UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31,
      2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________





Commission
file number:  000- 52746


SINOHUB,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            87-0438200(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      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)





Securities
registered pursuant to Section 12(b) of the Act:  None





Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par
value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o  
No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes o   No x





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 Website, if any, every Interactive Date 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




1




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained here, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K x





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.  (Check one)




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





The
aggregate market value of common stock held by non-affiliates of SinoHub Inc.,
based upon the closing price of its common stock as of June 30, 2009, was
$23,723,355.  Shares of the Registrant’s common stock held by each
executive officer and director and by each person who owns 10 percent or more of
the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates of the Registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.





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 March 24, 2010Common
      Stock, $0.001 par value per share
            
            28,393,016shares





DOCUMENTS
INCORPORATED BY REFERENCE:





The
Registrant incorporates by reference portions of its Definitive Proxy Statement
for the 2010 Annual Meeting of Stockholders, which is expected to be filed no
later than April 30, 2010, into Part III of this Form 10-K to the extent stated
herein.








2




SINOHUB,
INC.




FORM
10-K





TABLE OF CONTENTS





PagePART IItem 1.
            Business
            5Item 1A.
            Risk Factors
            17Item 1B.
            Unresolved Staff Comments
            31Item 2.
            Properties
            31Item 3.
            Legal Proceedings
            32Item 4.
            [Reserved]
            32PART IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            32Item 6.
            Selected Financial Data
            35Item 7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            35Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            51Item 8.
            Financial Statements and Supplementary
    Data
            51Item 9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            51Item 9A (T).
            Controls and Procedures
            51Item 9B.
            Other Information
            52PART IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            53Item 11.
            Executive Compensation
            53Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            53Item 13.
            Certain Relationships and Related Transactions, and
      Director Independence
            53Item 14.
            Principal Accounting Fees and Services
            53Part IVItem 15.
            Exhibits and Financial Statement
    Schedules
            53SIGNATURES
            
            58Consolidated Financial Statements and
      Footnotes
            59Certifications




3
 Table of Contents




PART
I




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.




Special
Note Regarding Forward Looking Statements




This
Annual Report on Form 10-K, including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements include, among others, those concerning our expected financial
performance and strategic and operational plans, as well as assumptions,
expectations, predictions, intentions or beliefs about future events. You are
cautioned that any such forward-looking statements are not guarantees of future
performance and that a number of risks and uncertainties could cause actual
results of the Company to differ materially from those anticipated, expressed or
implied in the forward-looking statements. The words “believe,” “expect,”
“plan,” “estimate,” “anticipate,” “project,” “targets,” “optimistic,”
“potential,” “intend,” “aim,” “may,” “will,” “continue” or similar expressions,
or the negative thereof, are intended to identify forward-looking
statements.




These
forward-looking statements involve known and unknown risks and uncertainties.
Our actual results may differ materially from those projected or assumed in such
forward-looking statements. Among the factors, risks and uncertainties that
could cause actual results to differ materially are the following:





            the
      rate of growth of the mobile telephone and network equipment markets in
      China;
            our
      ability to overcome competition from other suppliers;
            any
      increase in the cost of component parts that we supply to third parties or
      use in our own products or increases in operating costs which cannot be
      passed on to our customers;
            the
      availability of financing necessary to fund our operations and planned
      expansion on attractive terms or at all, which may adversely impact our
      growth plans or increase our future interest expense;
            changes
      in interest rate levels and volatility in securities
    markets;
            the
      retention of import/export licenses and SinoHub SCM SZ’s Client
      Coordinator Enterprise Coordinator status with the Huanggang Customs
      authority;
            economic,
      political, regulatory, legal and foreign exchange risks associated with
      our operations;
            Uncertainties
      related to China’s legal system and economic, political and social events
      in China;
            changes
      in governmental regulation, tax rates and similar
  matters;
            retention
      of key members of our senior management;
            the
      abatement of the current global economic crisis over
  time;




4
 Table of Contents




and the
additional factors, risks and uncertainties detailed under the heading “Risk
Factors” in Item 1A of this Annual Report on Form 10-K. Readers are urged
to carefully review and consider the various disclosures made by us in this
Report and our other filings with the SEC. These reports attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition and results of operations and prospects.All
forward-looking statements and risk factors included in this Report are made as
of the date hereof, based on information available to us as of the date hereof,
and we assume no obligation to update any forward-looking statement or risk
factor to reflect changes in our expectations or future events.





Item 1.  Business.





Overview




SinoHub,
Inc. (the “Company”) is engaged in electronic component sales, outsourced
electronics product production and sales, and electronic component supply chain
management (SCM) services. Our electronic component sales include
procurement-fulfillment and individually negotiated electronic component sales
to manufacturers. We only deal in original parts in original packing and do not
alter or modify the parts in any way.  Accordingly, any quality issues
with respect to the parts would be the responsibility of the manufacturer of the
parts. In Q4 2009 we began providing virtual contract manufacturing (VCM)
services for mobile phones to customers who are resellers in developing
countries.  We believe our asset light business model provides optimal
flexibility for our VCM customers while minimizing risk for SinoHub. Our SCM
services include warehousing, delivery and import/export. At present all of our
component sales and SCM services occur in the PRC and Hong Kong, and all mobile
phone sales are made outside China.




The
Company provides SCM services to electronics manufacturers and component
suppliers in the People’s Republic of China (the “PRC”).  Our
professional Supply Chain Management platform integrates SinoHub SCM, logistics
service centers located in key distribution/manufacturing cities in the PRC, and
a service team of about 200 employees.




As a
seller of electronic components and an electronic component supply chain
management service provider, we manage all aspects of the purchase and movement
of electronic components from their receipt from suppliers in our Hong Kong
warehouse to their delivery in Hong Kong or import into China and delivery to a
manufacturer there. We also handle the export of the finished goods when that is
required. Roughly eighty percent (80%) of our business with manufacturer
customers is related to mobile phones. The components we source in this vertical
market change rapidly in line with the rapid change of technology in this
industry.




Each
mobile phone built by one of our customers contains between 100 and 200
electronic components.  We have customers who make over one million
phones per month.  In the past, we have only been able to handle part
of their business because of liquidity constraints (our procurement-fulfillment
business requires us to have available capital to purchase components for
inventory prior to reselling them to customers).  However, we are
currently ramping up with several customers who want to give us the opportunity
to supply them with components for a larger share of their
business.  Our ability to scale with these growing customers will
continue to depend upon the availability of working capital.




5
 Table of Contents




In the
last three years, mobile phone components have accounted for approximately 70% -
80% of our business and network equipment components have accounted for
approximately 15% of our business. We expect the percentage of our business in
the mobile phone vertical to grow in 2010 as we ramp up our VCM
business.  90% of our manufacturer customers in the electronic
component purchasing business sell their products into the local Chinese
market.  As a result, we have yet to feel much adverse effect from the
global slowdown because demand has remained strong for these products in
China.




SinoHub
carries inventory for its virtual contract manufacturing business, we carry
electronic components that we are staging for procurement-fulfillment projects
and we carry a small amount of inventory that results from the service we
provide to customers to help them sell that portion of a minimum order quantity
they do not need. We never buy components in our electronic component purchasing
business without a corresponding order to purchase the components. We do not
have backlog orders, but with the successful completion of each
procurement-fulfillment project and component sale, we look for repeat orders
from existing customers.




Business
Operations




SinoHub’s
business operations are primarily dedicated toward utilizing the value of the
SCM Platformto
source and deliver electronic components and electronic products for our
customers. In this sense, SinoHub has become a market maker for our SCM
customers by using them as suppliers in our electronic component sales business
and for our electronic component sales customers by using them as suppliers in
our electronic product production and sales business.




The
Company offers customers the use of the SCM Platform under a fee based program
whereby customers outsource the supply chain process to SinoHub, while retaining
title to inventory, receivables, and commitments on supplier payables. SinoHub
provides the customer a complete SCM solution that includes importing and
exporting services, facilitating Customs clearance, performing warehouse and
distribution functions, and enabling foreign currency settlements through
SinoHub’s banking relationships and its licensed qualifications as a Client
Coordinator Enterprise in China.




SinoHub
also supports customers by providing a sourcing channel for electronic
components that are not part of a specific SCM or procurement-fulfillment
program. In these cases, SinoHub utilizes its industry knowledge and
relationships with components suppliers and manufacturers to source products at
competitive prices and within time constraints.  SinoHub responds to
these “spot” orders from customers, sources the product, confirms pricing, and
executes delivery as required.  Customers are required to pay on
delivery of product.




6
 Table of Contents




Development
of SinoHub’s Business; Component Sales; and Component Procurement-Fulfillment
Programs




SinoHub’s
original business was the provision of SCM services to assist suppliers of
electronic components with their supply chains into the PRC.  We refer
to these customers as our “supplier” customers. SinoHub developed an integrated
SCM service offering, including warehousing, delivery and import/exportto assist suppliers
delivery of electronic components to Chinese manufacturers.  As a
result of SinoHub’s position as a provider of SCM services in China and our
close relationships with a number of electronic component suppliers and Chinese
manufacturers as well as our experience in the electronic components industry,
we eventually decided we had an opportunity to supply certain Chinese
manufacturers with electronic components and began to source and sell components
for our own account.   As these sales grew as a percentage of
revenue, we increased the resources which we dedicated to sales of components.
As our component customers and the market became more aware of and confident in
our SCM service offering, the opportunity arose for us to generate integrated
sales of components and SCM services in a streamlined approach to inventory
management and order procurement-fulfillment.  Currently, the vast
majority of our revenues are the result of sales of electronic
components.  Our sales of components currently fall into two different
categories, namely individually negotiated spot component sales, which accounted
for approximately 55% of revenues in 2009 (compared to 51% in 2008) and
component sales as part of procurement-fulfillment programs which accounted for
approximately 38% (compared to 43% in 2008).




Currently,
our electronic component procurement and sales staff members look for
opportunities to source components for manufacturer customers at more
competitive prices than the manufacturer customer is currently
receiving.  If a lower price can be achieved and the customer agrees
with the price we quote, an opportunity to lower customer costs and increase our
revenues and profits exits.  Although we are not contractually
obligated to refrain from any sales activity, if a manufacturer customer of ours
is buying a specific component directly from one of SinoHub’s supplier
customers, we will not interrupt that purchase.




Market
Overview




The
Electronic Component Industry in China




The world
has witnessed the enormous growth of the Chinese electronic manufacturing
industry over the past decade. Accordingly, China is a major consumer of
electronic components.  This growth is expected to continue to increase with the rapid
development of new technologies and in turn to lead to the growth in the
consumption of electronics products in China and China’s continuing growth as
the world’s key electronics factory.




The rapid
growth of electronic component distributors in China and the growth of Web-based
Internet procurement have created a very fragmented electronic components
market, with no distributor capturing significant market share.  To
date even the biggest electronic component distributors in China (WPG, Arrow,
Avnet and Yosun) do not provide complete SCM services to their customers, unlike
in the US and Europe where large component manufacturers and franchise
distributors provide complete SCM services to their
customers.  SinoHub believes that the fragmented market for
electronics components in China and the lack of an end-to-end SCM service
offering create an opportunity for SinoHub to combine the sale of electronic
components with efficient SCM services to garner a share of the growing market
for such components and services in China.




White
Box Mobile Phones in Developing Countries




Unlike
the developed countries where most consumers identify mobile phones with a few
large vendors, in the developing countries a large proportion of the mobile
phones sold are so called white box phones meaning they are either unbranded or
carry a local brand name.  According to a report published by JP
Morgan Global Equity Research October 7, 2009 there were 335.2 million mobile
phones sold in developed countries in 2009, but 797.3 mobile phones sold in
developing countries and the projected growth rate in developing countries is
almost 13% for the next two years versus a little over 5% in developed
countries.  SinoHub continues its primary focus on the Chinese market,
which is expected to grow in coming years, and has targeted Southeast Asia for
its initial push into virtual contract manufacturing of mobile
phones.  With a potential of over 20 million phones per month in 2010
according to the same report, the Southeast Asian market is very large and
provides good opportunity for SinoHub’s VCM business in the future.




7
 Table of Contents




Company
Strengths




We
believe the strengths outlined below have contributed to our growth so
far:




-
            a
      supply chain management platform for the electronic components industry in
      China that connects manufacturer customers, supplier customers and SinoHub
      in a real time, transparent environment to allow our customers to manage
      their own components supply chain operations with
    efficiency;





-
            continuous
      innovation of our proprietary supply chain management system to expand
      functionality and improve customer
satisfaction;





-
            dedication
      and focus on providing supply chain management services for the electronic
      components sector in China;





-
            specialized
      knowledge about component sourcing and pricing which we obtain from our
      supply chain management operations and use in our procurement-fulfillment,
      component sales and VCM business;





-
            our
      ability to fill the niche market for custom mobile phones in developing
      markets with high quality, low cost handsets and the flexibility our
      business model provides to permit us to be competitive even on low volume
      orders;





-
            our
      ability to provide one-stop-shop for our customers who wish to purchase
      components from us for delivery to the factory without the need to handle
      sourcing, import/export, or any other aspect of logistics or
      fulfillment;





-
            SinoHub
      SCM SZ’s Client Coordinator Enterprise Coordinator status with the
      Huanggang Customs authority, which facilitates our ability to clear
      shipments through Customs and enables us to permit our customers to defer
      payment of Value Added Tax;





-
            a
      strong and seasoned management team with many years experience in the
      electronic components industry.







SinoHub’s
Strategy




SinoHub
is an electronics company in China that has succeeded because of the business
model we have built around our superior supply chain platform.  Our
goal is to make the SinoHub SCM Platform the most effective SCM Platform for
electronic component suppliers and electronics product manufacturers. To
accomplish this strategy, we plan to:




8
 Table of Contents




-
            increase
      brand awareness of SinoHub as a leading electronic component sales and SCM
      service provider for electronic component manufacturers and
      distributors;





-
            continue
      to expand our SCM Platform and improve process efficiency. We will
      continue to invest in improving our processing efficiencies by enhancing
      our technologies and expanding our service
team;





-
            optimize
      our SinoHub SCM software system, to create a dominant
      position;





-
            continue
      to expand the services we provide to our customers. We believe that the
      scope of our services differentiates us from many of our competitors. We
      will continue to look for ways to provide more value added services to
      become a best-in-class service
provider;





-
            expand
      our virtual contract manufacturing business in developing countries
      outside of China; and





-
            expand
      our SCM Platform to locations outside China, including the United States,
      through strategic acquisitions as opportunities and funding are available.
      We intend to leverage our reputation to pursue strategic acquisitions
      which we think will be accretive and fit with our business
      model.







SinoHub’s
Solution




While we
derive the vast majority of our revenues from the sale of electronic components
and, in the future, we believe a growing portion of our revenues will come from
virtual contract manufacturing, these business lines are made possible by
information derived from and the relationships made through our SCM platform.
SinoHub offers a full SCM Platform solution.  The SinoHub SCM Platform
brings a systems approach to our customers, which enables them to understand,
manage, and coordinate the flow of products and services, within their supply
chain.  SinoHub’s SCM Platform consists of a Web-based online supply
chain management system (SinoHub SCM), key service centers in Hong Kong,
Shenzhen, and Shanghai, and a supply chain management service team that is able
to work with our customers through our online system in real time.




SinoHub
SCM




SinoHub
SCM is a proprietary, Web-based software system that provides our customers
information along with security, accuracy and ease of use. Because we only deal
with electronic components, we can more easily implement features our customers
require. Since our SCM Platform is Web based, our customers can quickly
determine the status of shipments, the status and location of inventory in our
warehouses, and the status of financial transactions.  SinoHub SCM is
accessible in both Chinese and English.  The following flow chart
illustrates the SinoHub SCM functionality.




9
 Table of Contents









As
described by the graph, SinoHub SCM operates in Simplified Chinese and English,
providing the following functionality for electronic component
suppliers:




-
            Order
      entry with automated price and category
checking


-
            Order
      tracking


-
            Inventory
      management information system (warehouse
  management)


-
            Shipment
      information system


-
            Payment
      system


-
            Finished
      orders database


-
            Operations
      results tracking


-
            Executive
      reporting system




And for
OEMs and EMS companies it provides:




-
            Order
      tracking


-
            Shipment
      tracking


-
            Payment
      system


-
            Bonded
      inventory control system


-
            Operations
      results tracking


-
            Vendor
      Managed Inventory


-
            VAT
      tracking for recovery on export




10
 Table of Contents




SinoHub
Service Centers




SinoHub
utilizes its physical locations as service centers for electronic component
suppliers and OEM/EMS manufacturers. Geographical distances can significantly
affect the ability to provide effective SCM services. Establishing
multifunctional and technologically advanced service centers in major cities in
China may lower costs and improve service standards. SinoHub has established
service centers in Shenzhen and Shanghai which are connected through the SinoHub
SCM platform.




SCM
Service Team




SinoHub
has expended time and resources to hire employees with experience in the
electronic component field and to provide additional training to ensure the
highest quality of service to our customers.




SinoHub
SCM Services




SinoHub’s
supply chain management services include:




1.           Import
and export
services:




-
            Customs
      applications and declaration: bonded Customs declaration, application of
      import approval document, help with inspection & quarantine of the
      imports & exports


-
            Tax
      reports generation and recording


-
            Value
      added Tax advances and insurance (required by our customers for future
      rebate purposes)


-
            Certificates
      for paid custom tax


-
            A
      flexible combination of payment methods, including currency
      exchange




2.           Warehouse
services in Hong Kong, Shenzhen and Shanghai:




-
            Inventory
      management


-
            Kitting,
      Repacking


-
            Warehouse
      storage and insurance




3.           Delivery
services:




-
            Door-to-door
      just-in-time delivery service


-
            Guarantee
      one day for Shenzhen and two day delivery for other cities in China from
      Hong Kong




Our
customers may access the status of their components in real time through SinoHub
SCM and interact directly with our Customer Service representatives to resolve
any problems that may arise. The system has helped reduce errors, save cost and
time and enable customers to shorten their production cycle.




We
believe approximately 50% of the electronic components entering China are
imported at Huanggang Customs in Shenzhen. SinoHub has achieved Client
Coordinator Enterprise status with Huanggang Customs (the highest status
possible).




We
believe that through providing SCM services to our customers we gain critical
information about the market for electronic components used in the industries we
serve, including information about price and availability.  We believe
that providing these services also allows us to gain visibility and credibility
in the Chinese market for electronic components for our industry. We plan to
establish the SinoHub brand to be synonymous with SCM services for electronic
components in China, and to complement our procurement-fulfillment services with
our total SCM solution.




11
 Table of Contents




Unlike
express forwarders, SinoHub is able to charge for its SCM services as a
percentage of the value of the goods it handles.  SinoHub’s processing
volume for SCM services in 2009 exceeded US$500 million in inventory value
processed on behalf of our customers.  We estimate that approximately
85% of all of the electronic components that are used in manufacturing in China
must be imported as China’s production of electronic components is very limited
at this point. Our manufacturer customers, who are all located in China, must
import electronic components from outside the PRC to operate their businesses.
Our supplier customers are mainly companies incorporated outside of China who
have representative offices in China and supply electronic components to Chinese
manufacturers. Supplier customers use our warehousing, logistics and
import/export services.  Our supply chain management platform for the
electronic components industry in China connects manufacturer customers,
supplier customers and SinoHub in real time.




Import/Export Licenses;Client Coordinator
Enterprise




The
various companies listed above hold import/export licenses as
follows:




SinoHub
Electronics Shenzhen, Ltd. obtained its import/export license on April 30,
2004.  The current license is renewable within 30 days prior to
September 19, 2010.




SinoHub
SCM Shenzhen, Ltd. obtained its import/export license on January 18,
2002.  The current license is renewable within 30 days prior to
January 18, 2011.




SinoHub
SCM Shanghai, Ltd. obtained its import/export license on April 1,
2006.  The current license is renewable within 30 days prior to April
6, 2011.




The
licenses will expire if not renewed by the respective dates set forth
above.  The licenses can be terminated prior to expiration if, among
other reasons:





            the
      license owner declares bankruptcy,





            the
      license owner engages in smuggling,





            the
      license owner fails to pay Customs duties and Value Added Taxes when due,
      or





            the
      license owner fails to otherwise comply with the conditions of the
      license.




In
addition to its license, in September 2008, SinoHub SCM Shenzhen attained Client
Coordinator Enterprise Coordinator status with the Huanggang Customs authority
in China.  As a Client Coordinator Enterprise, SinoHub SCM Shenzhen is
able to achieve expedited Customs clearance of its goods that it is importing
into China and may defer the payment of Value Added Tax and Customs Duty for two
weeks.




Customers
and Suppliers




SinoHub
has approximately 30 manufacturer customers. Our manufacturer customers are
Chinese companies that are in the business of contract manufacturing or are
design houses (currently limited to mobile phone design)in
China.  These customers purchase components from us and ancillary to
these purchases we also provide them procurement-fulfillment, electronic
component sales and SCM services including warehousing, logistics and
import/export.  Sales of components to these customers constituted
approximately $120 million in 2009.




12
 Table of Contents




SinoHub
has approximately 95 supplier customers.   Our supplier customers
are mainly companies incorporated outside of China which have representative
offices in China and supply electronic components to Chinese
manufacturers.  The services we provide to our supplier customers are
SCM services comprised of warehousing, delivery and
import/export.   Pricing for our supplier customers is
negotiated, but on average it is about 1% of the value of the goods we handle
for them.  Sales of services to these customers (which do not involve
sales of components) were $8.6 million in 2009.




SinoHub
also has 5 new mobile phone distributor customers in developing markets
(Indonesia, India, Malaysia and Vietnam).  Revenues from these
customers were immaterial in 2009.




For the year ended
December 31, 2009, our top three customers represented 11%, 7%, and 6% of
SinoHub’s total revenues, respectively; our top three suppliers represented 6%,
5%, and 3% respectively of the electronic components we
purchased.




