3.	Acquisitions

Acquisition of idOnDemand

The Company completed the acquisition of idOnDemand, Inc. (“idOnDemand”) on May 2, 2011 (the “idOnDemand acquisition date”), pursuant to a Stock Purchase Agreement dated April 29, 2011 between the Company and certain shareholders (the “Selling Shareholders”) of idOnDemand, under which the Company has acquired approximately 95.8% of the shares of idOnDemand in exchange for cash and shares of the Company’s common stock. idOnDemand was a privately held corporation and is a provider of service-based identity credential provisioning and management. idOnDemand is headquartered in Pleasanton, California and maintains data centers in Santa Clara, California and Canberra, Australia. Initial consideration at closing consisted of approximately $2.4 million in cash and 995,675 shares of the Company’s common stock. Shares issued at closing to the Selling Shareholders are subject to a three-year lock-up period from the closing date of the acquisition. Of the total initial share consideration paid to the Selling Shareholders, 407,289 shares will be released from the lock-up on the six month anniversary of the closing date. Beginning on the second anniversary of the closing date, the remaining shares will be released from the lock-up in equal amounts on a monthly basis until the expiration of the lock-up period.

The shares of the Company’s common stock issued at closing were issued in reliance upon available exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), including Section 4(2) thereof and Regulation S thereunder, as well as comparable exemptions under applicable state and foreign securities laws. In addition, Selling Shareholders may receive potential earn-out payments over a period of three years and eight months from the idOnDemand acquisition date, payable in shares of the Company’s common stock and subject to achievement of specific financial and sales performance targets. Any shares issued in connection with the earn-out will be subject to a 12-month lock-up from date of issuance.

The idOnDemand acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805. Under the acquisition method of accounting, the total purchase consideration, assets acquired and the liabilities assumed is measured at fair value as of the date of acquisition when control is obtained. The fair value of the consideration transferred and the assets acquired and liabilities assumed was determined by the Company and in doing so relied in part upon a third-party valuation report to measure the purchase consideration, identifiable intangible assets acquired and obligations related to earn-out payments. The following table summarizes the consideration paid for idOnDemand, the total fair value of net identifiable assets acquired at the idOnDemand acquisition date and the resulting goodwill recorded (in thousands):

		111111111
Cash consideration	$	2,395
Fair value of common stock		3,043
Fair value of earn-out contingent consideration		10,053

Fair value of total consideration transferred		15,491
Fair value of noncontrolling interest		699

Fair value of controlling and noncontrolling interest		16,190
Fair value of idonDemand net identifiable assets acquired		(3,058	)

Goodwill	$	13,132

The fair value of the shares of the Company’s common stock issued in connection with the acquisition was determined using the closing market price of the Company’s common stock as of the idOnDemand acquisition date of $3.64 per share and then discounted to reflect the restriction on the resale or transfer of shares under the Securities Act. The fair value of the earn-out consideration was based on achieving certain revenue and profit targets as defined under the Stock Purchase Agreement and is payable in shares of the Company’s common stock. These contingent payments were probability weighted and also discounted to reflect the restriction on the resale or transfer of such shares. The fair-value of the contingent consideration was classified as liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). As of June 30, 2011, the Company reviewed the inputs used for measuring the fair-value of the contingent consideration in accordance with ASC 480 and noted no changes. The acquisition-date fair value of the noncontrolling interests is derived by determining the fair value of the acquired business as a whole and then subtracting the consideration transferred by the Company for its controlling interest in idOnDemand.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the idOnDemand acquisition date. The estimated fair value of the identifiable assets acquired and liabilities assumed in the acquisition is based on management’s best estimates. As the Company finalizes certain valuation assumptions, the provisional measurements of identifiable assets and liabilities, and the resulting goodwill and deferred income taxes are subject to change and the final purchase price accounting could be different from the amounts presented herein.

Assets acquired and liabilities assumed as of May 2, 2011 (in thousands):

		11111111
Accounts receivable	$	65
Inventory		74
Property and equipment		96
Other assets		291
Accounts payable		(123	)
Accrued expenses and other liabilities		(116	)
Deferred revenue		(161	)
Intangible assets subject to amortization
Developed technology		2,600
Patents		790
Customer relationships		840
Trade secrets		300
Order backlog		30
Trade name		70
Deferred tax liabilities in connection with acquired intangible assets and inventory fair value adjustment, net		(1,698	)

Fair value of idOnDemand net identifiable assets acquired	$	3,058

Intangible assets of $4.6 million consist primarily of developed technology, patents, customer relationships, trade secrets, and trade name. Developed technology, patents and trade secrets relates to idOnDemand’s technology and knowhow which is currently generating revenue. Customer relationships relate to idOnDemand’s ability to sell existing, in-process and future versions of its products to its existing customers. Trade names represent future value to be derived associated with the use of existing trade names. Order backlog represents future revenue to be derived from confirmed orders. Developed technology, patents and trade name were valued using the relief from royalty method based on discounted cash flow (“DCF”). A discount rate of 18% was used to value developed technology and trade name and 20% to value patents. The customer relationships and trade secrets were valued using the income approach based on DCF and using a discount rate of 20%. Trade secrets were valued using the increment income approach. The discount rates used in the present value calculations was derived from a weighted average cost of capital (“WACC”) analysis, adjusted to reflect additional risks related to each asset’s characteristics. The intangible assets of $4.6 million are subject to amortization and the Company expects to amortize these intangible assets on a straight-line basis over their expected useful lives of approximately one to twelve years.

