SINOHUB, INC. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - SINOHUB, INC.	ex32_2.htm
EX-31.2 - EXHIBIT 31.2 - SINOHUB, INC.	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - SINOHUB, INC.	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - SINOHUB, INC.	ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - SINOHUB, INC.	Financial_Report.xls

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, 2012

	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 x No o

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 27, 2012
Common Stock, $0.001 par value per share		33,454,903 shares

SINOHUB, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	1

Item 1. Financial Statements	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures About Market Risk	26

Item 4T. Controls and Procedures	26

PART II - OTHER INFORMATION	27

Item 1. Legal Proceedings	27

Item 1A. Risk Factors	27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3. Defaults Upon Senior Securities	27

Item 4. (Removed and Reserved)	27

Item 5. Other Information	27

Item 6. Exhibits	28

SIGNATURES	29

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.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SINOHUB, INC. AND SUBSIDIARIES

CONDENDED CONSOLIDATED BALANCE SHEETS

	March 31, 2012		December 31, 2011
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	7,169,000	$	7,743,000
Restricted cash		95,799,000		65,019,000
Accounts receivable, net		71,210,000		39,951,000
Deposit with suppliers		692,000		393,000
Inventories, net		15,012,000		43,112,000
Prepaid expenses and other current assets		697,000		705,000
Other tax refundable		6,053,000		7,448,000
Other tax recoverable		728,000		2,561,000
Total current assets		197,360,000		166,932,000

PROPERTY AND EQUIPMENT, NET		10,307,000		11,271,000
LONG TERM INVESTMENT		19,000		-
TOTAL ASSETS	$	207,686,000	$	178,203,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	6,073,000	$	7,720,000
Customer deposits		1,663,000		658,000
Accrued expenses and other current liabilities		1,292,000		1,587,000
Bank borrowings		98,117,000		68,681,000
Collateralized bank advances		11,579,000		8,408,000
Capital lease obligations – current portion		761,000		798,000
Income and other taxes payable		2,350,000		1,947,000
Total current liabilities		121,835,000		89,799,000

LONG-TERM LIABILITIES
Capital lease obligations, net of current portion		214,000		452,000
Warrant derivatives		212,000		225,000
Total long term liabilities		426,000		677,000

TOTAL LIABILITIES		122,261,000		90,476,000

COMMITMENTS AND CONTINGENT LIABILITIES

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; 33,454,903 and 33,454,903 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively		33,000		33,000
Additional paid-in capital		30,968,000		30,868,000
Retained earnings
Unappropriated		46,567,000		48,785,000
Appropriated		1,126,000		1,125,000
Accumulated other comprehensive income		6,731,000		6,916,000
Total stockholders’ equity		85,425,000		87,727,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	207,686,000	$	178,203,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

SINOHUB, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three months ended March 31
	2012			2011

NET SALES
ECSS	$	13,810,000		$	21,526,000
ICM		47,977,000			16,442,000
Total net sales		61,787,000			37,968,000
COST OF SALES
ECSS		13,395,000			17,310,000
ICM		46,793,000			12,972,000
Total cost of sales		60,188,000			30,282,000

GROSS PROFIT		1,599,000			7,686,000

OPERATING EXPENSES
Selling, general and administrative		1,798,000			2,713,000
Depreciation		627,000			466,000
Provision for bad debts		1,562,000			52,000
Total operating expenses		3,987,000			3,231,000

(LOSS) INCOME FROM OPERATIONS		(2,388,000	)		4,455,000

OTHER INCOME (EXPENSE)
Interest expense		(744,000	)		(490,000	)
Interest income		645,000			342,000
Changes in fair values of warrant derivatives		14,000			511,000
Other, net		490,000			227,000
Total other income, net		405,000			590,000

INCOME BEFORE INCOME TAXES		(1,983,000	)		5,045,000
Income tax expense		235,000			1,502,000

NET (LOSS) INCOME		(2,218,000	)		3,543,000

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation (loss) gain		(185,000	)		601,000

COMPREHENSIVE (LOSS) INCOME	$	(2,403,000	)	$	4,144,000

SHARE AND PER SHARE DATA
Net (loss) income per share-basic	$	(0.07	)	$	0.12
Weighted average number of shares-basic		33,455,000			30,181,000
Net (loss) income per share-diluted	$	(0.07	)	$	0.12
Weighted average number of shares-diluted		33,455,000			30,336,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

SINOHUB, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three months ended March 31
	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(2,218,000	)	$	3,543,000
Adjustments to reconcile net (loss) income used in operation:
Depreciation - operating expenses		627,000			466,000
Depreciation - cost of sales		456,000			406,000
Provision for bad debts		1,562,000			52,000
Stock option compensation amortization		100,000			109,000
Changes in fair values of warrant derivatives		(14,000	)		(511,000	)
Changes in operating assets and liabilities:
Accounts receivable		(32,786,000	)		(3,181,000	)
Inventories		28,026,000			(5,175,000	)
Prepaid expenses and other current assets		8,000			(1,201,000	)
Deposit with suppliers		(297,000	)		739,000
Other tax refundable		1,388,000			-
Accounts payable		(1,640,000	)		845,000
Customer deposits		1,005,000			639,000
Accrued expenses and other current liabilities		(294,000	)		63,000
Income and other taxes payable/recoverable		2,232,000			(1,183,000	)
Net cash used in operating activities		(1,845,000	)		(4,389,000	)

