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


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the quarterly period ended June 30, 2011
 
     
 
OR
 
     
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the transition period from ________________ to ________________
 

Commission file number:  001- 34430
SINOHUB, INC.
(Exact name of registrant as specified in its charter)

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

86 755 2661 2106

 (Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x           No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller Reporting Company
x
   
(Do not check if a smaller reporting company)   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No  x   

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at July 31, 2011
Common Stock, $0.001 par value per share
 
33,454,903 shares
 


 
1

 
 
FORM 10-Q

TABLE OF CONTENTS
 


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


SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(As Restated)
 
             
ASSETS
           
             
CURRENT ASSETS
           
     Cash and cash equivalents
  $ 7,164,000     $ 4,524,000  
     Restricted cash
    91,690,000       32,059,000  
     Accounts receivable, net
    51,251,000       45,686,000  
     Inventories, net
    31,517,000       14,631,000  
     Prepaid expenses and other current assets
    938,000       704,000  
     Deposit with suppliers
    750,000       1,308,000  
          Total current assets
    183,309,000       98,913,000  
                 
PROPERTY AND EQUIPMENT, NET
    12,877,000       11,190,000  
                 
TOTAL ASSETS
  $ 196,186,000     $ 110,103,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
     Accounts payable
  $ 4,280,000     $ 865,000  
     Customer deposits
    300,000       107,000  
     Accrued expenses and other current liabilities
    939,000       709,000  
     Bank borrowings
    94,738,000       37,299,000  
     Collateralized bank advances
    10,124,000       -  
     Capital lease obligations – current portion
    616,000       756,000  
     Income and other taxes payable
    644,000       1,712,000  
          Total current liabilities
    111,642,000       41,449,000  
                 
LONG-TERM LIABILITIES
               
     Capital lease obligations, net of current portion
    709,000       845,000  
     Warrant Derivatives
    894,000       1,692,000  
          Total long-term liabilities
    1,603,000       2,537,000  
                 
TOTAL LIABILITIES
    113,245,000       43,987,000  
                 
STOCKHOLDERS’ EQUITY
               
     Preferred stock, $0.001 par value, 5,000,000 shares authorized;
      no shares issued
    -       -  
     Common stock, $0.001 par value, 100,000,000 shares authorized;
      33,454,903 shares and 28,570,859 shares issued and outstanding
      as of June 30, 2011 and December 31, 2010, respectively
    33,000       29,000  
     Additional paid-in capital
    30,715,000       20,122,000  
     Retained earnings
               
          Unappropriated
    46,882,000       42,303,000  
          Appropriated
    934,000       934,000  
     Accumulated other comprehensive income
    4,377,000       2,730,000  
          Total stockholders’ equity
    82,941,000       66,116,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 196,186,000     $ 110,103,000  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
         
(As Restated)
         
(As Restated)
 
NET SALES
                       
     ECSS
  $ 31,688,000     $ 30,566,000     $ 53,215,000     $ 62,785,000  
     ICM
    9,235,000       13,314,000       25,677,000       19,699,000  
          Total net sales
    40,923,000       43,880,000       78,891,000       82,484,000  
COST OF SALES
                               
     ECSS
    27,798,000       25,285,000       45,109,000       51,723,000  
     ICM
    8,688,000       11,018,000       21,660,000       16,088,000  
          Total cost of sales
    36,486,000       36,303,000       66,768,000       67,812,000  
                                 
GROSS PROFIT
    4,437,000       7,577,000       12,123,000       14,672,000  
 
                               
OPERATING EXPENSES
                               
     Selling, general and administrative
    2,144,000       2,243,000       4,466,000       4,138,000  
     Professional services
    213,000       256,000       494,000       501,000  
     Depreciation
    542,000       349,000       1,009,000       571,000  
     Stock compensation expense
    -       95,000       -       151,000  
     Stock option compensation amortization
    79,000       125,000       188,000       218,000  
     Provision for bad debts
    43,000       158,000       96,000       191,000  
          Total operating expenses
    3,022,000       3,226,000       6,253,000       5,770,000  
                                 
INCOME FROM OPERATIONS
    1,415,000       4,351,000       5,870,000       8,902,000  
                                 
OTHER INCOME (EXPENSE)
                               
     Interest expense
    (615,000 )     (212,000 )     (1,105,000 )     (243,000 )
     Interest income
    442,000       98,000       784,000       105,000  
     Changes in fair values of warrant derivatives
    287,000       516,000       798,000       472,000  
     Other, net
    514,000       2,000       741,000       7,000  
          Total other income, net
    628,000       403,000       1,218,000       341,000  
                                 
INCOME BEFORE INCOME TAXES
    2,043,000       4,754,000       7,088,000       9,243,000  
     Income tax expense
    1,007,000       1,352,000       2,509,000       2,390,000  
                                 
NET INCOME
    1,036,000       3,402,000       4,579,000       6,853,000  
                                 
OTHER COMPREHENSIVE INCOME
                               
     Foreign currency translation gain
    1,047,000       81,000       1,648,000       109,000  
                                 
COMPREHENSIVE INCOME
  $ 2,083,000     $ 3,483,000     $ 6,227,000     $ 6,961,000  
                                 
SHARE AND PER SHARE DATA
                               
     Net income per share-basic
  $ 0.03     $ 0.12     $ 0.14     $ 0.25  
     Weighted average number of shares-basic
    33,454,000       28,536,000       31,818,000       27,909,000  
     Net income per share-diluted
  $ 0.03     $ 0.12     $ 0.14     $ 0.24  
     Weighted average number of shares-diluted
    33,546,000       28,780,000       31,854,000       28,277,000  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
SINOHUB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)


   
Six months ended June 30,
 
   
2011
   
2010
 
         
(As Restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
     Net income
  $ 4,579,000     $ 6,853,000  
     Adjustments to reconcile net income to cash used in operations:
               
          Depreciation - operating expenses
    1,009,000       571,000  
          Depreciation - cost of sales
    434,000       -  
          Stock compensation expense
    -       151,000  
          Stock option compensation amortization
    188,000       218,000  
          Provision for bad debts
    96,000       191,000  
          Changes in fair values of warrant derivatives
    (798,000 )     (472,000 )
     Changes in operating assets and liabilities:
               
