UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q/A


(Amendment No. 1)





x        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30, 2010





o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____ to _____





Commission File Number: 000-52792





SUSPECT DETECTION SYSTEMS INC.


(Exact name of small business issuer as specified in its charter)





Delaware

98-0511645(State of incorporation)

(IRS Employer ID Number)





150 West 56th Street, Suite 4005,  New York, NY 10019


(Address of principal executive offices)





972 (2) 500-1128


(Issuer's telephone number)





________________________________________________________________


(Former name, former address and former fiscal year, if changed since last report)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o





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 x





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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer
o

Accelerated filer
oNon-accelerated filer
o

Smaller reporting company
x(Do not check if a smaller reporting company)





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





As of November 15, 2010, 74,055,493 shares of common stock, par value $0.0001 per share, were issued and outstanding.










TABLE OF CONTENTS





PagePART IItem 1. Financial Statements
F-1Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
3Item 3. Quantitative and Qualitative Disclosures About Market Risk
8Item 4(T). Controls and Procedures
8PART IIItem 1. Legal Proceedings
9Item IA. Risk Factors
9Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
9Item 3. Defaults Upon Senior Securities
9Item 4. Removed and Reserved
9Item 5. Other Information
9Item 6. Exhibits
9










PART I


FINANCIAL INFORMATION





Item 1.    Financial Statements.




SUSPECT DETECTION SYSTEMS INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)


SEPTEMBER 30, 2010, AND 2009


(Unaudited)




Restated Consolidated Financial Statements-Consolidated Balance Sheets as of September 30, 2010, and December 31, 2009
F-2Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010, and 2009
F-3Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2010, and 2009
F-4Notes to Consolidated Financial Statements September 30, 2010, and 2009
F-6




F - 1




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS (NOTE 2) (RESTATED)
 AS OF SEPTEMBER 30, 2010, AND DECEMBER 31, 2009 (NOTE 3)
 (Unaudited)


ASSETSSeptember 30,


December 31,2010


2009(Restated)


(Restated)Current Assets:Cash and cash equivalents

$
637,110


$
701,931Restricted cash


15,827



15,827Inventory


100,588



55,281Prepaid expenses


196,574



60,343Total current assets


950,099



833,382Property and Equipment:Property and equipment


59,046



30,034Less - Accumulated depreciation


(23,592
)


(17,534
)Property and equipment, net


35,454



12,500Other Assets:Severance pay fund


82,139



45,563Prepaid expenses, non-current


39,507



10,578Goodwill


1,033,964



1,033,964Total other assets


1,155,610



1,090,105Total Assets

$
2,141,163


$
1,935,987LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable - Trade

$
89,878


$
9,175Accrued liabilities


242,231



161,161Advances from customers


706,870



919,400Deferred revenues


169,742



55,631Due to Directors and stockholders


155,113



99,541Total current liabilities


1,363,834



1,244,908Long-term Debt:Accrued severance pay


82,139



84,315Total liabilities


1,445,973



1,329,223Commitments and ContingenciesStockholders' Equity:Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 74,055,493 and 71,822,893 shares issued and outstanding in 2010 and 2009, respectively


7,405



7,182Additional paid-in capital


2,581,246



2,239,248Common stock subscribed


-



25,000Accumulated (deficit)


(1,722,025
)


(1,431,535
)Total Stockholders' Equity


866,626



839,895Less - Noncontrolling Interest


(171,436
)


(233,131
)Total stockholders' equity, Net


695,190



606,764Total Liabilities and Stockholders' Equity

$
2,141,163


$
1,935,987




The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.




F - 2




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 2) (RESTATED)

FOR THE THREE AND NINEMONTHS ENDED SEPTEMBER 30, 2010, AND 2009 (NOTE 3)

(Unaudited)


Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009(Restated)





(Restated)Revenues, net

$
259,080


$
401,512


$
1,596,682


$
825,253Cost of Goods Sold


72,384



34,264



142,132



86,450Gross Profit


186,696



367,248



1,454,550



738,803Expenses:Research and development


108,692



48,293



318,553



120,723Selling, general and administrative


226,158



609,996



1,345,576



1,387,136Total operating expenses


334,850



658,289



1,664,129



1,507,859Income (Loss) from Operations


(148,154
)


(291,041
)


(209,579
)


(769,056
)Other Income (Expense):Interest income


-



-



-



-Interest (expense)


(19,216
)


(16,158
)


(19,216
)


(9,117
)Total other income (expense)


(19,216
)


(16,158
)


(19,216
)


(9,117
)Provision for Income Taxes


-



-



-



-Net (Loss) Before Non controlling Interest


(167,370
)


(307,199
)


(228,795
)


(778,173
)Less - (Income) Loss Attributable toNon controlling Interest


44,971



(23,887
)


(61,695
)


(107,949
)Net (Loss)

$
(122,399
)

$
(283,312
)

$
(290,490
)

$
(670,224
)(Loss) Per Common Share:(Loss) per common share - Basic and Diluted

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.01
)Weighted Average Number of Common SharesOutstanding - Basic and Diluted


74,055,493



68,699,471



73,676,117



67,456,952





The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.




F - 3




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2) (RESTATED)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010, AND 2009 (NOTE 3)
 (Unaudited)


Nine Months Ended

September 30,2010


2009(Restated)Operating Activities:Net (loss)

$
(228,795
)

$
(778,173
)Adjustments to reconcile net (loss) to net cash (used in) operating activities:Common stock issued for officers' compensation


18,000



25,500Common stock issued for consulting services


149,000



112,500Stock-based compensation


55,221



-Depreciation


6,058



2,223Changes in Assets and Liabilities-Inventory


(45,307
)


23,822Prepaid expenses


(165,160
)


127,485Accounts payable - Trade


80,703



5,462Accrued liabilities


81,070



125,188Advances from customers


(212,530
)


(130,973
)Accrued severance pay


(2,176
)


(6,974
)Deferred revenues


114,111



-Net Cash (Used in) Operating Activities


(149,805
)


(493,940
)Investing Activities:Cash acquired in business combination


-



689,973Severance fund


(36,576
)


-Purchases of property and equipment


(29,012
)


(4,063
)Net Cash (Used in) Provided by Investing Activities


(65,588
)


685,910Financing Activities:Issuance of common stock for cash


95,000



257,000Due from related party - SDS


-



28,000Due to Director and stockholder


55,572



92,318Net Cash Provided by Financing Activities


150,572



377,318Net Increase (Decrease) in Cash


(64,821
)


569,288Cash and Cash Equivalents - Beginning of Period


717,758



179,565Cash and Cash Equivalents - End of Period

$
652,937


$
748,853Cash and Cash Equivalents - End of Period Consisting of:Cash in bank

$
637,110


$
733,026Restricted cash


15,827



15,827Total

$
652,937


$
748,853Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
-


$
-Income taxes

$
-


$
-





The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.




