##### 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 September 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
(STATE OR OTHER JURISDICTION OF 
INCORPORATION OR ORGANIZATION)
    
    77-0444317
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
 1900 Carnegie Avenue, Building B
Santa Ana, California 92705
 (949) 250-8888
  
  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
    
    
    35Item 1A
    
    Risk Factors
    
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58Item 3.
    
    Defaults Upon Senior Securities
    
    
    58Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    58Item 5.
    
    Other Information
    
    
    59Item 6.
    
    Exhibits
    
    
    59SIGNATURES
    
    
    59EXHIBIT INDEX
    
    
    60EX-10.48EX-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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue
    
    $
    13,334
    
    
    $
    6,393
    
    
    $
    29,450
    
    
    $
    19,377Cost of revenue
    
    
    6,940
    
    
    
    3,483
    
    
    
    15,371
    
    
    
    10,961Gross profit
    
    
    6,394
    
    
    
    2,910
    
    
    
    14,079
    
    
    
    8,416Operating expenses:Research and development
    
    
    1,518
    
    
    
    980
    
    
    
    3,776
    
    
    
    3,058Selling and marketing
    
    
    4,653
    
    
    
    2,280
    
    
    
    10,635
    
    
    
    7,010General and administrative
    
    
    2,978
    
    
    
    1,697
    
    
    
    7,665
    
    
    
    4,718Gain on sale of assets
    
    
    (1,168
    )
    
    
    
    
    
    
    (1,417
    )
    
    
    Total operating expenses
    
    
    7,981
    
    
    
    4,957
    
    
    
    20,659
    
    
    
    14,786Loss from operations
    
    
    (1,587
    )
    
    
    (2,047
    )
    
    
    (6,580
    )
    
    
    (6,370
    )Loss on equity investments
    
    
    (225
    )
    
    
    
    
    
    
    (795
    )
    
    
    Interest and other income (expense), net
    
    
    (71
    )
    
    
    (1,117
    )
    
    
    (5
    )
    
    
    (293
    )Loss from continuing operations before income taxes
    
    
    (1,883
    )
    
    
    (3,164
    )
    
    
    (7,380
    )
    
    
    (6,663
    )Benefit (provision) for income taxes
    
    
    (434
    )
    
    
    (103
    )
    
    
    1,307
    
    
    
    (151
    )Loss from continuing operations
    
    
    (2,317
    )
    
    
    (3,267
    )
    
    
    (6,073
    )
    
    
    (6,814
    )Gain from discontinued operations, net of income taxes
    
    
    39
    
    
    
    424
    
    
    
    190
    
    
    
    273Gain on sale of discontinued operations, net of income taxes
    
    
    41
    
    
    
    44
    
    
    
    115
    
    
    
    553Net loss
    
    $
    (2,237
    )
    
    $
    (2,799
    )
    
    $
    (5,768
    )
    
    $
    (5,988
    )Basic and diluted loss per share from continuing operations
    
    $
    (0.09
    )
    
    $
    (0.21
    )
    
    $
    (0.29
    )
    
    $
    (0.43
    )Basic and diluted income per share from discontinued operations
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05Basic and diluted net loss per share
    
    $
    (0.09
    )
    
    $
    (0.18
    )
    
    $
    (0.28
    )
    
    $
    (0.38
    )Shares used to compute basic and diluted income (loss) per share
    
    
    25,135
    
    
    
    15,744
    
    
    
    20,972
    
    
    
    15,743Comprehensive loss:Net loss
    
    $
    (2,237
    )
    
    $
    (2,799
    )
    
    $
    (5,768
    )
    
    $
    (5,988
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Foreign currency translation adjustment
    
    
    173
    
    
    
    (24
    )
    
    
    (244
    )
    
    
    (203
    )Total comprehensive loss
    
    $
    (2,064
    )
    
    $
    (2,823
    )
    
    $
    (6,012
    )
    
    $
    (6,163
    )
  3




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##### Table of Contents



SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands, except par value)
(unaudited)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,162
    
    
    $
    20,550Accounts receivable, net of allowances of $505 and
$689 as of September 30, 2009 and December 31,
2008, respectively
    
