UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended June 30,
2009
 
 o
              TRANSITION
      REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ________ to  ________
 
 Commission
file number:  000-53350
 
 AXIS
TECHNOLOGIES GROUP, INC.
 (Exact
name of registrant as specified in its charter)
 
 DELAWARE
              
              26-1326434(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)
 
 2055
So. Folsom Street, Lincoln, NE 68522
 (Address
of principal executive offices)
 
 (402)
476-6006
 (Issuer’s
telephone number)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes o   No
x
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o   No
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer  o
              
              Accelerated
      filer  oNon-accelerated
      filer  o
              
              Smaller
      Reporting Company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  oNo  x
 
 The
registrant has 64,446,779 shares of $0.001 par value common stock outstanding as
of November 20, 2009.
  
 1
  Axis
Technologies Group, Inc.
 
 FORM
10-Q
 For
The Six-Month Period Ended June 30, 2009
 
 
 INDEX
 
 
 PART
      I - FINANCIAL INFORMATIONITEM
      1
              
              CONSOLIDATED FINANCIAL STATEMENTS
              
              Page
      3ITEM
      2
              
              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
              
              Page
      14ITEM
      4T
              
              CONTROLS AND PROCEDURES
              
              Page
      19PART
      II - OTHER INFORMATIONITEM
      1
              
              LEGAL PROCEEDINGS
              
              Page
      20ITEM
      2
              
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              
              Page
      20ITEM
      3
              
              DEFAULTS UPON SENIOR SECURITIES
              
              Page
      20ITEM
      4
              
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              
              Page
      20ITEM
      5
              
              OTHER INFORMATION
              
              Page
      20ITEM
      6
              
              EXHIBITS
              
              Page
      21SIGNATURES
              
              Page
      21
  2
 Index
  PART I – FINANCIAL
INFORMATION
 
 ITEM1. FINANCIAL STATEMENTS
 
 
 Axis
Technologies Group, Inc.
 Consolidated
Balance Sheets
 June
      30,
              
              
              December
      31,2009
              
              
              2008(Unaudited)
              
              
              (Audited)ASSETSCURRENT
      ASSETSCash
              
              $
              18,907
              
              
              $
              12,205Accounts
      receivable
              
              
              118,380
              
              
              
              150,609Inventory
              
              
              259,310
              
              
              
              337,566Inventory
      deposits
              
              
              96,397
              
              
              
              58,497Prepaid
      expenses
              
              
              52,547
              
              
              
              3,412Total
      Current Assets
              
              
              545,541
              
              
              
              562,289PROPERTY
      AND EQUIPMENTProperty
      and equipment
              
              
              18,188
              
              
              
              18,188Less:
      accumulated depreciation
              
              
              (14,097
              )
              
              
              (12,899
              )Net
      Property and Equipment
              
              
              4,091
              
              
              
              5,289OTHER
      ASSETSPatents,
      net of accumulated amortization of $3,053 and $2,627,
      respectively
              
              
              13,984
              
              
              
              14,410Deferred
      financing costs, net
              
              
              78,703
              
              
              
              180,300Total
      Other Assets
              
              
              92,687
              
              
              
              194,710TOTAL
      ASSETS
              
              $
              642,319
              
              
              $
              762,288The
      accompanying notes are an integral part of these consolidated financial
      statements.
  3
 Index
  Axis
Technologies Group, Inc.
 Consolidated
Balance Sheets (Conintued)
 
 
 June
      30,
              
              
              December
      31,2009
              
              
              2008(Unaudited)
              
              
              (Audited)LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
              
              $
              106,256
              
              
              $
              145,108Accrued
      expenses
              
              
              96,684
              
              
              
              92,053Notes
      payable
              
              
              300,000
              
              
              
              -Convertible
      note payable, net of discount totaling $344,095 and $788,288,
      respectively
              
              
              813,312
              
              
              
              600,601Accrued
      salary - officers/stockholders
              
              
              546,313
              
              
              
              485,637Total
      Current Liabilities
              
              
              1,862,565
              
              
              
              1,323,399STOCKHOLDERS'
      DEFICITCommon
      stock, $0.001 par value, 500,000,000 shares authorized, 64,446,779 and
      62,267,767 shares issued and outstanding, respectively
              
              
              64,447
              
              
              
              62,268Additional
      paid-in capital
              
              
              3,621,007
              
              
              
              3,202,261Stock
      issuable
              
              
              66,600
              
              
              
              66,600Accumulated
      deficit
              
              
              (4,972,300
              )
              
              
              (3,892,240
              )Total
      Stockholders' Deficit
              
              
              (1,220,246
              )
              
              
              (561,111
              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
              $
              642,319
              
              
              $
              762,288The
      accompanying notes are an integral part of these consolidated financial
      statements.
  4
 Index
  Axis
Technologies Group, Inc.
 Consolidated
Statements of Operations
 (Unaudited)
 
 
 For
      the Three Months Ended
              
              
              For
      the Six Months EndedJune
      30,
              
              
              June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Sales,
      net
              
              $
              200,402
              
              
              $
              163,083
              
              
              $
              327,453
              
              
              $
              285,792Cost
      of goods sold
              
              
              147,373
              
              
              
              150,372
              
              
              
              242,814
              
              
              
              246,741Gross
      profit
              
              
              53,029
              
              
              
              12,711
              
              
              
              84,639
              
              
              
              39,051Operating
      expenses
              
              
              209,280
              
              
              
              218,180
              
              
              
              410,908
              
              
              
              364,348Loss
      from operations
              
              
              (156,251
              )
              
              
              (205,469
              )
              
              
              (326,269
              )
              
              
              (325,297
              )Other
      income (expense):Interest
      income
              
              
              7
              
              
              
              2,445
              
              
              
              26
              
              
              
              2,453Interest
      expense
              
              
              (440,994
              )
              
              
              (212,778
              )
              
              
              (753,817
              )
              
              
              (215,698
              )Total
      other income (expense)
              
              
              (440,987
              )
              
              
              (210,333
              )
              
              
              (753,791
              )
              
              
              (213,245
              )Net
      loss before income taxes
              
              
              (597,238
              )
              
              
              (415,802
              )
              
              
              (1,080,060
              )
              
              
              (538,542
              )Income
      tax provision
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (597,238
              )
              
              $
              (415,802
              )
              
              $
              (1,080,060
              )
              
              $
              (538,542
              )Net
      loss per common share (basic and diluted)
              
              $
              (0.009
              )
              
              $
              (0.007
              )
              
              $
              (0.017
              )
              
              $
              (0.009
              )Weighted
      average shares outstanding: basic and diluted
              