SinoHub
does not expect significant customer concentration in our electronic component
purchasing business to continue in the future since our customers are generally
small to medium size equipment manufacturers in China.  As our
business has grown our customer base has expanded and the percentage of business
we do with any one customer has declined.




Supplies
of the electronic components that we currently purchase are readily available
from numerous suppliers and resellers most of whom are based overseas but have
representative offices in China. Purchases are generally made based on purchase
orders and we do not have any long term supply
agreements.  Conversely, we do not have long term contracts with our
customers to buy the components from us.




Competition




We
compete with a number of companies in China that sell or distribute electronic
component parts and which may also offer import/export, logistics and other SCM
services. We also compete with “in house” purchasing departments of large
electronic component vendors, EMS providers and OEMs.  We believe that
many of the distributors against which we compete provide some but not all of
the SCM services that we provide. We do not believe that any other company
distributing electronic components in China currently provides a complete SCM
solution, although some electronic component vendors and distributors provide
logistic services to their customers and we expect that our competitors will
eventually seek to offer, directly or indirectly, a greater number of SCM
services.  We also face competition from local import/export
companies, such as Shenzhen Eternal Asia Supply Chain Company, Ltd., Shenzhen
Strongjet Technology Company, Ltd. and Shenzhen Huafuyang Import and Export
Company, Ltd. (HopeSea), which also offer logistics services, although none of
these companies focuses exclusively on the electronic components
market.  Professional freight forwarders such as Federal Express and
DHL provide express delivery to customers, however, they do not provide
electronic component inventory management, currency exchange, VAT invoicing, and
Customs and excise tax services, and they are not focused on the electronics
field.   We believe that SinoHub’s primary advantage over in-house
purchasing departments is that the up-to-date sourcing and pricing knowledge
which we gain from the large volume of components we handle as part of our SCM
service business for suppliers and the knowledge we gain from the purchase
transactions for our own component resales allows us to obtain better pricing
and availability than these in-house departments in product categories such as
mobile phones where the technology, pricing and availability of parts changes
rapidly.  Our advantage over many electronic component distributors is that
we have very detailed knowledge of what manufacturers are buying and that we
have a broader knowledge of electronic component pricing from our database of
parts that we import.  Many of our competitors have much greater
financial resources than we do and we expect competition to grow over time and
to present greater challenges for us, especially if any of our competitors were
to effectively adopt the elements of our business model.




13
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Bank
Facilities




The
Company has secured financing facilities (RMB based) with certain PRC banks to
support our business operations. The facilities generally run for one year terms
and are replaced by new facilities upon expiration.  We expect that we
will be able to obtain replacement facilities for the facilities listed below
upon their expiration.  The bank facilities include:




-
            Letter
      of credit facility with China Construction Bank in the amount of
      $4,700,000 to support its component sales business.  Restricted
      cash balances are required as security for draws against the
      facility.  The Company also has a $1,500,000 Customs duty import
      facility and a $3,200,000 Customs export refund facility through this bank
      to support short term duty collections for its component sales
      business.  These facilities renew each year and are available
      through December 2010.  The Customs export refund facility
      allows the Company to advance to its customers refunds of Value Added Tax
      to which such customers may be entitled by shipping products on which the
      tax was paid overseas prior to the receipt of the refunded
      amount.




-
            Letter
      of credit facility with Industrial Bank in the amount of $4,400,000 to
      support our component 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 Lei Xia , our President, and his
      spouse Hantao Cui and a lien on a PRC property co-owned by Henry T.
      Cochran, our CEO with his spouse, Linda Marie Hetue.  Also, the
      bank requires a third party guarantor.  The third-party
      guarantor is Shenzhen Yin Zhao Co., Ltd.  The only relationship
      between the Company and Shenzhen Yin Zhao Co., Ltd. is the guaranty.The facility is
      available through September, 2010.





-
            Letter
      of credit facility with Hangzhou Bank in the amount of $6,400,000 to
      support our component 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 B2B Chips, Ltd., and Lei Xia, our
      President, and his spouse Hantao Cui, and Li De Hai, our
      CFO.  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 April,
  2010.




14
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Our
Corporate Structure




The
following is information about the corporate structure of SinoHub, Inc. and its
subsidiaries:





SinoHub
International, Inc. was incorporated on March 23, 1999 as a Delaware
corporation. Prior to the Merger, this company was named SinoHub, Inc. and was
the primary 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 on September 19, 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. SinoHub SCM Shenzhen, Ltd. is wholly owned by SinoHub Electronics
Shenzhen, Ltd.




SinoHub
SCM Shanghai, Ltd. was incorporated on March 9, 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. which acquired record ownership of the company on January 17,
2008.




SinoHub
Electronics Shanghai, Ltd. was incorporated on July 5, 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.  SinoHub Electronics Shanghai has the same purpose
as SinoHub Electronics Shenzhen, with each company focused on operating in
Shanghai and Shenzhen, respectively.  The reason for the use of two
subsidiaries is driven by PRC law, which generally requires that a company be
organized in the area in which it is operating.




B2B
Chips, Limited was incorporated on June 12, 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 on May 8, 2007 in Hong Kong and
has not yet commenced business. SinoHub Technology (Hong Kong) is wholly owned
subsidiary of B2B Chips and was acquired on April 10, 2008.  B2B Chips
acquired SinoHub Technology (Hong Kong) from its owners, Henry T. Cochran and
Lei Xia, for HKD 10,000.




15
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History




Our
predecessor, Liberty Alliance, Inc. was a corporation organized in Utah in
1986.  In 1991, Liberty Alliance, Inc. completed its domestication as
a Delaware corporation.  Liberty Alliance, Inc. filed for bankruptcy
in 1994 and the bankruptcy proceedings were completed in 1995. From 1995 to
2006, Liberty Alliance, Inc. had no or nominal assets and was not conducting any
business operations.  In August 2006, Liberty Alliance, Inc. changed
its name to Vestige, Inc., and in September 2006 it changed its name back to
Liberty Alliance, Inc.  On August 1, 2007, Liberty Alliance, Inc.
became a voluntary reporting company under the Exchange Act when it filed a Form
10 registration statement with respect to its shares of common
stock.  Shares of Liberty Alliance, Inc. common stock began to be
reported on the over-the-counter bulletin board under the symbol “LBTI” on
November 14, 2007.




In May
2008, Liberty Alliance, Inc., its wholly-owned subsidiary SinoHub Acquisition
Corp., SinoHub, Inc., and Steven L. White, the principal stockholder of Liberty
Alliance, Inc., entered into an Agreement and Plan of Merger pursuant to which
SinoHub Acquisition Corp. merged with and into SinoHub, Inc. and SinoHub, Inc.
became a wholly-owned subsidiary of Liberty Alliance, Inc.  Pursuant
to the Agreement and Plan of Merger, the holders of 5,203,907 shares of Liberty
Alliance, Inc. common stock tendered their shares to the Company for
cancellation, Liberty Alliance, Inc. issued to the former stockholders of
SinoHub, Inc. 18,290,000 shares of Liberty Alliance, Inc. common stock in
exchange for all the outstanding shares of SinoHub, Inc.’s preferred and common
stock, and Liberty Alliance, Inc. assumed options to purchase shares of SinoHub,
Inc. common stock which became exercisable for 489,451 shares of Liberty
Alliance common stock.  In addition, Liberty Alliance, Inc. also
issued 510,000 shares of its common stock to certain consultants for services
rendered in connection with the merger, including 500,000 shares issued to JC
Global Capital Partners LLC.  These consulting services included
investment banking advice and strategic advisory services relating to the
structure and consummation of the reverse merger between SinoHub and Liberty
Alliance, Inc. that was eventually consummated.  Immediately following
the merger, Liberty Alliance, Inc. had 20,000,000 shares of common stock
outstanding and options exercisable for an additional 489,451 shares of common
stock. The merger was accounted for as a reverse acquisition with SinoHub, Inc.
as the acquirer for accounting purposes.  After completion of the
merger, the original stockholders of Liberty Alliance, Inc. held approximately
6% of the issued and outstanding shares of Liberty Alliance, Inc. common stock
on a fully diluted basis and the former stockholders of SinoHub, Inc., including
the shares issued to consultants for services rendered in connection with the
merger, held approximately 94% of Liberty Alliance, Inc. issued and outstanding
shares of common stock.




Subsequent
to the completion of the merger, on July 18, 2008:




-
            SinoHub,
      Inc. amended its certificate of incorporation to change its name to
      SinoHub International, Inc.;





-
            Liberty
      Alliance, Inc. amended its certificate of incorporation to change its name
      to SinoHub, Inc. and effect a 3.5-to-1 reverse stock split of all issued
      and outstanding shares of its common stock;
and





-
            shares
      of SinoHub, Inc. (formerly Liberty Alliance, Inc.) common stock began to
      be reported on the over-the-counter bulletin board under the new symbol
      “SIHI” on a post-merger, post-split
basis.




16
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For
financial reporting purposes, the reverse takeover of the Company has been
accounted for as a recapitalization of the Company with SinoHub International as
the accounting acquirer whereby the historical financial statements and
operations of SinoHub International, Inc. became the historical financial
statements of the Company, with no adjustment of the carrying value of the
assets and liabilities. When we refer in this Form 10-K to business and
financial information for periods prior to the consummation of the reverse
acquisition, we are referring to the business and financial information of
SinoHub International, Inc. on a consolidated basis unless the context suggests
otherwise.




Employees




At
December 31, 2009, there were 191 full-time employees of SinoHub and
its subsidiaries, compared to 110 full-time employees of SinoHub and its
subsidiaries at December 31, 2008.




Available
Information




The
Company’s mailing address and principal executive offices are located at 6/F,
Building 51, Road 5, Qiongyu Blvd., Technology Park, Nanshan District, Shenzhen
518057, People’s Republic of China. The Company’s telephone number, including
the International Code and Area Code is +86-755-2661-2106 and its corporate
website is www.sinohub.com. The information contained on our website is not part
of this Report.  The reports that the Company files with the
Securities and Exchange Commission pursuant to the Exchange Act are available on
the Securities and Exchange Commission website at http://www.sec.gov. The public
may read and copy any materials filed by the Company with the Securities and
Exchange Commission at the Public Reference Room at 100 F Street, N.E.,
Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Securities and
Exchange Commission at http://www.sec.gov. The contents of these websites are
not incorporated into this filing.







Item 1A.  Risk Factors.





Risks
Related To Our Business




The
industry in which we have chosen to concentrate our sales efforts is fast moving
and our customers may not be successful in growing in pace with the
industry.




We have
chosen to concentrate our sales efforts in the fast moving mobile phone
business, where the life cycles of new products can be relatively short, and our
available capital limits the number of new customers we can handle at any given
time. We face the risk of our customers’ growth not keeping pace with this
dynamic market, whether as a result of manufacturing products for which there is
lesser demand, lack of capitalization or otherwise.  In addition,
given our limited resources to evaluate new customers, if we ultimately select
new customers who are less successful, it will provide a smaller return on our
efforts than if we select more successful customers.  Despite our
requirement of non-cancelable purchase orders from our customers and our efforts
to investigate the credit histories of our customers, there is no guarantee that
all our customers will be able to pay for all of the goods they
order.




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 Table of Contents




Our
management and two significant shareholders collectively own a majority of our
common stock.




Collectively,
our officers, directors and certain significant shareholders own or exercise
voting and investment control over approximately 56% of our outstanding common
stock. As a result, investors may be prevented from affecting matters involving
the company, including:




-
            the
      composition of our board of directors and, through it, any determination
      with respect to our business direction and policies, including the
      appointment and removal of
officers;





-
            any
      determinations with respect to mergers or other business
      combinations;





-
            our
      acquisition or disposition of assets;
and





-
            our
      corporate financing activities.





Furthermore,
this concentration of voting power could have the effect of delaying, deterring
or preventing a change of control or other business combination that might
otherwise be beneficial to our stockholders. This significant concentration of
share ownership may also adversely affect the trading price for our common stock
because investors may perceive disadvantages in owning stock in a company that
is controlled by a small number of stockholders.




Changes
in governmental regulations affecting the export of electronics from China may
hurt our business.




While we
believe that our manufacturer customers sell approximately 90% of their products
in the Chinese market, to the extent the Company or its manufacturer customers
sell overseas, factors which adversely affect export of electronic products from
China may materially and adversely affect our business, financial condition,
results of operations and business prospects, including regulatory restrictions,
trade disputes, industry-specific quotas, copyright levies, tariffs, non-tariff
barriers and taxes that may result in limiting exports from China.




Our
business is sensitive to general economic conditions.




As the
vast majority of our sales are to manufacturers and design firms in China which
in turn causes the end products to be distributed to consumers in China, our
business could be adversely affected if there were to be a slowdown in the
consumer demand in China for products incorporating the components we sell or we
process for our supplier customers.  Our business may also be
negatively affected by rising labor and material costs in China and, to the
limited extent the Company or its manufacturer customers sell overseas, by a
downturn in general economic conditions in importing countries and
regions.




Negative
perception or publicity of Chinese products may hurt our business.




Any
negative perception or publicity of Chinese electronic products may cause a
decline in demand for Chinese electronic products and in turn negatively affect
our sales and revenue outside China.




SinoHub
envisions a period of rapid growth that may impose a significant burden on its
administrative and operational resources which if not effectively managed, could
impair its growth.




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SinoHub’s
strategy envisions a period of rapid growth that may impose a significant burden
on its administrative and operational resources. The growth of SinoHub’s
business will require significant investments of capital and management’s close
attention. SinoHub’s ability to effectively manage its growth will require it to
substantially expand the capabilities of its administrative and operational
resources and to attract, train, manage and retain qualified management,
technicians and other personnel.  If SinoHub is unable to successfully
manage its growth, SinoHub may be unable to achieve its goals.




In
order to grow at the pace expected by management, we will require additional
capital to support our long-term business plan. If we are unable to obtain
additional capital in future years, we may be unable to proceed with our
long-term business plan and we may be forced to curtail or cease our operations
or further business expansion.




We will
require additional working capital to support our long-term business
plan.  A large proportion of the Company’s business (currently
approximately 38%) is procurement-fulfillment which requires the Company to have
available capital to purchase components for inventory prior to reselling those
components to customers.  In addition, our VCM business will also
require working capital to purchase components required for products to fill
orders. A lack of sufficient capital beyond cash on hand and funds available
under the Company’s credit facilities can be expected to significantly impair
the Company’s ability to take on new customers and the size of the orders the
Company can take from existing customers.  Our working capital
requirements and the cash flow provided by future operating activities, if any,
will vary greatly from quarter to quarter, depending on the volume of business
during the period and payment terms with our customers and suppliers. We may not
be able to obtain adequate levels of additional financing, whether through
equity financing, debt financing or other sources, especially in light of the
global financial crisis and the market downturn. To raise funds, we may need to
issue new equities or debt which could result in additional dilution to our
shareholders and investors. Additional financings could result in significant
dilution to our earnings per share or the issuance of securities with rights
superior to our current outstanding securities or contain covenants that would
restrict our operations and strategy. In addition, we may grant registration
rights to investors purchasing our equity or debt securities in the future. If
SinoHub borrows money or issues debt securities, it will be subject to the risks
associated with indebtedness, including the risk that interest rates may
fluctuate and the possibility that it may not be able to repay principal and
interest on the indebtedness when due.  If we are unable to raise
additional financing, we may be unable to implement our long-term business plan,
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures on a timely basis. In
addition, a lack of additional financing could force us to substantially curtail
or cease operations.




The competitive
pressures the Company faces could have a material adverse affect on the
Company’s business.




The
market for the Company’s products and services is very competitive and subject
to rapid technological change. Not only does the Company compete with in-house
service teams and other third-party logistics providers, it also competes for
customers with distributors and with many of its own suppliers.  The
Company’s failure to maintain and enhance its competitive position could
adversely affect its business and prospects. Furthermore, the Company’s efforts
to compete in the marketplace could cause deterioration of gross profit margins
and, thus, overall profitability. The sizes of the Company’s competitors vary
across market sectors, as do the resources the Company has allocated to the
sectors in which it does business. Therefore, some of the competitors may have a
more extensive customer base than the Company has in all or some of its market
sectors or greater resources and funding to capture clients in such
sectors.




19
 Table of Contents




Unexpected
order cancellations by our customers could materially adversely affect our
business, results of operations, financial condition or liquidity.




Our sales
are typically made pursuant to individual purchase orders, and we generally do
not have long-term contracts with our customers.  While we try to
limit the risk of non-payment by providing that customer orders for
procurement-fulfillment projects and purchase orders for component purchases are
non-cancelable, and by making almost all of our spot component sales on a COD
basis, we do provide our customers with payment terms on component sales that
occur in connection with procurement-fulfillment projects.  While we
generally collect a deposit of 15-20% on each procurement-fulfillment project,
deal only in standard components, and limit the size of each order, we cannot be
certain that every invoice for a completed order will be paid on time and that
collection issues will not materially adversely affect our business, results of
operations, financial condition or liquidity.




SinoHub
generally does not have long-term contracts with its significant
customers.




We
generally do not have long-term contracts with our customers.  In
2009, SinoHub had three customers, all in the mobile phone business, who
accounted for 11%, 7%, and 6% of our revenue, respectively.  While we
expect this concentration to go down as our business expands, if the
concentration remains and we are not able to secure further business from these
customers or are unable to replace the business provided by these customers, it
may have a material adverse affect on our business, results of operations,
financial condition or liquidity.




We face risks
associated with debt financing (including exposure to variation in interest
rates).




Our total
outstanding indebtedness for bank borrowings as of December 31, 2009 was $11.8
million. The interest rates on these bank loans are fixed on an annual basis.
Our obligations under our existing loans have been mainly met through the cash
flow from our operations and our financing activities. We are subject to risks
normally associated with debt financing, including the risk of significant
increase in interest rates as borrowings increase or are rolled over for
additional periods, typically on an annual basis and the risk that our cash flow
will be insufficient to meet required payment of principal and interest. In the
past, cash flow from operations had been sufficient to meet payment obligations
and/or we have been able to roll over our borrowings. There is however no
assurance that we will be able to do so in the future. We may also underestimate
our capital requirements and other expenditures or overestimate our future cash
flows. In such event, additional capital, debt or other forms of financing may
be required for our working capital. If any of the aforesaid events occur and we
are unable for any reason to raise additional capital, debt or other financing
to meet our working capital requirements, our business, operating results,
liquidity and financial position will be adversely affected.




The components and products which we
sell in our electronic components sales business are designed or manufactured by
third parties and if third-party manufacturers lack sufficient quality control
or if there are significant changes in the financial or business condition of
such third-party manufacturers, it may have a material adverse effect on our
business.
  20
 Table of Contents
  We rely
on third-party suppliers for the components which we sell in our electronic
components sales business. If third parties lack sufficient quality control or
if there are significant changes in the financial or business condition of such
third parties, it could have a material adverse effect on our
business.  While we do not believe we have any warranty liability for
the components we sell in our electronic components sales business, if the
manufacturers do not stand by their warranties or other problems with such
supply develops, it could affect our business.  With respect to
products we sell in our VCM business, we may face product liability or return
issues if such products do not function as required.
  We also
have third-party arrangements for the design or manufacture of certain products,
parts and components. If we are not able to engage such parties with the
capabilities or capacities required by our business, or if these third parties
fail to deliver quality products, parts and components on time and at reasonable
prices, we could have difficulties fulfilling our orders and our sales and
profits could decline.
  If the quality of our products does
not meet our customers’ expectations, then our sales and operating earnings, and
ultimately our reputation, could be adversely affected.
  Some of
the products we sell may have quality issues resulting from the design or
manufacture of the product, or from the components or software used in the
product.  Sometimes, these issues may be caused by components we
purchase from other manufacturers or suppliers.  These issues may be
identified prior to the shipment of the products or after they have been shipped
to our customers.  Such pre-shipment and post-shipment quality issues
can have legal and financial ramifications, including: delays in the recognition
of revenue, loss of revenue or future orders, customer-imposed penalties on us
for failure to meet contractual requirements, increased costs associated with
repairing or replacing products, and a negative impact on our goodwill and brand
name reputation.
  In some
cases, if the quality issue affects the product’s safety or regulatory
compliance, then such a “defective” product may need to be
recalled.  Depending on the nature of the defect and the number of
products in the field in the case of our VCM business, we might have an
obligation to recall a product, which could cause us to incur substantial recall
costs, in addition to the costs associated with the potential loss of future
orders, and the damage to our goodwill.  In addition, we may be
required  to pay damages for failed performance that might exceed the
revenue that we receive from the contracts.  Recalls involving
regulatory agencies could also result in fines and additional
costs.  Finally, recalls could result in third-party litigation,
including class action litigation by persons alleging common harm resulting from
the purchase of the products.
  SinoHub faces many risks relating to
intellectual property rights.
  Our
business will be harmed if: (i) we, our customers and/or our suppliers are
found to have infringed intellectual property rights of third parties,
(ii) if the intellectual property indemnities in our supplier agreements
are inadequate to cover damages and losses due to infringement of third-party
intellectual property rights by supplier products, (iii) if we are required
to provide broad intellectual property indemnities to our customers, or
(iv) if our intellectual property protection is inadequate to protect our
proprietary rights.
  21
 Table of Contents
  Because
our products are comprised of complex technology, substantially all of which we
acquire from suppliers through the purchase of components, we may become
involved in or impacted by litigation regarding patent and other intellectual
property rights.  Third parties may assert intellectual property
infringement claims against us and against our customers and
suppliers.  Defending claims may be expensive and divert the time and
efforts of our management and employees.  If we do not succeed in any
such litigation, we could be required to expend significant resources to pay
damages, develop, license or purchase non-infringing intellectual property or to
obtain licenses to the intellectual property that is the subject of such
litigation.  However, we cannot be certain that any such licenses, if
available at all, will be available to us on commercially reasonable
terms.  In some cases, we might be forced to stop delivering certain
products if we or our customer or supplier are subject to a final
injunction.


