##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10  Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER: 0-29440
 
 SCM MICROSYSTEMS, INC.
  DELAWARE
    
    77-0444317(STATE OR OTHER JURISDICTION OF
    
    (I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)
    
    IDENTIFICATION NUMBER)
 Oskar-Messter-Str. 13, 85737 Ismaning, Germany
  + 49 89 95 95 5000
   
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer  o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
  o þ




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 3. Defaults Upon Senior Securities
    
    
    54Item 4. Submission of Matters to a Vote of Security Holders
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    54SIGNATURES
    
    
    54EXHIBIT INDEX
    
    
    55EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue
    
    $
    10,961
    
    
    $
    6,520
    
    
    $
    16,116
    
    
    $
    12,984Cost of revenue
    
    
    5,390
    
    
    
    3,697
    
    
    
    8,432
    
    
    
    7,478Gross profit
    
    
    5,571
    
    
    
    2,823
    
    
    
    7,684
    
    
    
    5,506Operating expenses:Research and development
    
    
    1,489
    
    
    
    1,043
    
    
    
    2,258
    
    
    
    2,078Selling and marketing
    
    
    3,739
    
    
    
    2,569
    
    
    
    5,983
    
    
    
    4,730General and administrative
    
    
    2,199
    
    
    
    1,518
    
    
    
    4,686
    
    
    
    3,021Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (249
    )
    
    
    Total operating expenses
    
    
    7,427
    
    
    
    5,130
    
    
    
    12,678
    
    
    
    9,829Loss from operations
    
    
    (1,856
    )
    
    
    (2,307
    )
    
    
    (4,994
    )
    
    
    (4,323
    )Loss on equity investments
    
    
    (281
    )
    
    
    
    
    
    
    (570
    )
    
    
    Interest and other income (expense), net
    
    
    (212
    )
    
    
    330
    
    
    
    67
    
    
    
    824Loss from continuing operations before income taxes
    
    
    (2,349
    )
    
    
    (1,977
    )
    
    
    (5,497
    )
    
    
    (3,499
    )Benefit (provision) for income taxes
    
    
    1,739
    
    
    
    (1
    )
    
    
    1,740
    
    
    
    (48
    )Loss from continuing operations
    
    
    (610
    )
    
    
    (1,978
    )
    
    
    (3,757
    )
    
    
    (3,547
    )Income (loss) from discontinued operations, net of income taxes
    
    
    84
    
    
    
    (26
    )
    
    
    151
    
    
    
    (151
    )Gain on sale of discontinued operations, net of income taxes
    
    
    38
    
    
    
    496
    
    
    
    75
    
    
    
    509Net loss
    
    $
    (488
    )
    
    $
    (1,508
    )
    
    $
    (3,531
    )
    
    $
    (3,189
    )Loss per share from continuing operations:Basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.20
    )
    
    $
    (0.22
    )Gain per share from discontinued operations:Basic and diluted
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.02Net loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.10
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )Shares used to compute basic and diluted loss per share
    
    
    22,039
    
    
    
    15,744
    
    
    
    18,891
    
    
    
    15,742Comprehensive loss:Net loss
    
    $
    (488
    )
    
    $
    (1,508
    )
    
    $
    (3,531
    )
    
    $
    (3,189
    )Unrealized gain (loss) on investments
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    28Foreign currency translation adjustment
    
    
    282
    
    
    
    (516
    )
    
    
    (417
    )
    
    
    (179
    )Total comprehensive loss
    
    $
    (206
    )
    
    $
    (2,029
    )
    
    $
    (3,948
    )
    
    $
    (3,340
    )
  3




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##### Table of Contents



SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands, except par value)
(unaudited)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,309
    
    
    $
    20,550Accounts receivable, net of allowances of $579 and
$689 as of June 30, 2009 and December 31, 2008,
respectively
    
    
    9,723
    
    
    
    8,665Inventories
    
    
    7,652
    
    
    
    5,065Income taxes receivable
    
    
    765
    
    
    
    Other current assets
    
    
    1,521
    
    
    
    1,139Total current assets
    
    
    24,970
    
    
    
    35,419Equity investments
    
    
    1,674
    
    
    
    2,244Property and equipment, net
    
    
    1,446
    
    
    
    1,236Intangible assets, net
    
    
    23,017
    
    
    
    307Goodwill
    
    
    21,895
    
    
    
    Other assets
    
    
    1,211
    
    
    
    1,932Total assets
    
    $
    74,213
    
    
    $
    41,138LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable to bank
    
    $
    81
    
    
    $
    Accounts payable
    
    
    5,713
    
    
    
    3,555Liability to related parties
    
    
    1,030
    
    
    
    Accrued compensation and related benefits
    
    
    1,285
    
    
    
    1,763Accrued restructuring and other charges
    
    
    1,296
    
    
    
    1,576Accrued professional fees
    
    
    958
    
    
    
    1,419Accrued royalties
    
    
    491
    
    
    
    475Accrued sales tax related expenses
    
    
    332
    
    
    
    330Other accrued expenses
    
    
    1,909
    
    
    
    1,959Income taxes payable
    
    
    415
    
    
    
    411Total current liabilities
    
    
    13,510
    
    
    
    11,488Long-term liability to related parties
    
    
    8,018
    
    
    
    Deferred tax liability
    
    
    4,154
    
    
    
    1,340Long-term income taxes payable
    
    
    377
    
    
    
    184Commitments and contingencies (see Notes 10 and 11)
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000 shares
authorized; 25,753 and 16,362 shares issued and
25,135 and 15,744 shares outstanding as of June
20, 2009 and December 31, 2008, respectively
    
    
    26
    
    
    
    16Additional paid-in capital
    
    
    253,754
    
    
    
    229,788Treasury stock, 618 shares
    
    
    (2,777
    )
    
    
    (2,777
    )Accumulated deficit
    
    
    (205,730
    )
    
    
    (202,199
    )Accumulated other comprehensive income
    
    
    2,881
    
    
    
    3,298Total stockholders equity
    
    
    48,154
    
    
    
    28,126Total liabilities and stockholders equity
    
    $
    74,213
    
    
    $
    41,138
  4




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##### Table of Contents



SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
(unaudited)
 Six MonthsEnded June 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (3,531
    )
    
    $
    (3,189
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Gain from discontinued operations
    
    
    (225
    )
    
    
    (358
    )Depreciation and amortization
    
    
    351
    
    
    
    152Gain on disposal of fixed assets
    
    
    (249
    )
    
    
    Stock compensation expense
    
    
    191
    
    
    
    125Deferred income taxes
    
    
    (1,935
    )
    