CASH FLOWS FROM INVESTING ACTIVITIES
Increase of restricted cash		(30,767,000	)		(42,545,000	)
Purchase of property and equipment		(126,000	)		(2,793,000	)
Long term investment		(19,000	)		-
Net cash used in investment activities		(30,912,000	)		(45,338,000	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock , net of costs		-			10,441,000
Bank borrowing proceeds		42,863,000			53,001,000
Bank borrowing repayments		(13,435,000	)		(4,478,000	)
Collateralized bank advances proceeds		3,171,000			-
Repayments of capital lease obligations		(276,000	)		(128,000	)
Net cash provided by financing activities		32,323,000			58,836,000

EFFECT OF EXCHANGE RATES ON CASH		(140,000	)		317,000

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(574,000	)		9,426,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		7,743,000			4,524,000
				$
CASH AND CASH EQUIVALENTS AT END OF PERIOD		7,169,000		$	13,950,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense	$	358,000		$	490,000
Cash paid for income tax	$	1,348,000		$	2,092,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

SINOHUB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

Overview

SinoHub, Inc. and subsidiaries (collectively the “Company”) is an electronics company based in Shenzhen, People’s Republic of China (“PRC” or “China”) which services clients worldwide. The Company is currently engaged in two business segments: electronics product manufacturing and sales (Integrated Contract Manufacturing or ICM), and electronic component sales and services (“ECSS”) which is comprised of electronic component sales (“ECP”) and electronic component supply chain management services (“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.

On February 13, 2012, the Company entered into a Joint Venture Agreement (the “Agreement”) with Ciao Telecom, Inc. (“Ciao Telecom”) relating to the manufacture and sale of mobile communications devices in Brazil. Pursuant to the terms of the Agreement, the joint venture created a Brazilian corporation named CiaoHub, S.A. (“CiaoHub”). SinoHub and Ciao Telecom each initially own 47% of CiaoHub, with the remaining 6% equally divided among the six directors of CiaoHub. The Agreement provides that Ciao Telecom will be responsible for obtaining land, government permits and debt financing for the construction of a factory in Brazil and for organizing and completing the construction of the factory. Ciao Telecom will also be responsible for the marketing of the products produced by the factory. The Agreement further provides that SinoHub will be responsible for developing a business plan to facilitate CiaoHub’s fund-raising efforts, managing the operations of the factory and assisting in the sale of the products produced by the factory.

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 amended Annual Report on Form 10-K/A for the year ended December 31, 2011, previously filed with the Securities and Exchange Commission on April 11, 2012.

Table of Contents

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 People’s Republic of China 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. In 2010 the business conducted through B2B Chips, Limited was expanded to include the electronics product manufacturing and sales business. B2B Chips, Limited 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.

As noted above, the Company also owns 47% of CiaoHub, S.A.

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.

Table of Contents

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 cash and cash equivalents, restricted cash and 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 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. An allowance for doubtful accounts 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, 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	5 Years
Motor vehicles	5 Years
Furniture, fixtures and equipment	2 to 5 Years
Leasehold improvements	1 to 5 Years

Table of Contents

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, 2012:

Quoted Prices

Significant

in Active

Other

Unobservable

Markets for

Observable

Inputs

Identical Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

2010 Warrants

—

212,000

Table of Contents

The following table sets forth a summary of changes in fair value of our derivative liability for the three months ended March 31, 2012 and 2011:

	2012			2011
Beginning Balance at January 1	$	226,000		$	1,692,000
Net gain included in earnings		(14,000	)		(511,000	)
Balance at March 31		212,000			1,181,000

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. As a result, the Company may be subject to significant foreign currency risks and may have potential opportunities due to fluctuations in, 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

For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in fair value of these warrants are recognized in earnings each reporting period. For warrants derivative instruments, the Company uses the Black-Scholes model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as a liability or as equity, is re-assessed at the end of each reporting period, in accordance with FASB ASC Topic 815, Derivatives and Hedging. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

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 ICM, and ECSS, which is comprised of ECP and 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. 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.

Table of Contents

The components of SCM service revenue are: delivery services, import/export services, warehouse services and a number of ancillary services and are primarily based on a percentage of inventory value handled for a customer. Cost of sales for SCM services primarily represents direct costs incurred for providing SCM services such as transportation, kitting, insurance, repackaging and re-labeling.

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.

Cost of sales for SCM services does not include cost of inventory. For electronic component sales, we purchase electronic components from independent third parties and hold them in inventory, valued at cost, until they are shipped to our customers.

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 operating 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.

Table of Contents

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 15, “Segment information.”

Rounding

The accompanying consolidated financial statements herein contain rounding to the nearest thousands.

Reclassifications

Certain amounts reported for prior years have been reclassified to conform to the current period’s presentation.