F - 4


SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2) (RESTATED)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010, AND 2009 (NOTE 3)
 (Unaudited)
  Supplemental Information of Noncash Investing and Financing Activities:
  On January 16, 2009, SDS Inc. issued 120,000 (post forward stock split) shares to its Chief Financial Officer, Mr. Zwebner for services rendered. The transaction was valued at $18,000.
  On May 6, 2009, SDS Inc. issued 50,000 shares to its Secretary, Treasurer, and Director, Mr. Julius Klein, for services rendered. The transaction was valued at $7,500.
  On May 6, 2009, SDS Inc. issued 750,000 shares to a consulting company for services rendered. The transaction was valued at $112,500.
  On August 18, 2009, the Company acquired an additional seven (7) percent of the capital stock of SDS - Israel by issuing 3,199,891 shares of common stock at a per share value of $0.15.  The transaction was recorded as an equity investment transaction in the accompanying consolidated balance sheets.
  On January, 6, 2010, the Company issued 152,600 shares of common stock to a consultant as a finders fee valued at $22,890.
 
 On January 6, 2010, the Company issued 660,000 shares of common stock to consultants for services valued at $99,000.
  On April 10, 2010, the Company issued 500,000 shares of common stock to a consultant for services valued at $50,000.
  On April 23, 2010, the Company issued 120,000 shares of common stock to its Chief Financial
  Officer, Mr. Zwebner, for services rendered. The transaction was valued at $18,000.
   The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
   F - 5


SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)
  1)           Summary of Significant Accounting Policies








Basis of Presentation and Organization




Suspect Detection Systems Inc. (“SDS Inc.” or the “Company”) is a Delaware corporation that conducts its operations through its 58 percent owned subsidiary, Suspect Detection Systems Ltd., an Israeli Corporation (“SDS - Israel”).  The Company was incorporated under the laws of the State of Delaware on October 5, 2006, as PCMT Corporation.  On December 24, 2008, the Company’s stockholders resolved to change its name from PCMT Corporation to Suspect Detection Systems Inc.  On January 27, 2009, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of Delaware to reflect this change.  The Company was in the development stage during the year ended December 31, 2008.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  The accompanying consolidated financial statements were prepared from the accounts of the Company and its subsidiary under the accrual basis of accounting.





On January 20, 2009, SDS Inc. completed a business combination for the purchase of 51 percent of the issued and outstanding shares of SDS – Israel for consideration of $1,100,000.  The Company incurred an additional $35,000 in acquisition costs related to legal and accounting fees.  The business combination was accounted for by the purchase method and accordingly, the purchase price has been allocated to the estimated fair values of the respective assets acquired and liabilities assumed of SDS – Israel, with the remaining representing goodwill in the amount of $1,033,964.  The results of operations of SDS – Israel have been included in the consolidated financial statements of the Company commencing January 20, 2009.





In July 9, 2009, SDS Inc. entered into an Exchange Agreement (the “Exchange Agreement”) with theNorthern Group LP ("NG"), pursuant to which NG exchanged 170,295 ordinary shares of SDS – Israel for 3,199,891 of SDS Inc’s common stock.  The 170,295 shares of SDS- Israel represented 7 percent of the outstanding shares of SDS-Israel and increased SDS Inc.’s ownership interest in SDS- Israel to 58 percent.  The acquisition of the additional equity interest was accounted as an equity transaction.  The increased percentage of ownership of SDS – Israel, amounting to 58 percent, has been applied to the operations of this subsidiary from July 9, 2009, through December 31, 2009.




Unaudited Interim Financial Statements





The accompanying consolidated financial statements of the Company as of September 30, 2010, and December 31, 2009, and for the three and nine months ended September 30, 2010, and 2009, are unaudited.  However, in the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of September 30, 2010, and December 31, 2009, and the results of its operations and its cash flows for the three and nine months ended September 30, 2010, and 2009.  These results are not necessarily indicative of the results expected for the calendar year ending December 31, 2010.  The accompanying consolidated financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States of America.  Refer to the Company’s audited financial statements as of December 31, 2009, filed with the SEC for additional information, including significant accounting policies.





Principles of Consolidation




The consolidated financial statements include the accounts of the Company and its 58 percent-owned Israeli subsidiary, Suspect Detection Systems, Ltd.  All significant intercompany accounts and transactions have been eliminated in consolidation.




F - 6




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


Cash and Cash Equivalents





For purposes of reporting within the consolidated statements of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.





Revenue Recognition





The Company recognizes revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.




Loss per Common Share





Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the periods.  Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  There were no dilutive financial instruments issued or outstanding for the three and nine months ended September 30, 2010, and 2009.




Income Taxes





The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.”  As per ASC 740, deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes.  The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.




The Company maintains a valuation allowance with respect to deferred tax assets.  SDS Inc. establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration SDS Inc.’s financial position and results of operations for the current period.  Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carryforward period under the Federal tax laws.




Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset.  Any change in the valuation allowance will be included in income in the year of the change in estimate.




Stock-based Compensation




The Company accounts for stock-based compensation in accordance with ASC Topics 505 and 718.  Stock-based compensation for stock options is measured based on the estimated fair value of each award on the date of grant using the Black-Scholes valuation model.  Stock-based compensation for restricted shares is measured based on the closing fair market value of the Company's common stock price on the date of grate.  The Company recognizes stock-based compensation costs as expense ratably on a straight-line basis over the requisite service period.




Fair Value of Financial Instruments




The Company estimates the fair value of financial instruments using the available market information and valuation methods.  Considerable judgment is required in estimating fair value.  Accordingly, the estimates of fair value may not be indicative of the amounts SDS Inc. could realize in a current market exchange.  As of September 30, 2010, and December 31, 2009, the carrying value of financial instruments approximated fair value due to the short-term nature and maturity of these instruments.




F - 7




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


Concentration of Risk





As of September 30, 2010, and December 31, 2009, the Company maintained its cash account at two commercial banks.  The balances in the accounts are subject to FDIC coverage.




