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 March 31, 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
 
 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

(Do not check if a smaller reporting company)
o
Smaller reporting company
x
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o            No  x
 
 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
  Class

Outstanding at April 30, 2010Common Stock, $0.001 par value per share

28,518,381 shares
 
 
 1
 
 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
20Item 3. Quantitative and Qualitative Disclosures About Market Risk
23Item 4T. Controls and Procedures
23PART II - OTHER INFORMATION
24Item 1. Legal Proceedings
24Item 1A. Risk Factors
24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
24Item 3. Defaults Upon Senior Securities
24Item 4. Reserved
24Item 5. Other Information
24Item 6. Exhibits
25SIGNATURES
26
 
 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
 Table of Contents
 
 PART I - FINANCIAL INFORMATION
 
 
 Item 1.  Financial Statements
 
 
 SINOHUB, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 ASSETS

March 31, 2010


December 31, 2009(Unaudited)


(Audited)CURRENT ASSETSCash and cash equivalents

$
10,305,000


$
8,347,000Restricted cash


11,579,000



7,595,000Accounts receivable, net of allowance


31,244,000



28,828,000Inventories, net


9,655,000



11,647,000Prepaid expenses and other current assets


1,030,000



650,000Deposit with suppliers


1,120,000



-Total current assets


64,933,000



57,067,000PROPERTY AND EQUIPMENT, NET


4,235,000



2,271,000TOTAL ASSETS

$
69,168,000


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

$
1,722,000


$
1,209,000Customer deposits


364,000



1,348,000Accrued expenses and other current liabilities


401,000



731,000Bank borrowings


15,468,000



11,793,000Income and other taxes payable


1,420,000



2,605,000Total current liabilities


19,375,000



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;28,393,016 shares and 26,669,605 shares issued and outstandingas of March 31, 2010 and December 31, 2009, respectively


28,000



27,000Additional paid-in capital


22,024,000



17,239,000Deferred stock compensation


(167,000
)


-Retained earningsUnappropriated


26,219,000



22,725,000Appropriated


788,000



787,000Accumulated other comprehensive income


901,000



874,000Total stockholders’ equity


49,793,000



41,652,000TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
69,168,000


$
59,338,000
  The accompanying notes are an integral part of these condensed consolidated financial statements.
  3
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF
 OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
 Three months ended March 31,2010


2009NET SALESSupply chain management services

$
1,551,000


$
1,778,000Electronic components


30,667,000



16,314,000VCM business


6,386,000



-Total net sales


38,604,000



18,092,000COST OF SALESSupply chain management services


59,000



82,000Electronic components


26,379,000



14,175,000VCM business


5,071,000



-Total cost of sales


31,509,000



14,257,000GROSS PROFIT


7,095,000



3,835,000OPERATING EXPENSESSelling, general and administrative


1,895,000



921,000Professional services


245,000



229,000Depreciation


223,000



104,000Stock compensation expense


149,000



13,000Allowance for doubtful accounts


33,000



2,000Total operating expenses


2,545,000



1,269,000INCOME FROM OPERATIONS


4,550,000



2,566,000OTHER INCOME (EXPENSE)Interest expense


(30,000
)


(25,000
)Interest income


6,000



7,000Other, net


6,000



4,000Total other expense, net


(18,000
)


(14,000
)INCOME BEFORE INCOME TAXES


4,532,000



2,552,000Income tax expense


1,037,000



562,000NET INCOME


3,495,000



1,990,000OTHER COMPREHENSIVE INCOMEForeign currency translation gain


27,000



30,000COMPREHENSIVE INCOME

$
3,522,000


$
2,020,000SHARE AND PER SHARE DATANet income per share-basic

$
0.13


$
0.08Weighted average number of shares-basic


27,283,000



24,581,000Net income per share-diluted

$
0.12


$
0.08Weighted average number of shares-diluted


27,979,000



25,156,000
  The accompanying notes are an integral part of these condensed consolidated financial statements.
  4
 Table of Contents
  SINOHUB, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF
 CASH FLOWS (UNAUDITED)
 
 Three months ended March 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
3,495,000


$
1,990,000Adjustments to reconcile net income to cash used in operations:Depreciation


223,000



104,000Stock compensation expense


149,000



13,000Allowance for doubtful accounts


33,000



2,000Changes in operating assets and liabilities:Accounts receivable


(2,445,000
)