    
    9,083
    
    
    
    8,665Inventories
    
    
    6,587
    
    
    
    5,065Income taxes receivable
    
    
    890
    
    
    
    Other current assets
    
    
    1,771
    
    
    
    1,139Total current assets
    
    
    24,493
    
    
    
    35,419Equity investments
    
    
    1,449
    
    
    
    2,244Property and equipment, net
    
    
    573
    
    
    
    1,236Intangible assets, net
    
    
    22,738
    
    
    
    307Goodwill
    
    
    21,895
    
    
    
    Other assets
    
    
    1,048
    
    
    
    1,932Total assets
    
    $
    72,196
    
    
    $
    41,138LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,207
    
    
    $
    3,555Liability to related parties
    
    
    1,029
    
    
    
    Accrued compensation and related benefits
    
    
    1,847
    
    
    
    1,763Accrued restructuring and other charges
    
    
    1,171
    
    
    
    1,576Accrued professional fees
    
    
    1,457
    
    
    
    1,419Accrued royalties
    
    
    551
    
    
    
    475Accrued sales tax related expenses
    
    
    347
    
    
    
    330Other accrued expenses
    
    
    1,999
    
    
    
    1,959Income taxes payable
    
    
    440
    
    
    
    411Total current liabilities
    
    
    14,048
    
    
    
    11,488Long-term liability to related parties
    
    
    7,959
    
    
    
    Deferred tax liability
    
    
    3,585
    
    
    
    1,340Long-term income taxes payable
    
    
    503
    
    
    
    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
September 30, 2009 and December 31, 2008,
respectively
    
    
    26
    
    
    
    16Additional paid-in capital
    
    
    253,765
    
    
    
    229,788Treasury stock, 618 shares
    
    
    (2,777
    )
    
    
    (2,777
    )Accumulated deficit
    
    
    (207,967
    )
    
    
    (202,199
    )Accumulated other comprehensive income
    
    
    3,054
    
    
    
    3,298Total stockholders equity
    
    
    46,101
    
    
    
    28,126Total liabilities and stockholders equity
    
    $
    72,196
    
    
    $
    41,138
  4




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##### Table of Contents



SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)
(unaudited)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (5,768
    )
    
    $
    (5,988
    )Adjustments to reconcile net loss to net cash used in operating activities:Gain from discontinued operations
    
    
    (305
    )
    
    
    (826
    )Deferred income taxes
    
    
    (1,986
    )
    
    
    (2
    )Depreciation and amortization
    
    
    711
    
    
    
    216Gain on disposal of property and equipment
    
    
    (1,264
    )
    
    
    Stock compensation expense
    
    
    203
    
    
    
    242Loss on equity investments
    
    
    795
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    2,582
    
    
    
    2,004Inventories
    
    
    383
    
    
    
    (1,704
    )Other assets
    
    
    104
    
    
    
    (352
    )Income taxes receivable
    
    
    194
    
    
    
    Accounts payable
    
    
    (283
    )
    
    
    (381
    )Accounts payable to related parties
    
    
    71
    
    
    
    Accrued expenses
    
    
    (211
    )
    
    
    283Other Liabilities
    
    
    (76
    )
    
    
    Income taxes payable
    
    
    125
    
    
    
    (47
    )Net cash used in operating activities from continuing operations
    
    
    (4,725
    )
    
    
    (6,555
    )Net cash used in operating activities from discontinued operations
    
    
    (128
    )
    
    
    (350
    )Net cash used in operating activities
    
    
    (4,853
    )
    
    
    (6,905
    )Cash flows from investing activities:Capital expenditures
    
    
    (271
    )
    
    
    (534
    )Cash paid for Hirsch acquisition
    
    
    (14,167
    )
    
    
    Cash acquired in HIRSCH acquisition
    
    
    3,275
    
    
    
    Proceeds from sale of assets, net
    
    
    2,087
    
    
    
    Maturities of short-term investments
    
    
    
    
    
    
    13,873Net cash provided by (used in) investing activities
    
    
    (9,076
    )
    
    
    13,339Cash flows from financing activities:Proceeds from issuance of equity securities
    
    
    
    
    
    
    18Net cash provided by financing activities
    
    
    