          Accounts receivable
    (4,557,000 )     (12,097,000 )
          Inventories
    (16,338,000 )     3,448,000  
          Prepaid expenses and other current assets
    (215,000 )     (103,000 )
          Deposit with suppliers
    580,000       (1,941,000 )
          Accounts payable
    3,352,000       1,219,000  
          Customer deposits
    188,000       (57,000 )
          Accrued expenses and other current liabilities
    211,000       (116,000 )
          Income and other taxes payable
    (1,093,000 )     126,000  
               Net cash used in operating activities
    (12,365,000 )     (2,009,000 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
     Increase of restricted cash
    (59,631,000 )     (4,851,000 )
     Purchase of property and equipment
    (3,158,000 )     (2,749,000 )
          Net cash used in investing activities
    (62,789,000 )     (7,600,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
     Proceeds from issuance of common stock, net of cost
    10,440,000       4,470,000  
     Proceeds from exercise of options, net of costs
    15,000       22,000  
     Bank borrowings -  proceeds
    88,356,000       20,999,000  
     Bank borrowings -  repayments
    (32,498,000 )     (14,746,000 )
     Collateralized bank advances
    9,994,000       -  
     Repayments of capital lease obligations
    (309,000 )     -  
          Net cash provided by financing activities
    75,999,000       10,745,000  
                 
EFFECT OF EXCHANGE RATE CHANGES
    1,795,000       (20,000 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    2,639,000       1,116,000  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    4,524,000       8,347,000  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 7,164,000     $ 9,463,000  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
     Cash paid for interest
  $ 1,105,000     $ 243,000  
     Cash paid for income tax
  $ 2,524,000     $ 2,438,000  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

SINOHUB, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2011
(UNAUDITED)


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

SinoHub, Inc. was originally organized in Utah in 1986 under the name Liberty Alliance, Inc.  The Company subsequently merged and reorganized in Delaware in 1991 and is now headquartered in Shenzhen, the People’s Republic of China (“PRC”). The Company was operated by different management teams in the past, pursuing a variety of business ventures.  In May 2008, Liberty Alliance, Inc., SinoHub Acquisition Corp., known as the Merger Sub, SinoHub, Inc., known as the Acquired Sub, and Steven L. White, the principal stockholder of Liberty Alliance, Inc., entered into an Agreement and Plan of Merger pursuant to which the Merger Sub agreed to merge with and into the Acquired Sub, with the Acquired Sub being the surviving corporation.  In July 2008, following the merger, the Company changed its name to SinoHub, Inc. and focused on the electronic components sales and services business, and the Acquired Sub changed its name from SinoHub, Inc. to SinoHub International, Inc.
 
The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission for interim financial information and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented. The consolidated financial results of operations for the interim periods are not necessarily indicative of results for the full year.
 
These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2010, previously filed with the Securities and Exchange Commission on May 24, 2011.
 
Organization Structure
 
The current operations of the Company include the following subsidiaries:
 
 
SinoHub International, Inc. was incorporated in March 1999 as a Delaware C corporation in the United States of America.  This company is the holding company for the Chinese and Hong Kong subsidiaries listed below. SinoHub International, Inc. is wholly owned by SinoHub, Inc.
 
SinoHub Electronics Shenzhen, Ltd. was incorporated in September 2000 in the People’s Republic of China to provide one-stop SCM services for electronic manufacturers and distributors in southern China.  SinoHub Electronics Shenzhen, Ltd. is wholly owned by SinoHub International, Inc.
 
SinoHub SCM Shenzhen, Ltd. was incorporated in December 2001 in the PRC to hold an import and export license in the PRC. SinoHub SCM Shenzhen, Ltd. purchases and sells electronic component parts and also provides customs clearance services to our customers. 100% of the equity interest in SinoHub SCM Shenzhen, Ltd. was held on behalf of SinoHub by SinoHub Electronics Shenzhen, Ltd. through a Declaration of Trust with SinoHub Electronics Shenzhen, Ltd. dated January 30, 2008.  On August 21, 2009 our wholly-owned subsidiary SinoHub Electronics Shenzhen, Ltd. exercised its rights under a declaration of trust with Ms. Hantao Cui, a citizen of the PRC, a shareholder of the Company and the spouse of our President Lei Xia, as trustee (the "Trustee") to cause the shares of SinoHub SCM Shenzhen, Ltd. previously registered in the name of the Trustee to be registered in the name of SinoHub Electronics Shenzhen, Ltd.  SinoHub SCM Shenzhen, Ltd. is now directly and solely owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub SCM Shanghai, Ltd. was incorporated in March 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in northern China. SinoHub SCM Shanghai, Ltd. is wholly owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub Electronics Shanghai, Ltd. was incorporated in July 2005 in the PRC to provide one-stop SCM services for electronic manufacturers and distributors in the PRC. SinoHub Electronics Shanghai, Ltd. is wholly owned by SinoHub International, Inc.
 
B2B Chips, Limited was incorporated in June 2006 in Hong Kong to purchase and sell electronic components.  B2B Chips, Limited is wholly owned by SinoHub Electronics Shenzhen, Ltd.
 
SinoHub Technology (Hong Kong) Limited was incorporated in May 2007 in Hong Kong and has not yet commenced business. SinoHub Technology (Hong Kong) Limited is wholly owned by B2B Chips, Limited.
 
Topology Communication Technology (Shenzhen), Ltd. was incorporated in April 2010 in Shenzhen to manufacture mobile phones and other electronic devices.  Topology Communication Technology (Shenzhen), Ltd. is wholly owned by B2B Chips, Limited.
 
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 with cash or cash equivalents on the balance sheet until the lien against such funds has been released.
 
Accounts Receivable
 
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is established and recorded based on managements’ assessment of customer credit history, overall trends in collections and write-offs, and expected exposures based on facts and prior experience.
 
Inventories
 
Inventories are stated at lower of cost or market, cost being determined on a first in first out method.  No allowance is made for excess or obsolete inventories as inventories are held for a short period of time and are substantially related to specific customer order commitments.  Inventory consists of electronic components purchased from suppliers and electronics products the Company manufactured. 
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation.  Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. 
 
