Attached files
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EX-5.1 - OPINION OF ELLENOFF GROSSMAN & SCHOLE LLP - SOKO FITNESS & SPA GROUP, INC. | fs1a6ex5i_soko.htm |
EX-23.1 - CONSENT OF BAGELL, JOSEPHS, LEVINE & COMPANY, LLC - SOKO FITNESS & SPA GROUP, INC. | fs1a6ex23i_soko.htm |
EX-21.1 - LIST OF SUBSIDIARIES - SOKO FITNESS & SPA GROUP, INC. | fs1a6ex21i_soko.htm |
EX-14.1 - CODE OF ETHICAL CONDUCT - SOKO FITNESS & SPA GROUP, INC. | fs1a6ex14i_soko.htm |
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2,
2010
REGISTRATION
NO. 333-151563
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1/A
(Amendment
No. 6)
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
SOKO
FITNESS & SPA GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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7991
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80-0122921
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification No.)
|
No.194,
Guogeli Street, Harbin,
Heilongjiang
Province, China 150001
86-451-87702255
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Mr.
Tong Liu
Chief
Executive Officer
SOKO
Fitness & Spa Group, Inc.
No.194,
Guogeli Street, Harbin,
Heilongjiang
Province, China 150001
86-451-87702255
(Name,
address including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Barry
I. Grossman, Esq.
Lawrence
A. Rosenbloom, Esq.
Ellenoff
Grossman & Schole LLP
150
East 42nd Street,
11th
Floor
New
York, NY 10017
212-370-1300
212-370-7889
(fax)
|
Ms.
Judy Jiang
Corporate
Secretary
SOKO
Fitness & Spa Group, Inc.
No.194,
Guageli Street, Harbin
Heilongjiang
Province, China 150001
86-451-87702255
|
Registrant’s
telephone number: 86-451-87702255
APPROXIMATE
DATE OF PROPOSED SALE TO PUBLIC: From time to time after this
Registration
Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
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Non-accelerated
filer
|
o
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Smaller
reporting company
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x
|
(Do
not check if a smaller reporting company)
|
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to Section 8(a) may
determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission (“SEC”) is
effective. This prospectus is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, FEBRUARY 2, 2010 |
SOKO FITNESS & SPA GROUP,
INC.
4,200,000
Shares of
Common
Stock
We have
prepared this prospectus to allow the persons named in this prospectus under the
caption “Selling Stockholders” to sell up to an aggregate of 4,200,000 shares of
our common stock they currently hold as well as shares we may issue to them upon
the exercise of their warrants. The shares and warrants were issued
to the selling stockholders in a private placement transaction completed prior
to the filing of the registration statement of which this prospectus is a
part.
The
selling stockholders may sell all or a portion of their shares through public or
private transactions at prevailing market prices or at privately negotiated
prices.
We are
not selling any shares of our common stock in this offering and will not receive
any proceeds from this offering. We may receive proceeds on exercise
of outstanding warrants for shares of common stock covered by this prospectus.
The exercise price is set forth in the warrants.
For a
more detailed description of the shares and warrants, see “Description of
Securities” and “Selling Stockholders.”
We have
agreed to pay all the costs and expenses of this registration.
Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol “SOKF.” The closing price of our common stock on the OTCBB
on February 1, 2010 was $3.21 per share.
We may
amend or supplement this prospectus from time to time by filing amendments or
supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
This
offering is highly speculative and these securities involve a high degree of
risk and should be considered only by persons who can afford the loss of their
entire investment. See “Risk Factors” beginning on page 7 of this
prospectus.
Neither
the SEC nor any state securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The
date of this prospectus
is
, 2010.
Page
Number
-i-
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1
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7
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26
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27
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27
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27
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28
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49
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57
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58
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61
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63
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65
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66
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68
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70
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70
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70
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71
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72
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F-1
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This
prospectus is part of a registration statement we filed with the
SEC. You should rely only on the information provided in this
prospectus and incorporated by reference in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in or incorporated by reference into this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the common stock offered by this
prospectus. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any common stock in any circumstances in which
such offer or solicitation is unlawful. The selling stockholders are
offering to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted.
Neither
the delivery of this prospectus nor any sale made in connection with this
prospectus shall, under any circumstances, create any implication that there has
been no change in our affairs since the date of this prospectus or that the
information contained by reference to this prospectus is correct as of any time
after its date. The information in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. The rules of the SEC may
require us to update this prospectus in the future.
The
following summary highlights selected information contained in this
prospectus. This summary does not contain all the information
you should consider before investing in the securities. Before
making an investment decision, you should read the entire prospectus
carefully, including the information set forth under the headings “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” and the financial statements and the notes to
the financial statements included in this prospectus.
As
used throughout this prospectus, the terms “SOKO”, “Company”, “we,” “us,”
or “our” refer to SOKO Fitness & Spa Group, Inc., together with its
wholly-owned indirect subsidiary, Harbin Mege Union Beauty Management
Ltd. (“Mege Union”), Mege Union’s subsidiaries, and Mege Union’s variable
interest entity, Queen Group (as defined below). For purposes
of this prospectus, the Queen Group is defined to include Harbin Huang
Emperor & Golden Gym Club Co. Ltd., Harbin Queen Beauty Demonstration
Center (consisting of three facilities, the Daowai Spa and two branches,
the Harbin Queen Beauty Demonstration Center Nangang Branch and Harbin
Queen Beauty Demonstration Center Xuanhua Branch), Harbin Daoli Queen
Demonstration Beauty Parlor, Harbin Xinyang Spa, Harbin SOKO Spa, Harbin
Queen Medical Beauty Clinic, Shenyang Beauty Demonstration
Center and Harbin Queen Beauty Vocational Skill Training
School.
As
used in this prospectus, “China” or “the PRC” refers to the People’s
Republic of China.
Business
We
are an operator of distinctive fitness centers, beauty salons and spas in
key cities in Northeastern China as well as in suburban
Beijing. We also operate one beauty school in Harbin,
China.
We
provide programs, services and products that combine exercise, education
and nutrition to help our members and clients to achieve their fitness and
beauty goals and to help them to lead a healthy way of life and to achieve
a richer lifestyle. Our beauty salons and spas provide
services that include, but are not limited to, skincare, hair dressing,
manicure, pedicure, body care, massage, and weight loss
therapy. Currently, our three fitness centers have
approximately 15,698 members in total and our ten beauty salons and spas
are visited by approximately 20,867 clients annually.
Our
corporate address is No.194, Guogeli Street, Harbin, Heilongjiang
Province, China 150001 and our telephone number is
86-451-87702255.
Background
and Organization
SOKO
was incorporated as a Delaware corporation on September 9, 2004 under the
name American Business Holdings, Inc. as a holding vehicle to own and
control a textile and plastic packaging company in Central and East
Africa. On September 12, 2004, the Company completed a transaction in
which it purchased all of the outstanding membership shares in Tissakin
Ltd. (“Tissakin”), a Democratic Republic of Congo corporation, so that
Tissakin Ltd. became our wholly owned subsidiary. Through Tissakin, the
Company was a manufacturer of bags for packaging agricultural products in
the Democratic Republic of Congo.
As
described in the “April 2008 Share Exchange and Financing Transactions”
section below, on April 11, 2008, we entered into a Share Exchange
Agreement with Wealthlink Co., Ltd. (“Wealthlink”) and the shareholders of
Wealthlink (the “Wealthlink Shareholders”) pursuant to which the Company
acquired all of the outstanding shares of common stock of Wealthlink from
the Wealthlink Shareholders. After the completion of these transactions,
we changed the Company’s name from American Business Holdings, Inc. to
SOKO Fitness & Spa Group, Inc.
As a result of the share exchange
with Wealthlink (the “Share Exchange”), SOKO became the indirect owner of
Mege Union Beauty Management Ltd., (“Mege Union”), which is a company
organized and existing under the laws of the People’s Republic of China
and a wholly-owned subsidiary of Wealthlink. SOKO and
Wealthlink are holding corporations and do not conduct any
operations. Mege Union currently operates one facility directly
and otherwise conducts its business through one wholly (100%) owned and
three majority (51%) owned operating subsidiaries as well as through an
association with eight individually-owned sole proprietorships (one
of which has two additional branches) comprising the variable interest
entity known as the “Queen Group.”
|
The
following is a complete list of the operations of Mege Union as of the
date of this prospectus, together with their recognized facility name and
relationship to Mege Union or Wealthlink and thereby to the
Company:
|
Legal
Name of Entity
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Commercial
Name
|
Ownership
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||
Fitness
Centers
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||||
Shenyang
Letian Yoga Fitness Center
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Yoga
Wave
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Owned
51% by Mege Union and 49% by an unaffiliated third party
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Shenyang
Starway Fitness Co., Ltd.
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Yoga
Wave II
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Owned
51% by Mege Union and 49% by an unaffiliated third party
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||
Harbin
Huang Emperor & Golden Gym Club Co., Ltd.
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SOKO
International Fitness Center
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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||
Beijing
Natural Beauty Services Limited
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SOKO
Beijing Natural Beauty Fitness
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Owned
51% by Mege Union and 49% by two unaffiliated third
parties
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First
Subsidiary of Beijing Natural Beauty Services Limited
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SOKO
Beijing Natural Fitness II
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A
branch of Beijing Natural Beauty Services Limited and as such part of Mege
Union
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Beauty
Salons and Spas
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||||
Harbin
Mege Union Beauty
Management
Ltd.
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Legend
Spa
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Owned
100% by Wealthlink
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Harbin
Tai Ai Beauty Co. Ltd.
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Lea
Spa
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Owned
100% by Mege Union
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Harbin
Queen Beauty Demonstration Center (“Harbin Demonstration
Center”)
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Daowai
Spa
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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||
Harbin
Queen Beauty Demonstration Center Nangang Branch
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Nangang
Spa
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A
branch of Harbin Demonstration Center and as such part of Queen
Group
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Harbin
Queen Beauty Demonstration Center Xuanhua Branch
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Xuanhua
Spa
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A
branch of Harbin Demonstration Center and as such part of Queen
Group
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Harbin
Daoli Queen Demonstration Beauty Parlor
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Daoli
Spa
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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Harbin
Xinyang Spa
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(same
as legal name)
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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Harbin
SOKO Spa
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(same
as legal name)
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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Shenyang
Queen Beauty Demonstration
Co.
Ltd.
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Shenyang
Queen Beauty Spa
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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Harbin
Queen Beauty Clinic
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Harbin
Queen Medical Beauty Spa
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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Beauty
School
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||||
Harbin
Queen Beauty Vocational Skill
Training
School
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(same
as legal name)
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Part
of Queen Group - owned 100% by Mr. Liu and operated under agreements
between this entity and Mege Union
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||
In
addition, Mege Union currently has four new facilities under construction.
The Da Qing beauty salon and spa is scheduled to open in May
2010. We have also begun construction on three as yet unnamed
facilities, one fitness center, a yoga facility and a beauty salon and
spa, all to be located in the Long Dian Building in Harbin. We
currently anticipate that these facilities will open to members and
clients by the end of June 2010 and we expect the three new facilities in
Harbin will generate advances from members and clients and, ultimately,
revenue of approximately US$ 2 million in the aggregate in the
first and second quarters after they open.
For
ease of reference, unless it is necessary to the understanding of the
context to differentiate, throughout this prospectus we will refer to all
of above entities collectively as our “subsidiaries” and, to the extent we
refer to a specific entity listed in the table above, we refer to such
entity by its commercial name.
There
is currently a limited public market for our common stock, par value
$0.001 per share, with minimal trading activity on our common stock for
the last 60 days. As with any investment, there are certain risks involved
in this offering. All potential investors should consult their
own tax, legal and investment advisors prior to making any decision
regarding this offering. The purchase of our shares is highly
speculative and involves a high degree of risk, including, but not
necessarily limited to, the “Risk Factors” described elsewhere
herein. Any person who cannot afford the loss of their entire
investment should not purchase our shares.
April
2008 Share Exchange and Financing Transactions
On
April 11, 2008 (the “Closing Date”), we entered into a Share Exchange
Agreement with Wealthlink and the Wealthlink Shareholders
(including Mr. Tong Liu, the Company’s current Chairman of the Board and
Chief Executive Officer) pursuant to which the Company issued an aggregate
of 13,300,000 shares of common stock of the Company to the Wealthlink
Shareholders in exchange for all of the outstanding shares of common stock
of Wealthlink (the “Share Exchange”).
Concurrently
with the Share Exchange, the Company provided $400,000 to Mr. Tong Liu to
purchase 1,000,000 shares of Company common stock from Mr. Syed Idris
Husain (“Idris Husain”), then director and the principal stockholder of
the Company, and an aggregate of 1,575,000 shares of Company common stock
from certain other original shareholders of the Company, with the
understanding that Mr. Liu would immediately return these 2,575,000 shares
to the Company for cancellation. Following the purchase of
these 2,575,000 shares by Mr. Tong Liu on the Closing Date, Mr. Liu
immediately returned them to the Company as agreed for
cancellation.
Also
on the Closing Date, the Company entered into a Consulting Agreement with
Idris Husain pursuant to which he was engaged to provide the Company with
regular and customary consulting advice as requested by the Company for a
period of six months from the Closing Date. Pursuant to this
Consulting Agreement, the Company paid Idris Husain $300,000 in
consideration of such services on the Closing Date.
In
consideration for structuring the Share Exchange with Wealthlink, SOKO
agreed to compensate E-Tech International, Inc. with (i) a retainer of
$20,000 and (ii) shares of common stock of the Company equal to two
percent (2%) of total number of shares outstanding after the Share
Exchange with Wealthlink and the placement of the Financing (as defined
below) (340,000 shares) having an aggregate fair value at the time of
issuance (applying a per share fair value of $0.63 computed for the shares
issued in the Financing to the Purchasers described below) of $214,200.
Further, in consideration of services provided to the Company in
association with the consummation of the Share Exchange, an aggregate of
425,000 shares having an aggregate fair value at the time of issuance
(applying a per share fair value of $0.63 computed for the shares issued
in the Financing to the Purchasers described below) of $267,750 were
issued to two other advisors (85,000 shares to Sichenzia Ross Friedman
Ference LLP and 340,000 shares to Fortune Badge Limited) in lieu of cash
compensation, totaling the number of shares issued to the advisors in
connection with the share exchange to 765,000 shares of common stock of
the Company having an aggregate fair value at the time of issuance
(applying a per share fair value of $0.63 computed for the shares issued
in the Financing to the Purchasers described below) of
$481,950.
Also,
on the Closing Date, immediately prior to and as a condition to the
completion of the Share Exchange, the Company entered into a Stock
Purchase Agreement with each of Syed Irfan Husain, the Company’s then
President and Chief Executive Officer, Idris Husain, and Verifica
International, Ltd. (collectively, the “Buyers”). Pursuant to this
agreement, the Buyers purchased all issued and outstanding shares of
Tissakin Ltd., a Democratic Republic of Congo corporation and a
wholly-owned subsidiary of the Company, in consideration of 79,000,000
shares of common stock of the Company owned by the Buyers.
|
Additionally,
on the Closing Date, SOKO entered into a Securities Purchase Agreement,
Warrant, Registration Rights Agreement and Lock-Up Agreement with three
investors (the “Purchasers”) for an aggregate of $2,000,000 (the
“Financing”). On the Closing Date, upon the terms and subject to the
conditions set forth in the Securities Purchase Agreement, SOKO sold, and
the Purchasers purchased, in the aggregate, 2,000,000 shares of our common
stock and warrants to purchase an additional 2,000,000 shares. The
warrants have an exercise price of $1.25 and are exercisable at any time
through the third anniversary of the Closing Date. Additionally, each
Purchaser’s ability to exercise the warrant is limited to the extent such
Purchaser’s beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) would
exceed 4.99% of the SOKO’s outstanding common stock. From the Closing Date
and through the twelve-month anniversary of the Closing Date, certain SOKO
shareholders agreed not to sell any of their shares of our common
stock.
By
using the Black-Scholes model to calculate the fair market value of the
warrants issued to the Purchasers in the Financing, SOKO computed that the
effective fair market value of each of the 2,000,000 share issued to the
investors at the time of issuance was $0.63 and that the effective fair
market value of each warrant share issued to the investors at the time of
issuance was $0.37.
In
consideration for acting as placement agent for the Financing, SOKO agreed
to compensate (a) E-Tech Securities Inc. with (i) a retainer of
$30,000, (ii) a cash placement fee equal to seven percent (7%) of the
proceeds of the Financing described below ($140,000) and (iii)
warrants to purchase an amount of securities equal to eight percent (8%)
of the total shares issued to the Purchasers (160,000 shares) having an
aggregate fair value at the time of issuance (applying a per warrant share
fair value of $0.37 computed for the warrant shares issued in the
Financing to the Purchasers) of $59,200 and (b) Luck Eagle Limited
shares of common stock of the Company equal to three percent (3%) of
total number of shares outstanding after the Share Exchange with
Wealthlink and the placement of the Financing (510,000 shares) having an
aggregate fair value at the time of issuance (applying a per share the
fair value of $0.63 computed for the shares issued in the Financing to the
Purchasers) of $321,300. The warrants issued to E-Tech Securities Inc.
have an exercise price of $1.25 and are exercisable at any time through
the third anniversary of the Closing Date.
Prior
to the consummation of the foregoing transactions, the Company had
82,000,000 shares of common stock outstanding. As a result of
the consummation of all of the foregoing transactions, the following
changes in the outstanding shares of the Company were
recorded:
|
● |
the
Company reacquired 79,000,000 shares from its original shareholders in
connection with the acquisition by such shareholders of Tissakin
Ltd.;
|
||
● |
Mr.
Liu acquired, with funds provided by the Company, 2,575,000 shares from
certain original shareholders of the Company and returned such shares to
the Company for cancellation; and
|
||
● |
an
additional 425,000 shares remained held by certain original shareholders
of the Company.
|
||
From the 81,575,000 shares that were reacquired and acquired as described above: | |||
● |
the
Company issued an additional 13,300,00 shares to Wealthlink Shareholders,
including Mr. Liu;
|
||
● |
the
Company issued an aggregate of 765,000 shares to several advisors of the
Company for structuring the Share Exchange;
|
||
● |
the
Purchasers acquired 2,000,000 shares and warrants to purchase up to an
additional 2,000,000 shares;
|
||
● |
the
Company issued an aggregate of 510,000 shares to Luck Eagle for
structuring the Financing;
|
||
● |
E-Tech
Securities Inc. was issued a warrant to purchase up to 160,000 shares for
structuring the Financing; and
|
||
● |
the
Company cancelled 65,000,000 shares.
|
||
As
a result, the Company now has 17,000,000 shares of common stock
outstanding, which is comprised of 16,575,000 shares issued in connection
with the foregoing and 425,000 shares held by certain original
shareholders of the Company.
As
a result of the foregoing transactions, we are in the business of
operating distinctive destination centers that offer professional fitness,
beauty salon and spa services in China. A detailed discussion of our
business and operations is included in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” beginning on
page 28 of this prospectus.
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|||
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THE
OFFERING
|
|||
Common
stock outstanding before the offering
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17,000,000
|
||
Common
stock offered by selling stockholders
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Up
to 4,200,000 shares. The maximum number of shares to be sold by
the selling stockholders, 4,200,000 represents 22.11% of our outstanding
stock, assuming full exercise of the warrants.
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||
Common
stock to be outstanding after the offering
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Up
to 19,000,000 shares, assuming full exercise of the
warrants.
|
||
Use
of proceeds
|
We
will not receive any proceeds from the sale of the common stock. However,
we may receive proceeds from the exercise of the warrants. See “Use of
Proceeds” beginning on page 27 for a complete description
|
||
The
above information regarding common stock to be outstanding after the
offering is based on 17,000,000 shares of common stock outstanding as of
February 1, 2010.
|
RISK FACTORS
You should carefully consider the
risks described below as well as other information provided to you in this
document, including information in the section of this document entitled
“Cautionary Note Regarding Forward Looking Statements.” The risks and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties not presently known to the Company or that
the Company currently believes are immaterial may also impair the Company’s
business operations. If any of the following risks actually occur,
the Company’s business, financial condition or results of operations could be
materially adversely affected, the value of the Company’s Common Stock could
decline, and you may lose all or part of your investment.
Risks
Related to Our Business and Industry
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
We have
only limited audited financial results on which you can evaluate us and our
operations. We have operated our business in our current
corporate structure only since April 2008 and are subject to, and
may be unable to address, the risks typically encountered by companies operating
in the rapidly evolving marketplace, including those risks relating
to:
●
|
the
failure to develop brand name recognition and
reputation;
|
●
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the
failure to achieve market acceptance of our
services;
|
●
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a
slow down in the growth of general consumer acceptance of fitness and yoga
services; and
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●
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an
inability to grow and adapt our business and technology to evolving
consumer demand.
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If we are
unable to address any or all of these or related risks, our business and results
of operations may be materially and adversely affected.
Our operating
results may fluctuate, which makes our results difficult to predict and could
cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many outside
of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our
past results as an indication of our future performance. Our quarterly,
year-to-date and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Our operating results in
future quarters may fall below expectations. Any of these events could cause our
stock price to fall. Each of the risk factors listed in this
prospectus, as well as the following factors, may affect our operating
results:
●
|
our
ability to continue to attract clientele to our health, fitness and spa
facilities;
|
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|
our
ability to generate revenue from our members and clientele for the
products and services we offer;
|
●
|
our
ability to attract advertisers to our
programs;
|
●
|
the
amount and timing of operating costs and capital expenditures related to
the maintenance and expansion of our businesses, operations and
infrastructure;
|
●
|
our
focus on long-term goals over short-term
results;
|
●
|
our
ability to keep our facilities operational at a reasonable cost;
and
|
●
|
our
ability to generate revenue from services in which we have invested
considerable time and resources.
|
Because
our business is changing and evolving, our historical operating results may not
be useful to you in predicting our future operating results.
We
have significant short-term debt obligations, which mature in less than one
year. Our inability to extend the maturities of, or to refinance,
this debt could result in defaults, and in certain instances, foreclosures on
our assets. Moreover, we may be unable to obtain financing to fund
ongoing operations and future growth.
We
currently depend on short-term bank loans and net revenues to meet our
short-term cash requirements. As of November 30, 2009, our total bank
debt outstanding was approximately $3.3 million which carries maturity periods
ranging from six months to one year, while the short-term and revolving nature
of these credit facilities is common in China. Part of these short-term credit
facilities are guaranteed by the building owed by Queen Group and the rest of
them are guaranteed by third-parties and our CEO, Mr. Liu. In China,
short-term bank loans generally mature in one year or less and contain no
specific renewal terms. However, it is customary practice for banks
and borrowers to negotiate roll-overs or renewals of short-term borrowings on an
on-going basis shortly before they mature. Although we have renewed our
short-term borrowings in the past, we cannot assure you that we will be able to
renew these loans in the future as they mature. If we are unable to
obtain renewals of these loans or sufficient alternative funding on reasonable
terms from banks or other parties, we will have to repay these borrowings with
the cash on our balance sheet or cash generated by our future operations, if
any.
Moreover,
we cannot assure you that our business will generate sufficient cash flow from
operations to repay these borrowings. Failure to obtain extensions of
the maturity dates of, or to refinance, these obligations or to obtain
additional equity financing to meet these debt obligations would result in an
event of default with respect to such obligations and could result in the
foreclosure on the collateral. The sale of such collateral at foreclosure would
significantly disrupt our operations, which could significantly lower our
revenues and profitability.
In
addition, we may be exposed to changes in interest rates. If interest
rates increase substantially, our results of operations could be adversely
affected.
Because
of the capital-intensive nature of our business, we may have to incur additional
indebtedness or issue new equity securities and, if we are not able to obtain
additional capital, our ability to operate or expand our business may be
impaired and our results of operations could be adversely affected.
Our
business requires significant levels of capital to finance the development
of our facilities and the construction of our new facilities, and we
therefore expect that we will need additional capital to fund our future
growth. If cash from available sources is insufficient or unavailable
due to restrictive credit markets, or if cash is used for unanticipated needs,
we may require additional capital sooner than anticipated. Our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of
uncertainties, including:
●
|
investors’
perceptions of, and demand for, companies in the Chinese health and beauty
industry;
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●
|
investors’
perceptions of, and demand for, companies operating in
China;
|
●
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conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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●
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our
future results of operations, financial condition and cash
flows;
|
●
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governmental
regulation of foreign investment in
China;
|
●
|
economic,
political and other conditions in the United States, China, and other
countries; and
|
●
|
governmental
policies relating to foreign currency
borrowings.
|
In the
event that we are required or choose to raise additional funds, we may be unable
to do so on favorable terms or at all.
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There
is no assurance that we will be able to secure suitable financing in a timely
fashion or at all. In addition, there is no assurance that we will be
able to obtain the capital we require by any other means. Future
financings through equity investments are likely to be dilutive to our existing
stockholders. Also, the terms of securities we may issue in future
capital transactions may be more favorable for our new
investors. Newly issued securities may include preferences, superior
voting rights, the issuance of warrants or other derivative securities, and the
issuances of incentive awards under equity employee incentive plans, which may
have additional dilutive effects. Further, we may incur substantial
costs in pursuing future capital and/or financing, including investment banking
fees, legal fees, accounting fees, printing and distribution expenses and other
costs. We may also be required to recognize non-cash expenses in
connection with certain securities we may issue, such as convertible notes and
warrants, which will adversely impact our financial condition.
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital
we are able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
We
may not be able to attract and retain a sufficient number of clients to maintain
or expand the business.
Our
business depends on our ability to attract and retain members, and we cannot
assure you that our marketing efforts will lead to increased membership or that
the membership levels at our centers will not materially decline. All of our
members can cancel their membership at any time upon providing advance notice.
There are numerous factors that could lead to a decline in membership levels or
sales of in-center services that could prevent us from increasing membership at
newer centers where membership is generally not yet at a targeted capacity,
including changes in discretionary spending trends and general economic
conditions, market maturity or saturation, a decline in our ability to deliver
quality service at a competitive price, direct and indirect competition in the
areas where our centers are located and a decline in the public’s interest in
health and fitness. In order to increase membership levels, we may from time to
time offer lower membership rates. Any decrease in our average dues, reduction
in enrollment fees or higher membership acquisition costs may adversely impact
our operating margins.
In
addition, our ability to attract and retain members depends significantly on the
effectiveness of our marketing practices. If our marketing and advertising
campaigns do not generate a sufficient number of members and subscribers, our
results of operations will be adversely affected.
If
we do not continue to develop innovative new services and products or if our
services and products do not continue to appeal to the market, we may not remain
competitive, and our revenues and operating results could suffer.
The
fitness and yoga services, as well as beauty salon and spa services, that we
offer are subject to changing customer demands. Our future operational and
financial performance depends on our ability to continue to develop and market
new services and products and to enhance our existing services and products,
each on a timely basis to respond to new and evolving customer demands, achieve
market acceptance and keep pace with new health and fitness
developments. We may be unable to develop, introduce on a timely
basis (or at all) or market any new or enhanced services and products, and we
cannot assure you that any new or enhanced services or products will appeal to
the market. Our failure to develop new services and products and to
enhance our existing services and products or the failure of our services and
products to continue to appeal to the market could have an adverse impact on our
ability to attract and retain members and subscribers and thus adversely affect
our business, financial condition or results of operations.
If
we are unable to identify and acquire suitable sites for fitness and yoga
services as well as beauty salon and spa services, our revenue growth rate and
profits may be negatively impacted.
In order
to expand our business, we must identify and acquire sites that meet the site
selection criteria we have established. In addition to finding sites
with the right demographic and other measures we employ in our selection
process, we also need to evaluate the penetration of our competitors in the
market. We face significant competition for sites that meet our
criteria, and as a result we may lose those sites, our competitors could copy
our format or we could be forced to pay significantly higher prices for those
sites. If we are unable to identify and acquire sites for new centers, our
revenue growth rate and profits may be negatively impacted. Additionally, if our
analysis of the suitability of a site is incorrect, we may not be able to
recover our capital investment in developing and building the new
center.
We
may be unable to make acquisitions or enter into joint ventures, which could
impair our growth prospects, and we may be unable integrate, operate or realize
the anticipated benefits of such businesses.
As part
of our growth strategy, we may pursue selected acquisitions or joint ventures.
We cannot assure you that we will be able to effect these transactions on
commercially reasonable terms or at all. Any future acquisitions or joint
ventures may require access to additional capital, and we cannot assure you that
we will have access to such capital on commercially reasonable terms or at all.
Even if we enter into these transactions, we may not realize the benefits we
anticipate or we may experience difficulties in integrating any acquired
companies and products into our existing business; attrition of key personnel
from acquired businesses; significant charges or expenses; higher costs of
integration than we anticipated; or unforeseen operating difficulties that
require significant financial and managerial resources that would otherwise be
available for the ongoing development or expansion of our existing
operations.
