**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
|   | **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR  THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003** |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                      |
|   | **or**     |
|   |       |                                                                                                                                      |
|   | **o**      | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                      |

 

**COMMISSIONFILE NUMBER: 0-11933**

** **

**AXCESS INTERNATIONAL INC.**

**(formerly AXCESSInc.)**

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

 
| **Delaware**                                                                         |   | **85-0294536**                       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                       |   | (I.R.S. Employer Identification No.) |
|                                                                                 |   |                                 |
| **3208 Commander DriveCarrollton, 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 theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ýNo o

 

Number of shares of commonstock outstanding on November 13, 2003: **19,446,028**

 

Transitional Small BusinessDisclosure Format: Yes oNo ý

 

 

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**AXCESS INC.INDEX**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                                                        |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                                                        |   |
|                              | Item 1. Financial Statements:                                                                                                               |   |
|                              |                                                                                                                                        |   |
|                              | Balance Sheets at September 30, 2003 and December 31, 2002                                                                                  |   |
|                              |                                                                                                                                        |   |
|                              | Statements of Operations for the Three  Months ended September 30, 2003 and 2002 and for the Nine Months ended  September 30, 2003 and 2002 |   |
|                              |                                                                                                                                        |   |
|                              | Statements of Cash Flows for the Nine  Months ended September 30, 2003 and 2002                                                             |   |
|                              |                                                                                                                                        |   |
|                              | Notes to Financial Statements                                                                                                               |   |
|                              |                                                                                                                                        |   |
|                              | Item 2. Management’s Discussion and  Analysis or Plan of Operation                                                                     |   |
|                              |                                                                                                                                        |   |
|                              | Item 3. Controls and Procedures                                                                                                             |   |
|                              |                                                                                                                                        |   |
| **PART II. OTHER INFORMATION**    |                                                                                                                                        |
|                              |                                                                                                                                        |   |
|                              | Item 1. Legal Proceedings                                                                                                                   |   |
|                              |                                                                                                                                        |   |
|                              | Item 2. Changes in Securities                                                                                                               |   |
|                              |                                                                                                                                        |   |
|                              | Item 3. Defaults Upon Senior Securities                                                                                                     |   |
|                              |                                                                                                                                        |   |
|                              | Item 4. Submission of Matters to a Vote of  Security Holders                                                                                |   |
|                              |                                                                                                                                        |   |
|                              | Item 5. Other Information                                                                                                                   |   |
|                              |                                                                                                                                        |   |
|                              | Item 6. Exhibits and Reports on Form 8-K                                                                                                    |   |
|                              |                                                                                                                                        |   |
| **SIGNATURES**                    |                                                                                                                                        |

 

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**PART1****. FINANCIAL INFORMATION**

**Item1****. Financial Statements**

**AXCESSINC.CONSOLIDATED BALANCE SHEETS**
|                                                                                                                                                                                            |   | **(Unaudited)  September 30,  2003** |       | **December  31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------|------------|
| ASSETS                                                                                                                                                                                          |   |                                 | ** ** |                    | ** ** |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Current assets:                                                                                                                                                                                 |   |                                 |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                       |   | $                                    | 300,256    |                    | $          | 33,249 |   |
| Restricted Cash                                                                                                                                                                                 |   | —                               |       | 140,000                 |       |
| Accounts receivable - trade, net of  allowance for doubtful accounts                                                                                                                            |   | 74,999                               |       | 85,379                  |       |
| Inventory                                                                                                                                                                                       |   | 146,000                              |       | 231,619                 |       |
| Prepaid expenses and other                                                                                                                                                                      |   | 198,268                              |       | 93,944                  |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Total current assets                                                                                                                                                                            |   | 719,523                              |       | 584,191                 |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Property, plant and equipment, net                                                                                                                                                              |   | 87,349                               |       | 213,794                 |       |
| Intellectual property, net                                                                                                                                                                      |   | 224,089                              |       | 447,245                 |       |
| Other assets                                                                                                                                                                                    |   | 595                                  |       | 29,384                  |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Total assets                                                                                                                                                                                    |   | $                                    | 1,031,556  |                    | $          | 1,274,614 |   |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)                                                                                                                                            |   |                                 |       |                    |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Current liabilities:                                                                                                                                                                            |   |                                 |       |                    |       |
| Accounts payable                                                                                                                                                                                |   | $                                    | 1,161,445  |                    | $          | 1,404,060 |   |
| Other accrued liabilities                                                                                                                                                                       |   | 1,826,585                            |       | 1,501,727               |       |
| Restricted cash for future funding                                                                                                                                                              |   | —                               |       | 140,000                 |       |
| Notes payable:                                                                                                                                                                                  |   |                                 |       |                    |       |
| Stockholders, includes $6,477,979 in  default                                                                                                                                                   |   | 10,405,227                           |       | 10,405,227              |       |
| Other                                                                                                                                                                                           |   | 83,993                               |       | 65,844                  |       |
| Dividends payable                                                                                                                                                                               |   | 756,180                              |       | 455,285                 |       |
| Total current liabilities                                                                                                                                                                       |   | 14,233,430                           |       | 13,972,143              |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Note payable to stockholder                                                                                                                                                                     |   | 1,288,333                            |       | 1,000,000               |       |
| Discount on convertible debt                                                                                                                                                                    |   | (840,282                             | )          | (956,148                | )          |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Total liabilities                                                                                                                                                                               |   | 14,681,481                           |       | 14,015,995              |       |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Stockholders’ equity (deficit):                                                                                                                                                            |   |                                 |       |                    |       |
| Convertible preferred stock, 7,000,000  shares authorized; 11,976 shares issued and outstanding in 2003 and 2002;  $4,872,847 aggregate liquidation preference in 2003 and 2002                 |   | 4,872,847                            |       | 4,872,847               |       |
| Common stock, $.01 par value, 50,000,000  shares authorized in 2003 and 2002; 19,446,028 shares issued and outstanding  in 2003 and 16,566,148 shares issued and outstanding in 2002            |   | 194,461                              |       | 165,662                 |       |
| Non-voting convertible common stock, $.01  par value, 2,250,000 shares authorized; no shares issued or outstanding in  2003 or 2002, convertible into common stock on a one for one share basis |   | —                               |       | —                  |       |
| Additional paid-in capital                                                                                                                                                                      |   | 126,054,368                          |       | 123,768,261             |       |
| Note receivable and accrued interest due  from stockholder                                                                                                                                      |   | (4,711,915                           | )          | (4,711,915              | )          |
| Accumulated deficit                                                                                                                                                                             |   | (140,059,686                         | )          | (136,836,236            | )          |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Total stockholders’ deficit                                                                                                                                                                |   | (13,649,925                          | )          | (12,741,381             | )          |
|                                                                                                                                                                                            |   |                                 |       |                    |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                |   | $                                    | 1,031,556  |                    | $          | 1,274,614 |   |

 

See accompanying notes to unaudited financial statements.