    
    
    
    18Effect of exchange rates on cash and cash equivalents
    
    
    (459
    )
    
    
    (32
    )Net increase (decrease) in cash and cash equivalents
    
    
    (14,388
    )
    
    
    6,420Cash and cash equivalents at beginning of period
    
    
    20,550
    
    
    
    18,600Cash and cash equivalents at end of period
    
    $
    6,162
    
    
    $
    25,020Supplemental disclosures of cash flow information  cash paid for:Income taxes
    
    $
    246
    
    
    $
    175
  5




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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 1. Basis of Presentation
   Discontinued Operations
 .
 Property, Plant and Equipment
 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
 6




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##### Table of Contents



Consolidation
 Fair Value Measurements and Disclosures
  
    
    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
  September 30, 2009
    
    December 31, 2008Level 1
    
    Level 2
    
    Level 3
    
    Total
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalMoney market fund
deposits
    
    $
    1,927
    
    
    $
    
    
    
    $
    
    
    
    $
    1,927
    
    
    $
    9,426
    
    
    $
    
    
    
    $
    
    
    
    $
    9,426
  7




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalGoodwill
    
    $
    
    
    
    $
    
    
    
    $
    21,895
    
    
    $
    21,895Acquired intangibles  Hirsch Acquisition
    
    
    
    
    
    
    
    
    
    
    22,333
    
    
    
    22,333Total:
    
    $
    
    
    
    $
    
    
    
    $
    44,228
    
    
    $
    44,228
   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:
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    13,334
    
    
    $
    12,571
    
    
    $
    36,110
    
    
    $
    37,126Net loss
    
    
    (2,237
    )
    
    
    (4,321
    )
    
    
    (8,646
    )
    
    
    (8,659
    )Weighted average common shares outstanding
used in
loss per common share  basic and diluted
    
    
    25,135
    
    
    
    25,135
    
    
    
    25,135
    
    
    
    25,134Net loss per common share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.17
    )
    
    $
    (0.34
    )
    
    $
    (0.34
    )
 3. Stock Based Compensation and Warrants
 th th
  10




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September. 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of revenue
    
    $
    (4
    )
    
    $
    6
    
    
    $
    9
    
    
    $
    16Research and development
    
    
    (14
    )
    
    
    12
    
    
    
    13
    
    
    
    36Selling and marketing
    
    
    25
    
    
    
    30
    
    
    
    99
    
    
    
    92General and administrative
    
    
    5
    
    
    
    70
    
    
    
    82
    
    
    
    98Stock-based compensation expense before income taxes
    
    $
    12
    
    
    $
    118
    
    
    $
    203
    
    
    $
    242Income tax benefit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Stock-based compensation expense after income taxes
    
    $
    12
    
    
    $
    118
    
    
    $
    203
    
    
    $
    242
 Stock Option Plans
     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
    
    
    (674,077
    )
    
    
    674,077
    
    
    $
    2.39
    
    
    
    
    
    
    
    Options cancelled or expired
    
    
    121,207
    
    
    
    (250,674
    )
    
    $
    12.07
    
    
    
    
    
    
    
    Balance at September 30, 2009
    
    
    582,349
    
    
    
    2,260,094
    
    
    $
    4.66
    
    
    $
    163,714
    
    
    
    5.61Vested or expected to vest
at September 30, 2009
    
    
    
    
    
    
    2,043,628
    
    
    $
    4.86
    
    
    $
    133,911
    
    
    
    5.53Exercisable at September 30, 2009
    
    
    
    
    
    
    1,049,785
    
    
    $
    6.83
    
    
    $
    6,034
    
    
    
    4.74
  11




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Expected volatility
    
    
    78
    %
    
    
    57
    %
    
    
    73
    %
    
    
    55
    %Dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Risk-free interest rate
    
    
    2.01
    %
    
    
    2.87
    %
    
    
    1.80
    %
    
    
    2.72
    %Expected term (in years)
    
    
    4.00
    
    
    
    4.00
    
    
    
    4.00
    
    
    
    4.00
 Expected Volatility
 Dividend Yield
 Risk-Free Interest Rate:
 Expected Term:
 Forfeitures Rate: Compensation-Stock
Compensation
 Warrants
   12