SinoHub
will be required to hire and retain skilled technical and managerial
personnel.




SinoHub’s
continued success depends in large part on its ability to attract, train,
motivate and retain qualified management and highly-skilled employees,
particularly managerial, technical, sales, and marketing personnel, technicians,
and other critical personnel. Any failure to attract and retain the required
highly-trained managerial and technical personnel who are integral to production
and development and technical support teams may have a negative impact on the
operation of SinoHub’s plants, which would have a negative impact on revenues.
There can be no assurance that SinoHub will be able to attract and retain
skilled persons and the loss of skilled technical personnel would adversely
affect its business.




SinoHub
is dependent upon its key officers for management and direction and the loss of
any of these persons could adversely affect its operations and
results.




SinoHub
is dependent upon its officers for implementation of its proposed expansion
strategy and execution of its business plan. These key officers include Henry T.
Cochran, our CEO, Lei Xia, our President, and De Hai Li, our chief financial
officer.  The loss of any of these officers could have a material
adverse effect upon its results of operations and financial position and could
delay or prevent the achievement of its business objectives.  SinoHub
does not maintain “key person” life insurance for any of its
officers.




Future
acquisitions may have an adverse effect on our ability to manage our
business.




Selective
acquisitions form part of our strategy to further expand our business. If we are
presented with appropriate opportunities, we may acquire additional companies,
products or technologies. Future acquisitions and the subsequent integration of
new companies into ours would require significant attention from our management.
Our company has little experience with integrating newly acquired businesses.
Potential problems encountered by each organization during mergers and
acquisitions would be unique, posing additional risks to the company. The
diversion of our management's attention and any difficulties encountered in any
integration process could have an adverse effect on our ability to manage our
business. Future acquisitions would expose us to potential risks, including
risks associated with the assimilation of new operations, technologies and
personnel, unforeseen or hidden liabilities, the diversion of resources from our
existing businesses, the inability to generate sufficient revenue to offset the
costs and expenses of acquisitions, and potential loss of, or harm to,
relationships with employees, customers and suppliers as a result of integration
of new businesses.




22
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We
may incur significant costs to ensure compliance with United States corporate
governance and accounting requirements.




We may
incur significant costs associated with our public company reporting
requirements, costs associated with applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission, or the
Commission. We expect all of these applicable rules and regulations to cause us
to continue to incur substantial legal and financial compliance costs and to
make some activities more time consuming and costly. We also expect that these
applicable rules and regulations may make it more difficult and more expensive
for us to maintain affordable director and officer liability insurance and we
may be required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. As a result,
it may be more difficult for us to attract and retain qualified individuals to
serve on our board of directors or as executive officers. We are currently
evaluating and monitoring developments with respect to these newly applicable
rules, and we cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.




Compliance
with Section 404 of the Sarbanes-Oxley Act on a timely basis may strain
SinoHub’s limited financial and management resources, negatively affect its
operating results, and cause SinoHub to fail to meet its reporting
obligations.




The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally
requiring each public company to include a report of management on the company’s
internal controls over financial reporting in its annual report on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal controls over financial reporting. A report of our management is
included under Item 9A(T) of our Annual Report on Form 10-K for the year ended
December 31, 2009.  In addition, commencing with our annual
report for the fiscal year ending December 31, 2010, our independent registered
accounting firm must attest to and report on the effectiveness of our internal
controls over financial reporting.  We can provide no assurance that
we will comply with all of the requirements imposed thereby. There can be no
assurance that we will receive a positive attestation from our independent
registered public accountants. In the event we identify significant deficiencies
or material weaknesses in our internal controls that we cannot remediate in a
timely manner or we are unable to receive a positive attestation from our
independent registered public accountants with respect to our internal controls,
such matters would be required to be disclosed in future filings with the SEC
and investors and others may lose confidence in the reliability of our financial
statements, which could have a negative effect on stock price.




SinoHub
may need to hire and/or engage additional personnel and incur incremental costs
in order to perform the work required by Section 404 of the Sarbanes-Oxley
Act.   The financial and management resources required to
implement and comply with Section 404 of the Sarbanes-Oxley Act, and any failure
to implement required new or improved controls or difficulties encountered in
their management and implementation, could negatively affect SinoHub’s operating
results or cause it to fail to meet its reporting obligations.




23
 Table of Contents




Risks
Related to Conducting Business in the People’s Republic of China




SinoHub’s
Chinese operations subject it to certain risks inherent in conducting business
operations in China, including political instability and foreign government
regulation, which could significantly impact its ability to operate in such
countries and impact its results of operations.




To date,
SinoHub has conducted substantially all of its business in
China.  SinoHub’s Chinese operations are, and will be, subject to
risks generally associated with conducting businesses in foreign countries, such
as:




-
            any
      general economic downturn in China which affects consumer demand for the
      components we process and sell;





-
            changes
      in applicable laws and regulations– for example, Customs regulations in
      China are quite complicated and are subject to
  change;





-
            challenges
      to, or failure of, title – should the Company purchase facilities, it is
      more difficult in China to perfect clear title than it is in the United
      States and this represents a potential
risk;





-
            changes
      in foreign economic and political conditions – to the limited extent that
      the Company’s manufacturer customers sell overseas, economic downturns and
      political instability outside of China is bad for our business. Also,
      since China is an export driven economy, economic downturns overseas are
      bad for China generally and this will have some effects on our
      manufacturer customers which make products for the local Chinese
      market;





-
            export
      and import restrictions – as noted above, Customs regulations change
      frequently and such changes could have negative effects on our
      business;





-
            tariffs,
      Customs, duties and other trade barriers– VAT and Customs Duty make
      electronic components more expensive in China (85% are imported), which
      makes products such as mobile phones, components of which are core to the
      Company’s business, more expensive in
China;





-
            difficulties
      in staffing and managing foreign operations– the number of qualified
      managers in China is much less than the need, therefore it is hard for the
      Company to hire highly qualified managers;
and





-
            difficulties
      in enforcing agreements - China’s legal system is not as fully developed
      as the legal system in the United States, which means there is more risk
      that the Company could have difficulty enforcing
    agreements.





To the
extent that the Chinese government may in the future require local ownership of
companies to perform certain activities, the Company’s ownership structure may
not permit it to accomplish all of its business objectives in China. Foreign
governments also may impose additional taxes and/or royalties on our business,
which would adversely affect SinoHub’s profitability. Internal unrest, acts of
violence or strained relations between a foreign government and SinoHub or other
governments may adversely affect its operations. These developments may, at
times, significantly affect SinoHub’s results of operations, and must be
carefully considered by its management when evaluating the level of current and
future activity in such countries.




24
 Table of Contents




The PRC
government exerts substantial influence over the manner in which we must conduct
our business activities.




The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.




Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.




SinoHub
SCM Shenzhen, Ltd. has certain favored customs statuses with Chinese
authorities which provide it with competitive advantages.  Should it
lose such statuses or should the benefits of the statuses change it could
materially adversely impact our operations.




Over 70%
of the electronic components that we sell are imported into China by
SinoHub SCM Shenzhen, Ltd. (“SinoHub SCM SZ”), a PRC corporation organized by
our wholly-owned subsidiary SinoHub Electronics Shenzhen, Ltd., also a PRC
corporation (“SinoHub Electronics SZ”).  In September 2008, SinoHub
SCM SZ attained Client Coordinator Enterprise Coordinator status with the
Customs authorities at the Huanggang border crossing with Hong
Kong.  As a Client Coordinator Enterprise, SinoHub SCM SZ is able to
achieve expedited Customs clearance of its goods that it is importing into China
and may defer the payment of Value Added Tax and Customs Duty for two
weeks.  In April 2009, SinoHub SCM SZ was approved as an AA Customs
High Credit Enterprise by the General Administration of Customs of the
People's Republic of China. AA Customs High Credit Enterprise status is the highest status
level that may be attained by importers.  Recognized in all of China’s
customs ports, AA Customs High Credit Enterprises are given priority, expedited
customs clearance, including exemption from customs examinations
and processing by dedicated customs personnel.




The
success of our current import operations in China is based in part upon SinoHub
SCM SZ’s statuses as a Client Coordinator Enterprise and as an AA Customs High
Credit Enterprise.  If SinoHub SCM SZ were to lose either status for
any reason, such loss of status could result in disruption of our business,
diversion of management attention and the incurrence of substantial costs, and
could have a material adverse effect on our results of operations and financial
condition.  Among the reasons such statuses could be lost are failure
to fully comply with applicable customs regulations.  A future change
in Chinese law, such as the elimination of Value Added Tax, that impacted the
benefits of our Client Coordinator Enterprise or AA Customs High Credit
Enterprise status by removing our competitive advantage of the deferral in
the payment of the tax we receive from such Client Coordinator Enterprise status
or the expedited processing permitted by our AA Customs High Credit
Enterprise status, could have a similar material adverse effect on our
results of operations and financial condition.




25
 Table of Contents




We
believe that our operations in China through and by SinoHub Electronics SZ and
SinoHub SCM SZ are valid under current PRC laws and
regulations.  However, many PRC import/export laws and regulations are
relatively new and as the PRC legal system continues to rapidly evolve, the
interpretations of many PRC laws, regulations and rules are not always uniform
and enforcement of these laws, regulations and rules involves uncertainties. We
cannot predict the effect of future developments in the PRC legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, the preemption of local regulations by
national laws, or the overruling of local government’s decisions by the
superior, national government.  If we are required to restructure our
operations to comply with new PRC laws or regulations, there can be no assurance
that SinoHub SCM SZ would be able to preserve its status as a Client Coordinator
Enterprise.




China’s
economic policies could affect our business.




Substantially
all of our assets are located in China and substantially all of our revenue is
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.




While
China’s economy has experienced a significant growth in the past twenty years,
growth has been irregular, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of China, but may also have a negative effect on us.
For example, our operating results and financial condition may be adversely
affected by the government control over capital investments or changes in tax
regulations.




The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets and the establishment of
corporate governance in business enterprises; however, a substantial portion of
productive assets in China are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.




Fluctuations
in currency exchange rates could adversely affect our business and the value of
our securities.




The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and Chinese Renminbi (RMB) and between those currencies and
other currencies in which our sales may be denominated, because substantially
all of our earnings and cash assets are denominated in RMB.  In
addition, appreciation or depreciation in the value of the RMB relative to the
U.S. dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations. Although we have no current intention to pay any dividends in the
foreseeable future, fluctuations in the exchange rate would also affect the
relative value of any dividend we issue that will be exchanged into U.S. dollars
as well as earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.




26
 Table of Contents




Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.




Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.




Currently,
all of the components we sell to our Chinese customers are
imported.  In the event that the U.S. dollar appreciates against RMB,
our costs will increase.  If we cannot pass the resulting cost
increases on to our customers, our profitability and operating results will be
adversely affected.  In addition, if our sales to international
customers grow, we will be increasingly subject to the risk of foreign currency
depreciation.




We
may be restricted from exchanging RMB to other currencies in a timely
manner.




At the
present time the RMB is not an exchangeable currency. The Company receives
nearly all of its revenue in RMB, which may need to be exchanged to other
currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective
from July 1, 1996, foreign currency “current account” transactions by foreign
investment enterprises, including Sino-foreign joint ventures, are no longer
subject to the approval of State Administration of Foreign Exchange, or SAFE,
but need only a ministerial review, according to the foreign exchange
regulations. Current account items include international commercial
transactions, which occur on a regular basis, such as those relating to trade
and provision of services. Distributions to joint venture parties also are
considered a current account transaction. Other non-current account items, known
as capital account items, remain subject to SAFE approval. Under current
regulations, the Company can obtain foreign currency in exchange for RMB from
swap centers authorized by the government. The Company does not anticipate
problems in obtaining foreign currency to satisfy its requirements; however,
there is no assurance that foreign currency shortages or changes in currency
exchange laws and regulations by the PRC government will not restrict the
Company from exchanging RMB in a timely manner. If such shortages or changes in
laws and regulations occur, the Company may accept RMB, which can be held or
reinvested in other projects.




Restrictions
under PRC law on our PRC subsidiaries' ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.




Currently,
SinoHub’s operating subsidiaries in China generate substantially all of the
company’s consolidated revenues.  However, PRC regulations restrict
the ability of our PRC subsidiaries to make dividends and other payments to
their US-based parent.  To repatriate the cash generated to the
US-based parent, these subsidiaries would need to declare a dividend or make
some other type of payment to the US-based parent.  Current PRC
regulations permit our subsidiaries to pay dividends to us only out of their
accumulated after-tax profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, our subsidiaries in China are
required to set aside at least 10% of our annual after-tax profits determined in
accordance with PRC GAAP in a statutory general reserve fund until the amount in
such fund reaches 50% of our registered capital. Allocations to these statutory
reserve funds can only be used for specific purposes and are not transferable to
us in the form of loans, advances or cash dividends. Further, if our
subsidiaries and affiliated Chinese entities in China incur debt on their own
behalf, the instruments governing the debt may restrict their ability to pay
dividends or make other payments to us, which may restrict our ability to
satisfy our liquidity requirements. Any limitations on the ability of our PRC
subsidiaries to transfer funds to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to
our business, pay dividends and otherwise fund and conduct our
business.




27
 Table of Contents




We
may have difficulty establishing adequate management, legal and financial
controls in the People's Republic of China.




The
People's Republic of China historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of employees who are qualified to assist us in
application of such consents and practices to work in the People's Republic of
China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.




Because
our assets and operations are located in China, you may have difficulty
enforcing any civil liabilities against us under the securities and other laws
of the United States or any state.




SinoHub,
Inc. is a holding company, and all of its assets are located in the People’s
Republic of China. In addition, some of our directors and officers are
non-residents of the United States and all or a substantial portion of the
assets of these non-residents are located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon these non-residents, or to enforce against them judgments
obtained in United States courts, including judgments based upon the civil
liability provisions of the securities laws of the United States or any
state.




There is
uncertainty as to whether courts of the People’s Republic of China would
enforce:




-
            Judgments
      of United States courts obtained against us or these non-residents based
      on the civil liability provisions of the securities laws of the United
      States or any state; or





-
            In
      original actions brought in the Republic of China, liabilities against us
      or non-residents predicated upon the securities laws of the United States
      or any state. Enforcement of a foreign judgment in the Republic of China
      also may be limited or otherwise affected by applicable bankruptcy,
      insolvency, liquidation, arrangement, moratorium or similar laws relating
      to or affecting creditors' rights generally and will be subject to a
      statutory limitation of time within which proceedings may be
      brought.






Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.




28
 Table of Contents




We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to PRC laws and
regulations including those applicable to foreign investments in China and, in
particular, laws applicable to foreign-invested enterprises. The PRC legal
system is a civil law system based on written statutes. Unlike common law
systems, decided legal cases have little precedential value. In 1979, the PRC
government began to promulgate a comprehensive system of laws and regulations
governing economic matters in general. The overall effect of legislation since
1979 has significantly enhanced the protections afforded to various forms of
foreign investment in China. However, PRC laws and regulations change frequently
and the interpretation of laws and regulations is not always uniform and
enforcement thereof can involve uncertainties. For instance, we may have to
resort to administrative and court proceedings to enforce the legal protection
that we are entitled to by law or contract. However, since PRC administrative
and court authorities have significant discretion in interpreting statutory and
contractual terms, it may be difficult to evaluate the outcome of administrative
court proceedings and the level of law enforcement that we would receive in more
developed legal systems. Such uncertainties, including the potential inability
to enforce our contracts, could limit legal protections available to you and us
and could affect our business and operations. In addition, intellectual property
rights and confidentiality protections in China may not be as effective as in
the United States or other countries. Accordingly, we cannot predict the effect
of future developments in the PRC legal system, particularly with regard to the
industries in which we operate, including the promulgation of new laws. This may
include changes to existing laws or the interpretation or enforcement thereof,
or the preemption of local regulations by national laws. These uncertainties
could limit the availability of law enforcement, including our ability to
enforce our agreements with PRC government entities and other foreign
investors.




Risks
Related to Ownership of SinoHub Common Stock




There
can be no assurance that a liquid public market for our common stock will exist
in the future.




Although
our common stock is listed on the NYSE Amex stock exchange, our average daily
trading volume is only about 25,000 shares and there may not be a highly liquid
market in our common stock in the future. There can also be no assurance as to
the strength of any market for our common stock or the prices at which holders
may be able to sell their shares.




It
is likely that there will be significant volatility in the trading
price.




In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies has experienced wide fluctuations that have not necessarily been
related to the operations, performance, underlying asset values or prospects of
such companies.  For these reasons, our shares of common stock can
also be expected to be subject to volatility resulting from purely market forces
over which we will have no control.  If our business development plans
are successful, we may require additional equity financing to continue our
growth and our success in raising additional equity capital could be affected by
such volatility.  Market prices for our common stock will be
influenced by many factors and can be expected to be subject to significant
fluctuations in response to variations in our operating results and other
factors. Our stock price will also be affected by the trading price of the stock
of our competitors, investor perceptions of SinoHub, interest rates, general
economic conditions and those specific to our industry, developments with regard
to SinoHub’s operations and activities, our future financial condition, and
changes in our management.




29
 Table of Contents




Our
shares of common stock are currently subject to penny stock regulations and
restrictions and you may have difficulty selling shares of our common
stock.




The
trading price of SinoHub’s common stock was $5.00 or above several times in 2009
but has traded below $5.00 in 2010 to date. Since our common stock currently
trades below $5.00 per share, trading in the common stock is subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), related to any trades involving a “penny
stock” (defined generally, any non-NASDAQ equity security that has a market
price of less than $5.00 per share, subject to certain
exceptions).  These rules impose additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and “accredited investors” (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). These rules require additional disclosure
by broker-dealers in connection with any trades involving a “penny stock” and a
two business day “cooling off period” before brokers and dealers can effect
transactions in penny stocks. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to the sale.
The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer’s presumed control over the market. These, and the
other burdens imposed upon broker-dealers by the penny stock requirements, could
discourage broker-dealers from effecting transactions in our common stock which
could severely limit the market liquidity of our common stock and the ability of
holders of our common stock to sell it.




We
do not intend to pay dividends.




We have
not paid any cash dividends on any of our securities since inception and we do
not anticipate paying any cash dividends on any of our securities in the
foreseeable future.




Future
sales of our securities, or the perception in the markets that these sales may
occur, could depress our stock price.




As of
March 24, 2010, we had issued and outstanding 28,393,016 shares of common stock,
warrants for 2,028,410 shares of common stock and options for 1,212,103 shares
of common stock.   These securities will be eligible for public
sale only if registered under the Securities Act or if the stockholder qualifies
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, or other applicable exemption. We believe that our stockholders
will be entitled to sell our shares pursuant to Rule 144 as of March 30, 2010
provided they are in compliance with the applicable provisions
thereof.  In addition to the restrictions on resale imposed by the
securities laws, a number of our outstanding shares are subject to contractual
restrictions on resale.  6,165,697 shares owned by our President and
by our CEO in the aggregate are subject to Lock-Up Agreements between the
President and CEO and the placement agent for our September 2008 private
placement. This lock-up restriction will expire on May 12, 2010.  An
aggregate of 3,182,849 shares owned by our President and by our CEO are further
subject to Lock-Up Agreements between the President and CEO and the placement
agent for our March 2010 private placement, which agreements expire on May 2,
2010.  An aggregate of 15,218,692 shares of outstanding common stock
and an aggregate of 2,028,410 shares issuable upon the exercise of outstanding
warrants (which figure excludes 163,332 shares of common stock registered for
resale for which the warrants could have been exercised if certain conditions
had occurred but which now are not exercisable pursuant to the terms of the
warrants)have been
registered for resale under currently effective registration
statements. The market price of our capital stock could drop significantly
if the holders of shares that were registered in such registration statements
sell their shares or are perceived by the market as intending to sell their
shares.  Moreover, to the extent that additional shares of our
outstanding common stock are either registered for resale or Rule 144 or another
exemption from registration becomes available to the holders of such shares, and
such shares are sold or the holders of such shares are perceived as intending to
sell them, the market price of our capital stock could drop further. These
factors also could make it more difficult for us to raise capital or make
acquisitions through the issuance of additional shares of our common stock or
other equity securities.




30
 Table of Contents




The
ability of the Board of Directors of SinoHub to issue “blank check” preferred
stock and any anti-takeover provisions we adopt may depress the value of our
Common Stock.




The
authorized capital of SinoHub includes shares of “blank check” preferred
stock.  The SinoHub Board has the power to issue any or all of the
authorized but unissued shares of its preferred stock, including the authority
to establish one or more series and to fix the powers, preferences, rights and
limitations of such class or series, without seeking stockholder approval. 
The authority of the SinoHub Board of Directors to issue “blank check” preferred
stock and any future anti-takeover measures it may adopt, in certain
circumstances delay, deter or prevent takeover attempts and other changes in
control of SinoHub not approved by its Board of Directors.  As a
result, SinoHub stockholders may lose opportunities to dispose of their shares
at favorable prices generally available in takeover attempts or that may be
available under a merger proposal and the market price of the Common Stock and
the voting and other rights of its stockholders may also be
affected.







Item 1B.  Unresolved Staff Comments.





Not
applicable.







Item 2.  Properties.





We do not
currently own any real property.  We lease the real properties
described below.




Corporate
Office. We lease 27,600 square feet of combined office and warehouse space
located at 6/F, Building 51, Road 5, Qiongyu Blvd., Technology Park, Nanshan
District,, Shenzhen 518053, People’s Republic of China. This location is our
corporate headquarters. We occupy this facility under a lease that commenced on
August 10, 2008 and ends on August 30, 2013. The base rent for this facility is
approximately $12,690 per month for the first three years of the lease
term.




Import/Export
Department Office near Huanggang Customs. We lease 1,076 square feet of office
space located at Unit 1904, Huang Cheng Guang Chang Da Sha, Rd. Huanggang,
Futian District, Shenzhen, People’s Republic of China. We occupy this facility
under a lease that commenced on May 16, 2008 and ends on May 16, 2010. Our
monthly rental cost is about $805.