              
              63,100,337
              
              
              
              62,267,767
              
              
              
              62,686,352
              
              
              
              62,184,360The
      accompanying notes are an integral part of these consolidated financial
      statements.
  5
 Index
  Axis
Technologies Group, Inc.
 Consolidated
Statements of Cash Flows
 (Unaudited)
 
 
 For
      the Six Months EndedJune
      30,2009
              
              
              2008Cash flows from operating
      activities:Net
      loss
              
              $
              (1,080,060
              )
              
              $
              (538,542
              )Adjustments
      to reconcile net loss to net cash (used in) operations:Depreciation
      and amortization
              
              
              1,624
              
              
              
              2,214Share-based
      compensation
              
              
              6,912
              
              
              
              3,906Issuance
      of common stock for services
              
              
              47,500
              
              
              
              18,600Amortization
      of original issue discount
              
              
              44,419
              
              
              
              15,015Amortization
      of debt issuance costs
              
              
              101,597
              
              
              
              34,743Non-cash
      interest expense related to issuance of warrants and beneficial conversion
      features
              
              
              534,805
              
              
              
              135,135Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
              
              
              32,229
              
              
              
              (17,224
              )Decrease
      in inventory and inventory deposits
              
              
              40,356
              
              
              
              33,552(Increase)
      in prepaid expenses
              
              
              (49,135
              )
              
              
              (4,899
              )(Decrease)
      in accounts payable
              
              
              (38,852
              )
              
              
              (17,253
              )Increase
      (decrease) in accrued salary officers/stockholders
              
              
              60,676
              
              
              
              (959
              )Increase
      in accrued expenses
              
              
              4,631
              
              
              
              184Net
      cash (used in) operating activities
              
              
              (293,298
              )
              
              
              (335,528
              )Cash flows from investing
      activities:Purchase
      of property and equipment
              
              
              -
              
              
              
              (1,094
              )Net
      cash (used in) investing activities
              
              
              -
              
              
              
              (1,094
              )Cash flows from financing
      activities:Cash
      proceeds from convertible notes payable, net of original issue discount of
      $138,889 and transaction fees of $32,000
              
              
              -
              
              
              
              1,218,000Debt
      issuance costs
              
              
              -
              
              
              
              (203,572
              )Net
      borrowings (repayments) on note payable
              
              
              -
              
              
              
              (195,074
              )Proceeds
      from issuance of notes payable
              
              
              300,000
              
              
              
              -Net
      cash provided by financing activities
              
              
              300,000
              
              
              
              819,354Net
      increase in cash and cash equivalents
              
              
              6,702
              
              
              
              482,732Cash
      and cash equivalents at beginning of period
              
              
              12,205
              
              
              
              14,528Cash
      and cash equivalents at end of period
              
              $
              18,907
              
              
              $
              497,260Supplemental cash and non-cash flow
      information:Cash
      paid for interest
              
              $
              70,647
              
              
              $
              5,879Deferred
      financing costs paid with the issuance of common stock
              
              $
              -
              
              
              $
              85,800Convertible
      debt discount recorded for warrant and beneficial conversion
      feature
              
              $
              -
              
              
              $
              1,250,000Conversion
      of convertible note payable to common stock
              
              $
              231,482
              
              
              $
              -The
      accompanying notes are an integral part of these consolidated financial
      statements.
  6
 Index
  Axis
Technologies Group, Inc.
 Notes
to Consolidated Financial Statements
 
 NOTE
1:
 BASIS
OF PRESENTATION
 
 The
accompanying unaudited consolidated financial information has been prepared by
Axis Technologies Group, Inc. (the “Company”) in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission
(SEC).  Accordingly, it does not include all of the information and
notes required by accounting principles generally accepted in the Untied States
of America for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of this financial information have
been included.  Financial results for the interim period presented are
not necessarily indicative of the results that may be expected for the fiscal
year as a whole or any other interim period.  This financial
information should be read in conjunction with the consolidated financial
statements and notes for the year ended December 31, 2008.
  NOTE
2:
 NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization:  Riverside
Entertainment, Inc ("Riverside") was incorporated in the State of
Delaware.  On September 18, 2006, Riverside entered into a Share
Exchange and Acquisition Agreement whereby it agreed to issue 45,000,000 shares
of its common stock to acquire all of the outstanding shares of Axis
Technologies, Inc. ("Axis"), a private corporation incorporated in 2003 in the
State of Delaware.  At the time of the share exchange transaction,
Riverside was a non-reporting public company and had no current
operations.  Axis has developed and sells a daylight harvesting
fluorescent lighting ballast that uses natural lighting to reduce electricity
consumption.  The Company's market for advertising and selling the
product currently lies within North America.
 
 Upon
completion of the transaction on October 25, 2006, Axis became a wholly-owned
subsidiary of Riverside and Riverside changed its name to Axis Technologies
Group, Inc. (the "Company").  Since this transaction resulted in the
existing shareholders of Axis acquiring control of Riverside, the share exchange
transaction has been accounted for as an additional capitalization of Riverside
(a reverse acquisition, with Axis being treated as the accounting acquirer for
financial statement purposes.)
 
 The
operations of Axis are the only continuing operations of the
Company.  In accounting for this transaction, Axis was deemed to be
the purchaser and parent company for financial reporting
purposes.  Accordingly, its net assets were included in the
consolidated balance sheet at their historical value.
 
 Principles of
Consolidation:  The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Axis Technology, Inc.  All inter-company transactions and balances
have been eliminated in the consolidation.
 
 Management
Estimates:  The preparation of financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the period.  Actual results could differ
from those estimates.
 
 Customer Concentrations and
Accounts Receivable:  The accounts receivable arise in the
normal course of business of providing services to
customers.  Accounts are written-off as they are deemed uncollectible
based upon a periodic review of the accounts.  As of June 30, 2009 and
2008, we have estimated that accounts receivable is fully collectible, and thus,
has not established an allowance for doubtful accounts.
 Concentrations
of credit risk with respect to accounts receivable arise because the Company
grants unsecured credit in the form of trade accounts receivable to its
customers.
  7
 Index
  At June
30, 2009, one customer accounted for 71% of sales and 81% of outstanding
accounts receivable.  At June 30, 2008, two customers accounted for
64% of sales and 72% of outstanding accounts receivable.
 
 Supplier Concentrations and
Inventory:  The Company maintains its inventory, consisting
primarily of finished goods, on a perpetual basis utilizing the first-in
first-out (FIFO) method.  Inventories have been valued at the lower of
cost or market.  Management has not recorded an obsolescence reserve
for inventory at June 30, 2009, and December 31, 2008, as all inventory is
considered usable and market value is above cost.
 