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##### Table of Contents



4. Discontinued Operations
     Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Operating gain (loss)
    
    $
    (2
    )
    
    $
    32
    
    
    $
    72
    
    
    $
    26Net income (loss) before income taxes
    
    $
    (2
    )
    
    $
    32
    
    
    $
    87
    
    
    $
    26Income tax benefit (provision)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued operations
    
    $
    (2
    )
    
    $
    32
    
    
    $
    87
    
    
    $
    26
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Operating loss
    
    $
    (73
    )
    
    $
    (58
    )
    
    $
    (219
    )
    
    $
    (202
    )Net gain (loss) before income taxes
    
    $
    (191
    )
    
    $
    365
    
    
    $
    (159
    )
    
    $
    225Income tax benefit
    
    $
    232
    
    
    $
    27
    
    
    $
    262
    
    
    $
    22Gain from discontinued operations
    
    $
    41
    
    
    $
    392
    
    
    $
    103
    
    
    $
    247
  13




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##### Table of Contents



5. Inventories
  September 30,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    2,176
    
    
    $
    1,648Work-in-process
    
    
    578
    
    
    
    Finished goods
    
    
    3,833
    
    
    
    3,417Total
    
    $
    6,587
    
    
    $
    5,065
 6. Equity Investments
  September 30,
    
    December 31,2009
    
    2008TranZfinity, Inc.
    
    $
    1,449
    
    
    $
    2,244
  Intangibles  Goodwill and Other
  7. Property and Equipment
  September 30,
    
    
    December 31,2009
    
    
    2008Building and leasehold improvements
    
    $
    553
    
    
    $
    1,734Furniture, fixtures and office equipment
    
    
    2,841
    
    
    
    2,777Automobiles
    
    
    28
    
    
    
    28Purchased software
    
    
    3,222
    
    
    
    3,233Total
    
    
    6,644
    
    
    
    7,772Accumulated depreciation
    
    
    (6,071
    )
    
    
    (6,536
    )Property and equipment, net
    
    $
    573
    
    
    $
    1,236
 14




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##### Table of Contents



8. Goodwill and Intangible Assets
 Goodwill
   Intangible Assets  Hirsch Acquisition
    September 30, 2009GrossAmortization
    
    
    Carrying
    
    
    Accumulated(in thousands)
    
    Period
    
    
    Value
    
    
    Amortization
    
    
    NetExisting technology
    
    15 years
    
    $
    4,600
    
    
    $
    (130
    )
    
    $
    4,470Customer relationships
    
    15 years
    
    $
    10,350
    
    
    $
    (287
    )
    
    $
    10,063Totals
    
    
    
    
    
    $
    14,950
    
    
    $
    (417
    )
    
    $
    14,533
   Intangible Assets  TranZfinity
  15




---



##### Table of Contents



September 30, 2009
    
    December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    GrossAmortization
    
    Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    Accumulated(in thousands)
    
    Period
    
    Value
    
    Amortization
    
    Net
    
    Value
    
    Amortization
    
    NetExclusivity right
    
    54 months
    
    $
    500
    
    
    $
    (95
    )
    
    $
    405
    
    
    $
    321
    
    
    $
    (14
    )
    
    $
    307
    Fiscal Year
    
    Amount2009
    
    $
    282010
    
    
    1142011
    
    
    1142012
    
    
    1142013
    
    
    35Total
    
    $
    405
 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
    
    
    
    1,291Provision for Q3 2009
    
    
    
    
    
    
    
    
    
    
    Changes in estimates
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )(41
    )
    
    
    
    
    
    
    (41
    )Payments and other changes in Q3 2009
    
    
    (98
    )
    
    
    15
    
    
    
    (83
    )Balances as of September 30, 2009
    
    $
    820
    
    
    $
    347
    
    
    $
    1,167
 Continuing Operations
  10. Gain on Sale of Assets
   11. Segment Reporting, Geographic Information and Major Customers
 Segment Reporting,
 17




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Security and Identity Solutions:Net revenue
    
    $
    12,508
    
    
    $
    5,873
    
    
    $
    26,479
    
    
    $
    15,758Gross profit
    
    
    6,069
    
    
    