Consummating
these transactions could also result in the incurrence of additional debt and
related interest expense, as well as unforeseen contingent liabilities, all of
which could have a material adverse effect on our business, financial condition
or results of operations. We may also issue additional equity in connection with
these transactions, which would dilute our existing shareholders.
We face competition from other
health and fitness facilities and service-providers who could copy our business model and erode
our market share, brand recognition and profitability.
We face
formidable competition in every aspect of our business, and particularly from
other health and fitness providers seeking to attain clientele. Currently, we
consider our primary competitor to be Weider-Tera. Weider-Tera can
use its resources in a variety of competitive ways, including by making
acquisitions, investing more aggressively in development and competing more
aggressively for marketing and advertisers. We cannot assure you that our
competitors will not attempt to copy our business model, or portions thereof,
and that this will not erode our market share and brand recognition and impair
our growth rate and profitability. If our competitors are able to
provide similar or better facilities, services and products than ours, we could
experience a significant decline in clientele or members. Any such
decline could negatively affect our revenues and profitability. Also
in response to any such competitors, we may be required to decrease our
membership fees, which may reduce our operating revenues and
profitability.
We
are dependent on our ability to negotiate lease arrangements with operators of
facilities.
We
currently lease the premises on which we conduct our business operations and our
business plan depends on our ability to negotiate lease agreements with facility
operators. We cannot guarantee that we will be able to negotiate new leases or
renew the leases that have expired on terms acceptable to us or at
all. If we are unable to secure such lease, or if we can only secure
such leases on economic terms that are less than optimal for us, we may not be
able to implement our business plan, which would have a material adverse effect
on our results of operations and stock price.
Third
parties may infringe on our brand and other intellectual property rights, and we
may be unable to protect ourselves against such infringement for competitive and
legal reasons, any of which could have a material adverse impact on our
business.
We
currently hold registered trademarks for five commercial names and symbols. We
rely on a combination of trademark, copyright, trade secret, and other
intellectual property laws and confidentiality procedures to establish and
protect our proprietary rights, including our brand. There is a risk
that third parties may infringe on, misappropriate or misuse our brand and other
intellectual property rights. If we are unable to protect or enforce
our intellectual property rights, the value of our brand, services and products
could be diminished and our business may suffer. Our precautions may
not prevent misappropriation of our intellectual property. Any legal action that
we may bring to protect our brand and other intellectual property may not
achieve the desired results, may be very expensive and could divert management’s
attention from other business concerns.
Moreover,
intellectual property rights and related laws in China are still developing, and
there are uncertainties involved in the protection and the enforcement of such
rights. Our failure to protect our intellectual property rights under
applicable law could lead to the loss of a competitive advantage that could not
be compensated by our damages award.
If
we fail to effectively manage our anticipated growth, by managing our employees
and operations and developing our client base, our business and operating
results could be adversely effected.
We have
experienced a period of growth and expansion that has placed, and is expected to
continue to place, strain on our management personnel, systems and
resources. To accommodate our growth pursuant to our strategies, we
anticipate that we will need to implement a variety of new and upgraded health,
beauty and other operational facilities as well as financial systems,
procedures and controls and the improvement of our accounting and other internal
management systems, all of which require substantial management efforts and
financial resources. We will also need to continue to expand, train,
manage and motivate our workforce, and develop and manage our relationships with
our existing and target client base. All of these endeavors will
require substantial management effort and skills and the incurrence of
additional expenditures. We cannot assure you that we will be able to
efficiently or effectively implement our growth strategies and manage the growth
of our operations, and any failure to do so may limit our future growth and
hamper our business strategy.
We
depend on key personnel and our business may be severely disrupted if we lose
the services of our key executives and employees.
Our
future prospects are heavily dependent upon the continued service of our key
executives, particularly Mr. Tong Liu, who is the founder, Chief Executive
Officer, Chairman of the Board, and a major shareholder of our company. We rely
on his expertise in our business operations, and on his personal relationships
with the relevant regulatory authorities, our customers and suppliers. We also
rely on other senior executives, such Xia Yu, our Chief Financial Officer. We
have not entered into non-competition or non-solicitation agreement with
our officers. If one or more of our key executives and employees are unable or
unwilling to continue in their present positions, we may not be able to replace
them easily and our business may be severely disrupted. In addition, if any of
our key executives or employees joins a competitor or forms a competing company,
we may lose customers and suppliers and incur additional expenses to recruit and
train personnel. We do not maintain key-man life insurance for any of our key
executives.
We rely on highly
skilled personnel and, if we are unable to retain or motivate key personnel or
hire qualified personnel, we may not be able to grow
effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals, including trainers, beautician and site managers. Our continued
ability to compete effectively depends on our ability to attract new personal
fitness trainers, skilled members of the health and fitness community, and to
retain and motivate our existing contractors. The market for highly skilled
trainers, managerial, marketing and support personnel is highly competitive as a
result of the limited availability of such personnel. The inability to hire or
retain qualified personnel may hinder our ability to implement our business
strategy and may harm our business.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC and we suffer a loss of a type
which would normally be covered by insurance in the United States, such as
business interruption insurance and third party liability insurance to cover
claims related to personal injury, or property damage arising from
accidents during our operations. We would incur significant expenses in both
defending any action and in paying any claims that result from a settlement or
judgment. We have not obtained fire or casualty insurance, and there
is no insurance coverage for our equipments, furniture and buildings in
China. Any losses incurred by us will have to be borne by us without
any assistance, and we may not have sufficient capital to cover material damage
to, or the loss of, our facility due to fire, severe weather, flood or other
cause, and such damage or loss would have a material adverse effect on our
financial condition, business and prospects.
We
could be subject to claims related to health or safety risks at our
centers.
Use of
our centers may pose potential health or safety risks to members or guests
through use of our equipment, facilities and services. There is a
risk that claims will be asserted against us for injury or death suffered by
someone using our facilities or services. Personal injury claims and
lawsuits can result in significant legal defense costs, settlement amounts and
awards, and could have an adverse effect on our business, financial condition
and result of operations or cash flow. In addition to the risks of
liability exposure and increased costs of defense, claims arising from our
service may produce publicity that could hurt our reputation and
business.
If we fail to
establish and maintain an effective system of internal controls, we may not be
able to report our financial results accurately or to prevent
fraud. Any inability to report and file our financial results
accurately and timely could harm our business and adversely impact the trading
price of our Common Stock.
We are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley Act”) and the rules promulgated by the SEC
thereunder. Our management, including our Chief Executive Officer and Chief
Financial Officer, cannot guarantee that our internal controls and disclosure
controls will prevent all possible errors or all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In
addition, the design of a control system must reflect the fact that there are
resource constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no system of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Further, controls can
be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, a
control may become inadequate because of changes in conditions or the degree of
compliance with policies or procedures may deteriorate. Because of inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected.
As of May
31, 2009, our management has concluded that our internal control over financial
reporting has significant deficiencies. We lack sufficient personnel with the
appropriate level of knowledge, experience and training in the application of US
GAAP standards, especially related to complicated accounting issues. This
could cause us to be unable to fully identify and resolve certain
accounting and disclosure issues that could lead to a failure to maintain
effective controls over preparation, review and approval of certain significant
account reconciliation from Chinese GAAP to US GAAP and necessary journal
entries. We have a relatively complicated corporate structure, which consists of
multiple facilities and subsidiaries. The relatively small number of
professionals we employ in our bookkeeping and accounting functions prevents us
from appropriate segregating duties within our internal control
system. The inadequate segregation of duties is a weakness because it
could lead to the untimely identification and resolution of accounting and
disclosure matters or could lead to a failure to perform timely and effective
reviews.
As a
result of such significant deficiencies, on December 22, 2008, our management
upon recommendation by our independent public accountants, concluded that our
financial statements for the fiscal year ended May 31, 2008 and the quarter
ended August 31, 2008 should no longer be relied upon and we restated the
financial statements contained in the Annual Report on Form 10-K for the year
ended May 31, 2008, as well as the Quarterly Report on Form 10-Q for the quarter
ended August 31, 2008.
On
November 14, 2009, our Audit Committee, after consultation with our management
and our independent registered public accountants, determined that the financial
statements contained in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2009 and May 31, 2008 and Quarterly Reports on Form 10-Q for the
quarters ended August 31, 2009, February 28, 2009, November 30, 2008 and August
31, 2008 should no longer be relied upon and we restated the financial
statements contained in these Annual Reports on Form 10-K or Quarterly Reports
on Form 10-Q accordingly.
The
remedial measures we are undertaking may be insufficient to address the material
weaknesses we identified, and there can be no assurance that significant
deficiencies or material weaknesses in our internal control over financial
reporting will not be identified or occur in the future. If
additional material weaknesses or significant deficiencies in our internal
controls are discovered or occur in the future, we may fail to meet our future
reporting obligations on a timely basis, our consolidated financial
statements may contain material misstatements, we may be
required to again
restate our prior period financial
results, we may be subject to litigation and/or regulatory proceedings, and our
business and operating results may be harmed.
The legal
requirements associated with being a public company, including those contained
in and issued under the Sarbanes-Oxley Act, may make it difficult for us to
retain or attract qualified officers and directors, which could adversely affect
the management of our business and our ability to obtain or retain listing of
our common stock.
We may be
unable to attract and retain qualified officers, directors and members of board
of directors committees required to provide for our effective management because
of the rules and regulations that govern publicly held companies, including, but
not limited to, certifications by principal executive officers. The
actual and perceived personal risks associated with compliance with the
Sarbanes-Oxley Act and other public company requirements may deter qualified
individuals from accepting roles as directors and executive
officers. Further, the requirements for board or committee
membership, particularly with respect to an individual’s independence and level
of experience in finance and accounting matters, may make it difficult to
attract and retain qualified board members. If we are unable to
attract and retain qualified officers and directors, the management of our
business and our ability to obtain or retain the listing of our common stock on
any stock exchange (assuming we are able to obtain such listing) could be
adversely affected.
Risks
Relating to the Our Corporate Structure
Our
corporate structure, in particular our variable interest entity arrangements
(the “VIE Arrangements”), are subject to significant risks, as set forth in the
following risk factors.
We are a holding
company that depends on cash flow from Mege Union, its subsidiaries and Queen
Group to meet our obligations.
After the
consummation of the Share Exchange in April 2008, we became a holding company
with no material assets other than the stock of Mege Union and Queen
Group. Accordingly, all our operations are conducted by Mege Union,
its direct subsidiaries and Queen Group. We currently expect that the
earnings and cash flow of our subsidiaries will primarily be retained and used
by us in their operations.
We
depend upon the VIE Arrangements in conducting our business in the PRC, which
may not be as effective as direct ownership.
Our
affiliation with the Queen Group is managed through several exclusive agreements
between the Company and each Queen Group entity. The VIE Arrangements may
not be as effective in providing us with control over each Queen Group entity as
direct ownership. The VIE Arrangements are governed by the PRC laws
and provide for the resolution of disputes through arbitration pursuant to
the PRC laws. Accordingly, the VIE Arrangements would be interpreted
in accordance with the PRC laws. If any entity of Queen Group or its
shareholders fail to perform the obligations under the VIE Arrangements, we may
have to rely on legal remedies under the PRC laws, including seeking specific
performance or injunctive relief, and claiming damages, and there is a risk that
we may be unable to obtain these remedies. The legal environment in
China is not as developed as in other jurisdictions. As a result,
uncertainties in the PRC legal system could limit our ability to enforce the VIE
Arrangements.
We
may not be able to consolidate the financial results of some of our affiliated
companies or such consolidation could materially adversely affect our operating
results and financial condition.
A
substantial part of our business are conducted through Queen Group which
currently is considered for accounting purposes as variable interest entities
(“VIEs”), and we are considered the primary beneficiary, enabling us to
consolidate our financial results in our consolidated financial statements.
In the event that in the future a company we hold as a VIE would no longer meet
the definition of a
VIE, or we are deemed not to be the
primary beneficiary, we would not be able to consolidate line by line that
entity’s financial results in our consolidated financial statements for PRC
purposes. Also, if in the future an affiliate company becomes a
VIE and we become the primary beneficiary, we would be
required to consolidate that entity’s financial results in our consolidated
financial statements for PRC purposes. If such entity’s financial results were
negative, this could have a corresponding negative impact on our operating
results for PRC purposes. However, any material variations in the accounting
principles, practices and methods used in preparing financial statements for PRC
purposes from the principles, practices and methods generally accepted in the
United States and in the SEC accounting regulations must be discussed,
quantified and reconciled in financial statements for United States and SEC
purposes.
The
contractual arrangements between Mege Union and Queen Group may result in
adverse tax consequences.
PRC laws
and regulations emphasize the requirement of an arm’s length basis for transfer
pricing arrangements between related parties. The laws and regulations also
require enterprises with related party transactions to prepare transfer pricing
documentation to demonstrate the basis for determining pricing, the computation
methodology and detailed explanations. Related party arrangements and
transactions may be subject to challenge or tax inspection by the PRC tax
authorities.
Under a
tax inspection, if our transfer pricing arrangements between Mege Union and
Queen Group are judged as tax avoidance, or related documentation does not meet
the requirements, Mege Union and Queen Group may be subject to material adverse
tax consequences, such as transfer pricing adjustment. A transfer pricing
adjustment could result in a reduction, for PRC tax purpose, of adjustments
recorded by Mege Union, which could adversely affect us by (i) increasing
Queen Group’s tax liabilities without reducing our
subsidiaries’ tax liabilities, which could further result in interest being
levied to us for unpaid taxes; or (ii) limiting the ability of our PRC
companies to maintain preferential tax treatment and other financial
incentives.
Our
controlling shareholder has potential conflicts of interest with our company
which may adversely affect our business.
Mr. Tong
Liu is the primary controlling shareholder of and also chairman and chief
executive officer of our company. Each of the entities that comprised the Queen
Group is owned independently by Mr. Liu. Given his significant
interest in our company, there is a risk that when conflicts of interest arise,
Mr. Liu will not act completely in the best interests of our stockholders (as
opposed to his personal interest) or that conflicts of interests will be
resolved in our favor. For example, he may determine that it is in
Queen Group’s interests to sever the contractual arrangements with us,
irrespective of the effect such action may have on us. In addition,
he could violate his fiduciary duties by diverting business opportunities from
us to others, thereby affecting the amount of payment Queen Group is obligated
to remit to us under the consulting services agreements.
Our board
of directors is comprised of a majority of independent directors (including one
based in the United States). These independent directors may be in a position to
deter and counteract the actions of our officers or non-independent directors
(including, potentially, Mr. Liu) that are against our interests. We
cannot, however, give any assurance as to how the independent directors will act
in any given circumstance. Further, if we or the independent
directors cannot resolve any conflicts of interest between us and those of our
officers and directors who are management members of our affiliated companies in
the PRC, we would have to rely on legal proceedings, which could result in the
disruption of our business.
In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against us or our
officers or directors whom reside within China. Even if you are
successful in bringing an action, the laws of China may render you unable to
enforce a judgment against our assets and management, all of which are located
in China.
We
rely on the approval certificates and business license held by Queen Group and
any deterioration of the relationship between Mege Union and Queen Group could
materially and adversely affect the overall business operation of the
Company.
Pursuant
to the VIE Arrangements, a substantial part of our business in China will be
undertaken on the basis of the approvals, certificates and business license as
well as other requisite licenses held by each entity of Queen
Group. There is no assurance that each entity of Queen Group will be
able to renew its licenses or certificates when their terms expire with
substantially similar terms as the ones they currently hold.
Further,
our relationship with each entity of Queen Group is governed by the VIE
Arrangements, which are intended to provide us, through our indirect ownership
of WFOE, with effective control over the business operations of each entity of
Queen Group. However, the VIE Arrangements may not be effective in
providing control over the applications for and maintenance of the licenses
required for our business operations. Any entity of Queen Group could violate
the VIE Arrangements, go bankrupt, suffer from difficulties in its business or
otherwise become unable to perform its obligations under the VIE Arrangements
and, as a result, our operations, reputation, business and stock price could be
severely harmed.
The
exercise of our option to purchase part or all of the equity interests in the
any entity of Queen Group under the Option Agreement might
be subject to approval by the PRC government. Our failure to obtain
this approval may impair our ability to substantially control the
VIE entities and could result in actions by
VIE entities that conflict with our interests.
Our
option agreement with
Queen Group gives Mege Union, the
option to purchase all or part of the equity interests in Queen Group, however,
the option may not be exercised if the exercise would violate any applicable
laws and regulations in China or cause any license or permit held by, and
necessary for the operation of Queen Group, to be cancelled or
invalidated. Under the PRC laws, if a foreign entity, through a
foreign investment company that it invests in, acquires a domestic related
company, China’s regulations regarding mergers and acquisitions would
technically apply to the transaction. Application of these
regulations requires an examination and approval of the transaction by China’s
Ministry of Commerce (“MOFCOM”), or its local counterparts. Also, an
appraisal of the equity or assets to be acquired is mandatory. We can’t
guarantee you that we can pass such examination and get the approval to acquire
any entity of Queen Group. If we are not able to purchase the equity of
Queen Group, then we will lose a substantial portion of our ability to control
Queen Group and our ability to ensure that Queen Group will act in our
interests.
Because
we rely on the consulting services agreement with each entity of Queen Group for
our revenue, the termination of this agreement will severely and detrimentally
affect our continuing business viability under our current corporate
structure.
We are a
holding company and a substantial part of our business operations are conducted
through the contractual arrangements between each entity of Queen Group and Mege
Union. As a result, we currently rely for our revenues on dividends payments
from Mege Union after it receives payments from Queen Group pursuant to the
consulting services agreement. The consulting services agreement may be
terminated by written notice of Queen Group or Mege Union in the event that: (a)
one party causes a material breach of the agreement, provided that if the breach
does not relate to a financial obligation of the breaching party, that party may
attempt to remedy the breach within 14 days following the receipt of the written
notice; (b) one party becomes bankrupt, insolvent, is the subject of proceedings
or arrangements for liquidation or dissolution, ceases to carry on business, or
becomes unable to pay its debts as they become due; (c) Mege Union terminates
its operations; (d) Queen Group’s business license or any other license or
approval for its business operations is terminated, cancelled or revoked; or (e)
circumstances arise which would materially and adversely affect the performance
or the objectives of the agreement.
Additionally,
Mege Union may terminate the consulting services agreement without cause.
Because neither we nor our subsidiaries own equity interests of Queen Union, the
termination of the consulting services agreement would sever our ability to
continue receiving payments from Queen Union under our current holding company
structure. While we are currently not aware of any event or reason that may
cause the consulting services agreement to terminate, we cannot assure you that
such an event or reason will not occur in the future. In the event that the
consulting services agreement is terminated, this may have a severe and
detrimental effect on our continuing business viability under our current
corporate structure, which, in turn, may affect the value of your
investment.
Risks
Associated With Doing Business in China
Our
operations and assets in China are subject to significant political and economic
uncertainties over which we have little or no control and may be unable to alter
our business practice in time to avoid the possibility of reduced
revenues.
Doing
business outside the United States, particularly in China, subjects us to
various risks including changing economic and political conditions, major work
stoppages, exchange controls, currency fluctuations, armed conflicts and
unexpected changes in United States and foreign laws relating to tariffs, trade
restrictions, transportation regulations, foreign investments and
taxation. Changes in the PRC laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has
been pursuing economic reform policies that encourage private economic
activities and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice. We have no control over most of these risks and may be
unable to anticipate changes in international economic and political
conditions. Therefore, we may be unable to alter our business
practice in time to avoid the possibility of reduced revenues.
We
derive all of our sales in China and a slowdown or other adverse developments in
the PRC economy may materially and adversely affect our business.
All of
our assets are located in China and our revenue is derived from our operations
in China. We anticipate that our revenues generated in China will continue to
represent all of our revenues in the near future. Accordingly, our
results of operations and prospects are subject, to a significant extent, on the
economic, political and legal developments in China. We are therefore
subject to the risks associated with an economic slowdown or other adverse
developments in the PRC. Any such event could particularly harm our
company if discretionary spending on health and beauty services and products in
adversely impacted. Moreover, the industry which we are involved in
the PRC is relatively new and growing, but we do not know how sensitive we are
to a slowdown in economic growth or other adverse changes in the PRC economy
which may affect demand for our health and beauty services and
products. In addition, the Chinese government also exercises
significant control over Chinese economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Efforts by the Chinese government to slow
the pace of growth of the Chinese economy could result in reduced demand for our
services and products. A slowdown in overall economic growth, an
economic downturn or recession or other adverse economic developments in the PRC
may materially reduce the demand for our products and materially and adversely
affect our business.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local government in the province in which
we operate our business. Chinese government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability
to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, environmental regulations, land use
rights, property and other matters. The central or local governments
of in the PRC jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in
the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties.
In
addition, another obstacle to our operations in China is governmental, judicial
and other corruption. There are significant risks that we will be unable to
obtain necessary permits or licenses, or recourse in any legal disputes with
suppliers, customers or other parties with whom we conduct business, if desired,
as a result China’s underdeveloped and sometimes corrupt governmental and
judicial systems.
If relations
between the United States and China worsen, investors may be unwilling to hold
or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our Common
Stock.
Future
inflation in China may inhibit our activity to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. Rapid economic growth can lead to growth in the
money supply and rising inflation. If prices for our services
and products rise at a rate that is insufficient to compensate for the rise
in the costs of supplies, it may have an adverse effect on
profitability. These factors have led to the adoption by Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain
inflation. High inflation may in the future cause Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our services
and products.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects
of exchange rate fluctuations with respect to any of these
currencies. For example, the value of the Renminbi depends to a large
extent on Chinese government policies and China’s domestic and international
economic and political developments, as well as supply and demand in the local
market. Since 1994, the official exchange rate for the conversion of Renminbi to
the U.S. dollar had generally been stable and the Renminbi had appreciated
slightly against the U.S. dollar. However, on July 21, 2005, the
Chinese government changed its policy of pegging the value of Chinese Renminbi
to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. It is possible that the Chinese government could adopt a more
flexible currency policy, which could result in more significant fluctuation of
Chinese Renminbi against the U.S. dollar. We can offer no assurance
that Chinese Renminbi will be stable against the U.S. dollar or any other
foreign currency.
Our
financial statements are translated into U.S. dollars at the average exchange
rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly,
to the extent the U.S. dollar weakens against foreign currencies, the
translation of these foreign currency denominated transactions results in
increased revenue, operating expenses and net income
for our
international operations. We are also exposed to foreign exchange
rate fluctuations as we convert the financial statements of our foreign
consolidated subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign consolidated subsidiaries’ financial statements into U.S. dollars will
lead to a translation gain or loss which is recorded as a component of other
comprehensive income. Changes in the functional currency value of
these assets and liabilities create fluctuations that will lead to a transaction
gain or loss. We have not entered into agreements or purchased
instruments to hedge our exchange rate risks, which could leave us exposed to
the potential adverse effects of currency fluctuations. Moreover, the
availability and effectiveness of any hedging transaction, should such
transactions be available to us on reasonable terms and should we choose to
engage in such transactions (of which no assurances can be given), may be
limited and we may not be able to hedge our exchange rate risks.
The
State Administration of Foreign Exchange (“SAFE”) restrictions on currency
exchange may limit our ability to receive and use our sales revenue effectively
and to pay dividends.
All of
our sales revenue and expenses are denominated in the Chinese currency,
Renminbi. Under PRC law, the Renminbi is currently convertible under
the “current account,” which includes dividends and trade and service-related
foreign exchange transactions, but not under the “capital account,” which
includes foreign direct investment and loans. Currently, our PRC
operating subsidiaries may purchase foreign currencies for settlement of current
account transactions, including payments of dividends to us,
without the approval of SAFE, by complying with certain procedural
requirements. However, the relevant PRC government authorities may
limit or eliminate our ability to purchase foreign currencies in the
future. Since a significant amount of our future revenue will be
denominated in Renminbi, any existing and future restrictions on currency
exchange may limit our ability to utilize revenue generated in Renminbi to fund
our business activities outside China that are denominated in foreign
currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. In particular, our PRC operating subsidiaries, borrows foreign
currency through loans from us or other foreign lenders, these loans must be
registered with SAFE, and if we finance our PRC operating subsidiaries by means
of additional capital contributions, these capital contributions must be
approved by certain government authorities, including the Ministry of Commerce,
or their respective local counterparts. These limitations could
affect our PRC operating subsidiaries’ ability to obtain foreign exchange
through debt or equity financing.
The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining foreign currency, we may be unable to
pay the interest and principal on the Notes, pay dividends or meet obligations
that may be incurred in the future that require payment in foreign
currency.
Because
our principal assets are located outside of the United States and a majority of
our directors and our officers will reside outside of the United States, it may
be difficult for you to enforce your rights based on the United States federal
securities laws against us and our officers and directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
All of
our officers and four of our directors reside outside of the United States. In
addition, our operating subsidiary is located in the PRC and all of its assets
are located outside of the United States. China does not have a
treaty with United States providing for the reciprocal recognition and
enforcement of judgments of courts. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the United States federal securities laws against us in
the courts of either the United States or the PRC and, even if civil judgments
are obtained in courts of the United States, to enforce such judgments in the
PRC courts. Further, it is unclear if extradition treaties now in
effect between the United States and the PRC would permit effective enforcement
against us or our officers and directors of criminal penalties, under the United
States federal securities laws or otherwise.
The
PRC legal system embodies uncertainties which could limit the legal protections
available to us and you, or could lead to penalties on us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. Our PRC operating subsidiaries are subject to laws and regulations
applicable to foreign investment in China. In addition, all of our subsidiaries
and VIEs are incorporated in China and subject to all applicable Chinese laws
and regulations. Because of the relatively short period for enacting such a
comprehensive legal system, it is possible that the laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to us and other foreign investors, including you, and may lead to
penalties imposed on us because of the different understanding between the
relevant authority and us. For example, according to current tax laws and
regulation, we are responsible to pay business tax on a “Self-examination and
Self-application” basis. However, since there is no clear guidance as to the
applicability of those preferential treatments, we may be found in violation of
the interpretation of local tax authorities with regard to the scope of taxable
services and the percentage of tax rate and therefore might be subject to
penalties, including but not limited to monetary penalties. In addition, we
cannot predict the effect of future developments in the PRC legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by
national laws.
We
may have limited legal recourse under the PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted significant laws and regulations dealing with
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, their experience in
implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. If our new business ventures are unsuccessful, or
other adverse circumstances arise from these transactions, we face the risk that
the parties to these ventures may seek ways to terminate the transactions, or,
may hinder or prevent us from accessing important information regarding the
financial and business operations of these acquired companies. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under the PRC laws, in either of these cases, are severely limited,
and without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations. Although legislation in China
over the past 30 years has significantly improved the protection afforded to
various forms of foreign investment and contractual arrangements in China, these
laws, regulations and legal requirements are relatively new and their
interpretation and enforcement involve uncertainties, which could limit the
legal protection available to us, and foreign investors, including
you. The inability to enforce or obtain a remedy under any of our
future agreements could result in a significant loss of business, business
opportunities or capital and could have a material adverse impact on our
operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to obtain the prior approval of the China
Securities Regulatory Commission, or the CSRC, for the listing and trading of
our common stock could have a material adverse effect on our business, operating
results, reputation and trading price of our common stock, and may also create
uncertainties in the future.
In
November 2005, SAFE issued a public notice, known as Circular 75, concerning the
use of offshore holding companies in mergers and acquisitions in China. The
public notice provides that if an offshore company controlled by PRC residents
intends to acquire a PRC company, such acquisition will be subject to
registration with the relevant foreign exchange authorities. The public notice
also suggests that registration with the relevant foreign exchange authorities
is required for any sale or transfer by the PRC residents of shares in an
offshore holding company that owns an onshore company. The PRC residents must
each submit a registration form to the local SAFE branch with respect to their
ownership interests in the offshore company, and must also file an amendment to
such registration if the offshore company experiences material events, such as
changes in the share capital, share transfer, mergers and acquisitions, spin-off
transactions or use of assets in China to guarantee offshore
obligations.
On August
8, 2006, MOFCOM, joined by the State-owned Assets Supervision and Administration
Commission of the State Council, the State Administration of Taxation, the State
Administration for Industry and Commerce, the China Securities Regulatory
Commission and SAFE, released a substantially amended version of the Provisions
for Foreign Investors to Merge with or Acquire Domestic Enterprises (the
“Revised M&A Regulations”), which took effect September 8, 2006. These new
rules significantly revised China’s regulatory framework governing
onshore-to-offshore restructurings and foreign acquisitions of domestic
enterprises. These new rules signify greater PRC government attention to
cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in
China and requiring MOFCOM approval of a broad range of merger, acquisition and
investment transactions. Further, the new rules establish reporting requirements
for acquisition of control by foreigners of companies in key industries, and
reinforce the ability of the Chinese government to monitor and prohibit foreign
control transactions in key industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs
seeking CSRC approval of their overseas listings. However, the
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement.