 The
Company purchases 100% of its inventory from suppliers located in
China.
 
 Revenue
Recognition:  The Company recognizes revenue when persuasive
evidence of an arrangement exists, transfer of title has occurred or services
have been rendered, the selling price is fixed or determinable, collectibility
is reasonably assured and delivery has occurred per the contract
terms.
 
 Warranty
and return costs are estimated and accrued based on historical
rates.  Management has determined that a warranty reserve of $3,003 is
required at June 30, 2009, and no warranty reserve was recorded at December 31,
2008.
 
 Deferred Financing
Costs:  Deferred financing costs relate to the convertible debt
instrument issued by the Company on April 25, 2008.  The financing
costs are being amortized using the effective interest method over the term of
the debt instrument to April 2010.
 
 Income
Taxes:  The Company provides for income taxes under Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
No. 109") as clarified by FIN No. 48 which requires the use of an asset and
liability approach in accounting for income taxes.  Deferred tax
assets and liabilities are recorded based on the differences between the
financial statement and tax bases of assets and liabilities and the tax rates in
effect when these differences are expected to reverse. SFAS No. 109 requires the
reduction of deferred tax assets by a valuation allowance if, based on the
weight of the available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.  At June 30, 2009 and
December 31, 2008, the Company has recorded a full valuation allowance against
its deferred tax assets.The Company’s 2006, 2007
and 2008 tax years are open for examination by the IRS.
 
 FIN No.
48 requires the recognition of a financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit.  For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority.
 
 Effect of Recently Issued
Accounting Standards:  In June 2009, the FASB issued Statement
of Financial Accounting Standards No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“FAS 168”).  While FAS 168 is not intended to change accounting
principles generally accepted in the United States, it will change the way the
Company references these accounting principles in its Consolidated Financial
Statements and Notes.  FAS 168 is effective for interim or annual
reporting periods ending after September 15, 2009.  The adoption of
FAS 168 will change the Company’s disclosures.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)” (“FAS 167”).  This
statement amends the timing, and considerations, of analyses performed to
determine if the Company’s variable interests give it a controlling financial
interest in a variable interest entity, as well as requires additional
disclosures.  FAS 167 is effective as of the first annual reporting
period beginning after November 15, 2009, for interim periods within the first
annual reporting period and thereafter.  The Company is currently
evaluating the impact of adopting FAS 167.
  8
 Index
  In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events” (“FAS 165”).  FAS 165 establishes general
standards of accounting and disclosures for events that occur after the balance
sheet date, but before financial statements are issued.  Application
of FAS 165 is required for interim or annual financial periods ending after June
15, 2009.  The adoption of FAS 165 changed the Company’s
disclosures.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 107-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP 107-1”).  FSP 107-1
amends Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about fair value of financial
instruments for interim and annual reporting periods.  FSP 107-1 is
effective for interim reporting periods ending after June 15,
2009.  The Company’s adoption of FSP 107-1 resulted in no additional
disclosures.
  NOTE
3:
 LIQUIDITY/GOING
CONCERN
 
 The
Company has incurred significant operating losses during its periods of
operation.  At June 30, 2009, the Company reports a negative working
capital position of $1,317,024 and an accumulated deficit of
$4,972,300.  It is management's opinion that these facts raise
substantial doubt about the Company's ability to continue as a going concern
without additional financing through debt or equity.
 
 In order
to meet its working capital needs through the next twelve months, the Company
plans to seek additional outside debt or equity financing to support the planned
increase in revenues via new channels and products over the next
year.  However, the Company is uncertain such financing will be
available on terms favorable to the Company if at all. If adequate funds are not
available or not available on acceptable terms, we may have to curtail our
operations and may be unable to fund expansion, develop or enhance products or
respond to competitive pressures.
 
 NOTE
4:
 ACCRUED
SALARY – OFFICERS/STOCKHOLDERS
 
 Certain
officers/stockholders of the Company have elected to forego a certain portion of
their salary due to limited operating funds over the past several
years.  These amounts do not accrue interest and are due and payable
to these officers/stockholders as funds become available in the
future.  The total balance owed as of June 30, 2009 and December 31,
2008 is $546,313 and $485,637, respectively.
  NOTE
5:
 NOTES
PAYABLE
 
 On March
25, 2009, the Company entered into a debt instrument security agreement with
Gemini Master Fund, Ltd. (“Gemini”), pursuant to which the Company issued a 10%
Senior Secured note in the principal amount of $150,000 (the “Note”) for working
capital monies.  The note is past due and demand can be made for
payment in full.
 
 On May
20, 2009, the Company issued a promissory note with Mid-America Funding Company
generating net cash proceeds of $150,000 for working capital
purposes.  In connection with the note payable, the Company issued
1,000,000 shares of its common stock to be held in escrow as collateral for the
loan.  Additionally, the Company assigned a customer purchase order
totaling $247,500 to the issuer as additional collateral on the
note.  The note bears interest at a monthly rate of 2% of the
outstanding balance.  The note is past due and demand can be made for
payment in full.
  9
 Index
  NOTE
6:
 CONVERTIBLE
NOTE PAYABLE
 
 On April
25, 2008, the Company entered into a debt instrument security agreement with
Gemini Master Fund LTD (“Gemini”), pursuant to which Gemini was issued a 10%
Senior Secured Convertible Promissory Note in the principal amount of $1,388,889
(the “Note”).  The face amount of the Note of $1,388,889 was reduced
by an original issue discount of $138,889 and other issuance costs of $32,000 to
arrive at net proceeds of $1,218,000.
 
 In
connection with the Note, the Company also incurred additional financing costs
of $203,572 which were paid out of the net proceeds to third-party placement
agents and issued 50,000 shares of common stock valued at $0.31 per share to
these same agents.  The Company is obligated to issue to the placement
agents for this transaction an additional 180,000 shares valued at $0.37 per
share totaling $66,600 which have not been issued as of June 30,
2009.  The share price of which was based on the five day average
closing price of the Company’s common stock prior to the closing date of the
Note.
 
