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EX-31.1 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - Suspect Detection Systems, Inc.f10q0311ex31i_suspect.htm
EX-31.2 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - Suspect Detection Systems, Inc.f10q0311ex31ii_suspect.htm
EX-32.2 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - Suspect Detection Systems, Inc.f10q0311ex32ii_suspect.htm
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - Suspect Detection Systems, Inc.f10q0311ex32i_suspect.htm
 
 


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 March 31, 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
o
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 May 13, 2010, 76,555,493 shares of common stock, par value $0.0001 per share, were issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS

 
Page
PART I
 
Item 1. Financial Statements
F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Item 3. Quantitative and Qualitative Disclosures About Market Risk
10
Item 4(T). Controls and Procedures
10
PART II
 
Item 1. Legal Proceedings
11
Item IA. Risk Factors
11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
11
Item 3. Defaults Upon Senior Securities
11
Item 4. Removed and Reserved
11
Item 5. Other Information
11
Item 6. Exhibits
              11
 
 
 
 

 
 
PART I
FINANCIAL INFORMATION

Item 1.    Financial Statements.
 
SUSPECT DETECTION SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
 
Consolidated Financial Statements-
 
   
Consolidated Balance Sheets as of March 31, 2011(unaudited), and December 31, 2010
F-2
   
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited)
F-3
   
Consolidated Statements of Cash Flows for Three Months Ended March 31, 2011 and 2010
F-4
   
Notes to Consolidated Financial Statements March 31, 2011 and 2010
F-7
 
 
F-1

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS


U.S. dollars
 
ASSETS
 
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Unaudited
   
Audited
 
Current Assets:
           
Cash and cash equivalents
  $ 1,037,374     $ 803,443  
Restricted cash
    115,804       115,501  
Accounts receivable
    22,422       288,037  
Inventory
    76,217       188,185  
Prepaid expenses and other receivables
    76,063       253,864  
   Total current assets
    1,327,880       1,649,030  
                 
Property and Equipment:
               
Computer and other equipment
    58,946       56,556  
Less - Accumulated depreciation
    (29,088 )     (25,687 )
Property and equipment, net
    29,858       30,869  
                 
Other Assets:
               
Severance pay fund
    35,393       89,684  
Long term deposit
    7,463       7,300  
Goodwill
    1,333,214       1,333,214  
   Total other assets
    1,376,070       1,430,198  
Total Assets
  $ 2,733,808     $ 3,110,097  
 
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
 
 
F-2

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS 


U.S. dollars
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Unaudited
   
Audited
 
Current Liabilities:
           
Accounts payable - Trade
  $ 35,793     $ 43,174  
Accrued liabilities
    230,944       227,228  
Advances from customers
    42,995       1,656,249  
Deferred revenues
    264,577       112,890  
Due to related parties
    466,414       283,257  
   Total current liabilities
    1,040,723       2,322,798  
                 
Long-term Debt:
               
Convertible note
    300,905       -  
Accrued severance pay
    35,393       88,560  
   Total liabilities
    336,298       2,411,358  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity:
               
Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 76,555,493 shares issued and outstanding at March 31, 2011 and December 31, 2010.
    7,655       7,655  
Additional paid-in capital
    3,448,726       3,399,961  
Common stock subscribed
            -  
Accumulated (deficit)
    (2,472,628 )     (2,785,098 )
Total incorporated stockholders' equity, Net
    983,753       622,518  
Less - Noncontrolling interest
    (373,034 )     (76,221 )
   Total stockholders' equity
    1,356,787       698,739  
                 
Total Liabilities and Stockholders' Equity
  $ 2,733,808     $ 3,110,097  

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
 
 
F-3

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
U.S. dollars
 
   
Three months ended
March 31,
 
   
2011
   
2010
 
         
Restated
 
             
             
Revenues, net
  $ 1,608,418     $ 620,199  
                 
Cost of Goods Sold
    163,754       38,339  
                 
Gross Profit
    1,444,664       581,860  
                 
Expenses:
               
Research and development
    146,694       32,185  
Selling, general and administrative
    702,493       725,130  
Total operating expenses
    849,187       757,315  
                 
