UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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





For the quarterly period ended June 30, 2011





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)





(212) 977-4126


(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 x





As of August 18, 2011, 78,930,892 shares of common stock, par value $0.0001 per share, were issued and outstanding.













Table of Contents





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
9Item 4(T). Controls and Procedures
9PART II
10Item 1. Legal Proceedings
10Item IA. Risk Factors
10Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
10Item 3. Defaults Upon Senior Securities
11Item 4. Removed and Reserved
11Item 5. Other Information
11Item 6. Exhibits
11











PART I


FINANCIAL INFORMATION





Item 1.    Financial Statements.





SUSPECT DETECTION SYSTEMS INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)





Consolidated Financial Statements-
F-1Consolidated Balance Sheets as of June 30, 2011(unaudited), and December 31, 2010
F-2Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
F-4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)
F-5Notes to Consolidated Financial Statements June 30, 2011 and 2010 (unaudited)
F-6





F-1





CONSOLIDATED BALANCE SHEETS
 U.S. dollars




ASSETS

June 30,


December 31,2011


2010UnauditedCurrent Assets:Cash and cash equivalents

$
786,087


$
803,443Restricted cash


16,280



115,501Accounts receivable


22,423



288,037Inventory


71,683



188,185Prepaid expenses and other receivables


43,961



253,864Total current assets


940,434



1,649,030Property and Equipment:Computer and other equipment


60,766



56,556Less - Accumulated depreciation


(31,996
)


(25,687
)Property and equipment, net


28,770



30,869Other Assets:Severance pay fund


36,077



89,684Long term deposit


7,463



7,300Goodwill


1,333,214



1,333,214Total other assets


1,376,754



1,430,198Total Assets

$
2,345,958


$
3,110,097




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




F-2




CONSOLIDATED BALANCE SHEETS
 U.S. dollars




LIABILITIES AND STOCKHOLDERS' EQUITY

June 30,


December 31,2011


2010UnauditedCurrent Liabilities:Accounts payable - Trade

$
29,121


$
43,174Accrued liabilities


135,241



227,228Advances from customers


30,000



1,656,249Deferred revenues


159,711



112,890Due to related parties


382,159



283,257Total current liabilities


736,232



2,322,798Long-term liabilities:Convertible note


409,313



-Accrued severance pay


36,077



88,560Total long-term liabilities


445,390



88,560Commitments and ContingenciesStockholders' Equity:Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 78,930,892 and 76,555,493 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively.


7,893



7,655Additional paid-in capital


4,795,089



3,399,961Accumulated (deficit)


(3,953,492
)


(2,785,098
)849,490



622,518Less - Noncontrolling interest


314,846



76,221Total stockholders' equity


1,164,336



698,739Total Liabilities and Stockholders' Equity

$
2,345,958


$
3,110,097





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




F-3




CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 U.S. dollars




For the three months ended

June 30,


For the six months ended

June 30,2011


2010


2011


2010Restated





RestatedRevenues, net

$
129,861


$
717,403


$
1,738,279


$
1,337,602Cost of Goods Sold


(10,709
)


(31,409
)


(174,463
)


(69,748
)Gross Profit


119,152



685,994



1,563,816



1,267,854Operating Expenses:Research and development


48,417



177,671



195,111



209,861Selling, general and administrative


1,596,900



733,421



2,299,393



1,458,546Total operating expenses


1,645,317



911,092



2,494,504



1,668,407Loss from Operations


(1,526,165
)


(225,098
)


(930,688
)


(400,553
)Interest (expenses) income, net


(3,900
)


(15,242
)


9,906



(18,340
)Net income (loss)


(1,530,065
)


(240,340
)


(920,782
)


(418,893
)Net loss (income) Attributable to Noncontrolling Interest


49,201



(20,919
)


(247,612
)


(106,666
)Net income (loss) attributable to Suspect Detection Systems Inc.

$
(1,480,864
)

$
(261,259
)

$
(1,168,394
)

$
(525,559
)Income (Loss) Per Common Share:Income (Loss) per common share - Basic and Diluted

$
(0.02
)

$
(0.00
)

$
(0.02
)

$
(0.01
)Weighted Average Number of Common Shares  Outstanding


75,305,493



66,309,668



74,680,493



66,039,668





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





F-4




CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 U.S. dollars




For the six months ended June 30,2011


2010RestatedOperating Activities:Net (loss)

$
(920,782
)

$
(418,893
)Adjustments to reconcile net (loss) to net cash(used in) operating activities:Common stock compensation


483,699



172,000Stock options compensation


977,720



299,405Stock warrants issued to a consultant


-



49,888Interest due to the issuance of convertible note


9,313



-Depreciation


6,309



3,058Changes in Assets and Liabilities-Accounts receivable


265,614



(17,664
)Inventory


116,502



15,484Prepaid expenses and other receivables


209,903



(67,394
)Accounts payable - Trade


(14,053
)


8,489Accrued liabilities


(91,987
)


