10-Q/A 1 f10q0610a2_suspect.htm AMENDMENT NO. 2 TO QUARTERLY STATEMENT f10q0610a2_suspect.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 2)
 
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
 
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 August 16, 2010, 74,055,493 shares of common stock, par value $0.0001 per share, were issued and outstanding. 
 
 
 
 


 
 
EXPLANATORY NOTE TO AMENDMENT NO. 2 ON FORM 10-Q/A
 
Suspect Detection Systems, Inc. (the “Company”) is filing this Amendment No. 2 (this “Amendment No.2”) to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, which was originally filed with the Securities and Exchange Commission (“Commission”) on August 19, 2010, as amended by Amendment No.1 to Form 10-Q filed with the Commission on February 3, 2011 (the “Original Report”), to reflect the restatement of the Company’s financial statements for the period ended June 30, 2010 and 2009 and the financial statements for the fiscal year ended December 31, 2010. As more fully described in Note no. 4 (Restatement) to the consolidated financial statements, the adjustments principally relate to errors identified in the Company’s accounting pursuant to comments received from the Commission to our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2009 and to include additional changes in presentation of certain accounts in the financial statements.
 
The following items of the Original Report have been modified or revised in this Amendment No. 2 to reflect the restatement:
 
 
 
Part I, Item 1. Financial Statements
 
 
 
Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Part I, Item 4T. Controls and Procedures
 
 
 
Part II, Item 6. Exhibits
 
This Amendment No. 2 does not modify or update disclosures presented in the Original Report, except as required to reflect the effects of the restatement. Except for disclosures affected by the restatement, Amendment No. 2 speaks as of the original filing date of the Original Report on August 19, 2010 and does not modify or update disclosures in the Original Report, including the nature and character of such disclosures, to reflect events occurring or items discovered after the filing date of the Original Report. Accordingly, this Amendment No. 2 should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the Original Report, including any amendments to those filings.

 
 

 
 
TABLE OF CONTENTS

 
Page
PART I
 
Item 1. Financial Statements
F-1 – F-31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1
Item 3. Quantitative and Qualitative Disclosures About Market Risk
7
Item 4(T). Controls and Procedures
7
PART II
 
Item 1. Legal Proceedings
8
Item IA. Risk Factors
8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
8
Item 3. Defaults Upon Senior Securities
9
Item 4. Removed and Reserved
9
Item 5. Other Information
9
Item 6. Exhibits
9
 
 
 

 
 
PART I
FINANCIAL INFORMATION

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

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS 

 
U.S. dollars
 
ASSETS
 
June 30,
   
December 31,
 
   
2010
   
2009
 
   
Unaudited
   
Audited
 
   
Restated
   
Restated
 
Current Assets:
           
Cash and cash equivalents
  $ 286,344     $ 701,931  
Restricted cash
    115,827       15,827  
Inventory
    39,797       55,281  
Prepaid expenses and other receivables
    132,737       65,343  
   Total current assets
    574,705       838,382  
                 
Property and Equipment:
               
Computer and other 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  
Long term prepaid expenses
    12,891       10,578  
Goodwill
    1,333,214       1,333,214  
   Total other assets
    1,428,244       1,389,355  
Total Assets
  $ 2,023,458     $ 2,240,237  
 
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
 
 
F-1

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS 

 
U.S. dollars
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
June 30,
   
December 31,
 
   
2010
   
2009
 
   
Unaudited
   
Audited
 
   
Restated
   
Restated
 
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 related parties
    217,191       111,541  
   Total current liabilities
    844,905       1,256,908  
                 
Long-term Debt:
               
Accrued severance pay
    82,139       84,315  
   Total Liabilities
    927,044       1,341,223  
                 
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 at June 30, 2010 and December 31, 2009, respectively
    7,405       7,182  
Additional paid-in capital
    3,221,603       2,580,553  
Common stock subscribed
    -       25,000  
Accumulated (deficit)
    (2,305,379 )     (1,779,820 )
      923,629       832,895  
Less - Noncontrolling interest
    172,785       66,119  
   Total Stockholders' Equity
    1,096,414       899,014  
                 
