Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****                QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended June 30,2010**

 

**or**

 

**o****                   TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from             to              .**

 

**COMMISSION FILE NUMBER: 0-11933**

 

**AXCESSINTERNATIONAL INC.**

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

 

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

 

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

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

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

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

 

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

 

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

 

Numberof shares of common stock outstanding on July 30, 2010: 33,825,528

 

 

 

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**AXCESS INTERNATIONAL INC.**

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION**                                                                     |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Item 1. Financial Statements:                                                                               |   |
|                                                                                                        |   |
| Balance Sheets at June 30, 2010 and  December 31, 2009 (unaudited)                                |   |
|                                                                                                        |   |
| Statements of Operations for the Three Months and Six  Months ended June 30, 2010 and 2009 (unaudited) |   |
|                                                                                                        |   |
| Statements of Cash Flows for the Six Months ended  June 30, 2010 and 2009 (unaudited)                  |   |
|                                                                                                        |   |
| Notes to Financial Statements (unaudited)                                                                   |   |
|                                                                                                        |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |   |
|                                                                                                        |   |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                         |   |
|                                                                                                        |   |
| Item 4. Controls and Procedures                                                                             |   |
|                                                                                                        |   |
| **PART II.  OTHER INFORMATION**                                                                        |   |
|                                                                                                        |   |
| Item  1. Legal Proceedings                                                                                  |   |
|                                                                                                        |   |
| Item 1A. Risk Factors                                                                                       |   |
|                                                                                                        |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                        |   |
|                                                                                                        |   |
| Item 3. Defaults Upon Senior Securities                                                                     |   |
|                                                                                                        |   |
| Item  4. (Removed and Reserved)                                                                             |   |
|                                                                                                        |   |
| Item  5. Other Information                                                                                  |   |
|                                                                                                        |   |
| Item 6. Exhibits and Reports on Form 8-K                                                               |   |
|                                                                                                        |   |
| **SIGNATURES**                                                                                              |   |

 