(7,310,000
)Inventories


1,993,000



(1,138,000
)Prepaid expenses and other current assets


(379,000
)


(253,000
)Deposit with suppliers


(1,120,000
)


-Accounts payable


513,000



3,940,000Customer deposits


(985,000
)


-Accrued expenses and other current liabilities


(330,000
)


76,000Income and other taxes payable


(1,185,000
)


(1,805,000
)Net cash used in operating activities


(38,000
)


(4,381,000
)CASH FLOWS FROM INVESTING ACTIVITIESIncrease of restricted cash


(3,984,000
)


(259,000
)Purchase of property and equipment


(2,186,000
)


(29,000
)Net cash used in investing activities


(6,170,000
)


(288,000
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock, net of cost


4,470,000



-Proceeds from exercise of warrants issued for services, net of costs


-



13,000Bank borrowing proceeds


7,003,000



5,760,000Bank borrowing repayments


(3,328,000
)


(2,123,000
)Net cash provided by financing activities


8,145,000



3,650,000EFFECT OF EXCHANGE RATE CHANGES


21,000



25,000NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


1,958,000



(994,000
)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


8,347,000



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

$
10,305,000


$
4,866,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for interest

$
30,000


$
25,000Cash paid for income tax

$
2,350,000


$
2,187,000
  The accompanying notes are an integral part of these condensed consolidated financial statements.
  5
 Table of Contents
 
 SINOHUB, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 AS OF MARCH 31, 2010
 
 
 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”) and we are engaged in the production and sale of electronic products (currently mobile phones) overseas.  In the first quarter of 2010, approximately 79% 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 electronic products in the PRC.  These sales occur either as procurement-fulfillment projects or as one-off electronic component sales.  The Company began offering mobile phones for sale outside of China through its newly formed virtual contract manufacturing (“VCM”) division in late 2009, but did not have material revenue from this source in 2009.  Approximately 17% of our revenue in the first quarter of 2010 was derived from selling mobile phones overseas through our VCM division.
  In connection with the supply of such components and products, the Company also provides supply chain management services from which we derived approximately 4% of our revenues in the first quarter of 2010.
  The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States 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 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 Company’s audited consolidated financial statements and accompanying notes for the years ended December 31, 2009 and 2008.
 
 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.
  6
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 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.
  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.
  7
 Table of Contents
  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.
  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 a large 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 with cash or cash equivalents on the balance sheet until the lien against such funds has been released.
  8
 Table of Contents
  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.
  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 March 31, 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.
 
 9
 Table of Contents
 
 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.
  10
 Table of Contents
  Revenue Recognition
  The Company reports revenue from supply chain management, or SCM, services and electronic components sales, and 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.
  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. and SinoHub Electronics Shanghai, Ltd. maintain accounting records using RMB as the functional currency.
  The Company uses USD as its reporting currency.  The Company accounts for foreign currency translation pursuant to ASC Topic 830.  The functional currencies of the Company’s subsidiaries are HKD and RMB.  Under ASC Topic 830, all assets and liabilities are translated into United States dollars using the current exchange rate at the balance sheet date.  The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period.  Translation adjustments are included in other comprehensive income (loss) for the period.
  Foreign currency transactions during the year are translated to their functional currencies at the approximate rates of exchange on the dates of transactions.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the reporting currency at the approximate rates of exchange at that date.  Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired.  Exchange gains or losses are recorded in the statement of operations.
  Comprehensive Income
  The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in HKD and RMB to USD is reported as other comprehensive income in the statements of operations and stockholders’ equity.
  11
 Table of Contents
  Earnings Per Share
  Earnings per share in accordance with the provisions of ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.
  Segments
  The Company operates in one business segment.
  Recent Accounting Pronouncements
  In April 2010, FASB issued ASU 2010-13 Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. Management is currently evaluating the potential impact of ASU 2010-13 on our financial statements.
  In March 2010, FASB issued ASU 2010-11 Scope Exception Related to Embedded Credit Derivatives (“ASU 2010-11”). ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Management is currently evaluating the potential impact of ASU 2010-11 on our financial statements.
  
 2.           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.
  12
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 ·
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 and his spouse.  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, a director and his spouse, and an executive officer.  The facility renews each year and is available through May 2010.
 