Recent Accounting Pronouncements

In December 2011, the FASB issued new accounting guidance that will require disclosure of information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as disclosure of collateral received and posted in connection with these instruments. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The Company expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income. The new guidance is intended to improve the overall quality of financial reporting by increasing the prominence of items reported in other comprehensive income and aligning the presentation of other comprehensive income in financial statements prepared in accordance with U.S. GAAP with those prepared in accordance with IFRS. The new guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of this new guidance did not have an impact on the Company's financial position, results of operations or cash flows.

In May 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance to achieve common fair value measurements and disclosure requirements in generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). Some of the provisions of the new accounting guidance include requiring (1) that only nonfinancial assets should be valued based on a determination of their best use, (2) disclosure of quantitative information about unobservable inputs used in Level 3 fair value measurements and (3) disclosure of the level within the fair value hierarchy for each class of assets or liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. This new guidance is effective for interim and annual periods beginning after December 15, 2011. The Company expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

Table of Contents

2. ACCOUNTS RECEIVABLE, NET

Accounts receivable at March 31, 2012 and December 31, 2011 consisted of the following:

	March 31, 2012			December 31, 2011
	(Unaudited)

Accounts receivable	$	74,727,000		$	41,905,000
Less: allowance for doubtful accounts		(3,517,000	)		(1,954,000	)
Accounts receivable, net	$	71,210,000		$	39,951,000

For the three months ended March 31, 2012 and 2011, the Company recorded provision for bad debts of $1,562,000 and $52,000, respectively.

3. INVENTORIES, NET

Inventories at March 31, 2012 and December 31, 2011 consisted of the following:

	March 31, 2012			December 31, 2011
	(Unaudited)

Raw materials	$	652,000		$	1,371,000
Work-in-progress		838,000			1,040,000
Finished goods and goods for resale		13,711,000			40,890,000
	$	15,201,000		$	43,301,000
Less: allowance for obsolete inventories		(189,000	)		(189,000	)
Inventories, net	$	15,012,000		$	43,112,000

For the three months ended March 31, 2012 and 2011, the Company recorded no provision for obsolete inventories.

4. BANK BORROWINGS AND FINANCING ARRANGEMENTS

The Company has secured financing facilities with certain PRC banks to support its business operations. The bank facilities include:

Lines of credit facility with China Construction Bank in the amount of $22,244,000 to support our component sales business. Restricted cash balances are required as security for draws against the facility. The facility renews each year and is available through January 2013. As of March 31, 2012, the Company had unused lines of credit facilities amounting to $3.1 million.

Lines of credit facility with Industrial Bank in the amount of $7,477,000 to support our business. Restricted cash balances are required as security for draws against the facility. In addition, the bank requires third party guarantees from a third party, two subsidiaries, SinoHub Electronics Shenzhen, Ltd. and Topology Communication Technology (Shenzhen) Ltd. and an executive officer. The facility is available through December, 2012. As of March 31, 2012, the Company had unused lines of credit facilities amounting to $4.8 million.

Table of Contents

Lines of credit facility with Bank of Ningbo in the amount of $7,000,000 to support our electronics product manufacturing and sales business. Restricted cash balances are required as security for draws against the facility. The facility renews each year and is available through July 2012. As of March 31, 2012, the Company had unused lines of credit facilities amounting to $4.0 million.

Bank’s Acceptance Bill facility with Bank of Shanghai in the amount of $4,767,000 to support purchasing of raw material for our electronics product manufacturing and sales business. Restricted cash balances are required as security for draws against the facility. In addition, the bank requires third party guarantees from a subsidiary, SinoHub Electronics Shenzhen, Ltd. and the unlimited personal guaranty of an executive officer and his spouse. The facility renews each year and is available through October 2012. As of March 31, 2012, the Company had unused Bank’s Acceptance Bill facility amounting to $3.2 million.

Lines of credit facility with Bank of Jiangsu in the amount of $15,534,000 to support our electronics product manufacturing and sales 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 Electronics Shenzhen, Ltd. and Topology Communication Technology (Shenzhen) Ltd. and an executive officer. The facility renews each year and is available through July 2012. As of March 31, 2012, the Company had unused lines of credit facilities amounting to $9.5 million.

As of March 31, 2012, the Company had unused credit facilities amounting to $24.6 million.

Borrowings against these facilities at March 31, 2012 and December 31, 2011 were as follows:

			Interest rate		March 31,		December 31,
	From date	Maturity date	(per year)	$	2012	$	2011
Notes payable to a bank	January/11	January/12	3.00%		-		3,618,000
Notes payable to a bank	March/11	June/12	3.00%		-		2,557,000
Notes payable to a bank	April/11	April/12	3.00%		-		2,718,000
Notes payable to a bank	April/11	April/12	3.00%		-		5,158,000
Notes payable to a bank	May/11	May/12	3.00%		-		1,610,000
Notes payable to a bank	May/11	May/12	3.00%		-		10,359,000
Notes payable to a bank	May/11	May/12	3.00%		-		1,600,000
Notes payable to a bank	June/11	June/12	3.00%		-		3,253,000
Notes payable to a bank	June/11	June/12	3.00%		-		1,636,000
Notes payable to a bank	June/11	June/12	3.00%		-		3,594,000
Notes payable to a bank	June/11	June/12	3.00%		-		2,372,000
Notes payable to a bank	June/11	June/12	3.00%		-		1,172,000
Notes payable to a bank	July/11	January/12	2.80%		-		1,047,000
Notes payable to a bank	July/11	January/12	2.80%		-		2,019,000
Notes payable to a bank	September/11	September/12	4.31%		-		2,051,000
Notes payable to a bank	October/11	January/12	3.50%		-		2,307,000
Notes payable to a bank	October/11	January/12	3.10%		-		2,921,000
Notes payable to a bank	October/11	April/12	3.60%		-		3,040,000
Notes payable to a bank	November/11	February/12	3.50%		-		1,554,000
Notes payable to a bank	November/11	November/12	3.00%		-		4,031,000
Notes payable to a bank	December/11	June/12	7.02%		-		1,589,000