Common Stock Registration Expenses




The Company considers incremental costs and expenses related to the registration of equity securities with the SEC, whether by contractual arrangement as of a certain date or by demand, to be unrelated to original issuance transactions.  As such, subsequent registration costs and expenses are reflected in the accompanying financial statements as general and administrative expenses, and are expensed as incurred.




Lease Obligations




All noncancellable leases with an initial term greater than one year are categorized as either capital or operating leases.  Assets recorded under capital leases are amortized according to the methods employed for property and equipment or over the term of the related lease, if shorter.




Goodwill




Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in a business combination.  In accordance with ASC 350, “Goodwill and Other Intangible Assets,” goodwill is not amortized but reviewed annually for impairment.




Estimates




The consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America.  The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of September 30, 2010, and December 31, 2009, and expenses for the nine months ended September 30, 2010, and 2009.  Actual results could differ from those estimates made by management.




Reclassification




Certain prior period amounts have been reclassified to conform to the current period presentation.




(2)           Going Concern





The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure.  The Company has incurred a loss of $290,490 for the nine months ended September 30, 2010 (2009 - $682,232) and, as of September 30, 2010, and December 31, 2009, the Company had an accumulated deficit of approximately $1,723,985 (2009 - $1,433,495).  The Company’s ability to continue as a going concern is uncertain.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.





While management of the Company believes that the Company will be successful in its current and planned operating activities, there can be no assurance that the Company will be successful in the achievement of sales of its products that will generate sufficient revenues to earn a profit and sustain the operations of the Company.  The Company also intends to conduct additional capital formation activities through the issuance of its common stock and loans from related parties.




F - 8





SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has not established sufficient sources of revenues to cover its operating costs and expenses.  As such, it has incurred significant operating losses since inception.  Further, as of September 30, 2010, and December 31, 2009, the cash resources of the Company were insufficient to meet its planned business objectives.  These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.





(3)           Restatement





Subsequent to December 31, 2009, management of the Company determined that in accordance with FASB ASC 810-10-45, the carrying value of the goodwill, and the related accumulated deficit, and additional paid-in capital, and noncontrolling interest for the period ended December 31, 2009, resulting from the exchange of 3,199,891 shares of common stock of the Company for 170,295 ordinary shares of SDS – Israel for an additional seven percent interest in the equity ownership of SDS – Israel (where the Company already owned the controlling interest), was overstated by $291,690 for goodwill, overstated by $478,125 for the additional paid in capital, overstated by $1,960 for accumulated deficit, and overstated by $184,475 for the noncontrolling interest.  (See Notes 5 and 9 for additional information).  The Company corrected the error by decreasing goodwill by $291,690, and decreased its accumulated deficit by $1,960, additional paid in capital by $478,125 and noncontrolling interest by $184,475, respectively.  The adjustment had a minor impact on the net (loss) attributable to the Company for the period ended December 31, 2009, amounting to a decrease in the net (loss) of $1,960.  (Loss) per share – basic and diluted for the period remained unchanged.





(4)           Appointment of Officers




On October 18, 2007, SDS Inc. appointed Mr. Asher Zwebner as Chief Financial Officer (“CFO”).  On October 23, 2007, an employment agreement was entered into with the CFO.  This agreement provides that the CFO will receive a base salary of $3,000 per quarter, and $5,000 per annual audit.  This agreement is effective until the next annual general meeting of the stockholders of the Company or until his successor is elected or appointed.




On January 23, 2008, the Company appointed Mr. Constantin Stukalin as Treasurer.  This office will be held by the individual until the next annual general meeting of the stockholders of SDS Inc. or until a successor is elected or appointed.




On April 30, 2008, Mr. Yosef Nocham Bernstein resigned as the Company’s Secretary and tendered his resignation as a Director, effective May 31, 2008.




Mr. Nachman Shlomo Kohen resigned as a Director of SDS Inc. and tendered his resignation as the Company’s President, effective May 5, 2008.




On the same date, Mr. Asher Zwebner was appointed as the Company’s interim Chief Executive Officer, and was elected as a Director of SDS Inc.




On January 12, 2010, Mr. Asher Zwebner, the Chief Executive Officer and Chief Financial Officer of the Registrant, resigned as the Chief Executive Officer.  Mr. Zwebner remains as Chief Financial Officer and a Director of the Company.




On January 13, 2010, the Board of Directors of the Company appointed Mr. Gil Boosidana as Chief Executive Officer.




On January 13, 2010, the Board of Directors of the Company appointed Mr. Yoav Krill as its Chairman.




F - 9




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


(5)           Common Stock




On January 16, 2009, the Company issued 120,000 shares of common stock at par $0.0001, valued at $18,000, to an officer and Director for the services provided.





On January 19, 2009, the former Secretary and Director of SDS Inc. returned 7,000,000 shares of SDS Inc.’s common stock, which shares were cancelled.





In April 2009, SDS Inc. began a fifth capital formation activity through a Private Placement Offering (“PPO #5”), exempt from registration under the Securities Act of 1933, to raise up to $2,500,000 through the issuance of 16,666,666 Units.  Each Unit consists of one share of common stock of the Company, and one warrant with the exercise price at $0.25 per share, which expired one year from the date of subscription, and one warrant with the exercise price at $0.375 per share, which will be expired three years from the date of subscription.  As of December 31, 2009, the Company had issued 1,633,334 shares of common stock subscribed for proceeds of $245,000.




On May 6, 2009, SDS Inc. issued 50,000 shares to its Secretary, Treasurer, and Director, Mr. Julius Klein, for services rendered.  The transaction was valued at $7,500.





On May 6, 2009, SDS Inc. issued 750,000 shares to a consulting company for services rendered.  The transaction was valued at $112,500.





In July 2009, SDS Inc. began a sixth capital formation activity through a Private Placement Offering (“PPO #6”), exempt from registration under the Securities Act of 1933, to raise up to $1,500,000 through the issuance of 10,000,000 Units.  Each Unit consists of one share of common stock of the Company, and one warrant with the exercise price at $0.25 per share, which expired one year from the date of subscription, and one warrant with the exercise price at $0.375 per share, which will be expired three years from the date of subscription.  As of December 31, 2009, the Company had issued 80,000 shares of common stock subscribed for proceeds of $12,000.




