UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2010ORo
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)





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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes  x           No  o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  o           No  o (the Registrant is not yet required to submit Interactive Data)





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller Reporting Company
x(Do not check if asmaller reporting company)




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o            No  x





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.




Class

Outstanding at October 31, 2010Common Stock, $0.001 par value per share

28,558,280 shares














SINOHUB, INC.


FORM 10-Q





TABLE OF CONTENTS











PART I - FINANCIAL INFORMATION
3Item 1. Financial Statements
3Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
22Item 3. Quantitative and Qualitative Disclosures About Market Risk
26Item 4T. Controls and Procedures
26PART II - OTHER INFORMATION
27Item 1. Legal Proceedings
27Item 1A. Risk Factors
27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
27Item 3. Defaults Upon Senior Securities
27Item 4. (Removed and Reserved)
27Item 5. Other Information
27Item 6. Exhibits
28SIGNATURES
29





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





2
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PART I - FINANCIAL INFORMATION








Item 1.  Financial Statements








SINOHUB, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





ASSETS

September 30, 2010


December 31, 2009(Unaudited)


(Audited)CURRENT ASSETSCash and cash equivalents

$
5,413,000


$
8,347,000Restricted cash


10,724,000



7,595,000Accounts receivable, net of allowance


46,343,000



28,828,000Inventories, net


8,645,000



11,647,000Prepaid expenses and other current assets


608,000



650,000Deposit with suppliers


4,710,000



-Total current assets


76,443,000



57,067,000PROPERTY AND EQUIPMENT, NET


7,168,000



2,271,000TOTAL ASSETS

$
83,611,000


$
59,338,000LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT LIABILITIESAccounts payable

$
616,000


$
1,209,000Customer deposits


41,000



1,348,000Accrued expenses and other current liabilities


834,000



731,000Bank borrowings


16,372,000



11,793,000Capital lease obligations – current portion


644,000



-Income and other taxes payable


4,384,000



2,605,000Total current liabilities


22,891,000



17,686,000LONG-TERM LIABILITIESCapital lease obligations, net of current portion


1,144,000



-TOTAL LIABILITIES


24,035,000



17,686,000STOCKHOLDERS’ EQUITYPreferred stock, $0.001 par value, 5,000,000 shares authorized;


-



-no shares issuedCommon stock, $0.001 par value, 100,000,000 shares authorized;


29,000



27,00028,557,685 shares and 26,669,605 shares issued and outstandingas of September 30, 2010 and December 31, 2009, respectivelyAdditional paid-in capital


22,321,000



17,239,000Deferred stock compensation


(56,000
)


-Retained earningsUnappropriated


34,603,000



22,725,000Appropriated


788,000



787,000Accumulated other comprehensive income


1,891,000



874,000Total stockholders’ equity


59,576,000



41,652,000TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
83,611,000


$
59,338,000




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





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SINOHUB, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF


OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)








Three months ended September 30,


Nine months ended September 30,2010


2009


2010


2009NET SALESSupply chain management services

$
1,460,000


$
1,910,000


$
4,809,000


$
5,943,000Electronic components


35,267,000



34,270,000



94,703,000



79,689,000VCM business


19,024,000



-



38,723,000



-Total net sales


55,751,000



36,180,000



138,235,000



85,632,000COST OF SALESSupply chain management services


34,000



198,000



122,000



408,000Electronic components


29,782,000



29,544,000



81,418,000



69,250,000VCM business


15,755,000



-



31,843,000



-Total cost of sales


45,571,000



29,742,000



113,383,000



69,658,000GROSS PROFIT


10,180,000



6,438,000



24,852,000



15,974,000OPERATING EXPENSESSelling, general and administrative


2,123,000



1,578,000



6,261,000



3,574,000Professional services


193,000



253,000



694,000



614,000Depreciation


479,000



151,000



1,051,000



387,000Stock compensation expense


167,000



272,000



535,000



328,000(Write back of) Allowance for doubtful accounts


(236,000
)


(504,000
)


(45,000
)


(317,000
)Total operating expenses


2,726,000



1,750,000



8,496,000



4,586,000INCOME FROM OPERATIONS


7,454,000



4,688,000



16,356,000



11,388,000OTHER INCOME (EXPENSE)Interest expense


(109,000
)


(20,000
)


(352,000
)


(83,000
)Interest income


41,000



4,000



145,000



15,000Other, net


9,000



2,000



16,000



7,000Total other expense, net


(59,000
)


(14,000
)


(191,000
)


(61,000
)INCOME BEFORE INCOME TAXES


7,395,000



4,674,000



16,165,000



11,327,000Income tax expense


1,898,000



1,134,000



4,287,000



2,616,000NET INCOME


5,497,000



3,540,000



11,878,000



8,711,000OTHER COMPREHENSIVE INCOMEForeign currency translation gain


909,000



31,000



1,017,000



63,000COMPREHENSIVE INCOME

$
6,406,000


$
3,571,000


$
12,895,000


$
8,774,000SHARE AND PER SHARE DATANet income per share-basic

$
0.19


$
0.14


$
0.42


$
0.35Weighted average number of shares-basic


28,558,000



24,883,000



28,126,000



24,682,000Net income per share-diluted

$
0.19


$
0.13


$
0.42


$
0.34Weighted average number of shares-diluted


28,721,000



26,260,000



28,362,000



25,463,000





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




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SINOHUB, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF


CASH FLOWS (UNAUDITED)








Nine months ended September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
11,878,000


$
8,711,000Adjustments to reconcile net income to cash provided by (used in) operations:Depreciation


1,051,000



387,000Stock compensation expense


535,000



328,000(Write back of) Allowance for doubtful accounts


(45,000
)


(317,000
)Changes in operating assets and liabilities:Accounts receivable


(16,578,000
)


(10,902,000
)Inventories


3,187,000



(3,067,000
)Prepaid expenses and other current assets


56,000



(73,000
)Deposit with suppliers


(4,628,000
)


-Accounts payable


(608,000
)


2,809,000Customer deposits


(1,313,000
)


-Accrued expenses and other current liabilities


87,000



436,000Income and other taxes payable


1,696,000



(1,546,000
)Net cash used in operating activities


(4,682,000
)


(3,234,000
)CASH FLOWS FROM INVESTING ACTIVITIESIncrease of restricted cash


(3,129,000
)


(2,588,000
)Purchase of property and equipment


(3,385,000
)


(1,620,000
)Net cash used in investing activities


(6,514,000
)


(4,208,000
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock, net of cost


4,470,000



1,200,000Proceeds from exercise of warrants and options, net of costs


22,000



108,000Bank borrowing proceeds


24,609,000



14,284,000Bank borrowing repayments


(20,382,000
)


(7,338,000
)Repayments of capital lease obligations


(647,000
)


-Net cash provided by financing activities


8,072,000



8,254,000EFFECT OF EXCHANGE RATE CHANGES


190,000



27,000NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


(2,934,000
)


839,000CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


8,347,000



5,860,000CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
5,413,000


$
6,699,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for interest

$
352,000


$
83,000Cash paid for income tax

$
2,444,000


$
3,671,000Equipments acquired under capital leases

$
2,436,000


$
-







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




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SINOHUB, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


AS OF SEPTEMBER 30, 2010








1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION




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.




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.




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The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission for interim financial information and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented. The consolidated financial results of operations for the interim periods are not necessarily indicative of results for the full year.




These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the years ended December 31, 2009 and 2008, previously filed with the Securities and Exchange Commission on March 31, 2010.




Organization Structure




SinoHub, Inc. (the “Company”) is an electronics company focused on mobile devices. The Company has three operating business units that provide Electronic Component Purchasing (ECP), Virtual Contract Manufacturing (VCM) and Supply Chain Management (SCM) services. SinoHub’s three divisions work together with tight information integration to facilitate the mobile device revolution. The ECP business unit does spot component sales and procurement-fulfillment, the VCM business is currently focused on manufacturing and selling custom design mobile phones in developing countries and the SCM business unit primarily provides logistics services around the importing of electronic components into China. In short, SinoHub 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”) and we are engaged in the production and sale of mobile devices (currently custom design mobile phones) overseas.




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.




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SinoHub SCM Shanghai, Ltd. was incorporated in March 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in northern China. SinoHub SCM Shanghai, Ltd. is wholly owned by SinoHub Electronics Shenzhen, Ltd.




SinoHub Electronics Shanghai, Ltd. was incorporated in July 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in the PRC. SinoHub Electronics Shanghai, Ltd. is wholly owned by SinoHub International, Inc.




B2B Chips, Limited was incorporated in June 2006 in Hong Kong to purchase and sell electronic components. B2B Chips is wholly owned by SinoHub Electronics Shenzhen, Ltd.




SinoHub Technology (Hong Kong) Limited was incorporated in May 2007 in Hong Kong and has not yet commenced business. SinoHub Technology (Hong Kong) Limited is wholly owned by B2B Chips, Limited.




Topology Communication Technology (Shenzhen), Ltd. was incorporated in April 2010 in Shenzhen to manufacture mobile phones and other electronic devices.  Topology Communication Technology (Shenzhen), Ltd. is wholly owned by B2B Chips, Limited.




Principles of Consolidation




The accompanying consolidated financial statements include the accounts of the Company and its 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 the majority 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 purposes 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 in cash or cash equivalents on the balance sheet until the lien against such funds has been released.




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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.  On September 30, 2010, the Company reduced its allowance for doubtful accounts from 1.3% to 0.65% of accounts receivable.




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 and impairment.  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 YearsLeasehold improvements
Over the unexpired lease terms







Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstances or events indicate that the carrying amount of an asset may not be recoverable.  For purposes of evaluating the recoverability of long-lived assets, the Company considers various factors, including future cash flows, to determine whether the carrying amount exceeds fair value, and in that case, the asset is written down to fair value.  The Company believes that no impairment of property and equipment exists at September 30, 2010.




Financial Instruments




The Company analyzes all financial instruments that may have features of both liabilities and equity under ASC Topic 480-10 and ASC Topic 815.  At present, there are no such instruments in the financial statements.  The Company also analyzes registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under ASC Topic 825.  At present, there are no registration rights as to which late filing penalties may apply.




Fair Value of Financial Instruments




ASC Topic 825 requires certain disclosures regarding the fair value of financial instruments.  Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.





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ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.





ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:





Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.





Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.





Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.





The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, bank borrowings, and other liabilities approximate their fair values because of the short-term nature of these instruments.  Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.