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**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                            | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $                       | 21,402     |                        | $          | 65,534 |   |
| Accounts receivable - trade, net of allowance for  doubtful accounts of $16,766 and $24,715 for 2010 and 2009, respectively.                                                                                          |       | 45,621                  |       | 142,213                     |       |
| Inventory, net                                                                                                                                                                                                        |       | 53,861                  |       | 83,387                      |       |
| Prepaid expenses and other                                                                                                                                                                                            |       | 19,925                  |       | 46,631                      |       |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Total current assets                                                                                                                                                                                                  |       | 140,809                 |       | 337,765                     |       |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Property, plant and equipment, net                                                                                                                                                                                    |       | 12,146                  |       | 16,727                      |       |
| Deferred debt issuance costs                                                                                                                                                                                          |       | 11,146                  |       | 12,500                      |       |
| Other assets                                                                                                                                                                                                          |       | 35,035                  |       | 40,213                      |       |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                                          |       | $                       | 199,136    |                        | $          | 407,205 |   |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                                  |       |                    |       |                        |       |
| Accounts payable (includes $5,092 and $15,253 with  related party in 2010 and 2009, respectively)                                                                                                                     |       | $                       | 839,375    |                        | $          | 831,484 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 283,841                 |       | 331,899                     |       |
| Accrued interest                                                                                                                                                                                                      |       | 1,373,244               |       | 1,246,812                   |       |
| Deferred revenue                                                                                                                                                                                                      |       | 3,059                   |       | 9,342                       |       |
| Notes payable                                                                                                                                                                                                         |       | 117,000                 |       | 162,000                     |       |
| Dividends payable                                                                                                                                                                                                     |       | —                  |       | 31,514                      |       |
| Total current liabilities                                                                                                                                                                                             |       | 2,616,519               |       | 2,613,051                   |       |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Notes payable to stockholders (includes $2,361,213  and $1,791,213 with a related party in 2010 and 2009, respectively)                                                                                               |       | 5,068,772               |       | 4,248,772                   |       |
| Debt discount                                                                                                                                                                                                         |       | (874,372                | )          | (682,478                    | )          |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Total liabilities                                                                                                                                                                                                     |       | 6,810,919               |       | 6,179,345                   |       |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Commitments  and contingencies (Notes 1 and 2)                                                                                                                                                                        |       |                    |       |                        |       |
| Stockholders’ deficit:                                                                                                                                                                                           |       |                    |       |                        |       |
| Convertible preferred stock, 10,000,000 shares  authorized in 2010 and 2009. Without liquidation preferences; $0.01 par  value, 4,550,201 and 4,550,211 shares issued and outstanding in 2010 and  2009, respectively |       | 45,502                  |       | 45,502                      |       |
| Common stock, $.01 par value, 70,000,000 shares  authorized in 2010 and 2009; 33,742,593 and 33,642,593 shares issued and  outstanding in 2010 and 2009, respectively.                                                |       | 338,255                 |       | 336,426                     |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 168,266,410             |       | 167,385,813                 |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (175,261,950            | )          | (173,539,881                | )          |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Total stockholders’ deficit                                                                                                                                                                                      |       | (6,611,783              | )          | (5,772,140                  | )          |
|                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                                      |       | $                       | 199,136    |                        | $          | 407,205 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Sales                                                |       | $                                     | 317,444    |                                | $          | 3,156,836 |   | $ | 462,733 |   | $ | 4,239,518 |   |
| Cost of sales                                        |       | 145,766                               |       | 797,930                             |       | 231,814 |   | 1,543,904 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Gross profit                                         |       | 171,678                               |       | 2,358,906                           |       | 230,919 |   | 2,695,614 |   |
| Expenses:                                            |       |                                  |       |                                |       |   |   |   |   |
| Research and development                             |       | 217,389                               |       | 239,240                             |       | 561,067 |   | 548,599 |   |
| General and administrative                           |       | 287,907                               |       | 410,470                             |       | 772,942 |   | 734,923 |   |
| Selling and marketing                                |       | 139,706                               |       | 532,093                             |       | 387,292 |   | 926,651 |   |
| Depreciation and amortization                        |       | 5,128                                 |       | 5,058                               |       | 10,385 |   | 9,722 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses                                   |       | 650,130                               |       | 1,186,861                           |       | 1,731,686 |   | 2,219,895 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Profit (loss) from operations                        |       | (478,452                              | )          | 1,172,045                           |       | (1,500,767 | ) | 475,719 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Other income (expense):                              |       |                                  |       |                                |       |   |   |   |   |
| Interest expense                                     |       | (115,054                              | )          | (71,134                             | )          | (211,472 | ) | (178,495 | ) |
| Gain on vendor settlements                           |       | (9,830                                | )          | 14,868                              |       | (9,830 | ) | 58,677 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Other expense, net                                   |       | (124,884                              | )          | (56,266                             | )          | (221,302 | ) | (119,818 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                    |       | (603,336                              | )          | 1,115,779                           |       | (1,722,069 | ) | 355,901 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Preferred  stock dividend requirements:              |       |                                  |       |                                |       |   |   |   |   |
| Recurring                                            |       | —                                |       | (47,797                             | )          | — |   | (95,263 | ) |
| Preferred stock dividend requirements                |       | —                                |       | (47,797                             | )          | — |   | (95,263 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) applicable to common stock         |       | $                                     | (603,336   | )                                   | $          | 1,067,982 |   | $ | (1,722,069 | ) | $ | 260,638 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) per share                          |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                |       | $                                     | (0.01      | )                                   | $          | 0.03 |   | $ | (0.05 | ) | $ | 0.01 |   |
| Diluted                                              |       | $                                     | (0.01      | )                                   | $          | 0.03 |   | $ | (0.05 | ) | $ | 0.01 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Weighted average shares of common stock  outstanding |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                |       | 33,825,528                            |       | 31,776,731                          |       | 33,777,473 |   | 31,495,431 |   |
| Diluted                                              |       | 33,825,528                            |       | 43,338,048                          |       | 33,777,473 |   | 42,908,467 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                             | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                                                  |       |                                |       |   |   |
| Net income (loss)                                                                                      |       | $                                   | (1,722,069 | ) | $ | 355,901 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) by operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                                          |       | 10,385                              |       | 9,722 |   |
| Amortization of financing discount and issuance  costs, net                                            |       | (190,540                            | )          | 16,217 |   |
| Gain on vendor settlements and statutory write-off  of payables                                        |       | —                              |       | 58,677 |   |
| Stock based compensation expense                                                                       |       | 577,332                             |       | 297,402 |   |
| Changes in operating assets and liabilities:                                                           |       |                                |       |   |   |
| Accounts receivable                                                                                    |       | 96,592                              |       | (355,530 | ) |
| Inventory                                                                                              |       | 29,526                              |       | 40,513 |   |
| Prepaid expenses and other                                                                             |       | 26,706                              |       | 13,615 |   |
| Other assets                                                                                           |       | —                              |       | (443 | ) |
| Accounts payable and accrued expenses                                                                  |       | 353,562                             |       | (194,204 | ) |
| Net cash provided by (used in) operating  activities                                                   |       | (818,506                            | )          | 241,870 |   |
|                                                                                                   |       |                                |       |   |   |
| Cash flow from investing activities:                                                                   |       |                                |       |   |   |
| Capital expenditures                                                                                   |       | (626                                | )          | (5,599 | ) |
| Net cash used in investing activities                                                                  |       | (626                                | )          | (5,599 | ) |
|                                                                                                   |       |                                |       |   |   |
| Cash flow from financing activities:                                                                   |       |                                |       |   |   |
| Principal payments on financing agreements                                                             |       | (45,000                             | )          | (160,000 | ) |
| Borrowings on financing agreements                                                                     |       | 820,000                             |       | 160,000 |   |
| Net cash provided by financing activities                                                              |       | 775,000                             |       | — |   |
|                                                                                                   |       |                                |       |   |   |
| Net change in cash and cash equivalents                                                                |       | (44,132                             | )          | 236,271 |   |
| Cash and cash equivalents, beginning of period                                                         |       | 65,534                              |       | 51,392 |   |
| Cash and cash equivalents, end of period                                                               |       | $                                   | 21,402     |   | $ | 287,663 |   |
|                                                                                                   |       |                                |       |   |   |
| Supplemental  Disclosure of Non-Cash Investing and Financing Activities:                               |       |                                |       |   |   |
| Warrants  issued as a debt discount                                                                    |       | $                                   | 273,580    |   | $ | 57,215 |   |
| Accrued preferred stock dividends                                                                      |       | —                              |       | 95,263 |   |
| Conversion of preferred shares into common stock                                                       |       | 1,000                               |       | 100 |   |
| Conversion of accrued dividends into common stock                                                      |       | 31,514                              |       | 344,142 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

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

 

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

 

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

 

The Company’s business plan for2010 is predicated principally upon the successful marketing of its RFIDproducts. During the first six months of 2010, operations utilizedapproximately $819,000 of cash. The Company anticipates that its existingworking capital resources and revenues from operations will not be adequate tosatisfy its funding requirements for all of 2010. We are currently experiencing declining liquidity, losses from operationsand negative operating cash flows, which make it difficult for us to meet ourcurrent cash requirements, including payments to vendors, and may jeopardizeour ability to continue as a going concern. Management is attempting toobtain equity financing for use in the Company’s operations. In addition, managementis trying to expand the Company’s sales and obtain profitable operations.

 

Our auditorshave included an explanatory paragraph in their audit opinion with respect toour consolidated financial statements at December 31, 2009. The paragraphstates that our recurring losses from operations and resulting continueddependence on access to external financing raise substantial doubts about ourability to continue as a going concern. Furthermore, the factors leading to andthe existence of the explanatory paragraph may adversely affect ourrelationship with customers and suppliers and have an adverse effect on ourability to obtain financing.

 

The future results of operationsand 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 inrelationships with customers, difficulties in developing and marketing newproducts, marketing existing products, customer acceptance of existing and newproducts, validity of patents, technological change, dependence on keypersonnel, availability of key component parts, dependence on third partymanufacturers, vendors, contractors, product liability, casualty to or otherdisruption of the production facilities, delays and disruptions in the shipmentof the Company’s products, and the ability of the Company to meet its statedbusiness goals.