114,976Advances from customers


(1,626,249
)


(784,276
)Deferred revenues


46,821



160,822Due to related parties


98,902



105,650Accrued severance pay


1,124



(38,752
)Net Cash (Used in) Operating Activities


(437,164
)


(397,207
)Investing Activities:Decrease (increase) in restricted cash


99,221



(100,000
)Additional purchase of 10% of subsidiary


(75,040
)


-Long term deposit


(163
)


(2,313
)Purchases of Property and Equipment


(4,210
)


(11,067
)Net Cash Provided by (Used in) Investing Activities


19,808



(113,380
)Financing Activities:Issuance of convertible note


400,000



-Issuance of common stock for cash


-



95,000Net Cash Provided by Financing Activities


400,000



95,000Net (decrease) in Cash


(17,356
)


(415,587
)Cash and Cash Equivalents - Beginning of Period


803,443



701,931Cash and Cash Equivalents - End of Period

$
786,087


$
286,344Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
-


$
-Income taxes

$
-


$
-




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





F-5




Note 1: General




Suspect Detection Systems Inc. (“SDS Inc.” or the “Company”) is a Delaware corporation that conducts its operations through its 68.6 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 changed its name from PCMT Corporation to Suspect Detection Systems Inc.





The accompanying consolidated financial statements were prepared from the accounts of the Company and its subsidiary under the accrual basis of accounting.





The Company operates through its Israeli subsidiary, Suspect Detection Systems Ltd, (“SDS – Israel”). SDS Israel was incorporated under the Companies Law, 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 “Cogito” 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.  Cogito 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.





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 $1,333,214.  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 the Northern 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 for by the equity method.  The increased percentage of ownership of SDS – Israel, amounting to 58 percent, has been applied to the operations of this subsidiary since July 9, 2009.





On June 16, 2011, SDS Inc. entered into a share purchase agreement with Isahyau (Sigi) Horowitz (“the Seller”), pursuant to which the Company will purchase from the Seller 250,000 ordinary shares of SDS Israel (which represents 10.6% of the outstanding shares of common stock of SDS Israel) in consideration of $75,000.





F-6




On June 27, 2011, the Company entered into a Share Purchase Agreement with Shabtai Shoval (“Shoval”), a shareholder of SDS, Ltd. and its chief executive officer. Pursuant to the Agreement, Shoval will sell and transfer, under certain conditions as described herewith, to the Company all shares of SDS Israel held by him on the date of the Agreement, namely, NIS 0.01 par value 750,000 ordinary shares, which constitute 31.4% of SDS Israel outstanding shares as of the date of the agreement. In consideration for the shares, the Company will pay Shoval $1,174,500 (“Purchase Price”) which shall be paid in 35 installments. Shares shall only be transferred to the Company upon (1) the payment of fifty percent (50%) of the Purchase Price plus any and all accrued and outstanding interest as of the date of payment and/or (2) the passing of five (5) years from the date of closing provided that prior to such time, payment of no less than $225,000 on the account of the purchase price shall have been made to Shoval, plus any and all accrued and outstanding interest. The Company may defer the payment of all or a portion of any of the installments (except for the first installment, which was payable on the day of the closing)  if and to the extent: (i) prior to the payment of $225,000 on the account of the aggregate purchase price to Shoval (the “Initial Threshold Amount”) the obtainable cash (cash or cash equivalents less any amounts of signed checks or any other instruments that were issued or wire transfer instructions which were executed as of the payment date of the relevant Installment) is less than the Initial Threshold Amount; or (ii) following payment of the Initial Threshold Amount, if the obtainable cash as of the payment date of the relevant Installment is less than $500,000 as of the relevant payment date.




Note 2: Summary of Significant Accounting Policies




Unaudited Interim Financial Information





The accompanying consolidated balance sheet as of June 30, 2011, consolidated statements of operations and cash flows for the three and six months ended June 30, 2011 and 2010 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of June 30, 2011, our consolidated results of operations for the three and six months ended June 30, 2011 and 2010 and cash flows for the six months ended June 30, 2011 and 2010.





These consolidated financial statements should be read in conjunction with consolidated financial statements and accompanying notes for the year ended December 31, 2010 included in our Annual Report for our year ended December 31, 2010 on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 22, 2011.





Results for the three and six months ended June 30, 2011 are not necessarily indicative of results that may be expected for the year ending December 31, 2011.





Unless otherwise noted, all references to “dollars” or “$” are to United States dollars.





Use of Estimates





The accompanying 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 consolidated assets, liabilities and equity as of June 30, 2011, and consolidated revenues and expenses for the three and six months ended June 30, 2011 and 2010.  Actual results could differ from those estimates made by management.





F-7





Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its 68.6 percent owned Israeli subsidiary, SDS-Israel.   Inter-company transactions and balances, have been eliminated in consolidation.





Fair Value Measurement





As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:





Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.


Level 2: Other inputs those are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.


Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.





In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible in its assessment of fair value.