    2,748
    
    
    
    12,999
    
    
    
    7,172Gross profit %
    
    
    49
    %
    
    
    47
    %
    
    
    49
    %
    
    
    46
    %Digital Media and ConnectivityNet revenue
    
    $
    826
    
    
    $
    520
    
    
    $
    2,971
    
    
    $
    3,619Gross profit
    
    
    325
    
    
    
    162
    
    
    
    1,080
    
    
    
    1,244Gross profit %
    
    
    39
    %
    
    
    31
    %
    
    
    36
    %
    
    
    34
    %Total:Net revenue
    
    $
    13,334
    
    
    $
    6,393
    
    
    $
    29,450
    
    
    $
    19,377Gross profit
    
    
    6,394
    
    
    
    2,910
    
    
    
    14,079
    
    
    
    8,416Gross profit %
    
    
    48
    %
    
    
    46
    %
    
    
    48
    %
    
    
    43
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenueUnited States
    
    $
    8,865
    
    
    $
    2,655
    
    
    $
    17,517
    
    
    $
    7,214Europe
    
    
    2,903
    
    
    
    2,064
    
    
    
    7,544
    
    
    
    7,151Asia-Pacific
    
    
    1,566
    
    
    
    1,674
    
    
    
    4,389
    
    
    
    5,012Total
    
    $
    13,334
    
    
    $
    6,393
    
    
    $
    29,450
    
    
    $
    19,377% of net revenueUnited States
    
    
    66
    %
    
    
    42
    %
    
    
    59
    %
    
    
    37
    %Europe
    
    
    22
    %
    
    
    32
    %
    
    
    26
    %
    
    
    37
    %Asia-Pacific
    
    
    12
    %
    
    
    26
    %
    
    
    15
    %
    
    
    26
    %
 18




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008Property and equipment, net:United States
    
    $
    251
    
    
    $
    5Europe
    
    
    254
    
    
    
    259Asia-Pacific
    
    
    68
    
    
    
    972Total
    
    $
    573
    
    
    $
    1,236
  12. Commitments
    13. Net Income (Loss) per Common Share
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss from continuing operations
    
    $
    (2,317
    )
    
    $
    (3,267
    )
    
    $
    (6,073
    )
    
    $
    (6,814
    )Income (loss) from discontinued operations
    
    
    80
    
    
    
    468
    
    
    
    305
    
    
    
    826Net loss
    
    $
    (2,237
    )
    
    $
    (2,799
    )
    
    $
    (5,768
    )
    
    $
    (5,988
    )Shares used in income (loss) per common
share  basic
    
    
    25,135
    
    
    
    15,744
    
    
    
    20,972
    
    
    
    15,743Net income (loss) per common share  basic
and dilutedContinuing operations
    
    $
    (0.09
    )
    
    $
    (0.21
    )
    
    $
    (0.29
    )
    
    $
    (0.43
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05Net loss per common share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.18
    )
    
    $
    (0.28
    )
    
    $
    (0.38
    )
 19




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14. Related Party Transactions
        20




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##### Table of Contents



15. Legal Proceedings
  
 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.
 21




---



##### Table of Contents



Overview
 Highlights of the Third Quarter, Ending September 30, 2009:
 
    
    Financial results for the 2009 third quarter include the results of the Hirsch business,
which we acquired on April 30, 2009 and consolidated as a wholly-owned subsidiary.
    
    Net revenue rose to $13.3 million in the third quarter of 2009, a substantial increase
compared to the same quarter a year earlier due primarily to new revenue from Hirsch.
Excluding Hirsch, revenues were relatively unchanged from the previous year.
    
    On a continuing basis, SCM overall posted an after-tax loss of $(2.3) million in the
third quarter of 2009 compared to a loss of $(3.3) million in the same quarter of the
previous year. Our net loss for the third quarter of 2009 was $(2.2) million, compared to a
loss of $(2.8) million in the third quarter of 2008.
    
