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EX-31.2 - SINOHUB, INC.ex31_2.htm
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EX-32.1 - SINOHUB, INC.ex32_1.htm
EX-31.1 - SINOHUB, INC.ex31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 31, 2011
   
 
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:  001- 34430
SINOHUB, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
87-0438200
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
6/F, Bldg 51, Rd 5, Qiongyu Blvd.
Technology Park, Nanshan District
Shenzhen, People’s Republic of China
 
 
 
518057
(Address of principal executive offices)
 
(Zip Code)

86 755 2661 2106

 (Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x           No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  o           No  o (the Registrant is not yet required to submit Interactive Data)
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o  Accelerated filer o
Non-accelerated filer o Smaller Reporting Company x
    (Do not check if a smaller reporting company)   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o            No  x   

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at April 30, 2011
Common Stock, $0.001 par value per share
 
33,451,806 shares
 


 
1

 
 
SINOHUB, INC.
FORM 10-Q



 
 
Except as otherwise required by the context, all references in this report to "we", "us”, "our", “SinoHub” or "Company" refer to the consolidated operations of SinoHub, Inc., a Delaware corporation, and its wholly owned subsidiaries.
 





SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


ASSETS
 
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
         
(As Restated)
 
CURRENT ASSETS
           
     Cash and cash equivalents
  $ 13,950,000     $ 4,524,000  
     Restricted cash
    74,604,000       32,059,000  
     Accounts receivable, net
    49,256,000       45,686,000  
     Inventories, net
    19,960,000       14,631,000  
     Prepaid expenses and other current assets
    1,916,000       704,000  
     Deposit with suppliers
    579,000       1,308,000  
          Total current assets
    160,266,000       98,913,000  
                 
PROPERTY AND EQUIPMENT, NET
    13,290,000       11,190,000  
                 
TOTAL ASSETS
  $ 173,556,000     $ 110,103,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
     Accounts payable
  $ 1,721,000     $ 865,000  
     Customer deposits
    749,000       107,000  
     Accrued expenses and other current liabilities
    779,000       709,000  
     Bank borrowings
    86,330,000       37,299,000  
     Capital lease obligations – current portion
    608,000       756,000  
     Income and other taxes payable
    541,000       1,712,000  
          Total current liabilities
    90,728,000       41,449,000  
                 
LONG-TERM LIABILITIES
               
     Capital lease obligations, net of current portion
    880,000       845,000  
     Warrant Derivatives
    1,181,000       1,692,000  
TOTAL LIABILITIES
    92,789,000       43,985,000  
                 
STOCKHOLDERS’ EQUITY
               
     Preferred stock, $0.001 par value, 5,000,000 shares authorized;
    -       -  
     no shares issued
     Common stock, $0.001 par value, 100,000,000 shares authorized;
    33,000       29,000  
     33,379,420 shares and 28,570,859 shares issued and outstanding
     as of March 31, 2011 and December 31, 2010, respectively
     Additional paid-in capital
    30,622,000       20,122,000  
     Retained earnings
               
          Unappropriated
    45,846,000       42,301,000  
          Appropriated
    934,000       934,000  
     Accumulated other comprehensive income
    3,331,000       2,730,000  
          Total stockholders’ equity
    80,766,000       66,118,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 173,556,000     $ 110,103,000  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
   
Three months ended March 31,
 
         
2010
 
   
2011
   
(As Restated)
 
NET SALES
           
     ECSS
  $ 21,526,000     $ 32,218,000  
     ICM
    16,442,000       6,386,000  
          Total net sales
    37,968,000       38,604,000  
COST OF SALES
               
     ECSS
    17,311,000       26,438,000  
     ICM
    12,972,000       5,071,000  
          Total cost of sales
    30,282,000       31,509,000  
                 
GROSS PROFIT
    7,686,000       7,095,000  
 
               
OPERATING EXPENSES
               
     Selling, general and administrative
    2,322,000       1,895,000  
     Professional services
    281,000       245,000  
     Stock compensation expense
    -       56,000  
     Stock option compensation amortization
    109,000       93,000  
     Depreciation
    466,000       223,000  
     Provision for bad debts
    52,000       33,000  
          Total operating expenses
    3,231,000       2,545,000  
                 
INCOME FROM OPERATIONS
    4,455,000       4,550,000  
                 
OTHER INCOME (EXPENSE)
               
     Interest expense
    (490,000 )     (30,000 )
     Interest income
    342,000       6,000  
     Changes in fair values of warrant derivatives
    511,000       (44,000 )
     Other, net
    227,000       6,000  
          Total other income (expense), net
    590,000       (62,000 )
                 
INCOME BEFORE INCOME TAXES
    5,045,000       4,488,000  
     Income tax expense
    1,502,000       1,037,000  
                 
NET INCOME
    3,543,000       3,451,000  
                 
OTHER COMPREHENSIVE INCOME
               
     Foreign currency translation gain
    601,000       27,000  
                 
COMPREHENSIVE INCOME
  $ 4,144,000     $ 3,478,000  
                 
SHARE AND PER SHARE DATA
               
     Net income per share-basic
  $ 0.12     $ 0.13  
     Weighted average number of shares-basic
    30,181,000       27,283,000  
     Net income per share-diluted
  $ 0.12     $ 0.12  
     Weighted average number of shares-diluted
    30,336,000       27,979,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)

   
Three months ended March 31,
 
         
2010
 
   
2011
   
(As Restated)
 
   
 
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
     Net income
  $ 3,543,000     $ 3,451,000  
     Adjustments to reconcile net income to cash used in operations:
               
          Depreciation - operating expenses
    466,000       223,000  
          Depreciation - cost of sales
    406,000       -  
          Changes in fair value of warrant derivatives
    (511,000 )     44,000  
          Provision for bad debts
    52,000       33,000  
          Stock compensation expense
    -       56,000  
          Stock option compensation amortization
    109,000       93,000  
     Changes in operating assets and liabilities:
               
          Accounts receivable
    (3,181,000 )     (2,445,000 )
          Inventories
    (5,175,000 )     1,993,000  
          Prepaid expenses and other current assets
    (1,201,000 )     (379,000 )
          Deposit with suppliers
    739,000       (1,120,000 )
          Accounts payable
    845,000       513,000  
          Customer deposits
    639,000       (985,000 )
          Accrued expenses and other current liabilities
    63,000       (330,000 )
          Income and other taxes payable
    (1,183,000 )     (1,185,000 )
               Net cash used in operating activities
    (4,389,000 )     (38,000 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
     Increase in restricted cash
    (42,545,000 )     (3,984,000 )
     Purchase of property and equipment
    (2,793,000 )     (2,186,000 )
          Net cash used in investing activities
    (45,338,000 )     (6,170,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
     Proceeds from issuance of common stock, net of cost
    10,441,000       4,470,000  
     Bank borrowings -  proceeds
    53,000,000       7,003,000  
     Bank borrowings -  repayments
    (4,478,000 )     (3,328,000 )
     Repayments of capital lease obligations
    (128,000 )     -  
          Net cash provided by financing activities
    58,836,000       8,145,000  
                 
EFFECT OF EXCHANGE RATE CHANGES
    316,000       21,000  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    9,426,000       1,958,000  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    4,524,000       8,347,000  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 13,950,000     $ 10,305,000  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
     Cash paid for interest expense
  $ 490,000     $ 30,000  
     Cash paid for income tax
  $ 2,092,000     $ 2,350,000  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

SINOHUB, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2011
(UNAUDITED)


1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

 
Overview
 
SinoHub, Inc. (the “Company”) is an electronics company based in Shenzhen, PR China which services clients worldwide.  The Company is currently engaged in two business segments: electronics product manufacturing and sales (ICM, Integrated Contract Manufacturing), and electronic component sales and services (ECSS) which is comprised of electronic component sales (known as ECP) and electronic component supply chain management services (known as SCM).  We now report on each of ICM and ECSS as separate business segments.
 