If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required for our restructuring, we may face regulatory actions or other
sanctions from the CSRC or other PRC regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in the PRC, limit our
operating privileges in the PRC, or take other actions that could have a
material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our Common
Stock.
Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our common stock. Furthermore, published news reports in
China recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75 and the Revised M&A
Regulations. It is anticipated that application of the new rules will be subject
to significant administrative interpretation, and we will need to closely
monitor how MOFCOM and other ministries apply the rules to ensure that our
domestic and offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we may
need to expend significant time and resources to maintain
compliance.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law,
which became effective on January 1, 2008, amended and formalized workers’
rights concerning overtime hours, pensions, layoffs, employment contracts and
the role of trade unions. In addition, under the new law, employees
who either have worked for a company for 10 years or more or who have had two
consecutive fixed-term contracts must be given an “open-ended employment
contract” that, in effect, constitutes a lifetime, permanent contract, which is
terminable only in the event the employee materially breaches the company’s
rules and regulations or is in serious dereliction of his
duty. Should we become subject to such non-cancelable employment
contracts, our employment related risks could increase significantly and we may
be limited in our ability to downsize our workforce in the event of an economic
downturn. No assurance can be given that we will not in the future be subject to
labor strikes or that it will not have to make other payments to resolve future
labor issues caused by the new laws. Furthermore, there can be no
assurance that the labor laws will not change further or that their
interpretation and implementation will vary, which may have a negative effect
upon our business and results of operations.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time-to-time in
mainland China. If our competitors engage in these practices, they
may receive preferential treatment from personnel of some companies, giving our
competitors an advantage in securing business or from government officials who
might give them priority in obtaining new licenses, which would put us at a
disadvantage. Although we inform our personnel that such practices
are illegal, we can not assure you that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with SAFE. We may also face regulatory
uncertainties that could restrict our ability to adopt equity compensation plans
for our directors and employees and other parties under PRC laws.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is
not clear whether Circular 78 covers all forms of equity compensation plans or
only those which provide for the granting of stock options. For any plans which
are so covered and are adopted by a non-PRC listed company, such as our company,
after April 6, 2007, Circular 78 requires all participants who are PRC citizens
to register with and obtain approvals from SAFE prior to their participation in
the plan. In addition, Circular 78 also requires PRC citizens to
register with SAFE and make the necessary applications and filings if they
participated in an overseas listed company’s covered equity compensation plan
prior to April 6, 2007. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time
consuming.
In the
future, we may adopt an equity incentive plan and make numerous stock option
grants under the plan to our officers, directors and employees, some of whom are
PRC citizens and may be required to register with SAFE. If it is
determined that any of our equity compensation plans are subject to Circular 78,
failure to comply with such provisions may subject us and participants of our
equity incentive plan who are PRC citizens to fines and legal sanctions and
prevent us from being able to grant equity compensation to our PRC employees. In
that case, our ability to compensate our employees and directors through equity
compensation would be hindered and our business operations may be adversely
affected.
Due
to various restrictions under PRC laws on the distribution of dividends by our
PRC operating companies, we may not be able to pay dividends to our
shareholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises (“WFOE”) may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. Additionally, WFOE is required to set aside a certain
amount of their accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends except
in the event of liquidation and cannot be used for working capital
purposes.
Furthermore,
if our consolidated subsidiaries in China incur debt on their own in the future,
the instruments governing the debt may restrict its ability to pay dividends or
make other payments. If we or our consolidated subsidiaries are unable to
receive all of the revenues from our operations due to these contractual or
dividend arrangements, we may be unable to pay dividends on our Common Stock. In
addition, under current PRC law, we must retain a reserve equal to 10 percent of
net income after taxes, not to exceed 50 percent of registered capital.
Accordingly, this reserve will not be available to be distributed as dividends
to our shareholders. We presently do not intend to pay dividends in the
foreseeable future. Our management intends to follow a policy of retaining all
of our earnings to finance the development and execution of our strategy and the
expansion of our business.
As
all of our operations and personnel are in the PRC, we may have difficulty
establishing adequate western style management, legal and financial
controls.
The PRC
historically has been deficient in western style management and financial
reporting concepts and practices, as well as in modern banking, and other
control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a
result of these factors, and especially given that we expect to be a publicly
listed company in U.S. and subject to regulation as such, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet western
standards. We may have difficulty establishing adequate management,
legal and financial controls in the PRC. Therefore, we may, in turn,
experience difficulties in implementing and maintaining adequate internal
controls as required under Section 404 of the Sarbanes-Oxley Act and other
applicable laws, rules and regulations. This may result in
significant deficiencies or material weaknesses in our internal controls which
could impact the reliability of our financial statements and prevent us from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of
compliance could have a materially adverse effect on our business and the public
announcement of such deficiencies could adversely impact our stock
price.
An
outbreak of a pandemic avian influenza, SARS or other contagious disease may
have an adverse effect on the Chinese economy which may adversely affect our
results of operations.
During
the past four years, large parts of Asia experienced unprecedented outbreaks of
avian influenza. Currently, no fully effective avian flu vaccines
have been developed and there is evidence that the H5N1 virus is
evolving. An effective vaccine may not be discovered in time to
protect China against an avian flu pandemic. Also, in the first half of 2003,
certain countries in Asia experienced an outbreak of severe acute respiratory
syndrome, or SARS, a highly contagious form of atypical pneumonia, which
seriously interrupted the economic activities in the affected
regions.
An
outbreak or perceived outbreak of avian flu, SARS or other contagious disease
may seriously interrupt our operations, which may have a materially adverse
effect on the financial result.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various banks and trust companies located in China. Our
cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise
unable to withdraw funds, we would lose the cash on deposit with that particular
bank or trust company.
Risks
Associated With Our Common Stock
Shares
of our common stock lack a significant trading market.
Our
common stock trades on over-the-counter bulletin board market (OTCBB) under the
symbol “SOKF” since July 2008. This market tends to be highly
illiquid. There can be no assurance that an active trading market in
our common stock will develop, or if such a market develops, that it will be
sustained. In addition, there is a greater chance for market volatility for
securities that trade on the OTCBB as opposed to securities that trade on a
national exchange or quotation system. This volatility may be caused by a
variety of factors, including the lack of readily available quotations, the
absence of consistent administrative supervision of “bid” and “ask” quotations,
and generally lower trading volume. The price at which investors purchase shares
of our common stock may not be indicative of the price that will prevail in the
trading market. Investors may be unable to sell their shares of common stock at
or above their purchase price, which may result in substantial
losses.
The
limited public trading market may cause volatility in our stock
price.
The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like
us. Our common stock is thus and will be subject to significant
volatility. Sales of substantial amounts of our common stock, or the
perception that such sales might occur, could adversely affect prevailing market
prices of our common stock.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
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liquidity
of the market for the shares;
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research
analysts;
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|
conditions
in pharmaceutical markets;
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●
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changes
in the economic performance or market valuations of other pharmaceutical
companies;
|
●
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
●
|
addition
or departure of key personnel;
|
●
|
fluctuations
of exchange rates between RMB and the U.S.
dollar;
|
●
|
intellectual
property litigation;
|
●
|
our
dividend policy; and
|
●
|
general
economic or political conditions in
China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also
materially and adversely affect the market price of our stock.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time. Sales of shares of our common stock in the
public market covered under an effective registration statement, or the
perception that those sales may occur, could cause the trading price of our
common stock to decrease or to be lower than it might be in the absence of those
sales or perceptions.
We may issue
additional shares of our capital stock or debt securities to raise capital or
complete acquisitions, which would reduce the equity interest of our
stockholders.
Our
certificate of incorporation authorizes the issuance of up to 500,000,000 shares
of common stock, par value $.001 per share, and 10,000,000 shares of preferred
stock with $.001 par value. There are currently 17,000,000 shares of our common
stock and no shares of our preferred stock outstanding. An additional 2,160,000
shares of common stock are reserved for issuance upon the exercise of
outstanding warrants and 110,000 shares of common stock are reserved for
issuance upon the exercise of outstanding stock options. As a result,
there are approximately 480,730,000 authorized and unissued shares of our common
stock and 10,000,000 shares of our preferred stock which have not been reserved
and are available for future issuance. Although we have no commitments as of the
date of this offering to issue our securities, we may issue a substantial number
of additional shares of our securities to complete a business combination or to
raise capital. The issuance of additional shares of our securities
may cause economic and percentage dilution to our stockholders and may adversely
affect prevailing market prices for our common stock.
Our management
and directors own a significant amount of our common stock, giving them
influence or control in corporate transactions and other matters, and their
interests could differ from those of other stockholders.
As of the
date of this prospectus, our management and directors as a group own 53.3% of
our outstanding common stock. As a result, they are in a position to
significantly influence the outcome of matters requiring a stockholder vote,
including the election of directors, the adoption of any amendment to our
articles of incorporation or bylaws, and the approval of significant corporate
transactions. Their control may delay or prevent a change of control on terms
favorable to our other stockholders and may adversely affect your voting and
other stockholders rights.
Compliance
with changing regulation of corporate governance and public disclosure, and our
management’s inexperience with such regulations, will result in additional
expenses and creates a risk of non-compliance.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant
management time and financial resources to comply with both existing and
evolving standards for public companies, which will lead to increased general
and administrative expenses and a diversion of management time and attention
from revenue generating activities to compliance activities. In
addition, our management is located in the PRC had has relatively little
experience with compliance with U.S. laws (including securities
laws). This inexperience may cause us to fall out of compliance with
applicable regulatory requirements, which could lead to enforcement action
against us and a negative impact on our stock price.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our
common stock, which is currently and will be quoted for trading on OTCBB, may be
considered to be a “penny stock” if it does not qualify for one of the
exemptions from the definition of “penny stock” under Section 3a51-1 of the
Exchange Act, as amended. Our common stock may be a “penny stock” if
it meets one or more of the following conditions: (i) the stock trades at a
price less than $5.00 per share; (ii) it is NOT traded on a “recognized”
national exchange; (iii) it is not quoted on the Nasdaq Capital Market, or even
if so, has a price less than $5.00 per share; or (iv) is issued by a company
that has been in business less than three years with net tangible assets less
than $5 million. The principal result or effect of being designated a
“penny stock” is that securities broker-dealers participating in sales of our
common stock will be subject to the “penny stock” regulations set forth in SEC
Rules 15-2 through 15g-9 promulgated under the Exchange Act. For
example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document at least two
business days before effecting any transaction in a penny stock for the
investor’s account. Moreover, SEC Rule 15g-9 requires broker-dealers
in penny stocks to approve the account of any investor for transactions in such
stocks before selling any penny stock to that investor. This
procedure requires the broker-dealer to: (i) obtain from the investor
information concerning his or her financial situation, investment experience and
investment objectives; (ii) reasonably determine, based on that
information,
that transactions in penny stocks are suitable for the investor and that the
investor has sufficient knowledge and experience as to be reasonably capable of
evaluating the risks of penny stock transactions; (iii) provide the investor
with a written statement setting forth the basis on which the broker-dealer made
the determination in (ii) above; and (iv) receive a signed and dated copy of
such statement from the investor, confirming that it accurately reflects the
investor’s financial situation, investment experience and investment
objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We have
never paid cash dividends on our common stock and we do not plan to declare or
pay any cash dividends on our shares of common stock in the foreseeable future
and currently intend to retain any future earnings for funding growth. As a
result, investors should not rely on an investment in our securities if they
require the investment to produce dividend income. Capital appreciation, if any,
of our shares may be investors’ sole source of gain for the foreseeable future.
Moreover, investors may not be able to resell their shares of the Company at or
above the price they paid for them.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements contained in this Registration Statement that are not historical
facts are “forward-looking statements” which can be identified by the use of
terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,”
“anticipates,” “intends,” or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Registration Statement, reflect our current beliefs with respect to future
events and involve known and unknown risks, uncertainties and other factors
affecting our operations, market growth, services and products. No
assurances can be given regarding the achievement of future results, as actual
results may differ materially as a result of the risks we face, and actual
events may differ from the assumptions underlying the statements that have been
made regarding anticipated events. Factors that may cause actual
results, our performance or achievements, or industry results, to differ
materially from those contemplated by such forward-looking statements include
without limitation:
●
|
our
financial position, business strategy and other plans and objectives for
future operations;
|
●
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the
ability of our management team to execute its plans to meet its
goals;
|
●
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our
ability to attract and retain
management;
|
●
|
our
growth strategies;
|
●
|
anticipated
trends in our business;
|
●
|
our
ability to consummate or integrate
acquisitions;
|
●
|
our
liquidity and ability to finance our operations and acquisition and
development activities;
|
●
|
the
timing, cost and procedure for proposed
acquisitions;
|
●
|
the
impact of government regulation in China and
elsewhere;
|
●
|
estimates
regarding future net revenues or
profits;
|
●
|
planned
capital expenditures (including the amount and nature
thereof);
|
●
|
estimates,
plans and projections relating to acquired properties or
businesses;
|
●
|
the
possibility that our acquisitions may involve unexpected
costs;
|
●
|
the
impact of competition;
|
●
|
general
economic conditions, whether internationally, nationally or in the
regional and local market areas in which we are doing business, that may
be less favorable than expected;
and
|
●
|
other
economic, competitive, governmental, legislative, regulatory, geopolitical
and technological factors that may negatively impact our businesses,
operations and pricing.
|
Regarding
the Company’s acquisition strategy, please see “Business” “-- Key
Characteristics” and “-- Marketing Strategy.” All written and oral
forward-looking statements made in connection with this prospectus that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements. Given the uncertainties that
surround such statements, you are cautioned not to place undue reliance on such
forward-looking statements.
USE
OF PROCEEDS
Any net
proceeds from any sale of shares of our common stock covered by this prospectus
will be received by the selling stockholders. We will not receive any
proceeds from the sale of shares by the selling stockholders. However, 2,000,000
of these shares will only be issued upon exercise of warrants that were issued
to the three accredited investors in connection with the
Financing. If all of these warrants are exercised for cash, then we
will receive gross proceeds of $2,500,000. We will use any proceeds
we receive in connection with the exercise of warrants for working capital and
general corporate purposes.
DETERMINATION
OF OFFERING PRICE
The
selling stockholders may sell these shares in the over-the-counter market or
otherwise, at market prices prevailing at the time of sale, at prices related to
the prevailing market price, or at negotiated prices. We will not
receive any proceeds from the sale of shares by the selling
stockholders.
DIL
UTION
Not
applicable. We are not offering any shares in this prospectus. All
shares are being registered on behalf of our selling stockholders.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Safe
Harbor Declaration
The comments made throughout this
prospectus should be read in conjunction with our financial statements and the
notes thereto, and other financial information appearing elsewhere in this
document. In addition to historical information, the following discussion and
other parts of this document contain certain forward-looking information. When
used in this discussion, the words, “believes,” “anticipates,” “expects,” and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially from projected results, due to a number of
factors beyond our control. SOKO does not undertake to publicly update or revise
any of its forward-looking statements, even if experience or future changes show
that the indicated results or events will not be realized. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Readers are also urged to carefully review and
consider our discussions regarding the various factors, which affect company
business, included in this section and elsewhere in this
prospectus.
Background
SOKO was
incorporated as a Delaware corporation on September 9, 2004 under the name
American Business Holdings, Inc. as a holding vehicle to own and control a
textile and plastic packaging company in Central and East Africa. On September
12, 2004, SOKO completed a transaction in which it purchased all of the
outstanding membership shares in Tissakin Ltd., a Democratic Republic of Congo
corporation, so that Tissakin Ltd. became our wholly owned subsidiary. Through
Tissakin Ltd., we were a manufacturer of bags for packaging agricultural
products in the Democratic Republic of Congo.
On April
11, 2008, we consummated a Share Exchange and a series of transactions pursuant
to which we acquired all of the outstanding shares of common stock of Wealthlink
from the Wealthlink Shareholders in exchange for 13,300,000 shares of our common
stock. We also sold the Tissakin operations to our former chief
executive officers and certain others.
Following
the completion of the transactions described above, we changed our name to SOKO
Fitness & Spa Group, Inc. effective as of June 6, 2008. These
transactions are described in further detail under “Prospectus Summary - April
2008 Share Exchange and Financing Transactions.”
Wealthlink
was organized under the laws of the Cayman Islands on March 27, 2007 and is
headquartered in Harbin, Heilongjiang Province, China.
Our
Business
We
operate distinctive fitness centers, beauty salons and spas in key cities in
Northeastern China as well as in suburban Beijing. Our beauty salons
and spas provide services that include, but are not limited to, skincare, hair
dressing, manicure, pedicure, body care, massage, and weight loss
therapy. Currently, our three fitness centers have approximately 15,698
members in total and our ten beauty salons and spas are visited by approximately
20,867 clients annually. We also operate one beauty school in Harbin,
Heilongjiang Province, China. Our goal is to provide programs, services and
products that combine exercise, education and nutrition to help our members
and clients to achieve their fitness and beauty goals and to help them to
lead a healthy way of life and to achieve a richer lifestyle.
We have
established a marketing department which constantly conducts in depth market
research by conducting customer surveys and analyzing competitors, market
trends, fitness and beauty trends, sports participation statistics and sports
and beauty demographics.
Today,
urban residents of large and medium-sized Chinese cities spend more time and
money in health and fitness clubs, to balance their work lives, seeking a
scientific and customized recipe for their physical fitness. For many
individuals, the most important thing in working out is to do exercises more
scientifically and healthily. Our internal statistics show that the members of
our fitness centers spend more than $700 per year. We believe that the rapid
expansion of urban middle class population and continuous economics growth in
China will provide the fitness industry with sustainable growth for the
foreseeable future.
The
growth potential in our key markets in Harbin and Shenyang is
substantial. According to the 2008 China Fitness Club Industry Report
(“AASFP Report”) published by the Asian Academy for Sports and Fitness
Professionals,, there were 2,770 fitness clubs in the 61 largest cities in
China. According to the AASFP Report, Harbin has a population of
about ten million, with 50,250 individuals currently being served in 43 fitness
centers, resulting in a membership penetration rate (the proportion of the
fitness club members to the local population) of 0.51%, which currently makes it
the 18th largest fitness market in China. Shenyang has a population
of about seven million, with 59,500 individuals currently being served in 47
fitness centers, resulting in a membership penetration rate of 0.84% and making
it currently the 14th largest fitness market in China. We currently
operate one fitness center in Harbin (with about 8,000 members) and two fitness
centers in Shenyang (with an aggregate of about 5,000 members). Based
on the statistics provided in the AASFP Report, in Harbin and Shenyang, SOKO’s
are as of operation, SOKO currently has market shares (the number of its members
in the respective city as a percentage of the total number of members in fitness
clubs in such city) of approximately 16% and approximately 8%,
respectively.
Although
Harbin and Shenyang are deemed to be second tier cities, we see more
opportunities for our company in these markets than in other cities in China as
we experience less competition while the residents of Harbin and Shenyang
experience similar growth of their personal wealth as the residents in
first tier cities. With respect to the beauty and spa market, SOKO’s own
extensive market research by its marketing department shows that in its primary
market, Harbin, SOKO has a market share of approximately 25-30% of the overall
market, with a market share of about 50% of high end spas. Even in
the current global economic downturn we find that our business is robust and the
spending habits of our members and clients are relative unaffected.
However, if Chinese economic conditions start to show deterioration and
the Chinese stimulation program fails to achieve its goal, we may see
a slowdown in our business. In the short-term, we face the challenge of
a pricing war with our competitors. Facing such challenges, SOKO will
continue its current strategy of focusing on high-end customers by maintaining
our quality of services and continuing to promote our brand name to maintain the
loyalty of our members and clients. SOKO promotes the concept of total wellness,
which seeks a balance of nutrition, exercises and way of living
rather than just fitness. Currently, approximately 81% of
the members of our fitness centers renew their memberships and
approximately 84% of our beauty salon and spa clients return and book
additional treatments.
Although
the fitness and beauty markets are fast developing in China, such markets face
certain challenges. In China, the markets for fitness clubs and beauty salons
and spas are currently not segmented. While in the US different clubs position
themselves based on their target group (such as marital status, gender, age,
social status, pricing, etc.), in China currently most fitness clubs and beauty
salons and spas only compete on pricing. We believe, however, that
market segmentation similar to the segmentation in the US will be the future.
The majority of customers of fitness clubs and beauty salons and spas in China
are well educated middle class residents with substantial disposable income
seeking to show their social status. As such they have developed certain tastes
and various demands and focus on building a certain lifestyle. In order to
succeed we therefore must analyze their demands carefully and position ourselves
accordingly. As the market will become more and more segmented, to
gain considerable return in such segmented market will become more difficult and
will result slower development for our brand.
As the
market entry costs are relatively low and new fitness clubs can attract
considerable customers by massive advertising before opening, we face
competition from new competitors. However, as the expectations of the customers
are very high. Due to a lack of customer service, meeting the demands of the
customers and lack of managerial skills, many customers become disappointed and
choose to leave such new competitors. In order to maintain our member and client
base and attract new customers, we always improve our services and engage in
extensive market research to find out more about our member and client needs,
demands and trends.
We see
loyal members and clients as a long term investment, whose value is increasing
over years. While many competitors may be willing to enter into a
price war, we position our company as a high end fitness center and beauty salon
and spa operator that will not enter into a price war as a decrease of
membership fees and spa treatment fees for new customers would alienate our
existing members and clients. We rather work on building our brand image and
recognition as an operator of high end fitness centers and beauty salons and
spas that offers outstanding services and facilities and
fulfils our members' and clients' growing demands. Although
SOKO’s membership fees and spa treatment fees are not cheap in the markets
where we operate, one of our main focuses is improving member and client
experience by constantly adding new facilities, equipment, courses and
treatments. Surveys of our marketing department show that our members and
clients appreciate our constant increase of more quality services.
The
2009-2012 Investment Analysis and Prospective Projection Report on China Beauty
and Spa Market points out that “[i]n 2008, China’s beauty and spa industry was
seeing high speed development with 23.8%, its total revenue reached RMB 320
billion, and its profit rises with 37.9%, which is the highest growth rate among
all industries in China. National employee number in beauty and spa
industry is approximately 11.2 million, which ranks number one in the industry.
Until 2008, demand for beauty and spa products is beyond Japan and Korea and is
on first place in Asia while is third place in the world after the United States
and France. As population base is very big in China, demand for
beauty and spa products is very big, too. Based on per capita demand,
China beauty and spa industry has 15 to 18 times market space to develop and
future market is very optimistic. Now China beauty and spa industry
is becoming the fifth hottest market after real estate, automobile, computer and
electronics, and tourism. As it has excellent industry development prospect and
space, tremendous commercial opportunity has arisen.”
For the
fiscal year ended May 31, 2009, our beauty and spa operations accounted for
approximately 76% of our revenue, fitness operations accounted for
approximately 15% of our revenue and miscellaneous activities (including
our beauty school) accounted for the remaining 9% of our
revenue. For the first three months of fiscal year 2010, our beauty
and spa operations, which include professional services and sales of products,
accounted for approximately 80% of our revenue, fitness membership fees
accounted for approximately 14% of our revenue, and tuition and other
beauty school related activities accounted for the remaining 6% of our revenue.
We believe that this revenue breakdown will continue in the future. We generally
open our facilities to members and clients 12 hours a day and 7 days a
week. Currently, our fitness centers average 34,500 visits per month
and our beauty salons and spas average 21,500 visits per month.
Our
services and products are tailored to high end customers who appreciate quality
and personal service from trained professionals. This customer
base, coupled with the growing demand for health and fitness facilities in China
has positively impacted our revenues, irrespective of the recent slowdown in
China’s economy. We do not anticipate that our business will be
materially negatively impacted by the current economic conditions in
China. However, in the event that economic conditions continue to
deteriorate, our business may be affected
Plan
of Operation and Financing Needs
Plan
of Operation
SOKO
currently holds all of the issued and outstanding capital of Wealthlink, which
holds all of the issued and outstanding capital of Mege Union. SOKO
and Wealthlink are holding corporations and do not conduct any
operations. Mege Union directly operates one facility and otherwise
conducts its business through one wholly (100%) owned and three majority
(51%) owned operating subsidiaries and a branch of the majority owned subsidiary
as well as through an association with eight individually-owned sole
proprietorships (one of which has two additional branches) comprising the
variable interest entity known as the Queen Group. Each of the
entities that comprises the Queen Group is owned independently by our Chairman,
Mr. Liu. Our affiliation with the Queen Group is managed through
several exclusive agreements between the Company and each Queen Group
entity. As a result of our arrangements with these entities, we
effectively control each of the Queen Group entities and, through them, we
operate successful fitness centers and beauty salons and
spas. For a complete description of our existing
facilities and those under construction, please see “Prospectus Summary –
Background and Organization” on page 1 of this prospectus.
In
addition, Mege Union currently has four new facilities under
construction. The Da Qing beauty salon and spa is scheduled to open
in May 2010. We have also begun construction on three as yet unnamed
facilities, one fitness center, a yoga facility and a beauty salon and spa, all
to be located in the Long Dian Building in Harbin. We currently
anticipate that these facilities will open to members and clients by the end of
June 2010 and we expect the three new facilities in Harbin will generate
advances from members and clients and, ultimately, revenue of
approximately US$ 2 million in the aggregate in the first and second quarters
after they open.
Through
more than 17 years of dedicated efforts, we have grown significantly in terms of
the number of facilities we operate and our facilities have become distinctive
destinations. At the end of the fiscal year ended May 31, 2009, we
had approximately 13,000 members at our fitness centers and approximately 19,500
clients at our beauty salons and spas. Currently, our three fitness centers have
approximately 15,698 members in total and our ten beauty salons and spas are
visited by approximately 20,867 clients annually. While entry to our
fitness centers is limited to members only, clients of our beauty salons and
spas do not have to become members to receive treatments. The clients of our
beauty salons and spas can either purchase one time treatments or choose to
purchase multiple treatments at a discounted price. As an additional benefit,
clients of our beauty salons and spas who purchase multiple treatments receive
additional benefits such as private lockers, free showers and use of one of our
luxury treatment suites. Although many of the members of our fitness
centers are also clients of our beauty salons and spas, membership in our
fitness center is not compulsory for being a client of our beauty salons and
spas. The members of our fitness centers enjoy professional fitness and yoga
services and the clients of our beauty salon and spa enjoy professional spa
treatments provided by our facilities. The attrition rate in our
fitness centers is currently approximately 19%, and the attrition rate in
our beauty salons and spas (clients not returning after booking a single
treatment or a multiple treatments) is currently approximately
16%. In the last three years, the membership base of our fitness
centers and the client base of our beauty salons and spas purchasing multiple
spa treatment developed as follows:
May
31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Fitness
Memberships
|
6,800
|
10,000
|
13,000
|
|||||||||
New
Memberships
|
-
|
3,540
|
(1)
|
4,890
|
||||||||
Old
memberships that were renewed
|
-
|
6,460
|
8,110
|
|||||||||
Memberships
that were not renewed
|
-
|
340
|
1,890
|
|||||||||
Beauty
Salon and Spa Clients
|
5,000
|
10,000
|
19,500
|
|||||||||
New
Clients
|
-
|
5,340
|
11,068
|
|||||||||
Recurring
Clients that purchased additional treatments
|
-
|
4,660
|
8,432
|
|||||||||
Clients
that did not purchase additional treatments
|
-
|
340
|
1,568
|
(1)
|
Includes
560 memberships that were signed up as a group prior to the end of
the fiscal year ended May 31, 2007 but where the membership term
began in the fiscal year ended May 31,
2008.
|
We are
focused on generating revenue in three business segments: Professional Fitness
and Yoga, Beauty and Spa, and Beauty School operations. Our revenues are
generated through professional services, sales of products that complement and
supplement our services, membership fees and the tuition we charge our students.
We currently offer different levels of membership and price structures
for our fitness centers, beauty salons and spas and beauty
school.
With
respect to our fitness centers, new and renewing members can choose among
three-month, twelve-month and twenty four-month memberships as well as long term
memberships for three and five years based on their individual needs. For our
SOKO International Fitness Center once a member signs up for the service and
chooses the membership term, the member is required to prepay the membership fee
for the entire term. Such prepaid membership fee is non-refundable if the member
decides to cancel the membership before the term expires. No other
fees have to be paid by the member to maintain the membership. For our Yoga Wave
and Yoga Wave II fitness centers, each new and renewing member pays a
non-refundable initial membership fee plus a small administration fee to become
a member. In addition to such fees, members of our Yoga Wave and Yoga
Wave II fitness centers pay monthly membership fees in order to maintain their
membership. Members can choose to pay the monthly membership fee on a
month-by-month basis or to prepay, on a non-refundable basis, the monthly
membership fees for the entire membership term at a discounted rate depending on
the length of the membership term. Currently approximately 60% of the
members of our Yoga Wave and Yoga Wave II fitness center prepay their monthly
membership fees. Members of our fitness centers have unlimited access
to the facility and do not have to pay for any classes we offer. However, to the
extent they request the service of personal trainers, additional fees are paid
by the member for such services.