The following table presents the Company’s financial assets and liabilities that are carried at fair value, classified according to the three categories described above:





Fair Value Measurements at June 30, 2011Quoted Prices in Active


Significant Other


SignificantMarkets for Identical Assets


Observable Inputs


Unobservable InputsTotal


(Level 1)


(Level 2)


(Level 3)Cash and cash equivalents

$
786,087


$
786,087


$
-


$
-Restricted Cash


16,280



16,280



-



-Total assets at fair value

$
802,367


$
802,367


$
-


$
-





Fair Value Measurements at December 31, 2010Quoted Prices in Active


Significant Other


SignificantMarkets for Identical Assets


Observable Inputs


Unobservable InputsTotal


(Level 1)


(Level 2)


(Level 3)Cash and cash equivalents

$
803,443


$
803,443


$
-


$
-Restricted Cash


15,501



115,501



-



-Total assets at fair value

$
924,944


$
924,944


$
-


$
-





F-8





Impact of recently issued and adopted accounting pronouncement





In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-03 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.




In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.




There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries.  None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.




Note 3: 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 net loss of $1,168,394 for the six months ended June 30, 2011 and as of June 30, 2011 the Company had an accumulated deficit of $3,953,492.  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-9





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 June 30, 2011, 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.




Note 4: Restatement




The financial statements for June 30, 2010 were restated pursuant to comments received from the Securities and Exchange Commission (the "Commission") to our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2009 and to include additional changes in presentation of certain accounts in the financial statements.




The accompanying financial statements for the three and six months ended June 30, 2010 have been restated to reflect the corrections in accordance with FASB ASC 250-10-50-7, “Accounting Change and Error Corrections Disclosure”. This restatement is due to corrections of errors in previously reported financial statements.




Effects on previously issued financial statements as of June 30, 2010 as follows:




Statement of operations for the three months ended June 30, 2010:Increase in general and administrative expenses

$
160,814Increase in interest expense, net


15,365Increase in  net loss attributable to Suspect Detection Systems Inc.

$
176,179Statement of operations for the six months ended June 30, 2010:Increase in general and administrative expenses

$
339,128Increase in interest expense, net


18,463Increase in net loss attributable to Suspect Detection Systems Inc.

$
357,591





F-10




Statement of Operations for the Six months ended June 30, 2010





Previouslyreported


Net Change





RestatedRevenues, net

$
1,337,602








$
1,337,602Cost of Goods Sold


69,748









69,748Gross Profit


1,267,854









1,267,854 1,267,854Expenses:Research and development


209,861









209,861Selling, general and administrative


1,119,418



339,128


a,b,c,d,

e,f,g,h,i,j



1,458,546Total operating expenses


1,329,279










1,668,407(Loss) from Operations


(61,425
)









(400,553
)Interest expense


123



(18,463
)


j



(18,340
)Net (loss)


(61,302
)










(418,893
)Net (loss) Attributable to Noncontrolling Interest


(106,666
)










(106,666
)Net (loss) attributable to Suspect Detection Systems Inc.

$
(167,968
)









$
(525,559
)(Loss) Per Common Share:(Loss) per common share - Basic and Diluted

$
(0.01
)









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


73,483,285



(7,443,617
)


k



66,039,668





(a) Correction of error of $49,500 originally included in selling, general and administrative for consultants fees which should have not been expensed.





(b) Correction of error of $5,000 originally included in selling, general and administrative for insurance premium for colander year 2010, which was paid in advanced in 2009 and should have been recorded as prepaid expenses and an error of $7,000 originally included in selling, general and administrative for insurance premium for colander year 2010, which should have been recorded as prepaid expenses.





(c) Correction of error of $12,000 originally included in selling, general and administrative for officer’s compensation which should have not been expensed.





(d) Correction of error of $49,595 originally not included in selling, general and administrative for consultants fees which should have been expensed.





(e) Correction of error of $31,035 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.





(f) Correction of error of $12,500 originally not included selling, general and administrative for directorship fees of the Chairman of the Board, and $16,274 originally not included selling, general and administrative for the compensation of the chief executive officer





F-11




(g) Correction of error involving of amortized fair value of 2,000,000 options that were granted to the chairman of the Board and a member of the advisory board in the amount of $90,434.





(h) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine agents of SDS-Israel in the amount of $163,054. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.





(i) Correction of error involving of fair value of 450,000 warrants that were granted to a consultant of the Company in the amount of $49,888. The warrants are execrable at $0.15 per share and no later than two years from the grant date.





(j) Reclassification of finance expenses in the amount of $18,463 from selling, general and administrative expenses.





(k) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding.




Statement of Operations for the three months ended June 30, 2010




Previouslyreported


Net Change





RestatedRevenues, net

$
717,403








$
717,403Cost of Goods Sold


31,409









31,409Gross Profit


685,994









685,994Expenses:Research and development


177,671









177,671Selling, general and administrative


572,607



160,814


a,b,c,

d,e,f,g,h,i



733,421Total operating expenses


750,278










911,022(Loss) from Operations


(64,284
)









(225,098
)Interest expense


123



(15,365
)


i



(15,242
)Net (loss)


(64,161
)










(240,340
)Net (loss) Attributable to Noncontrolling Interest


(20,919
)










(20,919
)Net (loss) attributable to Suspect Detection Systems Inc.

