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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended September 30, 2010**

 

**or**

 

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

 

**For thetransition period from             to              .**

 

**COMMISSIONFILE NUMBER: 0-11933**

 

**AXCESS INTERNATIONAL INC.**

(Exact name ofsmall business issuer as specified in its charter)

 

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

 

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

(Address, including telephone number and areacode, of principal executive offices)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the proceeding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See the definitionsof “large accelerated filer,” “accelerated file and “Smaller reporting company”in Rule 12b-2 of the Exchange Act:

 

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

 

Indicate by check mark weather the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Number of shares of common stock outstanding onNovember 17, 2010: 33,825,528

 

 

 

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**AXCESS INTERNATIONAL INC.**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |
|                                    | Item  1. Financial Statements: |
|                                    |   |   |
|                                    |   | Condensed Consolidated Balance Sheets at September 30,  2010 and December 31, 2009 (unaudited) |
|                                    |   |   |
|                                    |   | Condensed Consolidated Statements of Operations for  the Three Months and Nine Months ended September 30, 2010 and 2009  (unaudited) |
|                                    |   |   |
|                                    |   | Condensed Consolidated Statements of Cash Flows for  the Nine Months ended September 30, 2010 and 2009 (unaudited) |
|                                    |   |   |
|                                    |   | Notes to Condensed Consolidated 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. Submission of Matters to a Vote of Security  Holders |
|                                    |   |
|                                    | Item 5. Other Information |
|                                    |   |
|                                    | Item 6. Exhibits and Reports on Form 8-K |
|                                    |   |
| **SIGNATURES**                          |

 

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**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**AXCESS INTERNATIONAL INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                            | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $                            | 3,277      |                        | $          | 65,534 |   |
| Accounts receivable -  trade, net of allowance for doubtful accounts of $16,766 and $24,715 for 2010  and 2009, respectively.                                                                                         |       | 62,538                       |       | 142,213                     |       |
| Inventory, net                                                                                                                                                                                                        |       | 46,042                       |       | 83,387                      |       |
| Prepaid expenses and other                                                                                                                                                                                            |       | 39,985                       |       | 46,631                      |       |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total current assets                                                                                                                                                                                                  |       | 151,842                      |       | 337,765                     |       |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Property, plant and  equipment, net                                                                                                                                                                                   |       | 10,366                       |       | 16,727                      |       |
| Deferred debt issuance  costs                                                                                                                                                                                         |       | 9,485                        |       | 12,500                      |       |
| Other assets                                                                                                                                                                                                          |       | 32,445                       |       | 40,213                      |       |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                                          |       | $                            | 204,138    |                        | $          | 407,205 |   |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                                  |       |                         |       |                        |       |
| Accounts payable (includes  $16,994 and $15,253 with related party in 2010 and 2009, respectively)                                                                                                                    |       | $                            | 872,449    |                        | $          | 831,484 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 376,533                      |       | 331,899                     |       |
| Accrued interest                                                                                                                                                                                                      |       | 1,443,847                    |       | 1,246,812                   |       |
| Deferred revenue                                                                                                                                                                                                      |       | 2,366                        |       | 9,342                       |       |
| Notes payable                                                                                                                                                                                                         |       | 110,000                      |       | 162,000                     |       |
| Dividends payable                                                                                                                                                                                                     |       | —                       |       | 31,514                      |       |
| Total current liabilities                                                                                                                                                                                             |       | 2,805,195                    |       | 2,613,051                   |       |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Notes payable to  stockholders (includes $2,458,713 and $1,791,213 with a related party in 2010  and 2009, respectively)                                                                                              |       | 5,316,272                    |       | 4,248,772                   |       |
| Debt discount                                                                                                                                                                                                         |       | (1,003,045                   | )          | (682,478                    | )          |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total liabilities                                                                                                                                                                                                     |       | 7,118,422                    |       | 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; 33,825,528 and  33,642,593 shares issued and outstanding in 2010 and 2009, respectively.                                                |       | 338,255                      |       | 336,426                     |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 168,609,182                  |       | 167,385,813                 |       |
| Shares of common stock to  be issued                                                                                                                                                                                  |       | —                       |       | —                      |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (175,907,223                 | )          | (173,539,881                | )          |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total stockholders’  deficit                                                                                                                                                                                     |       | (6,914,284                   | )          | (5,772,140                  | )          |
|                                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                     |       | $                            | 204,138    |                        | $          | 407,205 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                                |       | $                                                    | 127,483    |                                                | $          | 213,164 |   | $ | 590,216 |   | $ | 4,452,681 |   |
| Cost of sales                                        |       | 61,204                                               |       | 133,741                                             |       | 293,018 |   | 1,677,644 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Gross profit                                         |       | 66,279                                               |       | 79,423                                              |       | 297,198 |   | 2,775,037 |   |
| Expenses:                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development                             |       | 227,001                                              |       | 257,137                                             |       | 788,068 |   | 805,736 |   |
| General and administrative                           |       | 274,016                                              |       | 361,599                                             |       | 1,046,959 |   | 1,096,522 |   |
| Selling and marketing                                |       | 83,100                                               |       | 160,550                                             |       | 470,392 |   | 1,087,201 |   |
| Depreciation and  amortization                       |       | 4,369                                                |       | 5,709                                               |       | 14,754 |   | 15,431 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Operating expenses                                   |       | 588,486                                              |       | 784,995                                             |       | 2,320,173 |   | 3,004,890 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from operations                                 |       | (522,207                                             | )          | (705,572                                            | )          | (2,022,975 | ) | (229,853 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense):                              |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                     |       | (124,915                                             | )          | (55,453                                             | )          | (336,387 | ) | (233,949 | ) |
| Gain on vendor settlements                           |       | 1,850                                                |       | 1,677                                               |       | (7,980 | ) | 60,355 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Other expense, net                                   |       | (123,065                                             | )          | (53,776                                             | )          | (344,367 | ) | (173,594 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                             |       | (645,272                                             | )          | (759,348                                            | )          | (2,367,342 | ) | (403,447 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Preferred stock dividend requirements:               |       |                                                 |       |                                                |       |   |   |   |   |
| Recurring                                            |       | —                                               |       | —                                              |       | — |   | (95,263 | ) |
| Preferred stock dividend  requirements               |       | —                                               |       | —                                              |       | — |   | (95,263 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss applicable to  common stock                 |       | $                                                    | (645,272   | )                                                   | $          | (759,348 | ) | $ | (2,367,342 | ) | $ | (498,710 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per share                                   |       | $                                                    | (0.02      | )                                                   | $          | (0.02 | ) | $ | (0.07 | ) | $ | (0.02 | ) |
| Weighted average shares of  common stock outstanding |       | 33,825,528                                           |       | 33,625,582                                          |       | 33,825,528 |   | 32,213,284 |   |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