The Company’s operations are primarily based in the PRC, which may give rise to significant foreign currency risks and opportunities from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar (“USD”) and the Chinese Renminbi (“RMB”).In July 2005, the PRC allowed the RMB to fluctuate within a narrow range ending its decade-old valuation peg to the USD.  Since this change in 2005, the RMB has experienced positive trends in valuation against the USD; such trends are reflected in part by the foreign currency translation gains reported in the Company’s financial statements.





Derivative Instruments





The Company does not utilize derivative or hedge instruments in its financing activities.




Stock-Based Compensation




The Company adopted ASC Topic 718.   This Statement requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which services are received.  Stock compensation for stock granted to non-employees has been determined in accordance with ASC Topic 718 and ASC Topic 505-50, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.




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Revenue and Cost Recognition




The Company reports revenue from supply chain management (SCM), services and electronic components sales (ECP), and virtual contract manufacturing (VCM) businesses.  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 and VCM businesses are based on quoted prices and are recognized at the time of shipment to customers.  Revenues are recognized on the gross amount billed to customers.  Sales are recorded net of discounts and allowances.  In all cases, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services rendered, the sales price is determinable, and collectability is reasonably assured.




Cost of goods sold in VCM business includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment, rent and local transportation charges consistent with the revenue earned.




Income Taxes




The Company accounts for income taxes under ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income taxes in the period that included the enactment date.




Foreign Currency Translation




SinoHub, Inc., SinoHub International, Inc., B2B Chips, Ltd., and SinoHub Technology Hong Kong, Ltd. maintain accounting records using the functional currencies, USD and Hong Kong Dollars (“HKD”) respectively.  SinoHub SCM Shenzhen, Ltd., SinoHub Electronics Shenzhen, Ltd., SinoHub SCM Shanghai, Ltd., SinoHub Electronics Shanghai, Ltd. and Topology Communication Technology (Shenzhen), Ltd. maintain accounting records using RMB as the functional currency.




The Company uses USD as its reporting currency.  The Company accounts for foreign currency translation pursuant to ASC Topic 830.  The functional currencies of the Company’s subsidiaries are HKD and RMB.  Under ASC Topic 830, all assets and liabilities are translated into United States dollars using the current exchange rate at the balance sheet date.  The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period.  Translation adjustments are included in other comprehensive income (loss) for the period.




Foreign currency transactions during the year are translated to their functional currencies at the approximate rates of exchange on the dates of transactions.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the reporting currency at the approximate rates of exchange at that date.  Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired.  Exchange gains or losses are recorded in the statement of operations.




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Comprehensive Income




The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in HKD and RMB to USD is reported as other comprehensive income in the statements of operations and stockholders’ equity.




Earnings Per Share




Earnings per share in accordance with the provisions of ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.




Segments




The Company operates in one business segment.




Recent Accounting Pronouncements




In July 2010, the FASB issued ASU 2010-20 Receivable (Topic 310)disclosure about the credit quality of financing receivables and the allowance for credit losses. The objective of this guidance is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The guidance requires an entity to provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The guidance includes additional disclosure requirements about financing receivables, including: (1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and (3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the potential impact of ASU 2010-20 on the financial statements.





2.           ACCOUNTS RECEIVABLE, NET OF ALLOWANCE





Accounts receivable, net of allowance as of September 30, 2010 and December 31, 2009 were as follows:





September 30, 2010


December 31, 2010(Unaudited)Accounts receivable

$
46,645,000


$
29,175,000Less: allowance for doubtful debts


(302,000
)


(347,000
)Total

$
46,343,000


$
28,828,000





12
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As of September 30, 2010 and 2009, the Company recorded an allowance for doubtful accounts of $302,000 and $347,000 respectively. For the three months ended September 30, 2010 and 2009, write backs of allowance for doubtful accounts of $236,000 and $504,000, respectively, were recorded and for the nine months ended September 30, 2010 and 2009, write backs of allowance for doubtful accounts of $45,000 and $317,000, respectively were recorded.







3.           INVENTORIES





Inventories at September 30, 2010 and December 31, 2009 consisted of the following:




September 30, 2010


December 31, 2009(Unaudited)Raw materials

$
88,000


$
-Work-in-progress


69,000



-Finished goods and goods for resale


8,488,000



11,647,000$
8,645,000


$
11,647,000Less: allowance for obsolete inventories


-



-Inventories, net

$
8,645,000


$
11,647,000








4.           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 the Company’s 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 are renewable each year and are available through December 2010.





·
Letter of credit facility with another bank in the amount of $4,400,000 to support the Company’s 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 and his spouse.  The facility is renewable each year and is available through October 2011.





·
Banking facilities with another bank in the amount of $7,100,000 to support the Company’s VCM business and expand trade relationships with component suppliers.  Restricted cash balances are required as security for draws against the facility and the bank requires unlimited personal guaranty from an executive officer and a subsidiary.  The facility is renewable each year and is available through May 2011.





·
Banking facilities with another bank in the amount of $2,000,000 to support the Company’s VCM business and expand trade relationships with component suppliers.  Restricted cash balances are required as security for draws against the facility and the bank requires unlimited personal guaranty from an executive officer.  The facility is renewable each year and is available through May 2011.





·
Banking facilities with another bank in the amount of $5,000,000 to support the Company’s VCM business and expand trade relationships with component suppliers.  Restricted cash balances are required as security for draws against the facility and the bank requires unlimited personal guaranty from an executive officer.  The facility is renewable each year and is available through April 2011.