On August 18, 2009, the Company issued 3,199,891 shares of common stock to NG-The Northern Group LP ("NG"), a stockholder of SDS- Israel, in accordance with the terms of the Exchange Agreement, entered between the Company and NG on July 9, 2009, to exchange 170,295 shares of SDS-Israel common stock that NG held.  As result of this transaction, the Company acquired an additional 7 percent of ownership interest in SDS- Israel.  The acquisition was recorded as an equity transaction in the accompanying consolidated financial statements.




On January 6, 2010, the Company issued 152,600 shares of common stock to a consultant for a finder’s fee valued at $22,890.




On January 6, 2010, the Company issued 660,000 shares of common stock to consultants for services valued at $99,000.




On January 6, 2010, the Company issued 166,667 shares of common stock 166,667 Class A Warrants, and 166,667 Class B Warrants to Asher Gil Mediouni, a non-US person, in consideration for a stock subscription that was paid in 2009.  The warrants were considered as non-detachable.




On January 29, 2010, the Company issued 300,000 shares of common stock, 300,000 Class A Warrants, and 300,000 Class B Warrants to Asher Gil Mediouni for a cash payment of $45,000.  The warrants were considered as non-detachable.




On March 24, 2010, the Company issued 333,333 shares of common stock, 333,333 Class A Warrants and 333,333 Class B Warrants to Avishai Goldberg Orner for a cash payment of $50,000.  The warrants were considered as non-detachable.




On April 10, 2010, the Company issued 500,000 shares of common stock to a consultant for services provided.  These services were valued at $50,000.




F - 10




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)




On April 23, 2010, the Company issued 120,000 shares of common stock at par $0.0001, valued at $18,000, to an officer and Director for the services provided.





Stock Options





On January 13, 2010, the Company appointed Mr. Yoav Krill as Chairman of the Board of Directors.  In connection the appointment, Mr. Krill was granted 1,500,000 options of common stock of the Company, exercisable at $0.15 per share, from the stock option plan adopted by the Company.  A total of 250,000 options vested immediately, while the remaining options vest at a rate of 104,167 options each calendar quarter over three years.  Vesting of these options commenced on March 31, 2010.  The options terminate forty-eight (48) months from the date of vesting.




As of the date of the grant, the expected term of the options was 7 years, expected volatility was 158.87 percent, expected dividend rate was 0 percent, and the risk free rate of return was 3.28 percent.




The following table summarizes stock option activity for the Company during the nine months ended September 30, 2010:


Options


Weighted Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term


Aggregate

Intrinsic

ValueOutstanding December 31, 2009


-



-



-



-Granted


1,500,000


$
0.15



-



-Exercised


-



-



-



-Forfeited or expired


-



-



-



-Outstanding September 30, 2010


1,500,000


$
0.15



3.20



-Vested & Exercisable at September 30, 2010


562,499


$
0.15



3.20



-


As of September 30, 2010, the total unrecognized compensation cost related to stock options amounted to $118,330, which will be recognized over the remaining requisite service period through December 2013.




(6)           Income Taxes




The provision (benefit) for income taxes for the nine months ended September 30, 2010, and 2009, were as follows (assuming a 23 percent effective tax rate):




Nine Months Ended

September 30,2010


2009Current Tax Provision:Federal and state-Taxable income

$
-


$
-Total current tax provision

$
-


$
-Deferred Tax Provision:Federal and state-Loss carryforwards

$
66,813


$
154,152Change in valuation allowance


(66,813
)


(154,152
)Total deferred tax provision

$
-


$
-
  F - 11
  SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


SDS Inc. had deferred income tax assets as of September 30, 2010, and December 31, 2009, as follows:




As of

September 30,

2010


As of

December 31,

2009Loss carryforwards

$
396,066


$
329,253Less - Valuation allowance


(396,066
)


(329,253
)Total net deferred tax assets

$
-


$
-




The Company provided a valuation allowance equal to the deferred income tax assets for the nine months ended September 30, 2010, and 2009, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.




As of September 30, 2010, and December 31, 2009, the Company had approximately $1,723,985 and $1,433,495 in tax loss carryforwards that can be utilized in future periods to reduce taxable income, and will expire in various periods through the year 2030.




(7)           Related Party Transactions




Effective October 5, 2006, SDS Inc. entered into a verbal agreement with an individual who is a former Director, President, and Treasurer of SDS Inc., and current stockholder of the Company, to lease 250 square feet of office space for operations in Jerusalem, Israel.  The monthly lease rental amount was $300, and the term of the lease arrangement was month-to-month.  At the end of the March 2009, the Company terminated the verbal agreement regarding the lease of office space.





On October 23, 2007, SDS Inc. entered into an employment agreement with its CFO.  This agreement provides that the CFO will receive a base salary of $3,000 per quarter, and $5,000 per annual audit.  This agreement is effective until the next annual general meeting of the stockholders of the Company or until his successor is elected or appointed.  During the nine months ended September 30, 2010, and 2009, SDS Inc. recognized $15,500 and $6,000, respectively in officer’s compensation expense.




As described in Note 4, on January 16, 2009, the Company issued 120,000 shares of common stock at par $0.0001, valued at $18,000, to an officer and Director for the services provided.





As described in Note 4, on May 6, 2009, SDS Inc. issued 50,000 shares to its Secretary, Treasurer, and Director, Mr. Julius Klein for services rendered.  The transaction was valued at $7,500.





As of September 30, 2010, the Company owed $155,113 to the Directors of SDS – Israel.  The loan was provided for working capital purposes, and is unsecured, non-interest bearing, and has no terms for repayment.





(8)           Commitments





On January 20, 2009, an employment agreement was entered into between SDS - Israel and its Chief Executive Officer (CEO).  This agreement provides that the CEO will receive a base salary of NIS 63,000 per month, plus monthly contributions by SDS - Israel of an aggregate of 20.84 percent of the base salary towards the cost of the CEO’s life insurance, pension savings, disability insurance, severance compensation fund, and professional education.  SDS Inc. has agreed to guarantee the performance by SDS - Israel of all its obligations under the employment agreement.




F - 12




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)


On April 1, 2009, the Company entered into a consulting agreement with L.A. Investments Ltd. (the “Consultant”).  The Consultant agreed to render assistance and advice to the Company relating to capitalization and financing of the Company.  The consulting agreement is for a term of three years, commencing on April 1, 2009.  In consideration for such services, the Company agreed to compensate the Consultant in the amount of $6,500 quarterly, commencing on April 1, 2009.




