $375,360 for the three months ended
September 30, 2003. The decrease is a result of decreased spending on an
investor relations firms, decreased directors and officers insurance,
decreased professional services, reduction of bad debt expense offset by
increased salaries from the recession of the pay reduction implemented during
2003. Selling and marketing expenses were $238,278 for the three months ended
September 30, 2004 and $65,450 for the three months ended September 30, 2003.
The increase is a result of increased salaries from the recession of the pay
reduction implemented during 2003, increased headcount and an increase in
advertising. We attended several trade shows during the quarter as well as
placed several advertisements. We are attempting to reestablish our place in
the market. Depreciation and amortization expenses were $11,129 for the three months
ended September 30, 2004 and $103,511 for the three months ended September 30,
2003. $73,985 of the decrease is related to lower amortization expense as a
result of the intangible assets being fully amortized. The remaining decrease
is a result decreased depreciation expense as a result of the age of the
equipment, the closing of the Georgia facility and the downsizing of the
California facility. Other expenses, net. Other expenses, net, were $147,668 for the three
months ended September 30, 2004 and $267,508 for the three months ended
September 30, 2003. Interest expense was $111,383 lower during the three months
ended September 30, 2004, compared to the three months ended September 30,
2003, reflecting a decrease in the amortization of the debt discount related to
the convertible notes that converted during the quarter, lower debt balance and
lower rate. We also were able to settle some accounts payable issues relating
to prior periods at a discount from the accrued amounts, which resulted in a
$9,304 gain on settlements. Net Loss. Net loss was $738,260 for the three months ended September 30,
2004, compared to a loss of $1,006,704 for the three months ended September 30,
2003. The decrease is mainly related to increase in sales, reduced interest
expense and decreases in outside services including insurance, legal and
investor relations. Preferred Stock dividend requirements.Preferred Stock dividend
requirements were $81,735 for the three months ended September 30, 2004 and
$101,401 for the three months ended September 30, 2003. This decrease was due
to the reduction in the number of preferred shares outstanding during 2004. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 Sales and Gross Profit. Sales for the nine months ended September 30, 2004
were $733,695 and for the nine months ended September 30, 2003 were $717,572.
Cost of sales for the nine months ended September 30, 2004 were $364,986 and
for the nine months ended September 30, 2003 were $448,964. The company also
recorded a charge of $98,428 for inventory impairment during the nine months
ended September 30, 2003. The impairment was a result of the change in
strategy to contract manufacturing. The amount reflects items that have not
been able to be used by the contract manufacturer in the building of additional
products. The gross profit for the nine months ended September 30, 2004 was
$368,709 and $170,180 for the nine months ended September 30, 2003. The
increase in sales was a result of the increase sales and marketing activity
initiated during 2004. The margin improvement is driven by a shift in the
product mix and continued improvement in margins based on the shift to contract
manufacturers.




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Radio frequency identification (RFID) product sales were $621,395 for the
nine months ended September 30, 2004 and $418,990 for the nine months ended
September 30, 2003. Cost of sales was $311,041 for the nine months ended
September 30, 2004 and $205,585 for the nine months ended September 30, 2003.
The company also recorded a charge of $23,422 for inventory impairment during
the three months ended September 30, 2003. The impairment was as a result of
the change in strategy to contract manufacturing. The amounts reflect items
that have not been able to be used by the contract manufacturer in the building
of additional products. As a result, gross profits from RFID products were
$310,354 for the nine months ended September 30, 2004 and $189,983 for the nine
months ended September 30, 2003. Sales are continuing to increase based on the
increased exposure in the marketplace. The margin improvement is a result of
the product mix shift and continued improvement based on the shift to contract
manufacturers. Digital video product sales were $112,300 for the nine months ended
September 30, 2004 and $298,582 for the nine months ended September 30, 2003.
Cost of sales was $53,945 for the nine months ended September 30, 2004 and
$243,379 for the nine months ended September 30, 2003. The company also
recorded a charge of $75,006 for inventory impairment during the three months
ended September 30, 2003. The impairment was a result of the change in
strategy to contract manufacturing. The amounts reflect items that have not
been able to be used by the contract manufacturer in the building of additional
products. As a result, gross profit (loss) from digital video products were
$58,355 for the nine months ended September 30, 2004 and $(19,803) for the nine
months ended September 30, 2003. The decrease in sales is a result of one
large order during 2003 that was not duplicated in 2004. The margin
improvement is a result of the product mix shift and continued improvement
based on the shift to contract manufacturers. Operating Expenses. Operating expenses were $2,497,949 for the nine months
ended September 30, 2004 and $1,964,473 for the nine months ended September 30,
2003. This increase was due to increased salaries, increased advertising,
additional research and development and the hiring of outside professional
services companies. Research and development expenses were $528,683 for the nine months ended
September 30, 2004 and $458,199 for the nine months ended September 30, 2003.
The increase is a result of increased salaries from the recession of the pay
reduction implemented during 2003, increase in contract labor for a software
development project and some additional travel offset by the downsizing of the
California facility and completion of Canadian certification testing. Corporate general and administrative expenses were $1,191,049 for the nine
months ended September 30, 2004 and $965,828 for the nine months ended
September 30, 2003. The increase is a result of increased salaries from the
recession of the pay reduction implemented during 2003, increased spending on
an investor relations firms, increased outside accounting fees relating to the
filing of a registration statement. However, we were able to offset some of
that increase with a reduction in bad debt expense. Selling and marketing expenses were $585,022 for the nine months ended
September 30, 2004 and $203,984 for the nine months ended September 30, 2003.
The increase is a result of increased salaries from the recession of the pay
reduction implemented during 2003, increased headcount and an increase in
advertising. We attended several trade shows during the period as well as
placed several advertisements. We are attempting to reestablish our place in
the market. Depreciation and amortization expenses were $193,195 for the nine months
ended September 30, 2004 and $336,462 for the nine months ended September 30,
2003. The decrease is related to lower amortization expense as a result of the
intangible assets being fully amortized as of June 30, 2004 and decreased
depreciation expense as a result of the age of the equipment, the closing of
the Georgia facility and the downsizing of the California facility. Other expenses, net. Other expenses, net, were $645,960 for the nine
months ended September 30, 2004 and $653,407 for the nine months ended
September 30, 2003. Interest expense was $20,178 higher during the nine months
ended September 30, 2004, compared to the nine months ended September 30, 2003,
reflecting an increase in the amortization of the debt discount related to the
convertible notes that converted during the period. We also were able to
settle some accounts payable issues relating to prior periods at a discount
from the accrued amounts, which resulted in a $162,056 gain on settlements. Net Loss. Net loss was $2,775,200 for the nine months ended September 30,
2004, compared to a loss of $2,447,700 for the nine months ended September 30,
2003. The increase is mainly relating to the increased salary expense,
increased marketing activity and the hiring of certain professional service
firms. Preferred Stock dividend requirements.Preferred Stock dividend
requirements were $217,746 for the nine months ended September 30, 2004 and
$775,750 for the nine months ended September 30, 2003. This decrease was due to
a beneficial conversion discount of $474,855 for the 2003 preferred stock
converted during 2003.