Income (Loss) from Operations
    595,477       (175,455 )
                 
Interest income (expense), net
    13,806       (3,098 )
                 
Net income (loss)
    609,283       (178,553 )
                 
Net loss (income) Attributable to Noncontrolling Interest
    (296,813 )     (85,747 )
                 
Net income (loss) attributable to Suspect Detection Systems Inc.
  $ 312,470     $ (264,300 )
                 
Income (Loss) Per Common Share:
               
Income (Loss) per common share - Basic and Diluted
  $ (0.00 )   $ (0.00 )
                 
Weighted Average Number of Common Shares  Outstanding - Basic and Diluted
    74,055,493       65,729,668  
 
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
 
 
F-4

 
 
SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


U.S. dollars
 
   
Three months ended
March 31,
 
   
2011
   
2010
 
         
Restated
 
             
Operating Activities:
           
Net (loss)
  $ 609,283     $ (178,553 )
Adjustments to reconcile net (loss) to net cash
               
(used in) operating activities:
               
Common stock issued for officers' compensation
    21,000       -  
Stock options issued to directors
    22,265       105,203  
Stock options issued to sales agents
    -       81,527  
Stock warrants issued to a consultant
    -       49,888  
Common stock issued for consulting services
    5,500       99,000  
Interest due to the issuance of convertible note
    905       -  
Depreciation
    3,401       1,281  
Changes in Assets and Liabilities-
               
    Inventory
    111,968       7,870  
Prepaid expenses and other receivables
    177,801       (68,970 )
Accounts payable - Trade
    (7,381 )     63,004  
Accrued liabilities
    3,716       15,795  
Advances from customers, net
    (1,347,639 )     (469,400 )
Deferred revenues
    151,687       87,350  
Due to related parties
    183,157       83,389  
Accrued severance pay
    1,124       647  
Net Cash (Used in) Operating Activities
    (63,213 )     (121,969 )
                 
Investing Activities:
               
Increase in restricted cash
    (303 )     (100,000 )
Long term deposit
    (163 )     (177 )
Purchases of Property and Equipment
    (2,390 )     (2,789 )
Net Cash Provided by (Used in) Investing Activities
    (2,856 )     (102,966 )
                 
Financing Activities:
               
Issuance of convertible note
    300,000       -  
Issuance of common stock for cash
    -       95,000  
Net Cash Provided by Financing Activities
    300,000       95,000  

 
 
F-5

 

SUSPECT DECTECTION SYSTEMS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


U.S. dollars
 
   
Three months ended
March 31,
 
   
2011
   
2010
 
         
Restated
 
             
             
Net Increase (Decrease) in Cash
    233,931       (129,935 )
Cash and Cash Equivalents - Beginning of Period
    803,443       701,931  
Cash and Cash Equivalents - End of Period
    1,037,374     $ 571,996  
 
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-6

 
 
Note 1: General
 
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.

The Israeli subsidiary, Suspect Detection Systems Ltd, (“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 “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.
 
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 from July 9, 2009.
 
 
F-7

 
 
Note 2: Summary of Significant Accounting Policies
 
Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of March 31, 2011, consolidated statements of income and cash flows for the three months ended March 31, 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 March 31, 2011, our consolidated results of operations and cash flows for the three months ended March 31, 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 months ended March 31, 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 March 31, 2011, and consolidated revenues and expenses for the three months ended March 31, 2011 and 2010.  Actual results could differ from those estimates made by management.
 
Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 58 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.
 
 
 
F-8

 
 
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 March 31, 2011
 
         
Quoted Prices in Active
   
Significant Other
   
Significant
 
         
Markets for Identical Assets
   
Observable Inputs
   
Unobservable Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Cash and cash equivalents
  $ 1,037,374     $ 1,037,374     $ -     $ -  
Restricted Cash
    115,804       115,804       -       -  
Total assets at fair value
  $ 1,153,178     $ 1,153,178     $ -     $ -  

   
Fair Value Measurements at December 31, 2010
 
         
Quoted Prices in Active
   
Significant Other
   
Significant
 
         
Markets for Identical Assets
   
Observable Inputs
   
Unobservable Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Cash and cash equivalents
  $ 803,443     $ 803,443     $ -     $ -  
Restricted Cash
    115,501       115,501       -       -  
Total assets at fair value
  $ 918,944     $ 918,944     $ -     $ -  
 
Impact of recently issued and adopted accounting pronouncements
 
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. This update is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of these requirements did not have an impact on the Company's consolidated financial position or results of operations.
 