Of the total purchase consideration, $13.1 million was recognized as goodwill, which represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill arising from the idOnDemand acquisition is largely attributable to the synergies expected to be realized and is assigned to the Company’s Identity Management reportable segment in accordance with ASC 350. None of the goodwill recorded as part of the idOnDemand acquisition will be deductible for United States federal income tax purposes.

Deferred tax assets and liabilities resulting from the acquisition of idOnDemand have been netted, where applicable. Following the idOnDemand acquisition, idOnDemand has become part of the U.S. tax group of the Company’s entities. Accordingly, the deferred tax liability of $1.7 million which was recognized in the purchase price accounting has been netted with the Company’s existing deferred tax assets. As a result, there is a $1.7 million release of the Company’s valuation allowance. In accordance with ASC 805, the release of the valuation allowance was booked as a tax benefit in the 2011 second quarter financial statements.

The Company recognized $0.2 million of acquisition-related costs that were expensed in the three and six months ended June 30, 2011. These costs are included as part of general and administration costs in the condensed consolidated statement of operations.

The amounts of revenue and earnings of idOnDemand included in the Company’s condensed consolidated statement of operations from the idOnDemand acquisition date to the period ending June 30, 2011 are as follows (in thousands):

		1111111
Revenues	$	210
Net loss	$	574

Acquisition of Smartag

The Company completed the acquisition of FCI Smartag Pte., Ltd. (“Smartag”) on November 19, 2010 (the “Smartag acquisition date”), pursuant to a Share Purchase Agreement between the Company’s subsidiary SCM Microsystems (Asia) Pte. Ltd. and FCI Asia Pte. Ltd., FCI SA and FCI Connectors Singapore Pte. Ltd., under which the Company paid approximately $3.2 million to acquire all the shares and intellectual property of Smartag, consisting of a one-time cash payment at the close of the transaction of $1.0 million and a debt note for approximately $2.2 million. The debt note carries an interest rate of 6% per year and is payable within 30 months from the closing date.

Certain closing balance sheet items in connection with the acquisition of Smartag were subject to post-closing adjustment which was finalized during the second quarter of 2011. As a result, the net assets acquired increased by $0.1 million and the purchase consideration was increased by $0.2 million which were accounted for as measurement period adjustments in the second quarter of 2011 in the acquisition accounting below. The amounts in the table below include the impact of measurement period adjustments.

The Smartag acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805. The following table summarizes the consideration paid for Smartag, the total fair value of net identifiable assets acquired at the Smartag acquisition date and the resulting goodwill recorded (in thousands):

		11111111
Cash consideration	$	1,000
Fair value of debt note consideration		2,160

Fair value of total consideration transferred		3,160
Fair value of Smartag net identifiable assets acquired		(2,384	)

Goodwill	$	776

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the Smartag acquisition date. The estimated fair value of the identifiable assets acquired and liabilities assumed in the acquisition is based on management’s best estimates. As the Company finalizes certain valuation assumptions, the provisional measurements of identifiable assets and liabilities, and the resulting goodwill and deferred income taxes are subject to change and the final purchase price accounting could be different from the amounts presented herein.

Assets acquired and liabilities assumed as of November 19, 2010 (in thousands):

		11111111
Accounts receivable	$	921
Inventories		1,319
Other assets		135
Property and equipment		1,142
Accounts payable		(794	)
Accrued expenses and other liabilities		(606	)
Amortizable intangible assets:
Customer relationships		70
Developed technology		160
Trade name		40
Order backlog		(10	)
Deferred tax assets in connection with acquired intangible assets and fair value adjustments for inventory and property and equipment, net		7

Fair value of Smartag net identifiable assets acquired	$	2,384

The Company recognized identifiable intangible assets of $0.3 million related to the acquisition of Smartag, which are being amortized on a straight-line basis over their expected useful lives of approximately one to five years.

Acquisition of RockWest (now Multicard U.S.)