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**AXCESS INTERNATIONAL INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                                                        |       |                                                |       |   |   |
| Net loss                                                                                      |       | $                                                   | (2,367,342 | ) | $ | (403,447 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) by operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                                                |       | 14,755                                              |       | 15,431 |   |
| Amortization of financing  discount and issuance costs, net                                   |       | (317,552                                            | )          | 17,780 |   |
| Gain on vendor settlements  and statutory write-off of payables                               |       | —                                              |       | 60,355 |   |
| Stock based compensation  expense                                                             |       | 738,780                                             |       | 446,046 |   |
| Changes in operating  assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                           |       | 79,675                                              |       | (37,368 | ) |
| Inventory                                                                                     |       | 37,345                                              |       | 67,908 |   |
| Prepaid expenses and other                                                                    |       | 6,646                                               |       | (18,871 | ) |
| Other assets                                                                                  |       | —                                              |       | (443 | ) |
| Accounts payable and  accrued expenses                                                        |       | 730,562                                             |       | (109,551 | ) |
| Net cash provided by (used  in) operating activities                                          |       | (1,077,131                                          | )          | 37,840 |   |
|                                                                                          |       |                                                |       |   |   |
| Cash flow from investing  activities:                                                         |       |                                                |       |   |   |
| Capital expenditures                                                                          |       | (626                                                | )          | (8,399 | ) |
| Net cash used in investing  activities                                                        |       | (626                                                | )          | (8,399 | ) |
|                                                                                          |       |                                                |       |   |   |
| Cash flow from financing  activities:                                                         |       |                                                |       |   |   |
| Principal payments on  financing agreements                                                   |       | (52,000                                             | )          | (160,000 | ) |
| Borrowings on financing  agreements                                                           |       | 1,067,500                                           |       | 160,000 |   |
| Net cash provided by  financing activities                                                    |       | 1,015,500                                           |       | — |   |
|                                                                                          |       |                                                |       |   |   |
| Net change in cash and  cash equivalents                                                      |       | (62,257                                             | )          | 29,441 |   |
| Cash and cash equivalents,  beginning of period                                               |       | 65,534                                              |       | 51,392 |   |
| Cash and cash equivalents,  end of period                                                     |       | $                                                   | 3,277      |   | $ | 80,833 |   |
|                                                                                          |       |                                                |       |   |   |
| Supplemental Disclosure of Non-Cash Investing and  Financing Activities:                      |       |                                                |       |   |   |
| Warrants issued as a debt discount                                                            |       | $                                                   | 454,903    |   | $ | 57,215 |   |
| Accrued preferred stock  dividends                                                            |       | —                                              |       | 95,263 |   |
| Conversion of preferred  shares into common stock                                             |       | —                                              |       | 15,750 |   |
| Conversion of accrued  dividends into common stock                                            |       | 31,514                                              |       | 344,072 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**AXCESS INTERNATIONAL INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(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 nine months of 2010, operations utilizedapproximately $1,077,000 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,management is trying to expand the Company’s sales and obtain profitableoperations.