$
(85,080
)


(176,179
)





$
(261,259
)(Loss) Per Common Share:(Loss) per common share - Basic and Diluted

$
(0.00
)









$
(0.00
)Weighted Average Number of Common SharesOutstanding - Basic and Diluted


73,977,031



(7,667,363
)


j



66,309,668





(a) Correction of error of $24,750 originally not included in selling, general and administrative for consultants fees which should have been expensed.





(b) Correction of error of $12,000 originally included in selling, general and administrative for officer’s compensation which should have not been expensed.




F-12




(c) Correction of error of $49,595 originally not included in selling, general and administrative for consultants fees which should have been expensed.





(d) Correction of error of $12,850 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.





(e) Correction of error of $6,250 originally not included selling, general and administrative for directorship fees of the Chairman of the Board, and $8,137 originally not included selling, general and administrative for the compensation of the chief executive officer





(f) Correction of the additional paid-in capital in the amount of $ (136,839) and the accumulated deficit in the amount of $ (346,325) due to the restatements of the financial statements to the fiscal year ended at December 31, 2009.





(g) Correction of error involving of amortized fair value of 2,000,000 options that were granted to the chairman of the Board and a member of the advisory board in the amount of $ (14,766).





(h) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine agents of SDS-Israel in the amount of $81,527. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.





(i) Reclassification of finance expenses in the amount of $15,365 from selling, general and administrative expenses.





(j) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding





Statement of Cash Flows for the six months ended June 30, 2010





Previously


Net Change


RestatedreportedOperating Activities:Net (loss)

$
(61,302
)

$
(357,591
)

$
(418,893
)Adjustments to reconcile net (loss) to net cashCommon stock compensation


172,000



-



172,000Stock options compensation


71,884



227,521



299,405Stock warrants issued to a consultant


-



49,888



49,888Depreciation


3,058



-



3,058Changes in Assets and Liabilities-Accounts receivable


(17,664
)






(17,664
)Inventory


(15,484
)


30,968



15,484Prepaid expenses and other receivables


(52,112
)


(15,282
)


(67,394
)Accounts payable - Trade


8,489



-



8,489Accrued liabilities


114,976



-



114,976Advances from customers, net


(784,276
)


-



(784,276
)Deferred revenues


160,822



-



160,822Due to related parties


-



105,650



105,650Accrued severance pay


(2,176
)


(36,576
)


(38,752
)
  F-13
 Net Cash (Used in) Operating Activities


(401,785
)


4,578



(397,207
)Investing Activities:Increase in restricted cash


-



(100,000
)


(100,000
)Prepaid expenses, non-current


-



(2,313
)


(2,313
)Increase in severance pay fund


(36,576
)


36,576



-Purchases of Property and Equipment


(11,067
)


-



(11,067
)Net Cash Provided by (Used in) Investing Activities


(47,643
)


(65,737
)


(113,380
)





Financing Activities:Issuance of common stock for cash


95,000



-



95,000Due to related party


38,841



(38,841
)


-Net Cash Provided by Financing Activities


133,841



(38,841
)


95,000Net Increase (Decrease) in Cash


(315,587
)


(100,000
)


(415,587
)Cash and Cash Equivalents - Beginning of Period


717,758







701,931Cash and Cash Equivalents - End of Period

$
386,344







286,344Cash and Cash Equivalents - End of Period:Cash in bank

$
701,931






$
701,931Restricted cash


15,827



(15,827
)


-Total

$
717,758






$
701,931Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
-






$
-Income taxes

$
-






$
-




Note 5: Related parties





As of June 30, 2011 and December 31, 2010 the Company has unpaid sales commissions to a director in SDS Israel in the amounts of $382,159 and $283,257, respectively.





F-14





On June 29, 2011 SDS Inc. approved an Amended Consulting Agreement with Mr. Yoav Krill, the Company’s Chairman of the Board. In consideration of the services to be performed under the Amended Consulting Agreement, Mr. Krill shall receive an annual director’s fee of $25,000 for the first twelve-month period. 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, which 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. In addition, under the Amended Consulting Agreement, Mr. Krill was granted 2,400,000 shares of common stock of the Company valued at $240,000 and 10,500,000 stock options valued at $978,936.


The Options vests as follows: 4,666,660 shares were vested upon execution of the Amended Agreement and the balance of 5,833,340 shares shall vest in equal monthly amounts of 291,667 shares during each and every calendar month during the twenty month period commencing on July 1, 2011. The price of the Company's share at date of grant of shares and options was $0.1, the exercise price of the options $0.1 and the its expiration date 10 years from grant.