In addition, the Company agreed to issue to the Consultant warrants to purchase an aggregate of 1,800,000 shares of the Company’s common stock.  On each of April 1, 2009, September 1, 2009, March 1, 2010, and September 1, 2010, provided that the Consulting Agreement is still in force, the Company shall issue a warrant to purchase 450,000 shares of the Company’s common stock.  Each common stock purchase warrant entitles the Consultant to purchase one share of the Company’s common stock at an exercise price of $0.15 per share and is exercisable for a period of two years.




(9)           Business Combination





On October 18, 2007, SDS Inc. entered into a Letter Agreement with SDS - Israel.  The Letter Agreement allowed the Company to conduct a due diligence review of SDS - Israel and its technology for the purpose of entering into a future business combination transaction on terms and conditions to be negotiated.  As part of the Letter Agreement, SDS Inc. committed to raise $1,500,000 and agreed to advance proceeds of $60,000 to SDS - Israel.  As of December 31, 2007, SDS Inc. had paid SDS - Israel $60,000.  In January 2008, SDS Inc. and SDS - Israel amended the Letter Agreement such that the Company agreed to advance SDS - Israel an additional $30,000 each month commencing January 2008 until the consummation or termination of the Letter Agreement.  The amount of $60,000 previously paid by SDS Inc. to SDS - Israel as well as each monthly payment of $30,000 served to reduce the $1,500,000 which SDS Inc. was committed to raise.  In May 2008, SDS Inc. and SDS - Israel again amended the Letter Agreement such that the Company agreed to advance SDS - Israel $80,000 each month commencing May 2008 until the consummation or termination of the Letter Agreement.  In August 2008, SDS Inc. and SDS - Israel again amended the Letter Agreement such that the Company agreed to advance SDS - Israel $100,000 each month commencing August 2008 until the consummation or termination of the Letter Agreement.  In December 2008, SDS Inc. and SDS - Israel entered into an Investment Agreement and the Company agreed to advance SDS - Israel an additional $280,000 and SDS - Israel issued to SDS Inc. 1,218,062 shares of SDS – Israel’s capital stock, par value NIS 0.01 per share, which represented 51 percent of the issued and outstanding share capital of SDS - Israel.  As of September 30, 2010, SDS Inc. had paid SDS - Israel a cumulative total of $1,100,000.




On November 14, 2007, the Company entered into a Letter of Intent with SDS - Israel, pursuant to which SDS Inc. intended to acquire all of the issued and outstanding capital stock of SDS - Israel.  In consideration thereof, SDS Inc. is to issue to the stockholders of SDS - Israel no less than 28,600,000 (post forward stock split) shares of SDS Inc.’s common stock, or such number of shares of SDS Inc.’s common stock representing not less than 31 percent of SDS Inc.’s issued and outstanding shares of common stock at the time of closing.  The closing of the transaction was to take place after SDS Inc. had raised a minimum of $500,000 from PPO #3.  SDS Inc. also agreed to pay up to $20,000 in accounting fees to obtain Israel Tax Authority approval of the transaction, and up to $15,000 in legal fees.  As December 31, 2009, SDS Inc. had paid $15,000 in legal fees, and $20,000 in accounting fees in addition to the $1,100,000 described above for a total $1,135,000.




On April 30, 2008, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) between SDS Inc. and SDS - Israel.  Pursuant to the Agreement, SDS Inc. was to acquire on the closing date of the agreement 100 percent of the outstanding capital stock of SDS - Israel (1,170,295 shares), in exchange for 21,768,032 newly issued shares of its common stock, and options to purchase 6,831,968 shares of its common stock at an exercise price of $0.0001 per share at any time on or before the 10th anniversary of issuance of SDS Inc.’s options.  The parties agreed that the fair value of the transaction was $4,290,000.  On the closing date of the Agreement, SDS - Israel was to become a wholly owned subsidiary of SDS Inc.  As a result of the Agreement, the stockholders of SDS - Israel were to become the beneficial owners of approximately 31 percent of SDS Inc.’s outstanding common stock on the closing date of the Agreement.  On December 18, 2008, the Company and SDS - Israel entered into a Termination Agreement and terminated the Agreement, effective immediately.




F - 13




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)




On January 20, 2009, SDS Inc. and SDS - Israel completed the transactions under the Exchange Agreement.  At closing, SDS - Israel issued 1,218,062 ordinary shares, par value NIS 0.01 per share, representing 51 percent of its issued and outstanding share capital to SDS Inc., as consideration for $280,000 paid by SDS Inc. to SDS - Israel on December 22, 2008, and $820,000 previously paid by SDS Inc. to SDS - Israel pursuant to the letter agreements dated October 18, 2007, November 14, 2007, January 10, 2008, May 18, 2008, and October 20, 2008.




The following table summarizes the fair values of the assets acquired and liabilities assumed as of January 20, 2009 (the acquisition date):




Current assets

$
783,383Property and equipment


16,019Severance pay fund


40,827Prepaid expenses


28,360Total assets acquired

$
868,589Current Liabilities

$
(622,679
)Accrued severance fund


(47,801
)Total Liabilities assumed

$
(670,480
)Net Assets acquired

$
198,109Non- controlling interest

$
(97,073
)Total purchase price

$
1,135,000Excess of purchase price over value of net assets acquired

$
1,033,964


On December 18, 2008 SDS Inc. and SDS –Israel entered into an Investment Agreement (“Investment Agreement”).  The Investment Agreement provides for good faith negotiations of a second agreement (the “Second Agreement”), following the closing of the Investment Agreement, pursuant to which: (i) SDS Inc. will grant options to the shareholders of SDS-Israel to exchange their SDS-Israel ordinary shares into shares of the SDS Inc’s common stock; (ii) SDS Inc. will grant options to the holders of options to purchase SDS Inc ordinary shares to exchange such options into options to purchase shares of SDS Inc’s common stock; (iii) SDS Inc. will grant additional options, to Mr. Shabtai Shoval and certain SDS-Israel employees or consultants, to purchase new SDS ordinary shares; and (iv) SDS Inc will grant rights to Mr. Shabtai Shoval and said SDS-Israel employees or consultants to exchange all or any part of the additional SDS options into options to purchase shares of SDS Inc’s common stock.