    
    4Loss on equity investments
    
    
    570
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,798
    
    
    
    1,265Inventories
    
    
    (901
    )
    
    
    (1,396
    )Other assets
    
    
    35
    
    
    
    (131
    )Income taxes receivable
    
    
    319
    
    
    
    Accounts payable
    
    
    338
    
    
    
    (217
    )Accounts payable to related parties
    
    
    132
    
    
    
    Accrued expenses
    
    
    (1,193
    )
    
    
    174Other liabilities
    
    
    6
    
    
    
    Income taxes payable
    
    
    (19
    )
    
    
    (21
    )Net cash used in operating activities from continuing operations
    
    
    (4,313
    )
    
    
    (3,592
    )Net cash provided by (used in) operating activities from discontinued operations
    
    
    401
    
    
    
    (664
    )Net cash used in operating activities
    
    
    (3,912
    )
    
    
    (4,256
    )Cash flows from investing activities:Capital expenditures
    
    
    (246
    )
    
    
    (159
    )Cash paid for Hirsch acquisition
    
    
    (14,167
    )
    
    
    Cash acquired in Hirsch acquisition
    
    
    3,275
    
    
    
    Proceeds from disposal of fixed assets
    
    
    249
    
    
    
    Maturities of short-term investments
    
    
    
    
    
    
    13,873Net cash provided by (used in) investing activities
    
    
    (10,889
    )
    
    
    13,714Cash flows from financing activities:Proceeds from issuance of equity securities, net
    
    
    
    
    
    
    18Net cash provided by financing activities
    
    
    
    
    
    
    18Effect of exchange rates on cash and cash equivalents
    
    
    (440
    )
    
    
    (85
    )Net increase (decrease) in cash and cash equivalents
    
    
    (15,241
    )
    
    
    9,391Cash and cash equivalents at beginning of period
    
    
    20,550
    
    
    
    18,600Cash and cash equivalents at end of period
    
    $
    5,309
    
    
    $
    27,991Supplemental disclosures of cash flow information:Income tax refunds received
    
    $
    (319
    )
    
    $
    Income taxes paid
    
    $
    183
    
    
    $
    51
  5




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##### Table of Contents



SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
 1. Basis of Presentation
   Discontinued Operations
 .
 Accounting
for the Impairment or Disposal of Long Lived Assets
 Recent Accounting Pronouncements and Accounting Changes
 The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principlesa replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles,
 Business Combinations Business Combinations
 6




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
 Fair Value Measurements
 Determination of
the Useful Life of Intangible Assets Goodwill and Other Intangible
Assets
   
    
    Level 1  Quoted prices for identical instruments in active markets;
    
    Level 2  Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and model-derived
valuations, in which all significant inputs are observable in active markets; and
    
    Level 3  Valuations derived from valuation techniques, in which one or more
significant inputs are unobservable.
  Cash equivalents
 7




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##### Table of Contents



Short-term investments
  Level 1
    
    Level 2
    
    Level 3
    
    TotalMoney market fund deposits
    
    $
    1,553
    
    
    $
    
    
    
    $
    
    
    
    $
    1,553
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalGoodwill
    
    $
    
    
    
    $
    
    
    
    $
    21,895
    
    
    $
    21,895Acquired
intangibles  Hirsch Acquisition
    
    
    
    
    
    
    
    
    
    
    22,583
    
    
    
    22,583Total:
    
    $
    
    
    
    $
    
    
    
    $
    44,478
    
    
    $
    44,478
   2. Acquisition of Hirsch Electronics
     8




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##### Table of Contents



Cash paid for Hirsch common stock
    
    $
    14,167Fair value of common stock issued
    
    
    22,258Fair value of warrants issued
    
    
    1,327Fair value of warrants converted
    
    
    200Total purchase consideration
    
    $
    37,952
  Cash and cash equivalents
    
    $
    3,275Accounts receivable, net
    
    
    2,832Inventories
    
    
    1,649Other assets
    
    
    437Deferred income taxes and taxes receivable
    
    
    1,085Property and equipment
    
    
    262Amortizable intangible assets:Developed technology
    
    
    4,600Customer relationships
    
    
    10,350Intangible assets with indefinite lives (unamortizable):Trade names
    
    
    7,800Accounts payable
    
    
    (1,814
    )Accrued expenses
    
    
    (467
    )Other liabilities
    
    
    (192
    )Deferred tax liabilities and taxes payable
    
    
    (1,957
    )Deferred tax liabilities in connection with acquired tangibles assets with indefinite lives
    
    
    (3,003
    )Fair value of liabilities assumed to related parties
    
    
    (8,800
    )Goodwill
    
    
    21,895Total purchase consideration
    
    $
    37,952
  9




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##### Table of Contents



Pro forma financial information:
  10




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    12,234
    
    
    $
    12,098
    
    
    $
    22,776
    
    
    $
    24,514Net loss
    
    
    (2,012
    )
    
    
    (2,367
    )
    
    
    (6,409
    )
    
    
    (4,253
    )Weighted average common shares outstanding used in
loss per common share  basic and diluted
    
    
    25,135
    
    
    
    25,135
    
    
    
    25,135
    
    
    
    25,133Net loss per common share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.25
    )
    
    $
    (0.17
    )
 3. Stock Based Compensation and Warrants
 th th
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of revenue
    
    $
    7
    
    
    $
    (2
    )
    
    $
    13
    
    
    $
    10Research and development
    
    
    16
    
    
    
    6
    
    
    
    27
    
    
    
    25Selling and marketing
    
    
    44
    
    
    
    6
    
    
    
    74
    
    
    
    62General and administrative
    
    
    63
    
    
    
    37
    
    
    
    77
    
    
    
    28Stock-based
compensation expense
before income taxes
    
    $
    130
    
    
    $
    47
    
    
    $
    191
    
    
    $
    125Income tax benefit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Stock-based
compensation expense
after income taxes
    
    $
    130
    
    
    $
    47
    
    
    $
    191
    
    
    $
    125
 Stock Option Plans
   11




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##### Table of Contents



WeightedWeighted
    
    
    
    
    
    
    AverageNumber of
    
    
    Average
    
    
    Aggregate
    
    
    RemainingAvailable
    
    
    Options
    
    
    Exercise Price
    
    
    Intrinsic
    
    
    Contractualfor Grant
    
    
    Outstanding
    
    
    per share
    
    
    Value
    
    
    Life (in years)Balance at December 31, 2008
    
    
    1,135,219
    
    
    
    1,836,691
    
    
    $
    6.51
    
    
    $
    13,652
    
    
    
    5.62Options granted
    
    
    (672,877
    )
    