 
 
F-9

 
 
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities and additional details of valuation techniques and inputs utilized. This update is consistent with the Company's current accounting application for fair value measurements and disclosures.
 
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 income of $312,470 for the three months ended March 31, 2011  and, as of March 31, 2011, and December 31, 2010, the Company had an accumulated deficit of approximately $2,472,628 (2010 - $ 2,785,098).  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 March 31, 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 the period ended March 31, 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.
 
 
 
F-10

 
 
Effects on previously issued financial statements for the period ended March 31, 2010 as follows:
 
Increase in general and administrative expenses
  $ 181,412  
Increase in 2009 net loss attributable to Suspect Detection Systems Inc.
  $ 181,412  
 
The accompanying financial statements for the year ended December 31, 2009 and for the three months ended at March 31, 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. The effect on the Company's previously issued financial statements is summarized as follows:
 
Statement of Operations for the three months ended March 31, 2010
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
                         
Revenues, net
  $ 620,199                     $ 620,199  
Cost of Goods Sold
    38,339                       38,339  
   Gross Profit
    581,860                       581,860  
                                 
Expenses:
                               
Research and development
    32,185                       32,185  
Selling, general and administrative
    543,718       181,412       A,b,c,d,e,f,g,h       725,130  
   Total operating expenses
    575,903                       757,315  
                                 
Income (loss) from Operations
    5,957                       (175,455 )
                                 
Interest expense
    (3,098 )                     (3,098 )
                                 
Net (loss)
    2,859                       (178,553 )
                                 
Net (loss) Attributable to Noncontrolling Interest
    (85,747 )                     (85,747 )
                                 
Net (loss) attributable to Suspect Detection Systems Inc.
  $ (82,888 )                   $ (264,300 )
                                 
 
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
(Loss) Per Common Share:
                       
(Loss) per common share - Basic and Diluted
  $ (0.00 )                   $ (0.00 )
                                 
Weighted Average Number of Common Shares
                               
Outstanding - Basic and Diluted
    72,984,053       (7,254,385 )     i       65,729,668  

 
F-11

 

(a) 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.

(b) 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 $105,203.
 
(c) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine sales 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.

(d) Correction of error of $7,000 originally included in selling, general and administrative for insurance premium for calendar year 2010, which should have been recorded as prepaid expenses.

(e) Correction of error of $74,250 originally included in selling, general and administrative for consultants fees which should have not been expensed.

(f) 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

(g) Correction of error of $18,058 originally not included in selling, general and administrative for general charges from SDS Israel, which should have been expensed.

(h) Correction of error of $6,402 originally not included in selling, general and administrative

(i) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding
 
 
 
F-12

 
 
Statement of Cash Flows for the three months ended March 31, 2010

   
Previously
             
   
reported
    Net Change     Restated  
Operating Activities:
                 
Net income (loss)
  $ 2,859     $ (348,285 )   $ (178,553 )
Adjustments to reconcile net (loss) to net cash
                       
Options issued to director
    -       105,203       105,203  
Options issued to agents
    -       81,527       81,527  
Warrants issued to a consultant
    -       49,888       49,888  
Common stock issued for consulting services
    99,000       -       99,000  
Depreciation
    1,281       -       1,281  
Changes in Assets and Liabilities-
                       
Inventory
    7,870       -       7,870  
Prepaid expenses and other receivables
    12,103       (81,703 )     (68,970 )
Accounts payable - Trade
    63,004       -       63,004  
Accrued liabilities
    31,148       (15,353 )     15,795  
Advances from customers, net
    (469,400 )     -       (469,400 )
Deferred revenues
    87,350       -       87,350  
Due to related party
    -       83,389       83,389  
Accrued severance pay
    647       -       647  
                         