Table of Contents

Notes payable to a bank	December/11	June/12	7.32%		-		2,383,000
Notes payable to a bank	December/11	December/12	3.00%		-		3,052,000
Notes payable to a bank	December/11	June/12	4.60%		-		3,040,000
Notes payable to a bank	December/11	June/12	7.02%		1,588,000		-
Notes payable to a bank	February/12	January/13	7.32%		627,000		-
Notes payable to a bank	March/12	September/12	7.32%		1,340,000		-
Notes payable to a bank	May/11	May/12	3.00%		1,599,000		-
Notes payable to a bank	June/11	June/12	3.00%		1,634,000		-
Notes payable to a bank	January/12	April/12	3.80%		1,504,000		-
Notes payable to a bank	February/12	May/12	3.80%		2,235,000		-
Notes payable to a bank	March/11	June/12	3.00%		2,556,000		-
Notes payable to a bank	April/11	April/12	3.00%		2,717,000		-
Notes payable to a bank	April/11	April/12	3.00%		5,155,000		-
Notes payable to a bank	May/11	May/12	3.00%		1,609,000		-
Notes payable to a bank	May/11	May/12	3.00%		10,354,000		-
Notes payable to a bank	June/11	June/12	3.00%		3,251,000		-
Notes payable to a bank	June/11	June/12	3.00%		3,592,000		-
Notes payable to a bank	June/11	June/12	3.00%		2,371,000		-
Notes payable to a bank	June/11	June/12	3.00%		1,172,000		-
Notes payable to a bank	November/11	November/12	3.00%		4,028,000		-
Notes payable to a bank	December/11	December/12	3.00%		3,051,000		-
Notes payable to a bank	February/12	May/12	3.26%		5,988,000		-
Notes payable to a bank	February/12	February/13	3.58%		6,189,000		-
Notes payable to a bank	February/12	August/12	3.10%		2,992,000		-
Notes payable to a bank	February/12	August/12	3.15%		2,992,000		-
Notes payable to a bank	March/12	September/12	3.15%		4,989,000		-
Notes payable to a bank	March/12	September/12	3.09%		3,141,000		-
Notes payable to a bank	October/11	April/12	3.60%		3,038,000		-
Notes payable to a bank	December/11	June/12	4.60%		3,038,000		-
Notes payable to a bank	January/12	January/13	5.23%		7,054,000		-
Notes payable to a bank	September/11	September/12	4.31%		2,050,000		-
Notes payable to a bank	March/12	March/13	3.25%		1,170,000		-
Notes payable to a bank	March/12	March/13	3.25%		278,000		-
Notes payable to a bank	March/12	March/13	3.25%		1,803,000		-
Notes payable to a bank	March/12	June/12	3.17%		3,012,000		-
				$	98,117,000	$	68,681,000
	Less : current portion				98,117,000		68,681,000
	Long -term portion			$	-	$	-

Interest expense for the three months ended March 31, 2012 and 2011 was $744,000 and $490,000 respectively. The weighted average interest rate of all loans outstanding is 3.5%.

As of March 31, 2012 SinoHub had restricted cash and bank loan balances of $87.5 million related to non-deliverable forward (NDF) contracts. The Company assumes no risk for the NDF contracts in these transactions. Under each NDF contract, The Company is obligated to deposit an agreed amount of money in RMB with the bank for one year and the bank is obligated to loan the Company an amount of US Dollars or Hong Kong Dollars at a small discount to current exchange rates that is paid directly to a supplier outside of PR China. As an example, if the Company owed a supplier in Hong Kong $1 million, in the third quarter of 2011 Chinese banks were willing to loan the Company $1 million for one year at a fixed rate of interest to pay the supplier as long as SinoHub was willing to deposit an amount of RMB (less than the current exchange rate) for one year in their bank. At the end of the one year period, the bank will use the deposit to pay off the loan and keep the difference, if any, resulting from any appreciation of the RMB against the dollar during the period. If the value of the RMB versus the US dollar declines, the bank will make up the difference, and the Company would not be required to make any payments to the bank to pay off the loan other than the deposit.

Table of Contents

We have considered whether the NDF contracts that require assessment under FASB ASC Topic 815 should be accounted for as derivative instruments and concluded that these NDF contracts are loan commitments and are not derivative instruments and therefore FASB ASC Topic 815 does not apply.