In accordance with the terms of the Investment Agreement, SDS Inc. entered into an Exchange Agreement (the “Exchange Agreement”), dated July 9, 2009, with NG, pursuant to which NG exchanged all of NG’s SDS- Israel ordinary shares of 170,295 for 3,199,891 shares of SDS Inc’s common stock.  As a result of this transaction, the Company acquired an additional 7 percent of ownership interest in SDS-Israel.  The acquisition was recorded as an equity transaction in the accompanying consolidated financial statements.




Also on July 9, 2009, SDS Inc. also entered into a warrant agreement (the “Warrant Agreement”) with NG, pursuant to which, SDS Inc. issued 2,250,000 stock purchase warrants (the “Warrants”) to NG.  Each Warrant grants NG the right to purchase one share of SDS Inc’s common stock, commencing on July 9, 2009, and terminating on July 8, 2011, at an exercise price of $0.15 per Warrant Share.  As a condition to the exchange for all the SDS- Israel ordinary shares of 170,295 for 3,199,891 shares of SDS Inc’s common stock, NG agreed not to sell any shares of SDS Inc’s common stock prior to the one-year anniversary of the agreement.  As of May 17, 2010, the Company had not issue any warrants.




F - 14




SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 SEPTEMBER 30, 2010, AND 2009
 (Unaudited)




On December 24, 2008, SDS Inc.’s shareholders resolved to change its name from PCMT Corporation to Suspect Detection Systems, Inc.  On January 27, 2009, the Company filed with the Secretary of State of Delaware an amendment to its Certificate of Incorporation to reflect this change.




SDS - Israel was incorporated under the Companies Law, 5759-1999, of the State of Israel in 2004.  SDS – Israel specializes in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  SDS – Israel completed the development of its “Cognito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings.  Cognito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed and distributed.  The front-end test station serves as the point of contact with the individual being examined.  The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases.  A provisional patent application has been issued for the Cognito line of products in the United States.  SDS – Israel is also engaged in the development of behavior based screening technologies for the checkpoint screening market.




(10)           Recent Accounting Pronouncements




Effective July 1, 2009, the Company adopted FASB ASC Topic 105-10, “Generally Accepted Accounting Principles – Overall” (“Topic 105-10”).  Topic 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASU’s”).  The FASB will not consider ASU’s as authoritative in their own right.  ASU’s will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been updated for the Codification.




In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements.”  This update requires additional disclosure within the roll forward of activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair value hierarchy.  In addition, the update requires enhanced disclosures of the valuation techniques and inputs used in the fair value measurements within Levels 2 and 3.  The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosure of purchases, sales, issuances, and settlements of Level 3 measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010.  As ASU 2010-06 only requires enhanced disclosures, the Company does not expect that the adoption of this update will have a material effect on its financial statements.




In February 2010, the FASB issued ASU No. 2010-09, "Amendments to Certain Recognition and Disclosure Requirements,” which eliminates the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events.  ASC No. 2010-09 is effective for its fiscal quarter beginning after December 15, 2010.  The adoption of ASC No. 2010-06 will not have a material impact on the Company's financial statements.




Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.





F - 15





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





As used in this Form 10-Q, references to “Suspect,” the “Company,” “we,” “our” or “us” refer to Suspect Detection Systems, Inc. unless the context otherwise indicates.





Forward-Looking Statements





The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.





For a description of such risks and uncertainties refer to our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 14, 2010. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.





Corporate Background





The Company was incorporated under the General Corporation Law of the State of Delaware on October 5, 2006.  Initially the Company was focused on the business of offering computer hardware and software products to religious consumers, with an emphasis on ultra-orthodox Jewish communities in Israel.  On November 14, 2007, the Company executed a letter of intent with Suspect Detection Systems Ltd., an Israeli corporation (“SDS”), providing for the acquisition of SDS by the Company.  Since the execution of the letter of intent with SDS, the Company’s activities have focused on the consummation of the acquisition of SDS by the Company. On January 23, 2009, the Company amended its Certificate of Incorporation for the purpose of changing its name from “PCMT Corporation” to “Suspect Detection Systems Inc.” Such amendment was approved at a special meeting of the Company’s shareholders held on the same date.





On December 18, 2008, the Company and SDS executed and delivered an investment agreement (the “Investment Agreement”).  Pursuant to the Investment Agreement, at closing on January 20, 2009 SDS issued 1,218,062 ordinary shares, par value NIS 0.01 per share, to the Company, representing 51% of the issued and outstanding share capital of SDS, in consideration for (a) the sum of $280,000 paid by the Company to SDS on December 22, 2008, and (b) the sum of $820,000 previously paid by the Company to SDS pursuant to letter agreements dated as of October 18, 2007, November 14, 2007, January 10, 2008, May 18, 2008 and October 20, 2008.





The Investment Agreement also provides for good faith negotiations of a second agreement (the “Second Agreement”), following the closing of the Investment Agreement, pursuant to which: (i) the Company will grant options to the shareholders of SDS to exchange their SDS ordinary shares into shares of the Company’s common stock; (ii) the Company will grant options to the holders of options to purchase SDS ordinary shares to exchange such options into options to purchase shares of the Company’s common stock; (iii) SDS will grant additional options, to Mr. Shoval and certain SDS employees or consultants, to purchase new SDS ordinary shares; and (iv) the Company will grant rights to Mr. Shoval and said SDS employees or consultants to exchange all or any part of the additional SDS options into options to purchase shares of the Company’s common stock.





In accordance with the terms of the Investment Agreement, the Company entered into an Exchange Agreement, dated July 9, 2009, with NG-The Northern Group LP ("NG"), pursuant to which NG exchanged all the SDS ordinary shares for 3,199,891 shares of the Company’s common stock, and the issuance of warrants to purchase additional shares of common stock of the Company, on the terms and provisions provided for in the Exchange Agreement.




3





On July 9, 2009, the Company also entered into a warrant agreement (the “Warrant Agreement”) with NG, pursuant to which the Company issued Two Million Two Hundred Fifty Thousand (2,250,000) stock purchase warrants (the “Warrants”) to NG. Each Warrant grants NG the right to purchase one (1) share of the Company’s common stock, commencing on July 9, 2009 and terminating on July 8, 2011, at an exercise price of $0.15 per Warrant Share.





As a condition to the exchange for all the SDS ordinary shares 3,199,891 shares of the Company’s common stock, NG agreed not to sell any shares of our common stock prior to the one (1) year anniversary of the Lock-Up Agreement.