 

1

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**AXCESSINC.CONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)**

 
|                                                 |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
|                                                 |   | **2003**                               |       | **2002**                              |   | **2003** |   | **2002** |   |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Sales                                                |   | $                                      | 181,580    |                                  | $      | 504,779 |   | $ | 717,572 |   | $ | 1,289,431 |   |
| Cost of sales                                        |   | 113,973                                |       | 379,871                               |   | 448,964 |   | 1,008,445 |   |
| Inventory impairment                                 |   | 98,428                                 |       | —                                |   | 98,428 |   | — |   |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Gross profit (loss)                                  |   | (30,821                                | )          | 124,908                               |   | 170,180 |   | 280,986 |   |
| Expenses:                                            |   |                                   |       |                                  |   |   |   |   |   |
| Research and development                             |   | 164,054                                |       | 286,366                               |   | 458,199 |   | 1,427,244 |   |
| General and administrative                           |   | 375,360                                |       | 311,146                               |   | 965,828 |   | 1,186,229 |   |
| Selling and marketing                                |   | 65,450                                 |       | 130,687                               |   | 203,984 |   | 947,356 |   |
| Depreciation and amortization                        |   | 103,511                                |       | 129,560                               |   | 336,462 |   | 443,780 |   |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Operating expenses                                   |   | 708,375                                |       | 857,759                               |   | 1,964,473 |   | 4,004,609 |   |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Loss from operations                                 |   | (739,196                               | )          | (732,851                              | )      | (1,794,293 | ) | (3,723,623 | ) |
| Other income (expense):                              |   |                                   |       |                                  |   |   |   |   |   |
| Interest expense                                     |   | (268,395                               | )          | (329,430                              | )      | (794,387 | ) | (944,425 | ) |
| Interest income                                      |   | —                                 |       | 81,778                                |   | — |   | 242,667 |   |
| Other                                                |   | 887                                    |       | 34,981                                |   | 140,980 |   | 33,983 |   |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Other expense, net                                   |   | (267,508                               | )          | (212,671                              | )      | (653,407 | ) | (667,775 | ) |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Net loss                                             |   | (1,006,704                             | )          | (945,522                              | )      | (2,447,700 | ) | (4,391,398 | ) |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Preferred stock dividend requirements                |   | (101,401                               | )          | (140,298                              | )      | (775,750 | ) | (362,672 | ) |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Net loss applicable to common stock                  |   | $                                      | (1,108,105 | )                                     | $      | (1,085,820 | ) | $ | (3,223,450 | ) | $ | (4,754,070 | ) |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Basic and diluted net loss per share                 |   | $                                      | (0.06      | )                                     | $      | (0.07 | ) | $ | (0.18 | ) | $ | (0.30 | ) |
|                                                 |   |                                   |       |                                  |   |   |   |   |   |
| Weighted average shares of common stock  outstanding |   | 19,419,597                             |       | 16,257,722                            |   | 17,964,124 |   | 15,986,193 |   |

 

See accompanying notes to unaudited financialstatements.

 

2

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**AXCESS,INC.CONSOLIDATED STATEMENT OF CASH FLOWS(Unaudited)**

 
|                                                                         |   | **Nine  Months Ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2003**                              |       | **2002** |   |
|                                                                         |   |                                  |       |   |   |
| Cash flows from operating activities:                                        |   |                                  |       |   |   |
| Net loss                                                                     |   | $                                     | (2,447,700 | ) | $ | (4,391,398 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |   |                                  |       |   |   |
| Depreciation and amortization                                                |   | 336,462                               |       | 443,780 |   |
| Amortization of financing discount and  issuance costs                       |   | 348,449                               |       | 588,429 |   |
| Shares issued for services rendered                                          |   | 80,000                                |       | — |   |
| Interest income earned but not received                                      |   | —                                |       | (242,666 | ) |
| Loss on disposal of assets                                                   |   | 13,139                                |       | 26,202 |   |
| Inventory impairment                                                         |   | 98,428                                |       | — |   |
| Changes in operating assets and  liabilities:                                |   |                                  |       |   |   |
| Accounts receivable                                                          |   | 10,380                                |       | (56,503 | ) |
| Inventory                                                                    |   | 12,809                                |       | 426,175 |   |
| Prepaid expenses and other                                                   |   | (109,922                              | )          | 137,577 |   |
| Other assets                                                                 |   | 28,789                                |       | (150 | ) |
| Accounts payable                                                             |   | (239,117                              | )          | (438,622 | ) |
| Other liabilities                                                            |   | 324,858                               |       | 458,259 |   |
| Net cash used by operating activities                                        |   | (1,569,043                            | )          | (3,048,917 | ) |
|                                                                         |   |                                  |       |   |   |
| Cash flow from investing activities:                                         |   |                                  |       |   |   |
| Proceeds from asset sales                                                    |   | —                                |       | 11,016 |   |
| Capital expenditures                                                         |   | —                                |       | (686 | ) |
| Net cash increased by investing activities                                   |   | —                                |       | 10,330 |   |
|                                                                         |   |                                  |       |   |   |
| Cash flow from financing activities:                                         |   |                                  |       |   |   |
| Borrowings under financing agreements                                        |   | 305,000                               |       | 3,379,000 |   |
| Net proceeds (payments) on short-term  financing agreements                  |   | 18,149                                |       | (108,702 | ) |
| Net proceeds from exercise of employee  stock options                        |   | 52,276                                |       | — |   |
| Net proceeds from issuance of common and  preferred stock                    |   | 1,460,625                             |       | — |   |
| Net cash provided by financing activities                                    |   | 1,836,050                             |       | 3,270,298 |   |
|                                                                         |   |                                  |       |   |   |
| Net increase in cash and cash equivalents                                    |   | 267,007                               |       | 231,711 |   |
| Cash and cash equivalents, beginning of  period                              |   | 33,249                                |       | — |   |
| Cash and cash equivalents, end of period                                     |   | 300,256                               |       | 231,711 |   |
|                                                                         |   |                                  |       |   |   |
| Supplemental information:                                                    |   |                                  |       |   |   |
| Cash paid during the year for interest                                       |   | $                                     | 3,078      |   | $ | 3,123 |   |

 

3

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**AXCESSNOTES TO FINANCIAL STATEMENTS(Unaudited)**

 

**(1) Summary of Significant AccountingPolicies**

 

**(a) Description ofBusiness**

 

The Companyprovides advanced security and asset management systems, which locate,identify, track, monitor and protect assets. The main applications of theCompany’s systems are security video through closed circuit television (calledCCTV), personnel and vehicle access control, and automatic asset tracking and protection.The Company provides solutions in the recently identified homeland securitymarkets such as air and ground transportation, water treatment facilities, oiland gas, power plants, as well as in the markets for data centers, retail /convenience stores, education, healthcare, and corporate offices. AXCESSutilizes two patented and integrated technologies: network-based radiofrequency identification (RFID) and tagging and streaming video.  Both application and browser-based softwareoptions deliver critical real-time information tailored to each end user viathe enterprise network or Internet, also providing custom alerts in the form ofstreaming video, e-mail, or messages delivered to wireless devices.