 

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 followingfactors, among others: changes from anticipated levels of sales, access tocapital, future national or regional economic and competitive conditions,changes in relationships with customers, difficulties in developing andmarketing new products, marketing existing products, customer acceptance ofexisting and new products, validity of patents, technological change,dependence on key personnel, availability of key component parts, dependence onthird party manufacturers, vendors, contractors, product liability, casualty toor other disruption of the production facilities, delays and disruptions in theshipment of the Company’s products, and the ability of the Company to meet itsstated business 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 be giventhat the Company will be successful in raising additional funds or enteringinto 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, AmphionInvestments LLC, Antiope Partners LLC, VennWorks LLC (formerly incuVest LLC),Amphion Capital Management LLC, Amphion Innovations plc, Amphion Innovations USInc. and NVW, LLC (collectively, the “Amphion Group”). The Amphion Group ownsapproximately 49% of the outstanding voting common stock of the 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 September 30, 2010 and for the three and ninemonths ended September 30, 2010 and 2009, respectively, have been preparedin accordance with generally accepted accounting principles for interimfinancial information. Accordingly, they do not include all of the informationand footnotes 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 September 30, 2010 andDecember 31, 2009, respectively, was comprised of the following:

 
| ** **      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 33,944     |                        | $          | 37,838 |   |
| Work-in-process |       | 109                          |       | 104                         |       |
| Finished goods  |       | 11,989                       |       | 45,445                      |       |
|            |       | $                            | 46,042     |                        | $          | 83,387 |   |

 

The components of cost of sales aresummarized as follows:

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Product cost         |       | $                                                    | 63,492     |                                                | $          | 133,741 |   | $ | 300,913 |   | $ | 1,666,285 |   |
| Warranty expense     |       | (2,288                                               | )          | —                                              |       | (7,895 | ) | 11,359 |   |
| Inventory impairment |       | —                                               |       | —                                              |       | — |   | — |   |
| Total                |       | $                                                    | 61,204     |                                                | $          | 133,741 |   | $ | 293,018 |   | $ | 1,677,644 |   |

 

**(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 $738,780 and $446,046, respectivelywhich was recorded in operating expenses. This expense decreased net profit per share by $0.017 and $0.0014 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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development expense   |       | $                                                    | 65,407     |                                                | $          | 51,147 |   | $ | 239,247 |   | $ | 153,441 |   |
| General and administrative expense |       | 68,489                                               |       | 70,412                                              |       | 355,442 |   | 211,349 |   |
| Selling and marketing expense      |       | 27,552                                               |       | 27,085                                              |       | 144,091 |   | 81,256 |   |
| Total                              |       | $                                                    | 161,448    |                                                | $          | 148,644 |   | $ | 738,780 |   | $ | 446,046 |   |

 