 Borrowings against these facilities at March 31, 2010 and December 31, 2009 were as follows:
 
 March 31,


December 31,2010


2009Note 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 3.00%, due April 2010


1,791,000



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


299,000



-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 1.18%, due May 2010


644,000



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


445,000



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


1,381,000



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


1,333,000



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


230,000



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


995,000



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


1,156,000



-Note payable to a bank, annual interest rate 1.39%, due June 2010


503,000



-Note 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



-Note payable to a bank, annual interest rate 1.45%, due July 2010


341,000



-Note payable to a bank, annual interest rate 1.60%, due September 2010


1,455,000



-Note payable to a bank, annual interest rate 6.42%, due September 2010


731,000



-Note payable to a bank, annual interest rate 1.69%, due September 2010


1,526,000



-$
15,468,000


$
11,793,000Less : current portion


15,468,000



11,793,000Long -term portion

$
-


$
-
 
 13
 Table of Contents
 
 Interest expense for the three months ended March 31, 2010 and 2009 was $30,000 and $25,000, respectively.
 
 
 3.           COMMITMENTS AND CONTINGENCIES
 
 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 three months ended March 31, 2010 and 2009 was $211,000 and $112,000 respectively.  At March 31, 2010, the Company has outstanding commitments with respect to operating leases, which are due as follows:
  Fiscal year ending December 31,2010

$
561,0002011

$
643,0002012

$
553,0002013

$
166,0002014

$
20,000$
1,943,000
 
  Contingencies
  The Company accounts for loss contingencies in accordance with ASC Topic 450.  As of March 31, 2010, there was no loss contingency.
 
 
 4.           EARNINGS PER SHARE
 
 The elements for calculation of earnings per share for the three months ended March 31, 2010 and 2009 were as follows:
  Three months ended March, 312010


2009Net income for basic and diluted earnings per share

$
3,495,000


$
1,990,000Weighted average shares used in basic computation


27,283,000



24,581,000Effect of dilutive stock options and warrants


696,000



575,000Weighted average shares used in diluted computation


27,979,000



25,156,000Earnings per share:Basic

$
0.13


$
0.08Diluted

$
0.12


$
0.08
  14
 Table of Contents
  5.           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.
  15
 Table of Contents
  Warrants
 
 Following is a summary of the status of warrants outstanding and exercisable at March 31, 2010 and December 31, 2009:
 
  March 31, 2010





December 31, 2009Exercise Price

Number of

Average

Average


Number of

AverageShares

Remaining

Exercise Price


Shares

RemainingContractual Life






Contractual Life$3.00


1,211,740

3.5 years

$
3.00



1,211,740

3.75 years$3.25


816,670

4.9 yearsTotal


2,028,410



Total



1,211,740
  
 6. STOCK OPTIONS
 
 The Company has granted qualified stock options under the Company’s 2000 Incentive Stock Option Plan (the “2000 ISOP”) and 2008 Incentive Stock Option Plan (the “2008 ISOP”).  At March 31, 2010, stock options to purchase 1,119,100 shares of common stock at an exercise price ranging from $0.10 to $4.36 per share were outstanding.  Prior to becoming publically traded, the exercise prices were determined by the Board at the time of grant.  In each such case the exercise price was not less than the fair market value of the common stock as determined by the Board in good faith taking into account such factors as recent issuances of preferred stock with an appropriate discount factored in relative to the common shares.  The exercise prices for options issued under the 2000 ISOP following the sale of preferred stock by the Company during November and December of 2007 represent a discount to the issuance price of $0.78 for such preferred stock taking into account the added value of the conditions in the preferred stock (for example, it was redeemable with 10% appreciation).  The exercise prices for options issued under the 2008 ISOP represent the closing price of the Company’s common stock on the business day preceding the grant date.  The stock options granted become exercisable (“vested”) as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 6.25% of the original number of shares at the end of each successive three-month period following the first anniversary of the grant date until the fourth anniversary of the grant date.  Unless earlier terminated, these stock options granted shall expire ten years after the grant date.  Following the reverse merger, all shares of preferred stock which were convertible on the basis of one share of preferred stock for one share of common stock issued were exchanged for common stock of Liberty Alliance, Inc. retroactively adjusted for all periods presented.
  16
 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 did not grant stock options in the three months ended March 31, 2010.
  The following is a summary of the stock options activity:
  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


$
2.08Options exercisable on March 31, 2010


300,587


$
1.03Weighted average fair value of options granted during Q1 2010






-
  17
 Table of Contents
 
 Of the total options granted, 300,587 are fully vested exercisable and non-forfeitable at March 31, 2010.
 