    
    672,877
    
    
    $
    2.39
    
    
    
    
    
    
    
    Options cancelled or expired
    
    
    57,385
    
    
    
    (128,587
    )
    
    $
    12.21
    
    
    
    
    
    
    
    Balance at June 30, 2009
    
    
    519,727
    
    
    
    2,380,981
    
    
    $
    5.04
    
    
    $
    30,731
    
    
    
    5.71Vested or expected to vest
at June 30, 2009
    
    
    
    
    
    
    2,122,918
    
    
    $
    5.31
    
    
    $
    25,258
    
    
    
    5.59Exercisable at June 30, 2009
    
    
    
    
    
    
    1,064,120
    
    
    $
    7.82
    
    
    $
    50
    
    
    
    4.60
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2008
    
    2008Expected volatility
    
    
    75
    %
    
    
    54
    %
    
    
    71
    %
    
    
    54
    %Dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Risk-free interest rate
    
    
    1.86
    %
    
    
    3.13
    %
    
    
    1.69
    %
    
    
    2.64
    %Expected term (in years)
    
    
    4.00
    
    
    
    4.00
    
    
    
    4.00
    
    
    
    4.00
 Expected Volatility
 Dividend Yield
 Risk-Free Interest Rate:
 Expected Term:
 12




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##### Table of Contents



Forfeitures Rate:
 Warrants
   4. Discontinued Operations
  Accounting for the Impairment or Disposal of Long Lived Assets
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Operating gain (loss)
    
    $
    (4
    )
    
    $
    (2
    )
    
    $
    74
    
    
    $
    (6
    )Income (loss) before income taxes
    
    $
    (4
    )
    
    $
    (2
    )
    
    $
    89
    
    
    $
    (6
    )Income tax benefit (provision)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued operations
    
    $
    (4
    )
    
    $
    (2
    )
    
    $
    89
    
    
    $
    (6
    )
   13




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Operating loss
    
    $
    (64
    )
    
    $
    (62
    )
    
    $
    (146
    )
    
    $
    (144
    )Net income (loss) before income taxes
    
    $
    91
    
    
    $
    (22
    )
    
    $
    32
    
    
    $
    (140
    )Income tax benefit (provision)
    
    $
    (3
    )
    
    $
    (2
    )
    
    $
    30
    
    
    $
    (5
    )Gain (loss) from discontinued operations
    
    $
    88
    
    
    $
    (24
    )
    
    $
    62
    
    
    $
    (145
    )
  5. Inventories
  June 30,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    2,114
    
    
    $
    1,648Work-in-process
    
    
    663
    
    
    
    Finished goods
    
    
    4,875
    
    
    
    3,417Total
    
    $
    7,652
    
    
    $
    5,065
 6. Equity Investments
  June 30,
    
    December 31,2009
    
    2008TranZfinity, Inc.
    
    $
    1,674
    
    
    $
    2,244
    14




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##### Table of Contents



7. Property and Equipment
  June 30,
    
    
    December 31,2009
    
    
    2008Building and leasehold impovements
    
    $
    1,772
    
    
    $
    1,734Furniture, fixtures and office equipment
    
    
    3,165
    
    
    
    2,777Automobiles
    
    
    28
    
    
    
    28Purchased software
    
    
    3,260
    
    
    
    3,233Total
    
    
    8,225
    
    
    
    7,772Accumulated depreciation
    
    
    (6,779
    )
    
    
    (6,536
    )Property and equipment, net
    
    $
    1,446
    
    
    $
    1,236
  8. Goodwill and Intangible Assets
 Goodwill
  Goodwill and Other Intangible Assets
 Intangible Assets  Hirsch Acquisition
    June 30, 2009GrossAmortization
    
    
    Carrying
    
    
    Accumulated(in thousands)
    
    Period
    
    
    Value
    
    
    Amortization
    
    
    NetExisting technology
    
    15 years
    
    $
    4,600
    
    
    $
    (52
    )
    
    $
    4,548Customer relationships
    
    15 years
    
    $
    10,350
    
    
    $
    (115
    )
    
    $
    10,235Totals
    
    
    
    
    
    $
    14,950
    
    
    $
    (167
    )
    
    $
    14,783
 15




---



##### Table of Contents



Intangible Assets  TranZfinity
  June 30, 2009
    
    December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    GrossAmortization
    
    Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    Accumulated(in thousands)
    
    Period
    
    Value
    
    Amortization
    
    Net
    
    Value
    
    Amortization
    
    NetExclusivity right
    
    54 months
    
    $
    500
    
    
    $
    (66
    )
    
    $
    434
    
    
    $
    321
    
    
    $
    (14
    )
    
    $
    307
 Goodwill and Other Intangible Assets Accounting for the Impairment or Disposal of Long-Lived Assets
   Fiscal Year
    
    Amount2009
    
    $
    572010
    
    
    1142011
    
    
    1142012
    
    
    1142013
    
    
    35Total
    
    $
    434
 9. Restructuring and Other Charges
 Discontinued Operations
   16




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##### Table of Contents



Lease/ContractCommitments
    
    
    Other Costs
    
    
    TotalBalances as of January 1, 2008
    
    $
    2,589
    
    
    $
    349
    
    
    $
    2,938Provision for 2008
    
    
    
    
    
    
    
    
    
    
    Changes in estimates
    
    
    (594
    )
    
    
    
    
    
    
    (594
    )(594
    )
    
    
    
    
    
    
    (594
    )Payments and other changes in 2008
    
    
    (765
    )
    
    
    (19
    )
    
    
    (784
    )Balances as of December 31, 2008
    
    
    1,230
    
    
    
    330
    
    
    
    1,560Provision for Q1 2009
    
    
    
    
    
    
    
    
    
    
    Changes in estimates
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )(37
    )
    
    
    
    
    
    
    (37
    )Payments and other changes in Q1 2009
    
    
    (98
    )
    
    
    (16
    )
    
    
    (114
    )Balances as of March 31, 2009
    
    
    1,095
    
    
    
    314
    
    
    
    1,409Provision for Q2 2009
    
    
    
    
    
    
    
    
    
    
    Changes in estimates
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )(38
    )
    
    
    
    
    
    
    (38
    )Payments and other changes in Q2 2009
    
    
    (98
    )
    
    
    18
    
    
    
    (80
    )Balances as of June 30, 2009
    
    $
    959
    
    
    $
    332
    
    
    $
    1,291
 Continuing Operations
   10. Gain on Sale of Assets
  11. Segment Reporting, Geographic Information and Major Customers
 Disclosures about Segments of an Enterprise and Related Information,
  17




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Security and Identity SolutionsNet revenue
    