Depreciation is provided on a straight-line basis, less estimated residual values over the assets’ estimated useful lives.  The estimated useful lives are as follows: 
 
Plant and machinery
 
2 to 5 Years
Motor vehicles
 
5 Years
Furniture, fixtures and equipment
 
2 to 5 Years
Leasehold improvements
 
1 to 5 Years

 
Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstances or events indicate that the carrying amount of an asset may not be recoverable.  For purposes of evaluating the recoverability of long-lived assets, the Company considers various factors, including future cash flows, to determine whether the carrying amount exceeds fair value, and in that case, the asset is written down to fair value.
 
Financial Instruments
 
The Company analyzes all financial instruments that may have features of both liabilities and equity under ASC Topic 480-10 and ASC Topic 815.  At present, there are no such instruments in the financial statements.  The Company also analyzes registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under ASC Topic 825.  At present, there are no registration rights as to which late filing penalties may apply.
 
Fair Value of Financial Instruments
 
ASC Topic 825 requires certain disclosures regarding the fair value of financial instruments.  Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
 
ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
 
ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:
 
Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
 
Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
The following table sets forth our estimate of fair value of our financial instruments that are liabilities as of June 30, 2011:
 
   
Quoted Prices
in Active
Markets for
Identical Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
2010 Warrants
  $     $     $ 894,000     $ 894,000  

 
The following table sets forth a summary of changes in fair value of our derivative liability for the three and six months ended June 30, 2011 and 2010:
 

   
Three months ended June 30, 2011
   
Six months ended June 30, 2011
 
             
Beginning Balance
  $ 1,181,000     $ 1,692,000  
Net gain included in earnings
    (287,000 )     (798,000 )
Balance at June 30, 2011
  $ 894,000     $ 894,000  
                 
                 
   
Three months ended June 30, 2010
   
Six months ended June 30, 2010
 
   
(As Restated)
   
(As Restated)
 
                 
Beginning Balance
  $ 2,348,000     $ -  
Fair value of 2010 warrants at issue date
    -       2,304,000  
Net gain included in earnings
    (516,000 )     (472,000 )
Balance at June 30, 2010
  $ 1,832,000     $ 1,832,000  
 
 
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, bank borrowings, and other liabilities approximate their fair values because of the short-term nature of these instruments.  Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.
 
The Company’s operations are primarily based in the PRC, which may give rise to significant foreign currency risks and opportunities from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar (“USD”) and the Chinese Renminbi (“RMB”). In July 2005, the PRC allowed the RMB to fluctuate within a narrow range ending its decade-old valuation peg to the USD.  Since this change in 2005, the RMB has experienced positive trends in valuation against the USD; such trends are reflected in part by the foreign currency translation gains reported in the Company’s financial statements.
 
 
Derivative Instruments

The Warrants issued in connection with the private placement the Company consummated on September 10, 2008 (the “2008 Warrants”) and on March 2, 2010 (the “2010 Warrants”) include a reset provision (to adjust the exercise price of the warrants) which is triggered if the Company issues common shares below the exercise price as defined in the respective warrants. Effective January 1, 2009 the reset provision of these warrants precludes equity accounting treatment under ASC 815 (formerly EITF 07-05). Accordingly, effective January 1, 2009, the Company was required to reclassify these warrants at their fair value to liabilities each reporting period under ASC 815-40.  The reset provision in the 2008 Warrants expired on September 10, 2009.
 
At June 30, 2011, the fair value of the Company’s derivative warrants liability for the 2010 Warrants was $894,000. The Company used the Black-Scholes valuation model to estimate the fair value of the 2010 Warrants.  Significant assumptions used at June 30, 2011 and 2010 were as follows:
 
 
   
2011
   
2010
 
             
Closing price of stock on reporting date
  $ 1.09     $ 2.61  
Risk-free interest rate (1)   
    1.61%       1.79%  
Dividend yield (2)
    0.00%       0.00%  
Volatility factor  
    220.95%       138.23%  
Expected life (3)
 
4.18 years
   
4.7 years
 
 
 
(1)
The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant.
 
 
(2)
Management determined the dividend yield to be 0% based upon its expectation that the Company will not make any near term change to its policy of retaining all earnings available to pay dividends for the foreseeable future.
 
 
(3)
Expected life is remaining contractual life of the warrants.
 
Changes in fair value of the 2010 Warrants are recognized in earnings each reporting period.
 
Stock-Based Compensation
 
The Company adopted ASC Topic 718.   This Statement requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which services are received.  Stock compensation for stock granted to non-employees has been determined in accordance with ASC Topic 718 and ASC Topic 505-50, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.
 
Revenue and Cost Recognition
 
The Company reports revenue from electronics product manufacturing and sales (ICM, Integrated Contract Manufacturing), and electronic component sales and services (ECSS), which is comprised of electronic component sales (known as ECP) and electronic component supply chain management services (known as SCM).
 
 
Revenues for SCM services are earned from both the SCM and procurement-fulfillment programs and are primarily based on a percentage of inventory value handled for a customer.  The Company recognizes revenue from SCM services when the services are provided.  Revenues from ECP and ICM businesses are based on quoted prices and are recognized at the time of shipment to customers.  Revenues are recognized on the gross amount billed to customers.  Sales are recorded net of discounts and allowances.  In all cases, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services rendered, the sales price is determinable, and collectability is reasonably assured.
 
Cost of goods sold in ICM business includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment, rent, shipping and handling costs, and local transportation charges consistent with the revenue earned.
 
Income Taxes
 
The Company accounts for income taxes under ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income taxes in the period that included the enactment date.
 
Foreign Currency Translation
 
SinoHub, Inc., SinoHub International, Inc., B2B Chips, Ltd., and SinoHub Technology Hong Kong, Ltd. maintain accounting records using the functional currencies, USD and Hong Kong Dollars (“HKD”) respectively.  SinoHub SCM Shenzhen, Ltd., SinoHub Electronics Shenzhen, Ltd., SinoHub SCM Shanghai, Ltd., SinoHub Electronics Shanghai, Ltd. and Topology Communication Technology (Shenzhen), Ltd. maintain accounting records using Renminbi (“RMB”) as the functional currency.
 