    On September 21, 2009, we announced that we have entered into a business combination
agreement with Bluehill ID AG, a Swiss industrial holding group focused on investments in
the radio frequency identification (RFID)/identification and security industries. We
currently expect the transaction to close in early 2010.
 Narrative Summary of the 2009 Third Quarter
     22




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##### Table of Contents



Company Background
    
    
    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




---



##### Table of Contents



Trends in our Business
 Sales Trends
    24




---



##### Table of Contents



Gross Profit Margin Trends
  Operating Expense Trends
  25




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##### Table of Contents



Results of Operations
  Net Revenue.
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended
    
    period to
    
    Nine months ended
    
    period toSeptember 30,
    
    period
    
    September 30,
    
    period2009
    
    2008
    
    
    
    
    
    2009
    
    2008Security and Identity SolutionsRevenue
    
    $
    12,508
    
    
    $
    5,873
    
    
    
    113
    %
    
    $
    26,479
    
    
    $
    15,758
    
    
    
    68
    %Gross profit
    
    
    6,069
    
    
    
    2,748
    
    
    
    
    
    
    
    12,999
    
    
    
    7,172Gross profit %
    
    
    49
    %
    
    
    47
    %
    
    
    
    
    
    
    49
    %
    
    
    46
    %Digital Media and ConnectivityRevenue
    
    $
    826
    
    
    $
    520
    
    
    
    59
    %
    
    $
    2,971
    
    
    $
    3,619
    
    
    
    (18
    )%Gross profit
    
    
    325
    
    
    
    162
    
    
    
    
    
    
    
    1,080
    
    
    
    1,244Gross profit %
    
    
    39
    %
    
    
    31
    %
    
    
    
    
    
    
    36
    %
    
    
    34
    %Total:Revenue
    
    $
    13,334
    
    
    $
    6,393
    
    
    
    109
    %
    
    $
    29,450
    
    
    $
    19,377
    
    
    
    52
    %Gross profit
    
    
    6,394
    
    
    
    2,910
    
    
    
    
    
    
    
    14,079
    
    
    
    8,416Gross profit %
    
    
    48
    %
    
    
    46
    %
    
    
    
    
    
    
    48
    %
    
    
    43
    %
   26




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##### Table of Contents



.
    Gross Profit.
   .
  27




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##### Table of Contents



Operating Expenses.
 Research and Development .
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended September 30
    
    period to
    
    Nine months ended September 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    1,518
    
    
    $
    980
    
    
    
    55
    %
    
    $
    3,776
    
    
    $
    3,058
    
    
    
    23
    %Percentage of total revenues
    
    
    11
    %
    
    
    15
    %
    
    
    
    
    
    
    13
    %
    
    
    16
    %
   Selling and Marketing .
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended September 30
    
    period to
    
    Nine months ended September 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    4,653
    
    
    $
    2,280
    
    
    
    104
    %
    
    $
    10,635
    
    
    $
    7,010
    
    
    
    52
    %Percentage of total revenues
    
    
    35
    %
    
    
    36
    %
    
    
    
    
    
    
    36
    %
    
    
    36
    %
   General and Administrative .
 % change
    
    
    
    
    
    
    
    
    
    % changeThree months ended September 30
    
    period to
    
    Nine months ended September 30
    
    period to(In thousands)
    
    2009
    
    2008
    
    period
    
    2009
    
    2008
    
    periodExpenses
    
    $
    2,978
    
    
    $
    1,697
    
    
    
    75
    %
    
    $
    7,665
    
    
    $
    4,718
    
    
    
    62
    %Percentage of total revenues
    
    
    22
    %
    
    
    27
    %
    
    
    
    
    
    
    26
    %
    
    
    24
    %
   28




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Gain on Sale of Assets.
 Loss on Equity Investments
 Interest and Other Income (Expense), Net.
   Income Taxes
  Discontinued Operations.
   29




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##### Table of Contents



Liquidity and Capital Resources
   Nine Months EndedSeptember 30,2009Cash used in operating activities from continuing operations
    
    $
    (4,725
    )Cash used by operating activies from discontinued operations
    
    
    (128
    )Cash used in investing activities
    
    
    (9,076
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (459
    )Decrease in cash and cash equivalents
    
    
    (14,388
    )Cash and cash equivalents at beginning of period
    
    
    20,550Cash and cash equivalents at end of period
    
    $
    6,162
       Critical Accounting Policies and Estimates
  30




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##### Table of Contents




    
    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.
    