Total Liabilities and Stockholders' Equity
  $ 2,023,458     $ 2,240,237  

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
 
 
F-2

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

 
U.S. dollars
 
   
Three months ended
June 30,
   
Six months ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
Restated
   
Restated
   
Restated
   
Restated
 
                         
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
    177,671       32,683       209,861       72,430  
Selling, general and administrative
    733,421       408,049       1,458,546       912,140  
Total operating expenses
    911,022       440,732       1,668,407       984,570  
                                 
(Loss) from Operations
    (225,098 )     (200,702 )     (400,553 )     (613,015 )
                                 
Interest income (expense), net
    (15,242 )     1,407       (18,340 )     7,041  
                                 
Net (loss)
    (240,340 )     (199,295 )     (418,893 )     (605,974 )
                                 
Net loss (income) Attributable to Noncontrolling Interest
    (20,919 )     (7,159 )     (106,666 )     84,062  
                                 
Net (loss) attributable to Suspect Detection Systems Inc.
  $ (261,559 )   $ (206,454 )   $ (525,559 )   $ (521,912 )
                                 
(Loss) Per Common Share:
                               
(Loss) per common share - Basic and Diluted
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
Weighted Average Number of Common Shares  Outstanding - Basic and Diluted
    66,309,668       60,781,113       66,039,668       56,659,441  
 
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 CASH FLOWS (unaudited)

 
U.S. dollars
 
   
Six months ended
June 30,
 
   
2010
   
2009
 
   
Restated
   
Restated
 
Operating Activities:
           
Net (loss)
  $ (418,893 )   $ (605,974 )
Adjustments to reconcile net (loss) to net cash
               
(used in) operating activities:
               
Common stock issued for officers' compensation
    23,000       25,500  
Stock options issued to directors
    136,351       -  
Stock options issued to sales agents
    163,054       -  
Stock warrants issued to a consultant
    49,888       -  
Common stock issued for consulting services
    149,000       135,000  
Depreciation
    3,058       2,859  
Changes in Assets and Liabilities-
               
Inventory
    15,484       41,260  
Prepaid expenses and other receivables
    (67,394 )     103,314  
Accounts payable -trade
    8,489       (46,551 )
Prepaid expenses, non-current
    (2,313 )     5,837  
Accrued liabilities
    114,976       (40,277 )
Advances from customers
    (801,940 )     (277,762 )
Deferred revenues
    160,822       -  
Due to related parties
    105,650       13,466  
Accrued severance pay
    (38,752 )     (6,975 )
Net Cash (Used in) Operating Activities
    (399,520 )     (650,303 )
                 
Investing Activities:
               
Cash acquired in business combination (a)
    -       702,147  
Increase in restricted cash
    (100,000 )     -  
Purchases of Property and Equipment
    (11,067 )     (1,850 )
Net Cash Provided by (Used in) Investing Activities
    (111,067 )     700,297  
                 
Financing Activities:
               
Issuance of common stock for cash
    95,000       55,000  
Net Cash Provided by Financing Activities
    95,000       55,000  

 
F-4

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
U.S. dollars
 
   
Six months ended
June 30,
 
   
2010
   
2009
 
   
Restated
   
Restated
 
             
Net Increase (Decrease) in Cash
    (415,587 )     104,994  
Cash and Cash Equivalents - Beginning of Period
    701,931       179,565  
Cash and Cash Equivalents - End of Period
  $ 286,344     $ 284,559  
                 
 
Supplemental Disclosure of Cash Flow Information:
           
Cash paid during the period for:
           
Interest
  $ -     $ -  
                 
Income taxes
  $ -     $ -  
 
(a) Cash acquired in acquisition of 51% interest in SDS - Israel Ltd.:
           
             
Working capital deficiency, excluding cash and cash equivalents
  $ -     $ 541,442  
Property and equipment, net
    -       (16,019 )
Accrued severance pay, net
    -       6,975  
Long term prepaid expenses
    -       (28,360 )
Intercompany balance
    -       1,100,000  
Acquisition costs
            35,000  
Goodwill
    -       (1,333,214 )
Noncontrolling Interest
    -       396,323  
    $ -     $ 702,147  
 
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 (UNAUDITED)

Note 1: General
 
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.