Net Cash (Used in) Operating Activities
    (164,137 )     42,168       (121,969 )
                         
Investing Activities:
                       
Increase in restricted cash
    -       (100,000 )     (100,000 )
Prepaid expenses, non-current
    -       (177 )     (177 )
Purchases of Property and Equipment
    (2,789 )     -       (2,789 )
                         
Net Cash Provided by (Used in) Investing Activities
    (2,789 )     (100,177 )     (102,966 )
                         
 
Statement of Cash Flows for the three months ended March 31, 2010
 
   
Previously
   
Net Change
   
Restated
 
   
reported
             
Financing Activities:
                 
Issuance of common stock for cash
    95,000       -       95,000  
Due to related party
    41,991       (41,991 )     -  
Net Cash Provided by Financing Activities
    136,991       (41,991 )     95,000  
                         
Net Increase (Decrease) in Cash
    (29,935 )     -       (129,935 )
Cash and Cash Equivalents - Beginning of Period
    701,931               701,931  
Cash and Cash Equivalents - End of Period
  $ 677,996             $ 571,996  
Supplemental Disclosure of Cash Flow Information:
                       
Cash paid during the period for:
                       
Interest
  $ -             $ -  
Income taxes
  $ -             $ -  
 
 
 
F-13

 
 
Note 5 Common Stock

As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $2,500 to the Chief Executive Officer of the Company for services rendered during the three months ended March 31, 2011.

As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $4,500 to the Chief Financial Officer of the Company for services rendered by the officer rendered during the three months ended March 31, 2011.

As of March 31, 2011 the Company is committed to issue 90,000 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 March 31, 2011.
 
Note 6 Convertible Note
 
On March 21, 2011, the Company issued a convertible note (the “Note”) to Tamar Shefet (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. 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.

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 balance sheet date. We concluded that the liability value is equal to similar liability that does not include a conversion option and therefore the equity component is zero.  At March 31, 2011 our stock price closed at $0.06.  Therefore, our convertible note is presented as a long term debt.
 
 
 
F-14

 
 
Note 7 Stock warrants

A summary of the warrants granted is as follows:
 
   
For the period ended
 
   
March 31, 2011
 
   
Number
of warrants
   
Weighted Average Exercise Price
 
             
Outstanding and exercisable at the beginning of the period
    21,003,339     $ 0.268  
Granted
    3,783,336       0.349  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding and exercisable at the end of the period
    17,220,003     $ 0.25  
 
   
For the year period
 
   
March 31, 2010
 
   
Number
of warrants
   
Weighted Average Exercise Price
 
             
Outstanding and exercisable at the beginning of the period
    16,699,667     $ 0.317  
Granted
    2,050,000       0.277  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding and exercisable at the end of the period
    18,749,667     $ 0.313  

 
 
F-15

 

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 march 31, 2011 2,000,000 stock options were granted under the Stock Option Plan.
 
On December 30, 2009  the Company authorized 35,000,000 shares of Common Stock for issuance under the SDSS Inc., 2009 the stock option plan, of which as of December 31, 2010 1,500,000 options were granted to Mr. Yoav krill, the Chairman of the Board of Directors and 500,000 to a member of the Advisory Board. The Options granted were valued at $ 236,970. The options were granted to Mr. Yoav Krill on January 13, 2010, under the consultancy agreement with Mr., Krill and they are exercisable at $0.15 per share. A total of 250,000 options were vested at the date of the grant, while the remaining options will vest at a rate of 104,167 options each calendar quarter over three years. The options terminate forty-eight (48) months from the date of vesting. The options were granted to the member of the Advisory Board on January 14, 2010, under the consultancy agreement and they are exercisable at $0.15 per share. A total of 250,000 options were vested at the date of the grant, while the remaining options will vest at a rate of 20,833 options each calendar quarter over three years. The options terminate forty-eight (48) months from the date of vesting. The number of the options exercisable at December 31, 2010 was 1,000,000 options. As of the date of the grant, the average expected term of the options was 5.32 years, expected volatility was 147.51 percent, expected dividend rate was 0 percent, and the risk free rate of return was 2.77 percent.
 