5. COLLATERALIZED BANK ADVANCES

Collateralized bank advances at March 31, 2012 consisted of purchases financed by two banks for which bank charges of 0.05% on the invoice amount is incurred and guaranteed by the Company’s restricted cash, a subsidiary of the Company and an executive officer of the Company. Collateralized bank advances are due at various dates from April 17, 2012 through September 22, 2012 and bank advance charges due will be settled on the date of acceptance.

6. CAPITAL LEASE OBLIGATIONS

Certain of the equipment included in fixed assets have been acquired under a capital lease. The capital lease obligations are as follows:

	March 31, 2012		December 31, 2011
	(Unaudited)

Gross capital lease obligations	$	975,000	$	1,250,000
Less: current portion		761,000		798,000
Long-term capital lease obligations	$	214,000	$	452,000

The lease is guaranteed by a pledge of equipment with a total cost of $2,747,000. Depreciation expenses associated with capital leases were $130,000 and $81,000 for the three months ended March 31, 2012 and 2011 respectively. Interest expenses associated with capital leases were $15,000 and $74,000 for the three months ended March 31, 2012 and 2011 respectively.

7. WARRANT DERIVATIVES

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 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 preclude equity accounting treatment under ASC 815. Accordingly, effective January 1, 2009, the Company was required to reclassify the 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.

Table of Contents

At March 31, 2012, the fair value of the Company’s derivative warrants liability was $212,000. The Company used the Black-Scholes valuation model to estimate the fair value of the Warrants. Significant assumptions used at March 31, 2012 were as follows:

	2012	2011

Estimated market value of stock on grant date	$0.54	$1.89
Risk-Free interest Rate(1)	0.51%	1.60%
Dividend yield (2)	0.00%	0.00%
Volatility factor	129.09%	123.08%
Expected life (3)	2.93 years	3.9 years

	(1)	The estimated market value of the stock on the date of grant/reporting 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 there will not be earnings available to pay dividends in the near term.

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

Changes in fair value of these warrants are recognized in earnings each reporting period.

8. COMMITMENTS AND CONTINGENCIES

Commitments

The Company leases factory, warehouse, office spaces and equipment from third parties under operating leases which expire at various dates from June 2012 through March 2015. Rent expense for the three months ended was $235,000 and $271,000 respectively. At March 31, 2012, the Company has outstanding commitments with respect to operating leases, which are due as follows:

Fiscal year ending December 31,

2012		949,000
2013		352,000
2014		58,000
2015		14,000
	$	1,373,000

The Company leases equipment under a non-cancelable capital lease agreement. Future minimum lease payments under the capital lease are as follows:

Fiscal year ending December 31,

2012		575,000
2013		432,000
		1,007,000
Less: Interest		32,000
		975,000
Less: Current portion		761,000
Capital lease obligation – Non-current	$	214,000

Table of Contents

Capital Commitment

As of March 31, 2012, the Company has a capital commitment with respect to a capital injection to a PRC subsidiary of $2,051,000 by April 2012. As indicated in Note 17, in April 2012, the Company deferred the additional capital contribution.

Contingencies

The Company accounts for loss contingencies in accordance with ASC Topic 450-20. As of March 31, 2012, there was no loss contingency.

9. EARNINGS PER SHARE

The elements for calculation of earnings per share for the three months ended March 31, 2012 and 2011 were as follows:

	Three months ended March 31,
	2012			2011


Net (loss) income for basic and diluted earnings per share	$	(2,218,000	)	$	3,543,000

Weighted average shares used in basic computation		33,455,000			30,181,000
Effect of dilutive stock options and warrants		-			155,000
Weighted average shares used in diluted computation		33,455,000			30,336,000

Earnings (loss) per share:
Basic	$	(0.07	)	$	0.12
Diluted	$	(0.07	)	$	0.12

During the first quarter of 2012, options to purchase 2,133,739 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. The diluted net loss per common share is the same as the basic net loss per share for the three months ended March 31, 2012 as all potential ordinary shares including stock options and warrants are anti-dilutive and are therefore excluded from the computation of diluted net loss per share.

During the first quarter of 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.

Table of Contents

10. STOCKHOLDERS’ EQUITY

Warrants

Following is a summary of the status of warrants outstanding and exercisable at March 31, 2012 and December 31, 2011

March 31, 2012							December 31, 2011
						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		2,649,069	1.45years	$	3.00		2,649,069		2,649,069	1.70years
$	3.11		853,433		853,433	3.42years	$	3.11		853,433		853,433	3.67years
$	3.25		75,000		75,000	0.84years	$	3.25		75,000		75,000	1.09years
Total			3,577,502		3,577,502		Total			3,577,502		3,577,502

11. STOCK OPTIONS

The Company has granted qualified stock options under the Company’s 2000 Stock Incentive Plan (the “2000 ISOP”) and 2008 Stock Plan, as amended and restated (the “2008 ISOP”). At March 31, 2012, stock options to purchase 2,133,739 shares of common stock at an exercise price ranging from $0.20 to $4.36 per share were outstanding. Prior to becoming publicly 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% - 176%	0%	0.3% - 2.50%	$0.278 - $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 a historical period matching the expected life of the options.

Table of Contents

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: The expected life (estimated period of time outstanding) of stock options granted was estimated based on historical exercise and termination activity.