The Company uses USD as its reporting currency.  The Company accounts for foreign currency translation pursuant to ASC Topic 830.  The functional currencies of the Company’s subsidiaries are HKD and RMB.  Under ASC Topic 830, all assets and liabilities are translated into United States dollars using the current exchange rate at the balance sheet date.  The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period.  Translation adjustments are included in other comprehensive income (loss) for the period.
 
Foreign currency transactions during the year are translated to their functional currencies at the approximate rates of exchange on the dates of transactions.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the reporting currency at the approximate rates of exchange at that date.  Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired.  Exchange gains or losses are recorded in the statement of operations.
 
 
Comprehensive Income
 
The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in HKD and RMB to USD is reported as other comprehensive income in the statements of operations and stockholders’ equity.
 
Earnings Per Share
 
Earnings per share in accordance with the provisions of ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.
 
Segments
 
The Company operates in two segments: electronics product manufacturing and sales (ICM) and electronic component sales and services (ECSS).  Segment disclosure is presented in Note 15, “Segment information.”
 
Recent Accounting Pronouncements
 
In June 2011, FASB issued ASU 2011-05 Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Management is currently evaluating the potential impact of ASU 2011-05 on the Company’s consolidated financial statements.
 
In May 2011, FASB issued ASU 2011-04 Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Management is currently evaluating the potential impact of ASU 2011-04 on the Company’s consolidated financial statements.
 
 
In April 2011, FASB issued ASU 2011-03 Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Management is currently evaluating the potential impact of ASU 2011-03 on the Company’s consolidated financial statements.
 
In April 2011, FASB issued ASU 2011-02 Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The amendments in this Update would provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-02 to have a material impact on its consolidated results of operations or financial position.
 
2.              RESTATEMENT OF PREVIOUSLY REPORTED CONDEDSED CONSOLIDATED FINANCIAL STATEMENTS

On May 16, 2011, the Company filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report management’s determination that the Company’s financial statements for the fiscal quarter ended June 30, 2010, included in its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010, filed with the SEC on August 12, 2010 (the “June 2010 Form 10-Q”),  should no longer be relied upon due to an error in such financial statements with respect to the accounting for 816,670 common stock purchase warrants in connection with its March 2, 2010 private placement (the “2010 Warrants”).  The Company determined that the historical financial statements for the fiscal quarter ended June 30, 2010, included in its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010, filed with the SEC on August 12, 2010 require restatement to properly record the 2010 Warrants as a derivative liability.
 
The Company has performed a complete assessment of its outstanding 2010 Warrants and has concluded that its outstanding 2010 Warrants are within the scope of Accounting Standards Codification 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), formerly Emerging Issues Task Force Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-05”), due to the inclusion in the Warrants of a provision requiring an adjustment to the exercise price of the 2010 Warrants in the event the Company issues common stock, or securities convertible into or exercisable for common stock, at a price per share lower than such exercise price.  Accordingly, ASC 815-40, formerly EITF 07-05, which was effective as of January 1, 2009, should have been applied resulting in a reclassification of the warrants as a liability, measured at fair value, with changes in fair value recognized as part of other income or expense for each reporting period thereafter. Because the reset provision contained in the Company’s warrants issued in 2008 (the “2008 Warrants”) expired on September 10, 2009, no change in the Company’s historical financial statements is required with respect to the 2008 Warrants.
 
 
On June 3, 2011, the Company filed an amended Quarterly Report on Form 10-Q/A reflecting the restatement of the financial statements for the fiscal quarter ended June 30, 2010.
 
The following tables show the effects of the restatement on the Company's condensed consolidated balance sheet as of June 30, 2010 as well as consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2010 and consolidated statements of cash flows for the six months ended June 30, 2010:
 
SinoHub, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet

   
As of June 30, 2010
 
   
As Previously Recorded
   
As Restated
 
             
TOTAL ASSETS
  $ 78,217,000     $ 78,217,000  
                 
Total current liabilities
  $ 25,213,000     $ 25,213,000  
                 
LONG-TERM LIABILITIES
               
     Warrant Derivatives
    -       1,832,000  
                 
TOTAL LIABILITIES
  $ 25,213,000     $ 27,045,000  
                 
STOCKHOLDERS’ EQUITY
               
     Additional paid-in capital
  $ 22,210,000     $ 19,906,000  
     Retained earnings
               
          Unappropriated
  $ 29,106,000     $ 29,578,000  
                 
Total stockholders’ equity
  $ 53,004,000     $ 51,172,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 78,217,000     $ 78,217,000  


SinoHub, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income

 
Three months ended June 30, 2010
 
 
As Previously Recorded
 
As Restated
 
         
Changes in fair values of warrant derivatives
  $ -     $ 516,000  
                 
Total other (expense) income, net
  $ (112,000 )   $ 403,000  
                 
INCOME BEFORE INCOME TAXES
  $ 4,239,000     $ 4,754,000  
                 
NET INCOME
  $ 2,887,000     $ 3,402,000  
                 
COMPREHENSIVE INCOME
  $ 2,968,000     $ 3,483,000  
                 
Net income per share-basic
  $ 0.10     $ 0.12  
                 
Net income per share-diluted
  $ 0.10     $ 0.12  
 
 
 
 
Six months ended June 30, 2010
 
 
As Previously Recorded
 
As Restated
 
                 
Changes in fair values of warrant derivatives
  $ -     $ 472,000  
                 
Total other (expense) income, net
  $ (131,000 )   $ 341,000  
                 
INCOME BEFORE INCOME TAXES
  $ 8,771,000     $ 9,243,000  
                 
NET INCOME
  $ 6,381,000     $ 6,853,000  
                 
COMPREHENSIVE INCOME
  $ 6,490,000     $ 6,961,000  
                 
Net income per share-basic
  $ 0.23     $ 0.25  
                 
Net income per share-diluted
  $ 0.23     $ 0.24  


The gain resulting from the change in fair value of derivative warrant liability for the three and six months ended June 30, 2010, was incurred at the corporate level (a Delaware corporation).  The Company did not recognize any income tax benefits (expense) associated with the change in fair value in the three and six months ended June 30, 2010.  Therefore, the restatement did not have an effect on the Company’s taxable income for the three and six months ended June 30, 2010.
 