 The Note
has a maturity date of April 25, 2010, and is secured by all assets of the
Company.  The Note accrues interest at a rate of 10% per annum, and
such interest is payable on a quarterly basis commencing July 26, 2008, with the
principal balance of the Note, together with any accrued and unpaid interest
thereon, due in twelve monthly installments beginning May 1,
2009.  The Company has the option to make the installment payments in
cash or in common stock shares at a conversion price equal to the lesser of
$0.26 or 80% of the lowest closing bid price occurring 10 trading days
immediately preceeding the date at which the price is determined. The May and
June 2009 installment payments were made through issuance of stock. This
resulted in a beneficial conversion feature valued at $135,031 being charged as
non-cash interest expense for the three-month period ended June 30, 2009. The
Note is convertible at the option of the holder at any time into shares of the
Company's common stock at an initial conversion price of $0.26 per
share.  The conversion price is subject to a weighted-average
anti-dilution adjustment in the event the Company issues equity or equity-linked
securities at a price below the then-applicable conversion price.  The
Note can be converted into a maximum of 4.9% of the Company’s outstanding common
stock on the date of conversion.
 
 Additionally,
the terms of the Securities Purchase Agreement issued in connection with the
Note provides that until such time as Gemini no longer holds any of the
securities or underlying securities purchased, the Company cannot issue shares
of common stock, securities convertible into common stock, or debt obligations
involving a variable rate transaction (meaning there is a conversion, exercise
or exchange price that is contingent on trading prices or other factors) or a
transaction where a purchaser of securities is granted the right to receive
additional securities in the future on terms better than those presently being
granted to the purchaser.  Further, until such time as Gemini no
longer holds any of the securities or underlying securities purchased, if the
Company issues common stock or securities convertible into common stock on terms
that Gemini deems to be more favorable than the terms received by Gemini, Gemini
may require the Company to amend the Securities Purchase Agreement and related
documents to give Gemini the benefit of the more favorable terms.
 
 Under the
terms of the Note and as additional consideration for the loan, the Company
issued Gemini a five-year warrant to purchase up to 5,341,880 shares of its
common stock at an exercise price of $0.26 per share (the “Warrant”) which was
deemed to have a fair value of $861,778.  The Company used the
Black-Scholes-Merton pricing model as a method for determining the estimated
fair value of the Warrant issued.  The following assumptions were used
to estimate the fair value of the Warrant:
 
 §
              risk
      free interest rate of 3.2%;
 §
              expected
      life of 2 years;
 §
              no
      expected dividends;
 §
              and
      volatility of 147%.
  10
 Index
  The
expected life of the Warrant was determined to be the full-term of the
warrant.  The risk-free interest rate is based on the Federal Reserve
Board’s constant maturities of U.S. Treasury bond obligations with terms
comparable to the expected life of the Warrant valued.  The Company’s
volatility is based on the historical volatility of the Company’s
stock.
 
 The fair
value of the Warrant was recorded as a discount to the Note and will be
amortized to interest expense over the term of the Note using the effective
interest method.  Due to the Company not having an effective Form 10
registration statement by February 25, 2009, the Warrant provides for a cashless
exercise in which the holder will be entitled to the number of shares equal to
the difference between the volume weighted average price as defined in the Note
agreement, and the exercise price of the Warrant multiplied by the number of
shares issuable upon exercise of the Warrant divided by the volume weighted
average price.  The Warrant also provides for a weighted-average
anti-dilution adjustment to the exercise price in the event the Company issues
equity or equity-linked securities at a price below the then-applicable exercise
price.
 
 The
Company may be obligated to issue an additional five-year warrant at an exercise
price of $0.26 per share to a placement agent if all or a portion of the shares
in the underlying Warrant attached to the Note are exercised by the
holder.  For every 100 shares exercised by the holder, the placement
agent will receive a warrant to purchase 7 additional shares up to a maximum of
373,932 shares.  The fair value for these conditional warrants will be
recorded by the Company if and when the original Warrant is exercised by the
holder.
 
 The
application of the provisions of EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27, Application of Issue 98-5 to Certain
Convertible Instruments, resulted in the proceeds of the loan being
allocated based on the relative fair value of the loan and warrants as of the
commitment date.  Then the Company calculated the intrinsic value of
the beneficial conversion feature embedded in the Note.  As the amount
of the beneficial conversion feature exceeded the fair value allocated to the
loan, the amount of the beneficial conversion feature to be recorded was limited
to the proceeds allocated to the loan.  Accordingly, the beneficial
conversion feature was calculated to be $388,222 and was recorded as an
additional discount on the Note and will be recognized over the term of the Note
using the effective interest method following the guidance in EITF 00-27, Issue
6.
 
 The
      following summarizes the convertible note balance as of June 30,
      2009:Original
      gross proceeds received in 2008
              
              $
              1,388,889Less:  original
      issue discount at time of issuance of notes
              
              
              (138,889
              )Net
      proceeds prior to paying transaction costs
              
              
              1,250,000Less:  value
      assigned to beneficial conversion feature and warrants
              
              
              (1,250,000
              )Add:  amortization
      of original issue discount, beneficial conversion feature and
      warrants
              
              
              1,044,794Less:  amounts
      converted to common stock
              
              
              (231,482
              )Balance
      at June 30, 2009 (face value of $1,157,407)
              
              $
              813,312
 
 The
effective interest rate of the Note was 88% as of June 30, 2009. The note is
past due and demand can be made for payment in full.
  NOTE
7:
 STOCKHOLDERS'
DEFICIT
 
 On June
24, 2009, the Company issued 964,506 shares of common stock for the conversion
of $115,741 in principal on the Gemini Convertible Note at a conversion price of
$0.12 per share per the terms of the agreement.
  11
 Index
  On May 4,
2009, the Company issued 964,506 shares of common stock for the conversion of
$115,741 in principal on the Gemini Convertible Note at a conversion price of
$0.12 per share per the terms of the agreement.
 
 On May 1,
2009, the Company issued 250,000 shares of its common stock at a fair value of
$0.19 per share to a consultant for prepaid marketing services with a total
value of $47,500.
 
 Restricted
Stock:  For the three month period ended March 31, 2008, the
Company awarded 60,000 shares of time-based restricted stock (non-vested) shares
to certain employees of the Company.  As a condition of the award, the
employees must be employed with the Company in order to continue to vest in
their shares over an 18-month period.  The fair value of the
non-vested shares is equal to the fair market value on the date of grant which
was estimated to be $0.31 and will be amortized ratably over the vesting
period.
 
 The
Company recorded $2,060 and $6,912 of compensation expense in the consolidated
statements of operations related to vested shares (restricted stock) for the
three and six month periods ended June 30, 2009.  For the three and
six month periods ended June 30, 2008, the Company recorded $3,090 and $3,906 of
related compensation expense.
 