 

If the Company’s losses or lack ofoperating capital continue, the Company will have to obtain funds to meet itscash requirements through business alliances, such as strategic or financialtransactions with third parties, the sale of securities or other financingarrangements, or the Company may be required to curtail its operations, seek amerger partner, or seek protection under federal bankruptcy laws. Any of theforegoing may be on terms that are unfavorable to the Company ordisadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

**(b) Company Organization**

 

The accompanying consolidatedfinancial statements include the accounts of the Company and its majority-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

TheCompany 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 LLC, VennWorks LLC (formerly incuVestLLC), Amphion Capital Management LLC, Amphion Innovations plc, AmphionInnovations US Inc. and NVW, LLC (collectively, the “Amphion Group”). TheAmphion Group owns approximately 49% of the outstanding voting common stock ofthe Company.

 

**(c) Basis of presentation**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Asdiscussed below, the Company makes significant assumptions in recording itsallowance for doubtful accounts, inventory valuation, impairment of long-livedassets, warranty costs, the valuation allowance for deferred tax assets, the 

 

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value of components of equity anddebt instruments and stock based compensation expense. Actual results coulddiffer from those estimates, and the differences may be significant.

 

The accompanying unauditedfinancial statements as of June 30, 2010 and for the three and six monthsended June 30, 2010 and 2009, respectively, have been prepared inaccordance with generally accepted accounting principles for interim financialinformation. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for auditedfinancial statements. In the opinion of management, the interim informationincludes all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation of the results for the interim periods. Thefootnote disclosures related to the interim financial information includedherein are also unaudited. Such financial information should be read inconjunction with the consolidated financial statements and related notesthereto as of December 31, 2009 and for the year then ended included inour annual report on Form 10-K for the fiscal year ended December 31,2009.

 

**(d) Use of Estimates**

 

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

 

**(e) Inventory**

 

Inventoryis valued at the lower of cost or market using the first-in, first-out method.Inventory, net of valuation allowance of $8,392 at June 30, 2010 andDecember 31, 2009, respectively, was comprised of the following:

 
| ** **      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 35,916     |                        | $          | 37,838 |   |
| Work-in-process |       | 89                      |       | 104                         |       |
| Finished goods  |       | 17,856                  |       | 45,445                      |       |
|            |       | $                       | 53,861     |                        | $          | 83,387 |   |

 

The components of cost of sales aresummarized as follows:

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Product cost         |       | $                                     | 151,414    |                                | $          | 787,395 |   | $ | 237,295 |   | $ | 1,528,612 |   |
| Warranty expense     |       | (5,773                                | )          | 6,602                               |       | (5,606 | ) | 11,359 |   |
| Inventory impairment |       | 125                                   |       | 3,933                               |       | 125 |   | 3,933 |   |
| Total                |       | $                                     | 145,766    |                                | $          | 797,930 |   | $ | 231,814 |   | $ | 1,543,904 |   |

 

**(f) Stock-Based Compensation**

 

ASC Topic 718, *Compensation — Stock Compensation*requiresthe cost of all share-based payments to employees, including grants of employeestock options, to be recognized in the consolidated financial statements basedon the grant date fair value of those awards.  In accordance with ASCTopic 718, this cost is recognized over the period for which an employee isrequired to provide service in exchange for the award.  Stock basedcompensation expense for 2010 and 2009 was $577,332 and $297,402, respectivelywhich was recorded in operating expenses. This expense decreased net profit per share by $0.017 and $0.009 for2010 and 2009, respectively.  The Companydid not recognize a tax benefit from the stock compensation expense because theCompany considers it is more likely than not the related deferred tax assets,which have been reduced by a full valuation allowance, will not be realized.

 

The Black-Scholes option-pricingmodel was used to estimate the option fair value.  The option pricing model requires a number ofassumptions, of which the most significant are, expected stock pricevolatility, risk-free interest rate and the expected option term (the amount oftime from the grant date until the options are exercised or expire).  Expected volatility was calculated based uponactual historical stock price movements over the most recent periods at thetime of the grants equal to the expected option term, which is consistent withASC Topic 718.

 

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Thefollowing table illustrates the effect on operating expenses:

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development expense   |       | $                                     | 62,810     |                                | $          | 51,147 |   | $ | 173,841 |   | $ | 102,294 |   |
| General and administrative expense |       | 61,456                                |       | 70,412                              |       | 286,953 |   | 140,937 |   |
| Selling and marketing expense      |       | 40,795                                |       | 27,085                              |       | 116,538 |   | 54,171 |   |
| Total                              |       | $                                     | 165,061    |                                | $          | 148,644 |   | $ | 577,332 |   | $ | 297,402 |   |

 

**(g) Stock Options and Warrants**

 

Under the Company’s 2005 EquityIncentive Plan, the Company may grant up to 5,000,000 shares of common stock toits employees. The exercise price of each option is not less than the marketprice of the Company’s stock on the date of grant and an option’s maximum termis ten years.  Options are generallygranted each year and have various vesting requirements. Options grantedtypically vest over a four-year period. Shares issued upon stock options exercised are issued as new shares.  During the six months ended June 30,2010, the Company granted 1,114,961 stock options under the stock optionplan.  Key assumptions are as follows:

 
| **Weighted Average  Black-Scholes Fair Value Assumptions** | ** ** | **2010**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|
| Risk free interest rate                                    |       | 3.27      | %          |
| Expected life                                              |       | 10 years  |       |
| Expected volatility                                        |       | 112.88    | %          |
| Expected dividend yield                                    |       | 0.00      | %          |
| Number of options granted                                  |       | 1,114,961 |       |
| Fair value of options granted                              |       | $         | 89,645     |   |
| Weighted average fair value of options granted             |       | $         | 0.28       |   |

 

As of June 30, 2010 the Companyhad 165,900 options outstanding from the 1991 Equity Plan, 20,000 from theDirectors plan, 1,519,961 from the 2001 Equity plan and 515,000 issued asinducements to hire.  In total theCompany had 2,220,861 employee options outstanding from plans other than the2005 Equity Incentive Plan.