On June 29, 2011 SDS Inc. approved an Amended Employment Agreement with Mr. Gil Boosidan will serve as the Company’s Chief Executive Officer. In consideration of the services to be performed under the Amended Employment Agreement, Mr. Boosidan shall receive (i) an aggregate of $30,000 in cash in four equal quarterly installments commencing September 30, 2011, and (ii) 1,200,000 shares of common stock of the Company valued at $120,000 and 6,000,000 stock options valued at $559,392.


The Options vests as follows: 2,666,680 shares vested upon the execution of his Amended Employment Agreement and the balance of 3,333,320 shares shall vest in equal monthly amounts of 166,667 shares during each and every calendar month during the twenty month period commencing on July 1, 2011. The price of the Company's share at date of grant of shares and options was $0.1, the exercise price of the options $0.1 and the its expiration date 10 years from grant.





On June 1, 2011 SDS Inc signed a consulting agreement with Mr. Daniel Krill, the son of Mr. Yoav Krill, chairman of the board of director. In consideration for services Mr. Daniel Krill was granted 400,000 shares valued at $32,000 and 200,000 stock options valued at $15,032. 5,555 options shall vest each calendar month commencing the date of the execution of the consulting Agreement. The price of the Company's share at date of grant of shares and options was $0.08, the exercise price of the options $0.1 and the its expiration date 10 years from grant.





Note 6: Convertible Note




On March 21, 2011, the Company issued a convertible note (the “Note”) to Investor (the “Lender”) whereby the Lender made a loan to the Company in an amount equal to $300,000 and accruing interest at a rate of 10% per annum. A similar note was issued on May 12, 2011 for an amount equal to $100,000 (together the loans are referred to as the "loan"). The Loan and the accrued interest will be repayable in one installment on the date that is eighteen months after the date the Loan is made; provided that such date may be extended at the Company’s request by another six months. The Lender shall have the right, at any time, to convert the principal and interest outstanding under the Note into common share issued by the Company at a conversion rate of $0.07 per a common share. In addition, the Lender is entitled to (i) 500 Class C warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.12 per Common Share and (ii) 500 Class D warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.21 per Common Share.  The Class C Warrants shall be exercisable at any time from the conversion date to and excluding the first anniversary thereof and the Class D Warrants shall be exercisable at any time from the conversion date to and excluding the third anniversary thereof. There will be no restrictions on shares being registered upon exercise of the loan and the warrants will be registered under the Securities Act, or any state securities laws, and may be offered or sold in the United States upon registration or an applicable exemption from the registration requirements of the Securities Act.





F-15


FSP APB 14-1 requires issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the liability and equity components of the convertible debt separately.  The liability component is computed based on the fair value of a similar liability that does not include the conversion option.  The equity component is computed based on the total debt proceeds less the fair value of the liability component.  The equity component (debt discount) and debt issuance costs are amortized as interest expense over the expected term of the debt facility. The liability component of our convertible notes is classified as long-term debt and presented as a long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our stock price is above the conversion prices of $0.07 at the grant date. We concluded there the liability value is equal to similar liability that does not include a conversion option and therefore the equity component is zero.





We did not calculate a beneficial conversion feature, in determining whether an instrument contains a beneficial conversion option, intrinsic value should be calculated using the effective conversion price, which is based on the proceeds received for the convertible instrument. The Company's shares market price at grant date of the notes was below the conversion price, therefore there was no beneficial conversion feature on the loans.




Note 7: Stock warrants





A summary of the warrants granted is as follows:




For the six months endedJune 30, 2011Number

of warrants


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


17,170,007


$
0.30Forfeited


(7,373,340
)


0.34Outstanding and exercisable at the end of the period


9,796,667


$
0.27







For the six months endedJune 30, 2010Number

of warrants


Weighted Average Exercise PriceOutstanding and exercisable at the beginning of the period


16,019,667


$
0.32Granted


2,050,000



0.28Forfeited


( 366,667
)


0.25Outstanding and exercisable at the end of the period


17,703,000


$
0.31





Note 8: Stock options





On December 30, 2009, the Company approved 2009 Global Stock Incentive Plan (the “stock option plan”), under which 35,000,000 shares of common stock are authorized for issuance. As of June 30, 2011 26,250,200 stock options were granted under the Stock Option Plan.




The Company accounts for stock based compensation using the fair value recognition provisions of ASC No. 718 “Compensation – stock compensation”.