There is
no membership for our beauty salons and spas and the clients of our beauty
salons and spas do not have to pay any upfront initiation fee or monthly service
fee in order to receive services. Clients can receive services as
walk-ins and on appointment. They can choose between one-time treatments at our
regular rates and multiple treatments at discounted rates. If a client chooses
multiple treatments, the client is required to prepay upfront, on a
non-refundable basis, the entire discounted package price for both all
treatments and the products that will be used for those
treatments. However, there is no time limit on when treatments can be
sought. In addition, clients who purchase multiple treatments receive
additional benefits such as private lockers, free showers and use of one of our
luxury treatment suites. All clients of our beauty salons and
spas have the opportunity to purchase additional products for at-home
use.
Our
beauty school offers beauty and spa professional training through different
forms of courses and workshops at different price levels. The
duration of such courses and workshops is between one month and two years.
Students pay tuition for coursework and workshops at the beginning of the term
and, throughout the term they pay the additional cost of supplies and
products. Tuition for our courses and workshops is determined based
on the level and the topic of a particular course or workshop, as well as on the
number of classes that make up a full course or workshop. Our beauty school
provides qualified beauticians for our beauty salon and spa operations as we
offer to the top 5% of graduates the opportunity to work in one of our beauty
salons and spas. Approximately one third of our students board at our
beauty school for an extra fee.
Our
working capital is used for operational costs, the development of new fitness
centers, debt service requirements and other capital expenditures necessary to
maintain existing facilities. Historically, we have satisfied our
working capital needs through cash from operations and various short-term
borrowing arrangements. Consistent with the general practice of our
industry in China, the bulk of our working capital is created through
non-refundable membership fees and prepaid non-refundable fees for
membership and/or treatments. Membership fees of members who pay
monthly are recognized in the period in which facility access is provided. The
membership fees of our SOKO International Fitness Center and the membership fees
from members of our Yoga Wave and Yoga Wave II fitness centers who pay their
monthly membership fees up-front (both new membership sales and membership
renewals) as well the non-refundable initial membership fees payable by the
members of our Yoga Wave and Yoga Wave II fitness centers are amortized over the
period of the contract commencing with the first month of the new member
contract or renewal contract, as applicable. All sales of prepaid spa
treatments are recorded as deferred revenue upon initiation and are recognized
proportionally when each treatment is provided.
Our aim
is to provide programs, services, and products uniquely combined with exercise,
education, and nutrition to help lead our members into living a rich lifestyle
as well as achieving their fitness and beauty goals. We have elected
to take advantage of the synergies among our core business lines,
locating some of our beauty salons and spas within our fitness center
facilities. Shenyang Queen Beauty Spa opened in late October 2008 in
the same building as our Yoga Wave fitness center. The continued
development of these overlapping opportunities has enabled us to enhance the
value of our services to clients and attracts new clients from one area to
another.
We
believe that the health and fitness market in China provides an excellent
opportunity for growth and we are currently focused on taking advantage of this
opportunity to enhance the value of our brand through organic growth and
strategic acquisitions. We have been expanding our business throughout Northeast
China by building new facilities and updating and modifying our existing beauty
salons and spas. We believe a key to our growth lies in finding new venues in
thriving metropolitan areas and upscale real estate markets where we can target
our core demographic customer. We have recently begun tapping in to this market
with the opening of Shenyang Queen Beauty Spa. We will continue to look for
opportunities to expand our operations throughout the region.
When we
open a new fitness center or beauty salon and spa, our fixed costs increase (as
do our variable costs to some degree), but without the membership revenue base
of a mature fitness center or beauty salon and spa. As a new fitness center or
beauty salon and spa increases its customer base, fixed costs are typically
spread over an increasing revenue base and its contribution tends to improve.
Based on our experience, revenues of a fitness center increase significantly
during its first four years of operation. By the end of the first full year of
operations, a fitness
club has
typically achieved modest membership contribution and is cash flow positive. By
the end of the second full year of operations, a fitness center has typically
generated significantly better membership contribution as the member base grows
with minimal incremental fixed operating costs. By the end of the fourth full
year of operations, a typical fitness center has matured, with memberships
at or near capacity. Our beauty salons and spas have even better capital cycles.
Based on our experience, by the end of the first 6-8 months of operations, a
beauty salon and spa has typically achieved modest spa contribution and is cash
flow positive. By the end of the first full year of operations, a beauty salon
and spa has typically generated significantly better spa contribution as the
member base grows with minimal incremental fixed operating costs. Based on the
historical performance of our mature fitness centers and beauty salons and spas,
we expect that, even in difficult economic times, our newer fitness centers and
beauty salons and spas will grow significantly faster over the first two to
three years than our average mature fitness center and beauty salon and
spa, while requiring only a minimal level of additional working capital. We
expect growth in revenues to continue as recently opened fitness centers and
beauty salons and spas continue to mature. In addition, we expect growth in
revenues as we implement long-term strategic plans to expand the brand with new
fitness centers and beauty salons and spas in existing markets and selected new
markets and with new programs, services and products.
Consistent
with the general practice of the spa industry in China, in order to maximize its
working capital, the Company makes advances and deposits to suppliers, with whom
the Company has a long standing business relationship, for inventory purchases.
By doing so, we are able to maintain the relationship with the supplier and
purchase the inventory under the most favorable conditions and discounts and in
certain cases become the exclusive agent of a product for the Northeast region
of China.
Management
is committed to the growth of the Company through both organic growth and
strategic acquisitions. Members of management research and assess our
existing facilities and systems to ensure that they are operating efficiently
and that local employees exemplify the professional skill and dedication that
has made SOKO a brand to be respected. In evaluating potential growth
opportunities within our existing operations, management evaluates our existing
client base and the need for additional services to meet the lifestyle of our
clients and the community at large.
Management
researches and reviews the demographic makeup of the areas in which we currently
operate, as well as other communities to determine the best way to utilize
Company resources to expand into new markets. Our research focuses on
those areas that can support a facility that caters to upscale clientele
interested in personalized attention and superior service provided by dedicated
professionals. Our marketing department has a well developed plan for
identifying and targeting potential geographic sites for business development
and expansion. The tools used by our marketing professionals include
reviewing independent market and demographic research and census data, as well
as conducting visual inspections and obtaining written surveys of the population
in a target area. The Company tracks the results of this research
against its business model to determine where or if an existing facility will be
upgraded or a new facility built in any proposed location. Our
internal market research targets growth in both residential areas and business
districts among young professionals, business executives, government officials,
business owners and other upper middle class individuals.
Our
market research has shown that women, particularly professional, upper middle
class women, are more likely to prepay for fitness and beauty services and are
less likely to forego these services in an economic downturn. Based
on this information, we have targeted our growth and expansion in areas where
women are likely to want to use our services - in upper middle class residential
areas and business districts serving large corporations and thriving small
businesses. We believe that this business profile provides the best
opportunity for growth in the Northeast region of China and is the least
susceptible to economic stress.
This type
of research resulted in our opening of the Shenyang Queen Beauty Spa in late
October of 2008.
The
Company may also utilize alternative methods of expanding its business in the
Northeast region of China, including partnering with existing spa owners or
establishing franchises. These strategies are under consideration and
may be opportunistically developed in the future as deemed
appropriate.
Coupled
with the desire to grow our business outlined above, we believe that it is key
to our ongoing success that all of our facilities be fitted with the most
sophisticated equipment and technology available. It is our intention to develop
and use 21st century technology to enhance the experience of each of our
clients. We have developed a website for the members of our fitness centers
that allows them to, among other things: consult with our team of professional
service providers, make appointments, hold on-line discussions with our staff
and other clients and review educational materials. We will continue to update
and change our technology as new operating systems and software are introduced
so we can remain ahead of the curve.
Financing
Needs
As
discussed above, the Company intends to pursue organic and acquisitive growth in
the future. At this time, based on our current membership and client
level and fee structure (including the acceptance of members of our fitness
centers to prepay their membership fees for the full term of their membership),
available short-term financing and past experience with respect to membership
and client increase, we believe that our existing cash reserves and incoming
cash from operations are sufficient to support annual growth in the number of
memberships and clients and number of facilities similar to our growth in
these areas in the past for approximately two (2) years. Thereafter,
the Company might need additional financing. In order of priority,
with existing reserves and income from operations, we have prioritized our
potential growth, focusing on the opening of new facilities
first. Any additional capital expenditures are made first to upgrade
our existing facilities to attract new members and clients and keep existing
ones and then to acquisitions of facilities from other
parties. As we identify potential acquisition targets that fall
within our target demographic, we may pursue sources of additional capital
through various means, including joint venture projects and debt or equity
financings in an effort to accelerate our growth. The Company has access to
short-term lending facilities which are used to support its organic growth in
the future. The Company had the following three (3) loans with
Shanghai Pudong Development Bank outstanding on November 30, 2009
Balance
at
Period
Ended
November
30 , 2009
|
|||||||
a)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from July
30, 2009 to July 29, 2010 at a fixed interest rate of 0.398% per
month
|
$
|
381,019
|
||||
b)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 24, 2009 to November 23, 2010 at a fixed interest rate of 0.3983%
per month
|
$
|
2,197,133
|
||||
b)
|
Loan
payable to Shanghai Pudong Development Bank with a term from September 4,
2009 to July 29, 2010 at a fixed interest rate of 0.3982% per
month
|
$
|
732,170
|
These
loans are used for daily operations, renovating existing facilities and the
construction of the new facilities in Harbin and Da Qing . The
Company is current with all of its obligations under the terms of these loan
facilities and not in breach of any covenant thereof. Based on our
loan performance and good relationship with the lender, we believe that the
lender is willing to renew our current short-term loans and/or provide new
short-term loans with a maxim total amount of approximately $5 million in the
future. As all of the members of our SOKO International Fitness
Center are required to prepay on a non-refundable basis their membership fee for
the entire term they sign-up for, approximately 60% of our members of our Yoga
Wave and Yoga Wave II fitness centers choose to prepay, on a non-refundable
basis, their monthly membership fees for the full term of their membership, and
as the clients of our beauty salons and spas, to the extent they purchase
multiple treatments, are required to prepay on a non-refundable basis all
treatments and the products used for those treatments, the Company expects to
able to prepay its short-term lending facilities from such fees.
Results
of Operation
For
the Three Months Ended November 30, 2009 compared to November 30,
2008
Three
Months Ended
November
30,
|
$
|
%
|
||||||||||||||
2009
|
2008
|
Change
|
Change
|
|||||||||||||
Revenues
|
||||||||||||||||
Professional
Services
|
$
|
5,338,148
|
3,084,895
|
2,253,253
|
73.0
|
%
|
||||||||||
Sales
of Product
|
$
|
597,628
|
295,482
|
302,146
|
102.3
|
%
|
||||||||||
Membership
Fees
|
$
|
1,085,634
|
914,293
|
171,341
|
18.7
|
%
|
||||||||||
Tuition
|
$
|
391,769
|
313,621
|
78,148
|
24.9
|
%
|
||||||||||
Total
Revenues
|
$
|
7,413,179
|
4,608,291
|
2,804,888
|
60.9
|
%
|
||||||||||
Cost
of Sales
|
$
|
(2,262,804)
|
(1,590,281)
|
(672,524)
|
42.3
|
%
|
||||||||||
Gross
Profit
|
$
|
5,150,375
|
3,018,010
|
2,132,365
|
70.7
|
%
|
||||||||||
Operating
Expenses
|
$
|
2,001,385
|
1,234,151
|
767,234
|
62.2
|
%
|
||||||||||
Income
Tax Provision
|
$
|
24,024
|
26,305
|
(2,281)
|
(8.7)
|
%
|
||||||||||
Net
Income attributable to SOKO Fitness & Spa Group, Inc
|
$
|
3,176,624
|
1,676,405
|
1,500,219
|
89,5
|
%
|
Revenues:
Revenues
for the three months ended November 30, 2009 increased by approximately $2.8
million or 60.9% to $7.41 million as compared to $4.61 million for the three
months ended November 30, 2008. Our sales growth was driven by expansion of our
facilities and services. Although we did not increase our prices from period to
period, our sales growth was driven by increasing sales from our existing
members and clients, sales of add-on services to members and clients and our
continued efforts to add new members and clients in new and existing
facilities.
Gross
Profit:
We
achieved gross profits of $5.15 million for the three months ended November 30,
2009, compared to $3.02 million for the same period of the previous year,
representing a 70.7% period to period increase. The increase is due to some
certain sales and services that SOKO provided with some new aesthetical
treatment equipments. The added manner of service allows the company obtained
bigger gross margin with a less corresponding cost of beauty product. Our
overall gross profit margin as a percentage of revenue grew by 4% from
69.5% for the three months ended November 30, 2009 compared to 65.5% of the same
period of the previous year.
Operating
Expenses:
Our
operating expenses, consisting of selling, general and administrative expenses,
increased by approximately $0.77 million, to $2.0 million, for the three months
ended November 30, 2009 from $1.23 million for the same period of the previous
year. This 62.2 % increase is mainly attributable to the increase in
amortization of leasehold improvement, increased rental expenses for new and
existing facilities and other expenses relating to our growth in
sales. The overall increase in our operating expenses was in
proportion to our increase in sales.
Other
Income (Expenses):
Other
Income (expenses), consisting primarily of interest expenses, penalty, donation
and other miscellaneous expenses, the other income for the three
months ended November 30, 2009 is $15,274, compared to the other expenses
($152,813) for the same period of the previous year. This difference is mainly
attributable to a one-time charge of $96,380 for the three months ended November
30, 2008 in liquidated damage penalty we are required to pay to the investors in
our April 2008 financing for failure to effect a registration statement by the
deadline set forth in the agreement.
Income
Tax Provision:
Our
provisions for income taxes for the three months ended November 30, 2009 and
2008 were $24,024 and $26,305 respectively, a decrease of $2,281 or 8.7 % from
period to period. The slight decrease in the income tax provision was
largely due to a slight decrease in the net taxable income attributable to our
fitness centers, related to the implementation of our recently announced tax
planning strategy separating our beauty and spa facilities from our fitness
centers.
Net
Income attributable to SOKO Fitness & Spa Group, Inc:
Net
income attributable to SOKO Fitness & Spa Group, Inc for the three months
ended November 30, 2009 increased by approximately $1.5 million to $ 1.7 million
as compared to $3.2 million for the same period of the previous year,
representing an 89.5% increase period to period. This increase was mainly
attributable to our 60.9% increase in revenues, coupled with our ongoing efforts
to cut costs.
Results
of Operations for the Six Months Ended November 30, 2009 and 2008
Six
Months Ended
November
30,
|
$
|
%
|
||||||||||||||
2009
|
2008
|
Change
|
Change
|
|||||||||||||
Revenues
|
||||||||||||||||
Professional
Services
|
$
|
9,179,441
|
5,826,879
|
3,352,562
|
57.5
|
%
|
||||||||||
Sales
of Product
|
$
|
1,898,278
|
708,678
|
1,189,600
|
167.8
|
%
|
||||||||||
Membership
Fees
|
$
|
1,978,157
|
1,589,055
|
389,102
|
24.5
|
%
|
||||||||||
Tuition
|
$
|
787,807
|
760,546
|
27,261
|
3.6
|
%
|
||||||||||
Total
Revenues
|
$
|
13,843,683
|
8,885,158
|
4,958,525
|
55.8
|
%
|
||||||||||
Cost
of Sales
|
$
|
(4,451,744)
|
(3,015,436)
|
(1,436,308)
|
47.6
|
%
|
||||||||||
Gross
Profit
|
$
|
9,391,939
|
5,869,722
|
3,522,217
|
60.0
|
%
|
||||||||||
Operating
Expenses
|
$
|
3,899,759
|
2,576,336
|
1,323,423
|
51.4
|
%
|
||||||||||
Income
Tax Provision
|
$
|
47,904
|
51,437
|
(3,533)
|
(6.9)
|
%
|
||||||||||
Net
Income attributable to SOKO Fitness & Spa Group, Inc
|
$
|
5,604,227
|
3,119,746
|
2,484,481
|
79.6
|
%
|
Revenues:
Revenues
for the six months ended November 30, 2009 increased by approximately $4.96
million or 56% to $13.84 million as compared to $8.89 million for the six months
ended November 30, 2008. Our sales growth was driven by expansion of our
facilities and services. Although we did not increase our prices from period to
period, our sales growth was driven by increasing sales from our existing
members and clients, sales of add-on services to members and clients and our
continued efforts to add new members and clients in new and existing
facilities. Our member and client bases increased as
follows:
As
of
|
||||||||
November
30,
2009
|
May
31,
2009
|
|||||||
|
||||||||
Fitness
Memberships
|
14,909
|
13,000
|
||||||
New
Memberships
|
3,218
|
4,890
|
||||||
Old
Memberships that were renewed
|
11,691
|
8,110
|
||||||
Memberships
that were not renewed
|
1,309
|
1,890
|
||||||
Beauty
Salon and Spa Clients
|
19,893
|
19,500
|
||||||
New
Clients
|
1346
|
11,068
|
||||||
Recurring
Clients that purchased additional treatments
|
18547
|
8,432
|
||||||
Clients
that did not purchase additional treatments
|
953
|
1,568
|
Compared
to the same period of 2008, beauty and spa revenues increased by 58%, driven by
the increasing number of clients and the opening of new facilities. Fitness and
yoga revenues increased by 24%, driven by our marketing efforts to add more
memberships, the acquisition of Yoga Wave II and the increased revenues from our
add-on services to our members. Other revenues, which consist of
beauty school tuition and related student surcharges, had a slightly increase by
$27,261. Our business is not seasonal.
Gross
Profit:
We
achieved gross profits of $9.39 million for the six months ended November 30,
2009, compared to $5.87 million for the same period of the previous year,
representing a 60% period to period increase. Our overall gross
profit margin as a percentage of revenue grew by 1.7% from 67.8% for the
six months ended November 30, 2009 compared to 66.1% of the same period of the
previous fiscal year.
Operating
Expenses:
Our
operating expenses, consisting of selling, general and administrative expenses,
increased by approximately $1.32 million, to $3.90 million, for the six months
ended November 30, 2009 from $2.58 million for the same period of the previous
fiscal year. This 51% increase is mainly attributable to the increase in
amortization of leasehold improvement, increased rental expenses for new and
existing facilities and other expenses relating to our growth in
sales. The overall increase in our operating expenses was in
proportion to our increase in sales.
Other
Income (Expenses):
Other
income (expenses), consisting primarily of interest expenses, penalty, donation
and other miscellaneous expenses, decreased by $267,547 to $2,200 for the six
months ended November 30, 2009 from $269,747 for the same period of the previous
year. This decrease is mainly attributable to a one-time charge of $152,760 for
the six months ended November, 2008 as liquidated damage penalty that we are
required to pay to the investors in our April 2008 financing as a result of the
failure to effect a registration statement by the deadline set forth in the
agreement.
Income
Tax Provision:
Our
provisions for income taxes for the six months ended November 30 2009 and 2008
were $47,904 and $51,437 respectively, a decrease of $3,533 or 7 % from period
to period. The slight decrease in the income tax provision was
largely due to a slight decrease in the net taxable income attributable to our
fitness centers, related to the implementation of our recently announced tax
planning strategy separating our beauty and spa facilities from our fitness
centers.
Net
Income attributable to SOKO Fitness & Spa Group, Inc:
Net
income attributable to SOKO Fitness & Spa Group, Inc for the six months
ended November 30, 2009 increased by approximately $2.48 million to $ 5.60
million as compared to $3.12 million for the same period of the previous year,
representing an 80% increase period to period. This increase was mainly
attributable to our 56% increase in revenues, coupled with our ongoing efforts
to cut costs.
Our
fitness membership and beauty salon and spa client base turns over at a rate of
approximately 8.89% and 0.76% for the six months ended November 30,
2009. We believe that this turnover rate is reasonable and acceptable
within our target market. We continue to strengthen our marketing strategies,
enhance our facilities to provide a state-of-the-art experience for our fitness
members and beauty and spa clients, and increase the knowledge and skill level
of our staff in an effort to minimize turnover. We believe that our
revenue will continue to increase primarily as a result of our continued
expansion of products and services, emphasis on enrolling new members and
attracting new clients and improving member/client retention, and our strong
focus on promoting the SOKO® and Queen’s Beauty® brands in the Northeast region
of China. As we develop higher margin offerings (such as spa
services), our profits and margins should continue to grow going
forward.
We have
begun to implement growth and expansion plans in existing and new facilities
that, we believe, will result in higher net income in the long
run. However, as we undergo these changes in our business, we believe
we will incur a significant increase in our operating expenses, mainly due to
construction costs, increased rent expenses, salaries and benefit costs and
sales commissions. We will seek to manage these costs so as minimize
any adverse impact our results of operations, although we may be unable to do
so. With respect to labor costs, we believe that by improving our
internal operational systems to optimize employee working schedules and reduce
overtime labor costs, we will be able maintain labor costs at a reasonable
level. With respect to expansion costs such as construction costs and
increased rent expenses, we have established internal mechanisms and an
implementation team to monitor and potentially limit and control increases of
these expenses. In each of the different locations in which we
operate, we consider local criteria before and during expansion planning and
execution.
For
the Fiscal Years Ended May 31, 2009 Compared to May 31, 2008
Year
Ended May 31,
|
$
|
%
|
||||||||||||||
2009
|
2008
|
Change
|
Change
|
|||||||||||||
Revenues
|
||||||||||||||||
Professional
Services
|
$
|
11,284,644
|
$
|
10,296,518
|
$
|
988,126
|
9.6
|
%
|
||||||||
Sales
of Product
|
$
|
3,624,257
|
$
|
1,229,363
|
$
|
2,394,894
|
194.8
|
%
|
||||||||
Membership
Fees
|
$
|
2,977,462
|
$
|
1,498,503
|
$
|
1,478,959
|
98.7
|
%
|
||||||||
Tuition
|
$
|
1,682,744
|
$
|
938,746
|
$
|
743,998
|
79.3
|
%
|
||||||||
Total
Revenues
|
$
|
19,569,108
|
$
|
13,963,130
|
$
|
5,605,978
|
40.2
|
%
|
||||||||
Cost
of Sales
|
$
|
6,591,906
|
$
|
5,010,643
|
$
|
1,581,263
|
31.6
|
%
|
||||||||
Gross
Profit
|
$
|
12,977,202
|
$
|
8,952,487
|
$
|
4,024,715
|
45.0
|
%
|
||||||||
Operating
Expenses
|
$
|
5,902,059
|
$
|
4,009,497
|
$
|
1,892,562
|
47.2
|
%
|
||||||||
Income
Tax Provision
|
$
|
42,667
|
$
|
74,381
|
$
|
(31,714
|
)
|
(42.6
|
)%
|
|||||||
Net
Income attributable to
SOKO
Fitness & Spa Group, Inc.
|
$
|
7,030,500
|
$
|
4,702,980
|
$
|
2,327,520
|
49.5
|
%
|
Revenues:
Revenues
for the fiscal year ended May 31, 2009 increased by approximately $5.6 million
or 40.2% to $19.6 million as compared to $14.0 million for the fiscal year ended
May 31, 2008. Although we did not increase our prices from year to year, our
sales growth was driven by increasing sales from our existing members and
clients, sales of add-on services to members and clients and our continued
efforts to add new members and clients in new and existing
facilities. Our member and client base increased as
follows:
Year
Ended May 31,
|
||||||||
2009
|
2008
|
|||||||
Fitness
Memberships
|
13,000
|
10,000
|
||||||
New
Memberships
|
4,890
|
3,540
|
(1)
|
|||||
Old
Memberships that were renewed
|
8,110
|
6,460
|
||||||
Memberships
that were not renewed
|
1,890
|
340
|
||||||
Beauty
Salon and Spa Clients
|
19,500
|
10,000
|
||||||
New
Clients
|
11,068
|
5,340
|
||||||
Recurring
Clients that purchased additional treatments
|
8,432
|
4,660
|
||||||
Clients
that did not purchase additional treatments
|
1,568
|
340
|
(1)
|
Includes
560 memberships that were signed up as a group prior to the end of the
business year ended May 31, 2007 but where the membership term began in
the fiscal year ended May 31, 2008.
|
Compared
to fiscal year ended May 31, 2008, beauty and spa revenues increased by 29.4%,
driven by the increasing number of clients and the opening of new facilities.
Fitness and yoga revenues increased by 98.7%, driven by our marketing efforts to
add more memberships, the acquisition of Yoga Wave and the increased revenues
from our add-on services to our members. Other revenues, which
consist of beauty school tuition and related student surcharges, increased by
79.3%, driven by the increasing number of students and new courses, which
in turn attracted more students. Our business is not
seasonal.
Gross
Profit:
We
achieved gross profits of $13.0 million for the fiscal year ended May 31, 2009,
compared to $9.0 million for the previous year, representing an 45.0% or
approximately $4.0 million year to year increase. Our overall gross profit
margin as a percentage of revenue was 66% for the fiscal year ended May 31,
2009, compared to 64% for the previous year. The improvement of our gross profit
margin was mainly driven by the shift from our lower-margin professional beauty
and spa services and sales of products to higher-margin services (i.e., yoga
services and beauty school tuition) during the fiscal year 2009. We also lowered
our costs of products sold by negotiating with our vendors to purchase products
at bulk rates.
Operating
Expenses:
Our
operating expenses, consisting of selling, general and administrative expenses,
increased by approximately $1.9 million to $5.9 million for the fiscal year
ended May 31, 2009 from $4.0 million for the previous year. This increase in
selling, general and administrative expenses by 47.2% is mainly attributable to
the increase in amortization of leasehold improvement, increased rental expenses
for new and existing facilities and other expenses relating to our growth in
sales. The overall increase in our operating expenses was in
proportion to our increase in sales.
Other
Income (Expenses):
Other
income (expenses), consisting primarily of interest expenses, penalty, donation
and other miscellaneous expenses, increased by $232,692 to $289,840 for the
fiscal year ended May 31, 2009 from $57,148 for the previous year. This increase
is mainly attributable to a one-time charge of $200,000 in liquidated damage
penalty we are required to pay to our investors for failure to effect a
registration statement by the deadline set forth in the agreement and a loss of
$54,809 from disposal of fixed assets.
Income
Tax Provision:
The
Company’s provision for income taxes for the fiscal years ended May 31, 2009 and
2008 were $42,667 and $74,381, respectively, a decrease of $31,714 or 42.6% from
year to year. The decrease in income taxes provisions is largely due
to execution of our tax planning strategy this year by separating our beauty and
spa facilities from our fitness centers. Revenues from our fitness
centers are usually taxed at a regular rate of 25% while revenues generated from
our beauty and spa facilities are generally subject to a fixed tax system, which
results in much lower taxes. As the Queen Group facilities were formed as
individually-owned sole proprietorships and are being consolidated as “variable
interest entities,” we will continue to enjoy a fixed tax system, in which, the
income taxes are assessed annually by the local tax authority based on our past
performance and creation of jobs etc. A majority of our net income is generally
exempt from income taxes. However, because of our continuing growth,
we expect our fixed taxes for the Queen Group will likely increase in the future
as the fixed tax system will be assessed annually based on past
performance.
Net
Income Attributable to SOKO Fitness & Spa Group, Inc.:
Net
income attributable to SOKO Fitness & Spa Group, Inc. for the fiscal year
ended May 31, 2009 increased by approximately $2.3 million to $7.0 million as
compared to $4.7 million for the previous year, representing a 49.5% increase
year-to-year. This increase was mainly attributable to our 40.2% increase in
revenues, coupled with our ongoing efforts to cut costs.
In
general, our fitness membership and beauty salon and spa client base turns over
at rate of approximately 11% and 19%, respectively, per year. We
believe that this turnover rate is reasonable and acceptable within our target
market. We continue to strengthen our marketing strategies, enhance our
facilities to provide a state-of-the-art experience for our fitness members and
beauty and spa clients, and increase the knowledge and skill level of our staff
in an effort to minimize turnover. We believe that our revenue will
continue to increase primarily as a result of our continued expansion of
products and services, emphasis on enrolling new members and attracting new
clients and improving member/client retention, and our strong focus on promoting
the SOKO® and Queen’s Beauty® brands in the Northeast region of
China. As we develop higher margin offerings (such as spa services),
our profits and margins should continue to grow going
forward.
We have
begun to implement growth and expansion plans in existing and new facilities
that, we believe, will result in higher net income in the long
run. However, as we undergo these changes in our business, we believe
we will incur a significant increase in our operating expenses, mainly due to
construction costs, increased rent expenses, salaries and benefit costs and
sales commissions. We will seek to manage these costs so as minimize
any adverse impact our results of operations, although we may be unable to do
so. With respect to labor costs, we believe that by improving our
internal operational systems to optimize employee working schedules and reduce
overtime labor costs, we will be able maintain labor costs at a reasonable
level. With respect to expansion costs such as construction costs and
increased rent expenses, we have established internal mechanisms and an
implementation team to monitor and potentially limit and control increases of
these expenses. In each of the different locations in which we
operate, we consider local criteria before and during expansion planning and
execution.