 The following is a summary of the status of options outstanding at March 31, 2010 and December 31, 2009:
 
 Outstanding Options at March 31, 2010

Exercisable OptionsRange of

Number

Weighted

Weighted

Number

WeightedExercise Price

Average
Average
AverageRemaining
Exercise
ExerciseContractual
Price
PriceLife$0.09 - $1.02

384,578

7.8 years

$0.47

201,210

$0.35$2.35 - $2.50

487,822

4.1 years

$2.40

99,377

$2.40$3.77 - $4.36

246,700

9.5 years

$3.96

-

$3.96Total

1,119,100





300,587

$1.03
 
 
 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
 
 
 7.           RELATED PARTY TRANSACTIONS
 
 There were no related party transactions in the first quarter of 2009 or the first quarter of 2010.
  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.
 
 
 8.           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 March 31, 2010 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.
  18
 Table of Contents
  The Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax at a statutory rate of 16.5%.  No provision for Hong Kong profits tax was required as these entities incurred losses during the three months ended March 31, 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 2012.  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 March 31, 2010 and 2009 is summarized as follows:
  2010


2009Current

$
1,037,000


$
562,000Deferred


-



-$
1,037,000


$
562,000
  
 9.           CONCENTRATIONS AND RISKS
 
 More than 90% of the Company’s assets are located in China.
 
 During the three months ended March 31, 2010 and 2009, 15% 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 three months endedMarch 31, 2010

9%

5%

5%March 31, 2009

10%

7%
 
  As of March 31, 2010 and 2009, accounts receivable from those customers were $5.8 million and $4.4 million respectively.
  19
 Table of Contents
 
 Major suppliers and purchases from those suppliers as a percentage of total purchases were as follows:
  Vendor A

Vendor B

Vendor CFor three months endedMarch 31, 2010

5%

4%

2%March 31, 2009

5%

3%
 
  As of March 31, 2010 and 2009, accounts payable to those vendors were $180,000 and $25,000, respectively.
  
 
 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 THREE MONTHS ENDED
 MARCH 31, 2010 COMPARED TO MARCH 31, 2009
 
 Overall Results
 
 The Company reported net income for the three months ended March 31, 2010 of $3.5 million compared to $2.0 million in the year-earlier period, an increase of 75%.  Net margins declined because we had a substantially lower percentage, 4%, of high margin (i.e., approximately 95% gross margin) net sales from the SCM business in Q1 2010 versus 9.8% in Q1 2009, in each case as a percentage of our total net sales.  Net margins from our ECP business were 14% in Q1 2010, up slightly from 13.1% in Q1 2009.  Our new VCM business experienced a healthy 20.6% gross margin in its debut in Q1 2010.
 
 Net Sales
 
 Net sales for three months ended March 31, 2010 were $38.6 million, up 113% from $18.1 million in the year-earlier period.  Revenues increased dramatically in Q1 2010 due to larger than expected revenue from the VCM business and strong growth in ECP revenues.  The Company reports net sales on the basis of three business categories, supply chain management services, electronic component sales, and VCM business.
  20
 Table of Contents
 
 In three months ended March 31, 2010, net sales of supply chain management services decreased to $1.6 million from $1.8 million in the year-earlier period.  In three months ended March 31, 2010, net sales of electronic components increased 88% to $30.7 million from $16.3 in the year-earlier period.  In three months ended March 31, 2010, net sales in the VCM business were $6.4 million.  In the year-earlier period, we did not conduct VCM business.
 
 Gross Profit
 
 The Company recorded gross profit of $7.1 million in the three months ended March 31, 2010, compared with $3.8 million in the year-earlier period, an increase of 87%.  The gross margin in the three months ended March 31, 2010 decreased to 18.4% from 21.0% in the year-earlier period.  The reason for the decline in overall gross margin was the substantially lower percentage, 4%, of high margin net sales from the SCM business in Q1 2010 versus 9.8% in Q1 2009, in each case as a percentage of our total net sales.  Net margins from our ECP business were 14% in Q1 2010, up slightly from 13.1% in Q1 2009.  Our new VCM business experienced a healthy 20.6% gross margin in its debut in Q1 2010.
 