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Borrowings against these facilities at September 30, 2010 and December 31, 2009 were as follows:





September 30,


December 31,2010


2009(Unaudited)Note payable to a bank, annual interest rate 3.12%, due January 2010

$
-


$
1,792,000Note payable to a bank, annual interest rate 3.12%, due February 2010


-



804,000Note payable to a bank, annual interest rate 5.35%, due March 2010


-



731,000Note payable to a bank, annual interest rate 1.22%, due April 2010


-



299,000Note payable to a bank, annual interest rate 5.84%, due May 2010


-



1,463,000Note payable to a bank, annual interest rate 1.22%, due May 2010


-



457,000Note payable to a bank, annual interest rate 1.22%, due May 2010


-



445,000Note payable to a bank, annual interest rate 1.18%, due May 2010


-



644,000Note 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


-



224,000Note payable to a bank, annual interest rate 1.44%, due June 2010


-



494,000Note payable to a bank, annual interest rate 2.01%, due October 2010


2,010,000



-Note payable to a bank, annual interest rate 3.00%, due November 2010


2,239,000



-Note payable to a bank, annual interest rate 4.56%, due November 2010


1,493,000



-Note payable to a bank, annual interest rate 3.76%, due November 2010


4,479,000



-Note payable to a bank, annual interest rate 4.56%, due November 2010


4,479,000



-Note payable to a bank, annual interest rate 3.00%, due December 2010


1,552,000



-Note payable to a bank, annual interest rate 4.56%, due February 2011


120,000$
16,372,000


$
11,793,000Less : current portion


16,372,000



11,793,000Long-term portion

$
-


$
-








Interest expense for the three months ended September 30, 2010 and 2009 was $109,000 and $20,000, respectively.  Interest expense for the nine months ended September 30, 2010 and 2009 was $352,000 and $83,000, respectively.








5.           CAPITAL LEASE OBLIGATIONS





Certain of equipment fixed assets have been acquired under capital lease. Capital lease obligations are as follows:




14
 Table of Contents




September 30,2010(Unaudited)Gross capital lease obligations

$
1,788,000Less: current portion


644,000Long-term capital lease obligations

$
1,144,000








The lease is guaranteed by equipment with a total cost of $2,435,897. Depreciation expenses associated with capital leases were $81,145 and $Nil for the three months and nine months ended September 30, 2010 and 2009.










6.           COMMITMENTS AND CONTINGENCIES





Commitments




(1)
Rental Lease Commitment




The Company leases factory, warehouse and office spaces from third parties under operating leases which expire at various dates from October 2010 through March 2015.  Rent expense for the three months ended September 30, 2010 and 2009 was $232,000 and $108,000, respectively.  Rent expense for the nine months ended September 30, 2010 and 2009 was $632,000 and $318,000, respectively.  At September 30, 2010, the Company has outstanding commitments with respect to operating leases, which are due as follows:




Fiscal year ending December 31,2010

$
222,0002011


908,0002012


908,0002013


309,0002014


67,0002015


12,000$
2,426,000







(2)
Capital Leases Commitment






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




Fiscal year ending December 31,2010

$
142,0002011


853,0002012


853,0002013


426,000$
2,274,000




15
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Contingencies




As of September 30, 2010, the Company had commitments for capital expenditures in connection with manufacturing machinery of approximately $52,000.








7.           EARNINGS PER SHARE





The elements for calculation of earnings per share for the three and nine months ended September 30, 2010 and 2009 were as follows:








Three months ended September 30,2010


2009Net income for basic and diluted earnings per share

$
5,497,000


$
3,540,000Weighted average shares used in basic computation


28,558,000



24,883,000Effect of dilutive stock options and warrants


163,000



1,377,000Weighted average shares used in diluted computation


28,721,000



26,260,000Earnings per share:Basic

$
0.19


$
0.14Diluted

$
0.19


$
0.13








Nine months ended September 30,2010


2009Net income for basic and diluted earnings per share

$
11,878,000


$
8,711,000Weighted average shares used in basic computation


28,126,000



24,682,000Effect of dilutive stock options and warrants


236,000



781,000Weighted average shares used in diluted computation


28,362,000



25,463,000Earnings per share:Basic

$
0.42


$
0.35Diluted

$
0.42


$
0.34





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 Table of Contents




8.           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 for additional 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.




The financial statements have been prepared as if the reverse merger transaction had occurred retroactively at 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





On January 19, 2010, pursuant to the terms of the 2008 Stock Plan, the Company authorized the grant to three executive officers of an aggregate of 58,625 shares of Common Stock vesting with respect to 100% of the aggregate number of shares granted on December 31, 2010.





In March 2010, certain employees exercised their stock options to purchase an aggregate of 31,452 shares of common stock.





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.  During the first quarter of 2010, net offering proceeds of approximately $4.5 million were recorded as an addition to stockholders’ equity, after deducting offering and related closing costs of the transaction.





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 Table of Contents





On June 4, 2010, pursuant to the terms of the Company’s 2008 Stock Plan, the Company authorized the grant to an executive officer of an aggregate of 14,706 shares of Common Stock at a fair value of $40,028 with the shares vesting in full immediately upon grant.