 

The following table summarizesemployee stock options outstanding and changes during the six months endedJune 30, 2010:

 
| ** **                                             | ** ** | **Outstanding Options** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Options outstanding at  December 31, 2009         |       | 6,361,417               |       | $ | 1.38 |   |   |   |   |   |
| Options granted                                        |       | 1,114,961               |       | 0.30 |   |   |   |   |   |
| Options exercised                                      |       | —                  |       | — |   |   |   |   |   |
| Options forfeited                                      |       | (279,556                | )          | 4.94 |   |   |   |   |   |
| Options outstanding at  June 30, 2010             |       | 7,196,822               |       | 1.07 |   | 6.70 |   | $ | 11,150 |   |
|                                                   |       |                    |       |   |   |   |   |   |   |
| Options exercisable at  June 30, 2010             |       | 3,671,111               |       | 1.72 |   | 6.70 |   | $ | 11,150 |   |
|                                                   |       |                    |       |   |   |   |   |   |   |
| Options available for grants  as of June 30, 2010 |       | 24,039                  |       |   |   |   |   |   |   |
|                                                        |            |                         |            |  |  |  |  |  |  |  |  |

 

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The options outstanding atJune 30, 2010 have exercise prices as indicated in the table below:

 
| **Option Price**   | ** ** | **Number of  Options** | ** ** | **Weighted Average  Remaining Life** | ** ** | **Intrinsic Value of  Vested Unexercised  Options** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|
| $0.00 - $1.00      |       | 3,693,961              |       | 8.36                                 |       | $                                                   | 11,150     |   |
| $1.01 - $2.00      |       | 3,116,961              |       | 5.40                                 |       |                                                |       |
| $2.01 – $3.00 |       | 200,000                |       | 1.72                                 |       |                                                |       |
| $3.01 - $4.00      |       | 165,900                |       | 0.53                                 |       |                                                |       |
| $4.01 - $5.00      |       | 20,000                 |       | 4.55                                 |       |                                                |       |
| $5.01 - $6.25      |       | —                 |       | —                               |       |                                                |       |
| Total              |       | 7,196,822              |       | 6.70                                 |       | $                                                   | 11,150     |   |

 

The Company has issued warrants topurchase common stock in connection with issuance of notes payable tostockholders and preferred stock. The following table summarizes warrantsoutstanding at June 30, 2010:

 
| **             ** | ** ** | **WARRANTS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------|------------|----------------------------------------|------------|
| Warrants outstanding at  beginning of year                                         |       | 11,826,436   |       | $                                      | 1.48       |   |
| Warrants issued                                                                    |       | 820,000      |       | 0.75                                   |       |
| Warrants exercised                                                                 |       | —       |       | —                                 |       |
| Warrants expired unexercised                                                       |       | (1,658,173   | )          | 1.50                                   |       |
| Warrants outstanding at end  of year                                               |       | 10,988,263   |       | 1.43                                   |       |
|                                                                                    |            |              |            |                                        |            |  |

 

The warrants outstanding atJune 30, 2010 have exercise prices as indicated in the table below.

 
| **Strike Price** | ** ** | **Number of  Warrants** | ** ** | **Weighted Average  Remaining Life** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------------------|------------|
| $0.00 - $1.00    |       | 2,923,474               |       | 4.32                                 |       |
| $1.01 - $2.00    |       | 8,064,789               |       | 1.58                                 |       |
| Total            |       | 10,988,263              |       | 2.31                                 |       |

 

Duringthe six months ended June 30, 2010 the Company issued an additional820,000 warrants in conjunction with various debt agreements.  The warrant had a strike price of $0.75 andthey expire on December 31, 2014.  The Company estimates the fair market valueof the warrant using Black-Scholes Valuation Model.  Key assumptions used to estimate the fairmarket value of the warrants include the exercise price of $0.75, the expectedterm (five years), the expected volatility of the Company’s stock over thewarrants expected term (ranging from 93% to 99%) and risk free interest rate(ranging from 3.59% to 3.89%).

 

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

 

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

 

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $47,676. We are currentlydefending or seeking to settle each of the vendor’s and customer claims.  At June 30, 2010, we accrued $30,676,which represents the delinquent amounts we expect to be liable for, for theclaims described in this paragraph.

 

OnMarch 31, 2008, Axcess entered into an agreement with the developer of ournext generation RFID product, the Dot, whereby Axcess has agreed to pay aminimum commercialization fee of one million dollars over the next sixyears.  The amount is still contingent onthe supplier completing the testing and certifying the product is within all ofthe original specifications.  The testingis ongoing but the product has not passed all of the preliminary testing and weare still evaluating the impact on the product. As of June 30, 2010 Axcess has not signed off on the completion ofthe product and Innovison has issued a letter of termination for failure topay. We currently have accrued $392,808 for services that have been completed;however, we have not accrued the remainder for services that have not beencompleted.

 

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

 

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

 
| ** **                                                              | ** ** | **Series  2005**                | ** ** | **Series  2006**                | ** ** | **Series  2006B**               | ** ** | **Series  2006C**                    | ** ** | **Series  2007**                     | ** ** | **Series  2008**                     | ** ** | **Series  2008B**                    | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| Number of shares authorized                                             |       | 2,750,000                       |       | 1,200,000                       |       | 750,000                         |       | 200                                  |       | 205                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Stated value                                                            |       | $                               | 0.01       |                            | $          | 0.01                            |       | $                                    | 0.01       |                                 | $          | 0.01                                 |       | $                                    | 0.01       |   | $ | 0.01 |   | $ | 0.01 |   |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Number of shares issued and Outstanding                                 |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| December 31, 2009                                                  |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 185                                  |       | 120                                  |       | 80                                   |       |
| June 30, 2010                                                      |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 175                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Conversion ratio (or conversion price) of  preferred shares into common |       | 1 to 1 into voting common stock |       | 1 to 1 into voting common stock |       | 1 to 1 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Liquidation preference                                                  |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                    |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Dividend rights                                                         |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                         |            |                                 |            |                                 |            |                                 |            |                                      |            |                                      |            |                                      |            |                                      |            |  |  |  |  |  |  |  |

 

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

 

On December 30, 2005, the Company raised $813,021of additional working capital through an exempt Preferred Stock offering underthe Securities Act of 1933 Section 4(6) private offering of preferredstock to accredited and institutional investors.  The Preferred Stock is designated as 2005Preferred and consists of 956,495 shares of Preferred Stock bearing nodividends.  However, the shares are convertibleinto common stock on a one to one basis at $0.85.  In addition, the Company issued 956,495warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Each warrant will be callable by the Company if andwhen the Company’s common stock share price exceeds $3.00 per share for atleast twenty (20) consecutive trading days. The Company used the proceeds for general working capital.