History and Basis of Reporting

SinoHub, Inc. was originally organized in Utah in 1986 under the name Liberty Alliance, Inc.  The Company subsequently merged and reorganized in Delaware in 1991 and is now headquartered in Shenzhen, the People’s Republic of China (“PRC”). The Company was operated by different management teams in the past, pursuing a variety of business ventures.  In May 2008, Liberty Alliance, Inc., SinoHub Acquisition Corp., known as the Merger Sub, SinoHub, Inc., known as the Acquired Sub, and Steven L. White, the principal stockholder of Liberty Alliance, Inc., entered into an Agreement and Plan of Merger pursuant to which the Merger Sub agreed to merge with and into the Acquired Sub, with the Acquired Sub being the surviving corporation.  In July 2008, following the merger, the Company changed its name to SinoHub, Inc. and focused on the electronic components sales and services business, and the Acquired Sub changed its name from SinoHub, Inc. to SinoHub International, Inc.
 
The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission for interim financial information and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented. The consolidated financial results of operations for the interim periods are not necessarily indicative of results for the full year.

These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, previously filed with the Securities and Exchange Commission on March 14, 2011.
 
 
Organization Structure
 
The current operations of the Company include the following subsidiaries:
 
SinoHub International, Inc. was incorporated in March 1999 as a Delaware C corporation in the United States of America.  This company is the holding company for the Chinese and Hong Kong subsidiaries listed below. SinoHub International, Inc. is wholly owned by SinoHub, Inc.
 
SinoHub Electronics Shenzhen, Ltd. was incorporated in September 2000 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in southern China.  SinoHub Electronics Shenzhen, Ltd. is wholly owned by SinoHub International, Inc.
 
SinoHub SCM Shenzhen, Ltd. was incorporated in December 2001 in the PRC to hold an import and export license in the PRC. SinoHub SCM Shenzhen, Ltd. purchases and sells electronic component parts and also provides customs clearance services to our customers. 100% of the equity interest in SinoHub SCM Shenzhen, Ltd. was held on behalf of SinoHub by SinoHub Electronics Shenzhen, Ltd. through a Declaration of Trust with SinoHub Electronics Shenzhen, Ltd. dated January 30, 2008.  On August 21, 2009 our wholly-owned subsidiary SinoHub Electronics Shenzhen, Ltd. exercised its rights under a declaration of trust with the spouse of a director who is a citizen of the PRC and a shareholder of the Company, as trustee (the "Trustee") to cause the shares of SinoHub SCM Shenzhen, Ltd. previously registered in the name of the Trustee to be registered in the name of SinoHub Electronics Shenzhen, Ltd.  SinoHub SCM Shenzhen, Ltd. is now directly and solely owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub SCM Shanghai, Ltd. was incorporated in March 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in northern China. SinoHub SCM Shanghai, Ltd. is wholly owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub Electronics Shanghai, Ltd. was incorporated in July 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in the PRC. SinoHub Electronics Shanghai, Ltd. is wholly owned by SinoHub International, Inc.
 
B2B Chips, Limited was incorporated in June 2006 in Hong Kong to purchase and sell electronic components. B2B Chips is wholly owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub Technology (Hong Kong) Limited was incorporated in May 2007 in Hong Kong and has not yet commenced business. SinoHub Technology (Hong Kong) Limited is wholly owned by B2B Chips, Limited.
 
Topology Communication Technology (Shenzhen), Ltd. was incorporated in April 2010 in Shenzhen to manufacture mobile phones and other electronic devices.  Topology Communication Technology (Shenzhen), Ltd. is wholly owned by B2B Chips, Limited.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
 
Concentrations and Risks
 
Substantially all of Company's assets are located in the PRC and Hong Kong and substantially all of the Company's revenues were derived from customers located in the PRC.  In addition, financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable.  The Company mitigates credit risk through procedures that include determination of credit limits, credit approvals, and related monitoring procedures to ensure delinquent receivables are collected.

Cash and Cash Equivalents
 
For the purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with a maturity of less than three months.  Cash amounts held as security for the Company’s bank loans is reported as restricted cash and is not included with cash or cash equivalents on the balance sheet until the lien against such funds has been released.
 
Accounts Receivable
 
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  A provision for bad debts is established and recorded based on managements’ assessment of customer credit history, overall trends in collections and write-offs, and expected exposures based on facts and prior experience.
 
Inventories
 
Inventories are stated at lower of cost or market value, cost being determined on a first in first out method.  No allowance is made for excess or obsolete inventories as inventories are held for a short period of time and are substantially related to specific customer order commitments.  Inventory consists of electronic components purchased from suppliers and electronics products the Company manufactured.
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation.  Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
 
Depreciation is provided on a straight-line basis, less estimated residual values over the assets’ estimated useful lives.  The estimated useful lives are as follows:
 
Plant and machinery
2 to 5 Years
Motor vehicles
5 Years
Furniture, fixtures and equipment
2 to 5 Years
Leasehold improvements
Over the unexpired lease terms

 
Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstances or events indicate that the carrying amount of an asset may not be recoverable.  For purposes of evaluating the recoverability of long-lived assets, the Company considers various factors, including future cash flows, to determine whether the carrying amount exceeds fair value, and in that case, the asset is written down to fair value.
 
Financial Instruments
 
The Company analyzes all financial instruments that may have features of both liabilities and equity under ASC Topic 480-10 and ASC Topic 815.  At present, there are no such instruments in the financial statements.  The Company also analyzes registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under ASC Topic 825.  At present, there are no registration rights as to which late filing penalties may apply.
 
Fair Value of Financial Instruments
 
ASC Topic 825 requires certain disclosures regarding the fair value of financial instruments.  Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
 
ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
 
ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:
 
Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of March 31, 2011:
 
 
 
 
 
 
 
 
Quoted
Prices
in Active
Markets
for
Identical
Assets
 
 
Significant
Other
Observable
Inputs
 
 
Significant
Unobservable
Inputs
 
 
 
 
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
Total
 
 2010 Warrants
 
$
 
 
$
 
 
$
1,181,000
 
 
$
1,181,000
 

The following table sets forth a summary of changes in fair value of our derivative liability for the three months ended March 31, 2011 and 2010:

   
2011
   
2010
 
Beginning Balance,
  $ 1,692,000     $ -  
Fair value of 2010 warrants at issue date      -       2,304,000  
Net (gain) loss included in earnings
    (511,000 )     44,000  
Balance March 31
  $ 1,181,000     2,348,000  

 
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, bank borrowings, and other liabilities approximate their fair values because of the short-term nature of these instruments.  Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.
 
The Company’s operations are primarily based in the PRC, which may give rise to significant foreign currency risks and opportunities from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar (“USD”) and the Chinese Renminbi (“RMB”). In July 2005, the PRC allowed the RMB to fluctuate within a narrow range ending its decade-old valuation peg to the USD.  Since this change in 2005, the RMB has experienced positive trends in valuation against the USD; such trends are reflected in part by the foreign currency translation gains reported in the Company’s financial statements.
 