    $
    10,028
    
    
    $
    4,878
    
    
    $
    13,971
    
    
    $
    9,885Gross profit
    
    
    5,251
    
    
    
    2,276
    
    
    $
    6,929
    
    
    $
    4,423Gross profit %
    
    
    52
    %
    
    
    47
    %
    
    
    50
    %
    
    
    45
    %Digital Media and ConnectivityNet revenue
    
    $
    933
    
    
    $
    1,642
    
    
    $
    2,145
    
    
    $
    3,099Gross profit
    
    
    320
    
    
    
    547
    
    
    $
    755
    
    
    $
    1,083Gross profit %
    
    
    34
    %
    
    
    33
    %
    
    
    35
    %
    
    
    35
    %Total:Net revenue
    
    $
    10,961
    
    
    $
    6,520
    
    
    $
    16,116
    
    
    $
    12,984Gross profit
    
    
    5,571
    
    
    
    2,823
    
    
    
    7,684
    
    
    
    5,506Gross profit %
    
    
    51
    %
    
    
    43
    %
    
    
    48
    %
    
    
    42
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenueEurope
    
    $
    2,471
    
    
    $
    2,697
    
    
    $
    4,641
    
    
    $
    5,087United States
    
    
    6,535
    
    
    
    2,449
    
    
    
    8,653
    
    
    
    4,560Asia-Pacific
    
    
    1,955
    
    
    
    1,374
    
    
    
    2,822
    
    
    
    3,337Total
    
    $
    10,961
    
    
    $
    6,520
    
    
    $
    16,116
    
    
    $
    12,984% of net revenueEurope
    
    
    22
    %
    
    
    41
    %
    
    
    28
    %
    
    
    39
    %United States
    
    
    60
    %
    
    
    38
    %
    
    
    54
    %
    
    
    35
    %Asia-Pacific
    
    
    18
    %
    
    
    21
    %
    
    
    18
    %
    
    
    26
    %
  June 30,
    
    
    December 31,2009
    
    
    2008Property and equipment, net:United States
    
    $
    274
    
    
    $
    5Europe
    
    
    249
    
    
    
    259Asia-Pacific
    
    
    923
    
    
    
    972Total
    
    $
    1,446
    
    
    $
    1,236
  18




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##### Table of Contents



12. Commitments
    13. Net Income (Loss) per Common Share
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss from continuing operations
    
    $
    (610
    )
    
    $
    (1,978
    )
    
    $
    (3,757
    )
    
    $
    (3,547
    )Income from discontinued operations
    
    
    122
    
    
    
    470
    
    
    
    226
    
    
    
    358Net income (loss)
    
    $
    (488
    )
    
    $
    (1,508
    )
    
    $
    (3,531
    )
    
    $
    (3,189
    )Weighted average common shares outstanding used in
income (loss) per common share  basic and diluted
    
    
    22,039
    
    
    
    15,744
    
    
    
    18,891
    
    
    
    15,742Net income (loss) per common share  basic and dilutedContinuing operations
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.20
    )
    
    $
    (0.22
    )Discontinued operations
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.02Net income (loss) per common share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.10
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )
   19




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14. Related Party Transactions
       15. Legal Proceedings
    20




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements for purposes of
the safe harbor provisions under Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. For example, statements, other than
statements of historical facts regarding our strategy, future operations, financial position,
projected results, estimated revenues or losses, projected costs, prospects, plans, market trends,
competition and objectives of management constitute forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as will, believe, could, should,
would, may, anticipate, intend, plan, estimate, expect, project or the negative of
these terms or other similar expressions. Although we believe that our expectations reflected in or
suggested by the forward-looking statements that we make in this Quarterly Report on Form 10-Q are
reasonable, we cannot guarantee future results, performance or achievements. You should not place
undue reliance on these forward-looking statements. All forward-looking statements speak only as of
the date of this Quarterly Report on Form 10-Q . While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any obligation to do so, even if
our expectations change, whether as a result of new information, future events or otherwise. We
also caution you that such forward-looking statements are subject to risks, uncertainties and other
factors, not all of which are known to us or within our control, and that actual events or results
may differ materially from those indicated by these forward-looking statements. We disclose some of
the important factors that could cause our actual results to differ materially from our
expectations under Part II  Item 1A, Risk Factors and elsewhere in this Quarterly Report on
Form 10-Q. These cautionary statements qualify all of the forward-looking statements included in
this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf.
 The following information should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto set forth in Part I  Item 1 of this Quarterly
Report on Form 10-Q . We also urge readers to review and consider our disclosures describing
various factors that could affect our business, including the disclosures under the headings
Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk
Factors and the audited financial statements and notes thereto contained in our Annual Report on
Form 10-K for the year ended December 31, 2008.
 The terms SCM, the Company, we and us refer to SCM Microsystems, Inc. and its
subsidiaries, unless otherwise specified.
 Overview
 Highlights of the Second Quarter, Ending June 30, 2009:
 
    
    We completed our acquisition of Hirsch Electronics Corp. (Hirsch) on April 30, 2009,
and consolidated it as a wholly-owned subsidiary. Financial results for the current quarter
therefore include two months of results related to the Hirsch acquisition (May 1 through
June 30, 2009).
    
    Net revenue rose to $11.0 million, a substantial increase compared to the same quarter a
year earlier due primarily to new revenue from the Hirsch subsidiary.
    
    Organic growth in our main Security and Identity Solutions business included record
sales in Asia (excluding Japan) and higher sales of smart card reader products in the U.S.
Organic growth excludes the sales of the acquired Hirsch business.
    
    Our gross profit margin increased in the second quarter, due primarily to an improved
product mix as a result of the Hirsch acquisition.
 21




---



##### Table of Contents




    
    On a continuing basis, SCM overall posted an after-tax loss of $(0.6) million compared
to a loss of $(2.0) million in the prior-year quarter. The loss in the current period
includes transaction expenses related to the Hirsch acquisition, offset by a
$1.7 million tax benefit related to the accounting for taxes following the Hirsch
acquisition. Our net loss for the quarter was $(0.5) million.
    
    Cash and cash equivalents at the end of the quarter were $5.3 million, after substantial
net cash outflows associated with the Hirsch acquisition.
 Narrative Summary of the 2009 Second Quarter
     Company Background
    22




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##### Table of Contents




    
    For the Security and Identity Solutions market, we offer a broad range of contact,
contactless and mobile smart card reader technology, access control products and digital
identity and transaction platforms, as well as systems that integrate physical access
control, secure data storage and transmission, digital certificates, biometrics and digital
video. Our solutions are used in a wide variety of industries for security, identity,
contactless payment, e-health and electronic government services. We also offer a range of
smart card-based productivity solutions, which include readers and software, for small and
medium-size businesses under our CHIPDRIVE® brand.
    