Liquidity
and Capital Resources
The
following table summarizes the cash flows for the six months ended November 30,
2009 and 2008.
Six
Months Ended
November
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$
|
7,746,898
|
4,094,072
|
|||||
Investing
Activities
|
$
|
(7,129,990)
|
(3,739,075)
|
)
|
||||
Financing
Activities
|
$
|
1,112,711
|
(1,276,215)
|
)
|
We have
historically funded our operation primarily through bank loans. Over the next
twelve months, we intend to pursue our primary objective of increasing market
share in China. We are also evaluating acquisition and consolidation
opportunities in China’s fragmented fitness and salon and beauty and spa
industry. We believe that we have sufficient funds to operate our existing
business for the next twelve months. However, in addition to funds available
from our operating and short term bank loans, we may need external sources of
capital for our expansion. There can be no assurance that we will be able to
obtain such additional financing at acceptable terms to us, or at
all.
Net
Cash Provided by Operating Activities
Cash
provided by operating activities totaled $7.75 million for the six months ended
November 30, 2009 as compared to $4.09 million provided by the same period of
the previous year. The increase in our cash provided by operations was primarily
due to the increase of $2.48 million in our net income, together with a $1.68
million increase in unearned revenue, which is associated with advances from
members and clients, offsetting a $0.7 million increase of advance to suppliers
as a result of purchasing five branded products at bulk rates form a new major
vendor.
Net
Cash Used in Investments Activities
We
invested $6.02 million in fixed assets and construction in progress for the six
months ended November 30, 2009, as part of our development plan which includes
the leasehold improvement of our existing facilities and construction of new
venues. This compares to $3.84 million in the same period of the
prior year.
We also
made a $1.17 million investment advance for the acquisition of 51% of equity
interest in two fitness clubs in Beijing for a total amount of $1.50 million
with Beijing Natural Beauty Fitness Services Ltd. The transaction was completed
on December 1, 2009.
Net
Cash Provided By Financing Activities Financing
As of
November 30, 2009, our outstanding short-term loans were:
Balance
at
|
||||||||
November
30,
2009
|
May
31,
2009
|
|||||||
(a)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from July
30, 2009 to July 29,2010 at a fixed interest rate of 0.398% per
month
|
$
|
381,019
|
$
|
--
|
|||
(b)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 21, 2008 to November 20, 2009 at a fixed interest rate of 0.4995%
per month
|
$
|
-
|
$
|
1,025,171
|
|||
(c)
|
Loan
payable to Shanghai Pudong Development Bank with a term from January 5,
2009 to November 20, 2009 at a fixed interest rate of 0.4995% per
month
|
$
|
-
|
$
|
1,171,624
|
|||
(d)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 24, 2009 to November 23, 2010 at a fixed interest rate of 0.3983%
per month
|
2,197,133
|
-
|
|||||
(e)
|
Loan
payable to Shanghai Pudong Development Bank with a term from Septermber 4,
2009 to July 29, 2010 at a fixed interest rate of 0.3982% per
month
|
732,170
|
- |
|
||||
$
|
3,310,322
|
$
|
2,196,795
|
Capitalized
interest included in construction in progress amounted to $66,918 and $72,578
for the six months ended November 30, 2009 and 2008, respectively.
Both
short-term loans (a) in the amount of $381,019 and (e) in the amount of $732,170
are guaranteed by SOKO International Fitness Center, Mr. Liu Tong and his
siblings and an unaffiliated third party, Zhaodong Dazhuangyuan Rouye Limited,
which is owned by an acquaintance of Mr. Liu. The other loans were secured by
the building owned by Queen Group.
The
Company is current with all of its obligations under the terms of the
outstanding short-term loan facilities and not in breach of any covenant
thereof. Because of our repayment performance on loan facilities and
our good relationship with Shanghai Pudong Development Bank, we believe that the
bank will be willing to provide new and/or additional short-term facilities with
a maxim total amount of approximately $ 5 million in the future.
For
the Fiscal Years Ended May 31, 2009 Compared to May 31, 2008
Year
Ended May 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$
|
9,385,023
|
$
|
4,858,473
|
||||
Investing
Activities
|
$
|
(8,675,665
|
)
|
$
|
(8,612,510
|
)
|
||
Financing
Activities
|
$
|
(391,432
|
)
|
4,728,315
|
Operations
Cash
provided by operating activities totaled approximately $9.4 million for the
fiscal year ended May 31, 2009 as compared to $4.8 million in the previous year,
an increase of approximately $4.5 million year to year. The increase in our cash
provided by operations was primarily due to the increase in our net income,
together with a $0.5 million decrease in our advances to vendors and a $1.4
million increase in unearned revenue.
Investments
We
invested $8.4 million in fixed assets and construction in process for the fiscal
year ended May 31, 2009 as compared to $6.0 million in the previous year. The
investments are a part of our development plans, which include continuous
renovation of our existing facilities and construction of new
venues.
Financing
For the
fiscal year ended May 31, 2009, we entered into two short-term commercial loans
with Shanghai Pudong Development Bank in the aggregate amount of
$2,196,795. We also paid off a commercial loan with Shanghai Pudong
Development Bank in the amount of $1,729,107 as well as two other short-term
loans in an aggregate amount of $859,120, resulting in net cash outflow of
$391,432. The short term loans include the following:
Balance
at
Year
Ended May 31,
|
||||||||||||
2009
|
2008
|
|||||||||||
a)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
February 29, 2008 to January 29, 2009 at a fixed interest rate of 0.62%
per month
|
$
|
--
|
$
|
1,729,107
|
b)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 21, 2008 to November 20, 2009 at a fixed interest rate of 0.4995%
per month
|
$
|
1,025,171
|
$
|
--
|
|||||||
c)
|
Loan
payable to an unrelated party with a one year term from October 23, 2007
to October 28, 2008 at a fixed interest payment of RMB4,000 per quarter.
This loan was extended to December 7, 2008 at a fixed interest rate of 2%
per month
|
$
|
--
|
$
|
288,184
|
|||||||
d)
|
Loan
payable to a related party with a one year term from April 1, 2008 to
March 31, 2009 free of interest
|
$
|
--
|
$
|
529,953
|
|||||||
e)
|
Loan
payable to Shanghai Pudong Development Bank with a term from January 5,
2009 to November 20, 2009 at a fixed interest rate of 0.4995% per
month
|
$
|
1,171,624
|
--
|
||||||||
Total
|
$
|
2,196,795
|
$
|
2,547,244
|
Interest
expense paid for the above short term loans totaled $66,121 and $49,042 for the
fiscal years ended May 31, 2009 and 2008, respectively. The loan from
an unrelated bank is secured by a building owned by Queen Group. The
Company is current with all of its obligations under the terms of the
outstanding loan facilities from Shanghai Pudong Development Bank and not in
breach of any covenant thereof. Because of our performance on the
loan facility and our good relationship with the bank, we believe that the bank
will be willing to renew our current short-term loans and/or provide new
short-term facilities with a maxim total amount of approximately $ 5 million in
the future.
Capital
Expenditures
On March
1, 2008, Mege Union entered into an acquisition agreement with Shengchao to
acquire 51% of Shengchao’s interest in Yoga Wave. The acquisition cost was
RMB12, 000,000 (approximately US$1.7 million at the date of signing). The
results of operations of Yoga Wave were included in the consolidated results of
operations commencing March 1, 2008.
On
July 1, 2008, Mege Union completed the acquisition of 100% of
the interest of Lea Spa for RMB8,000,000 (approximately US$1.1
million at the date of signing of the acquisition agreement). As a
result, Lea Spa is a direct subsidiary of Mege Union located in the Sofitel
Wanda Harbin Hotel engaged in the business of providing professional spa
services.
On May
31, 2009, Mege Union entered into an acquisition agreement with Starway Asia
Limited to purchase 51% interest of the Yoga Wave II, a Yoga studio located in
the city of Shenyang. The acquisition cost was
RMB2,042,040 (approximately US$0.3 million at the date of signing), payable
on signing. The transaction was completed in June 2009.
On
December 1, 2009, Mege Union entered into an equity transfer agreement with
Beijing Natural Beauty Fitness Services Ltd. for the acquisition of 51% of the
equity interest in two fitness clubs in suburban Beijing for RMB 10 million
(approximately U.S. $1.50 million). Mege Union also made a $1.17
million investment advance for the acquisition as of November 30,
2009. The transaction was completed on December 1, 2009.
The
general purpose of the acquisitions of Lea Spa, Yoga Wave and Yoga
Wave II is to expand our business presence in the Shenyang and Harbin
markets, resulting in a maximization of profits. The general purpose
of the Beijing acquisitions was to establish a presence in that
market. The funds used for the acquisitions came from the following
sources:
Fund
Source
|
Amount
|
Percentage
of Acquisition Cost
|
||||||
Short
Term Loan
|
$
|
811,125
|
18.3
|
%
|
||||
Corporate
Funds raised in Financing
|
$
|
793,711
|
17.9
|
%
|
||||
Existing
Profits
|
$
|
2,823,852
|
63.8
|
%
|
||||
Total
|
$
|
4,428,688
|
100.0
|
%
|
We have
also committed to upgrade and retrofit new and existing operations in several
locations to maximize our appeal to existing and new clients in those locations
as well as constructing new facilities, thus increasing our potential profit for
the future. In general, upgrading and retrofitting our facilities consists of
cosmetic renovation, purchasing state-of-the-art equipment, if appropriate, and
reconfiguring space to add attractive amenities that are designed to appeal to a
more sophisticated member and client base. As part of our commitment to upgrade
existing facilities, we entered into a new lease for our existing Kunlun beauty
salon and spa at a new location and, as a result thereof, changed its registered
name to Harbin Queen Beauty Demonstration Center Xuanhua Branch and its
commercial brand name used on the storefront, customer card and third party
communications to Xuanhua Spa.
We also
entered into new lease agreements for, and began construction of, three new
unnamed facilities, one fitness center, a yoga facility and a beauty salon and
spa, all to be located in the Long Dian Building in Harbin. We
currently anticipate that these facilities will open to members and clients by
the end of June 2010.
Additionally,
we are moving ahead on the construction of the Da Qing beauty salon and spa,
which we expect to be completed in May 2010. The total amount of initial
investment in the three new facilities under construction in Harbin,
including cost and expenses associated with the leases, construction and
decoration of the new facilities, and purchase and installment of equipment, is
estimated to be approximately $5.12 million. The estimated construction costs
associated with the Da Qing facility is approximately $1.5 million. The funds
for construction, as well as for the lease payments during the construction
period, come from the existing short term loans as well as from our cash flow
generated by our ongoing operations.
We
believe that our brand name has value. As part of our long-term
growth strategy, we anticipate capitalizing on this value by establishing an
upscale network of fitness centers and beauty salons and spas to expand our
territory and member and client base. We believe that there is significant
potential for the Company’s growth going forward.
Off-Balance
Sheet Arrangements
We do not
have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “special purpose
entities”.
Critical
Accounting Policies
While our
significant accounting policies are more fully described in Note 1 to our
consolidated financial statements, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Basis
of presentation and consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of SOKO, and
its direct and indirect subsidiaries, as well as the Queen Group. All
significant inter-company transactions and balances among SOKO, its subsidiaries
and the Queen Group are eliminated upon consolidation.
Use
of estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Accounts
and other receivables
Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible amounts, as needed. The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. There was no allowance for
uncollectible amounts for the fiscal years ended May 31, 2009 and 2008 nor
was there an allowance for uncollectible amounts for the six month periods ended
November 30, 2009 and 2008, respectively.
Inventories
Inventory
is mainly comprised of hair and skin care supplies. Inventories are stated at
the lower of cost, as determined on a first-in, first-out basis, or market cost.
Costs of inventories include unused purchases and supplies for providing beauty
treatments.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Estimated useful lives of the
assets are as follows:
Buildings
|
15
years
|
Building
Improvements
|
10
years
|
Machinery
and Equipment
|
5
years
|
Computer, Office
Equipment and Furniture
|
5
years
|
Automobiles
|
5
years
|
The
carrying value of property, plant and equipment is assessed annually and when
factors indicating impairment is present, the carrying value of the fixed assets
is reduced by the amount of the impairment. The Company determines the existence
of such impairment by measuring the expected future cash flows (undiscounted and
without interest charges) and comparing such amount to the net asset carrying
value. An impairment loss, if exists, is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Construction
in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended use.
For the fiscal years ended May 31, 2009 and 2008, the Company had total
accumulated costs involved with construction in progress in the amount of
$1,534,827 and $3,687,591, respectively. The Company had total
accumulated costs involved with construction in progress of approximately $7.31
million as of November 30, 2009. We have plans to renovate existing
facilities and open new facilities using existing cash flow from
operations.
Goodwill
Goodwill
and other intangible assets are accounted for in accordance with the provisions
of ASC 350, “Goodwill and Other Intangible Assets.” Under ASC 350, goodwill,
including any goodwill included in the carrying value of investments accounted
for using the equity method of accounting, and certain other intangible assets
deemed to have indefinite useful lives are not amortized. Rather, goodwill and
such indefinite-lived intangible assets are assessed for impairment at least
annually based on comparisons of their respective fair values to their carrying
values.
Goodwill
impairment is determined using a two-step process. The first step compares the
fair value of each reporting unit to its carrying amount, including goodwill. If
the fair value of each reporting unit exceeds its carrying amount, goodwill is
not considered to be impaired and the second step will not be required. If the
carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting
unit’s goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of
goodwill. An impairment loss is recognized for any excess in the carrying value
of goodwill over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the primary technique
being a discounted cash flow.
There
were no impairment losses recognized for the fiscal years ended May 31, 2009 or
2008 and there were no impairment losses recognized for the quarters ended
November 30, 2009 or 2008.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) No. 104. Sales revenue is generally recognized when
the services are provided and payments are received or collections are
reasonably assured. Payments received in advance from membership fees but not
yet earned are recorded as deferred revenue. Non-refundable membership fees,
non-refundable initial membership fees and monthly membership fees that are
prepaid on a non refundable basis are recognized on a straight-line basis over
the respective membership term.
Foreign
currency translation
Our
functional currency is RMB but we use US Dollars for financial reporting
purposes. We maintain our books and records in our functional currency, being
the primary currency of the economic environment in which our operations are
conducted.
In
general, for consolidation purposes, we translate our assets and liabilities
into US Dollars using the applicable exchange rates prevailing at the balance
sheet date, and the statement of income and cash flows are translated at average
exchange rates during the reporting period. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet. Equity accounts are translated at historical rates. Adjustments resulting
from the translation of our financial statements are recorded as accumulated
other comprehensive income.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. The rate of exchange at May 31, 2008 was $1.00 =
RMB6.94, at November 30, 2008 was $1.00 = RMB6.8254, at May 31, 2009 was
$1.00 = RMB 6.82813 and at November 30, 2009 was $1.00 = RMB6.82713. The
weighted average translation rate of $1.00 = RMB6.8412 was applied to the
Company’s annual income statement ended May 31, 2009 and the weighted average
translation rate of $1.00 = RMB6.8302 was applied to the Company’s three months
income statement for the period ended November 30, 2009.
Recent
Accounting Pronouncements
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We have included the required disclosures in our consolidated condensed
financial statements.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We adopted ASC
105 as of September 30, 2009 and thus have incorporated the new Codification
citations in place of the corresponding references to legacy accounting
pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
In
September 2009, the Financial Accounting Standards Board (FASB) amended existing
authoritative guidance to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The amended guidance is effective
for fiscal annual reporting periods beginning after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The Company is currently assessing the
impact, if any, adoption may have on its financial statements or
disclosures.
Income
Taxes
Wealthlink
is a tax exempted company incorporated in the Cayman Islands and conducts all of
its business through its subsidiary, Mege Union, and the variable interest
entity Queen Group. The Share Exchange between Wealthlink and American Business
Holdings, Inc. was considered a reverse merger, and the Company is a Delaware
corporation. For accounting purpose, the transaction was treated under purchase
method as a reorganization. There was no goodwill or additional value recorded
in such transaction. Therefore, the Share Exchange is not considered a taxable
event.
1)
|
Corporate
Income Tax
|
The
Company is a Delaware corporation and conducts all of its business through Mege
Union and Queen Group, both Chinese subsidiaries. All business is conducted in
China.
As
of the date of this prospectus, Queen Group consisted
of eight individual-owned sole proprietorships (one of which had two
additional branches), which, under the Chinese law, are generally exempt
from paying corporate level income taxes unless they are assessed by the local
authority otherwise. Two of the entities under Queen Group were assessed by the
local tax authority to be subject to a fixed-rate income tax. Under the
fixed-rate income tax system, generally 10% of the annual gross revenues from
each entity are deemed Taxable Net Income (“TNI”) for income tax purpose,
without giving consideration to the costs and operating expenses. The income tax
is then levied at 25% of the TNI.
Legend Spa
and Lea Spa, both wholly-owned subsidies of Harbin Mege Union, are also subject
to a fixed-rate income tax system similar to that imposed on the Queen Group
entities. While Legend Spa’s TNI is taxed at 25%, Lea Spa’s TNI is currently
levied at only 20%.
Yoga Wave
and Yoga Wave II are both subject to an income tax rate of 25% on all of their
net income.
The
Company was incorporated in Delaware. It incurred a net operating loss,
including amortization of share-based compensation, of $611,825 and $100,000 for
U.S. income tax purposes for the fiscal years ended May 31, 2009 and 2008,
respectively and $391,541 and $346,960 for U.S. income tax purposes for the
three months ended November 30, 2009 and 2008, respectively. The net operating
loss carry forwards may be available to reduce future years’ taxable income.
These carry forwards will expire, if not utilized, beginning in 2028 through
2029. Management believes that the realization of the benefits arising from
these losses appear to be uncertain due to Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance at May 31, 2009 for the
temporary difference related to loss carry-forwards. The valuation allowances
for the fiscal years ended May 31, 2009 and 2008 were $208,021 and $34,000,
respectively. The valuation allowances for the quarter ended November 30, 2009
and 2008 were $133,124 and $117,966, respectively.
2)
|
Business
Sales Tax
|
General
business sales taxes are levied on business under both Queen Group and Mege
Union. Except for SOKO International Fitness Center, which
is subject to 3% of actual revenue, and Yoga Wave, which is subject to 5% of
actual revenue, all other business is subject to either 3% or 5% on
pre-determined fixed revenue.
BU
SINESS
Our
Business
We are an
operator of distinctive fitness centers, beauty salons and spas in key cities in
Northeastern China as well as in suburban Beijing. Our beauty salons
and spas provide services that include, but are not limited to, skincare, hair
dressing, manicure, pedicure, body care, massage, and weight loss
therapy. Currently, our three fitness centers have approximately
15,698 members in total and our ten beauty salons and spas are visited by
approximately 20,867 clients annually. We also operate one beauty school in
Harbin, Heilongjiang Province, China.
Our goal
is to provide programs, services, and products that combine exercise, education,
and nutrition to help our members and clients to achieve their fitness and
beauty goals and to help them to lead a healthy way of life and to achieve a
richer lifestyle. To continue to support a strong member and client
base, we employ the following key characteristics to provide its members with a
high quality product: fully functioning, high quality centers, a breadth of
courses and services, and a strong focus on membership benefits and member
experience.
Overview
Our
business is operated through holding entities and operating
entities. SOKO currently holds all of the issued and outstanding
capital of Wealthlink, which is a holding corporation holding all of the issued
and outstanding capital of Mege Union. SOKO and Wealthlink are
holding corporations and do not conduct any operations. Mege Union
directly operates one facility and otherwise conducts its business through one
wholly (100%) owned and three majority (51%) owned operating subsidiaries as
well as through an association with eight individually-owned sole
proprietorships (one of which has two additional branches) comprising the
variable interest entity known as the Queen Group. In addition, Mege
Union currently has four new beauty salons and spa facilities under
construction. One of these facilities will operate under the
name Da Qing and is scheduled to open in May 2010. Each of the
entities that comprised the Queen Group is owned independently by our Chairman,
Mr. Liu. Our affiliation with the Queen Group is managed through
several exclusive agreements between the Company and each Queen Group
entity. As a result of our arrangements with these entities, we
effectively control each of the Queen Group entities and, through them, we
operate successful fitness centers and beauty salons and spas. We
plan to expand our brand through the establishment of additional directly owned
subsidiaries of Mege Union. For a complete description of our
existing facilities and those under construction, please see “Prospectus Summary
– Background and Organization” on page 1 of this prospectus.
Services,
Programs and Products
We offer
the following services and programs to our members.
Professional
Fitness
|
Beauty
Salon and Spa
|
Beauty
School
|
||
· Cardiovascular,
resistance and free-weight equipment;
· Professional
training;
· Group
training;
· Comprehensive
fitness testing;
· Educational
demonstrations;
· Nutrition
coaching;
· Weight
loss programs;
· Remix;
· Fight-do;
· Body-Balance;
· Yoga;
and
· Swimming
|
· Hair,
nail and skin care;
· Body
re-shaping;
· Whirlpool,
sauna and steam rooms;
· Therapeutic
massage; and
· Non-surgical
medical beauty services
|
· Professional
skill training; and
· Management
training
|
We also
offer our members high-end beauty and skin care products, including: Albion;
Albion-EXG; Syma; La Colline; SELF’SHOW; and BDO product lines.
We
typically experience the highest level of member activity at our fitness
facility and beauty salon and spa facilities during the hours of 11:00 a.m. –
01:00 p.m. and 05:00 p.m. – 07:00 p.m.
As of the
end of our most recent fiscal year, our revenues from each of our business
segments were:
Year
Ended May 31,
|
$
|
%
|
||||||||||||||
2009
|
2008
|
Change
|
Change
|
|||||||||||||
Professional
Services
|
$
|
11,284,644
|
$
|
10,296,518
|
$
|
988,126
|
9.6
|
%
|
||||||||
Sales
of Product
|
$
|
3,624,257
|
$
|
1,229,363
|
$
|
2,394,894
|
194.8
|
%
|
||||||||
Membership
Fees
|
$
|
2,977,462
|
$
|
1,498,503
|
$
|
1,478,959
|
98.7
|
%
|
||||||||
Tuition
|
$
|
1,682,744
|
$
|
938,746
|
$
|
743,998
|
79.3
|
%
|
||||||||
Total
Revenues
|
$
|
19,569,108
|
$
|
13,963,130
|
$
|
5,605,978
|
40.2
|
%
|
Acquisitions
of Lea Spa, Yoga Wave II and Beijing Natural Beauty Fitness
On July
1, 2008, Mege Union completed the acquisition of 100% of the interest of
Lea Spa for RMB8, 000,000 (equivalent to $1,124,938 at the date of
signing). As a result, Lea Spa is a direct subsidiary of Mege Union
engaged in the business of owning and operating a full service spa facility
located in the Sofitel Wanda Harbin Hotel.
On May
31, 2009, Mege Union entered into an acquisition agreement with Starway Asia
Limited (“Starway”) to purchase a 51% interest in Yoga Wave II, fitness
center located in the city of Shenyang, from Starway for RMB2,042,040
(approximately $0.3 million at the date of signing). The acquisition was
completed in June 2009.
On
December 1, 2009, Mege Union entered into an equity transfer agreement with
Beijing Natural Beauty Fitness Services Ltd. for the acquisition of 51% of the
equity interest in two fitness clubs in suburban Beijing for RMB 10 million
(approximately U.S. $1.50 million). The transaction was completed on December 1,
2009. The results of operations of the majority-owned Beijing Natural Beauty
Services Limited and its branch First Subsidiary of Beijing Natural Beauty
Services Limited are expected to be included in our financial statements for the
quarter ended February 28, 2010.
The
Queen Group
Each of
the Queen Group entities was established as an independent business in
1992. The Queen Group entities became part of Mege Union in
2007. The Queen Group’s revenue accounted for 86% and 100% of our
total revenue for fiscal years 2008 and 2007, respectively. The Queen
Group consists of independently owned variable interest entities through which
we operate successful fitness centers and beauty salons and spas. Our
Chairman, Mr. Liu, is the sole owner of each of the Queen Group
entities. The entities comprising the Queen Group
are:
●
|
Harbin
Huang Emperor & Golden Gym Club Co., Ltd. (SOKO International
Fitness Center);
|
●
|
Harbin
Daoli Queen Demonstration Beauty Parlor (Daoli
Spa);
|
●
|
Harbin
Queen Beauty Demonstration Center (consisting of three facilities, the
Daowai Spa and two branches, Nangang Spa and
Xuanhua Spa);
|
●
|
Harbin
Xinyang Spa;
|
●
|
Harbin
SOKO Spa;
|
●
|
Harbin
Queen Medical Beauty Clinic;
|
●
|
Shenyang
Queen Beauty Demonstration Co. Ltd. (Shenyang Queen Beauty
Spa); and
|
●
|
Harbin
Queen Beauty Vocational Skill Training
School.
|
Our
affiliation with the Queen Group is managed through several exclusive agreements
between the Company and each Queen Group’s entity. These agreements
are:
1.
|
a
Consulting Services Agreement between Mege Union and the Queen Group
entity that provides for Mege Union to exclusively provide essential
services relating to technology, human resources and research and
development to the Queen Group entity in exchange for a Consulting
Services Fee. Currently the parties have not instituted such Consulting
Fee;
|
2.
|
an
Operating Agreement between Mege Union and the Queen Group entity that
prohibits the Queen Group entity from taking certain material actions or
entering into material agreements, including assuming debt, selling or
purchasing any assets or rights, using the entity’s assets or rights as
collateral, or assigning some or all of the business to a third party,
without the prior written consent of Mege Union;
|
3.
|
an
Option Agreement among Mege Union, the Queen Group entity and the
shareholders of such entity that grants Mege Union the right to acquire
all of the shareholders’ interest in the Queen Group entity when, if and
to the extent permitted by the laws of the People’s Republic of China and
prohibits the shareholders from otherwise disposing of their interest in
the Queen Group entity except with the prior written consent of Mege
Union. Under the laws of China no appraisal is required in the
event the option granted by the Option Agreement is
exercised;
|
4.
|
an
Equity Pledge Agreement among Mege Union, the Queen Group entity and the
shareholders of such entity that grants Mege Union a pledged interest in
all of the issued and outstanding interests of the Queen Group, including
the right of Mege Union to vote such shares, as security for the
performance of the Queen Group entity’s obligations under the Consulting
Services Agreement and further; and
|
5.
|
a
Proxy Agreement between Mege Union and the shareholders of the Queen Group
entity that grants the board of directors of Mege Union an irrevocable
proxy for the maximum period permitted by law, to vote the shareholders
shares of the Queen Group entity in such manner and for or against such
proposals as the board may
determine.
|
Although
each of the Queen Group entities has its own set of agreements with us, for each
entity the terms and conditions of the agreements are identical to the forms
filed as Exhibit 10.12 through 10.16 to the registration statement of which this
prospectus is a part. As a result of the understandings and
agreements provided in the foregoing documents, we effectively control each of
the Queen Group entities. Except as set forth in these agreements,
Mr. Liu is not entitled to any other compensation in connection with his
ownership of the Queen Group entities.
Although
the Consulting Services Agreement gives Queen Group the right to terminate,
cancel or revoke the agreement in certain instances, we believe such would
neither be in the interest of Mr. Liu as a shareholder of the Company nor in his
interest as our Chairman and officer. The Company therefore believes that it
currently does not need additional safeguards to ensure that the termination
provision of the Consulting Services Agreement is not triggered.
As of the
date of this prospectus, there is no existing indebtedness of the Queen
Group.
We
generally open our facilities to members 12 hours a day and 7 days a
week. Currently, we are averaging 18,978 visits per month at our
SOKO International Fitness Center and 8,795 visits per month at our ten Queen’s
Beauty Spas and SOKO Beauty & Spa.
We
typically experience the highest level of member and client activity at our
fitness centers and beauty salons and spas during the hours of 11:00 a.m. –
01:00 p.m. and 05:00 p.m. – 07:00 p.m. Currently, we are running at the maximum
capacity at each one of our facilities. We believe additional
facilities are needed to optimize the usage of our facilities, to maximize the
satisfaction of our members, and to avoid inadequate space issues, such as lack
of equipment, professional trainers, beauty salon and spa professionals,
etc.
Key
Characteristics
Combined
with 15 years of knowledge and experience of beauty salon and spa operations,
advanced western management, and habits of Chinese consumers, we have developed
a localized managing system that supports both our current fitness center and
beauty salon and spa operations as well, we believe, as our future expansion
potential.