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

   
Six months ended June 30, 2010
 
   
As Previously Recorded
   
As Restated
 
             
NET INCOME
  $ 6,381,000     $ 6,853,000  
                 
Changes in fair values of warrant derivatives
    -       (472,000 )
                 
    $ 6,381,000     $ 6,381,000  
                 
Net cash used in operating activities
  $ (2,009,000 )   $ (2,009,000 )


3.              ACCOUNTS RECEIVABLE, NET
 
Accounts receivable at June 30, 2011 and December 31, 2010 consisted of the following:
 
   
June 30, 2011
    December 31, 2010  
   
(Unaudited)
       
             
Accounts receivable
  $ 52,022,000     $ 46,362,000  
Less: allowance for doubtful accounts
    771,000       676,000  
Accounts receivable, net
  $ 51,251,000     $ 45,686,000  

 
For the three months ended June 30, 2011 and 2010, the Company recorded provision for bad debts of $43,000 and $158,000 respectively.  For the six months ended June 30, 2011 and 2010, the Company recorded provision for bad debts of $96,000 and $191,000 respectively.
 
 
4.           INVENTORIES, NET

Inventories at June 30, 2011 and December 31, 2010 consisted of the following:
 
   
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
             
Raw materials and goods for resale
  $ 25,052,000     $ 14,335,000  
Work-in-progress
    1,877,000       -  
Finished goods
    4,588,000       296,000  
    $ 31,517,000     $ 14,631,000  
Less: allowance for obsolete inventories
    -       -  
Inventories, net
  $ 31,517,000     $ 14,631,000  

 
5.           BANK BORROWINGS AND FINANCING ARRANGEMENTS
 
The Company has secured the following financing facilities with certain PRC banks to support its business operations:
 
 
·
Letter of credit facility with China Construction Bank in the amount of $12,900,000 to support our component sales and services business.  Restricted cash balances are required as security for draws against the facility.  The facility renews each year and is available through January 2012.
 
 
·
Letter of credit facility with Industrial Bank in the amount of $50,000,000 to support our business.  Restricted cash balances are required as security for draws against the facility.  The facility is available through March, 2012.
 
 
 
·
Letter of credit facility with Bank of Ningbo in the amount of $7,000,000 to support our electronics product manufacturing and sales business.  The bank requires the unlimited personal guaranty of an executive officer.  The facility renews each year and is available through December, 2011.
 
 
·
Letter of credit facility with Bank of Shanghai in the amount of $3,050,000 to support our electronics product manufacturing and sales business.  The bank requires the unlimited personal guaranty of an executive officer.  The facility renews each year and is available through September 2011.
 
Borrowings including NDF (please see Note 16) against these facilities at June 30, 2011 and December 31, 2010 were as follows:
 

   
June 30,
   
December 31,
 
   
2011
   
2010
 
     (Unaudited)        
Note payable to a bank, annual interest rate 5.61%, due May 2011
  $ -     $ 1,512,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       634,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       536,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,140,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       505,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       484,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,800,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       847,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,805,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       352,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       342,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       5,022,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       362,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       993,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       480,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       736,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,001,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       1,443,000  
Note payable to a bank, annual interest rate 5.38%, due June 2011
    -       702,000  
Note payable to a bank, annual interest rate 5.84%, due October 2011
    -       756,000  
Note payable to a bank, annual interest rate 6.12%, due November 2011
    -       756,000  
Note payable to a bank, annual interest rate 5.38%, due November 2011
    -       5,815,000  
Note payable to a bank, annual interest rate 5.38%, due December 2011
    -       4,044,000  
Note payable to a bank, annual interest rate 5.50%, due December 2011
    -       5,232,000  
                 
Note payable to a bank, annual interest rate 3.00%, due July 2011
    2,490,000       -  
Note payable to a bank, annual interest rate 2.93%, due July 2011
    1,081,000       -  
Note payable to a bank, annual interest rate 3.16%, due July 2011
    619,000       -  
Note payable to a bank, annual interest rate 3.16%, due July 2011
    361,000       -  
Note payable to a bank, annual interest rate 2.93%, due July 2011
    188,000       -  
Note payable to a bank, annual interest rate 2.41%, due July 2011
    686,000       -  
Note payable to a bank, annual interest rate 2.25%, due July 2011
    325,000       -  
 