31
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Shanghai
Wai Gao Qiao Facility. We lease approximately 9,168 square feet of warehouse
space at No. 383 Fu Te Xi Yi Road, Wai Gao Qiao Free Trade Zone, Shanghai, PRC
200131 for a monthly rental of approximately $2,530. We occupy this facility
under a lease that commenced on July 27, 2009 and ends on August 26,
2014.




Hong Kong
Facility I.  We lease approximately 26,500 square feet of warehouse
space at Unit B, 17th Floor, Tins Plaza, 3 San On Street, Tuen Mun, N.T.
Kowloon, Hong Kong SAR for a monthly rental of about $14,996. We occupy this
facility under a lease that commenced on July 2, 2008 and ends on June 1,
2011.




Hong Kong
Facility II.  We lease approximately 53,000 square feet of warehouse
space at Unit B, 22nd Floor, Tins Plaza, 3 San On Street, Tuen Mun, N.T.
Kowloon, Hong Kong SAR for a monthly rental of about $28,500.  We
occupy this facility under a lease that commenced on December 10, 2009 and ends
on January 31, 2013.








Item 3.  Legal Proceedings.





None.








Item 4.  [Reserved.]







PART II







Item 5.  Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.


Market
Information




SIHI
common stock is quoted on the NYSE Amex under the symbol
“SIHI”.  Presented below is the high and low closing bid information
of SinoHub’s common stock for the periods indicated. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.  No bid quotations were available for
any of the quarterly periods prior to the Second Quarter of 2008.  All
quotations prior to July 18, 2008 were under the name of the Company’s
predecessor, Liberty Alliance, Inc., under the symbol “LBTI.”




SinoHubCOMMONSTOCKHIGH
            
            LOWFISCAL
      YEAR ENDING DECEMBER 31, 2009:Fourth
      Quarter
            
            $
            5.70
            
            
            $
            2.90Third
      Quarter
            
            $
            4.95
            
            
            $
            2.50Second
      Quarter
            
            $
            2.60
            
            
            $
            2.05First
      Quarter
            
            $
            2.50
            
            
            $
            2.05FISCAL
      YEAR ENDING DECEMBER 31, 2008:Fourth
      Quarter
            
            $
            2.74
            
            
            $
            1.02Third
      Quarter
            
            $
            3.15
            
            
            $
            2.50Second
      Quarter
            
            $
            3.15
            
            
            $
            2.80First
      Quarter
            
            $
            N/A
            
            
            $
            N/A





32
 Table of Contents




Our
common shares are issued in registered form. The registrar and transfer agent
for our shares is:




Interwest
Transfer Co. Inc.


1981
Murray Holladay Road, Suite 100


Salt Lake
City, UT  84117


Telephone:
801-272-9294


Facsimile:
801-277-3147




Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table includes the information as of the end of 2009 for our equity
compensation plans:




Plan
      category
            Number of
              securities
      to
              be issued
      upon
              exercise
              of
      outstanding
              options,
              warrants and
      rights
              (a)
            Weighted-
              average
              exercise price
      of
              outstanding
              options,
              warrants
and
              rights
              (b)
            Number of
      securities
              remaining
      available
              for future
      issuance
              under
equity
              compensation
      plans
              (excluding
      securities
              reflected in column (a))
              (c)Equity
      compensation plans approved by security holders(1)
            1,263,978
            $2.01
            2,474,953Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            1,263,978
            
            2,474,953




(1)
            Consists
      of our 2000 Incentive Stock Option Plan and 2008 Incentive Stock Option
      Plan (the “2008 Plan”). See Note 10—“Stock Options” of the Notes to the
      Consolidated Financial Statements included in this Annual Report on Form
      10-K.  The Company’s stockholders approved the 2008 Plan at the
      Company’s annual meeting of stockholders on June 19,
  2009.




33
 Table of Contents




Holders




As of
March 24, 2010, there were approximately 670 holders of record of our common
stock.  The number of record holders does not include persons who held
our common stock in nominee or “street name” accounts through
brokers.




Dividends




We have
not declared any dividends since incorporation and do not anticipate that we
will do so in the foreseeable future.  Our intention is to retain
future earnings for use in our operations and the expansion of our
business.




Recent
Sales of Unregistered Securities





In
October 2009, the Company sold 414,060 shares of common stock to accredited
investors in a private placement yielding aggregate gross proceeds to the
Company of $1,449,210 ($3.50 per share).   The common stock was
offered and sold solely to “accredited investors” in reliance on the exemption
from registration afforded by Rule 506 of Regulation D.  In connection
with the sale of these securities, the Company relied on each of the Investors'
written representations that it was an "accredited investor" as defined in Rule
501(a) of the Securities and Exchange Commission.  In addition,
neither the Company nor anyone acting on its behalf offered or sold these
securities by any form of general solicitation or general
advertising.  The Company used the proceeds of the sale for working
capital and other general corporate purposes.




In
October and November 2009, persons holding warrants to purchase our common stock
exercised their warrants to purchase an aggregate of 1,198,874 shares of common
stock for an aggregate purchase price of $2,459,062 in cash and the tender of
warrants to purchase an aggregate of 56,982 shares of common
stock.  We initially issued the warrants to the holders on September
10, 2008 as part of a private placement of common stock and warrants made in
reliance upon the exemption from registration afforded by Rule 506 of Regulation
D.  The warrants were initially issued to the investors in the private
placement and to the placement agent for the offering for services
rendered.  All of the warrants were exercisable at $2.15 per share of
the Company’s common stock except for warrants to purchase 44,177 shares of
common stock which were exercisable at $3.00 per share.  The exercise
of the warrants was made in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act for transactions not involving a public
offering.  Neither the Company nor anyone acting on its behalf offered
or sold these securities by any form of general solicitation or general
advertising and no commission was paid in connection with the issuance of the
shares.  SinoHub used the proceeds of the sale for working capital and
other general corporate purposes.




None of
the individuals and entities to which we issued securities as indicated in this
section of the Form 10-K are unaffiliated with us.




Repurchase
of Equity Securities





None.





34
 Table of Contents




Item 6.  Selected Financial Data.





Item 6 is
not applicable to us because we are a smaller reporting company.







Item 7.  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 our consolidated
financial statements, which are included elsewhere in this Form
10-K.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains statements that are
forward-looking.  These statements are based on current expectations
and assumptions that are subject to risk, uncertainties and other
factors.  Actual results could differ materially because of the
factors discussed in “Risks Factors” elsewhere in this Form 10-K, and other
factors that we may not know.  All amounts are expressed in United
States dollars.







OVERVIEW




Our
Business




SinoHub,
Inc. (the “Company”) is engaged in electronic component sales, outsourced
electronics product production and sales, and electronic component supply chain
management (SCM) services.  In Q4 2009 we began providing virtual
contract manufacturing (VCM) services for mobile phones to customers who are
resellers in developing countries.  Our electronic component sales
include procurement-fulfillment and individually negotiated electronic component
sales to manufacturers.  We only deal in original parts in original
packing and do not alter or modify the parts in any way.  Accordingly,
any quality issues with respect to the parts would be the responsibility of the
manufacturer of the parts.  Our SCM services include warehousing,
delivery and import/export.  At present all of our component sales and
SCM services occur in the PRC and Hong Kong, and all mobile phone sales are made
outside China.




The
Company provides SCM services to electronics manufacturers and component
suppliers in the People’s Republic of China (the “PRC”).  Our
professional Supply Chain Management platform integrates SinoHub SCM, logistics
service centers located in key distribution/manufacturing cities in the PRC, and
a service team of about 200 employees.




As a
seller of electronic components and an electronic component supply chain
management service provider, we manage all aspects of the purchase and movement
of electronic components from their receipt from suppliers in our Hong Kong
warehouse to their delivery in Hong Kong or import into China and delivery to a
manufacturer there. We also handle the export of the finished goods when that is
required. Roughly eighty percent (80%) of our business with manufacturer
customers is related to mobile phones. The components we source in this vertical
market change rapidly in line with the rapid change of technology in this
industry.




Each
mobile phone built by one of our customers contains between 100 and 200
electronic components.  We have customers who make over one million
phones per month.  In the past, we have only been able to handle part
of their business because of liquidity constraints (our procurement-fulfillment
business requires us to have available capital to purchase components for
inventory prior to reselling them to customers).  However, we are
currently ramping up with several customers who want to give us the opportunity
to supply them with components for a larger share of their
business.  Our ability to scale with these growing customers will
continue to depend upon the availability of working capital.




35
 Table of Contents




In the
last three years, mobile phone components have accounted for approximately 70% -
80% of our business and network equipment components have accounted for
approximately 15% of our business. We expect the percentage of our business in
the mobile phone vertical to grow in 2010 as we ramp up our VCM
business.  90% of our manufacturer customers in the electronic
component purchasing business sell their products into the local Chinese
market.  As a result, we have yet to feel much adverse effect from the
global slowdown because demand has remained strong for these products in
China.




SinoHub
carries inventory for its virtual contract manufacturing business.  We
carry electronic components that we are staging for procurement-fulfillment
projects and we carry a small amount of inventory that results from the service
we provide to customers to help them sell that portion of a minimum order
quantity they don’t need. We never buy components without a corresponding order
to purchase the components. We do not have backlog orders, but with the
successful completion of each procurement-fulfillment project and component
sale, we look for repeat orders from existing customers.




Our
growth in the mobile phone component business has been driven by the fact that
in recent years there has been a shift away from the branded products offered by
the multi-national companies that previously dominated the second tier phone
market to non-branded phones that sell at substantially less than the big brand
products.  The first tier (or top tier) mobile phone market in China
is dominated by big multi-national companies such as Nokia, Sony-Ericsson,
Motorola and Samsung. These companies are too large to be served by SinoHub’s
current capacity.  The first tier is the market for premium mobile
phones mainly sold in urban areas at high prices.  The second tier
mobile phone market is also mainly in urban areas, but is a more price sensitive
market and one that is increasingly dominated by non-branded mobile phones such
as the ones our customers produce.  SinoHub believes it has adequate
capacity to serve the needs of these second-tier customers and that, through
cost-effective procurement practices, it can deliver components to these
price-sensitive customers at competitive prices.




History
and Basis of Reporting




SinoHub,
Inc. (formerly known as Liberty Alliance, Inc.) is a Delaware corporation,
originally incorporated in Utah in 1986, and subsequently merged and reorganized
as Liberty Alliance, Inc. in Delaware in 1991.  In May 2008, Liberty
Alliance, Inc., its wholly-owned subsidiary SinoHub Acquisition Corp., SinoHub,
Inc., and Steven L. White, the principal stockholder of Liberty Alliance, Inc.,
entered into an Agreement and Plan of Merger pursuant to which SinoHub
Acquisition Corp. merged with and into SinoHub, Inc. and SinoHub, Inc. became a
wholly-owned subsidiary of Liberty Alliance, Inc.  After completion of
the merger, the original stockholders of Liberty Alliance held approximately 6%
of the issued and outstanding shares of Liberty Alliance, Inc. common stock on a
fully diluted basis and the former stockholders of SinoHub, Inc., including the
shares issued to consultants for services rendered in connection with the
merger, held approximately 94% of Liberty Alliance, Inc. issued and outstanding
shares of common stock.  Subsequent to the completion of the merger,
on July 18, 2008, Liberty Alliance, Inc. amended its certificate of
incorporation to change its name to SinoHub, Inc. and affect a 3.5-to-1 reverse
stock split of all issued and outstanding shares of its common
stock.




36
 Table of Contents
 
 For financial reporting purposes, the reverse takeover
of the Company has been accounted for as a recapitalization of the Company with
SinoHub International as the accounting acquirer whereby the historical
financial statements and operations of SinoHub International, Inc.became the historical financial statements of the
Company, with no adjustment of the carrying value of the assets and liabilities.When we refer in this Form 10-K to business and financial information for
periods prior to the consummation of the reverse acquisition, we are referring
to the business and financial information of SinoHub International, Inc. on a
consolidated basis unless the context suggests otherwise.
 
 Business
Operations
  SinoHub’s
business operations are primarily dedicated toward utilizing the value of the
SCM Platformto
source and deliver electronic components and electronic products for our
customers. In this sense, SinoHub has become a market maker for our SCM
customers by using them as suppliers in our electronic component sales business
and for our electronic component sales customers by using them as suppliers in
our electronic product production and sales business.
  The Company offers customers the use of the SCM Platform
under a fee based program whereby customers outsource the supply chain process
to SinoHub, while retaining title to inventory, receivables, and commitments on
supplier payables. SinoHub provides the customer a complete SCM solution that
includes importing and exporting services, facilitating Customs clearance,
performing warehouse and distribution functions, and enabling foreign currency
settlements through SinoHub’s banking relationships and its licensed
qualifications as a Client Coordinator Enterprise in
China.
  SinoHub
also supports customers by providing a sourcing channel for electronic
components that are not part of a specific SCM or procurement-fulfillment
program.  In these cases, SinoHub utilizes its industry knowledge and
relationships with components suppliers and manufacturers to source products at
competitive prices and within time constraints.  SinoHub responds to
these “spot” orders from customers, sources the product, confirms pricing, and
executes delivery as required.  Customers are required to pay on
delivery of product.
  Our
biggest competition in the procurement-fulfillment and component sales
businesses where we make 93% of our revenue comes from electronic component distributors, and in-house
purchasing departments of EMS providers and OEMs. We do have a few
competitors such as Shenzhen Eternal Asia, HopeSea and Strongjet, but none of
these companies focus exclusively on electronic components and none of them has
an online SCM system with the specialized functionality of SinoHub
SCM.
  Consolidated
Results of Operations
  The
Company derived revenue and gross profit in 2009 primarily from sales of
electronic components and fees associated with the provision of SCM
services.
  The
Company reports revenue from supply chain management services and electronic
components sales.  Revenues for supply chain management 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.  Revenue from electronic components sales is based on quoted
prices and is recognized at the time of shipment 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.
  37
 Table of Contents
  Cost of
sales for SCM services primarily represents direct costs incurred for providing
SCM services, including logistics services, import/export services, warehouse
services and a number of ancillary services such as kitting, insurance,
repackaging and re-labeling.  Cost of sales for electronic components
primarily represents the cost of components and expenses directly related to
component procurement.
  SCM
pricing is negotiated based on a percentage of the value of the goods
handled.  For procurement-fulfillment and electronic component sales
the Company makes a margin based on the difference between the price at which it
buys electronic components and the price at which it sells these parts to the
customer.  The margin SinoHub makes on this business varies based on
the rapidly changing prices in the market into which the SinoHub SCM database
give the Company a unique window.
  Selling,
general and administrative expenses include salaries paid to employees, employee
related expenses, marketing costs, technology costs, sales commissions, rent,
and related office and facility expenses.
  
  Fiscal
Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31,
2008
  Overall
Results
  The
Company reported net income for the year ended December 31,2009
of $12.4 million compared to $8.5 million in 2008, an increase of
46%.
  Net
Sales
  Net sales
for the year ended December 31, 2009 were $128.4 million, up 62% from $79.5
million recorded in 2008.  The Company reports net sales on the basis
of two business categories, supply chain management services and electronic
component sales (the insignificant amount of VCM sales in 2009 has not been
separately disclosed).  In the year ended December 31, 2009, net sales
of supply chain management services increased 73% to $8.6 million from $5.0
million in 2008.  This increase was primarily based on the addition of
five manufacturer customers who, we believe, were attracted to SinoHub by our
online software system, SinoHub SCM.  In the year ended December 31,
2009, net sales of electronic components increased 61% to $119.8 million from
$74.5 million in 2008 due primarily to increased sales as our customer base
expanded during 2009.  We believe that the main driving force behind
this increase was the Company’s ability to obtain from its supplier customers
better pricing for its manufacturer customers than they were able to achieve on
their own.  Electronic component sales are made in two ways,
individually negotiated sales and sales of components in procurement-fulfillment
projects.  For the year ended December 31, 2009 individually
negotiated sales rose almost 73% from the year of 2008 to $65.9 million and
procurement-fulfillment sales rose 42% from the year of 2008 to $45.5
million.
  Growth
was supported by additional access to financial resources and bank borrowings
during 2008 and 2009.  In particular, the Company raised net proceeds
of $6.5 million in 2008 and $2.6 million in 2009 from sales of new equity, and
$2.5 million in 2009 from the exercise of warrants that were put to use
financing additional procurement-fulfillment projects and increased component
sales.  Also, the Company was able to expand its bank lines with three
Chinese banks in both 2008 and 2009 for $2.2 million and $11.8 million
respectively.
  38
 Table of Contents
  Gross Profit
  The
Company recorded gross profit of $22.4 million in the year of 2009 compared with
$16.2 million in 2008.  The gross profit margin for the year of 2009
decreased to 17.4% from 20.4% in 2008.  The trend toward lower gross
profit margins may continue as the Company pursues and wins new business
opportunities.  In particular, in the Company’s electronic components
sales business, as volume increases, gross margins may tend to gradually decline
because the occasional opportunity for us to make a very high margin transaction
caused by a large price discrepancy between what the Company buys a component
for and its sales price will not have as dramatic an effect on the overall gross
profit earned for the period.  The Company is seeking to offset this
declining margin trend in its electronic components sales business by pursuing
sales in its new VCM business which it expects will carry higher margins, on
average.  As the Company has recently begun its VCM business, it is
too early to predict the results and overall margins.
  Income
from Operations and Operating Expenses
  Year
      Ended December 31,2009
                
                
                2008
                
                
                Change
                
                
                %Gross
      profit
                
                $
                22,388,000
                
                
                $
                16,210,000
                
                
                
                6,178,000
                
                
                
                38
                %Less
      operating expenses:Selling,
      general and
      administrative
                
                
                4,982,000
                
                
                
                2,990,000
                
                
                
                1,992,000
                
                
                
                67
                %Professional
      services
                
                
                1,122,000
                
                
                
                692,000
                
                
                
                430,000
                
                
                
                62
                %Stock
      compensation expenses
                
                
                436,000
                
                
                
                110,000
                
                
                
                326,000
                
                
                
                396
                %Depreciation
                
                
                553,000
                
                
                
                389,000
                
                
                
                164,000
                
                
                
                42
                %(Write
      back of) / Allowance for doubtful debts
                
                
                (890,000
                )
                
                
                1,237,000
                
                
                
                (2,127,000
                )
                
                
                (172
                %)Total
      operating
      expenses
                
                $
                6,203,000
                
                
                $
                5,418,000
                
                
                $
                785,000
                
                
                
                14
                %Income
      from
      operations
                
                $
                16,185,000
                
                
                $
                10,792,000
                
                
                $
                5,393,000
                
                
                