On June 7, 2010, the Company issued warrants to purchase an aggregate of 75,000 shares of common stock at an exercise price of $3.25 per share to 3 consultants for investor relations consulting services rendered at fair value of $149,025. The fair market value of the warrant was estimated on the grant date using the Black-Scholes option pricing model as required by ASC Topic 718 with the following assumptions and estimates: expected dividend 0%, volatility 98%, a risk-free rate of 2.5% and a contractual life of 2 years.





During the second quarter of 2010, certain employees exercised their stock options to purchase an aggregate of 149,910 shares of common stock for an aggregate price of $21,668.




During the third quarter of 2010, one employee exercised stock options to purchase an aggregate of 53 shares of common stock for an aggregate price of $9.04.




Warrants





Following is a summary of the status of warrants outstanding and exercisable at September 30, 2010 and December 31, 2009:







September 30, 2010
December 31, 2009Average






AverageRemaining






RemainingNumber

Number
Contractual



Number

Number
ContractualExercise Price
Outstanding

Exercisable
Life
Exercise Price

Outstanding

Exercisable
Life$
3.00


1,211,740

1,211,740
2.91 years
$
3.00


1,211,740

1,211,740
3.75 years$
3.25


891,670

816,670
4.71 yearsTotal


2,103,410

2,028,410


Total


1,211,740

1,211,740










9.           STOCK OPTIONS





The Company has granted qualified stock options under the Company’s 2000 Incentive Stock Option Plan (the “2000 ISOP”) and 2008 Incentive Stock Option Plan (the “2008 ISOP”).  At September 30, 2010, stock options to purchase 1,127,304 shares of common stock at an exercise price ranging from $0.10 to $4.36 per share were outstanding.  Prior to becoming publicly traded, the exercise prices were determined by the Board at the time of grant.  In each such case the exercise price was not less than the fair market value of the common stock as determined by the Board in good faith taking into account such factors as recent issuances of preferred stock with an appropriate discount factored in relative to the common shares.  The exercise prices for options issued under the 2000 ISOP following the sale of preferred stock by the Company during November and December of 2007 represent a discount to the issuance price of $0.78 for such preferred stock taking into account the added value of the conditions in the preferred stock (for example, it was redeemable with 10% appreciation).  The exercise prices for options issued under the 2008 ISOP represent the closing price of the Company’s common stock on the business day preceding the grant date.  The stock options granted become exercisable (“vested”) as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 6.25% of the original number of shares at the end of each successive three-month period following the first anniversary of the grant date until the fourth anniversary of the grant date.  Unless earlier terminated, these stock options granted shall expire ten years after the grant date.  Following the reverse merger, all shares of preferred stock which were convertible on the basis of one share of preferred stock for one share of common stock issued were exchanged for common stock of Liberty Alliance, Inc. retroactively adjusted for all periods presented.




18
 Table of Contents





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%
2.50%
$0.09 - $0.19The 2008 ISOP1-5 years
83% - 121%
0%
2.50%
$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.




Expected Life:  Because the Company has no historical share option exercise experience to estimate future exercise patterns, the expected life was determined using the simplified method as these awards meet the definition of "plain-vanilla" options under the rules prescribed by ASC Topic 718.




Stock compensation expense was recognized based on awards expected to vest.  There was no estimated forfeiture as the Company has a short history of issuing options. ASC Topic 718 requires forfeiture to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.




The Company granted stock options to purchase an aggregate of 109,290 shares of common stock in the third quarter of 2010 at an exercise price of $2.63 per share.




The following is a summary of the stock options activity:





19
 Table of Contents




Number of

Options

Outstanding

Weighted-

Average

Exercise

PriceBalance 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



$
2.01Granted


-




-Forfeited


(113,426
)



-Exercised


(31,452
)



-Balance at March 31, 2010


1,119,100



$
2.08Granted


335,000




2.95Forfeited


(30,554
)



-Exercised


(149,910
)



0.17Balance at June 30, 2010


1,273,636



$
2.52Granted


109,290




2.62Forfeited


(255,569
)



-Exercised


(53
)



0.17Balance at September 30, 2010


1,127,304



$
2.46Options exercisable on September 30, 2010


247,819



$
1.89Weighted average fair value of options granted during 2010




$

$
1.86








The following is a summary of the status of options outstanding at September 30, 2010 and December 31, 2009:





Outstanding Options at September 30, 2010

Exercisable OptionsRange of

Number

Weighted

Weighted

Number

WeightedExercise Price

Average
Average
AverageRemaining
Exercise
ExerciseContractual
Price
PriceLife$0.10 - $1.02

215,782

7.5 years

$0.56

92,418

$0.52$2.35 - $2.48

365,132

3.8 years

$2.40

125,491

$2.40$2.62 - $3.00

344,290

9.6 years

$2.83

-

$2.83$3.92 - $4.36

202,100

9.0 years

$3.92

29,910

$3.96Total

1,127,304





247,819

$1.89








Outstanding Options at December 31, 2009

Exercisable OptionsRange of

Number

Weighted

Weighted

Number

WeightedExercise Price

Average
Average
AverageRemaining
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

$0.42





20
 Table of Contents





10.        RELATED PARTY TRANSACTIONS





In 2010 and 2009, a PRC property owned by a director and his spouse is pledged to a bank to secure banking facilities for the Company.




In 2010 and 2009, 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.