Business and History of SDS





SDS specializes in the development and application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.  SDS completed the development of its “Cognito” line of products in 2007, which are based on proprietary software and use commercially available hardware to identify individuals that pose security threats, whether or not they are carrying a weapon on their person or in their belongings.  Cognito systems are comprised of a front-end test station and a back office, where multiple-station and multiple-site data is stored, managed and distributed.  The front-end test station serves as the point of contact with the individual being examined.  The back-office is designed to manage and control the test stations at a given site and it stores all test histories and traveler profiles and interfaces with external systems and databases.  A provisional patent application has been issued for the Cognito line of products in the United States.  SDS is also engaged in the development of behavior based screening technologies for the checkpoint screening market.





SDS was incorporated under the Companies Law, 5759-1999, of the State of Israel in 2004.  In order to finance its research and development activities, SDS sought public funding and in 2005 the Transportation Security Administration of the US Department of Homeland Security (the “TSA”) awarded a grant to SDS to support the development of behavior pattern recognition technology.  Additional funding was obtained from the Israeli government and US and Israeli governmental security authorities performed evaluations and testing of SDS’s products in 2005.  In 2006 SDS obtained private financing, issuing shares of preferred stock and warrants to the NG – The Northern Group LP.  Additional US government funding was obtained in 2006 from the TSA.





On April 1, 2009, the Company entered into a Consulting Agreement with L.A. Investments Ltd. (the “Consultant”).  The Consultant agreed to render assistance and advice to the Company relating to capitalization and financing of the Company. The Consulting Agreement is for a term of three years, commencing on April 1, 2009.  In consideration for such services, the Company agreed to compensate the Consultant in the amount of $6,500 quarterly, commencing on April 1, 2009.





In addition, the Company agreed to issue to the Consultant warrants to purchase an aggregate of 1,800,000 shares of the Company’s common stock. On each of April 1, 2009, September 1, 2009, March 1, 2010, and September 1, 2010, provided that the Consulting Agreement is still in force, the Company shall issue a warrant to purchase 450,000 shares of the Company’s common stock. Each common stock purchase warrant entitles the Consultant to purchase one share of the Company’s common stock at an exercise price of $0.15 per share and is exercisable for a period of two years.





On May 6, 2009, the Board of Directors of the Company appointed Julius Klein as the Treasurer, Secretary and a Director, to serve at the discretion of the Board, until his successor(s) are duly appointed and qualified.  In connection with his appointment as an officer and a Director of the Company, the Board of Directors approved a one time issuance of 50,000 shares of the Company’s common stock.




4





On January 13, 2010, the Company, appointed Yoav Krill as Chairman of the Board of Directors, effective as of said date, to serve until the next annual meeting of the Company’s stockholders and until his successor is duly appointed and qualified.  In connection with Mr. Krill’s appointment, the Company entered into an Agreement (the “Consulting Agreement”) to perform such duties as will be required of him as the Chairman of the Board. In consideration of the services to be performed under the Consulting Agreement, Mr. Krill shall receive an annual director’s fee of $25,000 per annum for the first twelve (12) month period and thereafter, the parties shall agree in writing, prior to November 30th of each calendar year as to the amount to be paid as director’s fees, but such amount shall not be less than $25,000 and shall be increased, proportionately, with any increase in the Company’s paid in capital, sales revenues or net profits. Mr. Krill was also granted 1,500,000 options of common stock of the Company, exercisable at $0.15 per share, from the stock option plan adopted by the Company. 250,000 options vested simultaneously with the execution and delivery of the Consulting Agreement, and the balance shall vest at the rate of 104,166 options each calendar quarter for the next three years, commencing on March 31, 2010. The options shall terminate forty-eight (48) months from the date of vesting.





The terms of the Consulting Agreement continue until either party provides the other with no less than 90 days prior written notice. The failure of the Company to maintain directors’ and officers’ liability insurance covering Mr. Krill shall be deemed a material breach of the agreement and shall automatically terminate the Agreement.





Also, on January 13, 2010, the Company appointed Gil Boosidan as its Chief Executive Officer and executed an employment agreement with Mr. Boosidan as of January 14, 2010 (the “Employment Agreement”). In consideration of the services to be performed under the Employment Agreement, Mr. Boosidan shall receive an aggregate of $30,000 - $20,000 in cash over four equal quarterly installments commencing March 31, 2010, and $10,000 in shares of commons stock of the Company, the number to be determined by the market value of the shares of the date of issuance. The terms of the Employment Agreement shall be for one year, and the Company has the right to terminate such agreement for cause in the event of a material breach by Mr. Boosidan which is not cured after notice of such breach.





Plan of Operation





As a result of the acquisition of 51% of Suspect Detection Systems Ltd. in the beginning of the first quarter of 2009, we are currently pursuing the development and marketing of SDS’s products.  At the beginning of the third quarter of 2009, we increased the ownership percentage of Suspect Detection Systems Ltd. from 51% to 58%.





Results of Operations





The following discussion should be read in conjunction with the condensed consolidated financial statements and in conjunction with the Company's Form 10-K filed on April 14, 2010, as amended. Results for interim periods may not be indicative of results for the full year.





Results of Operations For the three months ended September 30, 2010 compared to the three months ended September 30, 2009





Revenues





The Company through its consolidated subsidiary Suspect Detection Systems Ltd generated revenues in the amount of $259,080 for the three (3) months ended September 30, 2010 and as compared to $401,512 for the three ended September 30, 2009. The decrease in revenues for the three months ended in September 30, 2010, as compared to the same period in 2009, is a result of seasoned period in July - September 2010.





Total operating expenses





During the three (3) months ended September 30, 2010 and 2009, total operating expenses were $334,850 and $658,289 respectively, in 2009 as an increase in general and administrative expenses due to the increase in the Company's marketing activities.





Net loss





During the three (3) months ended September 30, 2010 and 2009, the net loss was $122,399 and $283,312 respectively.It should be noted thatSubsequent to September 30, 2010, management of the Company determined that the loss attributable to noncontrolling interest for the three months ended September 30, 2009, resulting from the exchange of 3,199,891 shares of common stock of the Company for 170,295 ordinary shares of SDS – Israel for an additional seven percent interest in the equity ownership of SDS – Israel, was incorrect. The Company corrected the error by increasing the loss attributable to noncontrolling interest and decreasing net loss by $12,010 for the three months ended September 30, 2010.




5





Results of Operations For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009





Revenues





The Company generated $1,596,682 and $825,253 in revenues for the nine (9) months ended September 30, 2010 and 2009.