F-16


The fair value of the stock options is estimated based upon grant date fair value using the Black-Scholes option-pricing model with the following weighted average assumptions used for 2011 grants:




Annual dividends of

$
0.00expected volatility of


151.54
%risk-free interest rate of


1.92
%expected average options expiration


6.52








For the six months endedJune 30, 2011Number

of options


Weighted Average Exercise PriceOutstanding at the beginning of the period


3,550,200


$
0.15Granted


22,700,000



0.11Exercised


-



-Forfeited


-



-Outstanding at the end of the period


26,250,200


$
0.12


Exercisable at the end of the period


13,993,263


$
0.17








For the six months endedJune 30, 2010Number

of options


Weighted Average Exercise PriceOutstanding at the beginning of the period


1,550,200


$
0.15Granted


2,000,000



0.15 0.15Exercised


-



-Forfeited


-



-Outstanding at the end of the period


3,550,200


$
0.15


Exercisable at the end of the period


2,000,198


$
0.15




Note 9: Major Customers





The Company’s revenues from a customer accounted for $1,696,279 or 98% of total revenues for the six months ended June 30, 2011 and 2 customers accounted for $1,306,405 or 97% of total revenues in the six months ended June 30, 2010.





F-17





Six months ended June 30, 2011Revenues


% of total revenuesCustomer A

$
1,696,279



98
%Other customers


42,000



2Total Revenues

$
1,738,279



100
%





Six months ended June 30, 2010Revenues


% of total revenuesCustomer A

$
1,006,411



75
%Customer B


299,994



22Other customers


31,197



3Total Revenues

$
1,337,602



100
%





Note 10: Subsequent events




As defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued.




On July 27, 2011, the Company entered into an indemnification agreement with Shabtai Shoval and with Yoav Krill and Gil Boosidan. Mr. Shoval is the chief executive officer of SDS Israel, the Company's operating subsidiary, Mr. Krill is the Chairman of the Company and Mr. Boosidan is the Company's Chief Executive Officer and a director.





Pursuant to the agreements, the Company agreed to indemnify each of Messrs. Shoval, Krill and Boosidan to the fullest extent permitted by law for all expenses, costs, liabilities and legal fees which such individual may incur in the discharge of his duties to the Company. Notwithstanding the foregoing, the person will not be entitled to any indemnification with respect to any claim arising directly or indirectly if, among others, (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty, (ii) he gained any financial profit or other advantage to which he was not legally entitled, or (iii) payment by the Company is not permitted by applicable law.





F-18





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





As used in this Form 10-Q (this “Report”), 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 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 March 22, 2011. 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 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 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.  Also, on December 3, 2009, the Company further amended its Certificate of Incorporation for the purpose of increasing its authorized capital stock from 100,000,000 to 250,000,000 shares.  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 Suspect Detection Systems, Ltd., an Israeli limited company (“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 $1,135,000. The Company closed the investment at January 20, 2009. 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.





3




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. In accordance with the terms of the Exchange Agreement, on July 9, 2009, NG exchanged all the SDS ordinary shares for 3,199,891 shares of the Company’s common stock.  The Company also issued Two Million Two Hundred Fifty Thousand (2,250,000) stock purchase warrants to NG, which 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.  The securities were offered and exchanged in reliance on an exemption from the registration requirements of United States federal and state securities laws under Regulation S promulgated under the Securities Act of 1933, as amended. Under the Exchange Agreement, NG agreed not to sell any shares of our common stock prior to the one (1) year anniversary of the Lock-Up Agreement.





On June 16, 2011 , SDS Inc. entered into a share purchase agreement with Isahyau (Sigi) Horowitz (“the Seller”), pursuant to which the Company will purchase from the Seller, all the shares of SDS Israel held by him on the date hereof, namely, 250,000 Ordinary Shares of SDS Israel (which represents 10.6% of the outstanding shares of common stock of SDS Israel) in consideration of $ 75,000.





On June 27, 2011, the Company entered into a Share Purchase Agreement with Shabtai Shoval (“Shoval”), a shareholder of SDS, Ltd. and its chief executive officer. Pursuant to the Agreement, Shoval will sell and transfer to the Company all shares of SDS Israel held by him on the date of the Agreement, namely, NIS 0.01 par value 750,000 ordinary shares, which constitute 31.4% of SDS Israel outstanding shares as of the date of the agreement. In consideration for the shares, the Company will pay Shoval $1,174,500 (“Purchase Price”) which shall be paid in 35 installments. Shares shall only be transferred to the Company upon (1) the payment of fifty percent (50%) of the Purchase Price plus any and all accrued and outstanding interest as of the date of payment and/or (2) the passing of five (5) years from the date of closing provided that prior to such time, payment of no less than $225,000 on the account of the purchase price shall have been made to Shoval, plus any and all accrued and outstanding interest. The Company may defer the payment of all or a portion of any of the installments (except for the first installment, which was payable on the day of the closing)  if and to the extent: (i) prior to the payment of $225,000 on the account of the aggregate purchase price to Shoval (the “Initial Threshold Amount”) the obtainable cash (cash or cash equivalents less any amounts of signed checks or any other instruments that were issued or wire transfer instructions which were executed as of the payment date of the relevant Installment) is less than the Initial Threshold Amount; or (ii) following payment of the Initial Threshold Amount, if the obtainable cash as of the payment date of the relevant Installment is less than $500,000 as of the relevant payment date.





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 “Cogito” 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.  Cogito 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 Cogito line of products in the United States.  SDS is also engaged in the development of behavior based screening technologies for the checkpoint screening market.