    Under ASC Topic 740-10, Income Taxes(ASC 740-10), 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. ASC 740-10 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.
 31




---



##### Table of Contents




    
    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.
 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
 Consolidation
 Fair Value Measurements and Disclosures
 32




---



##### 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
  September 30, 2009
    
    December 31, 2008Level 1
    
    Level 2
    
    Level 3
    
    Total
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalMoney market fund deposits
    
    $
    1,927
    
    
    $
    
    
    
    $
    
    
    
    $
    1,927
    
    
    $
    9,426
    
    
    $
    
    
    
    $
    
    
    
    $
    9,426
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalGoodwill
    
    $
    
    
    
    $
    
    
    
    $
    21,895
    
    
    $
    21,895Acquired intangibles  Hirsch Acquisition
    
    
    
    
    
    
    
    
    
    
    22,333
    
    
    
    22,333Total:
    
    $
    
    
    
    $
    
    
    
    $
    44,228
    
    
    $
    44,228
   33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (a)
    
    Evaluation of Disclosure Controls and Procedures
   (b)
    
    Changes in Internal Controls over Financial Reporting
  (c)
    
    Inherent Limitations on Effectiveness of Controls
  34




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PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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.
  Continuing 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.
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Disruption in the global financial markets may adversely impact our suppliers.
  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.
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
    
    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;
    
    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.
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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.
  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.
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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;
    
    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.
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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.
  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.
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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.
   
    
    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.
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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.
     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.
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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;
    
    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.
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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.
   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.
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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;
    
    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.
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
    
    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.
    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;
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
    
    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.
  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.
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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.
  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.
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Legal and Regulatory Risks
 Our business could be adversely affected by changes in laws or regulations pertaining to
security.
  
    
    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.
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
    
    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.
  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.
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We may be exposed to risks of intellectual property infringement by third parties.
    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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Risks Relating to the Proposed Business Combination with Bluehill ID
 We may not realize all of the anticipated benefits of the business combination.
  
    
    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;
    
    consolidating corporate and administrative infrastructures and eliminating duplicative
operations; and
    
    integrating the cultures of SCM and Bluehill ID.
  53




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Provisions of the business combination agreement between SCM and Bluehill ID may deter
alternative business combinations.
  The amount of consideration in SCMs offer to Bluehill ID shareholders is fixed and not subject
to adjustment based on the market price of SCM common stock.
  The value of SCM common stock issued in the transaction will depend on its market price at the
time of the closing of the offer, as the exchange ratio for the bearer shares in Bluehill ID at
the closing of the offer is fixed.
  The market price of SCM common stock could decline as a result of the large number of shares
that will become eligible for sale after the business combination.
  The issuance of shares of SCM common stock to Bluehill ID shareholders in connection with the
offer will substantially reduce the percentage ownership of current SCM stockholders.
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Bluehill ID is a significant stockholder of SCM, and its priorities as a stockholder of SCM may
be different from SCMs other stockholders. Additionally, Bluehill IDs current shareholders
will own a large percentage of the SCM common stock after the business combination, and will
have significant influence over the outcome of corporate actions requiring stockholder
approval; such stockholders priorities for SCMs business may be different from SCMs current
stockholders.
    SCMs interests in Bluehill ID may be further diluted.
 