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Other Inflation. Inflation has not had, and is not expected to have, a material
impact on the operations and financial condition of the Company. 
 Item 3. Controls and Procedures Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of the end of the period covered by this Quarterly Report on Form
10-QSB, the Companys principal executive officer and principal financial
officer have concluded that the Companys disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the Exchange Act)) are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. (b) Changes in Internal Controls. During the period covered by this
report, there were no significant changes in the Companys internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Axcess is engaged in a number of lawsuits with approximately eight vendors
who claim they are owed amounts from $500 to $45,000, which aggregates in total
$111,705. We are currently defending or seeking to settle each of the vendors
claims. At September 30, 2004, we had accrued the delinquent amounts we expect
to be liable for, for the claims described in this paragraph. 
 Item 2. Changes in Securities. During the three months ended September 30, 2004, we issued unregistered
securities in connection with the transactions described below. The issuance of
stock was exempt from the registration requirements of the Securities Act, as
amended by virtue of Section 4(2) thereof, as transactions not involving a
public offering and an appropriate restrictive legend was affixed to the stock
certificates. Convertible Note During the three months ended September 30, 2004 two of the holders of the
July 2002 Convertible debt elected to convert $183,333 of their $366,666 note
plus $11,518 of accrued interest into 135,313 of unregistered common stock. We
reissued the notes for $183,333. Stock Options During the three months ended September 30, 2004 three employees exercised
32,800 stock options. Common Stock for Services Rendered During the three months ended September 30, 2004 we issued 25,000
restricted common shares to Equitis, Inc. to compensate them for services
provided to Axcess. The fair market value of these shares issued for services
was expensed during the three months end June 30, 2004. SB-2 Registration Statement On October 29, 2004 the SEC declared our SB-2 Registration statement
effective which was originally filed on May 26, 2004. We registered a total of
12,613,278 common shares comprising 4,543,969 shares currently issued and held
by certain selling stockholders and 8,069,309 warrants. Proceeds from the sale
of the 4,543,969 shares beneficially owned by the selling stockholders will
inure solely to the benefit of the selling stockholders, as we will not receive
any of the proceeds from such sales. If fully exercised the warrants would
result in the issuance of 8,069,309 shares of our common stock and result in
proceeds to us of $17,349,014, which would be used for working capital and to
pay down any outstanding debt. There can be no assurance that any of the
warrants will be exercised. 
 Item 3. Defaults Upon Senior Securities None




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Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 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. *
   *
    
    Filed herewith (b) Reports on Form 8-K: Date
    
    DescriptionJuly 19, 2004
    
    On July 19, 2004, Axcess International Inc. filed an 8-K
announcing they had entered into an Exclusive License
Agreement with TechSearch LLC.




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AXCESS INTERNATIONAL INC.,
Registrant/s/ ALLAN GRIEBENOWAllan Griebenow Director, President and
Chief Executive Officer (Principal Executive Officer)/s/ ALLAN L. FRANKAllan L. Frank
Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)November 9, 2004