**(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 newshares.  During the nine months ended September 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                                                                |       | 116.85    | %          |
| 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 September 30, 2010 theCompany had 165,900 options outstanding from the 1991 Equity Plan, 20,000 fromthe Directors 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 nine months ended September 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  September 30, 2010             |       | 7,196,822                    |       | 1.07 |   | 6.43 |   | $ | — |   |
|                                                        |       |                         |       |   |   |   |   |   |   |
| Options exercisable at  September 30, 2010             |       | 3,728,611                    |       | 1.46 |   | 6.43 |   | $ | — |   |
|                                                        |       |                         |       |   |   |   |   |   |   |
| Options available for grants  as of September 30, 2010 |       | 24,039                       |       |   |   |   |   |   |   |
|                                                             |            |                              |            |  |  |  |  |  |  |  |  |

 

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The options outstanding at September 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                   |       | 8.10                                           |       | $                                                                  |       |   |
| $1.01 - $2.00         |       | 3,116,961                   |       | 5.14                                           |       |                                                               |       |
| $2.01 – $3.00    |       | 200,000                     |       | 1.47                                           |       |                                                               |       |
| $3.01 - $4.00         |       | 165,900                     |       | 0.28                                           |       |                                                               |       |
| $4.01 - $5.00         |       | 20,000                      |       | 0.67                                           |       |                                                               |       |
| $5.01 - $6.25         |       | —                      |       | —                                         |       |                                                               |       |
| Total                 |       | 7,196,822                   |       | 6.43                                           |       | $                                                                  | —     |   |

 

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 September 30, 2010:

 
| ** **                                 | ** ** | **WARRANTS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
|--------------------------------------------|------------|--------------|------------|----------------------------------------|------------|
| Warrants outstanding at  beginning of year |       | 11,826,436   |       | $                                      | 1.48       |   |
| Warrants issued                            |       | 1,810,000    |       | 0.48                                   |       |
| Warrants exercised                         |       | —       |       | —                                 |       |
| Warrants expired unexercised               |       | (1,658,173   | )          | 1.50                                   |       |
| Warrants outstanding at end  of year       |       | 11,978,263   |       | 1.33                                   |       |
|                                            |            |              |            |                                        |            |  |

 

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

 
| **Strike Price** | ** ** | **Number of  Warrants** | ** ** | **Weighted Average  Remaining Life** | ** ** |
|-----------------------|------------|------------------------------|------------|------------------------------------------------|------------|
| $0.00 - $1.00         |       | 3,913,474                    |       | 4.11                                           |       |
| $1.01 - $2.00         |       | 8,064,789                    |       | 1.32                                           |       |
| Total                 |       | 11,978,263                   |       | 2.24                                           |       |

 

Duringthe nine months ended September 30, 2010 the Company issued an additional1,810,000 warrants in conjunction with various debt agreements.  The warrant had a strike price range of $0.25- $0.75 and they expire on December 31, 2014.  TheCompany estimates the fair market value of the warrant using Black-ScholesValuation Model.  Key assumptions used toestimate the fair market value of the warrants include the exercise price of$0.25 - $0.75, the expected term (five years), the expected volatility of theCompany’s stock over the warrants expected term (ranging from 93% to 106%) andrisk free interest rate (ranging from 2.56% 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 September 30, 2010, we accrued$30,676, which represents the delinquent amounts we expect to be liable for,for the claims 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 nine years.  The amount is still contingent on thesupplier completing the testing and certifying the product is within all of theoriginal specifications.  The testing isongoing but the product has not passed all of the preliminary testing and weare still evaluating the impact on the product. As of September 30, 2010 Axcess has not signed off on thecompletion of the product and Innovison has issued a letter of termination forfailure to pay. We currently have accrued $392,808 for services that have beencompleted; however, we have not accrued the remainder for services that havenot been completed.

 

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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                                   |       |
| September 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 areconvertible into 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 1,752,055warrants 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.

 

As of September 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 September 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 750,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share.  The Companyused the proceeds for general working capital.

 

$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 September 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 areconvertible into common stock on a ten thousand (10,000) to one (1) basisat $1.00.  In addition, the Companyissued 1,000,000 warrants to purchase the Company’s common stock exercisablefor five years at $2.00 per share.  The Company used the proceeds for generalworking capital.

 

As of September 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 September 30, 2010 and December 31, 2009, the Companyhad 175 and 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 September 30, 2010 and December 31, 2009 the Company had 120shares of Series 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 September 30, 2010 andDecember 31, 2009 the Company had 80 shares of Series 2008B Preferredshares outstanding.