 

The Company’sbusiness plan for 2003 is predicated principally upon the successful marketingof its RFID and digital video products. During 2002, operating activitiesutilized approximately $3.2 million of cash. During the second quarter of 2003 theCompany raised a net of $1,460,625 of additional working capital through anexempt Preferred Stock offering.  ThePreferred Stock is designated as 2003 Preferred and each $75,000 unit consistedof 100,000 shares of Preferred Stock bearing a 7% dividend, approximately 15,000shares of common stock and 100,000 warrants to purchase the Company’s commonstock exercisable for two years at $1.00 per share.  However, even with the additional funding,the Company anticipates that its existing working capital resources andrevenues from operations will not be adequate to satisfy its fundingrequirements in 2003.

 

The future results of operations and financial condition of the Companywill be impacted by the following factors, among others: changes fromanticipated levels of sales, access to capital, future national or regionaleconomic and competitive conditions, changes in relationships with customers,difficulties in developing and marketing new products, marketing existingproducts, customer acceptance of existing and new products, validity ofpatents, technological change, dependence on key personnel, availability of keycomponent parts, dependence on third party manufacturers, vendors, contractors,product liability, casualty to or other disruption of the productionfacilities, delays and disruptions in the shipment of the Company’s products,and the ability of the Company to meet its stated business goals.

 

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

 

**(b) CompanyOrganization and Basis of Presentation**

 

The accompanying consolidated financial statements include the accountsof the Company and its majority-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.

 

The Companyhas received working capital in various forms from Amphion Ventures, L. P. andaffiliates of Amphion Ventures, L. P. including Amphion Partners, AmphionInvestments 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 Groupinto common stock in 2003, the Amphion Group owns approximately 67% of theoutstanding voting stock of the Company.

 

4

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**(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 30,2003 and December 31, 2002:

 
|            |   | **September  30,  2003** |    | **December  31,  2002** |   |
|-----------------|--------|--------------------------|---------|-------------------------|--------|
| Raw materials   |   | $                        | 74,726  |                    | $      | 162,806 |   |
| Work-in-process |   | 3,469                    |    | 3,370                   |   |
| Finished goods  |   | 67,805                   |    | 65,443                  |   |
|            |   | $                        | 146,000 |                    | $      | 231,619 |   |

 

**(d) Stock Options**

 

The Company accounts for its stock-based compensation plan underAccounting Principles Board (“ABP”) Opinion No. 25, Accounting for Stock Issuedto Employees.  The pro forma informationbelow is based on provisions of Statement of Financial Accounting Standard(“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS148, Accounting for Stock-Based Compensation – Transition and Disclosure,issued in December 2002.

 
|                                                       |   | **Three Months Ended****September 30,** |       | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------|--------|-----------------------------------------|------------|--------------------------------------|--------|
|                                                       |   | **2003**                                |       | **2002**                             |   | **2003** |   | **2002** |   |
| **Pro forma impact of fair value method (FAS 148)**        |   |                                    |       |                                 |   |   |   |   |   |
| Reported net loss attributed to common  stock              |   | $                                       | (1,108,105 | )                                    | $      | (1,085,820 | ) | $ | (3,223,450 | ) | $ | (4,754,070 | ) |
| Less: fair value of employee stock  compensation           |   | (103,310                                | )          | (43,887                              | )      | (327,938 | ) | (140,992 | ) |
| Pro forma net loss attributed to common stock              |   | (1,211,415                              | )          | (1,129,707                           | )      | (3,551,388 | ) | (4,895,062 | ) |
|                                                       |   |                                    |       |                                 |   |   |   |   |   |
| **Loss per common share**                                  |   |                                    |       |                                 |   |   |   |   |   |
| Basic and diluted net loss per share – as  reported   |   | $                                       | (0.06      | )                                    | $      | (0.07 | ) | $ | (0.18 | ) | $ | (0.30 | ) |
| Basic and diluted net loss per share – pro  forma     |   | $                                       | (0.06      | )                                    | $      | (0.07 | ) | $ | (0.20 | ) | $ | (0.31 | ) |
|                                                       |   |                                    |       |                                 |   |   |   |   |   |
| **Weighted average Black-Scholes fair value  assumptions** |   |                                    |       |                                 |   |   |   |   |   |
| Risk free interest rate                                    |   | 5.0                                     | %          | 5.0                                  | %      | 5.0 | % | 5.0 | % |
| Expected life                                              |   | 10 years                                |       | 10 years                             |   | 10 years |   | 10 years |   |
| Expected volatility                                        |   | 88% -92                                 | %          | 88% - 92                             | %      | 88% - 92 | % | 88% - 92 | % |
| Expected dividend yield                                    |   | 0.0                                     | %          | 0.0                                  | %      | 0.0 | % | 0.0 | % |

 

**(e) Recent AccountingPronouncements**

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, “*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*”(“FAS 150”). FAS 150 establishes standards for how an issuer classifies andmeasures in its statement of financial position certain financial instrumentswith characteristics of both liabilities and equity. FAS 150 requires that anissuer classify a financial instrument that is within FAS 150’s scope as aliability (or an asset in some circumstances) because that financial instrumentembodies an obligation of the issuer. Many of those instruments were previouslyclassified as equity. FAS 150 requires an issuer to classify the followinginstruments as liabilities (or assets in some circumstances): mandatoryredeemable financial instruments; obligations to repurchase the issuer’s equityshares by transferring assets; and certain obligations to issue a variablenumber of its equity shares. FAS 150 is effective for all financial instrumentsentered into or modified after May 31, 2003, and otherwise shall be effectiveat the beginning of the first interim period beginning after June 15, 2003. Theadoption of FAS 150 did not have a material effect on the company’sconsolidated balance sheet.

 

**(2) Contingencies**

 

Pioneer Standard Electronics, Incorporated(“Pioneer”), filed a lawsuit against the Company in the county court in DallasCounty, Texas on September 28, 2001. Pioneer was a vendor to the Company and seeks damages of $81,533 fornon-payment for services provided. During the first quarter of 2003, Pioneer was granted a judgment for theentire amount.  The Company has reacheda settlement with Pioneer and is making payments.