 A summary
of the status of non-vested restricted shares and remaining unearned
compensation as of June 30, 2009, is set forth below:
 RestrictedShares
              
              
              WeightedAverageFair
      Value
              
              
              UnrecognizedCompensation
              
              
              WeightedAverageRecognition
      Period(Months)Outstanding,
      December 31, 2008
              
              
              27,261
              
              
              $
              0.31
              
              
              $
              8,448Granted
              
              
              -
              
              
              
              -
              
              
              
              -Vested
              
              
              (22,299
              )
              
              
              0.31
              
              
              
              (6,912
              )Outstanding,
      June 30, 2009
              
              
              4,962
              
              
              $
              0.31
              
              
              $
              1,536
              
              
              
              2.2
 
 NOTE
8:
 BASIC
AND DILUTED EARNINGS PER SHARE
 
 The
Company computes earnings per share in accordance with FASB Statement of
Financial Accounting Standards No. 128, Earnings Per Share (“SFAS
128”).  SFAS 128 requires companies to compute earnings per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented.  Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding.  Diluted earnings per
share are computed by dividing net income by the weighted average number of
common stock and common stock equivalents outstanding.
 
 The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share for the quarters ended
June 30, 2009 and 2008.
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30
              
              
              June
      302009
              
              
              2008
              
              
              2009
              
              
              2008Basic
      earnings per share calculation:Net
      loss to common shareholders
              
              $
              (597,238
              )
              
              $
              (415,802
              )
              
              $
              (1,080,060
              )
              
              $
              (538,542
              )Weighted
      average of common shares outstanding
              
              
              63,100,337
              
              
              
              62,267,767
              
              
              
              62,686,352
              
              
              
              62,184,360Basic
      net loss per share
              
              $
              (0.009
              )
              
              $
              (0.007
              )
              
              $
              (0.017
              )
              
              $
              (0.009
              )Diluted
      earnings per share calculation:Net
      loss to common shareholders
              
              $
              (597,238
              )
              
              $
              (415,802
              )
              
              $
              (1,080,060
              )
              
              $
              (538,542
              )Weighted
      average of common shares outstanding
              
              
              63,100,337
              
              
              
              62,267,767
              
              
              
              62,686,352
              
              
              
              62,184,360Stock
      warrants, and convertible debt (1)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      weighted average common shares outstanding
              
              
              63,100,337
              
              
              
              62,267,767
              
              
              
              62,686,352
              
              
              
              62,184,360Diluted
      net loss per share
              
              $
              (0.009
              )
              
              $
              (0.007
              )
              
              $
              (0.017
              )
              
              $
              (0.009
              )
  12
 Index
  (1)The
computation of diluted net loss per share as of June 30, 2009 and 2008, does not
differ from the basic computation because potentially dilutive conversion shares
related to the convertible debt promissory note of 9,645,058 and 5,341,000,
respectively, would be anti-dilutive.  Additionally, potentially
dilutive issuable securities of warrants, totaling 5,341,000 were anti-dilutive
as of June 30, 2009 and 2008.
 
 NOTE
9:
 SUBSEQUENT
EVENTS
 
 The
Company has evaluated for disclosure subsequent events that have occurred up to
December 23, 2009, the date of issuance of the financial
statements.
  13
 Index
  ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 The
following discussion should be read in conjunction with the unaudited financial
statements and related notes that appear elsewhere in this Form 10-Q filing and
in conjunction with our audited financial statements and related notes that
appear in our Form 10-K filed with the Securities and Exchange Commission on
April 15, 2009.
 
 Forward
Looking Statements and Information
 
 This
document contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties and are based on the beliefs and assumptions of management and
information currently available to management. The use of words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates," "should,"
"likely" or similar expressions, indicates a forward-looking
statement.
 
 Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties
and assumptions. Future results may differ materially from those expressed in
the forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict.  Stockholders
are cautioned not to put undue reliance on any forward-looking statements, which
speak only to the date made.
 
 Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events, or performance and underlying assumptions and other statements,
which are other than statements of historical facts. These statements are
subject to uncertainties and risks including, but not limited to, product and
service demands and acceptance, changes in technology, economic conditions, the
impact of competition and pricing, and government regulation and approvals. The
Company cautions that assumptions, expectations, projections, intentions, or
beliefs about future events may, and often do, vary from actual results and the
differences can be material. Some of the key factors which could cause actual
results to vary from those the Company expects include changes in product
prices, the timing of planned capital expenditures, availability of
acquisitions, operational factors, the condition of the capital markets
generally, as well as our ability to access them, and uncertainties regarding
environmental regulations or litigation and other legal or regulatory
developments affecting our business.
 
 Our
expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished.   Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof.  We undertake no duty to update these forward-looking
statements.
 
 Overview
 
 Axis
Technologies Group, Inc. is in the business of developing and marketing
energy-saving electronic components for the commercial lighting sector. Our
primary products are self-contained electronic, dimming and daylight harvesting
fluorescent ballasts. A “ballast” is an electronic component that regulates
voltage in lighting.  We develop, test, and patent unique technology
to create energy efficient products that meet federal energy code standards and
encourage Green initiatives for high-profile companies.  Extensive
testing is conducted to ensure product reliability and energy-saving
properties.  We have obtained and own the patent rights for our
ballasts’ unique control system and have trademarked our slogan “The Future of
Fluorescent Lighting”. Underwriters Laboratory (“UL”), the lighting industry’s
certification authority, has approved our products for use in the United States
and Canada.
 
 Our
current and primary product is the patented T8 Axis Daylight Harvesting Dimming
Ballast (the “Axis Ballast”).  This ballast uses simple technology
that transforms the standard ballast, into a dynamic energy saving system that
can reduce lighting energy costs by up to 70% over a magnetic ballast utilizing
T12 lamps and up to 42% over traditional electronic ballasts.  The
Axis Ballast utilizes an individual photo sensor to automatically adjust the
amount of electrical current flowing to the light fixture and then dims or
increases lighting in conjunction with the amount of available
sunlight.  Based on our knowledge, the Axis Ballast is the only
ballast on the market that has automatic dimming controls integrated into each
ballast.  We believe this feature reduces the costs of acquisition and
installation over that of competing dimming systems, which require that first, a
dimming ballast must be acquired along with a separate control system, and a
separate photocell; then all components must be “hard-wired” together and
“commissioned” or “balanced” in order to operate properly.  The
Company believes that this extra equipment and labor for competing systems can
increase the cost of acquisition and installation over that of the T8 ballast
system.  We have recently completed a redesign of our T8 ballast which
is awaiting UL approval.
  14
 Index
  We have
under development a high-output T5HO ballast that capitalizes on the features of
our current T8 Axis Ballast.  When development is complete, this
product will be submitted to UL for testing and approval.  T5
fluorescent lamps are used mainly in “high-bay” fixtures which are installed in
warehouses, gymnasiums, etc., in conjunction with skylights.  These
high-output T5 lamps in conjunction with an Axis dimming ballast would be an
energy-saving choice for these applications.
 