    For the Digital Media and Connectivity market, we offer commercial digital media readers
that are used in digital photo kiosks to transfer digital content to and from various flash
media.
  Recent Trends and Strategies for Growth
    ®
  23




---



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Trends in our Business
 Sales Trends
      24




---



##### Table of Contents



Gross Profit Margin Trends
  Operating Expense Trends
  25




---



##### Table of Contents



Results of Operations
 
 Net Revenue.
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended
    
    period to
    
    Six months ended
    
    period toJune 30,
    
    period
    
    June 30,
    
    period2009
    
    2008
    
    
    
    
    
    2009
    
    2008Security and Identity SolutionsRevenue
    
    $
    10,028
    
    
    $
    4,878
    
    
    
    106
    %
    
    $
    13,971
    
    
    $
    9,885
    
    
    
    41
    %Gross profit
    
    
    5,251
    
    
    
    2,276
    
    
    
    
    
    
    
    6,929
    
    
    
    4,423Gross profit %
    
    
    52
    %
    
    
    47
    %
    
    
    
    
    
    
    50
    %
    
    
    45
    %Digital Media and ConnectivityRevenue
    
    $
    933
    
    
    $
    1,642
    
    
    
    (43
    )%
    
    $
    2,145
    
    
    $
    3,099
    
    
    
    (31
    )%Gross profit
    
    
    320
    
    
    
    547
    
    
    
    
    
    
    
    755
    
    
    
    1,083Gross profit %
    
    
    34
    %
    
    
    33
    %
    
    
    
    
    
    
    35
    %
    
    
    35
    %Total:Revenue
    
    $
    10,961
    
    
    $
    6,520
    
    
    
    68
    %
    
    $
    16,116
    
    
    $
    12,984
    
    
    
    24
    %Gross profit
    
    
    5,571
    
    
    
    2,823
    
    
    
    
    
    
    
    7,684
    
    
    
    5,506Gross profit %
    
    
    51
    %
    
    
    43
    %
    
    
    
    
    
    
    48
    %
    
    
    42
    %
   .
 26




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##### Table of Contents



Gross Profit.
   .
  Research and Development.
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended June 30
    
    period to
    
    Six months ended June 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    1,489
    
    
    $
    1,043
    
    
    
    43
    %
    
    $
    2,258
    
    
    $
    2,078
    
    
    
    9
    %Percentage of total revenues
    
    
    14
    %
    
    
    16
    %
    
    
    
    
    
    
    14
    %
    
    
    16
    %
   27




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##### Table of Contents



Selling and Marketing.
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended June 30
    
    period to
    
    Six months ended June 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    3,739
    
    
    $
    2,569
    
    
    
    46
    %
    
    $
    5,983
    
    
    $
    4,730
    
    
    
    26
    %Percentage of total revenues
    
    
    34
    %
    
    
    39
    %
    
    
    
    
    
    
    37
    %
    
    
    36
    %
   General and Administrative.
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended June 30
    
    period to
    
    Six months ended June 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    2,199
    
    
    $
    1,518
    
    
    
    45
    %
    
    $
    4,686
    
    
    $
    3,021
    
    
    
    55
    %Percentage of total revenues
    
    
    20
    %
    
    
    23
    %
    
    
    
    
    
    
    29
    %
    
    
    23
    %
   Gain on Sale of Assets.
 Loss on Equity Investments
 Interest and Other Income (Expense), Net.
  28




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##### Table of Contents



Income Taxes
  Discontinued Operations.
   Liquidity and Capital Resources
   Three Months EndedJune 30,2009Cash used in operating activities from continuing operations
    
    $
    (4,313
    )Cash provided by operating activies from discontinued operations
    
    
    401Cash used in investing activities
    
    
    (10,889
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (440
    )Decrease in cash and cash equivalents
    
    
    (15,241
    )Cash and cash equivalents at beginning of period
    
    
    20,550Cash and cash equivalents at end of period
    
    $
    5,309
  29




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##### Table of Contents



Critical Accounting Policies and Estimates
   
    
    We recognize product revenue upon shipment provided that risk and title have
transferred, a purchase order has been received, collection is determined to be reasonably
assured and no significant obligations remain. Maintenance revenue is deferred and
amortized over the period of the maintenance contract. Provisions for estimated warranty
repairs and returns and allowances are provided for at the time products are shipped. We
maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required, which could have a material impact on our results
of operations.
    
    We typically plan our production and inventory levels based on internal forecasts of
customer demand, which are highly unpredictable and can fluctuate substantially. We
regularly review inventory quantities on hand and record an estimated provision for excess
inventory, technical obsolescence and inability to sell based primarily on our historical
sales and expectations for future use. Actual demand and market conditions may be different
from those projected by our management. This could have a material effect on our operating
results and financial position. If we were to make different judgments or utilize different
estimates, the amount and timing of our write-down of inventories could be materially
different. Once we have written down inventory below cost, we do not subsequently write it
up.
 30




---



##### Table of Contents




    
    We adopted the Financial Accounting Standards Boards (FASB) Interpretation No. 48,
Accounting For Uncertain Tax Positions(FIN 48) in the first quarter of 2007. We are
required to make certain judgments and estimates in determining income tax expense for
financial statement purposes. Significant changes to these estimates may result in an
increase or decrease to our tax provision in a subsequent period. The calculation of our
tax liabilities requires dealing with uncertainties in the application of complex tax
regulations. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. It is inherently difficult and subjective to estimate such amounts.
We reevaluate such uncertain tax positions on a quarterly basis based on factors such as,
but not limited to, changes in tax laws, issues settled under audit and changes in facts or
circumstances. Such changes in recognition or measurement might result in the recognition
of a tax benefit or an additional charge to the tax provision in the period.
    
    The carrying value of our net deferred tax assets reflects that we have been unable to
generate sufficient taxable income in certain tax jurisdictions. A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will either
expire before we are able to realize their benefit, or that future deductibility is
uncertain. Management evaluates the realizability of the deferred tax assets quarterly. The
deferred tax assets are still available for us to use in the future to offset taxable
income, which would result in the recognition of a tax benefit and a reduction in our
effective tax rate. Actual operating results and the underlying amount and category of
income in future years could render our current assumptions, judgments and estimates of the
realizability of deferred tax assets inaccurate, which could have a material impact on our
financial position or results of operations.
    