 Selling, General and Administrative Expenses
 
 Selling, general and administrative expenses were $1.9 million in the three months ended March 31, 2010, compared with $0.9 million in the year-earlier period based on increased business volume.  These expenses were 4.9% of revenues in the three months ended March 31, 2010 compared to 5.0% in the year-earlier period.
  Income from Operations
 
 The Company recorded income from operations of $4.6 million in the three months ended March 31, 2010, compared with $2.6 million in the year-earlier period, an increase of 77%.
 
 Income Taxes
 
 The Company recorded income tax expense of $1.0 million in the three months ended March 31, 2010, compared with $0.6 million in the year-earlier period.  The Company’s subsidiaries in China were subject to China income tax at a special rate of 22% in 2010 and 20% in 2009.  Income tax estimates in interim periods have varied as the Company has adjusted provisions and accruals in light of actual tax filings.
 
 Foreign Currency Translation Gain and Comprehensive Net Income
 
 The Company recorded foreign currency translation gains of $27,000 in the three months ended March 31, 2010, as compared with $30,000 in the year-earlier period.  Comprehensive net income (net income plus foreign currency translation gains) was $3.5 million in the three months ended March 31, 2010, compared with $2.0 million in the year-earlier period.
  
 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 sales business, including procurement-fulfillment programs, 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 decreased with the private financings we closed in August and October of 2009 since these transactions were done on a direct basis.  However, our cost of capital increased markedly with the financing of $4.9 million of gross proceeds we closed in March 2010.  Our cost of capital with China Construction Bank, Industrial Bank, and Hangzhou Bank was approximately 2.4% at March 31, 2010.  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.
  21
 Table of Contents
  We believe SinoHub’s new virtual 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 in 2010 through the sale of debt, long-term debt financings, and operating cash flows.  Due to the risk factors referred to elsewhere in this report and 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 debt funding that we may obtain in the future may be unfavorable to us and to our stockholders.
  At March 31, 2010 and December 31, 2009, the Company had cash and cash equivalents of $10.3 million and $8.3 million, respectively.  During the three months ended March 31, 2010, the net amount of cash used in the Company’s operating activities was $38,000, the net amount of cash used in investing activities was $6.2 million, and the net amount of cash provided by financing activities was $8.1 million.
  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.
  Cash Flows from Operating Activities
 
 The net amount of cash used in the Company’s operating activities during three months ended March 31, 2010 was $38,000, which primarily included earnings from operations that were offset by increase in accounts receivable.  For three months ended March 31, 2009, the net amount of cash used in the Company’s operating activities was $4.4 million, which primarily included earnings from operations and increase in accounts payable that were more than offset by increase in accounts receivable and inventories to support the Company’s business growth.
  22
 Table of Contents
  Cash Flows from Investing Activities
 
 The net amount of cash used in investing activities during three months ended March 31, 2010 was $6.2 million which was the result of restricted cash buildup and investments in property and equipment.  For three months ended March 31, 2009, the net amount of cash used in investing activities was $288,000 primarily the result of restricted cash buildup.
 
 Cash Flows from Financing Activities
 
 The net amount of cash provided by financing activities during three months ended March 31, 2010 was $8.1 million which was the result of a private placement stock offering and the bank borrowings.  For three months ended March 31, 2009, the net amount of cash generated by financing activities was $3.7 million primarily the result of the bank borrowings.
  
 OFF-BALANCE SHEET ARRANGEMENTS
 
 We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
  
 CRITICAL ACCOUNTING POLICIES
 
 See Note 1, Summary of Significant Accounting Policies and Organization, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein for a discussion of critical accounting policies.
 
 
 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 Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of March 31, 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.
  23
 Table of Contents
  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 - OTHER INFORMATION
 
 Item 1.  Legal Proceedings
 
 None.
 
 
 Item 1A.  Risk Factors
 
 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.
 
 
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 None.
 
 
 Item 3.  Defaults Upon Senior Securities
 
 None.
 
 
 Item 4.  Reserved
 
 
 Item 5.  Other Information
 
 None.
  24
 Table of Contents
  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 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)
 
 
 *These certificates are furnished to, but shall not be deemed to be filed with, the Securities and Exchange Commission.
 
       25
 Table of Contents
 
 SIGNATURES
 
 In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 SINOHUB, INC.Date:  May 17, 2010
By:
/s/ Henry T. CochranHenry T. CochranChief Executive Officer
 
 
 
 Date:  May 17, 2010
By:
/s/ Li De HaiLi De HaiChief Financial Officer

(Principal Financial and Accounting Officer)














26