 
Note payable to a bank, annual interest rate 2.65%, due July 2011
    241,000       -  
Note payable to a bank, annual interest rate 3.16%, due August 2011
    1,593,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    471,000       -  
Note payable to a bank, annual interest rate 2.58%, due August 2011
    1,081,000       -  
Note payable to a bank, annual interest rate 2.50%, due August 2011
    2,216,000       -  
Note payable to a bank, annual interest rate 2.45%, due August 2011
    362,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    1,052,000       -  
Note payable to a bank, annual interest rate 3.00%, due August 2011
    319,000       -  
Note payable to a bank, annual interest rate 3.00%, due August 2011
    435,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    336,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    220,000       -  
Note payable to a bank, annual interest rate 3.17%, due August 2011
    581,000       -  
Note payable to a bank, annual interest rate 3.00%, due August 2011
    594,000       -  
Note payable to a bank, annual interest rate 3.00%, due August 2011
    578,000       -  
Note payable to a bank, annual interest rate 2.50%, due August 2011
    1,613,000       -  
Note payable to a bank, annual interest rate 3.00%, due September 2011
    388,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    5,552,000       -  
Note payable to a bank, annual interest rate 2.59%, due September 2011
    667,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    2,958,000       -  
Note payable to a bank, annual interest rate 2.59%, due September 2011
    151,000       -  
Note payable to a bank, annual interest rate 2.59%, due September 2011
    207,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    402,000       -  
Note payable to a bank, annual interest rate 2.60%, due September 2011
    736,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    216,000       -  
Note payable to a bank, annual interest rate 2.62%, due September 2011
    398,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    399,000       -  
Note payable to a bank, annual interest rate 3.16%, due September 2011
    240,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    106,000       -  
Note payable to a bank, annual interest rate 3.45%, due September 2011
    365,000       -  
Note payable to a bank, annual interest rate 4.06%, due September 2011
    1,330,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    957,000       -  
Note payable to a bank, annual interest rate 4.06%, due September 2011
    714,000       -  
Note payable to a bank, annual interest rate 3.63%, due September 2011
    798,000       -  
Note payable to a bank, annual interest rate 4.06%, due October 2011
    6,516,000       -  
Note payable to a bank, annual interest rate 4.05%, due October 2011
    358,000       -  
Note payable to a bank, annual interest rate 5.84%, due October 2011
    774,000       -  
Note payable to a bank, annual interest rate 3.73%, due October 2011
    370,000       -  
Note payable to a bank, annual interest rate 3.55%, due October 2011
    499,000       -  
Note payable to a bank, annual interest rate 4.43%, due October 2011
    361,000       -  
Note payable to a bank, annual interest rate 4.43%, due October 2011
    327,000       -  
Note payable to a bank, annual interest rate 6.12%, due November 2011
    774,000       -  
Note payable to a bank, annual interest rate 4.43%, due October 2011
    390,000       -  
Note payable to a bank, annual interest rate 6.44%, due November 2011
    1,547,000       -  
Note payable to a bank, annual interest rate 4.34%, due November 2011
    580,000       -  
Note payable to a bank, annual interest rate 3.00%, due November 2011
    5,948,000       -  
Note payable to a bank, annual interest rate 3.00%, due December 2011
    4,137,000       -  
 
 
Note payable to a bank, annual interest rate 3.00%, due January 2012
    3,522,000       -  
Note payable to a bank, annual interest rate 3.00%, due April 2012
    2,647,000       -  
Note payable to a bank, annual interest rate 3.00%, due April 2012
    5,023,000       -  
Note payable to a bank, annual interest rate 3.00%, due May 2012
    1,568,000       -  
Note payable to a bank, annual interest rate 3.00%, due May 2012
    10,087,000       -  
Note payable to a bank, annual interest rate 2.50%, due May 2012
    1,558,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2012
    3,167,000       -  
Note payable to a bank, annual interest rate 2.50%, due June 2012
    1,592,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2012
    3,500,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2012
    2,310,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2012
    1,141,000       -  
Note payable to a bank, annual interest rate 3.00%, due June 2012
    2,019,000       -  
                 
    $ 94,738,000     $ 37,299,000  
Less : current portion
    94,738,000       37,299,000  
Long -term portion
  $ -     $ -  


Interest expense for the three months ended June 30, 2011 and 2010 was $615,000 and $212,000, respectively.  Interest expense for the six months ended June 30, 2011 and 2010 was $1,105,000 and $243,000, respectively.
 


6.           COLLATERALIZED BANK ADVANCES

Collateralized bank advances at June 30, 2011 consisted of purchases financed by two banks for which bank charges of 0.05% on the invoice amount is incurred and guaranteed by the Company’s restricted cash, a subsidiary of the Company and a director of the Company.  Collateralized bank advances are due at various dates from July 19, 2011 through December 1, 2011 and bank advance charges due will be settled on the date of acceptance.
 
 
7.           CAPITAL LEASE OBLIGATIONS

Certain items of our equipment have been acquired under a capital lease.  The capital lease obligations are as follows:
 

 
   
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
             
Gross capital lease obligations
  $ 1,325,000     $ 1,601,000  
Less: current portion
    616,000       756,000  
Long-term capital lease obligations
  $ 709,000     $ 845,000  

The lease is guaranteed by equipment with a total cost of $2,436,000.  Depreciation expenses associated with capital leases were $126,000 and $Nil for the three months ended June 30, 2011 and 2010 respectively.  Interest expenses associated with capital leases were $26,000 and $Nil for the three months ended June 30, 2011 and 2010 respectively.
 
 
Depreciation expenses associated with capital leases were $251,000 and $Nil for the six months ended June 30, 2011 and 2010 respectively.  Interest expenses associated with capital leases were $50,000 and $Nil for the six months ended June 30, 2011 and 2010 respectively.
 
 
8.           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 2011 through March 2015.  Rent expense for the three months ended June 30, 2011 and 2010 was $168,000 and $399,000, respectively.  Rent expense for the six months ended June 30, 2011 and 2010 was $439,000 and $610,000, respectively.  At June 30, 2011, the Company has outstanding commitments with respect to operating leases, which are due as follows:
 
Fiscal year ending December 31,
     
       
2011
  $ 701,000  
2012
    1,206,000  
2013
    327,000  
2014
    49,000  
2015
    12,000  
    $ 2,295,000  

 
(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,
     
       
2011
  $ 303,000  
2012
    730,000  
2013
    365,000  
      1,398,000  
Less: Interest
    73,000  
      1,325,000  
Less: Current portion
    616,000  
Capital lease obligation – Non-current
  $ 709,000  

 
Contingencies
 
The Company accounts for loss contingencies in accordance with ASC Topic 450.  As of June 30, 2011, there was no known loss contingency.
 
 
9.           EARNINGS PER SHARE
 
The elements for calculation of earnings per share for the three and six months ended June 30, 2011 and 2010 were as follows: 

   
Three months ended June 30,
 
   
2011
   
2010
 
         
(As Restated)
 
             
Net income for basic and diluted earnings per share
  $ 1,036,000     $ 3,402,000  
                 
Weighted average shares used in basic computation
    33,454,000       28,536,000  
Effect of dilutive stock options and warrants
    92,000       244,000  
Weighted average shares used in diluted computation
    33,546,000       28,780,000  
                 
Earnings per share:
               
Basic
  $ 0.03     $ 0.12  
Diluted
  $ 0.03     $ 0.12  
                 
                 
   
Six months ended June 30,
 
      2011       2010  
           
(As Restated)
 
                 
Net income for basic and diluted earnings per share
  $ 4,579,000     $ 6,853,000  
                 
Weighted average shares used in basic computation
    31,818,000       27,909,000  
Effect of dilutive stock options and warrants
    36,000       368,000  
Weighted average shares used in diluted computation
    31,854,000       28,277,000  
                 
Earnings per share:
               
Basic
  $ 0.14     $ 0.25  
Diluted
  $ 0.14     $ 0.24  
 
For the three and six months ended June 30, 2011, options to purchase 660,504 shares of common stock and warrants to purchase 3,577,502 shares of common stock with exercise prices greater than the average fair market value of the Company's stock were not included in the calculation because the effect is anti dilutive.
 