    Resulting from the acquisition of Hirsch, we have recognized goodwill of $21.9 million.
Goodwill represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business combination. Goodwill is
not subject to amortization but is subject to annual assessment, at a minimum, for
impairment. We evaluate goodwill, at a minimum, on an annual basis and whenever events and
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the
reporting units carrying value, including goodwill, to the fair value of the reporting
unit. The fair values of the reporting units are estimated using a combination of quoted
market prices, the income, or discounted cash flows, approach and the market approach,
which utilizes comparable
companies data. If the carrying value of the reporting unit exceeds the fair value,
goodwill is considered impaired and a second step is performed to measure the amount of the
impairment loss, if any.
    
    We evaluate our long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net undiscounted
cash flows expected to be generated by an asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Intangible assets with definite
lives are being amortized using the straight-line method over the estimated useful lives of
the related assets. For intangible assets, where we have determined that these have an
indefinite useful life, no amortization is recognized until its useful life is determined
to be no longer indefinite. We evaluate indefinite useful life intangible assets for
impairment at a minimum on an annual basis and whenever events and changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
    
    We use the equity method of accounting for investments in unconsolidated entities where
the ability to exercise significant influence over such entities exists. Investments in
unconsolidated entities consist of capital contributions plus our share of accumulated
earnings of the entities, less capital withdrawals and distributions. Investments in excess
of the underlying net assets of equity method investees related to specifically
identifiable intangible assets, which are amortized over the useful life of the related
assets. Excess investment representing equity method goodwill is not amortized but is
generally evaluated for impairment on an annual basis. In case of adverse circumstances
arising which may impact the value of our investments, we also evaluate whether indications
for impairment exist on a case by case basis. Non-marketable equity investments are
inherently risky. Their success is dependent on product development, market acceptance,
operational efficiency, and other key business factors. Depending on future prospects,
these companies may not be able to raise additional funds when the
funds are needed or they
may receive lower valuations, with less favorable terms than expected, and our investments
would likely become impaired.
 31




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##### Table of Contents



Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles,
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
 Fair Value Measurements
  Determination
of the Useful Life of Intangible Assets
 32




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##### Table of Contents




    
    Level 1  Quoted prices for identical instruments in active markets;
    
    Level 2  Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and model-derived
valuations, in which all significant inputs are observable in active markets; and
    
    Level 3  Valuations derived from valuation techniques, in which one or more significant
inputs are unobservable.
  Cash equivalents
 Short-term investments
  Level 1
    
    Level 2
    
    Level 3
    
    TotalMoney market fund deposits
    
    $
    1,553
    
    
    $
    
    
    
    $
    
    
    
    $
    1,553
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalGoodwill
    
    $
    
    
    
    $
    
    
    
    $
    21,895
    
    
    $
    21,895Acquired
intangibles  Hirsch Acquisition
    
    
    
    
    
    
    
    
    
    
    22,583
    
    
    
    22,583Total:
    
    $
    
    
    
    $
    
    
    
    $
    44,478
    
    
    $
    44,478
   
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
    
    Controls and Procedures
       
 PART II: OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
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Item 1A.
    
    Risk Factors
 Our business and results of operations are subject to numerous risks, uncertainties and
other factors that you should be aware of, some of which are described below. The risks,
uncertainties and other factors described in the risk factors described below are not the only ones
facing our company. Additional risks, uncertainties and other factors not presently known to us or
that we currently deem immaterial may also impair our business operations. Any of the risks,
uncertainties and other factors could have a materially adverse effect on our business, financial
condition, results of operations, cash flows or product market share and could cause the trading
price of our common stock to decline substantially.
 Risks of Market Dynamics
 Disruption in the global financial markets may adversely impact the availability and cost of
credit.
  Disruption in the global financial markets may adversely impact SCMs customers and customer
spending patterns and we could experience heightened credit risk to our accounts receivable.
   Disruption in the global financial markets may adversely impact our suppliers.
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Our markets are highly competitive.
  
    
    the extent to which products must support existing industry standards and provide interoperability;
    
    the extent to which standards are widely adopted and product interoperability is required within industry segments;
    
    the extent to which products are differentiated based on technical features, quality
and reliability, ease of use, strength of distribution channels and price; and
    
    the ability of suppliers to develop new products quickly to satisfy new market and
customer requirements.
    Strategic Risks
 Our future success will depend on our ability to keep pace with technological change and meet
the needs of our target markets and customers.
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Sales of our products depend on the development of emerging applications in our target markets
and on diversifying and expanding our customer base in new markets and geographic regions, and
with new products.
   
    
    general economic conditions, for example the economic uncertainty caused by the
current global economic recession;
    
    our ability to demonstrate to our potential customers and partners the value and
benefits of new products;
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
    
    the ability of our competitors to develop and market competitive solutions for
emerging applications in our target markets and our ability to win business in advance of
and against such competition;
    
    the adoption and/or continuation of industry or government regulations or policies
requiring the use of products such as our smart card readers or identity management
solutions;
    
    the timing of large scale security programs involving smart cards and related
technology by governments, banks and enterprises;
    
    the adoption of privacy legislation that requires a change to our products or causes
customers to discontinue the use of our products;
    
    the ability of financial institutions, corporate enterprises, the U.S. government and
other governments to agree on industry specifications and to develop and deploy smart
card-based applications that will drive demand for smart card readers such as ours; and
    
    the ability of high capacity flash memory cards to drive demand for digital media
readers, such as ours, that enable rapid transfer of large amounts of data, for example
digital photographs.
 We face risks associated with strategic transactions.
     
    
    maintaining employee morale and retaining key employees;
    
    preserving important strategic and customer relationships;
    
    the diversion of managements attention from ongoing business concerns;
    
    coordinating geographically separate organizations;
    
    unanticipated issues in integrating information, communications and other systems;
    
    coordinating marketing functions;
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
    
    consolidating corporate and administrative infrastructures and eliminating duplicative operations; and
    
    integrating the cultures of SCM and Hirsch.
    We may not have uncovered all the risks associated with the acquisition of Hirsch and a
significant liability may be discovered.
  The representations and warranties contained in the Merger Agreement between SCM and Hirsch were
made solely for purposes of the contract among SCM, Hirsch, and the merger subsidiaries, and
used as a tool for allocating risk among the parties, and therefore they may not accurately
characterize the actual state of facts or conditions of SCM or Hirsch.
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Operational Risks
 We have incurred and will incur significant expenses as a result of our acquisition of Hirsch,
which has reduced and will reduce the amount of capital available to fund our business.
  We have incurred operating losses and may not achieve profitability.
  Our quarterly and annual operating results will likely fluctuate.
  