                50
                %
  Operating
Expenses
  Total
operating expenses were $6.2 million or 4.8% of revenues in 2009, compared to
$5.4 million, or 6.8% of revenues in 2008. Selling, general and administrative
expenses increased to $5.0 million in 2009 from $3.0 million in 2008,
representing approximately 3.9% of revenues in 2009 compared to 3.8% in 2008.
The largest factors in the increase in selling, general and administrative
expenses from 2008 to 2009 were salaries and fringe benefits which increased by
$1.5 million due to the large increase in headcount.  Other
significant factors in the increase were customs clearance and management fees,
logistics fees, staff travel, and office and warehouse rent to support the
general growth in sales and expanded operations.  Professional
services expenses were $1.1 million in 2009, compared to $692,000 in 2008 with
the increase due primarily to legal fees and non-recurring Sarbanes-Oxley
consulting expenses.  Stock compensation expenses were $436,000 in
2009 compared to $110,000 in 2008 due to an increase in stock option and
restricted stock grants. We
reduced the provision for doubtful debts by $890,000 in 2009 due primarily
to improved conditions in the global economy, as compared with an increase of
$1.2 million in 2008.
 Income
from Operations
  The
Company recorded income from operations of $16.2 million in 2009, as
compared with operating income of $10.8 million in 2008.
  Income
Taxes
  The
Company’s effective tax rate was 23.2% in 2009 compared to 20.2 % in
2008.  The statutory tax rate in the PRC of 25% in both 2009 and 2008
was reduced in both periods by favorable tax preferences experienced by the
Company’s operations in special economic zones as designated by the Chinese
government.  The trend toward a higher effective tax rate is expected
to continue as preferences lapse over time.  In Shenzhen, where the
Company does most of its business, the special economic zone status means the
corporate income tax rate for 2009 was 20%, versus 18% in 2008.  The
stated intention of the Chinese government is to gradually increase the
corporate tax rate in special economic zones such as in Shenzhen to the national
level, which is 25% at present.  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 reported foreign currency translation gains of $64,000 in 2009, compared
with foreign currency translation gains of $541,000 in 2008 reflecting the
fairly stable exchange rate between RMB and USD during
2009.  Comprehensive net income (net income plus foreign currency
translation gains) was $12.4 million in 2009 compared with $9.0 million in
2008.
  39
 Table of Contents
  CONSOLIDATED
FINANCIAL CONDITION AND LIQUIDITY
  Liquidity
and Capital Resources
  The
Company’s strategic plans include continued expansion and support of our SCM
Platform (consisting of SinoHub SCM, key service
centers in Hong Kong, Shenzhen, and Shanghai, and a supply chain management
service team providing real time support), electronic component sales,
including procurement-fulfillment programs, growth of our VCM business,
investment in inventory for both procurement-fulfillment and VCM orders, and
investment in a manufacturing facility for our VCM business.  As a
result of the working capital investments necessary to support these plans, the
Company will continue to require cash and financing resources to meet and exceed
its objectives. In
particular, if our procurement – fulfillment and VCM businesses expand as we
plan, we will need to make increased additions to inventory, and additional
financing may be required to support this investment in inventory. The
Company’s cost of capital decreased with the private financings we closed in
August and October of 2009 since these transactions were done on a direct
basis.  Our cost of capital with China Construction Bank, Industrial
Bank, and Hangzhou Bank was approximately 2.5% at December 31, 2009. Most of the
working capital the Company intends to raise in the near to medium term is
expected to come from Chinese banks, which, to date, have not been affected by
the global credit crisis nearly as much as the US and European banks although
the credit available through banks in China could be affected by Chinese
monetary policies.  We may also seek to raise additional capital in
public or private equity offerings.
  We
believe SinoHub’s new contract manufacturing business can grow rapidly with the
addition of a moderately sized manufacturing facility and with additional
inventory.  Additional working capital would enable us to purchase
more electronic components from our suppliers, which should lower our costs, and
thus enhance our profitability.  We believe increased volume would
also likely enable the Company to receive payment terms from suppliers (we are
currently mainly buying from suppliers on a C.O.D. basis) which would lessen our
need for additional financing from third parties.  Accordingly, if
SinoHub is unsuccessful in raising additional working capital, the Company’s
growth may be adversely affected.
  We intend
to raise additional funds through the sale of additional equity or debt,
long-term debt financings, and operating cash flows.  Due to the risk
factors discussed elsewhere in this report, there can be no assurance that we
will be successful in raising the additional funds necessary to carry out
management’s plans for the future on acceptable terms or at all.  Our
ability to obtain additional capital will also depend on market conditions,
national and global economies and other factors beyond our
control.  We cannot be sure that we will be able to implement or
capitalize on various financing alternatives.  The terms of any debt
or equity funding that we may obtain in the future may be unfavorable to us and
to our stockholders.
  The
Company’s cash and cash equivalents grew to $8.3 million at December 31, 2009
from $5.9 million at December 31, 2008.  The Company had working
capital of $39.4 million on December 31, 2009, up from $22.8 million at the end
of 2008, and a current ratio of 3.2 to 1 at December 31, 2009 compared to a
current ratio of 4.5 to 1 at December 31, 2008. Inventories were approximately
$11.6 million and accounts receivables were $28.8 million on December 31, 2009,
compared to approximately $0.44 million and $22.3 million on December 31, 2008,
respectively. The
variance between cash flow and net income for 2009 was mainly related to
inventory purchases as the Company increased its procurement-fulfillment
business which requires it to hold inventory until customer orders are ready to
ship.
 The
Company must generally pay the purchase price of electronic components for
procurement-fulfillment customers and then recoup the purchase price from the
customer after delivery.  We only purchase standard components which
are readily saleable.  To date we have not had any collection problems
with any procurement-fulfillment project funded.  The Company’s borrowings vary based on the timing of
procurement-fulfillment projects, large spot component sales, use of our VAT
import line and use of our export reimbursement line.
  40
 Table of Contents
  Cash
Flows from Operating Activities
  The
Company maintains a significant investment in working capital, primarily
accounts receivable and inventories. Accounts receivable and inventories
represented approximately 68% and 76% of total assets at December 31, 2009 and
2008, respectively.
  The net
amount of cash used in the Company’s operating activities during the year of
2009 was $3.1 million, which primarily included earnings from operations that
were more than offset by investments in accounts receivable and inventory to
support the Company’s business growth.
  The net
amount of cash used in the Company’s operating activities during the year of
2008 was $6.4 million, which primarily included earnings from operations that
were more than offset by investments in accounts receivable to support the
Company’s business growth.  In addition, accounts payable reductions
were made during the period to enable the Company to get favorable terms with
suppliers.
  Cash
Flows from Investing Activities
  The net
amount of cash used by investing activities during 2009 was $9.4 million
primarily the result of restricted cash buildup.
  The net
amount of cash generated by investing activities during the year of 2008 was
$5.0 million primarily the result of a release of restricted cash as the Company
settled bank notes under letters of credit that required restricted cash
balances.
  Cash
Flows from Financing Activities
  The net
amount of cash provided by financing activities during the year of 2009 was
$14.9 million, which included proceeds from bank borrowings of $21.5 million,
private placement stock offerings yielding gross proceeds of $2.7 million, and
exercises of warrants to purchase common stock yielding gross proceeds of $2.6
million, offset by payments on bank loans of $11.9 million.
  The net
amount of cash provided by financing activities during 2008 was $2.6 million,
which included a private placement stock offering in the third quarter with
gross proceeds of $7.5 million, proceeds from bank borrowings of approximately
$2.1 million, and an amount of $1.6 million due from a related party, offset by
payments on bank loans of $7.3 million, expenses associated with the private
placement of $1.0 million, and Note repayments of $251,000.  The
related company, GenNext Technology, Ltd., a company formerly owned jointly by
the Chairman and the President of the Company, which was based in Hong Kong,
assisted the Company by facilitating certain foreign exchange transactions, and
settled obligations to certain suppliers on behalf of the Company, and collected
certain customer remittances on behalf of the Company. Over the course of the fourth quarter of 2008, the
activities which were previously being conducted solely by GenNext Technology,
Ltd. were transferred to B2B Chips, a wholly owned subsidiary of the Company
that was used to conduct the Company’s Hong Kong business as it achieved the
required assignment of customer contracts and bank accounts to support the
necessary foreign exchange transactions.
  41
 Table of Contents
  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
  The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities.  On an ongoing basis, we evaluate our estimates,
including but not limited to those related to income taxes and impairment of
long-lived assets.  We base our estimates on historical
experience and on various other assumptions and factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Based on our ongoing review, we plan to
adjust to our judgments and estimates where facts and circumstances
dictate.  Actual results could differ from our
estimates.
  We
believe the following critical accounting policies are important to the
portrayal of our financial condition and results and require our management's
most difficult, subjective or complex judgments, often because of the need to
make estimates about the effect of matters that are inherently
uncertain.
  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,
with roughly eighty percent (80%) of the Company’s business with manufacturer
customers related to mobile phones.  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
are reported as restricted cash and are not included with cash and cash
equivalents on the balance sheet until the security for 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.  At December
31, 2009, the Company had $347,000 in provision, or 1.2% of accounts
receivable.  At December 31, 2008, the Company had $1.2 million in
provision, or 5.3% of accounts receivable, due to ongoing severe global
financial crisis.
  42
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  Inventories
  Inventories
are stated at cost, 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.
  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 YearsMotor
      vehicles
              5 YearsFurniture, fixtures
      and equipment
              2 to 5
      Years
  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.  The Company believes
that no impairment of property and equipment exists at December 31,
2009.
  Financial
Instruments
  The
Company analyzes all financial instruments that may have features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”  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 FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
  Fair Value of Financial
Instruments
  SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," 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.
  43
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  The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, bank borrowings, notes payable 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
Company does not utilize derivative or hedge instruments in its financing
activities.
  Stock-Based
Compensation
  The
Company adopted SFAS No. 123R, “Share-Based Payments.”  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 SFAS 123R and the Emerging
Issues Task Force consensus Issue No. 96-18, "Accounting for Equity Instruments
that are issued to Other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services" ("EITF 96-18"), as the fair value of the
consideration received or the fair value of equity instruments issued, whichever
is more reliably measured.
  Revenue
Recognition
  The
Company reports revenue from supply chain management, or SCM, services and
electronic components sales. Revenues for supply chain management 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 electronic components sales including
procurement-fulfillment procurement 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.
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  Income Taxes
  The
Company accounts for income taxes under the SFAS No. 109, “Accounting for Income
Taxes.”  Under SFAS 109, 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.  Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income 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. and SinoHub
Electronics Shanghai, Ltd. maintain accounting records using RMB as the
functional currency.
  The
Company uses United States Dollars (“USD”) as its reporting
currency.  The Company accounts for foreign currency translation
pursuant to SFAS No. 52, “Foreign Currency Translation” (“SFAS No.
52”).  The subsidiaries of the Company’s functional currencies are the
Hong Kong Dollar (“HKD”) and Chinese Renminbi (“RMB”).  Under SFAS No.
52, 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 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 SFAS No. 128, "Earnings Per
Share."  SFAS 128 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.
  45
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  RECENT
ACCOUNTING PRONOUNCEMENTS
  In
February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. The
Company does not expect the adoption of ASU 2010-09 to have a material impact on
its consolidated results of operations or financial position.
  In
January 2010, FASB issued ASU 2010-6 Improving Disclosures about Fair
Measurements ("ASU 2010-6"). ASU 2010-6 provides amendments to
subtopic 820-10 that require separate disclosure of significant transfers in and
out of Level 1 and Level 2 fair value measurements and the
presentation of separate information regarding purchases, sales, issuances and
settlements for Level 3 fair value measurements. Additionally, ASU 2010-6
provides amendments to subtopic 820-10 that clarify existing disclosures about
the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is
effective for financial statements issued for interim and annual periods ending
after December 15, 2010. The Company does not expect the adoption of ASU
2010-06 to have a material impact on its consolidated results of operations or
financial position.
  In
January 2010, FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards
Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. ASU 2010-2 is effective for the
Company starting January 3, 2010. The Company does not expect the adoption of
ASU 2010-2 to have a material impact on the Company's consolidated results of
operations or financial position.
  In
December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprise's
involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009. The Company does not expect the adoption of ASU
2009-17 to have a material impact on its consolidated results of operations or
financial position.
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  In
December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The
amendments in ASU 2009-16 improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009.  The Company does not
expect the adoption of ASU 2009-16 to have a material impact on its consolidated
results of operations or financial position.
  In
October, 2009, the FASB issued ASU 2009-15,“Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”(
amendments to ASC Topic 470, Debt)” (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance.  At the date of
issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with Topic 820 and recognized as
an issuance cost, with an offset to additional paid-in
capital.  Loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs.  The
amendments also require several disclosures including a description and the
terms of the arrangement and the reason for entering into the
arrangement.  The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009.   The
Company does not expect the adoption of ASU 2009-15 to have a material impact on
its consolidated results of operations or financial position.
  In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include
Software Elements, (amendments to ASC Topic 985, Software)” (“ASU
2009-14”). ASU 2009-14 removes tangible products from the scope of software
revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
  In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-13 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. Management is currently
evaluating the potential impact of ASU2009-13 on our financial
statements.
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  In
September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-12,
Fair Value Measurements and
Disclosures (Topic 820)—Investments in Certain Entities That Calculate Net Asset
Value Per Share (or Its Equivalent) which amended Accounting Standards
Codification Subtopic 820-10, Fair Value Measurements and
Disclosures—Overall. The amended guidance offers investors a practical
expedient for measuring the fair value of investments in certain entities that
calculate net asset value per share (NAV). The ASU is effective for the first
reporting period (including interim periods) ending after December 15,
2009. The adoption of ASU 2009-12 did not have a material impact on the
Company’s financial position or results of operations at the date of
adoption.
  In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic
740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities (formerly proposed as FASB
Staff Position No. 48-d, Application Guidance for
Pass-Through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure
Modifications for Nonpublic Entities), which amended Accounting
Standards Codification Subtopic 740-10, Income Taxes – Overall. ASU
2009-06 clarifies that an entity’s assertion that it is a pass-through entity is
a tax position and should be assessed in accordance with Subtopic 740-10.
Additionally, the ASU provides implementation guidance on the attribution of
income taxes to entities and owners. The revised guidance is effective for
periods ending after September 15, 2009. The adoption of ASU 2009-06 did
not have a material impact on the Company’s financial position or results of
operations at the date of adoption.
  In August
2009, FASB issued ASU 2009-5 Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value ("ASU
2009-5"). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of liabilities. ASU
2009-5 clarifies that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is
required to measure fair value. ASU 2009-5 was effective for the Company
for interim and annual periods ending after October 3, 2009. The adoption
of ASU 2009-5 did not have a material impact on the Company's consolidated
results of operations or financial position.
  In August
2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity
Instruments—an Amendment to Section 480-10-S99 ("ASU 2009-4"). ASU
2009-4 represents a Securities and Exchange Commission ("SEC") update to
Section 480-10-S99, Distinguishing Liabilities from
Equity. The adoption of guidance within ASU 2009-4 did not have an impact
on the Company's consolidated results of operations or financial
position.
  In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162
(subsequently codified into FASB ASC Topic 105) which established the FASB
Accounting Standards Codification (“ASC” or the “Codification”) as the single
source of authoritative accounting principles for U.S. GAAP issued by the FASB.
The Codification supersedes all existing non-SEC accounting and reporting
standards and subsequent to adoption, the FASB will issue new standards in the
form of ASUs, and no longer as SFASs, FASB Staff Positions or Emerging Issues
Task Force Abstracts. The Codification is effective for reporting periods ending
on or after September 15, 2009. The adoption of the Codification did not
have any impact on the Company’s financial position or results of operations at
the date of adoption.
  48
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  Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC or Codification), “Generally
Accepted Accounting Principles - Overall” (ASC Topic 105-10). The Codification
established one source for all U.S. GAAP. The Codification supersedes, but does
not change, all then-existing non-SEC accounting and reporting standards.
Throughout this report, references provided to applicable portions of the
Codification also include reference to the original FASB standard (SFAS), staff
position (FSP) or consensus of the Emerging Issues Task Force
(EITF).
  In May
2009, the FASB issued guidance on subsequent events (originally issued as SFAS
No. 165, Subsequent
Events, and subsequently codified into FASB ASC Topic 855). Topic 855
addresses the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. Topic 855 is
effective for interim or annual periods ending after June 15, 2009. The
adoption of Topic 855 did not have any impact on the Company’s financial
position or results of operations at the date of adoption.
  In April
2009, the FASB issued guidance on determining fair value when the volume and
level of activity for an asset or liability has significantly decreased and
identifying transactions that are not orderly (originally issued as FASB Staff
Position SFAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, and subsequently codified
within FASB ASC Topic 820). The guidance provides additional guidance to expand
on the factors that should be considered in estimating fair value when there has
been a significant decrease in market activity for an asset or liability. The
guidance is effective for interim and annual periods ending after June 15,
2009. The adoption did not have any impact on the Company’s financial position
or results of operations at the date of adoption.
  In April
2009, FASB issued Staff Position ("FSP") No. 115-2 and FSP 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (now codified within ASC 320, Investments—Debt and Equity
Securities ("ASC 320")). ASC 320 provides greater clarity about the
credit and noncredit component of an other-than-temporary impairment event and
more effectively communicates when an other-than-temporary impairment event has
occurred. ASC 320 amends the other-than-temporary impairment model for debt
securities. The impairment model for equity securities was not affected. Under
ASC 320, an other-than-temporary impairment must be recognized through earnings
if an investor has the intent to sell the debt security or if it is more likely
than not that the investor will be required to sell the debt security before
recovery of its amortized cost basis. This standard was effective for interim
periods ending after June 15, 2009. The adoption of ASC 320 did not have a
material impact on the Company's consolidated results of operations or financial
position.
  In April
2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value
of Financial Instruments (now codified within ASC 825, Financial Instruments
("ASC 825")). ASC 825 requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. ASC 825 was effective for interim periods ending after June 15,
2009. The adoption of ASC 825 did not have a material impact on the Company's
consolidated results of operations or financial position.
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  In June
2008, FASB issued Staff Position—Emerging Issues Task Force 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(now codified within ASC 260, Earnings Per Share ("ASC
260")). Under ASC 260, unvested share based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. ASC 260 was effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years and requires retrospective
application. The adoption of ASC 260 did not have a material impact on the
Company's earnings per share calculations.
  In April
2008, FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (now codified within ASC 350, Intangibles—Goodwill and
Other ("ASC 350")). ASC 350 provides guidance for determining the useful
life of a recognized intangible asset and requires enhanced disclosures so that
users of financial statements are able to assess the extent to which the
expected future cash flows associated with the asset are affected by our intent
and/or ability to renew or extend the arrangement. ASC 350 was effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The adoption of ASC 350 on January 4, 2009 did not
impact the Company's consolidated results of operations or financial
position.
  In March
2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (now codified within ASC 815, Derivatives and Hedging ("ASC
815")). ASC 815 requires enhanced disclosures about an entity's derivative and
hedging activities aimed at improving the transparency of financial reporting.
ASC 815 was effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of ASC 815
did not have any impact on the Company's consolidated results of operations or
financial position.
  In
December 2007, FASB issued SFAS No. 141(R), Business Combinations (now
codified within ASC 805, Business Combinations ("ASC
805")). ASC 805 establishes principles and requirements for how the acquirer in
a business combination recognizes and measures in its financial statements the
fair value of identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at the acquisition date. ASC 805
significantly changes the accounting for business combinations in a number of
areas, including the treatment of contingent consideration, preacquisition
contingencies, transaction costs and restructuring costs. In addition, under ASC
805, changes in an acquired entity's deferred tax assets and uncertain tax
positions after the measurement period will impact income tax expense. The
provisions of this standard will apply to any acquisitions we complete on or
after December 15, 2008. The adoption of ASC 805 did not have an impact on
the Company's consolidated results of operations or financial
position.
  In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 (now
codified within ASC 810,
Consolidation ("ASC 810")). ASC 810 changes the accounting and reporting
for minority interests, which is recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method significantly
changes the accounting for transactions with minority interest holders. The
provisions of ASC 810 were applied to all noncontrolling interests
prospectively, except for the presentation and disclosure requirements, which
were applied retrospectively to all periods presented and have been disclosed as
such in our consolidated financial statements herein. ASC 810 became effective
for fiscal years beginning on or after December 15, 2008. The adoption of
ASC 810 did not have a material impact on the Company's consolidated results of
operations or financial position.
  50
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  In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (now
codified within ASC 820). ASC 820 provides guidance for using fair value to
measure assets and liabilities. Under ASC 820, fair value refers to the
price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants at the measurement date. The
guidance within ASC 820 became effective for financial statements issued for
fiscal years beginning after November 15, 2007; however, the FASB provided
a one year deferral for implementation of the standard for non-recurring,
non-financial assets and liabilities. The Company adopted ASC 820 for
non-financial assets and non-financial liabilities effective January 4,
2009, which did not have any effect on its consolidated results of operations or
financial position.
 
 
 Item 7A.  Quantitative and Qualitative Disclosures About Market
Risk.
 
 The
Company is subject to certain market risks, including changes in interest rates
and currency exchange rates.  The Company does not undertake any
specific actions to limit those exposures.
 
 
 Item 8.  Financial Statements and Supplementary
Data.
 
 The
consolidated financial statements listed in Item 15(a) are incorporated herein
by reference and are filed as a part of this report and follow the signature
pages to this Annual Report on Form 10-K on page 59.
 
 
 Item 9.  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
 
 None.
 
 
 Item 9A(T).Evaluation of Disclosure Controls and
Procedures.
 
 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 December 31, 2009 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.
 
 Management
Report on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  Based on the evaluation performed, our managementconcluded that the Company's internal control over financial reporting
was effective as of December 31, 2009.
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 Table of Contents
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this annual
report.
  Changes
in Internal Control Over Financial Reporting
  During
the fourth quarter of 2009, we implemented the following measures to improve our
internal control over financial reporting:
 (1) Engaged
outside consultants to review our accounting policies and provide us with
documentation pertaining to accounting positions within the significant
transaction cycles. The outside consultants also reviewed the schedules prepared
for the 2009 year-end audit;
  (2) Prepared
SEC and GAAP disclosure checklists and engaged outside consultants to assist in
the review of our Form 10-K and subsequent Form 10-Qs;
  (3) Developed and instituted new internal
control procedures associated with the
identification and documentation of accruals and potential deficiencies;
and
  (4) Developed and instituted new internal
control procedures to capture software
capitalization costs and document the GAAP requirements for such
analysis.
 We
believe these measures have strengthened our internal control over financial
reporting and disclosure controls and procedures.
  Our
senior executives and our Board of Directors are committed to achieving and
maintaining a strong control environment, high ethical standards, and financial
reporting integrity. This commitment has been and will continue to be
communicated to and reinforced with our employees and to external
stakeholders.
  In
addition, under the direction of the Board of Directors, management will
continue to review and make changes to the overall design of our internal
control environment, as well as policies and procedures to improve the overall
effectiveness of internal control over financial reporting and our disclosure
controls and procedures.
  Except
for the changes discussed above, there was no change in our internal control
over financial reporting that occurred during the fourth quarter of 2009 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 Item 9B.   Other Information.
 
 None.
 
 52
 Table of Contents
  PART III
  Item 10.  Directors, Executive and Corporate
Governance.
   Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
SEC within 120 days of the end of the fiscal year ended December 31,
2009.
 
 
 Item 11.  Executive Compensation.
 
  Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
SEC within 120 days of the end of the fiscal year ended December 31,
2009.
 
 
 Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
  Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
SEC within 120 days of the end of the fiscal year ended December 31,
2009.
 
  Item 13.  Certain Relationships and Related Transactions,
and Director Independence.
 
  Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
SEC within 120 days of the end of the fiscal year ended December 31,
2009.
   Item 14.  Principal Accountant Fees and
Services.
  
 Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
SEC within 120 days of the end of the fiscal year ended December 31,
2009.
   PART IV
  
 Item 15.  Exhibits and Financial Statement
Schedules.
 
  (1)   Financial
Statements
  See Index
to Consolidated Financial Statements commencing on Page 59.
  53
 Table of Contents
 
 (2)   Financial
Statement Schedules
 
 All
supplemental schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements or
notes thereto.
  