The Company accounts for stock based compensation using the fair value recognition provisions of ASC No. 718 “Compensation – stock compensation”.
 
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:
 
       
   
Options granted under 2009 Global Stock Incentive Plan
 
annual dividends of
  $ 0.00  
expected volatility of
    114.78-158.87 %
risk-free interest rate of
    2.3-2.77 %
expected average options expiration
    3-5.32  
 
 
 
F-16

 
 
   
For the three months ended
 
   
March 31, 2011
 
   
Number
of options
   
Weighted Average Exercise Price
 
             
Outstanding and exercisable at the beginning of the period
    3,550,200     $ 0.15  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding and exercisable at the end of the period
    3,550,200     $ 0.15  
 
   
For the three months ended
 
   
March 31, 2010
 
   
Number
of options
   
Weighted Average Exercise Price
 
             
Outstanding and exercisable at the beginning of the period
    1,550,200     $ 0.15  
Granted
    2,000,000       0.15  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding and exercisable at the end of the period
    3,550,200     $ 0.15  
 
Note 9   Major Customers

The Company’s revenues from a customer accounted for $1,590,110 or 99% of total revenues for the three months ended March 31, 2011 and 3 customers accounted for $859,990 or 97% of total revenues in the nine months ended March 31, 2010.
 
   
Three months ended March 31, 2011
 
   
Revenues
   
% of total revenues
 
Customer A
  $ 1,590,110       99 %
Other customers
    18,308       1  
Total Revenues
  $ 1,608,418       100 %

 
F-17

 


   
Three months ended March 31, 2010
 
   
Revenues
   
% of total revenues
 
Customer B
  $ 610,000       69 %
Customer C
    165,000       19  
Customer D
    84,990       10  
Other customers
    28,645       3  
Total Revenues
  $ 888,635       100 %
 
Note 10: Subsequent events

At April 18, 2011, the Company granted 5,300,000 options to four employees of SDS- Ltd. A total of 3,750,000 options were vested at the date of the grant, while the remaining options will vest each calendar quarter over two years. The options terminate at the 31st of December of the fifth year following the calendar Gregorian year in which the option became exercisable.


 
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.

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.
 
SDS was incorporated under the Companies Law, 5759-1999, of the State of Israel in 2004.  In order to finance its research and development activities, SDS sought public funding and in 2005, the Transportation Security Administration of the US Department of Homeland Security (the “TSA”) awarded a grant to SDS to support the development of behavior pattern recognition technology.  Additional funding was obtained from the Israeli government and US and Israeli governmental security authorities performed evaluations and testing of SDS’s products in 2005.  In 2006, SDS obtained private financing, issuing shares of preferred stock and warrants to the NG – The Northern Group LP.  Additional US government funding was obtained in 2006 from the TSA.
 
On 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 Global Incentive Stock Option Plan adopted by the Company at December 30, 2009.  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.
 
 
4

 
 
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.
 
On January 13, 2010, the board of directors of the Company appointed Dr. Kevin Schatzle to the Board of Advisors. The advisory agreement calls for 500,000 options of common stock of the Company, exercisable at $0.15 per share, from the Global Incentive Stock Option Plan adopted by the Company at December 30, 2009. The agreement calls for 250,000 options vested simultaneously with the execution and delivery of the agreement, and the balance shall vest at the rate of 20,833 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.
 
During January 2010, SDS Ltd. executed an Indemnification and Exemption Agreement with Mr. Shabtai Shoval, the CEO of SDS Ltd. The agreement calls for the indemnification of Mr. Shoval and advance of expenses for any personal liability that may be imposed on Mr. Shoval in his capacity as an officer of SDS Ltd. Per the agreement, the maximum amount payable by SDS Ltd. to Mr. Shoval shall be the higher of $1,000,000 or 80% of SDS Ltd.’s cash reserves, measured promptly after receipt by SDS Ltd. of notice from Mr. Shoval of the commencement of any action, suit or proceeding regarding which Mr. Shoval may seek indemnification thereafter. SDS Ltd, agreed to reserve $100,000 from its cash and cash equivalents in order to assure the fulfillment the Company’s indemnification obligation under the agreement until such time as determined by the Board of Directors of SDS Ltd.
 