Derivative Instruments

The Warrants issued in connection with the private placement the Company consummated on September 10, 2008 (the “2008 Warrants) and on March 2, 2010 (the “2010 Warrants”) include a reset provision (to adjust the exercise price of the warrants) which is triggered if the Company issues common shares below the exercise price as defined in the respective warrants. Effective January 1, 2009 the reset provision of these warrants precludes equity accounting treatment under ASC 815 (formerly EITF 07-05). Accordingly, effective January 1, 2009, the Company was required to reclassify these warrants at their fair value to liabilities each reporting period under ASC 815-40.  The reset provision in the 2008 Warrants expired on September 10, 2009.

At March 31, 2011, the fair value of the Company’s derivative warrants liability for the 2010 Warrants was $1,181,000. The Company used the Black-Scholes valuation model to estimate the fair value of the 2010 Warrants. Significant assumptions used at March 31, 2011 and 2010 were as follows:
 
                        
    2011     2010  
Estimated market value of stock on grant date (1)
  $ 1.89     $ 3.18  
Risk-free interest rate  (2)
    1.60 %     2.55 %
Dividend yield   (3)
    0.00 %     0.00 %
Volatility factor
    123.08 %     146.50 %
Expected life  (4)
 
3.9 years
   
4.9 years
 

 
(1)
The estimated market value of the stock on the date of grant was based on a calculation by management after consideration of price per share received in the private offerings and reported public market prices.

 
(2)
The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant.

 
(3)
Management determined the dividend yield to be 0% based upon its expectation that the Company will not make any near term change to its policy of retaining all earnings available to pay dividends for use in the Company’s business.

 
(4)
Expected life is remaining contractual life of the warrants.

Changes in fair value of the 2010 Warrants are recognized in earnings each reporting period.



 
Stock-Based Compensation
 
The Company adopted ASC Topic 718.   This Statement requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which services are received.  Stock compensation for stock granted to non-employees has been determined in accordance with ASC Topic 718 and ASC Topic 505-50, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.
 
Revenue and Cost Recognition
 
The Company reports revenue from electronics product manufacturing and sales (ICM, Integrated Contract Manufacturing), and electronic component sales and services (ECSS), which is comprised of electronic component sales (known as ECP) and electronic component supply chain management services (known as SCM).
 
Revenues for SCM services are earned from both the SCM and procurement-fulfillment programs and are primarily based on a percentage of inventory value handled for a customer.  The Company recognizes revenue from SCM services when the services are provided.  Revenues from ECP and ICM businesses are based on quoted prices and are recognized at the time of shipment to customers.  Revenues are recognized on the gross amount billed to customers.  Sales are recorded net of discounts and allowances.  In all cases, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services rendered, the sales price is determinable, and collectability is reasonably assured.
 
Cost of goods sold in ICM business includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment, rent, shipping and handling costs, and local transportation charges consistent with the revenue earned.
 
 
Income Taxes
 
The Company accounts for income taxes under ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income taxes in the period that included the enactment date.
 
Foreign Currency Translation
 
SinoHub, Inc., SinoHub International, Inc., B2B Chips, Ltd., and SinoHub Technology Hong Kong, Ltd. maintain accounting records using the functional currencies, USD and Hong Kong Dollars (“HKD”) respectively.  SinoHub SCM Shenzhen, Ltd., SinoHub Electronics Shenzhen, Ltd., SinoHub SCM Shanghai, Ltd., SinoHub Electronics Shanghai, Ltd. and Topology Communication Technology (Shenzhen), Ltd. maintain accounting records using RMB as the functional currency.
 
The Company uses USD as its reporting currency.  The Company accounts for foreign currency translation pursuant to ASC Topic 830.  The functional currencies of the Company’s subsidiaries are HKD and RMB.  Under ASC Topic 830, all assets and liabilities are translated into United States dollars using the current exchange rate at the balance sheet date.  The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period.  Translation adjustments are included in other comprehensive income (loss) for the period.
 
Foreign currency transactions during the year are translated to their functional currencies at the approximate rates of exchange on the dates of transactions.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the reporting currency at the approximate rates of exchange at that date.  Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired.  Exchange gains or losses are recorded in the statement of operations.
 
Comprehensive Income
 
The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in HKD and RMB to USD is reported as other comprehensive income in the statements of operations and stockholders’ equity.
 
Earnings Per Share
 
Earnings per share in accordance with the provisions of ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.
 
 
Segments
 
The Company operates in two segments: electronics product manufacturing and sales (ICM) and electronic component sales and services (ECSS).  Segment disclosure is presented in Note 14, “Segment information.”
 
Recent Accounting Pronouncements
 
In April 2011, FASB issued ASU 2011-02 Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The amendments in this Update would provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-02 to have a material impact on its consolidated results of operations or financial position.
 
In January 2011, FASB issued ASU 2011-01 Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. The deferral in this amendment is effective upon issuance. The Company does not expect the adoption of ASU 2011-01 to have a material impact on its consolidated results of operations or financial position.
 
In December 2010, FASB issued ASU 2010-29 Business Combinations (Topic 805)-Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of ASU 2010-29 did not have a material impact on the Company’s financial statements.
 
In April 2010, FASB issued ASU 2010-13 Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.  ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied.  The adoption of ASU 2010-13 did not have a material impact on its consolidated results of operations or financial position.
 
 
2.              RESTATEMENT

On May 16, 2011, the Company filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report management’s determination that the Company’s financial statements for the year ended December 31, 2010, included in its Annual Report on Form 10-K filed with the SEC on March 14, 2011 (the “2010 For 10-K”) ,  should no longer be relied upon due to an error in such financial statements with respect to the accounting for 816,670 common stock purchase warrants in connection with its March 2, 2010 private placement (the “2010 Warrants”).  The Company determined that the historical financial statements for the year ended December 31, 2010 included in the Company’s 2010 Form 10-K require restatement to properly record the 2010 Warrants as a derivative liability.

The Current Report on Form 8-K which the Company filed with the SEC on May 16, 2011 also reported management’s determination that the Company’s financial statements:

(i)  
for the fiscal quarter ended March 31, 2010, included in its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010, filed with the SEC on May 17, 2010 (the “March 2010 Form 10-Q”);

(ii)  
 for the fiscal quarter ended June 30, 2010, included in its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010, filed with the SEC on August 12, 2010 (the “June 2010 Form 10-Q”); and

(iii)  
 for the fiscal quarter ended September 30, 2010, included in its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010 filed with the SEC on November 12, 2010 (the “September 2010 Form 10-Q” and, collectively with the March 2010 Form 10-Q and June 2010 Form 10-Q, the“Form 10-Qs”),

should no longer be relied upon due to an error in such financial statements with respect to the accounting for the 2010 Warrants.

The Company has performed a complete assessment of its outstanding 2010 Warrants and has concluded that its outstanding 2010 Warrants are within the scope of Accounting Standards Codification 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), formerly Emerging Issues Task Force Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-05”), due to the inclusion in the Warrants of a provision requiring an adjustment to the exercise price of the 2010 Warrants in the event the Company issues common stock, or securities convertible into or exercisable for common stock, at a price per share lower than such exercise price.  Accordingly, ASC 815-40, formerly EITF 07-05, which was effective as of January 1, 2009, should have been applied resulting in a reclassification of the warrants as a liability, measured at fair value, with changes in fair value recognized as part of other income or expense for each reporting period thereafter. Because the reset provision contained in the Company’s warrants issued in 2008 (the “2008 Warrants”) expired on September 10, 2009, no change in the Company’s historical financial statements is required with respect to the 2008 Warrants.
 
 
The Company is in the process of preparing amendments to the Form 10-Qs and 10-K for the prior periods noted above and plans to file those amendments with the SEC, reflecting the restatement relative to the 2010 Warrants.

This Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 incorporates corrections made in response to the accounting errors described above by restating the Company’s financial statements presented herein for the three months ended March 31, 2010.  The corrections to the quarterly information in this Form 10-Q had no impact on the Company’s previously reported operations or cash flows for the periods being restated.

The following tables show the effects of the restatement on the Company's consolidated balance sheet as of December 31, 2010 and consolidated statements of operations and comprehensive income and consolidated statements of cash flows for the three month period ended March 31, 2010:


SinoHub, Inc. and Subsidiaries
Consolidated Balance Sheet
(Audited)
 
 
 
Year Ended
December 31, 2010
 
 
 
As
Previously
Recorded
 
 
As Restated
 
 
 
 
 
 
 
 
Total Assets
 
$
110,103,000
 
 110,103,000
 
 
 
 
 
 
 
 
 
Total Current Liabilities
 
$
41,449,000
 
$  
 41,449,000
 
 
 
 
 
 
 
 
 
LONG-TERM LIABILITIES
 
 
 
 
     
Warrant Derivatives
 
 
-
 
 
 1,692,000
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
$
42,294,000
 
$  
43,985,000
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
  22,426,000
 
 
20,122,000
 
Retained earnings
 
 
 
 
 
 
 
Unappropriated
 
 
  41,691,000
 
 
42,301,000
 
 
 
 
 
 
 
 
 
Total stockholders' equity      67,809,000      66,118,000  
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
110,103,000
 
  110,103,000
 
 
SinoHub, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)

 
 
Three Months Ended
March 31, 2010
 
 
 
As
Previously
Recorded
 
 
As Restated
 
 
 
 
 
 
 
 
Change in fair value of derivative warrant liability
 
$
-
 
(44,000)
 
 
 
 
 
 
 
 
 
Total other income (expense)
 
$
(18,000)
 
(62,000)
 
 
 
 
 
 
 
 
 
Net Income Before Provision for Income Tax
 
$
4,532,000
 
4,488,000
 
 
 
 
 
 
 
 
 
Net Income
 
$
3,495,000
 
3,451,000
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share
 
$
0.13
 
0.13
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share
 
$
0.12
 
0.12
 
 
 
 
 
 
 
 
 
Other Comprehensive Income
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
$
27,000
 
27,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive Income
 
$
3,522,000
 
3,478,000
 

The gain (loss) resulting from the change in fair value of derivative warrant liability for the three month period ended March 31, 2010, was incurred at the corporate level (a Delaware corporation).  The Company did not recognize any income tax benefits (expense) associated with the change in fair value in the three months ended March 31, 2010.  Therefore, the restatement did not have an effect on the Company’s taxable income for the three months ended March 31, 2010.

SinoHub, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
 
Three Months Ended
March 31, 2010
 
 
 
As
Previously
Recorded
 
 
As Restated
 
 
 
 
 
 
 
 
Net Income
 
$
3,495,000
 
 
$
3,451,000
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative liability
 
 
-
 
 
 
44,000
 
 
 
 
 
 
 
 
 
 
Total:
 
$
3,495,000
 
 
$
3,495,000
 


3.              ACCOUNTS RECEIVABLE, NET
 
 
Accounts receivable at March 31, 2011 and December 31, 2010 consisted of the following:
 
   
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
          (As Restated)  
Accounts receivable
  49,984,000     46,362,000  
Less: allowance for doubtful accounts
    728,000       676,000  
Accounts receivable, net
  $ 49,256,000     $ 45,686,000  
 
 
For the three months ended March 31, 2011 and 2010, the Company recorded provision for bad debts of $52,000 and $33,000 respectively.
 

4.           INVENTORIES, NET

Inventories at March 31, 2011 and December 31, 2010 consisted of the following:
 
   
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
          (As Restated)  
Raw materials
  $ 18,188,000     $ 169,000  
Work-in-progress
    9,000       -  
Finished goods and goods for resale
    1,763,000       14,462,000  
    $ 19,960,000     $ 14,631,000  
Less: allowance for obsolete inventories
    -       -  
Inventories, net
  $ 19,960,000     $ 14,631,000  


5.           BANK BORROWINGS AND FINANCING ARRANGEMENTS
 
The Company has secured the following financing facilities with certain PRC banks to support its business operations:
 
 
Letter of credit facility with China Construction Bank in the amount of $12,900,000 to support our component sales and services business.  Restricted cash balances are required as security for draws against the facility.  The facility renews each year and is available through January 2012.
 
 
Letter of credit facility with Industrial Bank in the amount of $50,000,000 to support our business.  Restricted cash balances are required as security for draws against the facility.  The facility is available through March, 2012.
 
 
Letter of credit facility with Hangzhou Bank in the amount of $5,300,000 to support our component sales and services business.  Restricted cash balances are required as security for draws against the facility.  In addition, the bank requires third party guarantees from two subsidiaries, SinoHub SCM Shenzhen, Ltd., and B2B Chips, Ltd., and a director and an executive officer.  Also, the bank requires a third party guarantor.  The third-party guarantor is Meisun Technology Ltd.  The only relationship between the Company and Meisun Technology Ltd. is the guaranty. The facility renews each year and is available through May, 2011.
 
 
Letter of credit facility with Bank of Ningbo in the amount of $7,000,000 to support our electronics product manufacturing and sales business.  The bank requires the unlimited personal guaranty of an executive officer.  The facility renews each year and is available through December, 2011.
 
 
 
Letter of credit facility with Bank of Jiangsu in the amount of $9,000,000 to support our electronics product manufacturing and sales business.  The bank requires the unlimited personal guaranty of an executive officer.  In addition, the credit facility is secured by a lien on SinoHub's inventory and accounts receivable.  The facility renews each year and is available through May 2011.
 
 
Letter of credit facility with Bank of Shanghai in the amount of $3,050,000 to support our electronics product manufacturing and sales business.  The bank requires the unlimited personal guaranty of an executive officer.  The facility renews each year and is available through September 2011.
 

Borrowings against these facilities at March 31, 2011 and December 31, 2010 were as follows:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
    (Unaudited)     (Audited)  
          (As Restated)  
Note payable to a bank, annual interest rate 5.61%, due May 2011
  $ -     $ 1,512,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       634,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       536,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,140,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       505,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       484,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,800,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       847,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,805,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       352,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       342,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       5,022,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       362,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       993,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       480,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       736,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,001,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,443,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       702,000  
Note payable to a bank, annual interest rate 5.84%, due October 2011
    -       756,000  
Note payable to a bank, annual interest rate 6.12%, due November 2011
    -       756,000  
Note payable to a bank, annual interest rate 5.38%, due November 2011
    -       5,815,000  
Note payable to a bank, annual interest rate 5.38%, due December 2011
    -       4,044,000  
Note payable to a bank, annual interest rate 5.50%, due December 2011
    -       5,232,000  
 