 Also
under development is our next generation ballast, which utilizes PLC (power line
carrier), or a wirelessly addressable, load shedding ballast, and offers power
companies the ability to reduce the lighting load (load shedding) for their
customers during peak demand periods.  Most utility companies charge
their customers a surcharge or “peak demand” charge during those times of day
when the load on the power plants are at the highest.  Usually this
means the power companies must start up higher cost generators, and/or buy power
from the electrical grid at even higher rates.  This ballast allows
the consumer or the power company to reduce the output of the
ballast.  The consumer who installs this ballast can agree to
participate in the power company’s Peak Demand Reduction Program which can offer
reduced electric rates.  Certain utility companies have expressed
interest in working with Axis to complete the development of the load shedding
ballasts in order to provide for the installation of the ballasts in their
customers' facilities; however, we have entered into no formal agreements with
any such utility companies to date.
 
 Power
companies nation-wide are being pressured to reduce their greenhouse gas
emissions and reduce energy consumption.  There are many states that
have passed legislation that require lighting controls, and in some cases
(California for example), have requirements that new construction projects and
major lighting retrofits incorporate daylight harvesting.  These
regulations are specific to lighting, and there are many further regulations in
place from cities and states, that require government buildings to save a
certain amount of all forms of energy by specified dates.  We believe
that the Axis dimming ballast system can help greatly in achieving these
energy-reduction goals.
 
 Our
target market is small to large commercial users of fluorescent lighting
including office buildings, wholesale and retail buildings, hospitals, schools
and government buildings.  We have arrangements with sales
representatives, electrical distributors, electrical contractors, retrofitters,
ESCO’s (Energy Service Companies), and OEM’s (Original Equipment Manufacturers)
to market, distribute and install the Company’s products.  Through
these arrangements, sales to contractors, distributors, ESCO’s and OEM’s are
made through purchase orders submitted by them to the
Company.  However, we have not entered into any written agreements
regarding on-going or future sales involving any of these parties.
 
 Our
revenues consist primarily of sales of our T8 fluorescent ballasts to electrical
distributors and OEM’s for placement in commercial and governmental
buildings.  Our next generation ballast is expected to be sold
primarily to utility companies in addition to our existing customer
market.
 
 Recent
increases in energy costs have spurred many government agencies and private
companies to work towards decreasing their energy consumption.  This
“green” movement has helped to increase the awareness of our
product.  Our company is dedicated to helping our nation reduce its
energy consumption and greenhouse gas emissions.
 
 The
second quarter sales figures were less than anticipated due mainly to delays in
getting our redesigned T8 ballast to market.  Axis has contracted with
a new supplier from China to help in the development and manufacture of this
updated ballast.  The UL has taken longer than predicted to assess our
newly designed ballast as it has several improvements over our previous design
that necessitated additional testing.  We ultimately received UL
approval in June 2009.
  15
 Index
  Results
of Operation
 
 Three-month period ended
June 30, 2009 compared to three-month period ended June 30,
2008:
 
 Consolidated
net sales for the quarter ended June 30, 2009 and 2008 totaled $200,402 and
$163,083, respectively, for an increase of $37,319. This increase is due to
increased product awareness as the Company continues to market its ballasts
nationwide.  Cost of goods sold for the quarter ended June 30, 2009
and 2008 was $147,373 and $150,372, respectively, a decrease of $2,999. The
decrease is primarily due to a reduction in freight costs. After deducting costs
of goods sold, including warehouse salaries and allocated overhead, we finished
the quarter ended June 30, 2009 with $53,029 in gross profit, compared to a
gross profit of $12,711 for the quarter ended June 30, 2008, an increase of
$40,318. Gross profit as a percentage of sales for the quarter ended June 30,
2009 was 26.5%, compared to 7.8% for the quarter ended June 30, 2008, a 18.7%
increase in gross profit as a percentage of sales.   Our
increased sales volume has allowed us to improve our overall gross profit by
covering relatively fixed and unchanged overhead costs.
 
 For the
quarter ended June 30, 2009, operating expenses totaled $209,280 compared to
$218,180 for the quarter ended June 30, 2008, a decrease of $8,900. The
operating expenses were considered comparable between periods.
 
 For the
quarter ended June 30, 2009, interest expense was $440,994 compared to $212,778
for the quarter ended June 30, 2008, an increase of $228,216. This increase was
the result of the Company issuing in April 2008, a convertible note payable that
had significant transaction costs that are being amortized to interest expense
and debt discounts related to an original issue discount, warrants issued and a
beneficial conversion feature that are being accreted over the term of the debt
to interest expense.  Additionally, installment payments were made
during the quarter through the issuance of discounted common stock resulting in
$135,031 of non-cash interest expense. Non-cash interest expense attributable to
these transaction costs for the quarter ended June 30, 2009 totaled $404,082
compared to $184,898 for the quarter ended June 30, 2008. The details of this
note are listed in Note 6 to the consolidated financial statements of the
Company.
 
 For the
quarter ended June 30, 2009, the net loss was $597,238 compared to a net loss of
$415,802 for the quarter ended June 30, 2008, an increase of
$181,436.  This increase in net loss is attributable to the
differences, as described above.
 
 Six-month period ended June
30, 2009 compared to three-month period ended June 30, 2008:
 
 Consolidated
net sales for the six-month period ended June 30, 2009 and 2008 totaled $327,453
and $285,792, respectively, for an increase of $41,661. This increase is due to
increased product awareness as the Company continues to market its ballasts
nationwide.  Cost of goods sold for the six-month period ended June
30, 2009 and 2008 was $242,814 and $246,741, respectively, a decrease of $3,927.
The decrease is primarily due to a reduction in freight costs. After deducting
costs of goods sold, including warehouse salaries and allocated overhead, we
finished the six-month period ended June 30, 2009 with $84,639 in gross profit,
compared to a gross profit of $39,051 for the six-month period ended June 30,
2008, an increase of $45,588. Gross profit as a percentage of sales for the
six-month period ended June 30, 2009 was 25.8%, compared to 13.7% for the
six-month period ended June 30, 2008, a 12.1% increase in gross profit as a
percentage of sales.   Our increased sales volume has allowed us
to improve our overall gross profit by covering relatively fixed and unchanged
overhead costs.
  16
 Index
  For the
six-month period ended June 30, 2009, operating expenses totaled $410,908
compared to $364,348 for the six-month period ended June 30, 2008, an increase
of $46,560.  For the six-month period ended June 30, 2009 compared to
the six-month period ended June 30, 2008, professional fees increased by
approximately $61,000 and existing management employees salaries and wages
increased by approximately $26,000.  These increases were offset by
decreases in other various operating expenses.
 