4





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.




Marketing





SDS markets its products to local and national law enforcement and homeland security authorities in Israel, the US, Mexico, Europe and Asia, as well as operators of critical infrastructure in the private sector such as oil and gas companies, the diamond industry and financial enterprises.  SDS has executed agreements with several companies and individuals all in the framework of its ordinary course of business, providing for assistance in the marketing of its products and endorsements.





Competition





SDS has identified a number of potential competitors, including developers of voice stress analysis equipment designed to remotely detect a person trying to lie during an interview, and developers of equipment designed to generate stimuli from a remotely location that will generate enough data about an individual to enable detection of hostile intent.  WeCU Technologies and Nemesysco are just two of our competitors.





Dependence on major customers





A significant portion of SDS’s revenue in the three months ended at March 31,2011 was derived from sales of the system and services provided to a customer and a significant portion of SDS’s revenue in 2010 was derived from sales of the system and services provided to four customers.  Since the bulk of the Company’s revenues are generated by initial sales of its systems, as opposed ongoing support services, the loss of this customer may have a material adverse impact on the business of SDS.





Intellectual Property





The Intellectual Property was developed, invented, discovered, derived, programmed and/or designed with the assistance of various Persons, including former employees and consultants, none of which entered into an agreement that any rights that they have or may have in the Intellectual Property are assigned to the Company or that they waive any such rights and such Persons were not given consideration for their efforts.





The Company has agreed in principle and orally with an employee of the Company, that certain intellectual property developed by him prior to the time he was employed by the Company is owned by him. Such intellectual property has been integrated into the Products, whilst no formal license arrangement between the Company and the employee has been entered into.





5





A provisional patent application was filed on behalf of the Company with the US Patent and Trademark Office and the details of which were provided to the Purchaser. The Company has not decided whether or not it will renew said application or whether it will proceed to attempt to register any patent. There can be no assurance that the provisional application will be accepted.





The United States Transportation Security Administration of the US Department of Homeland Security has certain rights in the technology developed by SDS, pursuant to a Cooperative Agreement between SDS and the TSA dated June 22, 2005.  The Cooperative Agreement relates to a $200,000 grant provided to SDS by the TSA in 2005 for the development and adaptation for use in the US of a prototype application designed to detect suspicious behavior.  Pursuant to the agreement, SDS granted an irrevocable, non-exclusive, paid-up license for US Government use of the technology development using the grant funds.  The license requires prior approval from SDS for any commercial use of the technology, with the exception of use by US Government contractors under procurement contracts, grants, cooperative agreements and other transactions awarded or entered into for US government purposes.





The Science and Technology Directorate of the US Department of Homeland Security has certain rights in the technology developed by SDS, pursuant to a Cooperative Agreement between SDS and the STD dated September 29, 2006.  The Cooperative Agreement relates to a $260,000 grant provided to SDS by the STD on June 7, 2005 pursuant to a proposal entitled Automated Internal Threat Detection.  In the agreement, SDS granted (i) a royalty free, nonexclusive, irrevocable license to the US Government to use and authorize other to use scientific, technical or other works based on or containing data first produced under the grant, and (ii) an irrevocable, non-exclusive, paid-up license to the US government to use registered patents development with grant funds for or on behalf of the US government.





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%.


At the second quarter of 2011 we increased the ownership percentage to 68.6%.





Results of Operations





The following discussion should be read in conjunction with the condensed financial statements and in conjunction with the Company's Form 10-K filed on March 22, 2011.  Results for interim periods may not be indicative of results for the full year.





Results of Operations For the three months ended June 30, 2011 compared to the three months ended June 30, 2011





Revenues





The Company generated $129,861 and $717,403 in revenues for the three (3) months ended June 30, 2011 and 2010, respectively, which represents a decrease of $587,542 or 81.82%.  The decrease in revenues has to do with revenues from 2 contracts that were supplied and recorded in the 3 months ended June 30, 2010.





The Company generated revenues from one of its four major customers in the amount of $106,169 or 82% of total revenues for the three months ended June 30, 2011.





6




Cost of Revenue




Cost of revenue primarily consists of purchases and royalties to the Chief Science Office in Israel due to grants that were received in the past.  Cost of revenues was $10,709 and $31,409 for the three months ended June 30, 2011 and 2010, respectively. This decrease is primarily attributable to decrease in revenues.




Total Operating Expenses





Operating expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions, communication expenses, other administrative expenses and amortization of other acquired intangible assets. During the three (3) months ended June 30, 2011 and 2010, total operating expenses were $1,645,317 and $911,022, respectively.  The increase in operating expenses results mainly from an increase in stock based compensation to $1,412,654 in the three month ended June 30, 2011 compared with $135,787 in the three month ended June 30, 2010 and the decrease in salaries and other operating activities from $775,235 in the three month ended June 30, 2010 compared with $232,663 in the three month ended June 30, 2011.