For the three and six months ended June 30. 2010, options to purchase 572,300 shares and 237,300 shares of common stock, respectively and warrants to purchase 2,028,410 shares and 891,670 shares of common stock, respectively with exercise prices greater than the average fair market value of the Company's stock were not included in the calculation because the effect is anti-dilutive.
 
10.           STOCKHOLDERS’ EQUITY
 
Equity Share Transactions

On March 21, 2011, the Company completed the sale of the common stock and warrants under a Securities Purchase Agreement.  For each share of common stock purchased by an investor under the Securities Purchase Agreement, such investor received a warrant to purchase 0.3 shares of common stock at an initial exercise price of $3.00 per whole share of common stock.  The warrants cannot be exercised until six months after the date of issuance and have a term of exercise of thirty months from the date of issuance.  Each share of common stock, together with the related warrant, was sold at a negotiated price of $2.30 per share of common stock.  The Company received gross proceeds from the offering of approximately $11 million, before deducting placement agents' fees and estimated offering expenses.  During the first quarter of 2011, net offering proceeds of approximately $10.4 million were recorded as an addition to stockholders’ equity, after deducting offering and related closing costs of the transaction.
 
 
During the first quarter of 2011, certain employees and a former director exercised their stock options to purchase an aggregate of 17,464 shares of common stock for $1,337.
 
During the three months ended June 30, 2011, certain employees exercised their stock options to purchase an aggregate of 75,483 shares of common stock for $13,418.
 
Warrants

Following is a summary of the status of warrants outstanding and exercisable at June 30, 2011 and December 31, 2010:
 
June 30, 2011
 
December 31, 2010
                 
Average
                   
Average
                 
Remaining
                   
Remaining
       
Number
   
Number
   
Contractual
         
Number
   
Number
   
Contractual
Exercise Price
   
Outstanding
   
Exercisable
   
Life
   
Exercise Price
   
Outstanding
   
Exercisable
   
Life
  $ 3.00       2,649,069       1,211,740    
2.20 years
    $ 3.00       1,211,740       1,211,740    
2.66 years
  $ 3.11       853,433       853,433    
4.18 years
    $ 3.25       891,670       816,670    
4.66 years
  $ 3.25       75,000       75,000    
1.59 years
                             
 
Total
      3,577,502       2,140,173          
Total
      2,103,410       2,028,410      

 
11.           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 June 30, 2011, stock options to purchase 728,427 shares of common stock at an exercise price ranging from $0.20 to $4.36 per share were outstanding.  Prior to becoming publically traded, the exercise prices were determined by the Board at the time of grant.  In each such case the exercise price was not less than the fair market value of the common stock as determined by the Board in good faith taking into account such factors as recent issuances of preferred stock with an appropriate discount factored in relative to the common shares.  The exercise prices for options issued under the 2000 ISOP following the sale of preferred stock by the Company during November and December of 2007 represent a discount to the issuance price of $0.78 for such preferred stock taking into account the added value of the conditions in the preferred stock (for example, it was redeemable with 10% appreciation).  The exercise prices for options issued under the 2008 ISOP represent the closing price of the Company’s common stock on the business day preceding the grant date.  The stock options granted become exercisable (“vested”) as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 6.25% of the original number of shares at the end of each successive three-month period following the first anniversary of the grant date until the fourth anniversary of the grant date.  Unless earlier terminated, these stock options granted shall expire ten years after the grant date.  Following the reverse merger, all shares of preferred stock which were convertible on the basis of one share of preferred stock for one share of common stock issued were exchanged for common stock of Liberty Alliance, Inc. retroactively adjusted for all periods presented.
 
 
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
Expected
Expected
Dividend
Risk Free
Grant Date
Life
Volatility
Yield
Interest Rate
Fair Value
         
The 2000 ISOP
       
5 years
175%
0%
2.5%
$0.09 - $0.19
         
The 2008 ISOP
       
1-5 years
83% - 121%
0%
0.3% - 2.5%
$0.47 - $2.79

 
Expected Volatility: Expected volatility is computed based on the standard deviation of the continuously compounded rate of return of days when the stock price changed over the historical period of the expected life of the options.
 
Dividend Yield: The expected dividend yield is zero.  The Company has not paid a dividend and does not anticipate paying dividends in the foreseeable future.
 
Risk Free Rate: The risk-free interest rate was based on U.S. Treasury interest rates at the time of the grant whose term is consistent with expected life of the stock options.
 
Expected Life:  Because the Company has no historical share option exercise experience to estimate future exercise patterns, the expected life was determined using the simplified method as these awards meet the definition of "plain-vanilla" options under the rules prescribed by ASC Topic 718.
 
Stock compensation expense was recognized based on awards expected to vest.  There was no estimated forfeiture as the Company has a short history of issuing options. ASC Topic 718 requires forfeiture to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
 
The following is a summary of the stock options activity:
 
 
   
Number of
   
Weighted-
 
   
Options
   
Average
 
   
Outstanding
   
Exercise
 
         
Price
 
             
Balance at December 31, 2009
    1,263,978     $ 2.01  
Granted
    563,496     $ 2.73  
Forfeited
    (571,687 )     -  
Exercised
    (194,589 )   $ 0.47  
Balance at December 31, 2010
    1,061,198     $ 2.50  
Granted
    98,361     $ 2.71  
Forfeited
    (75,796 )     -  
Exercised
    (17,464 )   $ 1.13  
Balance at March 31, 2011
    1,066,299     $ 2.56  
Granted
    -       -  
Forfeited
    (262,389 )     -  
Exercised
    (75,483 )   $ 0.21  
Balance at June 30, 2011
    728,427     $ 2.74  
Options exercisable on June 30, 2011
    158,066     $ 3.11  


Of the total options granted, 158,066 are fully vested exercisable and non-forfeitable at June 30, 2011.
 