 
Note payable to a bank, annual interest rate 5.50%, due April 2011
  $ 3,359,000     $ -  
Note payable to a bank, annual interest rate 3.00%, due April 2011
    3,951,000       -  
Note payable to a bank, annual interest rate 5.50%, due April 2011
    198,000       -  
Note payable to a bank, annual interest rate 5.50%, due April 2011
    1,527,000       -  
Note payable to a bank, annual interest rate 5.61%, due May 2011
    1,527,000       -  
Note payable to a bank, annual interest rate 3.00%, due May 2011
    2,614,000       -  
Note payable to a bank, annual interest rate 3.00%, due May 2011
    2,405,000       -  
Note payable to a bank, annual interest rate 5.50%, due May 2011
    197,000       -  
Note payable to a bank, annual interest rate 2.66%, due May 2011
    709,000       -  
Note payable to a bank, annual interest rate 2.67%, due June 2011
    640,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    541,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    1,151,000       -  
Note payable to a bank, annual interest rate 2.99%, due June 2011
    510,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    489,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    1,817,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    855,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    1,822,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    355,000       -  
Note payable to a bank, annual interest rate 2.25%, due June 2011
    345,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    5,069,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    2,501,000       -  
Note payable to a bank, annual interest rate 3.03%, due June 2011
    365,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    1,002,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    484,000       -  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    3,402,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    743,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2011
    1,010,000       -  
Note payable to a bank, annual interest rate 3.16%, due June 2011
    1,457,000       -  
Note payable to a bank, annual interest rate 3.16%, due July 2011
    356,000       -  
Note payable to a bank, annual interest rate 3.16%, due July 2011
    611,000       -  
Note payable to a bank, annual interest rate 2.93%, due July 2011
    1,067,000       -  
Note payable to a bank, annual interest rate 2.93%, due July 2011
    186,000       -  
Note payable to a bank, annual interest rate 2.41%, due July 2011
    677,000       -  
Note payable to a bank, annual interest rate 5.50%, due July 2011
    244,000       -  
Note payable to a bank, annual interest rate 5.50%, due July 2011
    1,221,000       -  
Note payable to a bank, annual interest rate 2.25%, due July 2011
    321,000       -  
Note payable to a bank, annual interest rate 2.65%, due July 2011
    238,000       -  
Note payable to a bank, annual interest rate 3.16%, due August 2011
    1,572,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    465,000       -  
Note payable to a bank, annual interest rate 2.58%, due August 2011
    1,067,000       -  
Note payable to a bank, annual interest rate 5.50%, due August 2011
    171,000       -  
Note payable to a bank, annual interest rate 2.45%, due August 2011
    357,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    1,038,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    332,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    217,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    574,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    5,479,000       -  
 
 
Note payable to a bank, annual interest rate 2.59%, due September 2011
    658,000       -  
Note payable to a bank, annual interest rate 2.59%, due September 2011
    149,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    2,919,000       -  
Note payable to a bank, annual interest rate 2.59%, due September 2011
    204,000       -  
Note payable to a bank, annual interest rate 5.50%, due September 2011
    1,527,000       -  
Note payable to a bank, annual interest rate 2.60%, due September 2011
    726,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    397,000       -  
Note payable to a bank, annual interest rate 2.62%, due September 2011
    392,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    213,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    236,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    394,000       -  
Note payable to a bank, annual interest rate 5.50%, due September 2011
    115,000       -  
Note payable to a bank, annual interest rate 3.45%, due September 2011
    360,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    105,000       -  
Note payable to a bank, annual interest rate 4.06%, due September 2011
    1,312,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    945,000       -  
Note payable to a bank, annual interest rate 4.06%, due September 2011
    705,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    787,000       -  
Note payable to a bank, annual interest rate 5.84%, due October 2011
    763,000       -  
Note payable to a bank, annual interest rate 6.12%, due November 2011
    763,000       -  
Note payable to a bank, annual interest rate 3.00%, due November 2011
    5,870,000       -  
Note payable to a bank, annual interest rate 3.00%, due December 2011
    4,082,000       -  
Note payable to a bank, annual interest rate 3.00%, due January 2012
    3,476,000       -  
Note payable to a bank, annual interest rate 3.00%, due January 2012
    1,993,000       -  
                 
    $ 86,330,000     $ 37,299,000  
Less : current portion
    86,330,000       37,299,000  
Long -term portion
  $ -     $ -  
 
 
Interest expense for the three months ended March 31, 2011 and 2010 was $416,000 and $30,000, respectively.
 
6.           CAPITAL LEASE OBLIGATIONS

Certain items of our equipment have been acquired under a capital lease.  The capital lease obligations are as follows:
 
 
   
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
          (As Restated)   
Gross capital lease obligations
  $ 1,488,000     $ 1,601,000  
Less: current portion
    608,000       756,000  
Long-term capital lease obligations
  $ 880,000     $ 845,000  
 
 
The lease is guaranteed by equipment with a total cost of $2,436,000.  Depreciation expenses associated with capital leases were $81,000 and $Nil for the three months ended March 31, 2011 and 2010 respectively.  Interest expenses associated with capital leases were $74,000 and $Nil for the three months ended March 31, 2011 and 2010 respectively.
 
7.           COMMITMENTS AND CONTINGENCIES
 
Commitments
 
Rental Lease Commitment
 
The Company leases warehouse, office spaces and equipment from third parties under operating leases which expire at various dates from June 2011 through March 2015.  Rent expense for three months ended March 31, 2011 and 2010 was $271,000 and $211,000 respectively.  At March 31, 2011, the Company has outstanding commitments with respect to operating leases, which are due as follows:
 
Fiscal year ending December 31,
     
       
2011
  $ 830,000  
2012
    883,000  
2013
    280,000  
2014
    54,000  
2015
    13,000  
    $ 2,060,000  
 
Capital Leases Commitment
 
The Company leases equipment under a non-cancelable capital lease agreement.  Future minimum lease payments under the capital leases are as follows:
 
Fiscal year ending December 31,
     
       
2011
  $ 486,000  
2012
    730,000  
2013
    365,000  
      1,581,000  
Less: Interest
    93,000  
      1,488,000  
Less: Current portion
    608,000  
Capital lease obligation – Non-current
  $ 880,000  

 
Contingencies
 
The Company accounts for loss contingencies in accordance with ASC Topic 450.  As of March 31, 2011, there was no known loss contingency.
 
8.           EARNINGS PER SHARE
 
The elements for calculation of earnings per share for the three months ended March 31, 2011 and 2010 were as follows:

   
Three months ended March 31
 
       
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
         
(As Restated)
 
Net income for basic and diluted earnings per share
  $ 3,543,000     $ 3,451,000  
                 
Weighted average shares used in basic computation
    30,181,000       27,283,000  
Effect of dilutive stock options and warrants
    155,000       696,000  
Weighted average shares used in diluted computation
    30,336,000       27,979,000  
                 
Earnings per share:
               
Basic
  $ 0.12     $ 0.13  
Diluted
  $ 0.12     $ 0.12  
 
In 2011, options to purchase 631,251 shares of common stock and warrants to purchase 3,577,502 shares of common stock with exercise prices greater than the average fair market value of the Company’s stock were not included in the calculation because the effect is anti-dilutive.
 
In 2010, options to purchase 246,700 shares of common stock with exercise prices greater than the average fair market value of the Company’s stock were not included in the calculation because the effect is anti-dilutive.
 
 
9.           STOCKHOLDERS’ EQUITY
 
Equity Share Transactions

On March 21, 2011, the Company completed the sale of the common stock and warrants under a Securities Purchase Agreement.  For each share of common stock purchased by an investor under the Securities Purchase Agreement, such investor received a warrant to purchase 0.3 shares of common stock at an initial exercise price of $3.00 per whole share of common stock.  The warrants cannot be exercised until six months after the date of issuance and have a term of exercise of thirty months from the date of issuance.  Each share of common stock, together with the related warrant, was sold at a negotiated price of $2.30 per share of common stock.  The Company received gross proceeds from the offering of approximately $11 million, before deducting placement agents' fees and estimated offering expenses.  During the first quarter of 2011, net offering proceeds of approximately $10.4 million were recorded as an addition to stockholders’ equity, after deducting offering and related closing costs of the transaction.
 