 

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

 

As of June 30, 2010 andDecember 31, 2009, the Company had 2,649,726 shares of Series 2005Preferred shares outstanding, respectively.

 

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

 

On May 31, 2006, the Company raised $1,200,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors.  ThePreferred Stock is designated as 2006 Preferred and consists of 1,200,000shares of Preferred Stock bearing no dividends. However, the shares are convertible into common stock on a one to onebasis at $1.00.  In addition, the Companyissued 600,000 warrants to purchase the Company’s common stock exercisable forfive years at $2.00 per share. Each warrant will be callable by the Company if andwhen the Company’s common stock share price exceeds $5.00 per share for atleast twenty (20) consecutive trading days. The Company used the proceeds for general working capital.

 

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As of June 30, 2010 andDecember 31, 2009, the Company had 1,200,000 shares of Series 2006Preferred shares outstanding.

 

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

 

On December 1, 2006, the Company raised $750,000 ofadditional working capital through an exempt Preferred Stock offering under theSecurities Act of 1933 Section 4(6) private offering of preferredstock to accredited and institutional investors.  The Preferred Stock is designated as 2006BPreferred and consists of 750,000 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 750,000 warrantsto purchase the Company’s common stock exercisable for five years at $2.00 pershare.  The Company used the proceedsfor general working capital.

 

$150,000 of the 2006B PreferredEquity Offering was from Amphion Innovations plc, an affiliate of the AmphionGroup, our majority shareholder and $300,000 was from Richard C.E. Morgan ourchairman and an affiliate of the Amphion Group.

 

As of June 30, 2010 andDecember 31, 2009, the Company had 700,000 shares of Series 2006BPreferred shares outstanding.

 

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

 

On January 29, 2007, the Company raised $2,000,000of additional working capital through an exempt Preferred Stock offering underthe Securities Act of 1933 Section 4(6) private offering of preferredstock to accredited and institutional investors.  The Preferred Stock is designated as 2006CPreferred and consists of 200 shares of Preferred Stock bearing nodividends.  However, the shares are convertibleinto common stock on a ten thousand (10,000) to one (1) basis at $1.00.  In addition, the Company issued 1,000,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share.  The Companyused the proceeds for general working capital.

 

As of June 30, 2010 andDecember 31, 2009, the Company had 100 shares of Series 2006CPreferred shares outstanding.

 

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

 

During the third quarter of 2007, the Company raised$2,050,000 of additional working capital through an exempt Preferred Stockoffering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2007Preferred and consists of 205 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to ten thousand basis at $1.00.  In addition, the Company issued 1,025,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share.  The Company usedthe proceeds from the sale of the 2007 Preferred stock for general workingcapital.

 

$250,000of the 2007 Preferred Equity Offering was from Richard C.E. Morgan our chairmanand an affiliate of the Amphion Group.

 

During the first quarter of 2010,one holder of the Series 2007 Preferred elected to convert his 10 sharesin to 100,000 shares of Axcess Common shares. As of June 30, 2010 and December 31, 2009, the Company had 175and 185 shares of Series 2007 Preferred shares outstanding, respectively.

 

*(f) Series 2008 Preferred Stock*

 

OnApril 25, 2008, the Company raised $1,200,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors, which have previously invested in Axcess. ThePreferred Stock is designated as 2008 Preferred and consists of 120 shares ofPreferred Stock bearing no dividends. However, the shares are convertible intocommon stock on a 1 to 10,000 basis. In addition, the Company issued 1,200,000warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share.

 

TheCompany also recorded an additional preferred stock dividend of $558,686relating to the beneficial conversion feature and the warrants that were issuedin connection with the 2008 Preferred Stock Equity.

 

Asof June 30, 2010 and December 31, 2009 the Company had 120 shares ofSeries 2008 Preferred shares outstanding.

 

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*(g) Series 2008B Preferred Stock*

 

Beginningon September 30, 2008 the Company authorized the raising of $600,000 ofadditional working capital through an exempt Preferred Stock offering under theSecurities Act of 1933 Section 4(6) private offering of preferredstock to accredited and institutional investors. The Preferred Stock isdesignated as 2008B Preferred and consists of 80 shares of Preferred Stockbearing no dividends. However, the shares are convertible into common stock ona ten thousand (10,000) to one basis. In addition, the Company issued 400,000warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Each warrant will be callable by the Company if and when theCompany’s common stock share price exceeds $3.00 per share for at least twenty(20) consecutive trading days. The Company used the proceeds for generalworking capital.

 

TheCompany also recorded an additional preferred stock dividend of $187,501relating to the beneficial conversion feature and the warrants that were issuedin connection with the 2008B Preferred Stock Equity.

 

As of June 30, 2010 andDecember 31, 2009 the Company had 80 shares of Series 2008B Preferredshares outstanding.