 (3)   Exhibits
 
 The
following exhibits are filed as part of this report:
  
 EXHIBITS
  Exhibit
      No.
              Description2.1
              Agreement
      and Plan of Merger by and among Liberty Alliance, Inc., a Delaware
      corporation, SinoHub Acquisition Corp., a Delaware corporation and a
      wholly owned subsidiary of the Company, SinoHub, Inc., a Delaware
      corporation and Steven L. White, the principal stockholder of Liberty
      Alliance, Inc., dated May 12, 2008 (includes registration rights for the
      holders of shares subject to a lock-up).  (1)3.1
              Amendment
      and Amended and Restated Certificate of Incorporation of SinoHub, Inc.
      ***3.3.1
              Amended
      and Restated Bylaws of SinoHub, Inc., as amended by Amendment No. 1.
      *4.1
              Form
      of Series A and B Common Stock Warrant.  (2)10.1
              Lease
      dated June 10, 2008 between San On Investments No. 1 Limited and B2B
      Chips, Limited****10.2
              Lease
      Agreement by and between Zhou Dan and SinoHub SCM Shanghai, Ltd. dated
      March 23, 2006. (3)10.3
              Shanghai
      Wai Gao Qiao Bonded Zone Tenancy Agreement by and between Shanghai Xin
      Yong Logistics Ltd. and SinoHub Electronics Shanghai, Ltd., dated June 1,
      2008. (3)10.4
              Lease
      Contract dated August 10, 2008 between China Great Wall Computer Shenzhen
      Co., Ltd. and SinoHub SCM Shenzhen, Ltd.****10.5
              Securities
      Purchase Agreement dated September 10, 2008, among SinoHub, Inc. and the
      investors listed on the Schedule of Buyers on Annex A.
  (2)10.6
              Registration
      Rights Agreement dated September 10, 2008, among SinoHub, Inc. and the
      investors signatory thereto.  (2)10.6.1
              Waiver
      and General Release Agreement dated December
      30, 2008 among SinoHub, Inc. and the investors signatory
      thereto. **10.6.2
              Second
      Waiver and General Release Agreement dated
      February 19, 2009 among SinoHub, Inc. and the investors signatory
      thereto. **10.6.3
              Third
      WaiverAgreement dated March 6, 2009 among
      SinoHub, Inc. and the investors signatory
      thereto.**10.7
              Declaration
      of Trust dated January 30, 2008 between SinoHub Electronics Shenzhen,
      Ltd., (as “Beneficial Owner”), and Hantao Cui (as the “Trustee”).****10.8
              Form
      of Contract of Employment.  (3)10.9
              Form
      of Non-Solicitation, Invention Assignment and Non-Disclosure
      Agreement.  (4)10.10
              Trade
      Financing Loan between Shenzhen Branch, China Construction Bank and
      SinoHub SCM Shenzhen, Ltd. commencing on August 22, 2008
  **10.11
              Short
      Term Loan Contract between CIB Shenzhen Branch and SinoHub SCM
      Shenzhen, Ltd. for six months commencing on September 25, 2008.
      **10.12
              Credit
      Line Contract between CIB Shenzhen Branch and SinoHub SCM Shenzhen, Ltd.
      for one year commencing September 25, 2008. **10.13
              Promissory
      Note Issued by SinoHub, Inc. to Henry T. Cochran, dated January 17,
      2007.  (3)10.14
              Promissory
      Note Issued by SinoHub, Inc. to Peter Schech, dated January 27,
      2007****  54
 Table of Contents
  10.15
              Promissory
      Note Issued by SinoHub, Inc. to Peter Schech, dated January 27,
      2008****10.16
              Promissory
      Note Issued by SinoHub, Inc. to Jan Rejbo, dated June 20,
      2007****10.17
              Promissory
      Note Issued by SinoHub, Inc. to Tracey C. Hutchinson, dated January 26,
      2007****10.18
              Contract
      of Employment dated January 1, 2009 between SinoHub Electronics Shenzhen,
      Ltd and Henry T. Cochran*****10.19
              Employment
      Contract dated January 1, 2009 between B2B Chips, Ltd. and Henry T.
      Cochran*****10.20
              Contract
      of Employment dated January 1, 2009 between SinoHub Electronics Shenzhen,
      Ltd and Lei Xia*****10.21
              Employment
      Contract dated January 1, 2009 between B2B Chips, Ltd. and Lei
      Xia**10.22
              Contract
      of Employment dated January 1, 2009 between SinoHub Electronics Shenzhen,
      Ltd and Li De Hai*10.23
              Employment
      Contract dated January 1, 2009 between B2B Chips, Ltd. and Li De
      Hai*10.24
              Guaranty Agreement dated June 26, 2007 between
      SinoHub SCM Shenzhen, Ltd.and Shenzhen Hongfeng Paper Products Co.
      Limited **10.25
              Form
      of Lock-Up Agreement between SinoHub, Inc, and certain shareholders of
      SinoHub, Inc.**10.26
              SinoHub,
      Inc. 2008 Stock Plan, as Amended and Restated.(12)10.26.1
              SinoHub,
      Inc. 2000 Stock Plan.*10.27
              Contract
      of Mortgage of Maximum Amount dated August 21, 2008 between CIB Shenzhen
      Nanxin and Linda Marie Hetue**
 
    55
 Table of Contents
  10.28
              Contract
      of Guarantee of Maximum Amount dated August 21, 2008 between CIB Shenzhen
      Nanxin and Lei Xia.**10.29
              Contract
      of Guarantee of Maximum Amount dated August 21, 2008 between CIB Shenzhen
      Nanxin and Hantao Cui**10.30
              Equity
      Transferring Agreement dated January 17, 2008 between SinoHub Electronics
      Shenzhen Ltd. and SinoHub SCM Shanghai
  Ltd.**10.31
              Equity
      Transferring Agreement dated April 10, 2008 between B2B Chips Limited and
      SinoHub Technology (Hong Kong) Limited**10.32
              Loan
      for Export Rebates Custody Account between Shenzhen Branch, China
      Construction Bank and SinoHub SCM Shenzhen, Ltd. commencing on May 12,
      2008 *10.33
              Loan
      for Import Duties Custody Account between Shenzhen Branch, China
      Construction Bank and SinoHub SCM Shenzhen, Ltd. commencing on February 4,
      2009 *10.34
              Contract
      of Guarantee of Maximum Amount dated September 21, 2008 between CIB
      Shenzhen Nanxin and SinoHub Electronics Shenzhen, Ltd.*10.35
              Contract
      of Guarantee of Maximum Amount dated September 21, 2008 between CIB
      Shenzhen Nanxin and Shenzhen Yin Zhao Co., Ltd.*10.36
              Form
      of Indemnification Agreement for Officers and
  Directors.*10.37
              Code
      of Ethics.(5)10.38
              Registration
      Rights Agreement dated as of April 13, 2009, among SinoHub, Inc. and the
      stockholders signatory thereto. *10.39
              Lock-Up
      Agreement among Global Hunter Securities, LLC, Henry T. Cochran and
      Lei Xia. ******10.40
              Comprehensive
      Financing Line Contract between Shenzhen Branch, Bank of Hangzhou and
      SinoHub SCM Shenzhen, Ltd. commencing on April 6,
  2009.(6)10.41
              Financing
      Guarantee Letter dated April, 2009 between Shenzhen Branch, Bank of
      Hangzhou and Lei Xia.(6)10.42
              Financing
      Guarantee Letter dated April, 2009 between Shenzhen Branch, Bank of
      Hangzhou and De Hai Li.(6)10.43
              Financing
      Guarantee Letter dated April, 2009 between Shenzhen Branch, Bank of
      Hangzhou and Hantao Cui.(6)10.44
              Lease
      dated December 10, 2009 between San On Investments No. 1 Limited and B2B
      Chips, Limited.(7)10.45
              Side
      Letter dated December 10, 2009 between San On Investments No. 1 Limited
      and B2B Chips, Limited.(7)10.46
              Form
      of Restricted Share Award Agreement effective January 18, 2010 by and
      between SinoHub, Inc. and each of Henry T. Cochran, Lei Xia, and De Hai
      Li.(8)10.47
              Securities
      Purchase Agreement dated February 24, 2010, among SinoHub, Inc. and the
      Investors named therein.(9)10.48
              Form
      of Registration Rights Agreement.(9)10.49
              Form
      of Warrant.(9)10.50
              Amendment
      to Securities Purchase Agreement dated February 26, 2010, among SinoHub,
      Inc. and the Investors and Additional Investors named
      therein.(10)10.51
              Form
      of Lock-Up Agreement dated March 2, 2010 between Canaccord Adams Inc. and
      each of Henry T. Cochran and Lei Xia.(10)10.52
              Joinder
      Agreement to Registration Rights Agreement dated February 26, 2010, among
      SinoHub, Inc. and Paragon Capital LP.(11)10.53
              Joinder
      Agreement to Registration Rights Agreement dated February 26, 2010, among
      SinoHub, Inc. and Jayhawk Private Equity Fund
      II,  L.P.(11)10.54
              Joinder
      Agreement to Registration Rights Agreement dated February 26, 2010, among
      SinoHub, Inc. and Matthew Hayden.(11)10.55
              Joinder
      Agreement to Securities Purchase Agreement dated February 26, 2010, among
      SinoHub, Inc. and Paragon Capital LP.(11)10.56
              Joinder
      Agreement to Securities Purchase Agreement dated February 26, 2010, among
      SinoHub, Inc. and Jayhawk Private Equity Fund
      II,  L.P.(11)10.57
              Joinder
      Agreement to Securities Purchase Agreement dated February 26, 2010, among
      SinoHub, Inc. and  Matthew Hayden.(11)10.58
              Form
      of Restricted Stock Award Agreement.(12)10.59
              Form
      of Stock Option Award Agreement (U.S.).(12)10.60
              Form
      of Stock Option Award Agreement
(China).(12)
  (1)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on May 15, 2008.
  (2)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on September 16, 2008.
  (3)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on May 20, 2008.
  56
 Table of Contents
  (4)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on September 22, 2008.
  (5)
Incorporated by reference from Amendment No. 1  to the Company’s Form
10-K filed with the Securities and Exchange Commission on April 30,
2009.
  (6)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on May 7, 2009.
  (7)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on December 14, 2009.
  (8)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on January 21, 2010.
  (9)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on February 24, 2010.
  (10)
Incorporated by reference from the Company’s Form 8-K filed with the Securities
and Exchange Commission on March 3, 2010.
  (11)
Incorporated by reference from the Company’s Amended Form 8-K filed with the
Securities and Exchange Commission on March 3, 2010.
  (12)
Incorporated by reference from the Company’s Form 10-Q filed with the Securities
and Exchange Commission on November 16, 2009.
  *Previously filed with Amendment No. 4 to the
Registration Statement on Form S-1 on April 14, 2009.
  **Previously filed with Amendment No. 3 to the
Registration Statement on Form S-1 on March 17, 2009.
  ***Previously filed with the Registration
Statement on Form S-1 on October 24, 2008.
  ****Previously filed with Amendment No. 1 to the
Registration Statement on Form S-1 on December 17, 2008.
  *****Previously filed with Amendment No. 2 to
the Registration Statement on Form S-1 on January 20, 2009.
  ******Previously filed with Amendment No. 5 to
the Registration Statement on Form S-1 on May 12, 2009.
  
 Exhibit No.
              
              Title
      of Document31.1
              
              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
      amended31.2
              
              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
      amended32.1
              
              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)
 
 57
 Table of Contents
 
 SIGNATURES
 
 In
accordance with the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
 
 SINOHUB,
      INC.Date:  March
      31, 2010
              By:
              /s/ Henry T.
      CochranHenry
      T. CochranChief
      Executive Officer
 
 
 
 Date:  March
      31, 2010
              By:
              /s/De
      Hai  LiDe
      Hai LiChief
      Financial Officer
                (Principal
      Financial and Accounting Officer)
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant andin the
capacities and on the dates indicated.
  Signature
              
              Title
              
              Date/s/
      Henry T. Cochran
              
              Director
      and Chief Executive Officer
              
              March
      31, 2010Henry
      T. Cochran
              
              (Principal
      Executive Officer)/s/ De HaiLi
              
              Chief
      Financial Officer
              
              March
      31, 2010De HaiLi
              
              (Principal
      Financial and Accounting Officer)/s/
      Lei Xia
              
              Director
              
              March
      31, 2010Lei
      Xia/s/
      Charles T. Kimball
              
              Director
              
              March
      31, 2010Charles
      T. Kimball/s/
      Will Wang Graylin
              
              Director
              
              March
      31, 2010Will
      Wang Graylin/s/Richard
      L. King
              
              Director
              
              March
      31, 2010Richard
      L. King/s/Robert
      S. Torino
              
              Director
              
              March
      31, 2010Robert
      S. Torino/s/
      Afshin Yazdian
              
              Director
              
              March
      31, 2010Afshin
      Yazdian
 
 58
 Table of Contents
  SINOHUB, INC. AND SUBSIDIARIES
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  
  Reports of Independent Registered Public Accounting
      Firms
              60Consolidated
      Financial Statements for the Years Ended December 31, 2009 and
      2008Consolidated Balance Sheets
              62Consolidated Statements of Operations and Comprehensive
      Income
              63Consolidated Statements of Stockholders’
      Equity
              64Consolidated Statements of Cash Flows
              65Notes to Consolidated Financial
    Statements
              66
       
 59
 Table of Contents
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors of:
 
 SinoHub,
Inc.
 
 We have
audited the accompanying consolidated balance sheet of SinoHub, Inc. and
subsidiaries as of December 31, 2009 and the related consolidated statement of
operations and comprehensive income, stockholders’ equity and cash flows for the
year ended December 31, 2009. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit of the financial statements provide a reasonable basis for our
opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SinoHub, Inc. and subsidiaries as
of December 31, 2009, and the results of its operations and its cash flows for
the year ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
 
 
 /s/ Baker
Tilly Hong Kong Limited
 BAKER
TILLY HONG KONG LIMITED
 Certified
Public Accountants
 
 Hong
Kong
 Date:  March
29, 2010
    
 60
 Table of Contents
  Jimmy
      C.H. Cheung & Co
                
                Certified
      Public Accountants
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors of:
 
 SinoHub,
Inc.
 
 We have
audited the accompanying consolidated balance sheet of SinoHub, Inc. and
subsidiaries as of December 31, 2008 and the related consolidated statement of
operations and comprehensive income, stockholders’ equity and cash flows for the
year ended December 31, 2008. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s  internal control over
financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit of the financial statements provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SinoHub, Inc. and subsidiaries as
of December 31, 2008, and the results of its operations and its cash flows for
the year ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
 
 
 /s/ Jimmy
C.H. Cheung & Co.
 JIMMY
C.H. CHEUNG & CO
 
 Certified
Public Accountants
 
 Hong
Kong
 Date:  February
25, 2009
   61
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 ASSETS
              
              December
      31, 2009
              
              
              December
      31, 2008CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              8,347,000
              
              
              $
              5,860,000Restricted
      cash
              
              
              7,595,000
              
              
              
              374,000Accounts
      receivable, net of allowance
              
              
              28,828,000
              
              
              
              22,282,000Inventories,
      net
              
              
              11,647,000
              
              
              
              435,000Prepaid
      expenses and other current assets
              
              
              650,000
              
              
              
              370,000Total
      current assets
              
              
              57,067,000
              
              
              
              29,321,000PROPERTY
      AND EQUIPMENT, NET
              
              
              2,271,000
              
              
              
              703,000TOTAL
      ASSETS
              
              $
              59,338,000
              
              
              $
              30,024,000LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,209,000
              
              
              $
              764,000Customer
      deposits
              
              
              1,348,000
              
              
              
              -Accrued
      expenses and other current liabilities
              
              
              731,000
              
              
              
              234,000Bank
      borrowings
              
              
              11,793,000
              
              
              
              2,123,000Income
      and other taxes payable
              
              
              2,605,000
              
              
              
              3,391,000Total
      current liabilities
              
              
              17,686,000
              
              
              
              6,512,000STOCKHOLDERS’
      EQUITYPreferred
      stock, $0.001 par value, 5,000,000 shares authorized;
              
              
              -
              
              
              
              -no
      shares issuedCommon
      stock, $0.001 par value, 100,000,000 shares authorized;
              
              
              27,000
              
              
              
              25,00026,669,605
      shares and 24,501,989 shares issued and outstandingas
      of December 31, 2009 and December 31, 2008,
respectivelyAdditional
      paid-in capital
              
              
              17,239,000
              
              
              
              11,529,000Retained
      earningsUnappropriated
              
              
              22,725,000
              
              
              
              10,424,000Appropriated
              
              
              787,000
              
              
              
              724,000Accumulated
      other comprehensive income
              
              
              874,000
              
              
              
              810,000Total
      stockholders’ equity
              
              
              41,652,000
              
              
              
              23,512,000TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              59,338,000
              
              
              $
              30,024,000
  The
accompanying notes are an integral part of these consolidated financial
statements
  62
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
  Year
      ended December 31,2009
              
              
              2008NET
      SALESSupply
      chain management services
              
              $
              8,585,000
              
              
              $
              4,973,000Electronic
      components
              
              
              119,823,000
              
              
              
              74,511,000Total
      net sales
              
              
              128,408,000
              
              
              
              79,484,000COST
      OF SALESSupply
      chain management services
              
              
              447,000
              
              
              
              1,444,000Electronic
      components
              
              
              105,573,000
              
              
              
              61,830,000Total
      cost of sales
              
              
              106,020,000
              
              
              
              63,274,000GROSS
      PROFIT
              
              
              22,388,000
              
              
              
              16,210,000OPERATING
      EXPENSESSelling,
      general and administrative
              
              
              4,982,000
              
              
              
              2,990,000Professional
      services
              
              
              1,122,000
              
              
              
              692,000Stock
      compensation expense
              
              
              436,000
              
              
              
              110,000Depreciation
              
              
              553,000
              
              
              
              389,000(Write
      back of ) / Allowance for doubtful debts
              
              
              (890,000
              )
              
              
              1,237,000Total
      operating expenses
              
              
              6,203,000
              
              
              
              5,418,000INCOME
      FROM OPERATIONS
              
              
              16,185,000
              
              
              
              10,792,000OTHER
      INCOME (EXPENSE)Interest
      expense
              
              
              (122,000
              )
              
              
              (251,000
              )Interest
      income
              
              
              20,000
              
              
              
              66,000Other,
      net
              
              
              5,000
              
              
              
              27,000Total
      other income (expense)
              
              
              (96,000
              )
              
              
              (158,000
              )INCOME
      BEFORE INCOME TAXES
              
              
              16,089,000
              
              
              
              10,634,000Income
      tax expense
              
              
              3,725,000
              
              
              
              2,151,000NET
      INCOME
              
              
              12,364,000
              
              
              
              8,483,000OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
              
              
              64,000
              
              
              
              541,000COMPREHENSIVE
      INCOME
              
              $
              12,428,000
              
              
              $
              9,024,000SHARE
      AND PER SHARE DATANet
      income per share-basic
              
              $
              0.49
              
              
              $
              0.41Weighted
      average number of shares-basic
              
              
              25,079,000
              
              
              
              20,925,000Net
      income per share-diluted
              
              $
              0.48
              
              
              $
              0.40Weighted
      average number of shares-diluted
              
              
              25,677,000
              
              
              
              21,460,000
  The
accompanying notes are an integral part of these consolidated financial
statements
 63
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Retained
      earnings
              
              
              Appropriated
              
              
              AccumulatedCommon
      stock
              
              
              
              
              
              Additional
              
              
              (Accumulated
              
              
              retained
              
              
              other
      comprehensiveShares
              
              
              Amount
              
              
              paid-in
      capital
              
              
              deficit)
              
              
              earnings
              
              
              income
      (loss)
              
              
              TotalBalances
      at December 31, 2007
              
              
              18,290,000
              
              
              $
              18,000
              
              
              $
              4,509,000
              
              
              $
              2,309,000
              
              
              $
              356,000
              
              
              $
              269,000
              
              
              $
              7,461,000Reverse
      merger recapitalization
              
              
              1,200,000
              
              
              
              1,000
              
              
              
              (1,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
      issued for services
              
              
              510,000
              
              
              
              1,000
              
              
              
              433,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              434,000Stock
      issued for cash
              
              
              4,406,533
              
              
              
              5,000
              
              
              
              6,477,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,482,000Stock
      compensation - options issued
              
              
              -
              
              
              
              -
              
              
              
              53,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              53,000Exercise
      of stock options
              
              
              71,166
              
              
              
              -
              
              
              
              8,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,000Stock
      compensation - shares issued
              
              
              22,200
              
              
              
              -
              
              
              
              50,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50,000Rounding
      shares issued due to the reversed split
              
              
              190
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Shares
      issued to odd lot holders
              
              
              1,900
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,483,000
              
              
              
              -
              
              
              
              -
              
              
              
              8,483,000Foreign
      currency translation gain
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              541,000
              
              
              
              541,000Comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,024,000Transfer
      to appropriated retained earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (368,000
              )
              
              
              368,000
              
              
              
              -
              
              
              
              -Balances
      at December 31, 2008
              
              
              24,501,989
              
              
              $
              25,000
              
              
              $
              11,529,000
              
              
              $
              10,424,000
              
              
              $
              724,000
              
              
              $
              810,000
              
              
              $
              23,512,000Stock
      issued for cash
              
              
              756,922
              
              
              
              1,000
              
              
              
              2,648,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,649,000Exercise
      of warrants – cash
              
              
              1,170,425
              
              
              
              1,000
              
              
              
              2,553,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,554,000Exercise
      of warrants – cashless
              
              
              72,566
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of stock options
              
              
              78,809
              
              
              
              -
              
              
              
              13,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,000Option
      compensation cost
              
              
              -
              
              
              
              -
              
              
              
              252,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              252,000Stock
      compensation - shares issued
              
              
              24,000
              
              
              
              -
              
              
              
              60,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              60,000Stock
      compensation - shares issued to executives
              
              
              64,894
              
              
              
              -
              
              
              
              184,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              184,000Net
      income for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,364,000
              
              
              
              -
              
              
              
              -
              
              
              
              12,364,000Foreign
      currency translation gain
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              64,000
              
              
              
              64,000Comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,428,000Transfer
      to appropriated retained earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (63,000
              )
              
              
              63,000
              
              
              
              -
              
              
              
              -Balances
      at December 31, 2009
              
              
              26,669,605
              
              
              $
              27,000
              
              
              $
              17,239,000
              
              
              $
              22,725,000
              
              
              $
              787,000
              
              
              $
              874,000
              
              
              $
              41,652,000
  The
accompanying notes are an integral part of these consolidated financial
statements
  64
 Table of Contents
  SINOHUB, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 
 Year
      ended December 31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              12,364,000
              