 

The Company is also engaged in anumber of lawsuits with approximately seventeen vendors who claim they are owedamounts from $500 to $45,000, which aggregates in total $289,271. The Companyis currently defending or seeking to settle each of the vendor’s claims.  At September 30, 2003, the Company hasaccrued the delinquent amounts payable for the claims described in thisparagraph.

 

5

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**(3) Preferred Stock**

 

The Company has authorized 7,000,000 shares of convertible preferredstock, of which shares designated in five series have been issued. Informationwith respect to the series of preferred stock outstanding at each balance sheetdate is summarized below.

 
|                                                                    |   | **Series C**                        |   | **Series I**                        |   | **Series J**                        |   | **Series  1999**                    |   | **2003  Series**                    |
|-------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|
| Number of  shares authorized                                            |   | 1,500,000                           |   | 2,500                               |   | 2,500                               |   | 2,500                               |   | 2,133,333                           |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                                |
| Stated value                                                            |   | $                                   | 30.20  |                                | $      | 10,000                              |   | $                                   | 10,000 |                                | $ | 10,000 |   | $ | 1.00 |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                                |
| Number of shares issued and outstanding:                                |   |                                |   |                                |   |                                |   |                                |   |                                |
| December 31, 2002                                                       |   | 11,522                              |   | 125                                 |   | 177                                 |   | 152                                 |   | ––                        |
| September 30, 2003                                                      |   | 11,522                              |   | 125                                 |   | 177                                 |   | 152                                 |   | ––                        |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                                |
| Conversion ratio (or conversion price)  of preferred shares into common |   | 1 to 1 into voting common stock     |   | $2.51 into voting common stock      |   | $2.51 into non-voting common stock  |   | $2.50 into voting common stock      |   | 1 to 1 into voting common stock     |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                                |
| Liquidation  preference                                                 |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                                |
| Dividend  rights                                                        |   | 10% per annum, cumulative           |   | 8% per annum, cumulative            |   | 8% per annum, cumulative            |   | 8% per annum, cumulative            |   | 7% per annum, cumulative            |
|                                                                         |        |                                     |        |                                     |        |                                     |        |                                     |        |                                     |  |  |  |  |  |

 

The Company’s non-votingcommon stock may be converted to voting common stock at any time by the holderthereof, on a one-to-one basis.

 

The holders of the Company’s Series C Preferred Stock are entitled toreceive quarterly dividends on each such share held at the annual rate of 10%of the original issue price of each share payable in arrears, when, as and ifdeclared by the Company’s board of directors, in cash or additional shares ofpreferred stock at the option of the holder. During the three months ended September30, 2003 there were $8,890 of dividends accrued.  Dividends payable for Series C Preferred Stock were $79,431 and$53,051 at September 30, 2003 and December 31, 2002, respectively.

 

The holders of Series I Preferred Stock, Series J Preferred Stock, andSeries 1999 Voting Preferred Stock are entitled to receive semi-annualdividends on each such share at the annual rate of 8% of the original issueprice of each share payable in arrears, when, as and if declared by theCompany’s board of directors, in cash or additional shares of preferredstock.   Shares of Series I PreferredStock and Series J Preferred Stock are convertible into shares of common stockat a conversion price of $2.51 per share and Series 1999 Preferred Stock isconvertible into shares of common stock at a conversion price of $2.50 pershare.  During the three months endedSeptember 30, 2003 there were $25,593, $35,934 and $30,983 of dividends accruedfor Series I Preferred Stock, Series J Preferred Stock and Series 1999 VotingPreferred Stock, respectively.  Dividends payable were $205,190 and $129,245 for Series I PreferredStock at September 30, 2003 and December 31, 2002, respectively. Dividendspayable were $256,698 and $150,067 of dividends payable for Series J PreferredStock at September 30, 2003 and December 31, 2002, respectively. Dividendspayable were $214,862 and $122,922 of dividends payable for Series 1999 VotingPreferred Stock at September 30, 2003 and December 31, 2002, respectively.

 

The Company completed a $1,537,500 exemptPreferred Stock Offering during May of 2003. The Preferred Stock is designated as2003 Preferred and each $75,000 unit consisted of 100,000 shares of PreferredStock bearing a 7% dividend, approximately 15,000 shares of common stock and100,000 warrants to purchase the Company’s common stock exercisable for twoyears at $1.00 per share.  The offeringalso included an automatic conversion into Common Stock on a one for one basisif the closing twenty-day average stock price is over $2.00.  On June 5, 2003 the closing twenty-dayaverage was at $2.02 and the 2003 Preferred converted to 2,050,001 shares ofCommon Stock.

 

6

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**(4) Notes Payable to Stockholders**

 

The Company entered into a 6.75% convertible note with AmphionInvestments LLC dated January 25, 2002. During the three months ended June 30,2003, the Company repaid $50,000 under this note. The principal outstandingunder this note may be converted into securities of the Company at the optionof Amphion Investments. The borrowings are unsecured and are due and payable ondemand by Amphion Investments.  TheCompany repaid this note during the three months ended June 30, 2003.

 

 

**(5)Significant Customers**

 

During thethree months ended September 30, 2003 the Company had three customers thataccounted for 46% of the overall revenue, three customers accounted for 64% ofthe digital video product sales and three customers accounted for 62% of theRFID product sales.  During the threemonths ended September 30, 2002 the Company had two customers that accountedfor 56% of the overall revenue, two customers accounted for 92% of the digitalvideo product sales and three customers accounted for 46% of the RFID productsales.

 

During thenine months ended September 30, 2003 the Company had three customers thataccounted for 34% of the overall revenue, three customers accounted for 70% ofthe digital video product sales and two customers accounted for 28% of the RFIDproduct sales.  During the nine monthsended September 30, 2002 the Company had two customers that accounted for 39%of the overall revenue, three customers accounted for 72% of the digital videoproduct sales and three customers accounted for 39% of the RFID product sales.

 

**Item2****. Management’s Discussion and Analysis or Plan ofOperation**.

 

**Forward-LookingStatements**

This quarterly report on Form 10-QSB includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Actof 1934, as amended, which can be identified by the use of forward-lookingterminology such as, “may,” “expect,” “could,” “plan,” “seek,” “anticipate,”“estimate,” or “continue” or the negative thereof or other variations thereonor comparable terminology.