 For the
six-month period ended June 30, 2009, interest expense was $753,817 compared to
$215,698 for the six-month period ended June 30, 2008, an increase of $538,119.
This increase was the result of the Company issuing in April 2008 a convertible
note payable that had significant transaction costs that are being amortized to
interest expense and debt discounts related to an original issue discount,
warrants issued and a beneficial conversion feature that are being accreted over
the term of the debt to interest expense.  In addition, there was a
beneficial conversion feature on debt payments made through issuance of stock in
May and June of 2009 resulting in $135,031 of non-cash interest expense.
Non-cash interest expense for the six-month period ended June 30, 2009 included
$680,821 compared to $184,893 for the six-month period ended June 30, 2008,
attributable to the amortization of the original issue discount, beneficial
conversion feature, debt issuance costs and warrant discounts. The details of
this note are listed in Note 6 to the consolidated financial statements of the
Company.
 
 For the
six-month period ended June 30, 2009, the net loss was $1,080,060 compared to a
net loss of $538,542 for the six-month period ended June 30, 2008, an increase
of $541,518.  This increase in net loss is attributable to
differences, as described above.
 
 Assets,
Liabilities and Employees; Research and Development
 
 As of
June 30, 2009, the Company has total current assets of $545,541, which includes
$18,907 of cash, $118,380 of accounts receivable, $259,310 of inventory, $96,397
of inventory deposits and $52,547 of prepaid expenses.  As of June 30,
2009, the Company also has $18,188 of property and equipment, less accumulated
depreciation of $14,097, and total other assets of $92,687, consisting primarily
of debt financing costs.
 
 As of
June 30, 2009, the Company has total liabilities, consisting entirely of current
liabilities, totaling $1,862,565, including $106,256 of accounts payable,
$96,684 of accrued expenses, $813,312 of convertible note payable, $300,000 of
notes payable, and $546,313 of accrued salary of
officers/stockholders.
 
 As of
June 30, 2009, the Company has a working capital deficit of
$1,317,024.
 
 At June
30, 2009, our ballast inventory represented 40.4% of our total assets. Inventory
is manufactured in China and is shipped to our warehouse in Lincoln,
Nebraska.  The time from ordering the product to receipt of the
product can exceed 60 days.  We are currently working to reduce this
turnaround time to 45 days.  We maintain our inventory at levels that
are deemed reasonable based upon projected sales.
 
 At this
time, we do not anticipate purchasing or selling any significant equipment or
other assets in the near term. Neither do we anticipate any imminent or
significant changes in the number of our employees. We may, however, increase
the number of independent sales representatives in the event that we expand into
other markets or our current market significantly increases.
 
 We expect
that we will invest time, effort, and expense in the continued development and
refinement of our current and next generation ballasts, through our
relationships with lighting labs and the power companies.
 
 Liquidity
and Capital Resources; Anticipated Financing Needs
 
 For the
six-months ended June 30, 2009, we incurred a net operating loss aggregating
$1,080,060 which was the result of our efforts to secure funding to cover
working capital needs, marketing and advertising efforts to increase product
awareness, business development and other activities as discussed
above.
 
 Net cash
of $293,298 was used in operating activities during the six-month period ended
June 30, 2009, compared to $335,528 in cash used in operating activities during
the period ended June 30, 2008.  Net cash used in operating activities
for the six-month period ended June 30, 2009 is primarily attributable to the
$945,029 net loss, partially offset by $44,419 of amortization of original issue
discount, $101,597 of amortization of debt issuance cost, $534,805 of non-cash
interest expense related to issuance of warrants and beneficial conversion
features.
  17
 Index
  We had no
investing activities for the six-month period ended June 30, 2009 and $1,094 for
the six-month period ended June 30, 2008.
 
 Net cash
of $300,000 was provided by financing activities during the six-month period
ended June 30, 2009, compared to $819,354 of cash provided by financing
activities for the period ended June 30, 2008. Cash flows from financing
activities for the six-month period ended June 30, 2009 consisted entirely of
proceeds from notes payable totaling $300,000.
 
 More
specifically, March 25, 2009, the Company received cash proceeds of $150,000 on
a 90 day 10% Senior Secured Note.  Additionally, on May 20, 2009, the
Company issued a note payable for $150,000 in cash proceeds, which note bears
interest at a monthly rate of 2% and is due upon demand or the fulfillment of a
customer purchase order totaling $247,000.  In addition to this
funding and future working capital generated through anticipated revenue
increases from the sale of our current ballasts, we expect to seek additional
capital funding of approximately $2,000,000 for the final development and
introduction of our next generation ballast, to pay off our convertible note
with Gemini Master Fund, Ltd. (as described in Note 6 to the consolidated
financial statements), and for the purchase of an adequate supply of
inventory.  If we succeed in raising this money over the next three to
six months, it should give us the liquidity and resources to fund operations for
the foreseeable future.
 
 Additional
financing may not be available on terms favorable to us, especially in light of
current debt and equity markets.  If additional funds are raised by
the issuance of our equity securities, such as through the issuance and/or
exercise of common stock warrants, then existing stockholders will experience
dilution of their ownership interest. If additional funds are raised by the
issuance of debt or other types of (typically preferred) equity instruments,
then we may be subject to certain limitations in our operations, and issuance of
such securities may have rights senior to those of the then existing holders of
our common stock. If adequate funds are not available or not available on
acceptable terms, we may have to curtail our operations and may be unable to
fund expansion, develop or enhance products or respond to competitive
pressures.
 
 Critical
Accounting Policies
 
 The
discussion and analysis of the Company’s financial condition and results of
operations are based on its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and related disclosure of contingent assets and liabilities. Management
reviews its estimates on an on going basis. Management bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. While the Company’s critical accounting policies are described in
more detail in our Annual Report on Form 10-K for the year ended December 31,
2008, management believes the following accounting policies to be critical to
the judgments and estimates used in the preparation of its financial
statements:
 
 Revenue
Recognition:  We recognize revenue when persuasive evidence of an
arrangement exists, transfer of title has occurred, the selling price is fixed
or determinable, collectibility is reasonably assured and delivery has occurred
per the contract terms.
 
 Warranty
and return costs are estimated and accrued based on historical
rates.
 