The Israeli subsidiary, Suspect Detection Systems Ltd, (“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.
 
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.
 
 
F-6

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

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.

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

The accompanying consolidated balance sheet as of June 30, 2010, consolidated statements of income for the three and six months ended June 30, 2010 and 2009 and consolidated statements of cash flows for the six months ended June 30, 2010 and 2009 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of June 30, 2010, our consolidated results of operations for the three and six months ended June 30, 2010 and 2009 and our consolidated cash flows for the six months ended June 30, 2010 and 2009.
 
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2009 included in our Annual Report for our fiscal year ended December 31, 2010 on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 22, 2011.
 
Results for the three and six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010.
 
Unless otherwise noted, all references to “dollars” or “$” are to United States dollars.

Use of Estimates

The accompanying consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America.  The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of consolidated assets, liabilities and equity as of June 30, 2010, and 2009, and consolidated revenues and expenses for the three and six months ended June 30, 2010, and 2009.  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.
 
 
F-7

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Fair Value Measurement

As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
 Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 Level 2: Other inputs those are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.  
 Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible in its assessment of fair value.
The following table presents the Company’s financial assets and liabilities that are carried at fair value, classified according to the three categories described above:

   
Fair Value Measurements at June 30, 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
  $ 286,344     $ 286,344     $ -     $ -  
Restricted Cash
    115,827       115,827       -       -  
Total assets at fair value
  $ 402,171     $ 402,171     $ -     $ -  
 
   
Fair Value Measurements at December 31, 2009
 
         
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
  $ 701,931     $ 701,931     $ -     $ -  
Restricted Cash
    15,827       15,827       -       -  
Total assets at fair value
  $ 717,758     $ 717,758     $ -     $ -  

 
F-8

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Impact of recently issued and adopted accounting pronouncements
 
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.
 
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries.  None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.
 
Note 3: Going Concern
 
The Company’s current activities include sales of its products, marketing, capital formation, research and development, and building infrastructure.  The Company has incurred a loss of $525,559 for the six months ended June 30, 2010 and, as of June 30, 2010, and December 31, 2009, the Company had an accumulated deficit of approximately $2,305,379 (2009 - $1,779,820).  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, 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.
 
 
F-9

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Note 4: Restatement
 
The financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 and as of December 31, 2009 and for the year then ended 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.
 
Effects on previously issued financial statements as of June 30, 2010 as follows:
 
Balance sheet:
     
Decrease in cash and cash equivalents
  $ 100,000  
Increase in restricted cash
    100,000  
Increase in prepaid expenses and other receivables
    73,500  
Decrease in prepaid expenses, non current
    49,595  
Increase in Goodwill
    7,560  
Increase in due to related parties
    78,809  
Increase in the additional paid-in capital
    171,537  
Decrease in accumulated deficit
    703,916  
Increase in noncontrolling interest
    483,725  
Statement of operations for the three months ended June 30, 2010:
       
Increase in general and administrative expenses
  $ 140,978  
Increase in interest expense, net
    15,365  
Increase in  net loss attributable to Suspect Detection Systems Inc.
  $ 156,343  
Statement of operations for the six months ended June 30, 2010:
       
Increase in general and administrative expenses
  $ 339,128  
Increase in interest expense, net
    18,463  
Increase in net loss attributable to Suspect Detection Systems Inc.
  $ 357,591  
 
 
F-10

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Effects on previously issued December 31, 2009 financial statements as follows:
 
Balance sheet:
     
       Increase in prepaid expenses and other receivables
  $ 5,000  
       Increase in goodwill
    7,560  
       Increase in due to related parties
    12,000  
       Decrease in additional paid-in capital
    136,840  
       Decrease in accumulated deficit
    346,325  
       Increase in noncontrolling interest
  $ 483,725  
 