 

These forward-looking statements are subject to various risks anduncertainties that could cause actual results to differ materially from thosereferred to in the forward-looking statements and are made pursuant to the“safe-harbor” provisions of the Private Securities Litigation Reform Act of1995.  These statements are made basedon 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 materiallyfrom those anticipated in the Company’s forward-looking statements, includingthe following factors: changes fromanticipated levels of sales, access to capital, future national or regionaleconomic and competitive conditions, changes in relationships with customers,difficulties in developing and marketing new products, marketing existingproducts, customer acceptance of existing and new products, validity ofpatents, technological change, dependence on key personnel, availability of keycomponent parts, dependence on third party manufacturers, vendors, contractors,product liability, casualty to or other disruption of the productionfacilities, delays and disruptions in the shipment of the Company’s product,and the ability of the Company to meet its stated business goals.  For a detailed discussion of theseand other cautionary statements and factors that could cause actual results todiffer from the Company’s forward-looking statements, please refer to theCompany’s filings with the Securities and Exchange Commission, especially  “Item 1. Description of Business” (includingthe “Risk Factors” section of Item 1) and “Item 6. Management’s Discussion andAnalysis or Plan of Operation” of the Company’s 2002 Annual Report on Form10-KSB.

 

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

 

**RecentDevelopments:  Going Concern andLiquidity Problems**

 

Our auditors have included an explanatoryparagraph in their audit opinion with respect to our consolidated financialstatements at December 31, 2002. The paragraph states that our recurring lossesfrom operations and resulting continued dependence on access to externalfinancing raise substantial doubts about our ability to continue as a goingconcern. Furthermore, the factors leading to and the existence of theexplanatory paragraph may adversely affect our relationship with customers andsuppliers and have an adverse effect on our ability to obtain financing.

 

7

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We do not have sufficient workingcapital to sustain our operations.  Wehave been unable to generate sufficient revenues to sustain our operations. Wewill have to obtain funds to meet our cash requirements through businessalliances, such as strategic or financial transactions with third parties, thesale of securities or other financing arrangements, or we may be required tocurtail our operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tous or disadvantageous to existing stockholders. In addition, no assurance maybe given that the Company will be successful in raising additional funds orentering into business alliances.

##### ** **

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

 

Since inception, the Company hasutilized the proceeds from a number of public and private sales of its equitysecurities, the exercise of options and warrants and more recently, convertibledebt and short-term bridge loans from stockholders to meet its working capitalrequirements. At September 30, 2003, the Company had a working capital deficit of$13,513,907.

 

The Company’s operations continued togenerate losses in 2003. The Company’s cash increased $267,007 during the ninemonths ended September 30, 2003 with operating activities using $1,569,043 ofcash. The Company funded operations primarily through borrowings from Amphionand other accredited investors and proceeds from the 2003 Preferred stockissued to accredited investors with financing activities providing net cash of$1,836,050. No assurance can be given that such sources will continue toprovide funding to the Company.  TheCompany’s business plan for 2003 is predicated principally upon the successfulmarketing of its RFID and digital video products. The Company anticipates thatits existing working capital resources and revenues from operations will not beadequate to satisfy its funding requirements in 2003.  During the second quarter of 2003 the Company raised a netof  $1,460,625 of additional working capitalthrough an exempt Preferred Stock offering. The Preferred Stock is designated as 2003 Preferred and each $75,000unit consisted of 100,000 shares of Preferred Stock bearing a 7% dividend,approximately 15,000 shares of common stock and 100,000 warrants to purchasethe Company’s common stock exercisable for two years at $1.00 per share.

 

The Company’s working capital requirements depend upon many factors,including the extent and timing of the Company’s product sales, the Company’soperating results, the status of competitive products, and actual expendituresand revenues compared to its business plan. The Company is currentlyexperiencing declining liquidity, including negative working capital balances,losses from operations and negative cash flows, which makes it difficult forthe Company to meet its current cash requirements, including payments tovendors, and may jeopardize the Company’s ability to continue as a goingconcern. The Company intends to address its liquidity problems by controllingcosts, seeking additional funding (through capital raising transactions andbusiness alliances) and maintaining focus on revenues and collections.

 

If the Company’s losses or lack of operatingcapital continue, the Company will have to obtain funds to meet its cashrequirements through business alliances, such as strategic or financial transactionswith third parties, the sale of securities or other financing arrangements, orthe Company may be required to curtail its operations, seek a merger partner,or seek protection under federal bankruptcy laws. Any of the foregoing may beon terms that are unfavorable to the Company or disadvantageous to existingstockholders. In addition, no assurance may be given that the Company will besuccessful in raising additional funds or entering into business alliances.

 

The Company entered into a 6.75% convertible note with AmphionInvestments LLC dated January 25, 2002. During the three months ended March 31,2003, the Company borrowed $50,000 under this note. The principal outstandingunder this note may be converted into securities of the Company at the optionof Amphion Investments. The borrowings are unsecured and are due and payable ondemand by Amphion Investments.  TheCompany repaid this note during the three months ended June 30, 2003.

 

On January 17, 2003, the Company entered into a bridge financingagreement 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 convertiblepromissory note in the amount of $100,000 and 50,000 unregistered shares of theCompany’s common stock.

 

Pursuant to the bridge financing agreement, the Company is required touse reasonable efforts to register the shares of common stock comprising theunits within 60 days after the execution of the bridge financing agreement, oras soon as practicable thereafter.  TheCompany has not registered these shares of common stock yet.  Upon registration of the common stock, eachinvestor may not sell more than one-third of the common stock comprising theunits during any calendar month.  Theconvertible promissory notes comprising the units bear interest at an annualrate of 7% and mature on January 17, 2006. On each of January 17, 2004, January 17, 2005 and January 17, 2006, theinvestors have the option to convert one-third of the principal amount of thenotes into common stock of the Company. The conversion price of the notes is initially 65% of the averageclosing price of a share of the Company’s common stock for the 20 trading dayspreceding the given anniversary date of the notes.  The maximum conversion price shall be $2.00 per share and theminimum conversion price shall be $0.50 per share.  The conversion price will be subject to adjustment from time totime to reflect any reorganization, recapitalization, reclassification, stockdividend, stock split, reverse stock split or similar change in the Company’sshares of common stock.  The notes maybe prepaid in whole or in part by the Company without premium or penalty.

 

8

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In connection with this bridge financing, the Company recorded a$224,259 debt discount due to the value of the equity consideration andbeneficial conversion of the financing, pursuant to the guidance issued by theEmerging Issues Task Force.  The debtdiscount will be amortized using the effective interest method over thethree-year life of the agreement.

##### ** **

##### **Notes Currently In Default**

 

On September 30, 1999, the Company signed a10% convertible note maturing September 30, 2002 (“Amphion Convertible Note”),under which the Company could borrow up to $6,000,000 from Amphion Ventures. Asof September 30, 2003 the balance under this note was $2, 477,979.  The balance of the indebtedness under the10% convertible note issued was due in full by the Company on September 30,2002 and, as of September 30, 2003, this note is in default. The Company isnegotiating with Amphion Ventures to extend the term of the notes.  Amphion Ventures has not pursued anycollection activities relating to this note. However, no assurances can be given that they will not in the future.