 Accounts
Receivable and Allowance for Doubtful Accounts:  Accounts receivable
arise in the normal course of business by providing products to our
customers.  Accounts are written-off as they are deemed uncollectible
based upon a periodic review of the accounts.  As of June 30, 2009 and
2008, we have estimated that accounts receivable is fully collectible, and thus,
has not established an allowance for doubtful accounts.
  18
 Index
  Supplier
Concentrations and Inventory:  We maintain our inventory on a
perpetual basis utilizing the first-in first-out (FIFO)
method.  Inventories have been valued at the lower of cost or
market.  We have not recorded an obsolescence reserve for inventory at
June 30, 2009 and 2008 as all inventory is considered usable and market value is
above cost.
 
 Deferred
Financing Costs:  Costs and discounts related to the convertible note
payable issued by the Company on April 25, 2008, are being amortized and
accreted using the effective interest method over the term of the debt
instrument to April 2010 (see Note 6 of the consolidated financial
statements).
 
 
 Recently
Issued Accounting Pronouncements
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“FAS 168”).  While FAS 168 is not intended to
change accounting principles generally accepted in the United States, it will
change the way the Company references these accounting principles in its
Consolidated Financial Statements and Notes.  FAS 168 is effective for
interim or annual reporting periods ending after September 15,
2009.  The adoption of FAS 168 will change the Company’s
disclosures.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)” (“FAS 167”).  This
statement amends the timing, and considerations, of analyses performed to
determine if the Company’s variable interests give it a controlling financial
interest in a variable interest entity, as well as requires additional
disclosures.  FAS 167 is effective as of the first annual reporting
period beginning after November 15, 2009, for interim periods within the first
annual reporting period and thereafter.  The Company is currently
evaluating the impact of adopting FAS 167.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events” (“FAS 165”).  FAS 165 establishes general
standards of accounting and disclosures for events that occur after the balance
sheet date, but before financial statements are issued.  Application
of FAS 165 is required for interim or annual financial periods ending after June
15, 2009.  The adoption of FAS 165 changed the Company’s
disclosures.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 107-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP 107-1”).  FSP 107-1
amends Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about fair value of financial
instruments for interim and annual reporting periods.  FSP 107-1 is
effective for interim reporting periods ending after June 15,
2009.  The Company’s adoption of FSP 107-1 resulted in no additional
disclosures.
 
 OFF
BALANCE SHEET ARRANGEMENTS
 
 None.
 
 ITEM4T. CONTROLS AND PROCEDURES
 
 Management’s
Report On Internal Control Over Financial Reporting
 
 Under the
supervision of, and the participation of, our management, including our Chief
Executive Officer and Principal Financial Officer, we have conducted an
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this
Quarterly Report on Form 10-Q to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and is accumulated
and communicated to our management as appropriate to allow timely decisions
regarding required disclosure.
  19
 Index
  Based on
this evaluation and taking into account that certain material weaknesses existed
as of December 31, 2008, our Chief Executive Officer and Principal Financial
Officer have each concluded that our disclosure controls and procedures were not
effective.  As a result of this conclusion, the financial statements
for the period covered by this Quarterly Report on Form 10-Q were prepared with
particular attention to the material weaknesses in internal control over
financial reporting previously disclosed. Notwithstanding the material
weaknesses in internal controls that continue to exist as of June 30, 2009, we
have concluded that the financial statements included in this Quarterly Report
on Form 10-Q present fairly, the financial position, results of operations and
cash flows of the Company as required for interim financial
statements.
 
 Changes
in Internal Controls
 
 During
the fiscal quarter ended June 30, 2009, there was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Management has
concluded that the material weaknesses in internal control as described in Item
9A(T) of the Company’s Form 10-K for the year ended December 31, 2008, have not
been remediated.  Due to the small number of employees dealing with
general administrative and financial matters and the expenses associated with
increases to remediate the disclosure controls and procedures that have been
identified, the Company continued to operate without changes to its internal
controls over financial reporting for the period covered by this Quarterly
Report on Form 10-Q while continuing to seek the expertise it needs to remediate
the material weaknesses.
 
 PART II – OTHER
INFORMATION
 
 ITEM1. LEGAL PROCEEDINGS
 
 None.
 
 ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 ITEM3. DEFAULTS ON SENIOR SECURITIES
 
 None.
 
 ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None.
 
 ITEM 5.
OTHER INFORMATION
 
 On August
25, 2009, John Hanson resigned as a director of Axis Technologies Group, Inc.
(the “Company”).   On August 26, 2009, David Petersen also
resigned as a director of the Company.   There were no reasons
given by Mr. Hanson or Petersen included with their
resignations.  There was no disagreement or dispute between Mr.
Petersen and the Company regarding operations, policies, or practices which led
to his resignation. However, with respect to Mr. Hanson, the Company believes
Mr. Hanson had  disagreements with the Company’s management on
operations, policies and practices of the Company including when and how often
to hold shareholders meetings; therefore, we believe these disagreements led to
his resignation .  Mr. Hanson’s and Mr. Petersen’s resignations were
effective immediately. The remaining directors did accept their
resignations.
  There
were no additional items that occurred during the period of this report which
would have been required to be reported in a Form 8-K which have not been
reported.
  20
 Index
  ITEM6
 . EXHIBITS
 
 ExhibitNumber
              
              Description31.1
              
              Certification
      of Chief Executive Officer of Axis Technologies Group, Inc. required by
      Rule 13a-14(1) or Rule 15d - 14(a) of the
      Securities  Exchange  Act  of  1934,  as  adopted
      pursuant to Section 302 of the
      Sarbanes-Oxley  Act  of  2002.31.2
              
              Certification
      of Principal Financial Officer of Axis Technologies Group,
      Inc.   required by Rule 13a-14(1) or Rule 15d-14(a) of the
      Securities  Exchange  Act  of  1934,  as  adopted
      pursuant to Section 302 of the
      Sarbanes-Oxley  Act  of  2002.32.1
              
              Certification
      of Chief Executive Officer of Axis Technologies Group, Inc. pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18
      U.S.C. 63.32.2
              
              Certification
      of Principal Financial Officer of Axis Technologies Group,
      Inc.  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      and Section 1350 of 18 U.S.C. 63.
 
 SIGNATURES
 
 In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
 Axis
Technologies Group, Inc.
 
 Date:  December
23, 2009
 
 By:
              /s/
      Kipton HirschbachKipton
      HirschbachChief
      Executive OfficerBy:
              /s/
      James EricksonJames
      EricksonChief
      Accounting Officer andPrincipal
      Financial Officer







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