              
              $
              8,483,000Adjustments
      to reconcile net income to cash provided by (used in)
      operation:Depreciation
              
              
              553,000
              
              
              
              389,000(Write
      back of) / Allowance for doubtful accounts
              
              
              (890,000
              )
              
              
              1,237,000Loss
      on disposal of property and equipment
              
              
              -
              
              
              
              5,000Stock
      compensation expense
              
              
              184,000
              
              
              
              53,000Stock
      option compensation amortization
              
              
              252,000
              
              
              
              50,000Stock
      issued for professional services
              
              
              60,000
              
              
              
              434,000Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (5,597,000
              )
              
              
              (12,934,000
              )Inventories
              
              
              (11,204,000
              )
              
              
              468,000Prepaid
      expenses and other current assets
              
              
              (279,000
              )
              
              
              84,000Accounts
      payable
              
              
              442,000
              
              
              
              (6,367,000
              )Customer
      deposits
              
              
              1,348,000
              
              
              
              -Accrued
      expenses and other current liabilities
              
              
              496,000
              
              
              
              (93,000
              )Income
      and other taxes payable
              
              
              (794,000
              )
              
              
              1,808,000Net
      cash used in operating activities
              
              
              (3,065,000
              )
              
              
              (6,383,000
              )CASH
      FLOWS FROM INVESTING ACTIVITIES(Increase)
      Release of restricted cash
              
              
              (7,221,000
              )
              
              
              5,135,000Purchase
      of property and equipment
              
              
              (2,140,000
              )
              
              
              (172,000
              )Proceed
      from disposal of property and equipment
              
              
              -
              
              
              
              10,000Net
      cash (used in) provided by investment activities
              
              
              (9,361,000
              )
              
              
              4,973,000CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock , net of costs
              
              
              2,650,000
              
              
              
              6,482,000Proceeds
      from exercise of warrants and options, net of costs
              
              
              2,567,000
              
              
              
              8,000Bank
      borrowing proceeds
              
              
              21,529,000
              
              
              
              2,123,000Bank
      borrowing repayments
              
              
              (11,859,000
              )
              
              
              (7,286,000
              )Notes
      payable repayments
              
              
              -
              
              
              
              (251,000
              )Related
      company proceeds
              
              
              -
              
              
              
              1,568,000Net
      cash provided by financing activities
              
              
              14,887,000
              
              
              
              2,644,000EFFECT
      OF EXCHANGE RATES ON CASH
              
              
              26,000
              
              
              
              344,000NET
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              2,487,000
              
              
              
              1,578,000CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              5,860,000
              
              
              
              4,282,000CASH
      AND CASH EQUIVALENTS AT END OF YEAR
              
              $
              8,347,000
              
              
              $
              5,860,000SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest expense
              
              $
              122,000
              
              
              $
              251,000Cash
      paid for income tax
              
              $
              3,672,000
              
              
              $
              409,000
  The
accompanying notes are an integral part of these consolidated financial
statemenst
  65
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
  1.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
  Overview
  SinoHub,
Inc. (the “Company”) provides products and services to suppliers and purchasers
of electronic components in connection with the manufacture and assembly of
electronic products in the People’s Republic of China (the “PRC” or
“China”).  Approximately 93% of the Company’s revenues are derived
from the sale of electronic components and assemblies to contract manufacturers
and design houses which are engaged in the manufacture of mobile phones, network
equipment and other electronics products in the PRC.  These sales
occur either as procurement-fulfillment project or as one-off electronic
component sale.
  In
connection with the supply of such components and products, the Company also
provides supply chain management services from which we derive approximately 7%
of our revenues.
  History
and Basis of Reporting
  SinoHub,
Inc. (formerly known as Liberty Alliance, Inc.) is a Delaware corporation,
originally organized in Utah in 1986, and subsequently merged and reorganized as
Liberty Alliance, Inc. in Delaware in 1991.  Liberty Alliance, Inc.
filed for bankruptcy in 1994 and the filing was closed in
1995.  Liberty Alliance, Inc. remained dormant until 2006 when it
began preparing to become a public shell company and seek new business
opportunities.  In August 2006 the Company changed its name to
Vestige, Inc., and in September 2006 the Company changed its name back to
Liberty Alliance, Inc.
  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 connection with the merger, Liberty Alliance, Inc.
issued to the stockholders of the Acquired Sub 18,290,000 shares (as adjusted
for reverse stock split) of the Company’s common stock in exchange for all the
outstanding shares of the Acquired Sub’s preferred and common stock and the
Company assumed options exercisable for additional shares of common
stock.  At the closing, Liberty Alliance, Inc. also issued 510,000
shares (as adjusted for reverse stock split) of the Company’s common stock to
certain consultants for services rendered in connection with the Merger.
Immediately following the merger, the Company had 20,000,000 shares of common
stock outstanding and options exercisable for an additional 489,451 shares (as
adjusted for reverse stock split) of common stock.  The conclusion of
these events was deemed to be a reverse takeover transaction, or RTO, after
which the original stockholders of the Company held approximately 6% of the
issued and outstanding shares of the Company’s common stock on a fully diluted
basis and the Acquired Sub’s stockholders, including the shares issued to
consultants, held approximately 94% of the Company’s issued and outstanding
shares of common stock.
  66
 Table of Contents
  In June
2008, the Company approved a reverse stock split of 1 share for every 3.5 common
stock outstanding whereupon outstanding common stock and stock options were
adjusted to account for the effects of the reverse stock split.
  In July
2008, the Company changed its name from Liberty Alliance, Inc. to SinoHub, Inc.
and the Acquired Sub changed its name from SinoHub, Inc. to SinoHub
International, Inc.
  For
financial reporting purposes, the RTO has been accounted for as a
recapitalization of the Company whereby the historical financial statements and
operations of the Acquired Sub become the historical financial statements of the
Company, with no adjustment to the carrying value of assets and
liabilities.  Share and per share amounts reflect the effects of the
recapitalization and reverse stock split for all periods
presented.  In addition, the presentation for all periods includes
equity transactions of the Acquired Sub as adjusted for the effects of the
recapitalization and reverse stock split.
  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 Ms. Hantao Cui, a citizen of the PRC, a shareholder of the Company and the
spouse of our President Lei Xia, 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.
  67
 Table of Contents
  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.
  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
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 cost, 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.
  68
 Table of Contents
  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 YearsMotor
      vehicles
                5 YearsFurniture, fixtures
      and equipment
                2 to 5
      Years
 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.  The Company believes
that no impairment of property and equipment exists at December 31,
2009.
  Financial
Instruments
  The
Company analyzes all financial instruments that may have features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”  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 FSP
EITF 00-19-2, “Accounting for Registration Payment Arrangements.”
  Fair
Value of Financial Instruments
  SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," 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.
  The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, bank borrowings, notes payable 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.
  69
 Table of Contents
  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
Company does not utilize derivative or hedge instruments in its financing
activities.
  Stock-Based
Compensation
  The
Company adopted SFAS No. 123R, “Share-Based Payments.”  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 SFAS 123R and the Emerging
Issues Task Force consensus Issue No. 96-18, "Accounting for Equity Instruments
that are issued to Other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services" ("EITF 96-18"), as the fair value of the
consideration received or the fair value of equity instruments issued, whichever
is more reliably measured.
  Revenue
Recognition
  The
Company reports revenue from supply chain management, or SCM, services and
electronic components sales. Revenues for supply chain management 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 electronic components sales 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.
  Income
Taxes
  The
Company accounts for income taxes under the SFAS No. 109, “Accounting for Income
Taxes.”  Under SFAS 109, 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.  Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment date.
  70
 Table of Contents
  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. and SinoHub
Electronics Shanghai, Ltd. maintain accounting records using RMB as the
functional currency.
  The
Company uses United State Dollar (“USD”) as its reporting
currency.  The Company accounts for foreign currency translation
pursuant to SFAS No. 52, “Foreign Currency Translation” (“SFAS No.
52”).  The subsidiaries of the Company’s functional currencies are the
Hong Kong Dollar (“HKD”) and Chinese Renminbi (“RMB”).  Under SFAS No.
52, 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 SFAS No. 128, "Earnings Per
Share."  SFAS 128 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 one business segment.
  Recent
Accounting Pronouncements
  In
February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. The
Company does not expect the adoption of ASU 2010-09 to have a material impact on
its consolidated results of operations or financial position.
  71
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  In
January 2010, FASB issued ASU 2010-6 Improving Disclosures about Fair
Measurements ("ASU 2010-6"). ASU 2010-6 provides amendments to
subtopic 820-10 that require separate disclosure of significant transfers in and
out of Level 1 and Level 2 fair value measurements and the
presentation of separate information regarding purchases, sales, issuances and
settlements for Level 3 fair value measurements. Additionally, ASU 2010-6
provides amendments to subtopic 820-10 that clarify existing disclosures about
the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is
effective for financial statements issued for interim and annual periods ending
after December 15, 2010. The Company does not expect the adoption of ASU
2010-06 to have a material impact on its consolidated results of operations or
financial position.
  In
January 2010, FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards
Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. ASU 2010-2 is effective for the
Company starting January 3, 2010. The Company does not expect the adoption of
ASU 2010-2 to have a material impact on the Company's consolidated results of
operations or financial position.
  In
December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprise's
involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009. The Company does not expect the adoption of ASU
2009-17 to have a material impact on its consolidated results of operations or
financial position.
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  In
December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The
amendments in ASU 2009-16 improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009.  The Company does not
expect the adoption of ASU 2009-16 to have a material impact on its consolidated
results of operations or financial position.
  In
October, 2009, the FASB issued ASU 2009-15,“Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”(
amendments to ASC Topic 470, Debt)” (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. The Company
does not expect the adoption of ASU 2009-15 to have a material impact on its
consolidated results of operations or financial position.
  In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include
Software Elements, (amendments to ASC Topic 985, Software)” (“ASU
2009-14”). ASU 2009-14 removes tangible products from the scope of software
revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
  In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-13 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. Management is currently
evaluating the potential impact of ASU2009-13 on our financial
statements.
  In
September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-12,
Fair Value Measurements and
Disclosures (Topic 820)—Investments in Certain Entities That Calculate Net Asset
Value Per Share (or Its Equivalent) which amended Accounting Standards
Codification Subtopic 820-10, Fair Value Measurements and
Disclosures—Overall. The amended guidance offers investors a practical
expedient for measuring the fair value of investments in certain entities that
calculate net asset value per share (NAV). The ASU is effective for the first
reporting period (including interim periods) ending after December 15,
2009. The adoption of ASU 2009-12 did not have a material impact on the
Company’s financial position or results of operations at the date of
adoption.
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  In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic
740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities (formerly proposed as FASB
Staff Position No. 48-d, Application Guidance for
Pass-Through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure
Modifications for Nonpublic Entities), which amended Accounting
Standards Codification Subtopic 740-10, Income Taxes – Overall. ASU
2009-06 clarifies that an entity’s assertion that it is a pass-through entity is
a tax position and should be assessed in accordance with Subtopic 740-10.
Additionally, the ASU provides implementation guidance on the attribution of
income taxes to entities and owners. The revised guidance is effective for
periods ending after September 15, 2009. The adoption of ASU 2009-06 did
not have a material impact on the Company’s financial position or results of
operations at the date of adoption.
  In August
2009, FASB issued ASU 2009-5 Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value ("ASU
2009-5"). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of liabilities. ASU
2009-5 clarifies that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is
required to measure fair value. ASU 2009-5 was effective for the Company
for interim and annual periods ending after October 3, 2009. The adoption
of ASU 2009-5 did not have a material impact on the Company's consolidated
results of operations or financial position.
  In August
2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity
Instruments—an Amendment to Section 480-10-S99 ("ASU 2009-4"). ASU
2009-4 represents a Securities and Exchange Commission ("SEC") update to
Section 480-10-S99, Distinguishing Liabilities from
Equity. The adoption of guidance within ASU 2009-4 did not have an impact
on the Company's consolidated results of operations or financial
position.
  In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162
(subsequently codified into FASB ASC Topic 105) which established the FASB
Accounting Standards Codification (“ASC” or the “Codification”) as the single
source of authoritative accounting principles for U.S. GAAP issued by the FASB.
The Codification supersedes all existing non-SEC accounting and reporting
standards and subsequent to adoption, the FASB will issue new standards in the
form of ASUs, and no longer as SFASs, FASB Staff Positions or Emerging Issues
Task Force Abstracts. The Codification is effective for reporting periods ending
on or after September 15, 2009. The adoption of the Codification did not
have any impact on the Company’s financial position or results of operations at
the date of adoption.
  Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC or Codification), “Generally
Accepted Accounting Principles - Overall” (ASC Topic 105-10). The Codification
established one source for all U.S. GAAP. The Codification supersedes, but does
not change, all then-existing non-SEC accounting and reporting standards.
Throughout this report, references provided to applicable portions of the
Codification also include reference to the original FASB standard (SFAS), staff
position (FSP) or consensus of the Emerging Issues Task Force
(EITF).
  74
 Table of Contents
  In May
2009, the FASB issued guidance on subsequent events (originally issued as SFAS
No. 165, Subsequent
Events, and subsequently codified into FASB ASC Topic 855). Topic 855
addresses the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. Topic 855 is
effective for interim or annual periods ending after June 15, 2009. The
adoption of Topic 855 did not have any impact on the Company’s financial
position or results of operations at the date of adoption.
  In April
2009, the FASB issued guidance on determining fair value when the volume and
level of activity for an asset or liability has significantly decreased and
identifying transactions that are not orderly (originally issued as FASB Staff
Position SFAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, and subsequently codified
within FASB ASC Topic 820). The guidance provides additional guidance to expand
on the factors that should be considered in estimating fair value when there has
been a significant decrease in market activity for an asset or liability. The
guidance is effective for interim and annual periods ending after June 15,
2009. The adoption did not have any impact on the Company’s financial position
or results of operations at the date of adoption.
  In April
2009, FASB issued Staff Position ("FSP") No. 115-2 and FSP 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (now codified within ASC 320, Investments—Debt and Equity
Securities ("ASC 320")). ASC 320 provides greater clarity about the
credit and noncredit component of an other-than-temporary impairment event and
more effectively communicates when an other-than-temporary impairment event has
occurred. ASC 320 amends the other-than-temporary impairment model for debt
securities. The impairment model for equity securities was not affected. Under
ASC 320, an other-than-temporary impairment must be recognized through earnings
if an investor has the intent to sell the debt security or if it is more likely
than not that the investor will be required to sell the debt security before
recovery of its amortized cost basis. This standard was effective for interim
periods ending after June 15, 2009. The adoption of ASC 320 did not have a
material impact on the Company's consolidated results of operations or financial
position.
  In April
2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value
of Financial Instruments (now codified within ASC 825, Financial Instruments
("ASC 825")). ASC 825 requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. ASC 825 was effective for interim periods ending after June 15,
2009. The adoption of ASC 825 did not have a material impact on the Company's
consolidated results of operations or financial position.
  In June
2008, FASB issued Staff Position—Emerging Issues Task Force 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(now codified within ASC 260, Earnings Per Share ("ASC
260")). Under ASC 260, unvested share based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. ASC 260 was effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years and requires retrospective
application. The adoption of ASC 260 did not have a material impact on the
Company's earnings per share calculations.
  75
 Table of Contents
  In April
2008, FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (now codified within ASC 350, Intangibles—Goodwill and
Other ("ASC 350")). ASC 350 provides guidance for determining the useful
life of a recognized intangible asset and requires enhanced disclosures so that
users of financial statements are able to assess the extent to which the
expected future cash flows associated with the asset are affected by our intent
and/or ability to renew or extend the arrangement. ASC 350 was effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The adoption of ASC 350 on January 4, 2009 did not
impact the Company's consolidated results of operations or financial
position.
  In March
2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (now codified within ASC 815, Derivatives and Hedging ("ASC
815")). ASC 815 requires enhanced disclosures about an entity's derivative and
hedging activities aimed at improving the transparency of financial reporting.
ASC 815 was effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of ASC 815
did not have any impact on the Company's consolidated results of operations or
financial position.
  In
December 2007, FASB issued SFAS No. 141(R), Business Combinations (now
codified within ASC 805, Business Combinations ("ASC
805")). ASC 805 establishes principles and requirements for how the acquirer in
a business combination recognizes and measures in its financial statements the
fair value of identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at the acquisition date. ASC 805
significantly changes the accounting for business combinations in a number of
areas, including the treatment of contingent consideration, preacquisition
contingencies, transaction costs and restructuring costs. In addition, under ASC
805, changes in an acquired entity's deferred tax assets and uncertain tax
positions after the measurement period will impact income tax expense. The
provisions of this standard will apply to any acquisitions we complete on or
after December 15, 2008. The adoption of ASC 805 did not have an impact on
the Company's consolidated results of operations or financial
position.
  In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 (now
codified within ASC 810,
Consolidation ("ASC 810")). ASC 810 changes the accounting and reporting
for minority interests, which is recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method significantly
changes the accounting for transactions with minority interest holders. The
provisions of ASC 810 were applied to all noncontrolling interests
prospectively, except for the presentation and disclosure requirements, which
were applied retrospectively to all periods presented and have been disclosed as
such in our consolidated financial statements herein. ASC 810 became effective
for fiscal years beginning on or after December 15, 2008. The adoption of
ASC 810 did not have a material impact on the Company's consolidated results of
operations or financial position.
  In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (now
codified within ASC 820). ASC 820 provides guidance for using fair value to
measure assets and liabilities. Under ASC 820, fair value refers to the
price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants at the measurement date. The
guidance within ASC 820 became effective for financial statements issued for
fiscal years beginning after November 15, 2007; however, the FASB provided
a one year deferral for implementation of the standard for non-recurring,
non-financial assets and liabilities. The Company adopted ASC 820 for
non-financial assets and non-financial liabilities effective January 4,
2009, which did not have any effect on its consolidated results of operations or
financial position.
 
 76
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 2.           ACCOUNTS
RECEIVABLE
 
 Accounts receivable at December 31,
2009 and 2008 consisted of the following:
 
 2009
              
              
              2008Accounts
      receivable
              
              $
              29,175,000
              
              
              $
              23,520,000Less:
      allowance for doubtful accounts
              
              
              347,000
              
              
              
              1,237,000Accounts
      receivable, net of allowance
              
              $
              28,828,000
              
              
              $
              22,283,000
 
 As of
December 31, 2009 and 2008, the Company recorded an allowance for doubtful
accounts of $347,000 and $1,237,000 respectively. In 2009, a write back of
allowance for doubtful accounts of $890,000 was recorded.
 
 3.           PREPAID
EXPENSES AND OTHER CURRENT ASSETS
  Prepaid
expenses and other current assets at December 31, 2009 and 2008 consisted of the
following:
  2009
              
              
              2008Prepaid
      expenses
              
              $
              290,000
              
              
              $
              277,000Other
      receivables
              
              
              360,000
              
              
              
              93,000$
              650,000
              
              
              $
              370,000
 
 
 4.           PROPERTY
AND EQUIPMENT
  The
following is a summary of property and equipment at December 31, 2009 and
2008:
  2009
              
              
              2008Furniture,
      fixtures and equipment
              
              $
              3,401,000
              
              
              $
              1,333,000Plant
      and machinery
              
              
              777,000
              
              
              
              767,000Motor
      vehicles
              
              
              335,000
              
              
              
              288,000$
              4,513,000
              
              
              $
              2,388,000Less:  accumulated
      depreciation
              
              
              (2,242,000
              )
              
              
              (1,685,000
              )Property
      and equipment, net
              
              $
              2,271,000
              
              
              $
              703,000
  Depreciation
expenses for the years ended December 31, 2009 and 2008 were $553,000 and
$389,000 respectively.
  77
 Table of Contents
  5.           ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
  Accrued
expenses and other current liabilities at December 31, 2009 and 2008 and
consisted of the following:
  2009
              
              
              2008Accrued
      expenses
              
              $
              506,000
              
              
              $
              163,000Other
      liabilities
              
              
              225,000
              
              
              
              71,000$
              731,000
              
              
              $
              234,000
 
  6.           BANK
BORROWINGS AND FINANCING ARRANGEMENTS
  The
Company has secured financing facilities (RMB based) with certain PRC banks to
support its business operations. The bank facilities include:
  -
              Letter
      of credit facility with one bank in the amount of $4,700,000 to support
      its component sales business.  Restricted cash balances are
      required as security for draws against the facility.  The
      Company also has a $1,500,000 Customs duty import facility and a
      $3,200,000 Customs export refund facility through this bank to support
      short term duty collections for its component sales
      business.  These facilities renew each year and are available
      through December 2010.
 
 -
              Letter
      of credit facility with another bank in the amount of $4,400,000 to
      support its component sales business. Restricted cash balances are
      required as security for draws against the facility and the bank requires
      guarantors from a subsidiary and a director and lien on a PRC property
      owned by a director. The facility renews each year and is available
      through September, 2010.
 
 -
              Letter
      of credit facility with another bank in the amount of $6,400,000 to
      support its component sales business.  Restricted cash balances
      are required as security for draws against the facility and the bank
      requires guarantors from two subsidiaries and two executive
      officers.  The facility renews each year and is available
      through April, 2010.
 