 

On July 28, 1999, the Companyacquired substantially all of the assets of Prism Video, Inc. (“Prism”), aprivately held corporation, and agreed to pay $4,000,000 to “Prism” on December31, 2002. The balance of the indebtedness under the Prism note issued was duein full by the Company on December 31, 2002; as of September 30, 2003 this noteis in default. The Company is negotiating with Prism to extend the term of thenotes. The note payable has a face amount of $4,000,000 and is collateralizedby the Company’s $3,902,375 note receivable from Amphion Ventures, L.P.(“Amphion Ventures”). Pursuant to the Asset Purchase Agreement between AXCESSand Prism, AXCESS assigned Prism all payments of principal to be made byAmphion Ventures under the note receivable until the balance of the notereceivable is paid in full or the balance due under the note payable to Prismis paid in full, whichever occurs first.  Prism has not pursued any collection activities relating to thecollection of this note.  However, noassurances can be given that they will not in the future.

 

**Resultsof Operations**

##### ** **

##### **Three Months Ended September 30, 2003 Compared toThree Months Ended September 30, 2002**

* *

*Sales and GrossProfit*. Sales for the three months ended September 30,2003 were $181,580 and for the three months ended September 30, 2002 were$504,779.  Cost of sales for the threemonths ended September 30, 2003 were $113,973 and for the three months endedSeptember 30, 2002 were $379,871.  TheCompany also recorded a charge of $98,428 for inventory impairment during thethree months ended September 30, 2003. The impairment was as a result of the change in strategy to contractmanufacturing.  The amount reflectsitems that have not been able to be used by the contract manufacturer in thebuilding of additional products.  Thegross profit for the three months ended September 30, 2003 was ($30,821) and$124,908 for the three months ended September 30, 2002. The decrease in saleswas due to the lack of financing for the Company and the inability to fulfillorders.  The margin improvement(excluding the inventory impairment charge) is driven by a reduction of theproduction staff due to the Company’s move towards contract manufacturing.

 

Radio frequency identification (RFID) product sales were $134,020 forthe three months ended September 30, 2003 and $239,221 for the three monthsended September 30, 2002. Cost of sales was $88,344 for the three months endedSeptember 30, 2003 and $174,885 for the three months ended September 30, 2002.The Company also recorded a charge of $23,422 for inventory impairment duringthe three months ended September 30, 2003. The impairment was as a result of the change in strategy to contractmanufacturing.  The amount reflectsitems that have not been able to be used by the contract manufacturer in thebuilding of additional products. As a result, gross profits from RFID productswere $22,254 for the three months ended September 30, 2003 and $64,337 for thethree months ended September 30, 2002.

 

Digital videoproduct sales were $47,560 for the three months ended September 30, 2003 and$265,558 for the three months ended September 30, 2002.  Cost of sales was $25,629 for the threemonths ended September 30, 2003 and $204,986 for the three months endedSeptember 30, 2002. The Company also recorded a charge of $75,006 for inventoryimpairment during the three months ended September 30, 2003.  The impairment was as a result of the changein strategy to contract manufacturing. The amount reflects items that have not been able to be used by thecontract manufacturer in the building of additional products.  As a result, gross profits from digital videoproducts were ($53,075) for the three months ended September 30, 2003 and $60,572for the three months ended September 30, 2002.

* *

*Operating Expenses*.Operating expenses were $708,375 for the three months ended September 30, 2003and $857,759 for the three months ended September 30, 2002.  This decrease was due to cost reduction programsimplemented during 2002 and continuing through 2003 including a staffingreduction, fewer marketing expenditures, completion of several research anddevelopment projects offset slightly by an increase in investor relationsactivity and general insurance expenses.

 

Research anddevelopment expenses were $164,054 for the three months ended September 30,2003 and $286,366 for the three months ended September 30, 2002.  The decrease is a result of the completionof the integration of some of the video and RFID products allowing for areduction of employees, the closing of the Georgia facility, the downsizing ofthe California facility and offset by an increase in testing expenditures forcertain certifications and some additional development relating to certain RFIDproducts.

 

9

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 Corporate general andadministrative expenses were $375,360 for the three months ended September 30,2003 and $311,146 for the three months ended September 30, 2002.  The increase is due to the Company’sincreased spending on an investor relations firm and an increase in legalexpenses relating to the filing of a registration statement.  However, the Company was able to offset someof that increase with a reduction in salary expense, lower rent with theclosure of half of the Texas facility and decrease in bad debt expense.

 

Selling and marketing expenses were $65,450 for the three months endedSeptember 30, 2003 and $130,687 for the three months ended September 30,2002.  The decrease was caused by theCompany’s strategic shift away from a direct selling (our sales peoplecontacting the end users) approach and an increased reliance on an indirect(focus on us selling to the integrators who sell to the end users) marketingapproach.  The strategic shift allowedthe company to decrease the headcount and lower the advertising.  Theindirect sales model allows the Company to address multiple industry segmentsgenerically, including manufacturing, wholesale / distribution, retail,services, government, education and finance. The indirect sales model fits thecharacteristics of the Company’s product portfolio with other products, whichbecome system solutions that require custom site planning and installation. Byworking directly with established marketing channel partners, this indirectmodel also gives the Company the flexibility to introduce new products andapplication as they are developed.

 

Depreciation and amortization expenses were $103,511 for the threemonths ended September 30, 2003 and $129,560 for the three months endedSeptember 30, 2002.  The decrease isrelated to lower depreciation expense as a result of the age of the equipment,the closing of the Georgia facility and the downsizing of the Californiafacility.

 

*Other expenses, net*.Other expenses, net, were $267,508 for the three months ended September 30,2003 and $212,671 for the three months ended September 30, 2002. Interestincome was $81,778 lower during the three months ended September 30, 2003,compared to the three months ended September 30, 2002.  Interest expense was $39,178 lower in thethree months ended September 30, 2003 compared to the three months endedSeptember 30, 2002, reflecting a decrease in the amortization of the debtdiscount related to the Prism Note.  TheCompany also was able to settle some accounts payable issues relating to priorperiods at a discount from the accrued amounts, which resulted in an $887income.

 

*Net Loss*.Net loss was $1,006,704 for the three months ended September 30, 2003, comparedto a loss of $945,522 for the three months ended September 30, 2002.  The increase is mainly relating to theinventory impairment charge of $98,428 offset by improved gross margins as aresult of lower production staffing, headcount reductions across all departments,reduced rent due to the Georgia facility being closed and the Californiafacility being downsized.

* *

*Preferred Stockdividend requirements. *PreferredStock dividend requirements were $101,401 for the three months ended September30, 2003 and $140,298 for the three months ended September 30, 2002. Thisdecrease was due to fewer preferred shares outstanding.