Our
internal management systems address the following areas:
●
|
Working
environment;
|
●
|
Equipment;
|
●
|
Research
& Development;
|
●
|
Employee
benefits; and
|
●
|
Employee
training (professional courtesy).
|
Additionally,
we have dedicated managers who focus on the following external areas of
management control:
●
|
Marketing;
|
●
|
Financing;
|
●
|
Logistic
control; and
|
●
|
Public
relations.
|
We have
instituted a number of incentive plans that are designed to attract and motivate
our members and clients, employees and strategic partners, leading to more solid
relationships and enhanced customer loyalty.
We have
set our focus on serving wealthy individuals with premium consumption powers
(mid- to upper-tier consumer group). We have also set our consumer
focus on corporate clients who are willing to compensate their employees with
memberships in our facilities as extra benefits. However, currently we are not
reliant on corporate clients.
Marketing
Strategy
We
strategically target the following individual customer groups to differentiate
ourselves from our competitors:
●
|
Management level group from
various enterprises. This customer group has the
highest demands on their lifestyle and tastes as well as the awareness of
their appearances and health
conditions.
|
●
|
White-collar group from
various enterprises. This customer group tends to be the
most active group of population in pursuit of the newest trends in fashion
& sport activities. They also have high quality lifestyles
and are considered one of the strongest consumption power
groups.
|
●
|
Government
group. This customer group tends to contain the more
senior portion of the population which has comparatively higher demands on
their conditions.
|
●
|
Foreigner
group. This customer group is the mature-stage-consumer
group who usually have higher incentives and initiatives to become the
member of beauty salon and spa and fitness
center.
|
We not
only engage in the traditional marketing tools to advertise in the market space,
but also develop mutual beneficial platforms through our institutional customers
to further enhance our marketing strategy:
●
|
Direct
Telemarketing. By having access to the contact
information of wealthy individuals and households, SOKO believes direct
telemarketing is one of most effective marketing to reach its desired
target customers. Our partner for information sharing
in this sector is China Mobile
Ltd.
|
●
|
Event
Sponsorship. By engaging the major event sponsorships
with other reputable institutes, we have further increased our market
awareness and exposure within the wealthy individual
and
|
●
|
household
communities. Our partner for information sharing in this
sector is Hiersun Diamond Group.
|
●
|
Joint
Sales. We jointly sell our memberships with third party
institutes to efficiently utilize the marketing effects of other brands
and eventually to achieve mutual benefits by all parties. Some of our
partners for information sharing in this sector include China Everbright
Bank, Shanghai Pudong Development Bank, China Southern Airline and Songlei
Commercial Group.
|
●
|
Traditional
Media. We also reach our target customers through
traditional media channels such as television, magazine, radio and
newspapers.
|
With
respect to the information sharing partnerships referenced above, our partners
provide us with VIP customer lists for target marketing. In return, we provide
discount group membership for our partners as part of their employee benefit
plans. In addition, we engage in promotional events with shopping malls, and
provide some shops with beauty salon and spa discounts for their
customers.
Competition
China’s
health and fitness market is highly segmented and is still at its infant
stage. No market leader has emerged in China unlike most of the mature markets
in the West or other industrially-advanced countries. Currently, no single
company in China counts for more than 3% of total nationwide market share.
Management believes that due to the change ins consumer taste – health and
fitness is no longer a “hobby,” and that consumer focus on the
health and fitness market has shifted to quality and professionalism
of service instead of pricing, as was the case in the past.
Trademarks
We
currently hold registered trademarks for the following names and
symbols:
|
Government
Regulation
Physical
Exercise:
According
to “China Law on Physical Culture and Sport”, the administrative department
for physical culture and sports under the State Council is in charge of the
operation of physical culture and sports throughout China. Other relevant
departments under Chinese State Council administers the operation of physical
culture and sports within their respective functions and powers.
China
practices a skill-grading system for social sports instructors, who shall guide
social sports activities. The social sports instructors are classified into 4
categories, Class III, Class II, Class I and State Level. Each Class of the
instructors must be trained accordingly. State Level instructors (the highest
level) must have minimum five years relevant experience.
According
to “Heilongjiang Provincial Administration Regulation in respect of Physical
Exercise Related Business,” the physical exercise related business is
qualified with following conditions: (a). proper facilities and buildings in
satisfactory with the necessary requirement of business operation, security,
fire protection, environmental protection and hygiene; (b). necessary registered
capital; (c). the exercising facilities and instruments in compliance with the
national standard stipulated by competent institution; (d). the trained social
sports instructors or other staffs with proper qualification for physical
exercising guidance.
Beauty
Industry
According
to “Interim Measures for the Administration of Beauty Treatment and Hairdressing
Industry” (the “Beauty Order”) issued by Ministry of Commerce, The Ministry of
Commerce is in charge of the work of national beauty treatment and
hairdressing industry. Pursuant to the Beauty Order, the business
operators undertaking business activities of beauty treatment and hairdressing
shall meet the following basic conditions: (1). having capacity for bearing
civil liabilities; (2). having a fixed business place; (3). having establishment
and facilities accommodated to the service items they manage; and (4). having
professional technicians who have obtained the corresponding qualification
certificates
The
beauticians, hairdressers and other professional technicians who undertake
beauty treatment and hairdressing services must obtain the qualification
certificate issued by the relevant governmental department of China. The
business operator of beauty treatment and hairdressing must place its business
license, hygienic license, service items and charging standards in its business
premises for public viewing. The business premises for beauty
treatment and hairdressing must comply with the relevant sanitation provisions
and standards and have the corresponding sanitary and sterilizing facilities and
measures. The practitioner must be subject to the physical check-up of the
administrative department of public health and can take up an occupation with
health certificate.
Our
management believes that we are compliant with all relevant applicable
government regulations, and that such regulations do not materially impact our
operations.
Foreign
Corrupt Practices Act Compliance
In addition to other laws, rules and
regulations with which we must comply, since we are a Delaware incorporated,
U.S. publicly listed company, we must comply with the U.S. Foreign Corrupt
Practices Act of 1977, as amended, or FCPA. The FCPA makes it a
criminal offense to pay, offer, or give anything of value to a foreign
(non-U.S.) official, a foreign political party (or official thereof) or
candidate for foreign office for the purpose of influencing the decisions of
those officials, parties or candidates. Also, the FCPA sets forth record keeping
and accounting requirements that require U.S. companies to maintain records that
accurately and fairly reflect all transactions and dispositions of all
assets.
Our board of directors has adopted a
written company policy which requires that all officers, directors, employees,
agents and representatives of SOKO comply with the FCPA. This policy
requires, among other things, that:
●
|
no
such person shall make an offer, payment or gift of any money or other
item of value, directly or indirectly, to: (i) a foreign official, (ii) a
foreign political party, (iii) a foreign party official, (iv) a candidate
for foreign political office or (v) a foreign quasi-governmental business
entity for the “corrupt” purpose of obtaining or retaining business for
SOKO or for the purpose of directing business to any other
person;
|
●
|
permissible
and customary or necessary “expediting” payments or business expenditures
are subject to the approval of SOKO’s management and must be correctly
entered (and not omitted from) SOKO’s books and records;
and
|
●
|
SOKO
maintain internal controls and procedures to ensure that: (i) our
company’s books and records truly reflect the transactions they record;
(ii) that company assets and liabilities shall be recorded on our regular
books of account; (iii) no undisclosed or unrecorded fund or asset shall
be established for any purpose and (iv) no false or artificial entries
shall be made in our company’s books and records for any
reason.
|
We
believe that we are able to comply with these policies and procedures across our
various owned or controlled subsidiaries due the fact that, as a public company:
(i) we are required to maintain proper internal controls and procedures over
financial and disclosure matters (which controls and procedures we are presently
seeking to improve upon) and (ii) we are subject to quarterly reviews and annual
audits by our registered independent auditors.
Employees
Currently
we have approximately 879 full-time employees. Of these employees,
approximately 310 employees are employed by Mege Union and approximately 569
employees are employed by the Queen Group. Our employees work in the
functional units as indicated in the table below.
Department
|
Total
Number
|
|||
Management
|
32 | |||
Other
Administration
|
75 | |||
Sales
|
171 | |||
Beauty
and Spa Professionals
|
472 | |||
Fitness
Professionals
|
129 |
We have
not experienced any work stoppages and we consider relations with our employees
to be good.
Property
SOKO and
Mege Union have their corporate offices at 194 Guogeli Street, Heilongjiang
Province, Harbin, China 150001. This property is leased by
SOKO. We currently operate through standard tenancy agreements out of
leased properties located at:
(1)
|
Harbin
Daoli Queen Demonstration Beauty Parlor (Daoli
Spa)
|
24
Xishidao Street, Daoli District, Harbin, China;
|
|
|
|
(2)
|
Harbin
Queen Beauty Demonstration Center/Harbin Queen Medical Beauty
Clinic (Daowai Spa)
|
107
Jinyang Street, Daowai District, Harbin, China;
|
|
(3)
|
Harbin
Queen Beauty Demonstration Center Xuanhua Branch (Xuanhua
Spa)
|
380-400
Xuanhua Street, Nangang District, Harbin, China;
|
|
(4)
|
Harbin
Queen Beauty Demonstration Center Nangang Branch (Nangang
Spa)
|
108
Jiejing Street, Nangang District, Harbin, China;
|
|
(5)
|
Harbin
Huang Emperor & Golden Gym Club Co., Ltd. (SOKO International
Fitness Center)
|
7
Yushan Road, Nangang District, Harbin, China;
|
|
(6)
|
Harbin
Mege Union Beauty Management Ltd. (Legend Spa)
|
389
Hanshui Road, Nangang District, Harbin, China;
|
|
(7)
|
Shenyang
Letian Yoga Fitness Center (Yoga Wave)
|
96
Zhonghua Road, Heping District, Shenyang, China;
|
|
(8)
|
Harbin
Tai Ai Beauty Co. Ltd. (Lea Spa)
|
68
Ganshui Road, Kaifa District, Harbin, China;
|
|
(9)
|
Harbin
SOKO Spa
|
7
Yushan Road, Nangang District, Harbin, China (same as SOKO
International Fitness Center);
|
|
(10)
|
Shenyang
Queen Beauty Demonstration Co. Ltd., (Shenyang Queen Beauty
Spa)
|
96
Zhonghua Road, Heping District, Shenyang, China;
|
|
(11)
|
Harbin
Xinyang Spa
|
330
Xinyang Road, Daoli District, Harbin, China;
|
|
(12)
|
Shenyang Starway
Fitness Co., Ltd. (Yoga Wave II)
|
124
Huigong St. Shenhe District, Shenyang, China;
|
|
(13)
|
Beijing
Natural Beauty Fitness Services Limited
|
3F-4F,
Time Square, North Building, Huilongguan Residential Zone, Changping
District, Beijing, China; and
|
|
(14)
|
First
Subsidiary of Beijing Natural Beauty Fitness Services
Limited
|
1
Second Zone of Fengyayuan, Huilongguan Residential Zone, Changping
District, Beijing, China.
|
In
addition we entered into a standard lease agreement for the new Da Qing facility
at 1 Lishui Road, Lishui Commercial District, Daqing, China. We also entered
into new lease agreements for three new unnamed facilities, all to be located in
the Long Dian Building in Harbin.
The
classrooms used by Queen Beauty Vocational Skill Training School are owned by
Harbin Queen Beauty Demonstration Center, which permits the school to use them
without fee.
Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not
aware of any such legal proceedings or claims that will have, individually or in
the aggregate, a material adverse affect on our business, financial condition or
operating results. Should any liabilities incurred in the future,
they will be accrued based on management’s best estimate of the potential loss.
Furthermore, management does not believe that there are any proceedings to which
any director, officer, or affiliate of the Company, any beneficial owner of
record of more than five percent of the common stock of the Company, or any
associate of any such director, officer, affiliate of the Company, or security
holder is a party adverse to the Company or has a material interest adverse to
the Company.
Executive
Officers and Directors
Name
|
Position
|
Age
|
||
Tong
Liu
|
Chief
Executive Officer, Chairman of the Board
|
42
|
||
Xia
Yu
|
Chief
Financial Officer, Director
|
40
|
||
Yang
Chen
|
Director
|
33
|
||
Su
Zhang
|
Director
|
39
|
||
Gideon
E. Kory
|
Director
|
50
|
Tong Liu, 42, has served as
our Chief Executive Officer and Chairman of the Board since the consummation of
the Share Exchange on April 11, 2008. Mr. Liu has served as Chief
Executive Officer and Director of Wealthlink and Mege Union since their
formation in 2007. He was the Chief Executive Officer of Harbin Queen
Beauty Demonstration Center from July 1993 until June 2007. Mr. Liu’s
experience includes management and development of professional fitness, beauty
salon and lifestyle and spa businesses. Mr. Liu graduated from Harbin
Workingman Occupation University in 1991.
Xia Yu, 40, has served
as our Chief Financial Officer and a Director since consummation of the Share
Exchange on April 11, 2008. Ms. Yu has served as Chief Financial
Officer of Wealthlink and Mege Union since their formation in
2007. From January 2005 through May 2007, Ms. Yu served as Chief
Financial Officer of Harbin Queen Beauty Demonstration Center. From July
2004 through December 2004, Ms. Yu served as Deputy General Manager
of Gaoyang Advertisement Co., Ltd. and from March 2003 through June
2004, Ms. Yu was Deputy General Manager of Shiyite Trading Co.,
Ltd. Ms. Yu holds an MBA from Harbin Industry
University.
Yang Chen, 33, has
served as a Director of SOKO since the consummation of the Share Exchange on
April 11, 2008. Mr. Chen is an attorney and was a partner with the
law firm of Guangsheng & Partners from May 2002 through December
2007. Mr. Chen has an L.L.B. degree from Heilongjiang University Law
School and a bachelor’s degree in management from Harbin College.
Su Zhang, 39, has served as a
Director of SOKO since the consummation of the Share Exchange on April 11,
2008. From June 2006 through May 2009, Mr. Zhang served as Managing
Director of Investments for Hua-Mei 21st Century LLC, which is affiliated with
Guerilla Capital Management, L.L.C. and Hua-Mei 21st Century Partner, LP.
From December 2005 until May 2006, he served as the Chief Operating Officer of
TengTu International Ltd. Mr. Zhang was a founder of WeiZhXian
Science and Technology Co. Ltd. and served as its General Manager from March
2004 to November 2005. From October 2003 through February 2004, Mr.
Zhang served as the Assistant President of Joyo.com. From September 2002
through September 2003, Mr. Zhang worked for Legend Capital. Mr. Zhang
holds an MBA from Guanghua School of Management, Peking University.
Gideon E. Kory, 50, has
served as a Director of SOKO since the consummation of the Share Exchange on
April 11, 2008. Mr. Kory has been the Managing Director of Pacific Summit
Capital, an investment bank and registered broker-dealer, since August 2008.
From June 2005 through July 2008, Mr. Kory was Managing Director of Pacific
Summit Capital, an investment bank and registered broker-dealer and from January
2003 through May 2005, Mr. Kory served as Senior Research Analyst and Vice
President of Mergers and Acquisitions for Roth Capital Partners, an investment
bank and registered broker-dealer. Prior to his involvement in the securities
industry, Mr. Kory spent 15 years in engineering and management working with
government, commercial enterprises, and research institutions and as an
independent consultant. Mr. Kory is a Chartered Financial Analyst. Mr. Kory
holds a Bachelor of Science in Electrical Engineering from the Israel Institute
of Technology.
Each of
our directors has been elected to a one year term, to serve until the annual
meeting of stockholders or as soon thereafter as their successors are duly
elected and qualified.
EXECUTIVE
COMPENSATION
The table
below summarizes all compensation awarded to, earned by, or paid to our current
principal executive officer and our most highly compensated executive officer
other than our current principal executive officer (collectively, the “named
executive officers”) for all services rendered in all capacities to the Company,
and to Wealthlink, as our predecessor, and its subsidiaries for the fiscal years
ended May 31, 2009, 2008 and 2007.
Name
and Principal Position
|
Fiscal
Year
|
Salary (1)
|
Bonus
|
Total (1)
|
||||||||||
Tong
Liu, Chief Executive Officer (2)
|
2009
|
$
|
17,574
|
$
|
0
|
$
|
17,574
|
|||||||
2008
|
$
|
17,291
|
$
|
0
|
$
|
17,291
|
||||||||
2007
|
$
|
15,683
|
$
|
0
|
$
|
15,683
|
||||||||
Xia
Yu, Chief Financial Officer (3)
|
2009
|
$
|
8,084
|
$
|
0
|
$
|
8,084
|
|||||||
2008
|
$
|
7,954
|
$
|
0
|
$
|
7,954
|
||||||||
2007
|
$
|
7,214
|
$
|
0
|
$
|
7,214
|
(1)
|
The
salary for each of the named executive officers was calculated and paid in
Chinese Yuan Renminbi (RMB) by our wholly-owned subsidiary, Mege
Union. The amounts in the foregoing table represent the US
dollar equivalent based on the following conversion rates: RMB1
= $0.146453 at May 29, 2009, RMB1 = $0.144092 at May 30, 2008 and RMB1 =
$0.130692 at May 31, 2007.
|
(2)
|
Prior
to April 11, 2008, Mr. Liu served as Chief Executive Officer and director
of Wealthlink and its subsidiaries. Mr. Liu’s annual compensation is
RMB120,000.
|
(3)
|
Prior
to April 11, 2008, Ms. Yu served as the Chief Financial Officer of
Wealthlink and its subsidiaries. Ms. Yu’s annual compensation
is RMB55,200.
|
Outstanding Equity Awards at Fiscal
Year-End. There were no individual grants of stock options to purchase
our common stock made to our executive officers during the fiscal years ended
May 31, 2009, 2008 and 2007.
Options/SARs
Grants During Last Fiscal Year
None.
Director
Compensation
Neither
Mr. Liu nor Ms. Yu receives any compensation for serving on the board of
directors. The following table provides information concerning the compensation
of our non-executive directors for the period from June 1, 2008 through May 31,
2009:
Name
|
Fees Earned or
Paid in Cash
($)
|
Option
Awards
($)
(1)
|
Total
($)
|
|||||||||
Yang
Chen (2)
|
3,515
|
5,994
|
(3)
|
9,509
|
||||||||
Su
Zhang (2)
|
3,515
|
5,994
|
(3)
|
9,509
|
||||||||
Gideon
E. Kory (4)
|
29,990
|
36,633
|
(5)
|
66,623
|
(1)
|
The
options have an exercise price of $1.47 per share. The values
of the option awards are based on the amount recognized for financial
statement reporting purposes in 2009 computed in accordance with ASC 718
(disregarding any estimates of forfeitures relating to service-based
vesting conditions). See Note 14 to the audited consolidated
financial statements included as part of this prospectus regarding
assumptions underlying the valuation of stock option
grants.
|
(2)
|
The
cash compensation paid to Messrs. Chen and Zhang was calculated and paid
in RMB, at the annual rate of RMB24,000. The amounts in the
foregoing table represent the US dollar equivalent based on the conversion
rate of RMB1 = $0.146453 at May 29, 2009.
|
(3)
|
The
options awarded to Messrs. Chen and Zhang on March 2, 2009 vest over a
three year period, with 20% vesting on the grant date and 40% vesting on
the first and second anniversaries of the grant date, provided that the
reporting person remains associated with SOKO on the vesting dates. The
option is exercisable for three years from the date of
grant.
|
(4)
|
Mr.
Kory’s annual cash compensation was raised effective March 2, 2009 from
$24,000 to $36,000.
|
(5)
|
The
option awarded to Mr. Kory on March 2, 2009 was immediately exercisable in
full and is exercisable for three years from the date of
grant.
|
We have
granted individual compensatory stock options to our non-management
directors. An aggregate of 110,000 shares of our common stock have
been issued to our three non-management directors, Messrs. Chen, Kory and
Zhang. On July 8, 2008, Mr. Kory received an option to purchase
50,000 shares of our common stock, expiring on July 8, 2013, at an exercise
price of $1.47 per share, which price was the volume weighted average price of
our common stock for the period ended July 7, 2008. The option vests
in three equal installments, on the grant date and the first and second
anniversaries of such grant date. On March 2, 2009, each of Messrs.
Chen, Kory and Zhang received an option to purchase 20,000 shares of our common
stock, expiring on March 2, 2012, at an exercise price of $1.47 per share, which
price was above market and consistent with the exercise price established in Mr.
Kory’s initial grant. The options granted to Messrs. Chen and Zhang
on March 2, 2009 vest over a three year period, with 20% vesting on
the grant date and 40% vesting on the first and second anniversaries of the
grant date, provided that the reporting person remains associated with SOKO on
the vesting dates. The option granted to Mr. Kory on March 2,
2009 vested in full on the date of grant.
Equity
Compensation Plans
None.
Pension
and Retirement Plans
Currently,
we do not offer any annuity, pension or retirement benefits to be paid to any of
our officers, directors or employees. As required by China law,
the Company contributes to the “insurance and public housing funds” program
defined by the Department of Labor. These contributions are similar
to the Social Security and Medicare programs in the US. There are also no
compensatory plans or arrangements with respect to any individual named above
which results or will result from the resignation, retirement or any other
termination of employment with our company, or from a change in our
control.
Employment
Agreements
We do not
have any written employment agreements with our officers and directors, aside
from those entered into between our subsidiaries in China and all employees in
China.
Audit
Committee
Our board
of directors has an Audit Committee, which is comprised of Gideon E. Kory
(Chairman), Yang Chen and Su Zhang. The board of directors has examined the
composition of the Audit Committee in light of the regulations under the
Exchange Act and the current listing standards and regulations of the NASDAQ
Stock Market LLC applicable to audit committees. Based upon this examination,
the board of directors has determined that each of the Audit Committee members
is an “independent” director within the meaning of SEC and NASDAQ
regulations. Mr. Kory qualifies as an “audit committee financial expert” as that
term is defined in applicable regulations of the SEC.
Compensation
Committee
The board
of directors has a Compensation Committee, which is comprised of Yang Chen
(Chairman), Gideon E. Kory and Su Zhang, each of whom is an independent
director. The Compensation Committee is responsible for the design, review,
recommendation and approval of compensation arrangements for our directors,
executive officers and key employees, and for the administration of our equity
incentive plans, if any, including the approval of grants under such plans to
our employees, consultants and directors. The Compensation Committee also
reviews and determines compensation of our executive officers, including our
Chief Executive Officer. The board of directors is in the process of preparing a
written charter for the Compensation Committee that sets forth the foregoing and
further defined the duties and responsibilities of the Compensation
Committee.
Nominating and
Corporate Governance Committee
The board
of directors has a Nominating and Corporate Governance Committee, which is
comprised Su Zhang (Chairman), Yang Chen and Gideon E. Kory. The Nominating and
Corporate Governance Committee assists in the selection of director nominees,
approves director nominations to be presented for shareholder approval at our
annual general meeting and fills any vacancies on our board of directors,
considers any nominations of director candidates validly made by shareholders,
and reviews and considers developments in corporate governance practices. The
board of directors is in the process of preparing a written charter for the
Nominating and Corporate Governance Committee that sets forth the foregoing and
further defined the duties and responsibilities of the Nominating and Corporate
Governance Committee.
Director
Independence
Our board
has determined that each of Messrs. Chen, Kory and Zhang are independent
directors within the meaning of applicable NASDAQ Stock Market and SEC rules.
Each of Messrs. Chen, Kory and Zhang serve on our audit, compensation and
nominating and corporate governance committees. No other
directors serve on these committees. In considering director
independence, the board studied the shares of our common stock beneficially
owned by each of the directors, whether directly or indirectly, as set forth
under “Security Ownership of Certain Beneficial Owners and
Management.
Code
of Ethical Conduct
On January 31, 2010, the our board of
directors adopted a Code of Ethical Conduct applicable to SOKO and all
subsidiaries and entities controlled by SOKO as well as our directors, officers
and employees. Compliance with the Code of Ethics is required of all
SOKO personnel at all times. Our senior management is charged with
ensuring that the Code of Ethics and our corporate policies will govern all
business activities of the Company. The Code of Ethics addresses,
among other things, the use and protection of corporate funds, property and
information, avoiding conflicts of interest, insider trading, compliance with
the law, accuracy and retention of business records, document retention, as well
as reporting, enforcement and compliance procedures. We will post the text of
our Code of Ethical conduct and any amendments thereto on our Website
at www.sokofitness.com as well.
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
Three of
our subsidiaries rent their premises from Mr. Tong Liu, our Chairman and CEO.
Mr. Liu has leased the following stores to the Company pursuant to the terms of
binding written lease agreements containing terms no less favorable to the
Company than the Company could have negotiated in an arm’s length transaction
with a motivated landlord, including substantially the following
terms:
1. Harbin
Daoli Queen Demonstration Beauty Parlor: 5 years from January 1, 2008 through
December 31, 2012, for $47,300 per year, prepaid for 1 year plus an option for
additional 5 years at no more than $55,000 per year.
2. Harbin
Queen Beauty Demonstration Center: 5 years from January 1, 2008 through December
31, 2012 for $20,300 per year, prepaid for 1 year plus an option for additional
5 years at no more than $24,000 per year.
3. Mege
Union office: 10-year lease from January 1, 2009 through December 31,
2018 for $73,212 per year.
Our
Chairman, Mr. Liu, is the sole owner of each of the Queen Group
entities. The entities comprising the Queen Group
are:
●
|
Harbin
Huang Emperor & Golden Gym Club Co., Ltd. (SOKO International Fitness
Center);
|
●
|
Harbin
Daoli Queen Demonstration Beauty Parlor (Daoli
Spa);
|
●
|
Harbin
Queen Beauty Demonstration Center (consisting of three facilities, the
Daowai Spa and two branches, the Nangang Spa and the
XuanhuaSpa);
|
●
|
Harbin
Xinyang Spa;
|
●
|
Harbin
SOKO Spa;
|
●
|
Harbin
Queen Medical Beauty Clinic;
|
●
|
Shenyang
Queen Beauty Demonstration Co. Ltd. (Shenyang Queen Beauty Spa);
and
|
●
|
Harbin
Queen Beauty Vocational Skill Training
School.
|
Our
affiliation with the Queen Group is managed through several exclusive agreements
between the Company and each Queen Group’s entity. These agreements
are:
1. a
Consulting Services Agreement between Mege Union and the Queen Group entity that
provides for Mege Union to exclusively provide essential services relating to
technology, human resources and research and development to the Queen Group
entity in exchange for a Consulting Services Fee. Mr. Liu, sole
proprietor of each of the Queen Group entities, has not charged the Company, nor
has the Company paid Mr. Liu, any fees under the Consulting Services
Agreement;
2. an
Operating Agreement between Mege Union and the Queen Group entity that prohibits
the Queen Group entity from taking certain material actions or entering into
material agreements, including assuming debt, selling or purchasing any assets
or rights, using the entity’s assets or rights as collateral, or assigning some
or all of the business to a third party, without the prior written consent of
Mege Union;
3. an
Option Agreement among Mege Union, the Queen Group entity and the shareholders
of such entity that grants Mege Union the right to acquire all of the
shareholders’ interest in the Queen Group entity when, if and to the extent
permitted by the laws of the People’s Republic of China and prohibits the
shareholders from otherwise disposing of their interest in the Queen Group
entity except with the prior written consent of Mege Union;
4. an
Equity Pledge Agreement among Mege Union, the Queen Group entity and the
shareholders of such entity that grants Mege Union a pledged interest in all of
the issued and outstanding interests of the Queen Group including the
right of Mege Union to vote such shares, as security for the performance of the
Queen Group entity’s obligations under the Consulting Services Agreement and
further; and
5. a
Proxy Agreement between Mege Union and the shareholders of the Queen Group
entity that grants the board of directors of Mege Union an irrevocable proxy for
the maximum period permitted by law, to vote the shareholders' shares of the
Queen Group entity in such manner and for or against such proposals as the board
may determine.
Although
each of the Queen Group entities has its own set of agreements with us, the
terms and conditions of the agreements are identical for each
entity. As a result of the understandings and agreements provided in
the foregoing documents, we effectively control each of the Queen Group
entities. Except as set forth in these agreements, Mr. Liu is not
entitled to any other compensation in connection with his ownership of the Queen
Group entities.
SECURITY
OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table
below sets forth information, as of February 1, 2010, concerning (a) each person
that is known to us to be the beneficial owner of more than 5% of our common
stock; (b) each of our named executive officers; (c) each director; and (d) all
of the directors and executive officers as a group. Unless otherwise indicated,
to our knowledge, all persons listed below have sole voting and investment power
with respect to their shares, except to the extent spouses share authority under
applicable law. Beneficial ownership is determined in accordance with the rules
of the SEC. In computing the number and percentage of shares beneficially owned
by a person, shares that may be acquired by such person within 60 days of
February 1, 2010 are counted as outstanding, while these shares are not counted
as outstanding for computing the percentage ownership of any other
person. As of February 1, 2010, there were 17,000,000 shares of our
common stock outstanding.
