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 quarter ended June 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
(State of incorporation)
 
98-0511645
 (IRS Employer ID Number)

150 West 56 th 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 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                                                      
Non-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 16, 2010, 74,055,493 shares of common stock, par value $0.0001 per share, were issued and outstanding.

 
 

 

TABLE OF CONTENTS

 
Page
PART I
 
Item 1. Financial Statements
1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1
Item 3. Quantitative and Qualitative Disclosures About Market Risk
6
Item 4(T). Controls and Procedures
6
PART II
 
Item 1. Legal Proceedings
7
Item IA. Risk Factors
7
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
7
Item 3. Defaults Upon Senior Securities
8
Item 4. Removed and Reserved
8
Item 5. Other Information
8
Item 6. Exhibits
              8
 
 
 

 

PART I
FINANCIAL INFORMATION

Item 1.    Financial Statements.
 
SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited )
 
   
Consolidated Financial Statements-
 
   
Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009
F-2
     
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010, and 2009
F-3
   
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010, and 2009
F-4
   
Notes to Consolidated Financial Statements June 30, 2010, and 2009
F-6
   

 
F-1

 
 
SUSPECT DETECTION SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (NOTE 2)
AS OF JUNE 30, 2010, AND DECEMBER 31, 2009
(Unaudited)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 386,344     $ 701,931  
Restricted cash
    15,827       15,827  
Inventory
    39,797       55,281  
Other current assets
    59,237       60,343  
Total current assets
    501,205       833,382  
Property and Equipment:
               
Property and equipment
    41,101       30,034  
Less - Accumulated depreciation
    (20,592 )     (17,534 )
Property and equipment, net
    20,509       12,500  
Other Assets:
               
Severance pay fund
    82,139       45,563  
Other assets, non-current
    63,796       10,578  
Goodwill
    1,325,654       1,325,654  
Total other assets
    1,471,589       1,381,795  
Total Assets
  $ 1,993,303     $ 2,227,677  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts payable - Trade
  $ 17,664     $ 9,175  
Accrued liabilities
    276,137       161,161  
Advances from customers
    117,460       919,400  
Deferred revenues
    216,453       55,631  
Due to Directors and stockholders
    138,382       99,541  
Total current liabilities
    766,096       1,244,908  
Long-term Debt:
               
Accrued severance pay
    82,139       84,315  
Total liabilities
    848,235       1,329,223  
Commitments and Contingencies
               
Stockholders' 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
    7,406       7,182  
    Additional paid-in capital
    3,050,065       2,717,373  
    Common stock subscribed
    -       25,000  
    Accumulated (deficit)
    (1,601,463 )     (1,433,495 )
        Total stockholders' equity
    1,456,008       1,316,060  
Less - Noncontrolling interest
    (310,940 )     (417,606 )
        Total stockholders' equity, net
    1,145,068       898,454  
Total Liabilities and Stockholders' Equity
  $ 1,993,303     $ 2,227,677  
 
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)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010, AND 2009
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues, net
  $ 717,403     $ 254,759     $ 1,337,602     $ 423,741  
Cost of Goods Sold
    31,409       14,729       69,748       52,186  
Gross Profit
    685,994       240,030       1,267,854       371,555  
Expenses:
                               
Research and development
    177,676       32,683       209,861       72,430  
Selling, general and administrative
    515,590       299,926       963,406       777,140  
Stock-based compensation      45,916        -        45,916        -  
Professional fees paid by issuance of common stock
    11,096       -       110,096       -  
Total operating expenses
    750,278       332,609       1,329,279       849,570  
Income (Loss) from Operations
    (64,284 )     (92,579 )     (61,425 )     (478,015 )
Other Income (Expense):
                               
Interest income
    123       1,407       123       7,041  
Interest (expense)
    -       -               -  
Total other income (expense)
    123       1,407       123       7,041  
Provision for Income Taxes
    -       -       -       -  
Net (Loss) Before Noncontrolling Interest
    (64,161 )     (91,172 )     (61,302 )     (470,974 )
Less - (Income) Loss Attributable to
                               
Noncontrolling Interest
    (20,919 )     7,159       (106,666 )     84,062  
Net (Loss)
  $ (85,080 )   $ (98,331 )   $ (167,968 )   $ (386,912 )
(Loss) Per Common Share:
                               
(Loss) per common share - Basic and diluted
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )
Weighted Average Number of Common Shares
                               
Outstanding - Basic and Diluted
    73,977,031       66,002,708       73,483,285       66,592,909  
 
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)
FOR THE SIX MONTHS ENDED JUNE 30, 2010, AND 2009
(Unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Operating Activities:
           
Net (loss)
  $ (61,302 )   $ (470,974 )
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
               
Common stock issued for officers' compensation
    18,000       25,500  
Common stock issued for consulting services
    149,000       -  
Stock-based Compensation      45,916        -  
Depreciation
    3,058       2,859  
Changes in Assets and Liabilities-
               