 

##### **Nine Months Ended September 30, 2003 Compared toNine Months Ended September 30, 2002**

* *

*Sales and GrossProfit*. Sales for the nine months ended September 30,2003 were $717,572 and for the nine months ended September 30, 2002 were$1,289,431.  Cost of sales for the ninemonths ended September 30, 2003 were $448,964 and for the nine months endedSeptember 30, 2002 were $1,008,445.  TheCompany also recorded a charge of $98,428 for inventory impairment during thenine months ended September 30, 2003. The impairment was as a result of the change in strategy to contractmanufacturing.  The amount reflectsitems that have not been able to be used by the contract manufacturer in thebuilding of additional products.  Thegross profit for the nine months ended September 30, 2003 was $170,180 and$280,986 for the nine months ended September 30, 2002. The decrease in saleswas due to the lack of financing for the Company and the inability to fulfillorders.  The margin improvement(excluding inventory impairment charge) is driven by a reduction of theproduction staff due to the Company’s move towards contract manufacturing.

 

Radio frequency identification (RFID) product sales were $418,990 forthe nine months ended September 30, 2003 and $578,070 for the nine months endedSeptember 30, 2002. Cost of sales was $205,585 for the nine months endedSeptember 30, 2003 and $455,740 for the nine months ended September 30, 2002.The Company also recorded a charge of $23,422 for inventory impairment duringthe nine months ended September 30, 2003. The impairment was as a result of the change in strategy to contractmanufacturing.  The amount reflectsitems that have not been able to be used by the contract manufacturer in thebuilding of additional products. As a result, gross profits from RFID productswere $114,972 for the nine months ended September 30, 2003 and $122,330 for thenine months ended September 30, 2002.

 

Digital video product sales were $298,582 for the nine months endedSeptember 30, 2003 and $711,361 for the nine months ended September 30,2002.  Cost of sales was $243,379 forthe nine months ended September 30, 2003 and $552,705 for the nine months endedSeptember 30, 2002. The Company also recorded a charge of $75,006 for inventoryimpairment during the three months ended September 30, 2003.  The impairment was as a result of the changein strategy to contract manufacturing. The amount reflects items that have not been able to be used by thecontract manufacturer in the building of additional products.  As a result, gross profits from digitalvideo products were $55,208 for the nine months ended September 30, 2003 and$158,656 for the nine months ended September 30, 2002.

 

10

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*Operating Expenses*.Operating expenses were $1,964,473 for the nine months ended September 30, 2003and $4,004,609 for the nine months ended September 30, 2002.  This decrease was due to cost reductionprograms implemented during 2002 and continuing through 2003 including astaffing reduction, fewer marketing expenditures and the completion of severalresearch and development projects.

 

Research and development expenses were $458,199 for the nine monthsended September 30, 2003 and $1,427,244 for the nine months ended September 30,2002.  The decrease is a result of thecompletion of the integration of some of the video and RFID products allowingfor a reduction of employees, the closing of a facility in Georgia, thedownsizing of the facility in California and the elimination of certain leasedequipment.

 

Corporate general and administrative expenses were $965,828 for thenine months ended September 30, 2003 and $1,186,229 for the nine months endedSeptember 30, 2002.  During 2003 theCompany hired a firm to assist in their investor relation activity and didexperience an increase in their cost of insurance.  However, the Company was able to decrease their overallcost.  The decrease can be attributed toa reduction in head count, elimination of contract labor, lower rent with theclosure of half of the Texas facility and a reduction of outside legal andaccounting service fees.

 

Selling and marketing expenses were $203,984 for the nine months endedSeptember 30, 2003 and $947,356 for the nine months ended September 30,2002.  The decrease was caused by theCompany’s strategic shift away from a direct selling (our sales peoplecontacting the end users) approach and an increased reliance on an indirect(focus on us selling to the integrators who sell to the end users) marketingapproach.  The strategic shift allowedthe company to decrease the headcount and lower the advertising.  Theindirect sales model allows the Company to address multiple industry segmentsgenerically, including manufacturing, wholesale / distribution, retail,services, government, education and finance. The indirect sales model fits thecharacteristics of the Company’s product portfolio with other products, which becomesystem solutions that require custom site planning and installation. By workingdirectly with established marketing channel partners, this indirect model alsogives the Company the flexibility to introduce new products and application asthey are developed.

 

Depreciation and amortization expenses were $336,462 for the ninemonths ended September 30, 2003 and $443,780 for the nine months endedSeptember 30, 2002.  The decrease isrelated to lower depreciation expense as a result of the age of the equipment,the closing of the Georgia facility and the downsizing of the Californiafacility.

* *

*Other expenses, net*.Other expenses, net, were $653,407 for the nine months ended September 30, 2003and $667,775 for the nine months ended September 30, 2002. Interest income was$242,667 lower during the nine months ended September 30, 2003, compared to thenine months ended September 30, 2002. Interest expense was $150,038 lower in the nine months ended September30, 2003 compared to the nine months ended September 30, 2002, reflecting adecrease in the amortization of the Prism Note.  The Company also was able to settle several accounts payableissues relating to prior periods at a discount from the accrued amounts, whichresulted in a $106,997 improvement in Other for the nine months ended September30, 2003 compared to the same period in 2002.

*Net Loss*.Net loss was $2,447,700 for the nine months ended September 30, 2003, comparedto a loss of $4,391,398 for the nine months ended September 30, 2002.  The decrease is due primarily to improvedgross margins (excluding inventory impairment charge) as a result of lowerproduction staffing, headcount reductions across all departments, reduced rentdue to the Georgia facility being closed, downsizing of the Texas and Californiafacilities, a reduction of outside services, gains on settlements of accountpayables and offset by the inventory impairment charge and increased spendingon investor relations activities.

* *

*Preferred Stockdividend requirements. *PreferredStock dividend requirements were $775,750 for the nine months ended September30, 2003 and $362,672 for the nine months ended September 30, 2002. Thisincrease was due to the recording of the beneficial conversion discount of$474,855 for the 2003 preferred stock converted during 2003.

##### ** **

##### **Other**

* *

*Inflation*.Inflation has not had, and is not expected to have, a material impact on theoperations and financial condition of the Company.

 

11

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**Item3****. Controls and Procedures**

 

**Controlsand Procedures**

** **

(a)           Evaluation of Disclosure Controlsand Procedures.  Based on theirevaluation as of the end of the period covered by this Quarterly Report on Form10-QSB, the Company’s principal executive officer and principal financial officerhave concluded that the Company’s disclosure controls and procedures (asdefined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934 (the “Exchange Act”)) are effective to ensure that information required tobe disclosed by the Company in reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission.