    
    business and economic conditions overall and in our markets;
    
    the timing and amount of orders we receive from our customers that may be tied to
budgetary cycles, seasonal demand, product plans or program roll-out schedules;
    
    cancellations or delays of customer product orders, contract amendments, or the loss of a significant customer;
    
    the terms of customer contracts that affect the timing of revenue recognition;
    
    protests of federal, state or local government contract awards by competitors;
    
    inaccurate forecasts or incomplete information from our channel partners;
    
    potential effects of providing services as a prime contractor that may not carry gross
margins as high as those of our core solutions;
    
    our ability to obtain an adequate supply of components on a timely basis;
    
    poor quality in the supply of our components;
    
    delays in the manufacture of our products;
    
    the absence of significant backlog in our business;
    
    our inventory levels;
    
    our customer and distributor inventory levels and product returns;
    
    competition;
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
    
    new product announcements or introductions;
    
    our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all;
    
    our ability to successfully market and sell products into new geographic or market segments;
    
    the sales volume, product configuration and mix of products that we sell;
    
    technological changes in the markets for our products;
    
    the rate of adoption of industry-wide standards;
    
    reductions in the average selling prices that we are able to charge due to competition or other factors;
    
    strategic acquisitions, sales and dispositions;
    
    fluctuations in the value of foreign currencies against the U.S. dollar;
    
    the timing and amount of marketing and research and development expenditures;
    
    loss of key personnel; and
    
    costs related to events such as dispositions, organizational restructuring, headcount
reductions, litigation or write-off of investments or goodwill.
  The pre-acquisition financial projections for both our business and Hirschs business that were
prepared in connection with our acquisition of Hirsch are only estimates of future results and
there is no assurance that actual results will not be different.
  It is difficult to estimate operating results prior to the end of a quarter.
  If we do not accurately anticipate the correct mix of products that will be sold, we may be
required to record charges related to excess inventories.
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We may choose to take back unsold inventory from our customers.
  We are subject to a lengthy sales cycle and additional delays could result in significant
fluctuations in our quarterly operating results.
  A significant portion of our sales typically comes from a small number of customers and the loss
of one or more of these customers or variability in the timing of orders could negatively impact
our operating results.
  Our business could be adversely affected by significant changes in the contracting or fiscal
policies of governments and governmental entities.
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
    
    changes in fiscal policies or decreases in available government funding or grants;
    
    changes in government programs or applicable requirements;
    
    the adoption of new laws or regulations or changes to existing laws or regulations;
    
    changes in political or social attitudes with respect to security and defense issues;
    
    potential delays or changes in the government appropriations process; and
    
    delays in the payment of its invoices by government payment offices.
  A significant portion of our revenue is dependent upon sales to government programs, which are
impacted by uncertainty of timelines and budgetary allocations, delays in developing technology
standards, and changes in laws or regulations pertaining to security.
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We derive a substantial portion of our revenue through the sale of our solutions to U.S.
government entities, pursuant to government contracts which differ materially from standard
commercial contracts, involve competitive bidding and may be subject to cancellation or delay
without penalty, any of which may produce volatility in our revenues and earnings.
  Our business could be adversely affected by negative audits by government agencies; we could be
required to reimburse the U.S. government for costs that we have expended on government
contracts; and our ability to compete successfully for future contracts could be materially
impaired.
   Some of our sales are made through distributors, and the loss of such distributors could result
in decreased revenue.
  Our business could suffer if our third-party manufacturers cannot meet production requirements.
  
    
    difficulties in staffing;
    
    currency fluctuations;
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
    
    potentially adverse tax consequences;
    
    unexpected changes in regulatory requirements;
    
    tariffs and other trade barriers;
    
    export controls;
    
    political and economic instability;
    
    lack of control over the manufacturing process and ultimately over the quality of our
products;
    
    late delivery of our products, whether because of limited access to our product
components, transportation delays and interruptions, difficulties in staffing, or
disruptions such as natural disasters;
    
    capacity limitations of our manufacturers, particularly in the context of new large
contracts for our products, whether because our manufacturers lack the required capacity
or are unwilling to produce the quantities we desire; and
    
    obsolescence of our hardware products at the end of the manufacturing cycle.
   We have a limited number of suppliers of key components, and may experience difficulties in
obtaining components for which there is significant demand.
   Security breaches in systems we sell or maintain could result in the disclosure of sensitive
government information or private personal information that could result in the loss of clients
and negative publicity.
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Our products may have defects, which could damage our reputation, decrease market acceptance of
our products, cause us to lose customers and revenue and result in costly litigation or
liability.
    We have global operations, which require significant financial, managerial and administrative
resources.
 .
  
    
    divert a significant amount of time and energy to manage employees and contractors
from diverse cultural backgrounds and who speak different languages;
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
    
    travel between our different company offices;
    
    maintain sufficient internal financial controls in multiple geographic locations that
may have different control environments;
    
    manage different product lines for different markets;
    
    manage our supply and distribution channels across different countries and business
practices; and
    
    coordinate these efforts to produce an integrated business effort, focus and vision.
  We conduct a significant portion of our operations outside the United States. Economic,
political, regulatory and other risks associated with international sales and operations could
have an adverse effect on our results of operation.
  
    
    changes in foreign currency exchange rates;
    
    changes in a specific countrys or regions political or economic conditions and
stability, particularly in emerging markets;
    
    unexpected changes in foreign laws and regulatory requirements;
    
    export controls;
    
    potentially adverse tax consequences;
    
    longer accounts receivable collection cycles;
    
    difficulty in managing widespread sales and manufacturing operations; and
    
    less effective protection of intellectual property.
 Personnel Risks
 Our key personnel and directors are critical to our business, and such key personnel may not
remain with us in the future.
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Risks of Financial and Capital Markets
 Our stock price has been and is likely to remain volatile.
  