 

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

 

Notes payable to Stockholdersconsist of the following:

 
| ** **                                                         | ** ** | **September 30,****2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| 5.50% PV Proceeds  Holdings, Inc., due December 31, 2011 |       | $                              | 2,412,559  |                        | $          | 2,464,559 |   |
| 5.00% 2009 Convertible  notes, due December 31, 2014          |       | 2,372,426                      |       | 1,552,426                   |       |
| 5.00% 2010B Convertible  notes, due December 31, 2014         |       | 247,500                        |       | —                      |       |
| 5.50% Amphion Investment LLC  note, due December 31, 2011     |       | 393,787                        |       | 393,787                     |       |
| Debt discount                                                      |       | (1,003,045                     | )          | (682,478                    | )          |
|                                                               |       | 4,423,227                      |       | 3,728,294                   |       |
| Less current maturities                                            |       |                           |       |                        |       |
| PV Proceeds  Holdings, Inc                                    |       | (110,000                       | )          | (162,000                    | )          |
| Non-current notes payable to  stockholders                         |       | $                              | 4,313,227  |                        | $          | 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$4,000,000 to PV Proceeds Holdings, Inc. on December 31, 2002. Thebalance of the indebtedness under the PV Proceeds Holdings, Inc. noteissued was due in full by the Company on December 31, 2002 and was indefault during 2003 until 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 ProceedsHoldings, Inc. was paid in full, whichever occurred first. In addition,the shares of common stock, which PV Proceeds Holdings, Inc. may acquireupon conversion of preferred stock or by exercise of the warrant, were subjectto a three-year lockup from the date of the closing, which could be reduced totwo years upon the occurrence of certain events. The warrant was exercisable onor before July 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 September 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 

 

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$110,000is due at December 31, 2009 and September 30, 2010,respectively.  This has been reflected asa current liability.  For the nine monthsended September 30, 2010 and 2009, there were $100,476 and $67,218 ofinterest expensed for the PV Proceeds Holdings note.  Accrued interest for the PV Proceeds Holdingsnote were $1,211,186 and $1,110,710 at September 30, 2010 andDecember 31, 2009, respectively.

 

**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 thenine months ended September 30, 2010 and 2009, there were $16,199of interest expensed for the Amphion Investment LLC note.  Accrued interest for the Amphion Investmentnote was $140,059 and $123,859 at September 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 September 30,2010, total due to Amphion Innovations plc is $1,522,426.  Amphion has not funded the remaining $175,000that has been committed as of September 30, 2010.

 

Forthe nine months ended September 30, 2010 and 2009, there were $78,591 and$0 of interest expensed for the 2009 Convertible Notes.  Accrued interest for the 2009 ConvertibleNotes were $90,834 and $12,242 at September 30, 2010 and December 31,2009, respectively.

 

**2010B ConvertibleNote**

 

Startingon July 1, 2010 through September 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 $247,500 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 into990,000 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 990,000 common shares with an exercise price of $0.25. Thewarrants expire on December 31, 2014.

 

Forthe nine months ended September 30, 2010 and 2009, there were $1,769 and$0 of interest expensed for the 2010B Convertible Notes.  Accrued interest for the 2010B ConvertibleNotes were $1,769 and $0 at September 30, 2010 and December 31, 2009,respectively.

 

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

 

Duringthe three months ended September 30, 2010, the Company had four customersthat accounted for 64% of revenue. During the three months ended September 30, 2009 the Company hadthree customers that accounted for 49% of revenue.

 

Duringthe nine months ended September 30, 2010, the Company had two customersthat accounted for 32% of revenue. During the nine months ended September 30, 2009 the Company had onecustomer that accounted for 82% 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 

 

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arrangements entered into ormaterially modified on or after January 1, 2011, and earlier applicationis permitted. We may elect, but are not required, to apply the standards retrospectivelyto all prior periods. We are currently evaluating the impact this amendment mayhave on our consolidated financial position and results of operations.