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 following is a summary of the stock options activity:

	Number of			Weighted-
	Options			Average
	Outstanding			Exercise
				Price

Balance at December 31, 2010		1,061,198		$	2.50
Granted		98,361		$	2.71
Forfeited		(391,583	)		-
Exercised		(92,947	)	$	0.38
Balance at December 31, 2011		675,029		$	2.81
Granted		1,560,000		$	0.38
Forfeited		(101,290	)		-
Exercised		-		-
Balance at March 31, 2012		2,133,739		$	0.98
Options exercisable on March 31, 2012		256,991		$	2.51

Of the total options granted, options to purchase an aggregate of 256,991 shares of common stock are fully vested, exercisable and non-forfeitable. The aggregate intrinsic value of options vested and exercisable was $5,309.

As of March 31, 2012, there was a total of $995,469 of unrecognized compensation cost related to unvested stock options expected to be recognized over a weighted average period of approximately four years.

The following is a summary of the status of options outstanding at March 31, 2012 and December 31, 2011:

Outstanding Options at March 31, 2012						Exercisable Options

Range of	Number		Weighted	Weighted		Number		Weighted
Exercise Price			Average	Average				Average
			Remaining	Exercise				Exercise
			Contractual	Price				Price
			Life
$0.20 - $0.38		1,589,925	9.68years	$	0.38		29,925	$	0.20
$2.21 - $2.48		207,553	3.51years	$	2.32		96,092	$	2.36
$2.62 - $3.00		267,561	4.51years	$	2.74		91,733	$	2.75
$3.92 - $4.36		68,700	7.63years	$	4.04		39,241	$	4.05
Total		2,133,739		$	0.98		256,991	$	2.51

Table of Contents

Outstanding Options at December 31, 2011						Exercisable Options

Range of	Number		Weighted	Weighted		Number		Weighted
Exercise Price			Average	Average				Average
			Remaining	Exercise				Exercise
			Contractual	Price				Price
			Life
$0.20 - $1.02		30,025	5.93years	$	0.20		30,025	$	0.20
$2.21 - $2.48		207,553	3.76years	$	2.32		83,118	$	2.37
$2.62 - $3.00		267,651	4.76years	$	2.74		56,653	$	2.77
$3.92 - $4.36		169,800	7.76years	$	3.97		91,775	$	3.97
Total		675,029		$	2.81		261,571	$	2.77

For the three months ended March 31, 2012 and 2011, stock compensation expenses were $100,000 and $109,000, respectively.

12. RELATED PARTY TRANSACTIONS

There were no related party transactions during the three months ended March 31, 2012 other than the ongoing guarantees of certain of our credit facilities by an executive officer, in one instance together with his spouse, as described in Note 4 and the following transaction:

Pursuant to the terms of the Joint Venture Agreement with Ciao Telecom described in Note 1, our chief executive officer purchased 1% of the outstanding stock of CiaoHub, S.A., the Brazilian corporation formed by the Company and Ciao Telecom, for $400. Our chief executive officer is a director of Ciao Telecom and all directors of Ciao Telecom purchased a 1% interest in Ciao Telecom on the same terms.

13. 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 intention to reinvest all the income earned by the Company’s subsidiaries 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. These operating loss carry forwards (NOLs) will expire, if not utilized, commencing in 2028. 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 net 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 2012 and 2011. 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. Accordingly, no net deferred tax benefit has been recorded.

Table of Contents

The Company’s subsidiaries in China would be subject to China income tax at a statutory rate of 25% in 2012 and 2011. 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 were subject to a special tax rate was 24% in 2011.

Income tax expense for the three months ended March 31, 2012 and 2011 is summarized as follows:

	2012		2011

Current	$	235,000	$	1,502,000
Deferred		-		-
	$	235,000	$	1,502,000

Provision for income taxes mainly represents the PRC income taxes calculated at the applicable rate on SinoHub Electronics Shenzhen, Limited and SinoHub SCM Shenzhen, Limited.

The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the three months ended March 31, 2012 and 2011 is as follows:

	2012				2011

Income before income taxes	$	(1,983,000	)	100%	$	5,045,000	100%

China income taxes at statutory rate	$	(496,000	)	25%	$	1,261,000	25%
Operating loss carried forward		731,000		-37%		412,000	9%
Effect of (non-taxable income)/ non-deductible expenses		-		0%		(108,000)	-2%
China qualified income tax exemptions		-		0%		(63,000)	-1%
Income tax expense	$	235,000		-12%	$	1,502,000	33%

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax and book basis of assets and liabilities, and are recognized based on the enacted statutory tax rates for the year in which the Company expects the differences to reverse. A valuation allowance is established against a deferred tax asset when it is more likely than not that the asset or any portion thereof will not be realized. The Company provided a full valuation allowance against the deferred tax benefits related to net operating losses for the three months ended March 31, 2012 and 2011.

Table of Contents

14. CONCENTRATIONS AND RISKS

Substantially all of Company's assets are located in the PRC and Hong Kong.

During the three months ended March 31, 2012 and 2011, approximately 80% and 70% of revenues were derived from overseas sales, respectively.