Effects on previously issued financial statements for the three and six months ended June 30, 2009 as follows:
 
Statement of operations for the three months ended June 30, 2009:
     
Increase in general and administrative expenses
  $ 123,750  
Increase in interest expense, net
    15,320  
Increase in  net loss attributable to Suspect Detection Systems Inc.
  $ 139,070  
Statement of operations for the six months ended June 30, 2009:
       
Increase in general and administrative expenses
  $ 135,000  
Increase in  net loss attributable to Suspect Detection Systems Inc.
  $ 135,000  
 
The accompanying financial statements for the year ended December 31, 2010 and 2009 and for the six months ended at June 30, 2009 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:
 
 
F-11

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Balance Sheet as of June 30, 2010
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
Current Assets:
                       
Cash and cash equivalents
  $ 386,344     $ (100,000 )     a     $ 286,344  
Restricted cash
    15,827       100,000       a       115,827  
Inventory
    39,797                       39,797  
Prepaid expenses and other receivables
    59,237       73,500       b,c,d       132,737  
   Total current assets
    501,205                       574,705  
                                 
Property and Equipment:
                               
Computer and other equipment
    41,101                       41,101  
Less - Accumulated depreciation
    (20,592 )                     (20,592 )
   Property and equipment, net
    20,509                       20,509  
                                 
Other Assets:
                               
Severance pay fund
    82,139                       82,139  
Prepaid expenses, non-current
    63,796       (49,595 )     e       12,891  
Goodwill
    1,333,214       7,560       f,g       1,333,214  
                                 
   Total other assets
    1,471,589                       1,428,244  
                                 
Total Assets
  $ 1,993,303                     $ 2,023,458  
 
 
F-12

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Balance Sheet as of June 30, 2010
 
   
Previously
   
Net Change
       
Restated
 
   
reported
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                     
Current Liabilities:
                     
Accounts payable - Trade
  $ 17,664               $ 17,664  
Accrued liabilities
    276,137                 276,137  
Advances from customers
    117,460                 117,460  
Deferred revenues
    216,453                 216,453  
Due to related parties
    138,382       78,809      h,I,j     217,191  
   Total current liabilities
    766,096                     844,905  
                               
Long-term Debt:
                             
Accrued severance pay
    82,139                     82,139  
   Total liabilities
    848,235                     927,044  
                               
Commitments and Contingencies
                             
                               
Stockholders' Equity:
                             
Common stock
    7,405                     7,405  
Additional paid-in capital
    3,050,066       171,537    
g,I,k,l,p,q
    3,221,603  
Common stock subscribed
    -                     -  
Accumulated (deficit)
    (1,601,463 )     (703,916 )  
b,c,d,e,g,h,i,j,l,p,q
    (2,503,379 )
   Total stockholders’ equity
    1,456,068                     923,629  
                               
Less – Noncontrolling interest
    (310,940 )     483,725      f,g,k     172,785  
   Total stockholders' equity, Net
    986,880                     1,096,414  
Total Liabilities and Stockholders' Equity
  $ 2,432,853                   $ 2,023,458  
 
 
F-13

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Statement of Operations for the Six months ended June 30, 2010

   
Previously
   
Net Change
         
Restated
 
   
reported
                   
                         
Revenues, net
  $ 1,337,602                 $ 1,337,602  
                             
Cost of Goods Sold
    69,748                   69,748  
   Gross Profit
    1,267,854                   1,267,854  
                             
Expenses:
                           
Research and development
    209,861                   209,861  
Selling, general and administrative
    1,119,418       339,128    
b,c,d,e,h,i,l,p,q,r
      1,458,546  
   Total operating expenses
    1,329,279                     1,668,407  
                               
(Loss) from Operations
    (61,425 )                   (400,553 )
                               
Interest expense
    123       (18,463 )     r       (18,340 )
                                 
Net (loss)
    (61,302 )                     (418,893 )
                                 
Net (loss) Attributable to Noncontrolling Interest
    (106,666 )                     (106,666 )
                                 