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If less than 90% of Bluehill IDs current shareholders tender their shares in the Offer, SCM
will not be able to effect a squeeze out merger under Swiss law and Bluehill ID will continue
to have minority shareholders.
  If the conditions to the offer are not met or waived, the business combination will not occur.
  Certain conditions of the offer may be waived by SCM without re-soliciting SCM stockholder
approval.
  The date on which the offer will close is uncertain.
  If NASDAQ determines that the business combination will result in a change of control of SCM, we
will be required to submit an initial listing application and meet all initial NASDAQ Stock
Market inclusion criteria.
  If the business combination is not consummated, we may not be successful in our strategy to grow
revenue and increase our operational scale.
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We have incurred and will incur significant expenses as a result of the business combination
with Bluehill ID, which will reduce the amount of capital available to fund the combined
company.
  After the business combination, we will continue to incur significant costs as a result of
operating as a public company, and our management may be required to devote substantial time to
compliance initiatives.
   Qualified management, marketing, and sales personnel are difficult to locate, hire and train,
and if we cannot attract and retain qualified personnel after the business combination, it will
harm the ability of our business to grow.
  Completion of the business combination will require a significant amount of attention from our
management and this diversion of management attention away from ongoing operations could
adversely affect ongoing operations and business relationships.
  We may not have uncovered all the risks associated with the acquisition of Bluehill ID and a
significant liability may be discovered after the closing of the offer.
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The financial projections for both our business and Bluehill IDs business that were prepared in
connection with the proposed business combination are only estimates of future results and there
is no assurance that actual results will not be different.
  Bluehill IDs corporate records may be incomplete.
  Provisions of the business combination agreement regarding the payment of a termination fee to
Bluehill ID could negatively affect our business operations if the business combination
agreement is terminated.
  Our customers may seek to change the existing business relationship with us in reaction to the
announcement or completion of the business combination.
  
 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.
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Item 5. Other Information.
    
 Item 6. Exhibits.
  
 SIGNATURES
  Registrant
SCM MICROSYSTEMS, INC.November 16, 2009
    /s/ Felix MarxFelix MarxChief Executive OfficerNovember 16, 2009
    /s/ Martin WimmerMartin WimmerVice President and Interim Chief Financial Officer 59




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EXHIBIT INDEX
 ExhibitNumber
    
    DESCRIPTION OF DOCUMENT3.1(1)
    
    Fourth Amended and Restated Certificate of Incorporation, as amended.3.2(3)
    
    Amended and Restated Bylaws of Registrant.3.3(4)
    
    Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of SCM Microsystems, Inc.4.1(2)
    
    Form of Registrants Common Stock Certificate.4.2(4)
    
    Preferred Stock Rights Agreement, dated as of November 8, 2002,
between SCM Microsystems, Inc. and American Stock Transfer and Trust
Company.4.3(5)
    
    First Amendment to Rights Agreement, dated as of December 10, 2008,
between SCM Microsystems, Inc. and American Stock Transfer and Trust
Company.4.4(5)
    
    Form of Warrant Certificate.10.35(6)*
    
    Employment Agreement of Lawrence W. Midland, dated December 10, 2008.10.36(6)
    
    Stockholder Agreement, dated December 10, 2008.10.37(6)
    
    Settlement Agreement, dated April 8, 2009.10.38(7)
    
    Amended and Restated 1994 Settlement Agreement, dated April 8, 2009.10.39(7)
    
    Limited Guarantee, dated April 8, 2009.10.40(8)*
    
    Termination Agreement between Stephan Rohaly and SCM Microsystems
GmbH dated September 30, 2009.10.48
    
    Amended 2007 Stock Option Plan.10.49(9)
    
    Business Combination Agreement, dated September 20, 2009, between
SCM Microsystems, Inc. and Bluehill ID AG.10.50(10)
    
    Amendment to Business Combination Agreement, dated October 20, 2009,
between SCM Microsystems, Inc. and Bluehill ID AG.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-4/A dated November 10, 2009
(see SEC File No. 333-162618).(2)
    
    Filed previously as an exhibit to SCMs Registration Statement on Form S-1 (See SEC File No. 333-29073).(3)
    
    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).(4)
    
    Filed previously as an exhibit to SCMs Registration Statement on Form 8-A (See SEC File No. 000-29440).(5)
    
    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).(6)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated April 29, 2009 (see SEC File
No. 000- 60




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29440).(7)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated April 8, 2009 (see SEC File
No. 000-29440).(8)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated September 30, 2009 (see SEC
File No. 000-29440).(9)
    
    Filed previously as an exhibit to SCMs Current Report on Form 8-K, dated September 21, 2009 (see SEC
File No. 000-29440).(10)
    
    Filed previously within Annex A of SCMs Form S4/A
Amended Registration Statement, dated November 12, 2009 (see SEC
File No. 333-162618).*
    
    Denotes management compensatory arrangement. 61