In 2010 and 2009, an executive officer has provided unlimited personal guaranty to two banks for banking facilities for the Company in the aggregate principal amount of $7,000,000.







11.         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.  Management believes the realization of tax benefits from these operating loss carry forwards 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.




The Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax at a statutory rate of 16.5%.  No provision for Hong Kong profits tax was required as these entities incurred losses during the three months and nine months ended September 30, 2010 and 2009.  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 2010 and 2009.  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 2010. The Company’s subsidiaries in China were subject to a special tax rate of 22% in 2010 and 20% in 2009.




Income tax expense for the three months ended September 30, 2010 and 2009 is summarized as follows:




2010


2009Current

$
1,898,000


$
1,134,000Deferred


-



-$
1,898,000


$
1,134,000





21
 Table of Contents




Income tax expense for the nine months ended September 30, 2010 and 2009 is summarized as follows:




2010


2009Current

$
4,287,000


$
2,616,000Deferred


-



-$
4,287,000


$
2,616,000










12.         CONCENTRATIONS AND RISKS





More than 90% of the Company’s assets are located in China.





During the three months ended September 30, 2010 and 2009, 30% and 13%, respectively, of revenues were derived from sales outside of China.














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





The following discussion and analysis is based on, and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Qand the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included in the Company’s  Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission on March 31, 2010.  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Report on Form 10-Q.   All amounts are expressed in United States dollars.











RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED


SEPTEMBER 30, 2010 COMPARED TO SEPTEMBER 30, 2009





Overview





SinoHub, Inc. (the “Company”) is an electronics company focused on mobile devices that has prospered by leveraging the information and relationships derived from its original electronic component supply chain management business. The Company built a Web-based platform to make the entire supply chain transparent for its customer participants and attached a database to store information on all imported electronic components, which currently exceeds 50,000 components. Today, the majority of SinoHub’s revenue comes from leveraging this data to sell electronic components, but the Company’s new virtual contract manufacturing division, which produces and sells custom design mobile phones, is growing very rapidly.  SinoHub’s three divisions work together with tight information integration to facilitate the mobile device revolution.





22
 Table of Contents





SinoHub 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”) and we are engaged in the production and sale of mobile devices (currently custom design mobile phones) overseas. For the three months and nine months ended September 30, 2010 approximately 63% and 69% respectively of the Company’s revenues were 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 one-off electronic component sales (roughly 80%) or as procurement-fulfillment projects (about 20%). The Company began offering mobile phones for sale in developing countries in Southeast Asia through its newly formed virtual contract manufacturing division in late 2009, but did not have material revenue from this source in 2009. SinoHub opened its own factory to produce custom design mobile phones in the Boa’an district of Shenzhen, China in April 2010 with six assembly lines. In July, the Company installed four surface mount lines to build motherboards for mobile phones and in October 2010 added two more assembly lines bringing the total number to eight.  Roughly 34% and 28% of SinoHub’s revenue in the three months and nine months ended September 30, 2010 respectively were derived from selling mobile phones in markets outside of China and from producing motherboards for mobile phones (Printed Circuit Based Assemblies or PCBAs) through its virtual contract manufacturing division. In connection with the supply of such components and products, the Company also provides supply chain management services from which we derived approximately 3% of our revenues in both the three months and nine months ended September 30, 2010.
 
 Overall Results
 
 SinoHub reports net sales on the basis of three business categories, supply chain management services (SCM), electronic component purchasing (ECP), and virtual contract manufacturing (VCM). The Company reported net income for the three months ended September 30, 2010 of $5.5 million compared to $3.5 million in the year-earlier period, an increase of 55.3%.  Net income for the nine months ended September 30, 2010 was $11.9 million compared to $8.7 million in the year-earlier period, an increase of 36.4%.Net margins were relatively flat (9.9% in the three months ended September 30, 2010 as compared to 9.8% in the prior year period) even though we had a substantially lower percentage, 2.6%, of high margin (i.e., approximately 98% gross margin) net sales from the SCM business for the three months ended September 30, 2010 as compared to 5.3% in the prior year period, in each case as a percentage of our total net sales.  Net margins were 8.6% in the nine months ended September 30, 2010 as compared to 10.2% in the prior year period, primarily the result of greater expenses incurred in the first and second quarters of 2010 associated with startup expenditures for our factory. Gross margins from our ECP business were 15.6% for the three months ended September 30, 2010, an increase from 13.8% compared to the prior year period. Gross margins from our ECP business for the nine months ended September 30, 2010 were 14.0%, an increase from 13.1% in the prior year period.  In the three months and nine months ended September 30, 2010, we recorded strong revenue growth in VCM to $19.0 million and $38.7 million respectively, with the three-month revenues up 42.9% sequentially over VCM revenues of $13.3 million for the three months ended June 30, 2010 (there was no significant VCM business in 2009). This was attributable to better than expected mobile phone sales plus PCBA production to fully utilize our new surface mount technology machines that were installed in July 2010.  Although gross margins in the PCBA production business are significantly lower than in the mobile phone business, our VCM business continued to realize a strong gross margin of 17.2% in the three months ended September 30, 2010.  The strong growth in the VCM business reflects the fact that mobile phones are a have-to-have product in the developing countries where our sales are currently focused and that our unique business model allows us to provide highly valued strategic support to our distributor and operator customers in these rapidly growing markets.