During the first quarter of 2011, certain employees and a former director exercised their stock options to purchase an aggregate of 17,464 shares of common stock for $1,337.
 
Warrants

Following is a summary of the status of warrants outstanding and exercisable at March 31, 2011 and December 31, 2010:
 
March 31, 2011
December 31, 2010
               
Average
               
Average
               
Remaining
               
Remaining
       
Number
   
Number
 
Contractual
       
Number
   
Number
 
Contractual
Exercise Price
   
Outstanding
   
Exercisable
 
Life
 
Exercise Price
   
Outstanding
   
Exercisable
 
Life
  $ 3.00       2,649,069       1,211,740  
2.45 years
  $ 3.00       1,211,740       1,211,740  
2.66 years
  $ 3.11       853,433       853,433  
4.43 years
  $ 3.25       891,670       816,670  
4.66 years
  $ 3.25       75,000       75,000  
1.84 years
                       
 
 
Total
      3,577,502       2,140,173  
 
 
Total
      2,103,410       2,028,410    
 
As a result of the March 2011 sale of common stock and warrants described under “Equity Share Transactions” above, the exercise price and number of shares issuable upon the exercise of warrants sold by the Company in a private placement were adjusted. The exercise price of the warrants was reduced from $3.25 to $3.11 per share and the aggregate number of shares issuable upon the exercise price of the warrants was increased from 816, 670 to 853,425.  The warrants are also exercisable for an aggregate of an additional 8.25 fractional shares.  In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one warrant share as reported by the applicable trading market for the Company’s shares on the date of exercise.

 
10.           STOCK OPTIONS

The Company has granted qualified stock options under the Company’s 2000 Incentive Stock Option Plan (the “2000 ISOP”) and 2008 Incentive Stock Option Plan (the “2008 ISOP”).  At March 31, 2011, stock options to purchase 1,066,299 shares of common stock at an exercise price ranging from $0.10 to $4.36 per share were outstanding.  Prior to becoming publically traded, the exercise prices were determined by the Board at the time of grant.  In each such case the exercise price was not less than the fair market value of the common stock as determined by the Board in good faith taking into account such factors as recent issuances of preferred stock with an appropriate discount factored in relative to the common shares.  The exercise prices for options issued under the 2000 ISOP following the sale of preferred stock by the Company during November and December of 2007 represent a discount to the issuance price of $0.78 for such preferred stock taking into account the added value of the conditions in the preferred stock (for example, it was redeemable with 10% appreciation).  The exercise prices for options issued under the 2008 ISOP represent the closing price of the Company’s common stock on the business day preceding the grant date.  The stock options granted become exercisable (“vested”) as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 6.25% of the original number of shares at the end of each successive three-month period following the first anniversary of the grant date until the fourth anniversary of the grant date.  Unless earlier terminated, these stock options granted shall expire ten years after the grant date.  Following the reverse merger, all shares of preferred stock which were convertible on the basis of one share of preferred stock for one share of common stock issued were exchanged for common stock of Liberty Alliance, Inc. retroactively adjusted for all periods presented.
 
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
Expected
Expected
Dividend
Risk Free
Grant Date
Life
Volatility
Yield
Interest Rate
Fair Value
 
 
 
 
 
The 2000 ISOP
5 years
175%
0%
2.50%
$0.09 - $0.19
 
 
 
 
 
The 2008 ISOP
1-5 years
83% - 121%
0%
0.3% - 2.5%
$0.47 - $2.79

 
Expected Volatility: Expected volatility is computed based on the standard deviation of the continuously compounded rate of return of days when the stock price changed over the historical period of the expected life of the options.
 
Dividend Yield: The expected dividend yield is zero.  The Company has not paid a dividend and does not anticipate paying dividends in the foreseeable future.
 
Risk Free Rate: The risk-free interest rate was based on U.S. Treasury interest rates at the time of the grant whose term is consistent with expected life of the stock options.
 
Expected Life:  Because the Company has no historical share option exercise experience to estimate future exercise patterns, the expected life was determined using the simplified method as these awards meet the definition of "plain-vanilla" options under the rules prescribed by ASC Topic 718.
 
Stock compensation expense was recognized based on awards expected to vest.  There was no estimated forfeiture as the Company has a short history of issuing options. ASC Topic 718 requires forfeiture to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
 
The Company granted 98,361 stock options in the three months ended March 31, 2011.
 
 
The following is a summary of the stock options activity:
 
   
Number of
   
Weighted-
 
   
Options
    Average  
   
Outstanding
    Exercise  
         
Price
 
             
Balance at December 31, 2009
    1,263,978     $ 2.01  
Granted
    563,496       2.73  
Forfeited
    (571,687 )     -  
Exercised
    (194,589 )     0.47  
Balance at December 31, 2010
    1,061,198     $ 2.50  
Granted
    98,361       2.71  
Forfeited
    (75,796 )     -  
Exercised
    (17,464 )     1.13  
Balance at March 31, 2011
    1,066,299     $ 2.56  
Options exercisable on March 31, 2011
    304,847     $ 2.26  
Weighted average fair value of options granted during the three months ended March 31, 2011
          $ 1.53  


Of the total options granted, 304,847 are fully vested exercisable and non-forfeitable at March 31, 2011.

 
The following is a summary of the status of options outstanding at March 31, 2011 and December 31, 2010:
 
Outstanding Options at March 31, 2011
 
Exercisable Options
                     
Range of
 
Number
 
Weighted
 
Weighted
 
Number
 
Weighted
Exercise Price
Average
Average
Average
 
Remaining
Exercise
Exercise
 
Contractual
Price
Price
 
Life
 
 
$0.10 - $1.02
 
147,554
 
6.9 years
 
$0.44
 
80,067
 
$0.23
$2.21 - $3.00
 
730,145
 
5.8 years
 
$2.62
 
155,302
 
$2.53
$3.92 - $4.36
 
188,600
 
8.5 years
 
$3.97
 
69,478
 
$3.97
   
 
         
 
 
 
Total
 
1,066,299
 
 
 
 
 
304,847
 
$2.26


Outstanding Options at December 31, 2010
 
Exercisable Options
                     
Range of
 
Number
 
Weighted
 
Weighted
 
Number
 
Weighted
Exercise Price
Average
Average
Average
 
Remaining
Exercise
Exercise
 
Contractual
Price
Price
 
Life
 
 
$0.10 - $1.02
 
167,114
 
7.1 years
 
$0.44
 
92,708
 
$0.39
$2.21 - $3.00
 
700,684
 
5.9 years
 
$2.58
 
145,453
 
$2.40
$3.92 - $4.36
 
193,400
 
8.8 years
 
$3.97
 
61,467
 
$3.93
   
 
         
 
 
 
Total
 
1,061,198
 
 
 
 
 
299,628
 
$2.09
 
 
11.           RELATED PARTY TRANSACTIONS

There were no related party transactions during the three months ended March 31, 2011 and 2010 respectively except for the ongoing transactions set forth below.
 
As of March 31, 2011 and December 31, 2010, a director and his spouse as well as an executive officer have provided guarantees to a bank for banking facilities in the amount of $Nil and $7,100,000, respectively extended to the Company.
 
As of March 31, 2011 and December 31, 2010, a director and an executive officer have provided guarantees to a bank for banking facilities in the amount of Nil and $5,300,000, respectively extended to the Company.
 
As of March 31, 2011 and December 31, 2010, an executive officer has provided an unlimited personal guaranty to two banks for banking facilities for the Company in the aggregate principal amount of $16,000,000 and $19,050,000, respectively.