 

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

 

Notes payable to Stockholdersconsist of the following:

 
| ** **                                                         | ** ** | **June 30,****2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| 5.50% PV Proceeds  Holdings, Inc., due December 31, 2011 |       | $                         | 2,419,559  |                        | $          | 2,464,559 |   |
| 5.00% 2009 Convertible  notes, due December 31, 2014          |       | 2,372,426                 |       | 1,552,426                   |       |
| 5.50% Amphion Investment LLC  note, due December 31, 2011     |       | 393,787                   |       | 393,787                     |       |
| Debt discount                                                      |       | (874,372                  | )          | (682,478                    | )          |
|                                                               |       | 4,311,400                 |       | 3,728,294                   |       |
| Less current maturities                                            |       |                      |       |                        |       |
| PV Proceeds  Holdings, Inc                                    |       | (117,000                  | )          | (162,000                    | )          |
| Non-current notes payable to  stockholders                         |       | $                         | 4,194,400  |                        | $          | 3,566,294 |   |

 

**PV ProceedsHoldings, Inc.**

 

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

 

Axcessreached an Agreement to Amend Purchase Note and Payment Term with PV ProceedsHoldings, Inc.  PV Proceedsconsented to a five-year extension of the note with an interest rate of 5% perannum from January 1, 2003 payable in full at maturity ofDecember 31, 2007.  As furtherconsideration for entering into the agreement Axcess granted to PV ProceedsHoldings, Inc. a warrant to purchase up to 500,000 shares of common stockof Axcess.  The warrants had an exerciseprice of $2.00 per share and expired on the earlier of February 14, 2008or forty-five days after the principal and all accrued interest are paid.  Axcess has also agreed to reduce theprincipal amount due first for 10% of equity proceeds and second 20% ofproceeds from options exercised.  Axcess also recorded deferred debt issuancecosts of $689,932 for the value of the warrants, which were amortized over thelife of the loan.  The deferred debtissuance costs were fully amortized as of December 31, 2007.

 

Axcess reached an Agreement with PV ProceedsHoldings, Inc. to extend the maturity of the note from December 31,2007 to December 31, 2011.  Axcessagreed to pay a $25,000 extension fee and to increase the interest rate from5.0% to 5.5%. The extension fee is reflected as deferred debt issuance cost andamortized as interest expense over the life of the extension.  As of June 30, 2010 the balance is $9,375.  Axcess has also agreed toreduce the principal amount due by 10% of any equity proceeds and 20% of allproceeds from options and warrants exercised. In connection with the Series 2008 and 2008B Preferred equityoffering, $162,000 and $117,000 is due at December 31, 2009 and June 30,2010, respectively.  This has beenreflected as a current liability.  Forthe six months ended June 30, 2010 and 2009, there were $67,000 and$67,218 of interest expensed for the PV Proceeds Holdings note.  Accrued interest for the PV Proceeds Holdingsnote were $1,177,710 and $1,110,710 at June 30, 2010 and December 31,2009, respectively.

 

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**Amphion InvestmentLLC**

 

Axcessentered into a 6.75% demand note with Amphion Investments, LLC, datedJanuary 25, 2002. The borrowings are unsecured.  The note was due December 31, 2007, Axcess reached an Agreement with AmphionInvestments LLC to extend the maturity of the note to December 31,2011.  Axcess agreed to increase theinterest rate from 5.0% to 5.5%.  For thesix months ended June 30, 2010 and 2009, there were $10,740 ofinterest expensed for the Amphion Investment LLC note.  Accrued interest for the Amphion Investmentnote was $134,600 and $129,200 at June 30, 2010 and December 31,2009, respectively.

 

**2009 ConvertibleNote**

 

Startingon October 29, 2009 through June 30, 2010, Axcess entered intocertain convertible notes with several institutional or otherwise accreditedinvestors including Amphion Innovations plc, an affiliate of the Amphion Group,our majority shareholder.  The aggregateprincipal of the notes is $2,372,426 and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent perannum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into4,744,852 common shares of Axcess at the option of each of the holders.   As part of the consideration for theConvertible Notes, Axcess also issued to the note holders warrants to purchasean aggregate of 2,372,426 common shares with an exercise price of $0.75. Thewarrants expire on December 31, 2014.

 

Aportion of the new Convertible Notes was issued for the conversion andretirement of older convertible notes currently held by Amphion Innovationsplc. The principal of the notes converted was $1,038,273 and had accruedinterest of $79,153.  As of June 30,2010, total due to Amphion Innovations plc is $1,442,426.  Amphion has not funded the remaining $175,000that has been committed as of June 30, 2010.

 

Forthe six months ended June 30, 2010 and 2009, there were $48,692 and $0 ofinterest expensed for the 2009 Convertible Notes.  Accrued interest for the 2009 ConvertibleNotes were $60,935 and $12,242 at June 30, 2010 and December 31,2009, respectively.

 

**(5)****                                ****SignificantCustomers**

 

Duringthe three months ended June 30, 2010, the Company had three customers thataccounted for 58% of revenue.  During thethree months ended June 30, 2009 the Company had one customer thataccounted for 90% of revenue.

 

Duringthe six months ended June 30, 2010, the Company had three customers thataccounted for 44% of revenue.  During thesix months ended June 30, 2009 the Company had one customer that accountedfor 86% of revenue.

 

**(6)****                                ****RecentAccounting Pronouncements**

 

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

 

**(7)****                                ****SubsequentEvents**

 

SinceJune 30, 2010, Axcess has continued to enter into certain 2009 convertiblenotes with several institutional or otherwise accredited investors includingAmphion Innovations plc, an affiliate of the Amphion Group, our majorityshareholder.  The aggregate additionalprincipal of the notes is $217,500 issued and is unsecured (the “ConvertibleNotes”).  The Convertible Notes have afive percent per annum simple interest rate and will become due on December 31,2014.  The Convertible Notes areconvertible into 870,000 common shares of Axcess at the option of each of theholders.   As part of the considerationfor the Convertible Notes, Axcess also issued to the note holders warrants topurchase an aggregate of 870,000 common shares with an exercise price of $0.75.The warrants expire on December 31, 2014.

 

TheCompany’s payroll due to be paid July 30, 2010 was delayed until August 8,2010 due to working capital constraints.

 

OnJuly 15, 2010, the Company filed a lawsuit against Baker Botts L.L.P.asserting negligence, breach of fiduciary duty, and gross negligence related tointellectual property matters.

 

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

 

**Forward-Looking Statements**

 

Thisquarterly report on Form 10-Q includes “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), 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” orthe negative thereof or other variations thereon or comparable terminology.