Inventory
    15,484       41,261  
Other assets
    (52,112 )     109,150  
Accounts payable - Trade
    8,489       (18,551 )
Accrued liabilities
    114,976       (349,218 )
Advances from customers
    (801,940 )     -  
Accrued severance pay
    (2,176 )     -  
Deferred revenues
    160,822       -  
Net Cash (Used in) Operating Activities
    (401,785 )     (659,973 )
Investing Activities:
               
Severance fund
    (36,576 )     40,827  
Purchases of property and equipment
    (11,067 )     (1,850 )
Net Cash (Used in) Provided by Investing Activities
    (47,643 )     38,977  
Financing Activities:
               
Issuance of common stock for cash
    95,000       55,000  
Due to Director and stockholder
    38,841       (3,155 )
Net Cash Provided by Financing Activities
    133,841       51,845  
Net (Decrease) in Cash
    (315,587 )     (569,151 )
Cash and Cash Equivalents - Beginning of Period
    717,758       869,537  
Cash and Cash Equivalents - End of Period
  $ 402,171     $ 300,386  
Cash and Cash Equivalents - End of Period Consisting of:
               
Cash in bank
  $ 386,344     $ 284,559  
Restricted cash
    15,827       15,827  
Total
  $ 402,171     $ 300,386  
Supplemental 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)
FOR THE SIX MONTHS ENDED JUNE 30, 2010, AND 2009
(Unaudited)
 
Supplemental Information of Noncash Investing and Financing Activities:
 
On April 20, 2008, SDS Inc. issued 666,6666 (post forward stock split) shares of its common stock to a third-party for marketing and promotional services for one year. The transaction was valued at $100,000.
 
On October 1, 2008, SDS Inc. issued 1,000,000 (post forward stock split) shares of its common stock to a third-party for marketing and promotional services for one year. The transaction was valued at $150,000.
 
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 total value of the transaction was $479,984, and 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 issed 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 DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.

   Unaudited Interim Financial Statements

The accompanying consolidated financial statements of the Company as of June 30, 2010, and December 31, 2009, and for the three and six months ended June 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 June 30, 2010, and December 31, 2009, and the results of its operations and its cash flows for the three and six months ended June 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.

   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.
 
 
F-6

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)

 
    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 six months ended June 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 June 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 DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)

 
  Concentration of Risk

As of June 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 June 30, 2010, and December 31, 2009, and expenses for the three and six months ended June 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.
 
 
 
F-8

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
(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 $167,968 for the six months ended June 30, 2010 (2009 - $386,912) and, as of June 30, 2010, and December 31, 2009, the Company had an accumulated deficit of approximately $1,601,463 (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.

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, 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)           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.
 
 
F-9

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
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 Boosidan as Chief Executive Officer.

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

(4)           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 equity transaction was valued at $479,984.
 
 
F-10

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
 
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 for a stock subscription that was paid in 2009.

On January 29, 2010, the Company issued 300,000 shares of common stock for a cash payment of $45,000.

On March 24, 2010, the Company issued 333,333 shares of common stock for a cash payment of $50,000.

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.

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 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 six months ended June 30, 2010:

   
Options
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
Outstanding December 31, 2009
    -       -       -       -  
     Granted
    1,500,000     $ 0.15       -       -  
     Exercised
    -       -       -       -  
     Forfeited or expired
    -       -       -       -  
Outstanding June 30, 2010
    1,500,000     $ 0.15       3.46     $ 0  
Vested and Exercisable at June 30, 2010
    458,333     $ 0.15       3.46     $ 0  

As of June 30, 2010, the total unrecognized compensation cost related to stock options amounted to $127,634, which will be recognized over the remaining requisite service period through August 2011.

(5)           Income Taxes

The provision (benefit) for income taxes for the six months ended June 30, 2010, and 2009, were as follows (assuming a 23 percent effective tax rate):
 
             
   
Six Months Ended June 30,
 
   
2010
   
2009
 
Current Tax Provision:
           
Federal and state-
           
Taxable income
  $     $  
Total current tax provision
  $     $  
Deferred Tax Provision:
               
Federal and state-
               
Loss carryforwards
  $ 28,072     $ 88,990  
Change in valuation allowance
    (28,072 )     (88,990 )
Total deferred tax provision
  $     $  

 
F-11

 

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)

SDS Inc. had deferred income tax assets as of June 30, 2010, and December 31, 2009, as follows:
 
   
As of
June 30,
20 10
   
As of
December 31,
2009
 
Loss carryforwards
  $ 357,776     $ 329,704  
Less - Valuation allowance
    (357,776 )     (329,704 )
     Total net deferred tax assets
  $     $  
 
The Company provided a valuation allowance equal to the deferred income tax assets for the six months ended June 30, 2010, and 2009, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.

As of June 30, 2010, and December 31, 2009, the Company had approximately $1,555,547 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.

(6)           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. As of June 30, 2010, and December 31, 2009, SDS Inc. had accured 8,952 in office rent expese related to the lease.

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 six months ended June 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 June 30, 2010, the Company owed $138,094 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.
 