 Borrowings
against these facilities at December 31, 2009 and 2008 were as
follows:
 
 2009
              
              
              2008Note
      payable to a bank, annual interest rate 5.54%, due January
      2009
              
              $
              -
              
              
              $
              121,000Note
      payable to a bank, annual interest rate 5.54%, due January
      2009
              
              
              -
              
              
              
              156,000Note
      payable to a bank, annual interest rate 6.19%, due February
      2009
              
              
              -
              
              
              
              954,000Note
      payable to a bank, annual interest rate 6.83%, due March
    2009
              
              
              -
              
              
              
              730,000Note
      payable to a bank, annual interest rate 5.54%, due March
    2009
              
              
              -
              
              
              
              162,000Note
      payable to a bank, annual interest rate 3.12%, due January
      2010
              
              
              1,792,000
              
              
              
              -Note
      payable to a bank, annual interest rate 3.12%, due February
      2010
              
              
              804,000
              
              
              
              -Note
      payable to a bank, annual interest rate 5.35%, due March
    2010
              
              
              731,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.22%, due April
    2010
              
              
              299,000
              
              
              
              -  78
 Table of Contents
  Note
      payable to a bank, annual interest rate 5.84%, due May
2010
              
              
              1,463,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.22%, due May
2010
              
              
              457,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.22%, due May
2010
              
              
              445,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.18%, due May
2010
              
              
              644,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.22%, due May
2010
              
              
              1,380,000Note
      payable to a bank, annual interest rate 1.22%, due May
2010
              
              
              230,000Note
      payable to a bank, annual interest rate 1.18%, due May
2010
              
              
              1,332,000Note
      payable to a bank, annual interest rate 1.18%, due May
2010
              
              
              995,000Note
      payable to a bank, annual interest rate 1.39%, due June
    2010
              
              
              503,000Note
      payable to a bank, annual interest rate 1.38%, due June
    2010
              
              
              224,000
              
              
              
              -Note
      payable to a bank, annual interest rate 1.44%, due June
    2010
              
              
              494,000$
              11,793,000
              
              
              $
              2,123,000Less
      : current maturities
              
              
              11,793,000
              
              
              
              2,123,000Long
      -term portion
              
              $
              -
              
              
              $
              -
 
 Interest
expense paid for the years ended December 31, 2009 and 2008 was $122,000 and
$251,000 respectively.
 
 
 7.           COMMITMENTS
AND CONTINGENCIES
  Employee
Benefits
  The full
time employees of subsidiaries based in the PRC are entitled to employee
benefits including medical care, welfare subsidies, unemployment insurance and
pension benefits through a Chinese government mandated multi-employer defined
contribution plan.  The Company is required to accrue for those
benefits based on certain percentages of the employees’ salaries and make
contributions to the plans out of the amounts accrued for medical and pension
benefits.  The total provision and contributions made for such
employee benefits for the years ended December 31, 2009 and 2008 were $145,000
and $90,000 respectively.  The Chinese government is responsible for
the medical benefits and the pension liability to be paid to these
employees.
  Commitments
  The
Company leases warehouse and office spaces from third parties under operating
leases which expire at various dates from September 2010 through August
2014.  Rent expense for the years ended December 31, 2009 and 2008 was
$392,000 and $373,000 respectively.  At December 31, 2009, the Company
has outstanding commitments with respect to operating leases, which are due as
follows:
  2010
              
              $
              772,0002011
              
              
              643,0002012
              
              
              553,0002013
              
              
              166,0002014
              
              
              20,000$
              2,154,000
 
 79
 Table of Contents
  Contingencies
  The
Company accounts for loss contingencies in accordance with SFAS 5,“Accounting for Loss
Contingencies” and other related guidelines.  As of December
31, 2009, there was no loss contingency.
 
 
 8.           EARNINGS
PER SHARE
  The
elements for calculation of earnings per share for the years ended December 31,
2009 and 2008 were as follows:
  Years
      ended December 31,2009
              
              
              2008Net
      income for basic and diluted earnings per share
              
              $
              12,364,000
              
              
              $
              8,483,000Weighted
      average shares used in basic computation
              
              
              25,079,000
              
              
              
              20,925,000Effect
      of dilutive stock options and warrants
              
              
              598,000
              
              
              
              535,000Weighted
      average shares used in diluted computation
              
              $
              25,677,000
              
              
              $
              21,460,000Earnings
      per share:Basic
              
              $
              0.49
              
              
              $
              0.41Diluted
              
              $
              0.48
              
              
              $
              0.40
   9.           STOCKHOLDERS’
EQUITY
  Merger
and Reverse Stock Split
  The company’s reverse merger transaction has been
accounted for as a recapitalization of the Company whereby the historical
financial statements and operations of the Acquired Sub become the historical
financial statements of the Company, with no adjustment of the carrying value of
the assets and liabilities. In connection with the reverse
merger,the principal stockholder of Liberty
Alliance, Inc. contributed 5,203,907 shares of common stock (adjusted for
reverse stock split) held by him back to the Company for nil consideration.
Following the reverse merger,Liberty
Alliance, Inc. issued to the stockholders of the Acquired Sub 18,290,000 shares
(as adjusted for one for 3.5 reverse stock split) of the Company’s common stock
in exchange for all the outstanding shares of the Acquired Sub’s common stock
comprising 10,282,288 shares of common stock and 6,933,334 shares of Acquired
Sub’s preferred stock, of which 3,000,000 were designated Series A Convertible
Preferred Stock (convertible into 3,000,000 shares of Acquired Sub’s common
stock), 2,333,334 shares were designated Series B Convertible Preferred Stock
(convertible into 2,333,334 shares of Acquired Sub’s common stock), and
1,600,000 shares were designated Series C Convertible Preferred Stock
(convertible into 1,600,000 shares of Acquired Sub’s common
stock).  The Company also assumed options outstanding exercisable foradditional 489,451 shares (as adjusted for reverse stock split) of common stock.  At the closing, Liberty
Alliance, Inc. also issued 510,000 shares (as adjusted for reverse stock split)
of the Company’s common stock to certain consultants for services rendered in
connection with the Merger. Immediately following the merger, the Company had
20,000,000 shares of common stock outstanding and options exercisable for an
additional 489,451 shares (as adjusted for reverse stock split) of common
stock.
  80
 Table of Contents
  The financial statements have been prepared as if the
reverse merger transaction had occurred retroactivelyat the beginning of
the periods presented. Share and per share amounts
reflect the effects of the recapitalization and reverse stock split for all
periods presented. Accordingly, all of the outstanding shares of the
Acquired Sub’s common stock and preferred stock at the completion date of the
reverse merger transaction have been exchanged and converted to 18,290,000
shares (as adjusted for reverse stock split) of the Company’s common stock for
all periods presented. In addition, the presentation for all periods
includes equity share transactions of the Acquired Sub as adjusted for the
effects of the recapitalization and reverse stock split.  All costs
associated with the transaction were expensed as incurred.
  Equity
Share Transactions
  In July
2008, the Company issued an aggregate of190 shares of the
Company’s common stock to shareholders who held fractional shares as a result of
the 1-3.5 reverse stock split of the Company’s common stock effected in July
2008 pursuant to the terms of the amendment to the Company’s Certificate of
Incorporation effecting the reverse stock split which called for fractional
shares to be rounded up.
  Between
August 6, 2008 and November 19, 2008, the Company issued an aggregate of1,900 shares of the
Company’s common stock to odd lot holders in order to bring their holdings up to
round lots.  The holders were all holders of the shares of the
Company’s common stock prior to the Merger but who otherwise had no relationship
with the Company.  The sole consideration for the shares was the
execution and delivery of lock-up agreements by these stockholders pursuant to
which they agreed to lock up their shares until July 18,
2009.
  In
September 2008, the Company entered into and closed a Securities Purchase
Agreement with certain accredited investors in a private offering for shares of
common stock and warrants to purchase common stock.  The Company issued
4,406,533 shares of common stock, three-year warrants to purchase 1,101,633
shares of common stock at an exercise price of $2.15 per share, and five-year
warrants to purchase 1,101,633 shares of common stock at $3.00 per share in
return for gross proceeds of approximately $7.5 million in
cash.  During the third quarter of 2008, net offering proceeds of
approximately $6.5 million were recorded as an addition to stockholders’ equity,
after deducting offering and related closing costs of the transaction.  The
Company also issued warrants to the placement agent in connection with services
for the private offering.  These included three-year warrants to
purchase 154,228 shares of common stock at an exercise price of $2.15 per share,
and five-year warrants to purchase 154,229 shares of common stock at $3.00 per
share.
  On
October 29, 2008, certain employees exercised their stock options to purchase an
aggregate of 71,166 shares of common stock for $8,000.
  In
December 2008, the Company issued 22,200 shares to employees for services
rendered at a fair value of $50,000.
  In January 2009, certain employees exercised their stock
options to purchase an aggregate of 78,809 shares of common stock for
$13,000.
  81
 Table of Contents
  On July 22, 2009, pursuant to the terms of the 2008
Stock Plan, the Company authorized to grant to three executive officers an
aggregated 64,894 shares of Common Stockat fair value of $184,000 vesting with respect to 100% of the aggregate number of
shares granted on December 31, 2009.
  On August
3, 2009, the Company entered into and closed a Securities Purchase
Agreement with certain accredited investors in a private offering for an
aggregate of 342,862 shares of common stock, which resulted in gross proceeds to
the Company of $1,200,000.
  On August 14, 2009, the Company issued 24,000 shares of
common stock to third parties for investor relations services at fair
value of $60,000.  Both served the
Company in 2009.
  On August
28, 2009, an accredited investor exercised the Company’s A Warrants to purchase
44,117 shares of common stock, which resulted in gross proceeds to the Company
of $94,852.  On October 23, 2009, the same accredited investor
exercised the Company’s B Warrants to purchase 44,117 shares of common stock,
which resulted in gross proceeds to the Company of $132,351.
  On November 2, 2009, the Company entered into and
closed a Securities Purchase Agreement with certain accredited investors in
a private offering for an aggregate of 414,060 shares of common stock, which
resulted in gross proceeds to the Company of $1,449,210.
  During
November, 2009, certain accredited investors exercised the Company’s A Warrants
to purchase an aggregate of 1,154,757 shares of common stock, which resulted in
gross proceeds to the Company of $2,326,711.
  Appropriated
Retained Earnings
  The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on the after-tax net income determined in
accordance with the laws and regulations of the PRC.  Prior to January
1, 2006 the appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the laws and
regulations of the PRC until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to the statutory public welfare
fund are at 5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10% of net income after tax per
annum, such contributions not to exceed 50% of the respective companies’
registered capital.
  The
statutory reserve funds are restricted for use to set off against prior period
losses, expansion of production and operation or for the increase in the
registered capital of the Company.  The statutory public welfare fund
is restricted for use in capital expenditures for the collective welfare of
employees.  These reserves are not transferable to the Company in the
form of cash dividends, loans or advances.  These reserves are
therefore not available for distribution except in liquidation. During 2009 and
2008, the Company appropriated $63,000 and $368,000 respectively, to the
reserves funds based in accordance with the laws and regulations of the
PRC.
 
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 10.          STOCK
OPTIONS
 
 The
Company 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 December 31, 2009, stock options to purchase 1,263,978
shares of common stock at an exercise price ranging from $0.10 to $4.36 per
share were outstanding. The exercise prices were determined by the Board at the
time of grant.  In each 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 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
      DateLife
              Volatility
              Yield
              Interest
      Rate
              Fair
      ValueThe
      2000 ISOP5
      years
              175%
              0%
              2.5%
              $0.09
      - $0.19The
      2008 ISOP1-5
      years
              83%-121%
              0%
              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: Risk-free interest rate of 2.5% was used.  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.
  83
 Table of Contents
  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 Staff Accounting Bulletin
No. 107.
  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. SFAS No. 123R requires forfeiture to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
  During
2009 and 2008, the Company granted 973,972 shares and 252,524 shares of stock
options respectively with a total fair value of approximately $2,038,000 and
$299,000, respectively. The Company recognized $252,000 and $50,000 in stock
compensation expense for the years ended December 31, 2009 and 2008,
respectively. At December 31, 2009, unamortized compensation cost related to
stock options was $1,154,000.
 
 On July
22, 2009, pursuant to the terms of the Company’s 2008 Amended and Restated Stock
Plan, the Company authorized to grant to five independent directors
non-qualified stock options to purchase an aggregate of 449,048 shares of Common
Stock with average exercise price of $2.40 and 5 years vesting
period.
  The
following is a summary of the stock options activity:
  Number
      ofOptionsOutstanding
                
                
                
                Weighted-
                  Average
                  Exercise
                  PriceBalance
      at December 31, 2007
                
                
                505,802
                
                
                $
                0.13Granted
                
                
                450,000
                
                
                
                1.02Forfeited
                
                
                (257,747
                )
                
                
                -Exercised
                
                
                (71,166
                )
                
                
                0.11Balance
      at December 31, 2008
                
                
                626,889
                
                
                $
                0.49Granted
                
                
                973,972
                
                
                
                2.85Forfeited
                
                
                (258,074
                )
                
                
                -Exercised
                
                
                (78,809
                )
                
                
                0.15Balance
      at December 31, 2009
                
                
                1,263,978
                
                
                $
                2.01Options
      exercisable on December 31, 2009
                
                
                209,495
                
                
                $
                0.42Weighted
      average fair value of opinions granted during 2009
                
                
                
                
                
                $
                2.09
 
  Of the
total options granted, 209,495 are fully vested, exercisable and
non-forfeitable.
  84
 Table of Contents
 
 The
following is a summary of the status of options outstanding at December 31, 2009
and 2008:
  2009
      Outstanding Options
              
              Exercisable
      OptionsRange
      of
              
              Number
              
              Weighted
              
              Weighted
              
              Number
              
              WeightedExercise
      Price
              Outstanding
      at
              Average
              Average
              AverageDecember
      31, 2009
              Remaining
              Exercise
              ExerciseContractual
              Price
              PriceLife$0.09
      - $1.02
              
              504,106
              
              8.1
      years
              
              $0.60
              
              209,495
              
              $0.42$2.35
      - $2.50
              
              497,572
              
              4.5
      years
              
              $2.40
              
              -
              
              $2.40$3.77
      - $4.36
              
              262,300
              
              9.8
      years
              
              $3.96
              
              -
              
              $3.96Total
              
              1,263,978
              
              
              
              
              
              209,495
              
              $0.422008
      Outstanding Options
              
              Exercisable
      OptionsRange
      of
              
              Number
              
              Weighted
              
              Weighted
              
              Number
              
              WeightedExercise
      Price
              Outstanding
      at
              Average
              Average
              AverageDecember
      31, 2008
              Remaining
              Exercise
              ExerciseContractual
              Price
              PriceLife$0.09
      - $1.02
              
              657,651
              
              9.0 years
              
              $0.50
              
              145,401
              
              $0.14$2.48
              
              2,524
              
              10.0
      years
              
              $2.48
              
              -
              
              $2.48Total
              
              660,175
              
              
              
              
              
              145,401
              
              $0.14
 
  11.           RELATED
PARTY TRANSACTIONS
 
 On
January 17, 2007, a director purchased a one year 7.69% Note from SinoHub, Inc.
in the amount of RMB 1,658,000 (approximately $213,000) which was repayable on
demand. This Note was repaid by SinoHub on March 20, 2007. Interest expense paid
on this Note for the year ended December 31, 2007 was $3,500.
  On March
20, 2007, SinoHub issued 371,842 shares of its common stock to the spouse of a
director for agreeing to let SinoHub use the condominium in which she holds 50%
ownership (the director owns the remaining 50%) as collateral for a bank loan.
  The shares were valued at $43,000.
  On
January 17, 2008, SinoHub’s subsidiary SinoHub Electronics Shenzhen, Ltd.
acquired beneficial ownership of SinoHub SCM Shanghai, Ltd.  from Sai
Lin Xu with the shares of SinoHub SCM Shanghai, Ltd. being held for the benefit
of SinoHub Electronics Shenzhen, Ltd. by a trustee pursuant to a Declaration of
Trust   In accordance with the terms of the Declaration of Trust,
no material monetary payment was associated with this acquisition because
through the Declaration of Trust, SinoHub Electronics Shenzhen had borne all
costs.  The trustee was the mother-in-law of a director of the
Company.
  On April 10, 2008, B2B Chips acquired SinoHub Technology
(Hong Kong) from two directors of the Company for HKD 10,000 ($1,290), which
represented the initial capital contributions in the
company.SinoHub Technology never conducted any business
and its sole asset at all times was a Hong Kong bank account holding the balance
of the capital contributions.
  85
 Table of Contents
 
 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
connection with the merger, Liberty Alliance, Inc. issued to the stockholders of
the Acquired Sub 18,290,000 shares (as adjusted for reverse stock split) of the
Company’s common stock in exchange for all the outstanding shares of the
Acquired Sub’s preferred and common stock and the Company assumed options
exercisable for an additional 489,451 shares (as adjusted for reverse stock
split) of common stock. In connection with the Company’s reverse merger, Steve
White, the controlling shareholder of the company while it was a dormant shell
and its sole director, surrendered 5,203,907 shares of common stock of Liberty
Alliance, Inc.  (as adjusted for reverse stock split) and was granted
piggyback registration rights with respect to the remaining 196,093 shares he
owned. Mr. White also executed a lock-up agreement with the Company that expires
on May 14, 2009.
  The
Company distributed electronic components to and resold electronic products
purchased from a company owned jointly by the Chairman and the President of the
Company.  In addition, the related company provided certain
warehousing and logistics services to the Company during the development of its
Hong Kong operation.  During the year of 2009 and 2008, the Company
sold goods totaling approximately $Nil and $1.5 million to the related company
and purchased goods totaling approximately $Nil and $3,000,000 from the related
company.  The Company paid no service fees to the related company in
2008.  During 2008, the Company received rental income of $154,000 for
the lease of warehouse space to the related company. At December 31, 2008, there
was no amount outstanding between the Company and the related
company.  There was no related company transaction during the year of
2009.
  A PRC
property owned by a director and his spouse is pledged to a bank to secure
banking facilities for the Company.
  A
director and his spouse have provided guarantees to a bank for banking
facilities in the amount of $4,400,000 extended to the Company.
  A
director, his spouse and an executive officer have provided guarantees to a bank
for banking facilities in the amount of $6,400,000 extended to the
Company.
 
 
 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 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.  The Company has operating loss carry forwards (NOLs) for
income taxes purposes of approximately $1.2 million at December 31, 2009 which
may be available to reduce future years’ taxable income.  These NOLs
will expire, if not utilized, commencing in 2029.  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, a full deferred tax asset valuation allowance
has been provided and no deferred tax benefit has been recorded.
  86
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 The
Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax at a
statutory rate of 17.5%.  No provision for Hong Kong profits tax was
required as these entities incurred losses during 2009 and
2008.  There are no tax loss carry forward provisions in Hong
Kong.
  The
Company’s subsidiaries in China were subject to China income tax at a statutory
rate of 25% in 2009 and 2008.  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 taxrate was 20% and 18% in 2009 and 2008 respectively.
  Income
tax expense for 2009 and 2008 is summarized as follows:
  2009
              
              2008Current
              
              $
              3,725,000
              
              
              $
              2,151,000Deferred
              
              
              -
              
              
              
              -$
              3,725,000
              
              
              $
              2,151,000
 
  The
reconciliation of income taxes computed at the statutory income tax rates to
total income taxes for the years ended December 31, 2009 and 2008 is as
follows:
  2009
              
              
              2008Income
      before income taxes
              
              $
              16,089,000
              100%
              
              $
              10,634,000
              100%China
      income taxes at statutory rate
              
              $
              4,022,000
              25%
              
              $
              2,658,500
              25%China
      qualified income tax exemptions
              
              
              (297,000)
              -2%
              
              
              (507,500)
              -5%Income
      tax expense
              
              $
              3,725,000
              23%
              
              $
              2,151,000
              20%
 
  
 13.           CONCENTRATIONS
AND RISKS
 
 During
2009 and 2008, 90% and 99% of the Company’s assets were located in China,
respectively.
 
 During
2009 and 2008, 11% and 13% of revenues were derived from oversea sales,
respectively.
   Major
customers and sales to those customers as a percentage of total sales were as
follows:
  Customer
      A
              
              Customer
      B
              
              Customer
      CFor
      the year endedDecember
      31, 2009
              
              11%
              
              7%
              
              6%December
      31, 2008
              
              12%
              
              10%
              
              7%
 
 87
 Table of Contents
  As of
December 31, 2009 and 2008, accounts receivable from those customers were $5.0
million and $5.5 million respectively.
 
  Major
suppliers and purchases from those suppliers as a percentage of total purchases
were as follows:
  Vendor
      A
              
              Vendor
      B
              
              Vendor
      CFor
      the year endedDecember
      31, 2009
              
              6%
              
              5%
              
              3%December
      31, 2008
              
              6%
              
              5%
              
              3%
 
  As of
December 31, 2009 and 2008, accounts payable to those suppliers were $0.2
million and Nil, respectively.
 
 
 14.SUBSEQUENT
EVENTS
 
 On
January 18, 2010, the board of directors (the "Board of Directors") of SinoHub,
Inc. (the "Company") established a compensation committee of the Board of
Directors (the "Compensation Committee") consisting of independent directors
Charles T. Kimball, chairman, Richard L. King and Will Wang Graylin as its
members, and delegated to the Compensation Committee all power and authority of
the Board of Directors to oversee and administer the Company's compensation
plans and executive compensation matters.
  In March
2010, the Company entered into and closed a Securities Purchase Agreement with
certain accredited investors in a private offering for shares of common stock
and warrants to purchase common stock.  The Company issued 1,633,334 shares
of common stock (the “Shares”) and five and one-half-year warrants to purchase
816,670 shares of common stock (the “Warrant Shares”) at an exercise price of
$3.25 per share, in return for gross proceeds of approximately $4.9 million in
cash.  The warrants provided that in the event that the Shares and the
Warrant Shares are not timely registered as required thereby (with certain
limited exceptions), the number of shares issuable upon exercise of the
warrants, at the exercise price of $3.25 per share, would be subject to upward
adjustment by twenty percent, but this provision was effectively terminated upon
the effectiveness of the registration statement described in the following
paragraph.  During the first quarter of 2010, net offering proceeds of
approximately $4.4 million were recorded as an addition to stockholders’ equity,
after deducting offering and related closing costs of the transaction.
  In March
2010, the Company filed a registration statement on Form S-3 to register for
resale the Shares  and the Warrant Shares.  The registration
statement was declared effective by the Securities and Exchange Commission on
March 18, 2010.
   88