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.
 
 
5

 
 
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.

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.
 
 
 
6

 
 
Plan of Operation

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

Results of Operations

The following discussion should be read in conjunction with the condensed 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 March 31, 2011 compared to the three months ended March 31, 2011

Revenues

The Company generated $1,608,418 and $620,199 in revenues for the three (3) months ended March 31, 2011 and 2010, respectively, which represents an increase of $988,219 or 259.33%.  The increase in revenues is a result of increased marketing activities.

The Company generated revenues from one of its four major customers in the amount of $1,590,110 or 99% of total revenues for the three months ended March 31, 2011. During the three months ended March 31, 2010 the purchases of 3 customers in the aggregate amount of $859,990 accounted for  97% of the Company’s total revenues.

 
7

 
 
   
Three months ended March 31, 2011
 
   
Revenues
   
% of total revenues
 
Customer A
  $ 1,590,110       99 %
Other customers
    18,308       1  
Total Revenues
  $ 1,608,418       100 %
 
   
Three months ended March 31, 2010
 
   
Revenues
   
% of total revenues
 
Customer B
  $ 610,000       69 %
Customer C
    165,000       19  
Customer D
    84,990       10  
Other customers
    28,645       3  
Total Revenues
  $ 888,635       100 %
 
Total Operating Expenses

During the three (3) months ended March 31, 2011 and 2010, total operating expenses were $843,687 and $757,315, respectively.  The increase in operating expenses results from an increase in research and development expenses which increased from $32,185 for the three months ended March 31, 2010 to $146,964 for the three months ended March 31, 2011 and represents an increase of 456.62%. Selling, general and administrative expenses decreased during the three (3) months ended March 31, 2011 to $702,493 from $725,130, a difference of $22,637 or 3.12%.

Net Income (loss)
 
During the three (3) months ended March 31, 2011 the net income was $312,470 as oppose to a loss of $264,300, during the three (3) months ended March 31, 2010

Liquidity and Capital Resources

The Company had cash in the amount of $1,037,374 as of March 31, 2011 and $803,443 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.

As of March 31, 2011, the Company owed $293,162 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.  
 
 
8

 
 
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 income of $317,970 for the three month periods ending March 31, 2011. The Company had an accumulated deficit of approximately $2,472,628 (December 31, 2010 - $2,785,098).  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.    These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
Recent Accounting Pronouncements
 
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. This update is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of these requirements did not have an impact on the Company's consolidated financial position or results of operations.
 
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities and additional details of valuation techniques and inputs utilized. This update is consistent with the Company's current accounting application for fair value measurements and disclosures.
 
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.
 
 
 
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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.

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, Convertible Note and Use of Proceeds.
 
On March 21, 2011, the Company issued a convertible note (the “Note”) to Tamar Shefet (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. 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.

As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $2,500 to the Chief Executive Officer of the Company for services rendered during the three months ended March 31, 2011.

As of March 31, 2011 the Company is committed to issue shares of common stock of the Company, valued at $4,500 to the Chief Financial Officer of the Company for services rendered by the officer rendered during the three months ended March 31, 2011.

As of March 31, 2011 the Company is committed to issue 90,000 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 March 31, 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.
 
Description
     
31.1
 
Rule 13a-14(a)/15d14(a) Certification of Principal Executive Officer (attached hereto)
     
31.2
 
Rule 13a-14(a)/15d14(a) Certification of Principal Financial and Accounting Officer (attached hereto)
     
32.1
 
Section 1350 Certification of Principal Executive Officer (attached hereto)
     
32.1
 
Section 1350 Certification of Principal Financial and Accounting 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: May 13, 2011 
   
 
By:
/s/ Gil Boosidan
   
Name: Gil Boosidan
   
Title :  Chief Executive Officer and Director (Principal Executive Officer)
 
Dated: May 13, 2011 
By:
/s/ Ran Daniel
   
Name: Ran Daniel
   
Title:  Chief Financial Officer (Principal Financial and Accounting Officer)
 
 
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