 
F-12

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
As of June 30, 2010, the Company owed $288 to an individual who is a former Director, President, and Treasurer of SDS Inc., and a current stockholder.  The loan was provided for working capital purposes, and is unsecured, non-interest bearing, and has no terms for repayment.

(7)           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.

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.

(8)           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 June 30, 2010, SDS Inc. had paid SDS - Israel a cumulative total of $1,100,000.
 
 
 
F-13

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
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 of June 30, 2010, and 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.

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.

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.
 
 
F-14

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
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.

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 has not issue any warrants.

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.


 
F-15

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010, AND 2009
(Unaudited)
 
(9)           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-16

 

 

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.
 
 
1

 

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.

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.
 
 
2

 

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.

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.
 
 
3

 

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 58% of Suspect Detection Systems Ltd. in the beginning of the first quarter of 2009, we are currently  marketing SDS’s products.
 
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 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 June 30, 2010 compared to the three months ended June 30, 2009

Revenues

The Company through its consolidated subsidiary Suspect Detection Systems Ltd generated revenues in the amount of $717,403 for the three (3) months ended June 30, 2010 and as compared to $254,759 for the three ended June 30, 2009. The increase in revenues for the three months ending in June 30, 2010, as compared to the same period in 2009, is a result of increased marketing activities in 2009 and 2010.
 
Total operating expenses
 
During the three (3) months ended June 30, 2010 and 2009, total operating expenses were $750,248 and $332,609 respectively. The increase in operating expenses results from an increase in stock-based compensation and 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 June 30, 2010 and 2009, the net loss was $85,080 and $98,331 respectively.
 
 
 
4

 
 
 
Results of Operations For the six months ended June 30, 2010 compared to the six months ended June 30, 2009

Revenues

The Company generated $1,337,602 and $423,741 in revenues for the six (6) months ended June 30, 2010 and 2009. The increase in revenues is a result of increased marketing activities in 2009 and 2010.

Total Operating Expenses

During the six (6) months ended June 30, 2010 and 2009, total operating expenses were $1,329,279 and $849,570, respectively. The increase in operating expenses results from an increase in general and administrative expenses due to the increase in the Company 's marketing activities.

Net loss
 
During the six (6) months ended June 30, 2010 and 2009, the net loss was $167,968 and $386,912, respectively.

Liquidity and Capital Resources

The Company had cash in the amount of $386,344 as of June 30, 2010 and $701,931 as of December 31, 2010. 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 $717,403 for the three (3) months ended June 30, 2010, as compared to $254,759 for the three months ended June 30, 2009 and incurred net losses of $85,080 and $98,331 for the three month periods ending June 30, 2010 and 2009 respectively. In addition, the Company had a stockholders' equity of $1,993,303 as at June 30, 2010.

As of June 30, 2010, the Company owed $138,094 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 six months ended June 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.
 
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 $167,968 for the six months ended June 30, 2010 (2009 - $386,912) and, as of June 30, 2010, and December 31, 2009, the Company had an accumulated deficit of approximately $1,601,463 (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.

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, 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.
 
 
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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.
 
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.

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

On January 6, 2010, the Company issued 150,000 shares of common stock to Amir Uziel, a consultant, in consideration for services rendered in the amount of $22,500.

On January 6, 2010, the Company issued 150,000 shares of common stock to Lavi Krasney, a consultant, in consideration for services rendered in the amount of 22,500.

On January 6, 2010, the Company issued 360,000 shares of common stock to Samba Investitionen GmBH, a consultant, in consideration for services rendered in the amount of $54,000.

In order to obtain capital, during the last fiscal year ended December 31, 2009, the Company commenced capital formation activity through a private placement offering, exempt from registration under Regulation S of 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. 

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 the purchase price of $25,000.

On January 29, 2010, the Company issued 300,000 shares of common stock to, 300,000 Class A Warrants and 300,000 Class B Warrants to Asher Gil Mediouni, in consideration for the purchase price of $45,000.

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, in consideration for the purchase price of $50,000.
 
 
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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.

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.
 
Use of Proceeds

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

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.
 
Description
     
31.1
 
Rule 13a-14(a)/15d14(a) Certification of Gil Boosidan, Chief Executive Officer and Director(attached hereto)
     
31.2
 
Rule 13a-14(a)/15d14(a) Certification of Asher Zwebner, Chief Financial Officer and Director(attached hereto)
     
32.1
 
Section 1350 Certification of Gil Boosidan, Chief Executive Officer and Director (attached hereto)
     
32.1
 
Section 1350 Certification of Asher Zwebner, Chief Financial Officer and Director(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 17, 2010       
 
By:
/s/ Gil Boosidan  
    Name: Gil Boosidan  
    Title :  Chief Executive Officer and Director (Principal Executive Officer)  
 
Dated: August 17, 2010
     
 
By:
/s/ Asher Zwebner  
    Name: Asher Zwebner  
    Title :  Chief Financial Officer and Director (Principal Financial and Accounting Officer)  

 
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