Total Operating Expenses





During the nine (9) months ended September 30, 2010 and 2009, total operating expenses were $1,664,129 and $1,507,859, respectively.





Net loss





During the nine (9) months ended September 30, 2010 and 2009, the net loss was $290,490 and $670,224, respectively. It should be noted that Subsequent to September 30, 2010, management of the Company determined that the loss attributable to noncontrolling interest for the nine months ended September 30, 2009, resulting from the exchange of 3,199,891 shares of common stock of the Company for 170,295 ordinary shares of SDS – Israel for an additional seven percent interest in the equity ownership of SDS – Israel, was incorrect. The Company corrected the error by increasing the loss attributable to noncontrolling interest and decreasing net loss by $12,010 for the nine months ended September 30, 2010.





Liquidity and Capital Resources





The Company had cash in the amount of $637,110 as of September 30, 2010 and $701,931 as of December 31, 2009. Cash and cash equivalents from inception to date have been sufficient to provide the operating capital necessary to operate to date.





The Company through its consolidated subsidiary SDS Ltd generated revenues in the amount of $259,080 for the three (3) months ended September 30, 2010, as compared to $401,512 for the three months ended September 30, 2009 and incurred net losses of $122,399 and $283,312 for the three month periods ending September 30, 2010 and 2009, respectively. In addition, the Company had a stockholders' equity of $866,626 as at September 30, 2010.





As of September 30, 2010, the Company owed $155,113 to the Directors of SDS – Israel.  The loan was provided for working capital purposes, and is unsecured, non-interest bearing, and has no terms for repayment.





The Company expects significant capital expenditures during the next 12 months, contingent upon raising capital.  We anticipate that we will need approximately $1,000,000 for operations for the next 12 months. These anticipated expenditures are for manufacturing, research & development, marketing, sales channel development, general and administrative expenses and debt financing. In order to obtain capital, during the last fiscal year, the Company commenced capital formation activity through a private placement offering, exempt from registration under the Securities Act of 1933, to raise up to $1,500,000 through the issuance of 10,000,000 units.  The purchase price of each unit is $0.15.  Each unit contains one share of common stock, one Class A Warrant giving the holder the right to purchase one share of common stock for $0.25, which is exercisable for one year from the date of issuance and one Class B Warrant, giving the holder the right to purchase one share of common stock for $0.375, which is exercisable for three years from the date of issuance.  For the nine months ended September 30, 2010, the Company has sold an aggregate of 800,000 units and has issued 800,000 shares of common stock 800,000 Class A Warrants and 800,000 Class B Warrants, for the aggregate purchase price of $0.15. There can be no assurance that the Company will be successful in selling additional units.




6





Going Concern Consideration





The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure.  The Company has incurred a loss of $290,490 for the nine months ended September 30, 2010 (2009 - $670,222) and, as of September 30, 2010, and December 31, 2009, the Company had an accumulated deficit of approximately $1,722,025 (2009 - $1,431,535).  The Company’s ability to continue as a going concern is uncertain.  The revised business plan of the Company is the application of proprietary technologies for law enforcement and border control, including counter terrorism efforts, immigration control and drug enforcement, as well as human resource management, asset management and the transportation sector.





While management of the Company believes that the Company will be successful in its current and planned operating activities, there can be no assurance that the Company will be successful in the achievement of sales of its products that will generate sufficient revenues to earn a profit and sustain the operations of the Company.  The Company also intends to conduct additional capital formation activities through the issuance of its common stock and loans from related parties.





The Company has not established sufficient sources of revenues to cover its operating costs and expenses.  As such, it has incurred significant operating losses since inception.  Further, as of September 30, 2010, and December 31, 2009, the cash resources of the Company were insufficient to meet its planned business objectives.  These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.





Recent Accounting Pronouncements





Effective July 1, 2009, the Company adopted FASB ASC Topic 105-10, “Generally Accepted Accounting Principles – Overall” (“Topic 105-10”).  Topic 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASU’s”).  The FASB will not consider ASU’s as authoritative in their own right.  ASU’s will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been updated for the Codification.





In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements.”  This update requires additional disclosure within the roll forward of activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair value hierarchy.  In addition, the update requires enhanced disclosures of the valuation techniques and inputs used in the fair value measurements within Levels 2 and 3.  The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosure of purchases, sales, issuances, and settlements of Level 3 measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010.  As ASU 2010-06 only requires enhanced disclosures, the Company does not expect that the adoption of this update will have a material effect on its financial statements.





In February 2010, the FASB issued ASU No. 2010-09, "Amendments to Certain Recognition and Disclosure Requirements,” which eliminates the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events.  ASC No. 2010-09 is effective for its fiscal quarter beginning after December 15, 2010.  The adoption of ASC No. 2010-06 will not have a material impact on the Company's financial statements.




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Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.





Off Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.





Item 3. Quantitative and Qualitative Disclosures About Market Risk





A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.





Item 4(T). Controls and Procedures





As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and  15d-15(e) under the 1934 Act).  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. Furthermore, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.





A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.





Changes in Internal Controls





There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule  240.15d-15  that occurred during the Company’s last fiscal quarter that has  materially  affected,  or is reasonable  likely to materially  affect,  the Company internal control over financial reporting.


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PART II


OTHER INFORMATION





Item 1. Legal Proceedings.





There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.





Item 1A. Risk Factors





A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.





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





Use of Proceeds





None





Purchases of equity securities by the issuer and affiliated purchasers





Not applicable





Item 3. Defaults Upon Senior Securities.





Not applicable





Item 4. Removed and Reserved.





Item 5. Other Information.





Not applicable





Item 6. Exhibits





Exhibit No.

Description31.1

Rule 13a-14(a)/15d14(a) Certification of Principal Executive Officer (attached hereto)31.2

Rule 13a-14(a)/15d14(a) Certification of Principal Financial Officer (attached hereto)32.1

Section 1350 Certification of Principal Executive Officer (attached hereto)32.1

Section 1350 Certification of Principal Financial Officer (attached hereto)




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





SUSPECT DETECTION SYSTEMS, INC.Dated: February 3, 2011By:
/s/ Gil BoosidanName: Gil BoosidanTitle :  Chief Executive Officer and Director (Principal Executive Officer)





Dated: February 3, 2011
By:
//s/ Ran DanielName: Ran DanielTitle:  Chief Financial Officer