 

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

 

SinceSeptember 30, 2010, Axcess has continued to enter into certain 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 $100,000 issued and is unsecured (the “ConvertibleNotes”).  The Convertible Notes have afive percent per annum simple interest rate and will become due onDecember 31, 2014.  The ConvertibleNotes are convertible into 1,000,000 common shares of Axcess at the option ofeach of the holders.   As part of theconsideration for the Convertible Notes, Axcess also issued to the note holderswarrants to purchase an aggregate of 1,000,000 common shares with an exerciseprice of $0.10. Holders of the 2010 B Convertible notes who participated in the2010 C Convertible note funding received a conversion of their 2010 B holdingsinto 2010 C Convertible notes.  Thewarrants expire on December 31, 2014.

 

**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.

 

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**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 September 30, 2010, we had aworking capital deficit of $2,653,353.

 

Our operations are not profitable in 2010. Our cashdecreased $62,257 during the nine months ended September 30, 2010. Wefunded operations with convertible notes. No assurance can be given that such activities will continue to beavailable to provide funding to us.  Ourbusiness plan for 2010 is predicated principally upon the successful marketingof our RFID products. We anticipate that our existing working capital resourcesand revenues 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, includingpayments to vendors, and may jeopardize our ability to continue as a goingconcern. We intend to address our liquidity problems by controlling costs,seeking additional funding (through capital raising transactions and businessalliances) and maintaining focus on revenues and 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 September 30, 2010 Compared to Three MonthsEnded September 30, 2009**

 

*Sales and Gross Profit*. Sales for the three monthsended September 30, 2010 were $127,483 and for the three months ended September 30,2009 were $213,164.  Cost of sales forthe three months ended September 30, 2010 were $61,204 and for the threemonths ended September 30, 2009 were $133,741.  The gross profit for the three months ended September 30,2010 was $66,279 and $79,423 for the three months ended September 30,2009. The majority of the decrease in sales is a result of the decrease in ourability to fulfill orders.  The grossmargin percent for the three months ended September 30, 2010 was 52%compared to 37% for the same period in 2009. The higher gross margin percent was a result of the change in mix andthe decrease in our production expenses as a result of lower headcount.  We continue to expect the margin willcontinue to be stable in the 40% to 50% range.

 

*Operating Expenses*. Operating expenses were$588,486 for the three months ended September 30, 2010 and $784,995 forthe three months ended September 30, 2009. Overall operating expenses were down over the period.  The decrease relates to reduced sellingexpense related to the Port Security Contract and lower salary expenses.

 

Researchand development expenses were $227,001 for the three months ended September 30,2010 and $257,137 for the three months ended September 30, 2009.  The majority of the decrease is the result ofa pay cut we implemented during the second quarter along with reducedheadcount.  All salaries were cut from20% - 40%.  However, some of that savingswas offset by an increase in non-cash stock compensation expense.  We are continuing to expense the developmentas incurred.

 

Corporategeneral and administrative expenses were $274,016 for the three months ended September 30,2010 and $361,599 for the three months ended September 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% and decreased investor relationexpenses.

 

Sellingand marketing expenses were $83,100 for the three months ended September 30,2010 and $160,550 for the three months ended September 30, 2009.  The majority of the decrease is the result ofa pay cut we implemented during the second quarter along with reducedheadcount.  All salaries were cut from20% - 40%.  In addition we have loweradvertising expenses and travel related expenses.

 

Depreciationand amortization expenses were $4,369 for the three months ended September 30,2010 and $5,709 for the three months ended September 30, 2009.  Depreciation is basically flat over the period.

 

*Other expenses, net*. Other expenses, net, were$123,065 for the three months ended September 30, 2010 and $53,776 for thethree months ended September 30, 2009. Interest expense was $69,462 higherduring the three months ended September 30, 2010, 

 

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comparedto the three months ended September 30, 2009, primarily due to an increasein expense associated with warrants that were issued with the convertiblenotes.

 

*Net loss*. Net loss was $645,272 for the three months ended September 30,2010, compared to income of $759,348 for the three months ended September 30,2009.  The decrease in the loss is mainlyrelated to the reduction in salaries, lower headcount and reduced travelexpenses.

 

**Nine Months Ended September 30, 2010 Compared to Nine Months EndedSeptember 30, 2009**

 

*Sales and Gross Profit*.  Sales for the nine months ended September 30,2010 were $590,216 and for the nine months ended September 30, 2009 were$4,452,681.  Cost of sales for the ninemonths ended September 30, 2010 were $293,018 and for the nine monthsended September 30, 2009 were $1,677,644. The gross profit for the nine months ended September 30, 2010 was$297,198 and $2,775,037 for the nine months ended September 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 nine monthsended September 30, 2010 was 50% compared to 62% for the same period in2009.  The lower gross margin percent wasa result of the Port Security contract. We continue to expect our overall margin will continue to be stable inthe 40% to 50% range.