The following is a summary of the status of options outstanding at June 30, 2011 and December 31, 2010:
 

Outstanding Options at June 30, 2011
   
Exercisable Options
 
                                 
Range of
   
Number
   
Weighted
   
Weighted
   
Number
   
Weighted
 
Exercise
         
Average
   
Average
         
Average
 
Price          
Remaining
   
Exercise
         
Exercise
 
           
Contractual
   
Price
         
Price
 
           
Life
                   
$ 0.20 - $1.02       67,923    
6.9 years
    $ 0.65       12,950     $ 0.20  
$ 2.21 - $2.48       207,553    
4.3 years
    $ 2.32       45,766     $ 2.46  
$ 2.62 - $3.00       267,651    
5.3 years
    $ 2.74       19,375     $ 3.00  
$ 3.92 - $4.36       185,300    
8.3 years
    $ 3.97       79,975     $ 3.97  
Total
      728,427                     158,066     $ 3.11  
                                           
                                           
Outstanding Options at December 31, 2010
   
Exercisable Options
 
                                           
Range of
   
Number
   
Weighted
   
Weighted
   
Number
   
Weighted
 
Exercise
           
Average
   
Average
           
Average
 
Price             
Remaining
   
Exercise
           
Exercise
 
               
Contractual
   
Price
           
Price
 
               
Life
                         
$ 0.10 - $1.02       167,114    
7.1 years
    $ 0.44       92,708     $ 0.39  
$ 2.21 - $3.00       700,684    
5.9 years
    $ 2.58       145,453     $ 2.40  
$ 3.92 - $4.36       193,400    
8.8 years
    $ 3.97       61,467     $ 3.93  
Total
      1,061,198                     299,628     $ 2.09  


12.           RELATED PARTY TRANSACTIONS

There were no related party transactions during the three and six months ended June 30, 2011 and 2010 respectively except for the ongoing transaction set forth below.
 
 
As of June 30, 2011, an executive officer and his spouse have provided guarantees to a bank for banking facilities in the amount of $3,050,000 extended to the Company.
 
 
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 current intention to reinvest all the income earned by the Company’s subsidiaries based outside of the US.  Accordingly, no US federal income taxes have been provided on earnings of foreign based subsidiaries.
 
The Company and its wholly owned subsidiary, SinoHub International, Inc. are incorporated in the United States and have incurred operating losses since inception.  Management believes the realization of tax benefits from these NOLs is uncertain due to the Company’s current operating history and continuing losses in the US for tax purposes.  Accordingly, no deferred tax benefit has been recorded.
 
The Company’s subsidiaries in Hong Kong are subject to Hong Kong profits tax at a statutory rate of 16.5%.  No provision for Hong Kong profits tax was required as these entities incurred losses during the three and six months ended June 30, 2011 and 2010.  Management believes the realization of tax benefits from the net operating losses is uncertain due to the Company’s current operating history and continuing losses in Hong Kong for tax purposes.  Accordingly, no deferred tax benefit has been recorded.
 
The Company’s subsidiaries in China were subject to China income tax at a statutory rate of 25% in 2011 and 2010.  However, these subsidiaries are located in special economic regions and/or qualify as “new or high-technology enterprises” that are allowed special tax reductions until 2012. The Company’s subsidiaries in China was subject to special tax rate was 24% and 22% in 2011 and 2010 respectively.
 
Income tax expense for the three months ended June 30, 2011 and 2010 is summarized as follows:
 
   
2011
   
2010
 
         
(As Restated)
 
             
Current
  $ 1,007,000     $ 1,352,000  
Deferred
    -       -  
    $ 1,007,000     $ 1,352,000  

 
The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the three months ended June 30, 2011 and 2010 is as follows:
 
 
   
2011
       
2010
     
             
(As Restated)
     
                     
Income before income taxes
  $ 2,043,000   100 %   $ 4,754,000   100 %
                         
China income taxes at statutory rate
  $ 510,750   25 %   $ 1,188,500   25 %
Operating loss carried forward
    516,680   25 %     306,120   6 %
China qualified income tax exemptions
    (20,430 ) -1 %     (142,620 ) -3 %
Income tax expense
  $ 1,007,000   49 %   $ 1,352,000   28 %

 
Income tax expense for the six months ended June 30, 2011 and 2010 is summarized as follows:
 
   
2011
   
2010
 
         
(As Restated)
 
             
Current
  $ 2,509,000     $ 2,390,000  
Deferred
    -       -  
    $ 2,509,000     $ 2,390,000  

 
The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the six months ended June 30, 2011 and 2010 is as follows:
 
 
   
2011
       
2010
     
             
(As Restated)
     
                     
Income before income taxes
  $ 7,088,000   100 %   $ 9,243,000   100 %
                         
China income taxes at statutory rate
  $ 1,772,000   25 %   $ 2,310,750   25 %
Operating loss carried forward
    807,880   11 %     356,540   4 %
China qualified income tax exemptions
    (70,880 ) -1 %     (277,290 ) -3 %
Income tax expense
  $ 2,509,000   35 %   $ 2,390,000   26 %

 
14.         CONCENTRATIONS AND RISKS
 
Substantially all of Company's assets are located in the PRC and Hong Kong.
 
During the three months ended June 30, 2011 and 2010, 50% and 30% of revenues were derived from overseas sales, respectively.   During the six months ended June 30, 2011 and 2010, 47% and 25% of revenues were derived from overseas sales, respectively.
 
 
15.         SEGMENT INFORMATION
 
Since the Company began engaging in electronic products manufacturing and sales (ICM) in 2010, the Company has been organized as two business segments, electronics product manufacturing and sales (ICM) and electronic component sales and services (ECSS).  The Company follows the provision of authoritative pronouncement issued by the FASB regarding disclosures about segments of an enterprise and related information, which establishes standards for reporting information about operating segments.  Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.