 

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

 

Avariety of factors could cause actual results to differ materially from thoseanticipated in the Company’s forward-looking statements, including thefollowing factors: changes from anticipatedlevels of sales, access to capital, future national or regional economic andcompetitive conditions, changes in relationships with customers, difficultiesin developing and marketing new products, marketing existing products, customeracceptance of existing and new products, validity of patents, technologicalchange, dependence on key personnel, availability of key component parts,dependence on third party manufacturers, vendors, contractors, productliability, casualty to or other disruption of the production facilities, delaysand disruptions in the shipment of the Company’s product, and the ability ofthe Company to meet its stated business goals. For a detailed discussion of these and other cautionarystatements and factors that could cause actual results to differ from theCompany’s forward-looking statements, please refer to the Company’s filingswith the Securities and Exchange Commission, especially “Item 1. Description ofBusiness” (including the “Risk Factors” section of Item 1) and “Item 6.Management’s Discussion and Analysis of Plan of Operation” of the Company’s2009 Annual Report on Form 10-K.

 

Readersare cautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof. The Companydoes not undertake any obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the date hereof.Readers should carefully review the risk factors described in other documentsthe Company files from time to time with the Securities and ExchangeCommission.

 

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

 

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

 

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

 

**Liquidity and Capital Resources**

 

Since inception, we have utilized the proceeds from anumber of public and private sales of our equity securities, the exercise ofoptions, convertible debt, and short-term bridge loans from stockholders tomeet our working capital requirements. At June 30, 2010, we had a workingcapital deficit of $2,475,710.

 

Our operations are not profitable in 2010. Our cashdecreased $44,132 during the six months ended June 30, 2010. We fundedoperations with convertible notes.  Noassurance can be given that such activities will continue to be available toprovide funding to us.  Our business planfor 2010 is predicated principally upon the successful marketing of our RFIDproducts. We anticipate that our existing working capital resources andrevenues from operations will not be adequate to satisfy our fundingrequirements throughout 2010.

 

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

 

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business alliances) and maintaining focus on revenuesand collections.

 

If our losses continue, we will have to obtain funds tomeet our cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or we may be required to curtail our operations, seek amerger partner, or seek protection under federal bankruptcy laws. Any of theforegoing may be on terms that are unfavorable to us or disadvantageous toexisting stockholders. In addition, no assurance may be given that we will besuccessful in raising additional funds or entering into business alliances.

 

**Results of Operations**

 

**Three Months Ended June 30, 2010 Compared to Three Months Ended June 30,2009**

* *

*Sales and Gross Profit*. Sales for the three monthsended June 30, 2010 were $317,444 and for the three months ended June 30,2009 were $3,156,836.  Cost of sales forthe three months ended June 30, 2010 were $145,766 and for the threemonths ended June 30, 2009 were $797,930. The gross profit for the three months ended June 30, 2010 was$171,678 and $2,358,906 for the three months ended June 30, 2009. Themajority of the decrease in sales is a result of the Caribbean Port SecurityContract awarded in January 2009 that was not repeated during 2010.  The gross margin percent for the three monthsended June 30, 2010 was 54% compared to 75% for the same period in2009.  The lower gross margin percent wasa result of the increased services provided in the Port Security Contract andas a result of the timing of the project. We continue to expect the margin will continue to be stable in the 40%to 50% range.

 

*Operating Expenses*. Operating expenses were$650,130 for the three months ended June 30, 2010 and $1,186,861 for thethree months ended June 30, 2009. Overall operating expenses were down over the period.  The decrease relates to reduced selling expenserelated to the Port Security Contract and lower salary expenses.

 

Researchand development expenses were $217,389 for the three months ended June 30,2010 and $239,240 for the three months ended June 30, 2009.  The majority of the decrease is the result ofa pay cut we implemented during the quarter. All salaries were cut from 20% - 40%. However, some of that savings was offset by an increase in developmentof the next generation RFID product.  Weare continuing to expense the development as incurred.

 

Corporategeneral and administrative expenses were $287,907 for the three months ended June 30,2010 and $410,470 for the three months ended June 30, 2009.  The majority of the decrease is the result ofa pay cut we implemented during the quarter. All salaries were cut from 20% - 40%. In addition we had a reduction of bad debt expense.

 

Sellingand marketing expenses were $139,706 for the three months ended June 30,2010 and $532,093 for the three months ended June 30, 2009.  The majority of the decrease is the result ofexpenses paid relating to the Caribbean Port Security Contract during2009.  In addition we implemented a paycut during the quarter.  All salarieswere cut from 20% - 40%.

 

Depreciationand amortization expenses were $5,128 for the three months ended June 30,2010 and $5,058 for the three months ended June 30, 2009.  Depreciation is basically flat over theperiod.

 

*Other expenses, net*. Other expenses, net, were$124,884 for the three months ended June 30, 2010 and $56,266 for thethree months ended June 30, 2009. Interest expense was $43,920 higherduring the three months ended June 30, 2010, compared to the three monthsended June 30, 2009, reflecting higher expense associated with warrantsthat were issued with the convertible notes.  The loss on vendor settlements was also increased by $24,698.

 

*Net income (Loss)*. Net loss was $603,336 for the three monthsended June 30, 2010, compared to income of $1,115,779 for the three monthsended June 30, 2009.  The increasein the loss is mainly related to a decrease gross margin mainly relating to thePort Contract.  Offset by lower salaryexpense as a result of the pay cuts implemented during 2010.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were $0 for three months ended June 30,2010 and $47,797 for three months ended June 30, 2009.  The decrease is a result of all holders ofthe dividend barring preferred shareholders converting their preferred sharesto common.

 

**Six Months Ended June 30, 2010 Compared to Six Months Ended June 30,2009**

 

*Sales and Gross Profit*.  Sales for the six months ended June 30,2010 were $462,733 and for the six months ended June 30, 2009 were$4,239,518.  Cost of sales for the sixmonths ended June 30, 2010 were $231,814 and for the six months ended June 30,2009 were $1,543,904.  The gross profitfor the six months ended June 30, 2010 was $230,919 and $2,695,614 for thesix months 

 

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endedJune 30, 2009. The majority of the decrease in sales is a result of theCaribbean Port Security Contract awarded in January 2009 that was notrepeated during 2010.  The gross marginpercent for the six months ended June 30, 2010 was 50% compared to 64% forthe same period in 2009.  The lower grossmargin percent was a result of the Port Security contract.  We continue to expect our overall margin willcontinue to be stable in the 40% to 50% range.