Net Sales




Net sales for the three months ended September 30, 2010 were $55.8 million, up 54.1% from $36.2 million in the year-earlier period.  Net sales increased in the three months ended September 30, 2010 due to continued strong revenue growth in the VCM business, which produced $19.0 million in net sales.  Net sales for the nine months ended September 30, 2010 were $138.2 million, up 61.4% from $85.6 million in the prior year period.  The Company reports net sales on the basis of three business categories, supply chain management services (SCM), electronic component purchasing (ECP), and virtual contract manufacturing (VCM).


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In the three months ended September 30, 2010, net sales of supply chain management (SCM) services decreased to $1.5 million from $1.9 million in the year-earlier period due to the Company’s strategy to replace manufacturer customers with design house customers. There are three reasons for this shift in focus: 1) the volume from the design house customers we are courting is substantially larger than the volume of the manufacturers they will replace, 2) design house customers have a higher probability of becoming ECP customers and 3) we can use design house customers as suppliers in our VCM business.  Net sales of SCM services for the nine months ended September 30, 2010 were $4.8 million, a decrease of 19.1% from net sales of $5.9 million in the prior year period, due in part to the Company’s greater focus on design house customers and lower percentage fees applicable to certain customers with higher volumes.  In the three months ended September 30, 2010, net sales of electronic components increased 2.9% to $35.3 million from $34.3 million in the year-earlier period.  In the nine months ended September 30, 2010, ECP net sales increased to $94.7 million from $79.7 million in the prior year period due to new customer additions and higher volumes among existing customers.  In the three months ended September 30, 2010, net sales in the VCM business were $19.0 million, an increase of 42.9% from the $13.3 million recorded in the three months ended June 30, 2010.  Year-to-date, the Company generated $38.7 million of net sales in its VCM business due to significant demand for mobile phones in developing countries (there was no significant VCM business in 2009).
  Gross Profit





The Company recorded gross profit of $10.2 million in the three months ended September 30, 2010, compared with $6.4 million in the year-earlier period, an increase of 58.1%.  The gross margin in the three months ended September 30, 2010 increased to 18.3% from 17.8% in the year-earlier period.  The reason for the increase in overall gross margin in the third quarter was the substantially higher gross margin in the ECP business, which was 15.6% in the three months ended September 30, 2010 as compared to 13.8% in the three months ended September 30, 2009, reflecting a number of shortage opportunities which occurred during the quarter. Gross margins from our SCM business were 97.7% in the three months ended September 30, 2010 as compared to 90% in the prior year period.  Our new VCM business experienced a 17.2% gross margin in the three months ended September 30, 2010.  We expect VCM gross margins to remain in the high teens in the future even if we sell a larger percentage of low end handsets because as our volume grows the low margin contract PCBA manufacturing business will become a smaller percentage of our revenue as we dedicate a greater portion of our SMT lines to producing motherboards for handsets we manufacture.
 
 Gross profit for the first nine months of 2010 totaled $24.9 million, an increase of 55.6% over $16.0 million in 2009.  The gross profit margin for the first nine months of 2010 was 18.0% compared to 18.7% in the same period last year. The year-over-year decline was primarily due to lower contribution from the higher-margin SCM business. The gross profit margin for the first nine months of 2010 in our ECP business was 14.0% as compared to 13.1% in the prior year period.  In the first nine months of operation in 2010, the VCM business generated margins of 17.8%. Management expects VCM gross margins to be in the high teens, driven by a positive mix shift from selling more higher-margin handsets.
  Selling, General and Administrative Expenses





Selling, general and administrative expenses increased to $2.1 million in the three months ended September 30, 2010, compared with $1.6 million in the year-earlier period based on increased business volume and expenditures associated with our factory.  These expenses were 3.8% of revenues in the three months ended September 30, 2010 compared to 4.4% in the year-earlier period. For the nine months ended September 20, 2010, selling, general and administrative costs were $6.3 million up from $3.6 million in the prior year period, due mainly to increased business volume and expenditures associated with our factory.  These expenses were 4.5% of revenues in the nine months ended September 30, 2010 compared to 4.2% in the prior year period.  Costs were tightly controlled despite the build up to over 1,000 employees with over 800 in our new manufacturing facility at September 30, 2010.  Also, most of the new factory renovation costs which were expensed were booked in the second quarter.





Income from Operations


The Company recorded income from operations of $7.5 million in the three months ended September 30, 2010, compared with $4.7 million in the year-earlier period, an increase of 59.0%.  Operating margins were 13.4% for the three months ended September 30, 2010 compared to 13.0% for the prior year period.  For the nine month period ended September 30, 2010, income from operations was $16.4 million, up 43.6% from $11.4 million in the prior year period. Operating margins were 11.8% for the first nine months of 2010 compared to 13.3% for the prior year period.
 
 Income Taxes
 
 The Company recorded income tax expense of $1.9 million in the three months ended September 30, 2010, compared with $1.1 million in the year-earlier period.  The accrual for income tax for the three months ended September 30, 2010 amounted to 26% of net income as compared to 24% in the prior year period.  Income tax estimates in interim periods have varied as the Company has adjusted provisions and accruals in light of actual tax filings.  The Company recorded income tax expense of $4.3 million in the nine months ended September 30, 2010, compared with $2.6 million in the year-earlier period.  The accrual for income tax for the nine months ended September 30, 2010 amounted to 27% of net income as compared to 23% in the prior year period.
 