 
12.           INCOME TAXES
 
The Company and its subsidiaries are subject to income taxes on an “entity” basis, that is, on income arising in or derived from the tax jurisdiction in which each entity is domiciled.  It is management's current intention to reinvest all the income earned by the Company’s subsidiaries based outside of the US.  Accordingly, no US federal income taxes have been provided on earnings of foreign based subsidiaries.
 
The Company and its wholly owned subsidiary, SinoHub International, Inc. are incorporated in the United States and have incurred operating losses since inception.  Management believes the realization of tax benefits from these NOLs is uncertain due to the Company’s current operating history and continuing losses in the US for tax purposes.  Accordingly, no deferred tax benefit has been recorded.
 
The Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax at a statutory rate of 16.5%.  No provision for Hong Kong profits tax was required as these entities incurred losses during the three months ended March 31, 2011 and 2010.  Management believes the realization of tax benefits from the net operating losses is uncertain due to the Company’s current operating history and continuing losses in Hong Kong for tax purposes.  Accordingly, no deferred tax benefit has been recorded.
 
 
The Company’s subsidiaries in China were subject to China income tax at a statutory rate of 25% in 2011 and 2010.  However, these subsidiaries are located in special economic regions and/or qualify as “new or high-technology enterprises” that are allowed special tax reductions until 2012. The Company’s subsidiaries in China was subject to special tax rate was 24% and 22% in 2011 and 2010 respectively.
 
Income tax expense for the three months ended March 31, 2011 and 2010 is summarized as follows:
 
   
2011
   
2010
 
          (As Restated)  
Current
  $ 1,502,000     $ 1,037,000  
Deferred
    -       -  
 
  $ 1,502,000     $ 1,037,000  

 
The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the three months ended March 31, 2011 and 2010 is as follows:
 
 
 
2011
 
 
2010
 
 
     
 
(As Restated)
 
Income before income taxes
 
$
5,045,000
100%
 
$
4,488,000
100%
 
 
 
 
 
 
 
 
 
China income taxes at statutory rate
 
$
1,261,000
25%
 
$
1,122,000
25%
Operating loss carried forward
   
412,000
8%
   
45,000
1%
Effect of (non-taxable income)/ non-deductible expenses
   
(108,000)
  -2%    
11,000
  0%
China qualified income tax exemptions
 
 
(63,000)
-1%
 
 
(141,000)
-3%
Income tax expense
 
$
1,502,000
30%
 
$
1,037,000
23%
 

13.           CONCENTRATIONS AND RISKS

Substantially all of Company's assets are located in the PRC and Hong Kong.
 
During the three months ended March 31, 2011 and 2010, 43% and 15% of revenues were derived from overseas sales, respectively.
 
 
14.           SEGMENT INFORMATION
 
Since the Company began engaging in electronic products manufacturing and sales (ICM) in 2010, the Company has been organized as two business segments, electronics product manufacturing and sales (ICM) and electronic component sales and services (ECSS).  The Company follows the provision of authoritative pronouncement issued by the FASB regarding disclosures about segments of an enterprise and related information, which establishes standards for reporting information about operating segments.  Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
 
 
The Company's chief operating decision maker is the Chief Executive Officer.  The following were details of the Company's reportable segments:
 
   
For three months ended March 31,
 
   
2011
   
2010
 
Revenues from external customers:
           
ECSS
  $ 21,526,000     $ 32,218,000  
ICM
    16,442,000       6,386,000  
 
  $ 37,968,000     $ 38,604,000  
Depreciation:
               
ECSS
  $ 373,000     $ 215,000  
ICM
    93,000       8,000  
 
  $ 466,000     $ 223,000  
Stock compensation expense:
               
ECSS
  $ -     $ 47,000  
ICM
    -       9,000  
 
  $ -     $ 56,000  
Stock option compensation amortization:
               
ECSS
  $ 60,000     $ 78,000  
ICM
    49,000       15,000  
 
  $ 109,000     $ 93,000  
Provision for bad debts:
               
ECSS
  $ 28,000     $ 28,000  
ICM
    24,000       5,000  
 
  $ 52,000     $ 33,000  
Interest income:
               
ECSS
  $ 194,000     $ 5,000  
ICM
    148,000       1,000  
 
  $ 342,000     $ 6,000  
Interest expense:
               
ECSS
  $ 278,000     $ 25,000  
ICM
    212,000       5,000  
 
  $ 490,000     $ 30,000  
Income taxes expenses:
               
ECSS
  $ 868,000     $ 814,000  
ICM
    634,000       223,000  
 
  $ 1,502,000     $ 1,037,000  
Income from operations:
               
ECSS
  $ 1,760,000     $ 3,434,000  
ICM
    2,695,000       1,116,000  
 
  $ 4,455,000     $ 4,550,000  
 
 
Total amount of income from operations is consistent with the consolidated statements of operations.
 
                 
Addition to property and equipment:
               
ECSS
  $ 2,309,000     $ 2,186,000  
ICM
    457,000       -  
 
  $ 2,766,000     $ 2,186,000  
Total segment assets:
               
ECSS
  $ 73,161,000     $ 60,522,000  
ICM
    100,395,000       8,646,000  
    $ 173,556,000     $ 69,168,000  
 
 
15.           RESTRICTED CASH AND BANK BORROWINGS
 
Restricted cash and bank borrowings at March 31, 2011 and December 31, 2010 consisted of the following:
 
   
March 31, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
          (As Restated)  
Restricted cash - loan
  $ 3,288,000     $ 3,016,000  
Restricted cash - NDF
    71,316,000       29,043,000  
Total Restricted cash
  $ 74,604,000     $ 32,059,000  
                 
Bank borrowings - loan
  $ 15,014,000     $ 8,256,000  
Bank borrowings - NDF
    71,316,000       29,043,000  
Total Bank borrowings
  $ 86,330,000     $ 37,299,000  


Non-Deliverable Forward (NDF) contracts are instruments whereby a company can presently pay a supplier in a currency, principally US dollars (USD), using a predetermined rate of exchange against the Renminbi (RMB) that is lower than the current exchange rate on a riskless basis.  The reason this opportunity is available at this time is because Chinese banks anticipate that there will be further appreciation of the RMB.
 
 

The following discussion and analysis is based on, and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included in the Company’s  Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 14, 2011.  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations.  Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results or our published guidance and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.  Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the statements are made, or to update revenue guidance, including the factors that influence revenue and earnings.  You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Report on Form 10-Q. All amounts are expressed in United States dollars.
 


RESULTS OF OPERATIONS FOR THREE MONTHS ENDED
MARCH 31, 2011 COMPARED TO MARCH 31, 2010

Overview

SinoHub, Inc. (the “Company”) is an electronics company based in Shenzhen, PR China which services clients worldwide.  The Company is currently engaged in two business segments: electronics product manufacturing and sales (ICM, Integrated Contract Manufacturing), and electronic component sales and services (ECSS) which is comprised of electronic component sales (known as ECP) and electronic component supply chain management services (known as SCM).  We now report on each of ICM and ECSS as separate business segments.
 
Overall Results

The Company reported net income for the three months ended March 31, 2011 of $3.54 million compared to $3.45 million in the year-earlier period.  The first fiscal quarter is historically the slowest fiscal quarter of each year, and quarterly results fluctuate significantly from quarter to quarter.  Based on these facts and the Company’s continuing focus on its ICM business as a larger component of overall operations, the Company does not believe that net sales for the three months ended March 31, 2011 are necessarily indicative of future performance or any trends but continues to evaluate its results of operations on a quarterly basis going forward.  Net margins improved to 9.3% for the three months ended March 31, 2011 compared to 8.9% in the year-earlier period.
 