Results of Operations For the six months ended June 30, 2011 compared to the six months ended June 30, 2010





Revenues





The Company generated $1,738,279 and $1,337,602 in revenues for the six (6) months ended June 30, 2011 and 2010.  The increase in revenues is a result of the recognition of revenues from one big contract in the first quarter of  2011.





The Company’s revenues from 1 customer accounted for $1,696,279 or 97 % of total revenues for the six months ended June 30, 2011 and 2 customers accounted for $1,306,405 or 98% of total revenues in the six months ended June 30, 2010.





Six months ended June 30, 2011Revenues


% of total revenuesCustomer A

$
1,696,279



98
%Other customers


42,000



2Total Revenues

$
1,738,279



100
%





Six months ended June 30, 2010Revenues


% of total revenuesCustomer A

$
1,006,411



75
%Customer B


299,994



22Other customers


31,197



3Total Revenues

$
1,337,602



100
%





Cost of Revenue




Cost of revenue primarily consists of purchases and royalties to the Chief Science Office in Israel due to grants that were received in the past.  Cost of revenues was $174,463 and $69,748 for the six months ended June 30, 2011 and 2010, respectively. This increase is primarily attributable to increase in revenues.





7





Total Operating Expenses





Operating expenses consist primarily of personnel costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions, communication expenses, other administrative expenses and amortization of other acquired intangible assets. During the six (6) months ended June 30, 2011 and 2010, total operating expenses were $2,494,504 and $1,668,407, respectively.  The increase in operating expenses resulted mainly from an increase in stock based compensation to $1,461,419 in the six month ended June 30, 2011 compared with $471,405 in the six month ended June 30, 2010. Salaries and other operational expenses did not change from the six month ended June 2011 to the same period in 2010.




Liquidity and Capital Resources





The Company had cash in the amount of $786,087 as of June 30, 2011 and $803,443 as of December 31, 2010.





The Company through its consolidated subsidiary SDS Ltd generated revenues in the amount of $1,738,279 for the six (6) months ended June 30, 2011, as compared to $1,337,602 for the six months ended June 30, 2010 and incurred net loss of $1,168,394 for the six month periods ending June 30, 2011 and a loss of $525,559 for the six months ended June 30, 2010.  In addition, the Company had a stockholders' equity of $1,164,336 at June 30, 2011.





As of June 30, 2011, the Company owed $307,000 to Mr. Eran Drukman, an officer 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 and development, marketing, sales channel development, general and administrative expenses and debt financing.





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 net loss of $1,168,394 for the six months ended June 30, 2011. The Company had an accumulated deficit of $3,953,492.  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 June 30, 2011, 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.





8





Recent Accounting Pronouncements




In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-03 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.




In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.




There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries.  None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.





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 Principal Executive Officer and Principal 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 Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.





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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.





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, Convertible Note and Use of Proceeds.





On March 21, 2011, the Company issued a convertible note (the “Note”) to Investor (the “Lender”) whereby the Lender made a loan (the “Loan”) to the Company in an amount equal to $300,000 and accruing interest at a rate of 10% per annum. A similar note was issued on May 12, 2011 for an amount equal to $100,000 (together the loans are referred to as the "Loan"). The Loan and the accrued interest will be repayable in one installment on the date that is eighteen months after the date the Loan is made; provided that such date may be extended at the Company’s request by another six months. The Lender shall have the right, at any time, to convert the principal and interest outstanding under the Note into common share issued by the Company at a conversion rate of $0.07 per a common share. In addition, the Lender is entitled to (i) 500 Class C warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.12 per Common Share and (ii) 500 Class D warrants to purchase an additional 500 Common Shares for each 1000 Common Shares converted at exercise price of $0.21 per Common Share.  The Class C Warrants shall be exercisable at any time from the conversion date to and excluding the first anniversary thereof and the Class D Warrants shall be exercisable at any time from the conversion date to and excluding the third anniversary thereof. There will be no restrictions on shares being registered upon exercise of the loan and the warrants will be registered under the Securities Act, or any state securities laws, and may be offered or sold in the United States upon registration or an applicable exemption from the registration requirements of the Securities Act.





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As of June 30, 2011 the Company is committed to issue shares of common stock of the Company, valued at $5,000 to the Chief Executive Officer of the Company for services rendered during the six months ended June 30, 2011.





As of June 30, 2011 the Company is committed to issue 60,000 shares of common stock of the Company, to two consultants and shareholders of the Company for services rendered by the consultants during the three months ended June 30, 2011.





The shares will be issued pursuant to an exemption from the registration requirements provided under Section 4(2) of the Securities Act of 1933, as amended and by Regulation S.





Use of Proceeds





The proceeds from the sale of the Company’s securities were be used for working capital purposes.





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)32.1

Section 1350 Certification of Principal Executive 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: August 22, 2011By:
/s/ Gil BoosidanName: Gil BoosidanTitle :  Chief Executive Officer and Director

(Principal Executive and Principal Financial and Accounting Officer)





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