 Foreign Currency Translation Gain and Comprehensive Net Income
 
 The Company recorded foreign currency translation gains of $909,000 in the three months ended September 30, 2010, as compared with $31,000 in the year-earlier period.  Comprehensive net income (net income plus foreign currency translation gains) was $6.4 million in the three months ended September 30, 2010, compared with $3.6 million in the year-earlier period.  The Company recorded foreign currency translation gains of $1,017,000 in the nine months ended September 30, 2010, as compared with $63,000 in the year-earlier period.  Comprehensive net income (net income plus foreign currency translation gains) was $12.9 million in the nine months ended September 30, 2010, compared with $8.8 million in the year-earlier period.





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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), growth in our electronic component and mobile device sales businesses, including growth of our VCM business, investment in inventory for both procurement-fulfillment and VCM orders, and investment in the 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. The Company’s cost of capital with China Construction Bank, Industrial Bank, Hangzhou Bank, Jiangsu Bank and the Shenzhen branch of the Ningbo Bank was approximately 3.67% at September 30, 2010.  Chinese banks 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.




Although there can be no assurance, we believe SinoHub’s new VCM business can grow rapidly with the addition of more Surface-mount technology (SMT) lines and assembly lines in our manufacturing facility and with additional inventory.  Additional working capital would enable us to purchase more electronic components from our suppliers, which we expect would lower our costs, and thus enhance our profitability.  We believe increased volume would also likely better position the Company to negotiate payment terms from suppliers (in lieu of the C.O.D. basis on which we currently pay most of our suppliers) which would further reduce our need for additional financing from third parties.  Accordingly, if SinoHub is successful in raising additional working capital, management believes that such capital can be utilized to generate positive revenue growth in the near term.




Due to the risk factors described in detail in our Annual Report on Form 10-K for the year ended December 31, 2009, 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 funding that we may obtain in the future may be unfavorable to us and to our stockholders.
 
 The Company had working capital of $53.6 million on September 30, 2010, up from $39.4 million at December 31, 2009, and a current ratio of 3.3:1 at September 30, 2010. At September 30, 2010 and December 31, 2009, the Company had cash and cash equivalents of $5.4 million and $8.3 million, respectively.  During the nine months ended September 30, 2010, the net amount of cash used in the Company’s operating activities was $4.7 million, the net amount of cash used in investing activities was $6.5 million, and the net amount of cash provided by financing activities was $8.1 million.
 
 As of September 30, 2010, the Company had commitments for capital expenditures in connection with manufacturing machinery of approximately $52,000.
  Inventories were approximately $8.6 million and accounts receivable were $46.3 million on September 30, 2010, compared to approximately $11.6 million and $28.8 million, respectively, on December 31, 2009. The increase in accounts receivable resulted primarily from an increase in the volume of our ECP and VCM businesses.
  The Company must generally pay the purchase price of electronic components for spot buyers and procurement-fulfillment customers and then recoup the purchase price from the customer after delivery.  We purchase only 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.
  Cash Flows from Operating Activities





The net amount of cash used in the Company’s operating activities during the nine months ended September 30, 2010 was $4.7 million, an increase of approximately $1.5 million, or 47%, as compared to the prior year period.  The $4.7 million primarily included earnings from operations ($11.9 million) and reduction in inventory ($3.2 million) that were offset by the increase in accounts receivable ($16.6 million) and deposit with suppliers ($4.6 million) during the period.





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Cash Flows from Investing Activities





For the nine months ended September 30, 2010, the net amount of cash used in investing activities was $6.5 million, an increase of approximately $2.4 million, or 55%, as compared to the prior year period.  The $6.5 million is attributable equally to investments in property and equipment for the Company’s new factory as well as increase of restricted cash.





Cash Flows from Financing Activities





For the nine months ended September 30, 2010, the net amount of cash generated by financing activities was $8.1 million, a decrease of approximately $.02 million, or 2.4%, as compared to the prior year period.  The $8.1 million consists primarily of the short term bank borrowings (net $4.2 million) as well as proceeds from equity offerings (net $4.5 million).  The $8.3 million in the prior year period was derived largely from net bank borrowings.





OFF-BALANCE SHEET ARRANGEMENTS





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








CRITICAL ACCOUNTING POLICIES





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








Item 3.  Quantitative and Qualitative Disclosures About Market Risk





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








Item 4T.  Controls and Procedures





Disclosure Controls and Procedures





Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“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 Rules 13a-15(e) and 15d-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 September 30, 2010 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.





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Changes in Internal Control Over Financial Reporting





There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.





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














PART II - OTHERINFORMATION





Item 1.  LegalProceedings





None.








Item 1A.  Risk Factors





There have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.








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





None.








Item 3.  Defaults Upon Senior Securities





None.








Item 4.  (Removed and Reserved)








Item 5.  Other Information





None.




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Item 6.  Exhibits






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 amended*31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended*32.1

Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive Officer)**32.2

Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Financial Officer)**








*Filed as an exhibit hereto.








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







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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.





SINOHUB, INC.Date:  November 12, 2010
By:
/s/ Henry T. CochranHenry T. CochranChief Executive Officer











Date:  November 12, 2010
By:
/s/ Li De HaiLi De HaiChief Financial Officer

(Principal Financial and Accounting Officer)













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