Net (loss) attributable to Suspect Detection Systems Inc.
  $ (167,968 )                   $ (525,559 )
                                 
(Loss) Per Common Share:
                               
(Loss) per common share - Basic and Diluted
  $ (0.01 )                   $ (0.01 )
                                 
Weighted Average Number of Common Shares
                               
Outstanding - Basic and Diluted
    73,483,285       (7,443,617 )     s       66,039,668  

 
F-14

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
(a) Reclassification due to the indemnification agreement with the CEO of SDS- Israel to assure future credit availability of $100,000

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

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

(d) Correction of error of $12,000 originally included in selling, general and administrative for officer’s compensation which should have not been expensed.
 
(e) Correction of error of $49,595 originally not included in selling, general and administrative for consultants fees which should have been expensed.

(f) Correction of error in calculation of the fair value of goodwill and 49% noncontrolling interest in SDS-Israel to recognize their fair value of $ 392,000 under FASB ASC 805, as a result of the acquisition of 51% percent interest in the equity ownership of SDS – Israel.

(g) Correction of error in calculation of the goodwill, noncontrolling interest, additional paid in capital and net income as a result of the exchange of 3,199,891 shares of common stock of the Company for additional 7% interest in the equity ownership of SDS – Israel. Those accounts were restated to correct overstatement of the goodwill by $291,690, overstatement of additional paid in capital by $478,125, overstatement of the net income by $1,960, and understatement of the noncontrolling interest by $184,475.

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

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

(j) Correction of error of $24,000 originally not included in selling, general and administrative for consultants fees which should have been expensed in fiscal year 2009.

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

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

 
F-15

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
(p) Correction of error involving of amortized fair value of 1,550,200 options that were granted to nine agents of SDS-Israel in the amount of $163,054. The options are vested within one year of the grant date and they are execrable at $0.15 per share and no later than three years from the grant date.

(q) 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.

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

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

 
 
F-16

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Statement of Operations for the three months ended June 30, 2010
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
Revenues, net
  $ 717,403                 $ 717,403  
                             
Cost of Goods Sold
    31,409                   31,409  
   Gross Profit
    685,994                   685,994  
                             
Expenses:
                           
Research and development
    177,671                   177,671  
Selling, general and administrative
    527,607       160,814    
b,d,e,h,i,l,p,r
      733,421  
   Total operating expenses
    750,278                     911,022  
                               
(Loss) from Operations
    (64,284 )                   (225,098 )
                               
Interest expense
    123       (15,365 )     r       (15,242 )
                                 
Net (loss)
    (64,161 )                     (240,340 )
                                 
Net (loss) Attributable to Noncontrolling Interest
    (20,919 )                     (20,919 )
                                 
Net (loss) attributable to Suspect Detection Systems Inc.
  $ (85,080 )                   $ (261,259 )
                                 
(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
    73,977,031       (7,667,363 )     s       66,309,668  

 
F-17

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
(b) Correction of error of $24,750 originally not included in selling, general and administrative for consultants fees which should have been expensed.

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

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

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

(i) 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

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

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

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

(s) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding
 
 
F-18

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Statement of Cash Flows for the period ended June 30, 2010

   
Previously
   
Net Change
   
Restated
 
   
reported
             
Operating Activities:
                 
Net (loss)
  $ (61,302 )   $ (357,591 )   $ (418,893 )
Adjustments to reconcile net (loss) to net cash
                       
Common stock issued for officers' compensation
    18,000       -       18,000  
Stock options issued to directors
    45,916       90,.435       136,351  
Stock options issued to agents
    163,054       194,135       163,054  
Stock warrants issued to a consultant
    -       49,888       49,888  
Common stock issued for consulting services
    149,000       -       149,000  
Depreciation
    3,058       -       3,058  
Changes in Assets and Liabilities-
                       