 

(b)           Changes in Internal Controls.  During the period covered by this report,there were no significant changes in the Company’s internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

** **

**PARTII****. OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

Pioneer Standard Electronics, Incorporated(“Pioneer”), filed a lawsuit against the Company in the county court in DallasCounty, Texas on September 28, 2001. Pioneer was a vendor to the Company and seeks damages of $81,533 fornon-payment for services provided. During the first quarter of 2003, Pioneer was granted a judgment for theentire amount.  The Company has reacheda settlement with Pioneer and is making payments.

 

The Company is also engaged in anumber of lawsuits with approximately seventeen vendors who claim they are owedamounts from $500 to $45,000, which aggregates in total $289,271. The Companyis currently defending or seeking to settle each of the vendor’s claims.  At September 30, 2003, the Company hasaccrued the delinquent amounts payable for the claims described in thisparagraph.

** **

**Item 2. Changes in Securities**.

 

During the three months ended September 30, 2003, the Company issuedunregistered securities in connection with the transactions described below.The issuance of stock was exempt from the registration requirements of theSecurities Act, as amended by virtue of Section 4(2) thereof, as transactionsnot involving a public offering and an appropriate restrictive legend wasaffixed to the stock certificates.

*** ***

***ConvertibleNote***

 

During the three months ended September 30, 2003 one of the holders ofthe July 2002 Convertible debt elected to convert $16,667 of his $50,000 noteplus accrued interest into 11,629 of unregistered common stock.  The Company reissued the note for $33,333.

*** ***

***CommonStock***

 

During thethree months ended September 30, 2003 five employees exercised 30,750 stockoptions.

##### ** **

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

 

None

 

##### **Item 4. Submission of Matters to a Vote of Security Holders**

None

 

12

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**Item 5. Other Information**

** **

The Company has reached a restructuring agreement in principal with PVProceeds Holdings, Inc. the holders of $4.0 million of non-interest bearingnote that was due December 31, 2002 and is currently in default.  Subject to approval by the parties Boards ofDirectors, PV Proceeds will consent to a five-year extension of the note withan interest rate of 5% per annum from January 1, 2003 payable in full atmaturity of December 31, 2007.  TheCompany has also agreed to certain provisions that would reduce the principalamount over time.  The Companyanticipates receiving Board approval during the fourth quarter.  However, no assurances can be made that theParties will receive approval from their respective Board of Directors.

 

The Company has also reached a tentative agreement with the AmphionVentures LP with regards to certain notes between the Parties.  Currently, Axcess is indebted to AmphionVentures LP for $5,467,069 of principal and accrued interest.  Amphion Ventures LP currently owes Axcess  $5,228,256 of note receivable and accruedinterest.    The Parties have agreed,subjected to their Board of Directors approval that the above-described noteswill be set off against each other there by reducing the debt owed Amphion byAxcess to $238,813.  Amphion Ventureshas also agreed to convert the remaining $238,813 of demand notes and accruedinterest into 318,417 common shares and an equal number of warrants priced at$2.75.  The agreement is contingent onthe Company successfully reaching an agreement with the PV Proceeds Holdings,Inc. on favorable terms.  The Companyanticipates reaching an agreement during the fourth quarter.  However, no assurances can be made that theCompany will be able to reach a definitive agreement and that the terms will befavorable. The Company has reached a tentative agreement with the VennWorks LLCthat would convert $1,290,836 of demand notes and accrued interest into1,817,150 common shares and an equal number of warrants priced at $2.75.  The agreement is contingent on the Companysuccessfully gaining approval with the PV Proceeds Holdings, Inc. on favorableterms.  The Company anticipates approvalduring the fourth quarter.  However, noassurances can be made that the Parties will receive approval from theirrespective Board of Directors.

 

The Company has also reached a tentative agreement with the AmphionCapital Management LLC that would convert $350,000 of demand notes and $39,784of accrued interest into a Note that would mirror the term of the PV ProceedsHoldings, Inc. extension and match the interest rate.  The agreement is contingent on the Company successfully reachingan agreement with the PV Proceeds Holdings, Inc. on favorable terms.  The Company anticipates approval during thefourth quarter.  However, no assurancescan be made that the Parties will receive approval from their respective Boardof Directors.

 

The Company has reached a tentative agreement with the Antiope PartnersLLC that would convert $751,152 of Preferred Series I (including accrueddividends) and $1,795,482 of Preferred Series J (including accrued dividends)into 1,018,654 shares of common.  Theagreement is contingent on the Company successfully reaching an agreement withthe PV Proceeds Holdings, Inc. on favorable terms.  The Company anticipates approval during the fourth quarter.  However, no assurances can be made that theParties will receive approval from their respective Board of Directors.

 

During the fourth quarter of 2003 the Companyraised a net of approximately $2,500,000 of additional working capital throughan exempt Preferred Stock offering.  ThePreferred Stock is designated as 2003B Preferred and each $70,000 unit consistsof 40,000 shares of Preferred Stock bearing a 7% dividend, 2,000 shares ofcommon stock and 40,000 warrants to purchase the Company’s common stockexercisable for two years at $2.75 per share. The Preferred Stock is alsosubject to an automatic conversion provision. Theoffering also included an automatic conversion into common stock on a one forone basis if the closing twenty-day average stock price is over $3.75 pershare. In connection with the 2003B Preferred Stock offering includingcommissions, Axcess will issue 1,565,000 shares of the 2003B Preferred Stock,156,500 shares of common stock and 1,689,000 warrants.

** **

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

 

(a) Exhibits:

 
|   | **Exhibit No.** |   | **Description**                                                                                                                                                                   |
|--------|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.1            |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 302 of the Sarbanes-Oxley Act of 2002. *                                 |
|   | 31.2            |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 302 of the Sarbanes-Oxley Act  of 2002. * |
|   | 32.1            |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 906 of the Sarbanes-Oxley Act of 2002. *                                 |
|   | 32.2            |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 906 of the Sarbanes-Oxley Act  of 2002. * |

 

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* Filedherewith

(b) Reports onForm 8-K:

 
| **Date**         |   | **Description**                                                                                                                                       |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| August 12,  2003 |   | On August  11, 2003, AXCESS International Inc. issued a press release announcing Equitis  Inc. had initiated equity research coverage on the Company. |

 

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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 theundersigned thereunto duly authorized.

 
|               | AXCESS  INTERNATIONAL INC.,  Registrant                |
|--------------------|--------------------------------------------------------|
|               |                                                   |
|               | /s/ ALLAN  GRIEBENOW                                   |   |
|               | Allan  Griebenow Director, President and               |
|               | Chief  Executive Officer (Principal Executive Officer) |
|               |                                                   |
|               | /s/ ALLAN L.  FRANK                                    |   |
|               | Allan L.  Frank                                        |
|               | Chief  Financial Officer and Secretary                 |
|               | (Principal  Accounting and Financial Officer)          |
|               |                                                   |
| November 13,  2003 |                                                   |

 

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