 

*Operating Expenses*. Operating expenses were$1,731,685 for the six months ended June 30, 2010 and $2,219,895 for thesix months ended June 30, 2009.  Themajority of the decrease relates to selling expenses as a result of the PortSecurity Contract during 2009.

 

Researchand development expenses were $561,067 for the six months ended June 30,2010 and $548,599 for the six months ended June 30, 2009.  The expenses are basically flat for the twoperiods.   However, there was an increasein the stock compensation expense (non-cash) and a reduction in salaryexpenses.  We implemented a 20% - 40% payreduction during the second quarter of 2010.

 

Corporategeneral and administrative expenses were $772,942 for the six months ended June 30,2010 and $734,923 for the six months ended June 30, 2009.  The expenses are basically flat for the twoperiods.   However, there was an increasein the stock compensation expense (non-cash) and a reduction in salaryexpenses.  We implemented a 20% - 40% payreduction during the second quarter of 2010.

 

Sellingand marketing expenses were $387,292 for the six months ended June 30,2010 and $926,651 for the six months ended June 30, 2009. The majority ofthe decrease relates to reduced selling expense relating to the port contractsigned and implemented during 2009 that was not repeated in 2010.

 

Depreciationand amortization expenses were $10,385 for the six months ended June 30,2010 and $9,722 for the six months ended June 30, 2009.  Depreciation is basically flat over theperiod.

 

*Other expenses, net*. Other expenses, net, were$221,302 for the six months ended June 30, 2010 and $119,818 for the sixmonths ended June 30, 2009. Interest expense was $32,977 higher during thesix months ended June 30, 2010, compared to the six months ended June 30,2009, reflecting the expense associated with the warrants that were issued withthe convertible notes.   The gain onvendor settlements decreased by $68,507.

 

*Net income ( Loss)*. Net loss was $1,722,069for the six months ended June 30, 2010, compared to income of $355,901 forthe six months ended June 30, 2009. The increase is mainly related to a decrease in gross margin mainlyrelating to the Port Security Contract.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were $0 for six months ended June 30,2010 and $95,263 for six months ended June 30, 2009.

 

**Other**

 

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

 

**Item 3. Quantitative and Qualitative Disclosure aboutMarket Risk**

 

None

 

**Item 4. Controls and Procedures**

 

**Controls and Procedures**

 

TheCompany’s chief executive officer and chief financial officer areresponsible for establishing and maintaining disclosure controls and proceduresfor the Company.

 

(a) Evaluationof Disclosure Controls and Procedures

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and chief financial officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (“Exchange Act”), as of June 30, 2010.Based on this evaluation, our principal executive officer and our chieffinancial officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were not effective and notadequately designed to ensure that the information required to be disclosedbyus in the reports we submit under the Exchange Act is recorded, processed,summarized and reported within the time 

 

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periodsspecified in the applicable rules and forms and that such information wasaccumulated and communicated to our chief executive officer and chief financialofficer, in a manner that allowed for timely decisions regarding requireddisclosure.

 

Based on our evaluation, management has concluded that our internalcontrol over financial reporting was not effective as of June 30, 2010.Management has determined that (i) we are unable to maintain the propersegregation of various accounting and finance duties because of our small sizeand limited resources, (ii) much of the financial closing process is doneoff-line on electronic spreadsheets that are maintained on individual computersand are not backed up and (iii) based on our staffing we rely on our ChiefFinancial Officer to provide a significant amount of our compensating controls.

 

Weintended to remediate these material weaknesses during 2009 however; liquidityissues prevented us from making changes. Therefore, we intend to address theses material weaknesses during thesecond half of 2010 if liquidity improves. Notwithstanding these material weaknesses, we believe that our financialconditions, results of operations and cash flows presented in this report ofForm 10-Q are fairly presented in all material respects.

 

(b) Changesin Internal Controls

 

Duringthe period ended June 30, 2010, there has been no change in internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $47,676. We are currentlydefending or seeking to settle each of the vendor’s and customer claims.  At June 30, 2010, we had accrued$30,676, which represents the delinquent amounts we expect to be liable for.

 

On May 24, 2010, AxcessInternational Inc. filed suit against Savi Technologies, Inc. a whollyowned subsidiary of Lockheed Martin Corporation for infringing U.S. Patent Nos.6,294,953 entitled “High Sensitivity Demodulator For A Radio Tag And Method,”and7,271,727 entitled “Dual Frequency Radio Tag For A Radio FrequencyIdentification System”. The suit alleges damages past and present in amountsunspecified. The Company feels it had no alternative but to file suit toprotect its intellectual property, business, and plans going forward.

 

**Item 1A. Risk Factors**

 

Not required

 

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

 

Duringthe three months ended June 30, 2010, the Company issued unregisteredsecurities in connection with the transactions described below.  The proceeds were used for general workingcapital requirements.  The issuance ofstock was exempt from the registration requirements of the Securities Act, asamended by virtue of Section 4(2) thereof, as transactions notinvolving a public offering and an appropriate restrictive legend was affixedto the stock certificates.

 

***Common Stock***

 

Duringthe three months ended June 30, 2010 the Company issued 1,114,961 stockoptions with an exercise price of $0.30 and had 100,000 options expire and48,000 options that were forfeited.

 

***Warrants***

 

Duringthe three months ended June 30, 2010 the Company issued an additional470,000 warrants in conjunction with various debt offerings.  The warrants had a strike price of $0.75 andthey expire on December 31, 2014.

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. (Removed and Reserved)**

 

None

 

**Item 5. Other Information**

 

None

 

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

 

(a) Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
| 31.2                 |       | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 32.1                 |       | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 906 of the Sarbanes-Oxley Act of 2002.                                 |
| 32.2                 |       | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 906 of the  Sarbanes-Oxley Act of 2002. |
| 99.1                 |       | May 14,  2009 Axcess International Reports First quarter 2010 earning results                                                                                                   |

 
| **Date**   | ** ** | **Description** |
|------------|------------|-----------------|
| ** ** | ** ** | ** **      |

 

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**SIGNATURES**

 

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

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

 

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