Major customers and sales to those customers as a percentage of total sales were as follows:

	Customer A	Customer B	Customer C
For the three months ended
March 31, 2012	21%	8%	6%
March 31, 2011	10%	7%	5%

15. 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,
	2012		2011
Revenues from external customers:
ECSS	$	13,810,000	$	21,526,000
ICM		47,977,000		16,442,000
	$	61,787,000	$	37,968,000
Depreciation:
ECSS	$	261,000	$	373,000
ICM		822,000		93,000
	$	1,083,000	$	466,000
Stock option compensation amortization:
ECSS	$	32,000	$	60,000
ICM		68,000		49,000
	$	100,000	$	109,000
Provision for bad debts:
ECSS	$	1,027,000	$	28,000
ICM		535,000		24,000
	$	1,562,000	$	52,000
Interest income:
ECSS	$	147,000	$	194,000
ICM		498,000		148,000
	$	645,000	$	342,000

Table of Contents

Interest expense:
ECSS	$	180,000		$	278,000
ICM		564,000			212,000
	$	744,000		$	490,000
Income taxes expenses:
ECSS	$	102,000		$	868,000
ICM		133,000			634,000
	$	235,000		$	1,502,000
Income from operations:
ECSS	$	(514,000	)	$	1,760,000
ICM		(1,874,000	)		2,695,000
	$	(2,388,000	)	$	4,455,000

Total amount of income from operations is consistent with the consolidated statements of operations.

Addition to property and equipment:
ECSS	$	15,000		$	2,309,000
ICM		111,000			457,000
	$	126,000		$	2,766,000
Total segment assets:		As of March 31, 2012			As of December 31, 2011
ECSS	$	24,877,000		$	68,636,000
ICM		182,809,000			109,567,000
	$	207,686,000		$	178,203,000

16. GEOGRAPHICAL REVENUE

Of SinoHub’s $61.8 million in revenue in the first quarter of 2012, approximately 20% was from sales in PR China and 80% was from sales in Hong Kong.

17. SUBSEQUENT EVENTS

In April 2012 the company deferred the additional capital contribution of $2,051,000 that was due to be made to a PRC subsidiary.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 amended Annual Report on Form 10-K/A for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on April 11, 2012. 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 and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. 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 THE THREE MONTHS ENDED

MARCH 31, 2012 COMPARED TO MARCH 31, 2011

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 a net loss for the three months ended March 31, 2012 of $2.2 million compared to net income of $3.5 million in the year-earlier period. The change is due in large part to the loss of a significant customer that was a source of high margin business and a substantial increase in the Company’s provision for bad debts to $1.6 million from $52,000 in the year-earlier quarter based on the Company’s assessment of collection trends and market conditions. 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 results for the three months ended March 31, 2012 are necessarily indicative of future performance or any trends but continues to evaluate its results of operations on a quarterly basis going forward. Net loss margin was 3.6% for the three months ended March 31, 2012 compared to net income margin of 9.3% in the year-earlier period.

Net Sales

Net sales for three months ended March 31, 2012 were $61.8 million, up 62.7% from $38.0 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, 2012, net sales of the ECSS business segment decreased to $13.8 million from $21.5 million in the year-earlier period as the Company continued to shift its focus to ICM. In three months ended March 31, 2012, net sales of the ICM business segment increased 191.8% to $48.0 million from $16.4 million in the year-earlier period.

Gross Profit

The Company recorded gross profit of $1.6 million in the three months ended March 31, 2012, compared with $7.7 million in the year-earlier period, a decrease of 79.2%. The gross margin in the three months ended March 31, 2012 decreased to 2.6% from 20.3% in the year-earlier period. These decreases were in part the result of a more difficult environment in ECSS caused by a lack of a dominant company in the Chinese 3G market reducing opportunities for arbitrage and tightening of credit terms by Chinese banks leading to customers requesting longer payment terms and making collections more difficult. Another factor in the decreases is the fact that the company is still offering price incentives to gain new customers in ICM. Also, to utilize capacity, the Company has had to take on more ICM business where it provides pure contract manufacturing that is inherently low margin business as compared to the higher margin private label device business which the Company is seeking to obtain.

Table of Contents

Operating Expenses

Total operating expenses increased to $4.0 million or 6.5% of revenues in the three months ended March 31, 2012, compared to $3.2 million, or 8.5% of revenues in the year-earlier period. Selling, general and administrative expenses decreased to $1.8 million in the three months ended March 31, 2012 from $2.7 million in the year-earlier period, representing approximately 3.0% and 7.1% of revenues respectively. The largest factors in the decrease in selling, general and administrative expenses from 2011 to 2012 were lower fees for services and tighter cost control. Depreciation was $627,000 in the three months ended March 31, 2012, compared to $466,000 in the year-earlier period with the increase due primarily to additional equipment and leasehold improvements.

Income from Operations

The Company recorded a loss from operations of $2.4 million in the three months ended March 31, 2012, down 153.6% from income from operations of $4.5 million in the year-earlier period.