The Company completed the acquisition of RockWest on April 14, 2010 (the “RockWest acquisition date”), pursuant to a Share Purchase Agreement as amended between the Company, RockWest and certain sellers of RockWest dated April 9, 2010 (the “RockWest Share Purchase Agreement”). Subsequently, RockWest changed its name to “Multicard U.S.” Under the RockWest Share Purchase Agreement, the Company issued an aggregate of 2.6 million restricted shares of its common stock to George Levy, Matt McDaniel, Hugo Garcia and Stan McKinney (the “Sellers”) as consideration for the acquisition. The shares issued to the Sellers are subject to a 24-month lock-up from the closing date of the acquisition. Additionally, the Sellers are eligible to receive limited earn-out payments, subject to the satisfaction of conditions specified in the Share Purchase Agreement, in the form of shares of common stock subject to a 12-month lock-up period.

The RockWest acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805. The fair value of total consideration transferred, which included earn-out contingent consideration, was determined to be $4.5 million as of the RockWest acquisition date. The fair value of the earn-out consideration is based on achieving certain revenue and profit targets as defined under the Share Purchase Agreement and is payable in shares. These contingent payments are probability weighted and are discounted to reflect the restriction on the resale or transfer of shares. The fair-value of the contingent consideration is classified as liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). As of June 30, 2011, the Company remeasured the earn-out contingent consideration to fair value in accordance with ASC 480 and recognized $0.2 million and $0.1 million as a credit to stock-based compensation expense during the three and six months ended June 30, 2011, respectively, which has been included in general and administration expenses in the condensed consolidated statement of operations.

The Company recognized identifiable intangible assets of $2.2 million and goodwill of $3.0 million related to the acquisition of RockWest. The Company is amortizing the intangible assets on a straight-line basis over their expected useful lives of approximately one to six years.

Deferred tax assets and liabilities resulting from the acquisition of RockWest have been netted, where applicable. Following the RockWest acquisition, RockWest has become part of the U.S. tax group of the Company’s entities. Accordingly, the deferred tax liability of $0.6 million which was recognized in the purchase price accounting has been netted with the Company’s existing deferred tax assets. As a result, there is a $0.6 million release of the Company’s valuation allowance. In accordance with ASC 805, the release of the valuation allowance was booked as a tax benefit in the 2010 second quarter financial statements.

Acquisition of Bluehill ID

The Company completed the acquisition of Bluehill ID (the “Bluehill ID acquisition”) on January 4, 2010 (the “Bluehill acquisition date”), in accordance with the Business Combination Agreement dated as of September 20, 2009, as amended (the “Business Combination Agreement”). A total of 29,422,714, or approximately 92% of Bluehill ID shares outstanding were exchanged for a total of 15,299,797 new shares of the Company’s common stock.

Prior to the acquisition, Bluehill ID had granted to BH Capital Management AG (“BHCM”), a company controlled and owned by Ayman S. Ashour and Mountain Partners AG, an option to purchase up to 3,914,790 bearer shares in Bluehill ID at an exercise price of CHF 1.00 per share exercisable until June 30, 2014 pursuant to a Call Option Agreement dated September 8, 2009. Mr. Ashour is the former chief executive officer of Bluehill ID and the current Chairman and Chief Executive Officer of the Company; Mountain Partners AG is a significant stockholder of the Company and an affiliate of Daniel S. Wenzel, a former director of Bluehill ID and currently a director of the Company. Pursuant to the terms of the Business Combination Agreement, these options were converted at the closing of the transaction into an option to purchase up to 2,035,691 shares of the Company’s common stock at an exercise price of euro 1.28 per share.

The Bluehill ID acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805. The fair value of total consideration transferred and fair value of noncontrolling interest was determined to be $40.6 million as of the Bluehill ID acquisition date. The Company recognized identifiable intangible assets of $13.9 million and goodwill of $23.3 million related to the acquisition of Bluehill ID. The Company is amortizing the intangible assets on a straight-line basis over their expected useful lives of approximately one to ten years.

Pro forma financial information:

The results for the acquired idOnDemand, Smartag and RockWest businesses are included in the Company’s condensed consolidated statements of operations since their respective acquisition dates. As a result of the timing of these acquisitions, the Company’s condensed consolidated results for the periods presented are not directly comparable. The pro forma financial information is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been achieved if the idOnDemand, Smartag and RockWest acquisitions had been completed as of the date indicated, and should not be taken as representative of the Company’s future consolidated results of operations or financial condition. The unaudited pro forma financial information in the table below summarizes the results of operations of the combined entity, as though the acquisitions had occurred as of the beginning of the periods presented. Preparation of the pro forma financial information for all periods presented required management to make certain judgments and estimates to determine the pro forma adjustments such as purchase accounting adjustments, which include, among others, cost of sales resulted from step up of inventory at fair value, amortization charges from acquired intangible assets, and income tax effects.

Pro forma results of operations for the three and six months ended June 30, 2011 and 2010 are as follows (in thousands, unaudited):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenues	$	25,646		$	23,292		$	48,032		$	42,211
Net loss		(1,861	)		(2,264	)		(4,619	)		(10,179	)