Name
and Address of Beneficial Owner (1)
|
Number
of
Shares
Beneficially
Owned
|
Percentage
of
Shares
Beneficially
Owned
(2)
|
|||||
5%
Shareholders
|
|||||||
Guerilla
Capital Management, LLC. (3)
Hua-Mei
21st Century Partner, LP
237
Park Avenue
9th
Floor
New
York, New York 10017
|
3,652,000
|
19.43
|
%
|
||||
Directors
and Named Executives
|
|||||||
Tong
Liu (4)
|
8,960,000
|
52.71
|
%
|
||||
Xia
Yu
|
40,000
|
*
|
|||||
Yang
Chen (5)
|
4,000
|
*
|
|||||
Gideon
E. Kory (5)
|
53,333
|
*
|
|||||
Su
Zhang (5)
|
4,000
|
*
|
|||||
All
officers and directors as a group (5 persons)
|
9,061,333
|
53.30
|
%
|
*
|
Less
than 1 percent
|
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o SOKO,
No. 194,Guogeli Street, Harbin, Heilongjiang Province, China,
150001.
|
(2)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Unless otherwise noted, we believe that all persons named in
the table have sole voting and investment power with respect to all shares
of common stock beneficially owned by them.
|
(3)
|
This
information is derived from Amendment No. 1 to Schedule 13D
filed jointly by Guerilla Capital Management, LLC., a Delaware limited
liability company (“Guerrilla Capital”) and Hua-Mei 21st Century Partner,
LP, a Delaware limited partnership (the “Partnership”) on August 12, 2009
and includes 1,852,000 shares of the Company’s common stock and 1,800,000
shares underlying warrants acquired by Guerrilla Capital and the
Partnership in a private placement by the Company. Guerrilla
Capital may be deemed to be the beneficial owner of 3,652,000 shares and
the Partnership may be deemed to be the beneficial owner of 2,800,000
shares. Guerrilla Capital serves as investment manager for the Partnership
and Guerrilla Partners L.P., a Delaware limited partnership. Guerrilla
Capital (i) has the sole power to vote or direct the vote of, and sole
power to dispose or direct the disposition of, 800,000 shares of our
common stock and (ii) shares the power to vote or direct the vote of, to
dispose or direct the disposition of, 2,852,000 shares of our common
stock. The Partnership (i) has the sole power to vote or direct the vote
of, and sole power to dispose or direct the disposition of, no shares of
our common stock and (ii) shares the power to vote or direct the vote of,
to dispose or direct the disposition of, 2,800,000 shares of our common
stock. Peter Siris has control over management and investment decisions
for Guerilla Capital and the Partnership. Guerrilla Capital specifically
disclaims beneficial ownership in the shares reported herein except to the
extent of its pecuniary interest therein.
|
(4)
|
Includes
2,000,000 shares held in escrow by Crone Rozynko LLP under the terms of an
Escrow Agreement dated as of April 7, 2008.
|
(5)
|
Includes
beneficial ownership of shares issuable upon the exercise of options that
are currently exercisable or will be exercisable within 60 days of
February 1, 2010, as follows: Mr. Chen, 4,000 shares, Mr. Kory,
53,333 and Mr. Zhang, 4,000 shares.
|
DESCRIPTION
OF SECURITIES
Our
authorized capital consists of 500,000,000 shares of common stock with a par
value of $0.001, and 10,000,000 shares of preferred stock with a par value of
$0.001. On February 1, 2010, we had 17,000,000 shares of common stock
issued and outstanding.
Holders
of our common stock are entitled to one vote for each share on all matters
submitted to a stockholder vote. Holders of common stock do not have cumulative
voting rights. Therefore, holders of a majority of the shares of common stock
voting for the election of directors can elect all of the directors. Holders
of our common stock representing a majority of the voting power of our
capital stock issued, outstanding and entitled to vote, represented in person or
by proxy, are necessary to constitute a quorum at any meeting of stockholders. A
vote by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to our articles of incorporation.
Holders
of our common stock are entitled to share in all dividends that the board
of directors, in its discretion, declares from legally available funds. In the
event of a liquidation, dissolution or winding up, each outstanding share
entitles its holder to participate pro rata in all assets that remain after
payment of liabilities and after providing for each class of stock, if any,
having preference over the common stock. Our common stock has no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to our common stock.
Transfer
Agent and Registrar
Our transfer
agent is StockTrans, Inc. Their address is 44 West Lancaster Avenue, Ardmore, PA
19003, and their phone number is (610) 649-7300.
SELLING
STOCKHOLDERS
Of the
4,200,000 shares of our common stock registered for public resale pursuant to
this prospectus and listed under the column “Shares of Common Stock Included in
Prospectus” on the table set forth below, 2,200,000 shares were previously
issued and 2,000,000 are issuable upon exercise of warrants that were issued to
three accredited investors in connection with a private placement offering, in
which we sold units at $1.00 per share to the three accredited investors, with
each unit consisting of one share of common stock and a warrant to purchase one
share of common stock at an exercise price of $1.25 per share. Etech
International, Inc. was engaged by us to provide financial consulting services
in connection with the Share Exchange. In exchange for providing these services,
Etech International Inc. received $20,000 in cash as retainer fee and 340,000
shares of our common stock, 115,000 of which are registered for public resale
pursuant to this prospectus and listed under the column “Shares of Common Stock
Included in Prospectus” on the table set forth below. Etech International, Inc.
received these securities to be resold in the ordinary course of business and at
the time of the issuance of the securities to be resold, had no agreements or
understandings, directly or indirectly, with any person to distribute the
securities.. Sichenzia Ross Friedman Ference LLP was engaged by us to provide
legal services to us in connection with the transactions consummated on the
Closing Date, including the Share Exchange and the private placement. In
exchange for providing these services , Sichenzia Ross Friedman Ference LLP
received 85,000 shares of our common stock, all of which are
registered for public resale pursuant to this prospectus and listed under the
column “Shares of Common Stock Included in Prospectus” on the table set forth
below.
The
following table presents information as of February 1, 2010 and sets forth the
number of shares beneficially owned by each of the selling stockholders as of
the date of this prospectus. The table assumes that all of the currently
outstanding warrants will be exercised for common stock and all of the
securities will be sold in this offering. However, any or all of the securities
listed below may be retained by any of the selling stockholders, and therefore,
no accurate forecast can be made as to the number of securities that will be
held by the selling stockholders upon termination of this offering. The selling
stockholders are not making any representation that any shares covered by this
prospectus will be offered for sale. We believe that, except as otherwise
indicated, based on information provided to us by each of the selling
stockholders, the selling stockholders listed in the table have sole voting and
investment powers with respect to the securities indicated. No selling
stockholders are broker-dealers or affiliates of broker-dealers.
Stockholder
|
Shares
of Common Stock
Included
in Prospectus
|
Beneficial
Ownership
Before
Offering
(i)
(ii)
|
Percentage
of Common Stock Before Offering
(i)
(ii)
|
Beneficial
Ownership After the Offering
(iii)
|
Percentage
of Common Stock Owned After Offering
(iii)
|
|||||||||||||||
Guerrilla
Capital Management, L.L.C.(iv)
Hua-Mei
21st Century Partners (iv)
|
3,600,000
|
3,600,000
|
18.95
|
%
|
0
|
n/a
|
||||||||||||||
James
Fuld Jr. IRA Account (v)
|
400,000
|
400,000
|
2.11
|
%
|
0
|
|||||||||||||||
Etech
International, Inc. (vi)
|
115,000
|
340,000
|
2.06
|
%
|
225,000
|
1.18
|
%
|
|||||||||||||
Sichenzia
Ross Friedman Ference LLP (vii)
|
85,000
|
85,000
|
*
|
0
|
||||||||||||||||
Total
|
4,200,000
|
4,425,000
|
23.29
|
%
|
225,000
|
1.18
|
%
|
*
|
Represents
less than 1% of total outstanding common stock.
|
(i)
|
These
columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer
for resale at any one time).
|
(ii)
|
The
number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Under such rule, beneficial ownership includes any shares as to which the
selling stockholders has sole or shared voting power or investment power
and also any shares, which the selling stockholders has the right to
acquire within 60 days. The percentage of shares owned by each selling
stockholder is based on 17,000,000 shares issued and outstanding as
of February 1, 2010, plus 2,160,000 shares issuable upon exercise of
all outstanding warrants.
|
(iii)
|
Assumes
that all securities registered will be sold.
|
(iv)
|
Represents
1,800,000 shares of the Company’s common stock, and 1,800,000 shares
underlying warrants purchased in a private placement by the
Company. Pursuant to the information reported by Guerilla
Capital and the Partnership on a Schedule 13D jointly filed by them with
the SEC on April 28, 2008, Guerrilla Capital may be deemed to be the
beneficial owner of 3,600,000 shares and the Partnership may be deemed to
be the beneficial owner of 2,800,000 shares. Guerrilla Capital serves as
investment manager for the Partnership and Guerrilla Partners L.P., a
Delaware limited partnership. Peter Siris has control over
management and investment decisions for Guerilla Capital and the
Partnership.
Guerrilla
Capital (i) has the sole power to vote or direct the vote of, and sole
power to dispose or direct the disposition of, 800,000 shares of our
common stock and (ii) shares the power to vote or direct the vote of, to
dispose or direct the disposition of, 2,800,000 shares of our common
stock. The Partnership (i) has the sole power to vote or direct the vote
of, and sole power to dispose or direct the disposition of, no shares of
our common stock and (ii) shares the power to vote or direct the vote of,
to dispose or direct the disposition of, 2,800,000 shares of our common
stock. Guerrilla Capital specifically disclaims beneficial ownership in
the shares reported herein except to the extent of its pecuniary interest
therein. The principal business address of Guerilla Capital and the
Partnership is located at 237 Park Avenue, 9th Floor, New York, New York
10017.
|
(v)
|
Represents
200,000 shares of the Company’s common stock, and 200,000 shares
underlying warrants purchased in a private placement by the
Company.
|
(vi)
|
Represents
115,000 shares issued to the selling stockholder in consideration of
consulting services rendered. Mr. Zhang Wei exercises sole voting and
dispositive control of such shares.
|
(vii)
|
Represents
85,000 shares issued to the selling stockholder in consideration of legal
services rendered. Mr. Marc Ross exercises sole voting and dispositive
control of such shares.
|
PLAN
OF
DISTRIBUTION
The
selling stockholders and any of their respective pledgees, donees, assignees and
other successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as
principal;
|
●
|
facilitate
the transaction;
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
●
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
●
|
privately-negotiated
transactions;
|
●
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
|
●
|
through
the writing of options on the shares;
|
●
|
a
combination of any such methods of sale; and
|
●
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 of the Securities Act
of 1933, as amended (the “Securities Act”), if available, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if it deems the
purchase price to be unsatisfactory at any particular time.
The
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then existing market
price. We cannot assure that all or any of the shares offered in this prospectus
will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be “underwriters” as
that term is defined under the Securities Act, the Exchange Act and the rules
and regulations of such acts. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
We are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. The selling stockholders have
not entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. The
selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under such act, including, without
limitation, Regulation M. These provisions may restrict certain activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
stockholders or any other such person. In the event that any of the selling
stockholders are deemed an affiliated purchaser or distribution participant
within the meaning of Regulation M, then the selling stockholders will not be
permitted to engage in short sales of common stock. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. In addition, if a short sale is deemed to be a stabilizing activity,
then the selling stockholders will not be permitted to engage in a short sale of
our common stock. All of these limitations may affect the marketability of the
shares.
If a
selling stockholder notifies us that it has a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling stockholder
and the broker-dealer.
MARKET
FOR
COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our
common stock trades on the OTCBB under the symbol “SOKF.” From March 13, 2007
until July 16, 2008, our common stock traded on the OTCBB under the symbol
“AMHG.” The following table sets forth the high and low intra-day
prices per share of our common stock for the periods indicated, which
information was provided by the OTCBB. Prior to May 28, 2008, shares of our
common stock traded very infrequently and the actual price information is not
readily available. The quotations set forth below reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not represent actual
transactions.
High
|
Low
|
|||||||
Fourth
Quarter Fiscal 2008 (May 28, 2008 - May 31, 2008
|
$
|
12.00
|
$
|
1.25
|
||||
First
Quarter Fiscal 2009 (through August 31, 2008)
|
$
|
2.25
|
$
|
0.50
|
||||
Second
Quarter Fiscal 2009 (through November 30, 2008)
|
$
|
1.02
|
$
|
0.40
|
||||
Third
Quarter Fiscal 2009 (through February 28, 2009)
|
$
|
1.20
|
$
|
0.81
|
||||
Fourth
Quarter Fiscal 2009 (through May 31, 2009)
|
$
|
1.55
|
$
|
0.10
|
||||
First
Quarter Fiscal 2010 (through August 31, 2009)
|
$
|
4.00
|
$
|
1.55
|
||||
Second
Fiscal Quarter 2010 (through November 30, 2009)
|
$
|
3.15
|
$
|
2.50
|
||||
Third
Fiscal Quarter 2010 (through February 1, 2010)
|
$ | 4.45 | $ | 2.65 |
On
February 1, 2010, the closing price of our common stock as reported on the OTCBB
was $3.21.
Holders
As of
February 1, 2010, there were 17,000,000 shares of our common stock outstanding
held by approximately 23 shareholders of record. The number of our
shareholders of record excludes any estimate by us of the number of beneficial
owners of shares held in street name, the accuracy of which cannot be
guaranteed.
Dividend
Policy
We have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we will
declare and pay dividends in the future will be determined by our board of
directors at their discretion, subject to certain limitations imposed under
Delaware corporate law. In addition, our ability to pay dividends may be
affected by the foreign exchange controls in China. The timing, amount and form
of dividends, if any, will depend on, among other things, our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our board of directors.
LEGAL MATTERS
The
validity of our common stock offered hereby has been passed upon by Ellenoff
Grossman & Schole LLP, New York, New York.
EX
PERTS
The
consolidated balance sheet of the Company and its subsidiary for the
fiscal years ended May 31, 2008 and May 31, 2009, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows
appearing in this prospectus and registration statement have been so included in
reliance on the Report of Bagell Josephs, Levine & Company, LLC, an
independent registered public accounting firm, appearing elsewhere in this
prospectus, given on the authority of such firm as experts in accounting and
auditing.
CHANGES
IN AND DISAGREEMENTS WITH
ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
We
dismissed Gately & Associates, L.L.C. as our independent accountants,
effective as of May 14, 2008. Gately & Associates had previously
been engaged as the principal accountant to audit our financial
statements. The reason for the dismissal of Gately & Associates
is that, following the consummation of our April 2008 share exchange agreement:
(i) the former Wealthlink Shareholders own a significant amount of the
outstanding shares of our common stock and (ii) our primary business became the
business previously conducted by Wealthlink. The independent
registered public accountant of Wealthlink for US accounting purposes was the
firm of Bagell, Josephs, Levine & Company, LLC (“BJL”). We
believed that it was in our best interest to have BJL continue to work with our
business, and we therefore retained BJL as our new principal independent
registered accounting firm, effective as of May 14, 2008. BJL is
located at 406 Lippincott Drive., Suite J, Marlton,
NJ 08053. The decision to change accountants was approved by our
Board of Directors on May 13, 2008.
The
reports of Gately & Associates on our financial statements as at and for the
years ended December 31, 2006 and December 31, 2007 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During
the two most recent fiscal years and during the period prior to the dismissal of
Gately & Associates, there were no disagreements with Gately &
Associates on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of Gately & Associates, would have caused it to make
reference to the matter in connection with its reports.
Other
than in connection with the audit of our financial statements for Wealthlink in
the ordinary course prior to the consummation of the share exchange pursuant to
the share exchange agreement, during the two most recent fiscal years and during
the period prior to the dismissal of Gately & Associates, we did not consult
BJL regarding either: (i) the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on our financial statements; or (ii) any matter that was the subject
of a disagreement as described in Item 304(a)(1)(iv) of Regulation
S-K.
On
January 13, 2010, we were notified that the audit practice of BJL was combined
with Friedman LLP (“Friedman”) effective as of January 1, 2010. On
January 13, 2010, BJL resigned as our independent registered public accounting
firm and, on January 14, 2010, with the approval of the Audit Committee of our
board of directors, Friedman was engaged as our independent registered public
accounting firm.
During
the two years ended May 31, 2009 and from May 31, 2009 through the engagement of
Friedman as our independent registered public accounting firm, neither we nor
anyone on our behalf consulted Friedman with respect to any accounting or
auditing issues involving our company. In particular, there was no discussion
between us and Friedman regarding (i) the application of accounting principles
to a specified transaction either completed or proposed, or the type of audit
opinion that might be rendered on the financial statements and Friedman did not
provide a written report or oral advice to us that was an important factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was either the subject of a
disagreement, as described in Item 304 of Regulation S-K, with BJL, or a
“reportable event” as described in Item 304(a)(1)(v) of Regulation
S-K.
The audit
reports of BJL on our consolidated financial statements for the fiscal years
ended May 31, 2008 and May 31, 2009 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
During
the two years ended May 31, 2009, and from May 31, 2009 through the January 13,
2010, there were no (i) disagreements between the Company and BJL on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BJL, would have caused BJL to make reference to the subject
matter of such disagreements in connection with its report, or (ii) “reportable
events,” as described in Item 304(a)(1)(v) of Regulation S-K.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a Registration Statement on Form S-1 we have filed with
the SEC. We have not included in this prospectus all of the information
contained in the Registration Statement and you should refer to our Registration
Statement and its exhibits for further information.
We file
annual, quarterly, and special reports, proxy statements, and other information
with the SEC. You may read and copy any document we file at the SEC’s public
reference room at 100 F. Street, N.E., Washington, D.C. 20549. Copies
of these materials may also be obtained from the SEC at prescribed rates by
writing to the Public Reference Section of the SEC, 100 F. Street, N.E.,
Washington, D.C. 20549. You may obtain information about the operation of the
SEC public reference room in Washington, D.C. by calling the SEC at
1-800-SEC-0330. Our filings are also available to the public from commercial
document retrieval services and at the website maintained by the SEC at
http://www.sec.gov.
Our
website address is www.sokofitness.com. The information on our
website is not incorporated into this prospectus.
INDEX
TO FINANCIAL STATEMENTS
SOKO
FITNESS & SPA GROUP, INC.
(FORMERLY
AMERICAN BUSINESS HOLDINGS, INC)
TABLE
OF CONTENTS
Condensed
Consolidated Balance Sheets as of November 30, 2009 (unaudited) and May
31, 2009 (Restated)
|
F-2
|
Condensed
Consolidated Statements of Income for the Six and Three Months Ended
November 30, 2009 and 2008 (Restated) (Unaudited)
|
F-3
|
Condensed
Consolidated Statements of Cash Flow for the Six Months Ended November 30,
2009 and 2008 (Restated) (Unaudited)
|
F-4
|
Notes
to Condensed Consolidated Financial Statements for the Six Months Ended
November 30, 2009 and 2008 (Restated) (Unaudited)
|
F-5
- F-20
|
Report
of Independent Registered Public Accounting Firm
|
F-21
|
Consolidated
Balance Sheets as of May 31, 2009 (Restated) and 2008
(Restated)
|
F-22
|
Consolidated
Statements of Income for the Fiscal Years Ended May 31, 2009 and 2008
(Restated)
|
F-23
|
Statements
of Changes in Stockholders’ Equity for the Fiscal Years Ended May 31, 2009
and 2008 (Restated)
|
F-24
- F-25
|
Statements
of Cash Flows for the Fiscal Years Ended May 31, 2009 and 2008
(Restated)
|
F-26
|
Notes
to Consolidated Financial Statements for the Fiscal Years Ended May 31,
2009 (Restated) and 2008 (Restated)
|
F-27
- F-46
|
SOKO
FITNESS & SPA GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
US DOLLARS)
NOVEMBER
30,
|
MAY
31,
|
|||||||
2009
|
2009
|
|||||||
(UNAUDITED)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
& cash equivalents
|
$ | 3,638,308 | $ | 1,907,640 | ||||
Restricted
cash
|
- | 7,233 | ||||||
Accounts
receivable, net
|
411,431 | 110,541 | ||||||
Inventories
|
1,430,666 | 1,391,302 | ||||||
Advances
to suppliers
|
2,861,514 | 993,084 | ||||||
Employee
advance
|
87,531 | 54,783 | ||||||
Prepaid
expense
|
192,019 | 146,959 | ||||||
Total Current Assets | 8,621,469 | 4,611,542 | ||||||
Property,
plant and equipment, net of accumulated depreciation
|
24,637,890 | 19,674,394 | ||||||
Other
Assets
|
||||||||
Security
deposit
|
109,711 | 47,853 | ||||||
Deferred
rent
|
719,338 | 589,188 | ||||||
Deposit
to suppliers
|
1,464,847 | 1,464,530 | ||||||
Investment
advance
|
1,171,795 | 399,750 | ||||||
Goodwill
|
2,793,607 | 2,525,778 | ||||||
Total Other Assets | 6,259,298 | 5,027,099 | ||||||
Total Assets | 39,518,657 | 29,313,035 | ||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
loans
|
3,310,322 | 2,196,795 | ||||||
Accounts
payable, accrued expenses and other payable
|
833,606 | 471,457 | ||||||
Unearned
revenue
|
5,084,363 | 1,909,755 | ||||||
Taxes
payable
|
423,134 | 360,229 | ||||||
Contingent
liability
|
200,000 | 200,000 | ||||||
Total Current Liabilities | 9,851,425 | 5,138,236 | ||||||
Stockholders'
Equity
|
||||||||
Preferred
Stock, $.001 par value; 10,000,000 shares authorized;
|
||||||||
-
0 - shares issued and outstanding at November 30, 2009 and May
31,2009
|
- | - | ||||||
Common
stock, $0.001 Par value; 500,000,000 shares authorized;
|
||||||||
17,000,000
shares issued and outstanding
|
||||||||
at
November 30 and May 31, 2009
|
17,000 | 17,000 | ||||||
Additional
paid-in-capital
|
2,361,716 | 2,346,397 | ||||||
Additional
paid-in-capital - Warrants
|
639,253 | 639,253 | ||||||
Accumulated
other comprehensive income
|
1,915,447 | 1,910,752 | ||||||
Retained
earnings
|
24,819,341 | 19,215,114 | ||||||
Total Stockholders' Equity | 29,752,757 | 24,128,516 | ||||||
Noncontrolling
interest
|
(85,525 | ) | 46,283 | |||||
Total Equity | 29,667,232 | 24,174,799 | ||||||
Total Liabilities and Stockholders' Equity | $ | 39,518,657 | $ | 29,313,035 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SOKO
FITNESS & SPA GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(IN
US DOLLARS)
(UNAUDITED)
FOR
THE SIX MONTHS ENDED
|
FOR
THE THREE MONTHS ENDED
|
|||||||||||||||
NOVEMBER
30,
|
NOVEMBER
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(RESTATED)
|
(RESTATED)
|
|||||||||||||||
Net
Sales
|
$ | 13,843,683 | $ | 8,885,158 | $ | 7,413,179 | $ | 4,608,291 | ||||||||
Cost
of Sales
|
(4,451,744 | ) | (3,015,436 | ) | (2,262,805 | ) | (1,590,281 | ) | ||||||||
Gross
Profit
|
9,391,939 | 5,869,722 | 5,150,374 | 3,018,010 | ||||||||||||
Selling,
General and Administrative Expenses:
|
3,899,759 | 2,576,336 | 2,001,385 | 1,234,151 | ||||||||||||
Operating
Income
|
5,492,180 | 3,293,386 | 3,148,989 | 1,783,859 | ||||||||||||
Other
Income and Expenses
|
||||||||||||||||
Interest
expenses
|
(31,564 | ) | (106,632 | ) | 961 | (56,624 | ) | |||||||||
Other income
|
33,298 | 2,606 | 17,776 | 191 | ||||||||||||
Other expenses
|
(3,934 | ) | (165,721 | ) | (3,463 | ) | (96,380 | ) | ||||||||
Total
Other Income and (Expense)
|
(2,200 | ) | (269,747 | ) | 15,274 | (152,813 | ) | |||||||||
Income
Before Income Taxes
|
5,489,980 | 3,023,639 | 3,164,265 | 1,631,046 | ||||||||||||
Provision
for Income Taxes
|
47,904 | 51,437 | 24,024 | 26,305 | ||||||||||||
Net
Income
|
5,442,076 | 2,972,202 | 3,140,240 | 1,604,741 | ||||||||||||
Less:
net income (loss) attributable to the noncontrolling
interest
|
(162,151 | ) | (147,544 | ) | (36,384 | ) | (71,664 | ) | ||||||||
Net
Income Attributable to SOKO Fitness & Spa Group, Inc.
|
$ | 5,604,227 | $ | 3,119,746 | $ | 3,176,623 | $ | 1,676,405 | ||||||||
Other
Comprehensive Income
|
||||||||||||||||
Foreign
currency translation adjustment
|
4,695 | 260,748 | 25,977 | 17,788 | ||||||||||||
Comprehensive
Income
|
$ | 5,608,922 | $ | 3,380,494 | $ | 3,202,600 | $ | 1,694,193 | ||||||||
Basic
and Diluted Income per common share
|
||||||||||||||||
Basic
|
$ | 0.33 | $ | 0.18 | $ | 0.19 | $ | 0.10 | ||||||||
Diluted
|
$ | 0.31 | $ | 0.18 | $ | 0.17 | $ | 0.10 | ||||||||
Weighted
average common share outstanding
|
||||||||||||||||
Basic
|
17,000,000 | 17,000,000 | 17,000,000 | 17,000,000 | ||||||||||||
Diluted
|
18,168,443 | 17,000,000 | 18,168,443 | 17,000,000 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SOKO
FITNESS & SPA GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
US DOLLARS)
(UNAUDITED)
FOR
THE SIX MONTHS ENDED
|
||||||||
NOVEMBER
30,
|
||||||||
2009
|
2008
|
|||||||
(RESTATED)
|
||||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$ | 5,442,076 | $ | 2,972,202 | ||||
Adjustments to
reconcile net income to net cash
|
||||||||
provided by
operating activities:
|
||||||||
Stock based
compensation
|
15,319 | 18,651 | ||||||
Depreciation
|
1,143,137 | 710,372 | ||||||
Liquidated damage
penalty
|
- | 152,760 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
7,231 | - | ||||||
Accounts
receivable
|
(190,217 | ) | 503,580 | |||||
Inventories
|
(30,307 | ) | (47,400 | ) | ||||
Advances to
suppliers
|
(1,454,598 | ) | (754,025 | ) | ||||
Employee
advance
|
90,409 | 23,153 | ||||||
Other
receivables
|
(26,972 | ) | - | |||||
Prepaid
expense
|
32,387 | 69,834 | ||||||
Security
deposit
|
(61,823 | ) | (38,567 | ) | ||||
Deferred
rent
|
(29,581 | ) | (366,279 | ) | ||||
Deposit to
suppliers
|
(102 | ) | (8,589 | ) | ||||
Accounts
payable
|
(6,546 | ) | - | |||||
Unearned
revenue
|
2,781,139 | 1,100,559 | ||||||
Taxes
payable
|
53,783 | 126,204 | ||||||
Accrued expenses and other
payables
|
(18,435 | ) | (368,383 | ) | ||||
Cash
provided by operating activities
|
7,746,900 | 4,094,072 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Investment advance to
Beijing JV
|
(1,171,274 | ) | - | |||||
Addition in construction in
progress
|
(5,770,557 | ) | (3,633,432 | ) | ||||
Purchase of property and
equipment
|
(253,447 | ) | (203,833 | ) | ||||
Cash acquired from
acquisition
|
65,289 | 98,190 | ||||||
Cash
used in investing activities
|
(7,129,989 | ) | (3,739,075 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds from short-term
loan
|
3,308,850 | 1,025,581 | ||||||
Repayment of short-term
loan
|
(2,196,140 | ) | (2,301,796 | ) | ||||
Cash
provided by (used in) financing activities
|
1,112,710 | (1,276,215 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
1,046 | 25,399 | ||||||
Increase
In Cash and Cash Equivalents
|
1,730,667 | (895,819 | ) | |||||
Cash
and Cash Equivalents - Beginning of the period
|
1,907,641 | 1,563,709 | ||||||
Cash
and Cash Equivalents - Ending of the period
|
$ | 3,638,308 | $ | 667,890 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Interest
paid
|
$ | 31,564 | $ | 85,592 | ||||
Income taxes
paid
|
$ | 2,791 | $ | 1,166 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008 (RESTATED)
(UNAUDITED)
NOTE
1 - BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements of SOKO Fitness & Spa
Group, Inc. (the “Company” or “SOKO”) have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information
and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they
do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
financial statements. However, the information included in these interim
financial statements reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of November 30, 2009 was
derived from the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K/A for the year ended May 31, 2009. These
interim financial statements should be read in conjunction with that
report. Unless otherwise indicated, all amounts herein are expressed
in US Dollars.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal
of consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
consolidated financial statements include the financial statements of SOKO,
Wealthlink, Mege Union and its wholly-owned subsidiaries, Lea Spa,
majority-owned Shenyang Letian Yoga Fitness Center (“Yoga Wave”), and
majority-owned Shenyang Starway Fitness Co., Ltd. (“Yoga Wave II”), as well as
Mege Union’s variable interest entity (“VIE”), Queen Group. All significant
inter-company transactions and balances among the Company, its subsidiaries and
VIEs are eliminated upon consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Subsequent
Events
The
Company has evaluated subsequent events that have occurred through January 14,
2010, as of the issuance date of this financial statement (see note
20).