Inventory
    (15,484 )     -       (15,484 )
Prepaid expenses and other receivables
    (52,112 )     15,282       (67,394 )
Accounts payable - Trade
    8,489       -       8,489  
Accrued liabilities
    115,102       -       115,102  
Advances from customers, net
    (801,940 )     -       (801,940 )
Deferred revenues
    160,822       -       160,822  
Due to related parties
    -       110,650       100,650  
Accrued severance pay
    (2,176 )     (36,576 )     (38,752 )
                         
Net Cash (Used in) Operating Activities
    (401,785 )     4,578       (397,207 )
                         
Investing Activities:
                       
Increase in restricted cash
    -       (100,000 )     (100,000 )
Prepaid expenses, non-current
    -       (2,313 )     (2,313 )
Increase in severance pay fund
    (36,576 )     36,576       -  
Purchases of Property and Equipment
    (11,067 )     -       (11,067 )
                         
Net Cash Provided by (Used in) Investing Activities
    (47,643 )     (65,737 )     (113,380 )
 
F-19

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Statement of Cash Flows for the Year Ended December 31, 2010
 
   
Previously
   
Net Change
   
Restated
 
   
reported
             
Financing Activities:
                 
Issuance of common stock for cash
    95,000       -       95,000  
Due to related party
    38,841       (38,841 )     -  
Net Cash Provided by Financing Activities
    133,841       (38,841 )     95,000  
                         
Net Increase (Decrease) in Cash
    (315,587 )     (100,000 )     (415,587 )
Cash and Cash Equivalents - Beginning of Period
    717,758               701,931  
Cash and Cash Equivalents - End of Period
  $ 386,344       (15,827 )     286,344  
Cash and Cash Equivalents - End of Period:
                       
Cash in bank
  $ 701,931             $ 701,931  
Restricted cash
    15,827       (15,827 )     -  
Total
  $ 717,758             $ 701,931  
Supplemental Disclosure of Cash Flow Information:
                       
Cash paid during the period for:
                       
Interest
  $ -             $ -  
Income taxes
  $ -             $ -  

 
F-20

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Balance Sheet as of December 31, 2009
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
Current Assets:
                       
Cash and cash equivalents
  $ 701,931                 $ 701,931  
Restricted cash
    15,827                   15,827  
Accounts receivables
    -                   -  
Inventory
    55,281                   55,281  
Prepaid expenses and other receivables
    60,343       5,000       d       65,343  
   Total current assets
    833,382                       838,382  
                                 
Property and Equipment:
                               
Computer and other equipment
    30,034                       30,034  
Less - Accumulated depreciation
    (17,534 )                     (17,534 )
   Property and equipment, net
    12,500                       12,500  
                                 
Other Assets:
                               
Severance pay fund
    45,563                       45,563  
Prepaid expenses, non-current
    10,578                       10,578  
Goodwill
    1,325,654       7,560       a,b       1,333,214  
                                 
   Total other assets
    1,381,795                       1,389,355  
                                 
Total Assets
  $ 2,227,677                     $ 2,240,237  
                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                               
Current Liabilities:
                               
Accounts payable - Trade
  $ 9,175                     $ 9,175  
Accrued liabilities
    161,161                       161,161  
Advances from customers
    919,400                       919,400  
Deferred revenues
    55,631                       55,631  
Due to related parties
    99,541       12,000       e       111,541  
   Total current liabilities
    1,244,908                       1,256,908  
 
 
F-21

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Balance Sheet as of December 31, 2009

   
Previously
   
Net Change
           
Restated
 
   
reported
                     
Long-term Debt:
                         
Accrued severance pay
    84,315                     84,315  
   Total liabilities
    1,329,223                     1,341,223  
                               
Commitments and Contingencies
                             
                               
Stockholders' Equity:
                             
Common stock, par value $0.0001 per share, 250,000,000
                             
shares authorized; 76,554,893 and  71,822,893 shares issued
                             
and outstanding in 2010 and 2009, respectively
    7,182                     7,182  
Additional paid-in capital
    2,717,373       (136,840 )    
b,c,d,f,g
      2,580,533  
Common stock subscribed
    25,000                       25,000  
Accumulated (deficit)
    (1,433,495 )     (346,325 )    
b,c,d,e,f,g
      (1,779,820 )
   Total stockholders' equity
    1,316,060                       832,895  
                                 