 

*Operating Expenses*. Operating expenses were$2,320,173 for the nine months ended September 30, 2010 and $3,004,890 forthe nine months ended September 30, 2009. The majority of the decrease relates to selling expenses as a result ofthe Port Security Contract during 2009.

 

Researchand development expenses were $788,068 for the nine months ended September 30,2010 and $805,736 for the nine months ended September 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 $1,046,959 for the nine months ended September 30,2010 and $1,096,522 for the nine months ended September 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 $470,392 for the nine months ended September 30,2010 and $1,087,201 for the nine months ended September 30, 2009. Themajority of the decrease relates to reduced selling expense relating to theport contract signed and implemented during 2009 that was not repeated in 2010and reduced headcount.

 

Depreciationand amortization expenses were $14,754 for the nine months ended September 30,2010 and $15,431 for the nine months ended September 30, 2009.  Depreciation is basically flat over theperiod.

 

*Other expenses, net*. Other expenses, net, were$344,367 for the nine months ended September 30, 2010 and $173,594 for thenine months ended September 30, 2009. Interest expense was $102,438 higherduring the nine months ended September 30, 2010, compared to the ninemonths ended September 30, 2009, primarily due to an increase in expenseassociated with the warrants that were issued with the convertible notes.   The gain on vendor settlements decreased by$68,335.

 

*Net loss*. Net loss was $2,367,342 for the nine months ended September 30,2010, compared to income of $403,447 for the nine months ended September 30,2009.  The increase is mainly related toa decrease in gross margin mainly relating to the Port Security Contract.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were $0 for nine months ended September 30,2010 and $95,263 for nine months ended September 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

 

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**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 September 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 disclosed byus in the reports we submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the applicablerules and forms and that such information was accumulated and communicatedto our chief executive officer and chief financial officer, in a manner thatallowed for timely decisions regarding required disclosure.

 

Based on our evaluation, management has concluded that our internalcontrol over financial reporting was not effective as of September 30,2010. Management has determined that (i) we are unable to maintain theproper segregation of various accounting and finance duties because of oursmall size and limited resources, (ii) much of the financial closingprocess is done off-line on electronic spreadsheets that are maintained onindividual computers and are not backed up and (iii) based on our staffingwe rely on our Chief Financial Officer to provide a significant amount of ourcompensating 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 September 30, 2010, there has been no change ininternal control over financial reporting that has materially affected, or isreasonably likely to materially affect our internal control over financialreporting.

 

**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 September 30, 2010, we had accrued$30,676, which represents the delinquent amounts we expect to be liable for.

 

**Item 1A. Risk Factors**

 

Not required

 

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

 

Duringthe three months ended September 30, 2010, the Company issued unregisteredsecurities in connection with the transactions described below.  The proceeds were used for general workingcapital requirements.  The issuance of stockwas exempt from the registration requirements of the Securities Act, as amendedby virtue of Section 4(2) thereof, as transactions not involving apublic offering and an appropriate restrictive legend was affixed to the stockcertificates.

 

***Warrants***

 

Duringthe three months ended September 30, 2010 the Company issued an additional990,000 warrants in conjunction with various debt offerings.  The warrants had a strike price of $0.25 andthey expire on December 31, 2014.

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

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

 

None

 

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**Item 5. Other Information**

 

None

 

**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. |

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

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    | AXCESS  INTERNATIONAL INC.,   Registrant               |
|-------------------------|--------------------------------------------------------|
|                    |                                                   |
|                    | /s/  ALLAN GRIEBENOW                                   |
|                    | Allan  Griebenow Director, President and               |
|                    | Chief  Executive Officer (Principal Executive Officer) |
|                    |                                                   |
|                    | /s/  ROBERT HUSSEY                                     |
|                    | Robert  Hussey                                         |
|                    | Chief  Financial Officer and Secretary                 |
|                    | (Principal  Accounting and Financial Officer)          |
|                    |                                                   |
| November 19,  2010 |                                                   |

 

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