    
    low volumes of trading activity in our stock, particular in the U.S.;
    
    variations in our or our competitors financial and/or operational results;
    
    the fluctuation in market value of comparable companies in any of our markets;
    
    expected, perceived or announced relationships or transactions with third parties;
    
    comments and forecasts by securities analysts;
    
    trading patterns of our stock on the NASDAQ Stock Market or Prime Standard of the
Frankfurt Stock Exchange;
    
    the inclusion or removal of our stock from market indices, such as groups of
technology stocks or other indices;
    
    loss of key personnel;
    
    announcements of technological innovations or new products by us or our competitors;
    
    announcements of dispositions, organizational restructuring, headcount reductions,
litigation or write-off of investments;
    
    litigation developments; and
    
    general market downturns.
  SCM common stock has historically traded at a very low volume. The market price of SCM common
stock could decline as a result of the large number of shares that have been issued to the
former Hirsch shareholders and that will become eligible for sale in the future.
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You may experience dilution of your ownership interests due to the future issuance of additional
shares of our stock, and future sales of shares of our common stock could have an adverse effect
on our stock price.
    After giving effect to the acquisition of Hirsch, the issuance of shares of SCM common stock to
Hirsch shareholders in connection with the acquisition substantially reduced the percentage
ownership of the holders of SCM common stock who held the stock prior to the acquisition.
  The large percentage ownership of SCM common stock by Hirschs former shareholders gives those
shareholders significant influence over the outcome of corporate actions requiring stockholder
approval.
  Two of our directors directly or indirectly hold significant amounts of our common stock, and
both of them could have significant influence over the outcome of corporate actions requiring
board and stockholder approval, respectively.
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The sale of equity securities may cause the aggregate percentage ownership of our existing
stockholders to be reduced.
  Our listing on both the NASDAQ Stock Market and the Prime Standard of the Frankfurt Stock
Exchange exposes our stock price to additional risks of fluctuation.
  Provisions in our agreements, charter documents, Delaware law and our rights plan may delay or
prevent the acquisition of SCM by another company, which could decrease the value of your
shares.
    Legal and Regulatory Risks
 Our business could be adversely affected by changes in laws or regulations pertaining to
security.
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
    
    Homeland Security Presidential Directive (HSPD) 12 and Federal Information Processing
Standards (FIPS) 201 produced by National Institute of Standards and Technology (NIST);
    
    Federal Information Security Management Act (FISMA);
    
    Transportation Security Administrations (TSA) Transportation Worker Identification Credential (TWIC) program;
    
    Sarbanes-Oxley Act of 2002 (also known as the Public Company Accounting Reform and Investor Protection Act);
    
    Health Insurance Portability and Accountability Act (HIPAA);
    
    Gramm-Leach Bliley Act of 1999 (GLBA, a.k.a., the Financial Modernization Act);
    
    Customs-Trade Partnership Against Terrorism (C-TPAT);
    
    Free and Secure Trade Program (FAST);
    
    Chemical Facility Anti Terrorism Standards (CFATS); and
    
    various codes of the Code of Federal Regulations (CFR).
  We are subject to extensive government regulation, and any failure to comply with applicable
regulations could subject us to penalties that may restrict our ability to conduct our business.
  
    
    the Federal Acquisition Regulations, or the FAR, and agency regulations supplemental to
the FAR, which comprehensively regulate the formation and administration of, and
performance under government contracts;
    
    the Truth in Negotiations Act, which requires certification and disclosure of all cost
and pricing data in connection with contract negotiations;
    
    the Cost Accounting Standards, which impose accounting requirements that govern our
right to reimbursement under cost-based government contracts;
    
    the Foreign Corrupt Practices Act; and
    
    laws, regulations and executive orders restricting the use and dissemination of
information classified for national security purposes and the exportation of certain
products and technical data.
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If we are unable to continue to obtain U.S. government authorization regarding the export of our
products, or if current or future export laws limit or otherwise restrict our business, we could
be prohibited from shipping our products to certain countries, which could cause our business,
financial condition and results of operations to suffer.
  We face risks from litigation.
    We may be exposed to risks of intellectual property infringement by third parties.
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Changes in tax laws or the interpretation thereof, adverse tax audits and other tax matters may
adversely affect our future results.
  
    
    the jurisdictions in which profits are determined to be earned and taxed;
    
    the resolution of issues arising from tax audits with various tax authorities;
    
    changes in the valuation of our deferred tax assets and liabilities;
    
    adjustments to estimated taxes upon finalization of various tax returns;
    
    increases in expenses not deductible for tax purposes; and
    
    the repatriation of non-U.S. earnings for which we have not previously provided for
U.S. taxes.
  Changes to financial accounting standards may affect our results of operations and cause us to
change our business practices.
  We face costs and risks associated with maintaining effective internal controls over financial
reporting, and if we fail to achieve and maintain adequate internal controls over financial
reporting, our business, results of operations and financial condition, and investors
confidence in us could be materially affected.
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Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3.
    
    Defaults upon Senior Securities.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  1.
    
    To approve the issuance of new shares of SCM common stock, par value $0.001 per share,
and warrants to purchase shares of SCM common stock, to securityholders of Hirsch, in
connection with the acquisition of Hirsch Electronics Corporation:
 For
    
    Against
    
    Abstain7,248,826
    
    
    11,082
    
    
    
    1,270
 
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
  
 SIGNATURES
  Registrant
SCM MICROSYSTEMS, INC.August 14, 2009
    
    /s/ Felix MarxFelix MarxChief Executive OfficerAugust 14, 2009
    
    /s/ Stephan RohalyStephan RohalyChief Financial Officer and Secretary 54




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EXHIBIT INDEX
 ExhibitNumber
    
    DESCRIPTION OF DOCUMENT3.1(1)
    
    Fourth Amended and Restated Certificate of Incorporation.3.2(2)
    
    Amended and Restated Bylaws of Registrant.3.3(3)
    
    Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of SCM Microsystems, Inc.4.1(1)
    
    Form of Registrants Common Stock Certificate.4.2(3)
    
    Preferred Stock Rights Agreement, dated as of November 8, 2002,
between SCM Microsystems, Inc. and American Stock Transfer and Trust
Company.4.3(4)
    
    First Amendment to Rights Agreement, dated as of December 10, 2008,
between SCM Microsystems, Inc. and American Stock Transfer and Trust
Company.4.4(4)
    
    Form of Warrant Certificate.10.35(5)*
    
    Employment Agreement of Lawrence W. Midland, dated December 10, 2008.10.36(5)
    
    Stockholder Agreement, dated December 10, 2008.10.37(5)
    
    Settlement Agreement, dated April 8, 2009.10.38(6)
    
    Amended and Restated 1994 Settlement Agreement, dated April 8, 2009.10.39(6)
    
    Limited Guarantee, dated April 8, 2009.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.32
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed previously as an exhibit to SCMs Registration Statement on Form S-1 (See SEC File No. 333-29073).(2)
    
    Filed previously as an exhibit to SCMs Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (see SEC File No. 000-22689).(3)
    
    Filed previously as an exhibit to SCMs Registration Statement on Form 8-A (See SEC File No. 000-29440).(4)
    
    Filed previously as an exhibit to SCMs Quarterly Report on Form 10-Q for the quarter ended March 31,
2009 (see SEC File No. 000-29440).(5)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated April 29, 2009 (see SEC File
No. 000-29440).(6)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated April 8, 2009 (see SEC File
No. 000-29440).*
    
    Denotes management compensatory arrangement. 55