Income Taxes

The Company recorded income tax expense of $235,000 in the three months ended March 31, 2012, compared with $1.5 million in the year-earlier period. Income taxes were levied on profitable subsidiaries with no corresponding tax offset from subsidiaries with losses on consolidation. The Company’s subsidiaries in China are subject to Chinese income tax at 25% in 2012 versus a special rate of 24% in 2011. 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 loss of $185,000 in the three months ended March 31, 2012, as compared with $601,000 in the year-earlier period. Comprehensive net loss (net loss plus foreign currency translation loss) was $2.4 million in the three months ended March 31, 2012, compared with comprehensive net income of $4.1 million in the year-earlier period.

CONSOLIDATED FINANCIAL CONDITION AND LIQUIDITY

Liquidity and Capital Resources

Because the Company has not had the opportunity to raise additional equity capital for growth, the decision has been made to reduce our ECP business, which consumes working capital than our ICM business, at a rate faster than the Company initially planned in order to allow for more investment in ICM. At March 31, 2012, the Company’s working capital was $75.5 million, decreased from $77.1 million at December 31, 2011. The Company does not expect it will require further equity financing for the foreseeable future for its current operations as currently conducted, including the greater emphasis on ICM and a de-emphasis of our ECP business. The Company is, however, seeking to increase its customer base, including its customer base in additional geographic regions. The Company may seek to implement this strategy through joint ventures or strategic alliances which may require modest or significant amounts of capital. To the extent such strategies do require significant amounts of capital from the Company, the Company may seek additional equity financing but there is no guarantee that the Company would be able to obtain such financing on favorable terms or at all. As of March 31, 2012, the Company had approximately $24.6 million available to borrow under its credit facilities.

Table of Contents

At March 31, 2012 and December 31, 2011, the Company had cash and cash equivalents of $7.2 million and $7.7 million, respectively. During the three months ended March 31, 2012, the net amount of cash used in the Company’s operating activities was $1.8 million, the net amount of cash used in investing activities was $30.9 million, and the net amount of cash provided by financing activities was $32.3 million.

The company used a substantial amount of Non-Deliverable Forward (NDF) contracts to reduce its costs and on March 31, 2012 had $87.5 million in NDF deposits balanced by $87.5 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, 2012 was $1.8 million, which primarily included the loss from operations plus a substantial increase in accounts receivable, which was partially offset by a reduction in inventory. For three months ended March 31, 2011, the net amount of cash used in the Company’s operating activities was $4.4 million, which primarily included earnings from operations that were offset by an increase in inventory and accounts receivable.

Cash Flows from Investing Activities

The net amount of cash used in investing activities during three months ended March 31, 2012 was $30.9 million which was primarily the result of restricted cash buildup. For three months ended March 31, 2011, the net amount of cash used in investing activities was $45.3 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, 2012 was $32.3 million which was primarily the result of the bank borrowings. For three months ended March 31, 2011, the net amount of cash provided by financing activities was $58.8 million of which approximately $10.4 million was the result of a private placement stock offering and approximately $48.5 million was the result of 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.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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).

Item 4T. Controls and Procedures

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.

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, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012 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.

Remediation

As disclosed in Item 9A of our amended Annual Report on Form 10-K/A for the year ended December 31, 2011, management has been actively engaged in efforts to remediate the material weakness in internal control over financial reporting relating to the accounting for stock purchase warrants, as described in Item 9A of our Amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010, that we previously identified for the fiscal year ended December 31, 2010. As disclosed in Item 9A of our amended Annual Report on Form 10-K/A for the year ended December 31, 2011, management believes that its efforts effectively remediated the material weakness and no additional remedial steps were taken in the quarter ended March 31, 2012.

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.

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.

Table of Contents

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed under Item 1A of our amended Annual Report on Form 10-K/A for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Table of Contents

Item6.Exhibit No.		Title of Document


10.1		Contract of Employment dated January 1, 2012 between SinoHub Electronics Shenzhen, Ltd and Henry T. Cochran (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.2		Employment Contract dated January 1, 2012 between B2B Chips, Ltd. and Henry T. Cochran (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.3		Contract of Employment dated January 1, 2012 between SinoHub Electronics Shenzhen, Ltd and Lei Xia (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.4		Employment Contract dated January 1, 2012 between B2B Chips, Ltd. and Lei Xia (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.5		Contract of Employment dated January 1, 2012 between SinoHub Electronics Shenzhen, Ltd and Li De Hai (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.6		Employment Contract dated January 1, 2012 between B2B Chips, Ltd. and Li De Hai (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2012 and incorporated herein by reference)

10.7		Joint Venture Agreement between SinoHub, Inc. and Ciao Telecom, Inc. dated as of February 13, 2012 (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on February 14, 2012 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*

31.1		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)**

101		The following financial statements from the Quarterly Report on Form 10-Q of SinoHub, Inc. for the quarter ended March 31, 2012 formatted in XBRL: (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited), (iii) Condensed Consolidated Statements of Cash Flows (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.***

*Filed as an exhibit hereto.

**These certificates are furnished to, but shall not be deemed to be filed with, the Securities and Exchange Commission.

Table of Contents

SIGNATURES

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 15, 2012	By:	/s/ Henry T. Cochran
		Henry T. Cochran
		Chief Executive Officer

Date: May 15, 2012	By:	/s/ Li De Hai
		Li De Hai
		Chief Financial Officer (Principal Financial and Accounting Officer)

Attached files

SINOHUB, INC. Reports

Also read