Net Sales

Net sales for three months ended March 31, 2011 were $38.0 million, down 1.6% from $38.6 million in the year-earlier period.  The Company reports net sales on the basis of two business segments: electronic component sales and services (ECSS) and electronic products manufacturing and sales (ICM).
 
In three months ended March 31, 2011, net sales of ECSS business segment decreased to $21.5 million from $32.2 million in the year-earlier period.  In three months ended March 31, 2011, net sales of ICM business segment increased 156% to $16.4 million from $6.4 million in the year-earlier period.
 
Gross Profit

The Company recorded gross profit of $7.7 million in the three months ended March 31, 2011, compared with $7.1 million in the year-earlier period, an increase of 8.5%.  The gross margin in the three months ended March 31, 2011 increased to 20.3% from 18.4% in the year-earlier period.
 
Operating Expenses
 
Total operating expenses were $3.2 million or 8.5% of revenues in the three months ended March 31, 2011, compared to $2.5 million, or 6.6% of revenues in the year-earlier period.  Selling, general and administrative expenses increased to $2.3 million in the three months ended March 31, 2011 from $1.9 million in the year-earlier period, representing approximately 6.1% and 4.9% of revenues respectively.  The largest factors in the increase in selling, general and administrative expenses from 2010 to 2011 were salaries and fringe benefits due to the large increase in headcount related to creating the infrastructure for our rapidly expanding ICM business.  Depreciation was $466,000 in the three months ended March 31, 2011, compared to $223,000 in the year-earlier period with the increase due primarily to additional equipment and leasehold improvements.
 
Income from Operations

The Company recorded income from operations of $4.5 million in the three months ended March 31, 2011, down 2.1% from $4.6 million in the year-earlier period.
 
Income Taxes

The Company recorded income tax expense of $1.5 million in the three months ended March 31, 2011, compared with $1.0 million in the year-earlier period.  The reason for the large increase is that taxes are accrued by subsidiary.  There was a loss in the manufacturing subsidiary in the first quarter of 2011 that offsets profits from other subsidiaries on consolidation with no corresponding tax offset.  The Company’s subsidiaries in China were subject to China income tax at a special rate of 24% in 2011 and 22% in 2010.  Income tax estimates in interim periods have varied as the Company has adjusted provisions and accruals in light of actual tax filings.
 
Foreign Currency Translation Gain and Comprehensive Net Income

The Company recorded foreign currency translation gains of $601,000 in the three months ended March 31, 2011, as compared with $27,000 in the year-earlier period.  Comprehensive net income (net income plus foreign currency translation gains) was $3.7 million in the three months ended March 31, 2011, compared with $3.8 million in the year-earlier period.
 
 
CONSOLIDATED FINANCIAL CONDITION AND LIQUIDITY

Liquidity and Capital Resources

In light of the strong growth opportunities in SinoHub's ICM business segment and its strengthened working capital position as a result of its recently reported $11 million equity raise and existing bank facilities, SinoHub remains confident in the Company's fundamentals, strategy, and prospects.  At March 31, 2011, the Company’s working capital was $64.3 million, increased from $52.1 million at December 31, 2010.  The Company does not expect it will require further equity financing for the foreseeable future. As of March 31, 2011, the Company had approximately $5 million available to borrow under its credit facilities.
 
At March 31, 2011 and December 31, 2010, the Company had cash and cash equivalents of $14.0 million and $4.5 million, respectively.  During the three months ended March 31, 2011, the net amount of cash used in the Company’s operating activities was $4.4 million, the net amount of cash used in investing activities was $45.3 million, and the net amount of cash provided by financing activities was $58.8 million.
 
The company used a substantial amount of Non-Deliverable Forward (NDF) contracts to reduce its costs and on March 31, 2011 had $71.3 million in NDF deposits balanced by $71.3 million in borrowings related to these NDF contracts.  At the end of all NDF contracts the net of these deposits and borrowings will exactly offset each other.  There is no risk for the company in these transactions.
 

Cash Flows from Operating Activities

The net amount of cash used in the Company’s operating activities during three months ended March 31, 2011 was $4.4 million, which primarily included earnings from operations that were offset by increase in inventories and accounts receivable.  For three months ended March 31, 2010, the net amount of cash used in the Company’s operating activities was $38,000, which primarily included earnings from operations that were offset by increase in accounts receivable.
 

Cash Flows from Investing Activities

The net amount of cash used in investing activities during three months ended March 31, 2011 was $45.3 million which was primarily the result of restricted cash buildup.  For three months ended March 31, 2010, the net amount of cash used in investing activities was $6.2 million which was the result of restricted cash buildup and investments in property and equipment.
 

Cash Flows from Financing Activities

The net amount of cash provided by financing activities during three months ended March 31, 2011 was $58.8 million which was primarily the result of the bank borrowings and the sale of equity which resulted in net proceeds of approximately $10.4 million.  For three months ended March 31, 2010, the net amount of cash provided by financing activities was $8.1 million which was the result of a private placement stock offering and the bank borrowings.
 
 
OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.



CRITICAL ACCOUNTING POLICIES

See Note 1, Summary of Significant Accounting Policies and Organization, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein for a discussion of critical accounting policies.



As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information requested by this item, as provided by Regulation S-K Item 305(e).



Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.
 
 
On May 11, 2011, we became aware that we had failed to recognize warrant derivative liability with respect to our outstanding warrants issued in private placements in September 2008 and March 2010 and the subsequent re-measurement of fair value of the warrants derivative, as required by Accounting Standards Codification 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), formerly Emerging Issues Task Force Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-05”).  The error had a significant effect on our previously issued consolidated financial statements for the year ended December 31, 2010 and for each of the quarters for the year ended December 31, 2010 requiring us to restate the financial statements for such periods.  Because ASC 815-40 only applies to fiscal years beginning after December 15, 2008 and the provision of the warrants issued in the 2008 private placement requiring the recognition of warrant derivative liability terminated on September 10, 2009 we have determined that we are not required to restate our financial statements for the year ended December 31, 2009 or any of the quarters for the year ended December 31, 2009.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, and taking the matters described above into account, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2011 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  In light of the matters described above with respect to recognizing warrant liability, the Company intends to re-evaluate its internal control over financial reporting and to implement such changes as it may deem appropriate in light of such re-evaluation.

The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
 
 
 
 
 

 
None.



There have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.


 
           None.


 
None.

 
 

 
None.
 
 
 
 
 
Exhibit No.
 
Title of Document
 
 
 
     
4.1
 
Form of Common Stock Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2011 and incorporated herein by reference)
 
 
 
10.1
 
Form of Securities Purchase Agreement dated March 16, 2011 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2011 and incorporated herein by reference)
 
 
 
10.2
 
Form of Escrow Agreement dated March 16, 2011 by and among SinoHub, Inc., Rodman & Renshaw, LLC and Signature Bank (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2011 and incorporated herein by reference)
 
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended*
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended*
 
 
 
 32.1
 
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive Officer)**
 
 
 
 32.2
 
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Financial Officer)**
 

*Filed as an exhibit hereto.


**These certificates are furnished to, but shall not be deemed to be filed with, the Securities and Exchange Commission.
 
 
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
SINOHUB, INC.
 
 
 
 
 
Date:  May 16, 2011
By:
/s/ Henry T. Cochran
 
 
 
Henry T. Cochran
 
 
 
Chief Executive Officer
 

 
Date:  May 16, 2011
By:
/s/ Li De Hai
 
 
 
Li De Hai
 
 
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
 
 
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