Less - Noncontrolling interest
    (417,606 )     483,725      
a,b
      66,119  
   Total stockholders' equity, Net
    898,454                       899,014  
Total Liabilities and Stockholders' Equity
  $ 2,227,677                     $ 2,240,237  

(a) Correction of error in calculation of the fair value of goodwill and 49% noncontrolling interest in SDS-Israel to recognize their fair value of $ 392,000 under FASB ASC 805, as a result of the acquisition of 51% percent interest in the equity ownership of SDS – Israel.

(b) Correction of error in calculation of the goodwill, noncontrolling interest, additional paid in capital and net income as a result of the exchange of 3,199,891 shares of common stock of the Company for additional 7% interest in the equity ownership of SDS – Israel. Those accounts were restated to correct overstatement of the goodwill by $291,690, overstatement of additional paid in capital by $478,125, overstatement of the net income by $1,960, and understatement of the noncontrolling interest by $184,475.

(c) Correction of error involving of amortized fair value of 1,550,200 options that were granted to six agents of SDS-Israel in the amount of $131,973. 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 $ 5,000 originally included in selling, general and administrative for insurance premium for colander year 2010, which was paid in advanced in 2009 and should have been recorded as prepaid expenses.
 
 
F-22

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

(e) Correction of error of $57,000 originally not included in selling, general and administrative for consultants fees which should have been expensed in fiscal year 2009.

(f) Correction of error involving of amortized fair value of 300,000 shares that should been granted to two consultants of the Company under their consulting agreement.

(g) Correction of error involving of fair value of 900,000 warrants that were granted to a consultant of the Company in the amount of $141,437. The warrants are execrable at $0.15 per share and no later than two years from the grant date.

(h) Reclassification of certain expenses in the amount of $28,454 from cost of goods sold and $59,385 from selling, general and administrative expenses to research and developments costs.

(i) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding
 
 
F-23

 

SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Statement of Operations for the Six months ended June 30, 2009

   
Previously
   
Net Change
         
Restated
 
   
reported
                   
                         
Revenues, net
  $ 423,741                 $ 423,741  
                             
Cost of Goods Sold
    52,186                   52,186  
   Gross Profit
    371,555                   371,555  
                             
Expenses:
                           
Research and development
    72,430                   72,430  
Selling, general and administrative
    777,140       135,000       a,b       912,140  
   Total operating expenses
    849,570                       984,570  
                                 
(Loss) from Operations
    (478,015 )                     (613,015 )
                                 
Interest expense
    (7,041 )                     (7,041 )
                                 
Net (loss)
    (470,974 )                     (605,974 )
                                 
Net (loss) Attributable to Noncontrolling Interest
    84,062                       84,062  
                                 
Net (loss) attributable to Suspect Detection Systems Inc.
  $ (386,912 )                   $ (521,912 )
                                 
(Loss) Per Common Share:
                               
(Loss) per common share - Basic and Diluted
  $ (0.01 )                   $ (0.01 )
                                 
Weighted Average Number of Common Shares
                               
Outstanding - Basic and Diluted
    66,592,909       (9,933,468 )     c       56,659,441  
 
(a) Correction of error of $112,500 originally included in selling, general and administrative for consultants fees which should have been expensed in prior period.

(b) Correction of error of $22,500 involving of amortized fair value of 150,000 shares that should been granted to two consultants of the Company under their consulting agreement.
 
(c) Correction of error involving the calculation of the basic and diluted weighted average number of Common Shares outstanding
 
 
F-24

 
 
SUSPECT DECTECTION SYSTEMS INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)

Statement of Operations for the three months ended June 30, 2009
 
   
Previously
   
Net Change
         
Restated
 
   
reported
                   
                         
Revenues, net
  $ 717,403                 $ 254,759  
                             
Cost of Goods Sold
    31,409                   14.729  
   Gross Profit