Cash
and Cash Equivalents
For
purposes of the statement of cash flow, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts
and Other Receivables
Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible amounts, as
needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. There is no allowance for uncollectible
amounts for the six months ended November 30, 2009 and 2008.
Inventories
Inventory
is mainly composed of hair care supplies and skin care supplies. Inventories are
stated at the lower of cost or market, as determined on a first-in, first-out
basis, or market. Costs of inventories include unused purchases and supplies for
providing the beauty treatment. No allowance for inventories is considered
necessary for the six months ended November 30, 2009 and 2008,
respectively.
Property,
Equipment and Construction in Progress
Property
and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Estimated useful lives of the
assets are as follows:
Building
|
15
years
|
Building
Improvements
|
10
years
|
Machinery
and equipment
|
5
years
|
Computer,
office equipment and furniture
|
5
years
|
Automobiles
|
5
years
|
The
carrying value of property, plant and equipment is assessed annually and when
factors indicating impairment is present, the carrying value of the fixed assets
is reduced by the amount of the impairment. The Company determines the existence
of such impairment by measuring the expected future cash flows (undiscounted and
without interest charges) and comparing such amount to the net asset carrying
value. An impairment loss, if exists, is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Property,
Equipment and Construction in Progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
As of
November 30, 2009 and May 31, 2009, the Company had total accumulated costs
involved with construction in progress in the amount of $7,308,176 and
$1,534,827, respectively.
The
carrying value of property, plant and equipment is assessed annually and when
factors indicating impairment is present, the carrying value of the fixed assets
is reduced by the amount of the impairment. The Company determines the existence
of such impairment by measuring the expected future cash flows (undiscounted and
without interest charges) and comparing such amount to the net asset carrying
value. An impairment loss is measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset.
Interest
Capitalization
Interest
capitalization is reported in accordance with the provisions of ASC 835,
“Capitalization of Interest Cost.”
For loans
to finance constructions and provide for working capital, the Company
charges the borrowing costs related to working capital loans to interest expense
when incurred and capitalize interest costs related to construction developments
as a component of the construction costs. The interest to be capitalized for a
construction is based on the amount of borrowings related specifically to such
construction. Interest for any period is capitalized based on the amounts of
accumulated expenditures and the interest rate of the loans. The interest
capitalization period begins when expenditures have been incurred and activities
necessary to prepare the asset (including administrative activities before
construction) have begun, and ends when the construction is substantially
completed. Interest capitalized is limited to the amount of interest
incurred. The interest rate used in determining the amount of
interest capitalized is the weighted average rate applicable to the
construction-specific borrowings.
The
Company’s significant judgments and estimates related to interest capitalization
include the determination of the appropriate borrowing rates for the
calculation, and the point at which capitalization is started and discontinued.
Changes in the rates used or the timing of the capitalization period may affect
the balance of property under development and the costs of sales recorded.
Capitalized interest included in construction in progress amounted to $66,918
and $72,578 for the six months ended November 30, 2009 and 2008,
respectively.
Goodwill
Goodwill
and other intangible assets are accounted for in accordance with the provisions
of ASC 350, “Goodwill and Other Intangible Assets”. Under ASC 350, goodwill,
including any goodwill included in the carrying value of investments accounted
for using the equity method of accounting, and certain other intangible assets
deemed to have indefinite useful lives are not amortized. Rather, goodwill and
such indefinite-lived intangible assets are assessed for impairment at least
annually based on comparisons of their respective fair values to their carrying
values.
Goodwill
impairment is determined using a two-step process. The first step compares the
fair value of each reporting unit to its carrying amount, including goodwill. If
the fair value of each reporting unit exceeds its carrying amount, goodwill is
not considered to be impaired and the second step will not be required. If the
carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting
unit’s goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of
goodwill. An impairment loss is recognized for any excess in the carrying value
of goodwill over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the primary technique
being a discounted cash flow.
In
evaluating long-lived assets, other than goodwill for
recoverability, the Company uses its best estimate of future cash
flows expected to result from the use of the asset and eventual disposition in
accordance with ASC 360. To the extent that estimated future, undiscounted cash
inflows attributable to the asset, less estimated future, undiscounted cash
outflows, are less than the carrying amount, an impairment loss is recognized in
an amount equal to the difference between the carrying value of such asset and
its fair value. Assets to be disposed of and for which there is a committed plan
of disposal, whether through sale or abandonment, are reported at the lower of
carrying value or fair value less costs to sell. There was no
impairment losses recognized for the periods presented.
Stock-Based
Compensation
The
Company records stock based compensation expense pursuant to ASC 718. The
Company estimates the fair value of the award using the Black-Scholes Option
Pricing Model. Under ASC 718, the Company’s expected volatility assumption is
based on the historical volatility of Company’s stock. The expected life
assumption is primarily based on historical exercise patterns and employee
post-vesting termination behavior. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Stock
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures for the group received stock-based compensation.
ASC 718 requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is generally recognized when the
services are provided and payments of the customers are received or collections
are reasonably assured. Payments received in advance from members but not yet
earned are recorded as deferred revenue.
Non-refundable
membership fees, non-refundable initial membership fees and monthly membership
fees that are prepaid on a non refundable basis are recognized on a
straight-line basis over the respective membership term.
Cost
of Sales
Costs of
sales include costs of the products sold and used, inbound freight costs, cost
of direct labor and overhead. Write-down of inventory to lower of cost or market
is also recorded in cost of sales.
Selling,
General and administrative Costs
Selling,
general and administrative costs consist primarily of salaries and commissions
for sales representatives, salaries for administrative staffs, rent expenses,
depreciation expense and employee benefits for administrative
staffs.
Comprehensive
Income
Statement
of Financial Accounting Standards ASC 220, “Reporting Comprehensive Income”,
requires disclosure of all components of comprehensive income and loss on an
annual and interim basis. Comprehensive income and loss is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Accumulated other comprehensive
income arose from the changes in foreign currency exchange rates.
Income
Taxes
The
Company accounts for income tax under the provisions of ASC 740 “Accounting for
Income Taxes”, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. There are no
deferred tax amounts as of November 30, 2009 and May 31, 2009.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
Earnings
per Share
The
Company computes earnings per share (“EPS’) in accordance with ASC 260 “Earnings
per Share” (“ASC 260”), and SEC Staff Accounting Bulletin No. 98 (“SAB
98”). ASC 260 requires companies with complex capital structures to
present basic and diluted EPS. Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares (e.g., convertible securities, options and
warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Foreign
Currency Translation
The
Company uses the United States dollar (“US Dollars”) for financial reporting
purposes. Mege Union, its subsidiaries, and the Queen Group maintain their books
and records in their functional currency, Chinese Renminbi (“RMB”), being the
primary currency of the economic environment in which their operations are
conducted.
In
general, for consolidation purposes, the Company translates its assets and
liabilities into US Dollars using the applicable exchange rates prevailing at
the balance sheet date, and the statement of income and cash flows are
translated at average exchange rates during the reporting period. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the financial statements are
recorded as accumulated other comprehensive income.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. The rate of exchange on November 30, 2008 was US$1.00
= RMB6.8254, on May 31, 2009 was US$1.00 = RMB6.82813 and on November 30, 2009
was US$1.00 = RMB6.82713. The weighted average translation rate of US$1.00 =
RMB6.8302 was applied to the Company's six months income statement for the
period ended November 30, 2009.
Statement
of Cash Flows
In
accordance with ASC 230, “Statement of Cash Flows,” cash flows from the
Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Risks
of Losses
The
Company is potentially exposed to risks of losses that may result from business
interruptions, injury to others (including employees) and damage to
property. These losses may be uninsured, especially due to the fact
that the Company’s operations are in China, where business insurance is not
readily available. If: (i) information is available before the
Company’s financial statements are issued or are available to be issued
indicates that such loss is probable and (ii) the amount of the loss can be
reasonably estimated, an estimated loss will be accrued by a charge to
income. If such loss is probable but the amount of loss cannot be
reasonably estimated, the loss shall be charged to the income of the period in
which the loss can be reasonably estimated and shall not be charged
retroactively to an earlier period. As of November 30, 2009 and 2008,
the Company has not experienced any uninsured losses from injury to others or
other losses.
New
Accounting Pronouncements
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We have included the required disclosures in our consolidated condensed
financial statements.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We adopted ASC
105 as of September 30, 2009 and thus have incorporated the new Codification
citations in place of the corresponding references to legacy accounting
pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
In
September 2009, the Financial Accounting Standards Board (FASB) amended existing
authoritative guidance to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The amended guidance is effective
for fiscal annual reporting periods beginning after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The Company is currently assessing the
impact, if any, adoption may have on its financial statements or
disclosures.
NOTE
3 - ADVANCES TO SUPPLIERS
The
Company makes advances to certain vendors for inventory purchases totaling
$2,861,514 and $993,084 as of November 30, 2009 and May 31, 2009
respectively.
Below is
the breakdown of advances to major suppliers:
As
of
|
||||||||
November
30,
2009
|
May
31,
2009
|
|||||||
Major
supplier A
|
$
|
1,179,688
|
$
|
993,084
|
||||
Major
supplier B
|
1,443,972
|
|||||||
Others
|
237,854
|
-
|
||||||
-
|
||||||||
Total
|
$
|
2,861,514
|
$
|
993,084
|
NOTE
4 - INVENTORIES
The
inventories consist of the following:
As
of
|
||||||||
November
30,
2009
|
May
31,
2009
|
|||||||
Skin
care supplies
|
$
|
1,283,604
|
$
|
1,348,105
|
||||
Hair
care supplies
|
52,434
|
39,965
|
||||||
Other
suppliers
|
94,628
|
3,232
|
||||||
Total
|
$
|
1,430,666
|
$
|
1,391,302
|
No
allowance for inventories was made for the six months ended November 30, 2009
and 2008.
NOTE
5 - INVESTMENT ADVANCE
In
November 2009, Mege Union made a down payment of RMB 8 million (approximately
$1.2 million) to a shareholder of Beijing Natural Beauty Fitness Services Ltd to
acquire 51% of the equity interest in two fitness clubs in Beijing.
On December 1, 2009, Mege Union entered into an equity transfer agreement with
Beijing Natural Beauty Fitness Services Ltd. and acquired 51% of the equity
interest in Beijing Natural Beauty Services Limited and its branch First
Subsidiary of Beijing Natural Beauty Services Limited for RMB 10
million (approximately U.S. $1.50 million).
NOTE
6 - PROPERTY AND EQUIPMENT, NET
As
of
|
||||||||
November
30,
2009
|
May
31,
2009
|
|||||||
Machinery
& equipments
|
$
|
3,415,127
|
$
|
3,289,848
|
||||
Office
equipment & furniture
|
1,279,899
|
1,116,610
|
||||||
Automobiles
|
99,716
|
92,379
|
||||||
Buildings
|
1,772,348
|
1,772,081
|
||||||
Leasehold
improvements
|
15,046,641
|
15,004,204
|
||||||
sub-total
|
21,613,731
|
21,275,122
|
||||||
Less:
Accumulated depreciation and amortization
|
(4,284,017)
|
(3,135,554
|
)
|
|||||
Construction
in progress
|
7,308,176
|
1,534,827
|
||||||
Total
|
$
|
24,637,890
|
$
|
19,674,394
|
Depreciation
and amortization expense for the six months ended November 30, 2009 and 2008 was
$1,143,137 and $710,372, respectively.
NOTE
7 - DEPOSITS TO SUPPLIERS
The
Deposits to Suppliers of $1,464,847 and $1,464,530 as of November 30,
2009 and May 31, 2009, respectively, represent deposits made to two major
suppliers, with whom the Company has long standing business relationships. The
Company made the deposits in order to maintain the relationships and purchase
the products and equipment under the most favorable terms. Since the
Company expects the entire amount will be repaid, no allowance has been
established.
NOTE
8 - GOODWILL
On March
1, 2008, the Company’s subsidiary Mege Union (the “Purchaser”) entered into an
acquisition agreement with Shenyang Shengchao Management & Advisory Co., Ltd
(“the Seller”) to acquire 51% of the Seller’s interest in Yoga Wave. The
consideration paid was RMB 12,000,000 (approximately $1.7 million). Goodwill of
$1.5 million was recorded to reflect the excess of the purchase price over the
fair value of the net tangible and identifiable intangible assets of the
acquired interest in Yoga Wave. The acquisition of a majority interest in
Yoga Wave allowed the Company to expand its business into upscale yoga studios,
offering synergistic opportunities for growth and expansion in accordance with
its business model. As a result, the Company deemed that the
inclusion of goodwill in the premium paid for the interest was valuable
consideration. The results of operations of Yoga Wave were included in the
consolidated results of operations commencing March 1, 2008.
On July
1, 2008, Mege Union acquired 100% of the equity interest in Harbin Tai Ai for
RMB 8,000,000 (approximately $1.2 million). Goodwill of $1 million was recorded
for the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets of the acquired interest in Tai Ai. The
acquisition of Harbin Tai Ai allowed the Company to expand its business into
upscale hotels, offering further synergistic opportunities for growth and
expansion in accordance with its business model. As a result, the
Company deemed that the inclusion of goodwill in the premium paid for the
interest was valuable consideration. The results of operations for Tai Ai are
included in the consolidated results of operations of the Company commencing
July 1, 2008.
On May
31, 2009, Mege Union (the “Purchaser”) entered into an acquisition agreement
with Starway Asia Limited (“the Seller”) to acquire 51% of the Seller’s interest
in Yoga Wave II, another Yoga studio located in the city of Shenyang. The
consideration paid was RMB 2,042,040 (approximately $0.3 million). Goodwill of
$267,331 was recorded to reflect the excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets of the acquired
interest in Yoga Wave II. Mege Union also loaned RMB 676,260
(approximately $0.1 million) to Yoga Wave II on May 31, 2009 for business
operation. This loan is eliminated in the consolidated financial statements. The
acquisition of a majority interest in Yoga Wave II allowed the Company to
further expand its business into upscale yoga studios, offering synergistic
opportunities for growth and expansion in accordance with its business
model. As a result, the Company deemed that the inclusion of goodwill
in the premium paid for the interest was valuable consideration. The results of
operations of Yoga Wave II were included in the consolidated results of
operations commencing June 1, 2009.
The
accompanying consolidated financial statements include the allocation of the
acquisition cost to the net assets acquired based on their respective fair
values. The net assets were valued by the Company’s management giving
consideration to the valuation services provided by an independent third
party.
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible acquired. None of the goodwill recognized
is expected to be deductible for income tax purpose in China.
The
following represents the allocation of the acquisition costs to the net assets
acquired based on their respective fair values:
|
As
of
May
31, 2009
|
As
of
November
30, 2009
|
||||||||||
Addition
|
||||||||||||
Yoga
Wave II
|
Total
|
|||||||||||
Current
assets
|
$
|
667,836
|
$
|
672,217
|
1,340,053
|
|||||||
Fixed
assets
|
1,604,577
|
177,636
|
1,782,213
|
|||||||||
Total
liabilities assumed
|
(1,658,155
|
)
|
(788,093)
|
(2,446,248)
|
||||||||
Net
assets acquired
|
614,258
|
61,760
|
676,018
|
|||||||||
Noncontrolling
interest
|
(214,636
|
)
|
(30,406)
|
(245,042
|
||||||||
Total
consideration paid
|
2,900,731
|
299,108
|
3,199,839
|
|||||||||
Goodwill
recognized from acquisition
|
$
|
2,501,109
|
$
|
267,461
|
2,768,570
|
|||||||
Impact
of foreign currency translation
|
24,669
|
25,037
|
||||||||||
Total
Goodwill
|
$
|
2,525,778
|
2,793,607
|
The
impact of foreign currency translation was due to the fluctuation of exchange
rate (US$1.00 = 6.8281 RMB as of May 31, 2009 and US$1.00 = 6.8271 RMB as of
November 30, 2009).
NOTE
9 – TAXES
1)
|
Corporate
Income Tax
|
The
Company is a Delaware corporation and conducts all of its business through Mege
Union’s subsidiaries, and Mege Union’s variable interest entity, Queen Group.
All business is conducted in China.
As of
November 30, 2009, Queen Group consists of seven individually-owned sole
proprietorships (one of which has two additional branches), which, under the PRC
Laws, are generally exempt from paying corporate level income taxes unless they
are otherwise assessed by the local authority. These entities under Queen Group
are generally subject to a fixed-rate income tax assessed by the local tax
authority. Under the fixed-rate income tax system which is applicable to the
individually-owned sole proprietorships, generally 10% of the annual gross
revenues from each entity are deemed Taxable Net Income (“TNI”) for income tax
purpose, without giving consideration to the costs and operating expenses. The
income tax is then levied at 25% of the TNI.
Legend
Spa and Lea Spa, both wholly-owned subsidies of Mege Union, are also subject to
a similar fixed-rate income tax system as the entities under Queen Group. While
Legend Spa’s TNI is taxed at 25%, Lea Spa’s TNI is currently levied at only
20%.
All the
net income of Yoga Wave and Yoga Wave II are both subject to a 25% income tax
rate.
Our
provisions for income taxes for the six months ended November 30, 2009 and 2008
were $47,904 and $51,437, respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended November 30, 2009 and 2008:
For
the Six Months
Ended
November 30,
|
||||||||
2009
|
2008
|
|||||||
US
statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Foreign
income not recognized in USA
|
-34.0
|
%
|
-34.0
|
%
|
||||
China
income tax
|
25.0
|
%
|
25.0
|
%
|
||||
Tax
exemption
|
-24.12
|
%
|
-23.3
|
%
|
||||
Total
provision for income tax
|
0.88
|
%
|
1.7
|
%
|
The
parent company was incorporated in Delaware. It incurred a net operating loss on
its own, including amortization of stock-based compensation of $391,541 and
$346,960 for U.S. income tax purposes for the six months ended November 30, 2009
and 2008, respectively. The net operating loss carry forwards may be available
to reduce future years’ taxable income. These carry forwards will expire, if not
utilized, beginning in 2028 through 2029. Management believes that the
realization of the benefits arising from these losses appear to be uncertain due
to the Company’s business operations being primarily conducted in China and
continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance as of November 30, 2009 and
2008, respectively for the temporary difference related to the loss
carry-forwards. The valuation allowances for the six months ended November 30,
2009 and 2008 were $133,124 and $117,966, respectively.
The
Company intends to invest undistributed earnings in foreign subsidiaries
indefinitely and these undistributed earnings are essentially permanent in
duration.
2)
|
Business
Sales Tax
|
General
business sales taxes are levied on business under both Queen Group and Mege
Union and its subsidiaries. Except the Harbin Huang Emperor &
Golden Gym Club Co., Ltd. which is subject to 3% of its actual revenue and Yoga
Wave and Yoga Wave II, which are subject to 5% of their actual revenue, all
business is subject to either 3% or 5% of the pre-determined fixed
revenue.
3)
|
Taxes
payable as of November 30, 2009 and May 31, 2009 consisted of
the following:
|
As
of
|
||||||||
November
30, 2009
|
May
31,
2009
|
|||||||
Business
sales tax payable
|
$
|
303,768
|
$
|
296,887
|
||||
Corporate
income tax
|
54,357
|
11,692
|
||||||
Other
|
65,009
|
51,650
|
||||||
Total
taxes payable
|
$
|
423,134
|
$
|
360,229
|
NOTE
10 - SHORT TERM LOAN
The short
term loans include the following:
Balance
at
|
|||||||
November
30,
2009
|
May
31,
2009
|
||||||
(a)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from July
30, 2009 to July 29, 2010 at a fixed interest rate of 0.398% per
month
|
$
|
381,019
|
$
|
--
|
||
(b)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 21, 2008 to November 20, 2009 at a fixed interest rate of 0.4995%
per month
|
$
|
-
|
$
|
1,025,171
|
||
(c)
|
Loan
payable to Shanghai Pudong Development Bank with a term from January 5,
2009 to November 20, 2009 at a fixed interest rate of 0.4995% per
month
|
$
|
-
|
$
|
1,171,624
|
||
(d)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 24, 2009 to November 23, 2010 at a fixed interest rate of 0.3983%
per month
|
2,197,133
|
-
|
||||
(e)
|
Loan
payable to Shanghai Pudong Development Bank with a term from Septermber 4,
2009 to July 29, 2010 at a fixed interest rate of 0.3982% per
month
|
732,170
|
-
|
||||
$
|
3,310,322
|
$
|
2,196,795
|
Capitalized
interest included in construction in progress amounted to $66,918 and $72,578
for the six months ended November 30, 2009 and 2008, respectively.
Both
short-term loans (a) in the amount of $381,019 and (e) in the amount of $732,170
are guaranteed by SOKO International Fitness Center, Mr. Liu Tong and his
siblings and an unaffiliated third party, Zhaodong Dazhuangyuan Rouye Limited,
which is owned by an acquaintance of Mr. Liu. The other loans were secured by
the building owned by Queen Group.
NOTE
11 - DEFERRED REVENUE
Deferred
revenue represents cash received from members, but not yet earned. Cash
additions include all cash received for membership fees and advance payments for
services. Revenue recognized includes all revenue earned during the periods from
membership services and other services.
A
reconciliation of deferred revenue as of November 30, 2009 and May 31, 2009 is
as follows:
As
of
|
||||||||||||||||
May
31,
2009
|
Revenue
|
November
30, 2009
|
||||||||||||||
Balance
|
Cash
Additions
|
Recognized
|
Balance
|
|||||||||||||
Membership
fees & advance payment collected
|
$
|
1,909,755
|
$
|
14,425,333
|
$
|
(11,252,431)
|
$
|
5,082,657
|
||||||||
Receipts
collected & earned without deferral during period
|
2,591,252
|
(2,591,252)
|
||||||||||||||
1,909,755
|
1,7016,585
|
(13,843,683)
|
5,082,657
|
|||||||||||||
Impact
of foreign currency translation
|
1,706
|
|||||||||||||||
Total
|
$
|
5,084,363
|
NOTE
12 - SEGMENT REPORTING
The
Company has a single operating segment in accordance with the provisions of ASC
280, “Disclosures about Segments of an Enterprise and Related Information”.
Although the Company provides and markets various products and services, the
Company’s chief operating decision maker reviews and evaluates one set of
combined financial information deciding how to allocate resources and in
assessing performance.
For the
six months ended November 30, 2009 and 2008, the Company’s sales revenue from
various products and services are as
follows:
Six
months ended
|
||||||||
November
30,
|
||||||||
2009
|
2008
|
|||||||
Professional
services
|
$
|
9,179,441
|
$
|
5,826,879
|
||||
Sales
of products
|
1,898,278
|
708,678
|
||||||
Membership
fees
|
1,978,157
|
1,589,055
|
||||||
Tuitions
|
787,807
|
760,546
|
||||||
Total
|
$
|
13,843,683
|
$
|
8,885,158
|
||||
NOTE
13-STOCK OPTIONS
On March
2, 2009, the Board of Directors of the Company authorized the issuance of stock
options for 60,000 shares of the Company’s common stock to its three independent
directors (each option was for 20,000 shares of the Company’s common stock). The
options granted to two of the directors vest over a three year period, with 20%
vesting on the grant date and 40% vesting on the first and second anniversaries
of the grant date. These options are exercisable for three years from the date
of grant, provided that the directors remain associated with the Company during
the period. The option granted to the third director was fully vested on the
grant date and is exercisable for three years from the date of grant, regardless
of continued association with the Company. 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 life 3 years,
expected volatility 100%, dividend yield 0%, risk free interest rate 1.28% and
the exercise price of $1.47. The fair value of the 60,000 options was $53,945 at
the grant date.
In July
2008, the Board of Directors of the Company authorized the issuance of 50,000
shares of stock options to one of its independent directors. The options vest
over a three year period, with one-third vesting on each of the grant date, and
the first and second anniversaries of the grant date. The option is exercisable
for five years from the date of grant. 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 life 5 years, expected volatility 100%,
dividend yield 0%, risk free interest rate 3.91% and the exercise price of
$1.47. The fair value of the 50,000 options was $55,953 at the grant
date.
The
Company determined its expected volatility and dividend yield based on the
historical changes in stock price and dividend payments. The risk –free interest
rate for the expected term of the options is based on the U.S. Treasury yield
curve in effect at the time of grant.
Following
is a summary of the stock option activity:
Options
Outstanding
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
||||||||||
Outstanding
as of May 31, 2009
|
110,000
|
$
|
1.47
|
$
|
0--
|
|||||||
Granted
|
--
|
|||||||||||
Forfeited
|
--
|
--
|
--
|
|||||||||
Exercised
|
--
|
--
|
--
|
|||||||||
Outstanding
as of November 30, 2009
|
110,000
|
$
|
1.47
|
$
|
146,300--
|
Stock
compensation expense recognized for the period is based on awards expected to
vest, and there were no estimated forfeitures as the Company has a short history
of issuing options. Stock compensation expenses recognized were $15,320 and
$9,326 for the six months ended November 30, 2009 and 2008,
respectively.
All the
options granted have an intrinsic value of $146,300 at November 30, 2009. As of
November 30, 2009, the Company had $61,333 outstanding vested stock options,
diluted for purpose of the Company’s diluted earnings per shares. The
unvested stock option is expected to be expensed with an amount of $53,617 in a
weighted average period over 1.79 years.
NOTE
14 - STOCKHOLDERS’ EQUITY
No stocks
were issued during the six months ended November 30, 2009. There were 17,000,000
shares of common stock issued and outstanding on November 30, 2009 and May 31,
2009.
Following
is a summary of the status of warrants outstanding as of November 30,
2009:
Warrants
Outstanding
|
Weighted
Average Exercise Price
|
Average
Remaining Life
|
||||||||||
Outstanding
as of May 31, 2009
|
2,160,000
|
$
|
1.25
|
1.92
|
||||||||
Granted
|
-
|
-
|
-
|
|||||||||
Forfeited
|
-
|
-
|
-
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Outstanding
as of November 30, 2009
|
2,160,000
|
$
|
1.25
|
1.42
|
NOTE
15 - RELATED TRANSACTIONS
1) Real
Property Arrangements
The
Company rents the premises for certain locations from Mr. Tong Liu, our Chairman
and CEO. Mr. Liu has leased Mege Union’s office, as well as two stores premises
to the Company pursuant to the terms of binding written lease agreements
containing terms no less favorable to the Company than the Company could have
negotiated in an arm’s length transaction with a motivated landlord, including
substantially the following terms:
i.
|
Harbin
Daoli Queen Demonstration Beauty Parlor: 5-year lease from January 1, 2007
through December 31, 2011 for $47,300 per
year;
|
ii.
|
Harbin
Queen Beauty Demonstration Center: 5-year lease from January 1, 2007
through December 31, 2011 for $20,300 per
year;
|
iii.
|
Mege
Union office: 10-year lease from January 1, 2009 through
December 31, 2018 for $73,212 per
year.
|
2) Loan
Guarantee
Two
short-term loans in the amount of $381,019 and in the amount of $732,170 are
guaranteed by SOKO International Fitness Center, Mr. Liu Tong and his siblings
and an unaffiliated third party, Zhaodong Dazhuangyuan Rouye Limited, which is
owned by an acquaintance of Mr. Liu. The other loans were secured by the
building owned by Queen Group.
NOTE
16-EARNINGS PER SHARE
EPS for
the six month periods ended November 30, 2009 and 2008 is determined by dividing
net income for the periods by the weighted average number of both basic and
diluted shares of common stock and common stock equivalents outstanding. The
following is an analysis of the differences between basic and diluted EPS in
accordance with ASC No. 128, “Earnings Per Share.”
The
following demonstrates the calculation for EPS for the six months ended November
30, 2009 and 2008:
Six
Months Ended
November
30,
|
||||||||
2009
|
2008
(Restated)
|
|||||||
Earnings
per share-basic
|
||||||||
Net income
attributable to SOKO Fitness & Spa Group, Inc
|
$
|
5,604,227
|
$
|
3,119,746
|
||||
Weighted average
number of common share outstanding-basic
|
17,000,000
|
17,000,000
|
||||||
Earnings per
share-basic
|
$
|
0.33
|
$
|
0.18
|
||||
Earnings per
share-diluted
|
||||||||
Net income
attributable to SOKO Fitness & Spa Group, Inc
|
$
|
5,604,227
|
$
|
3,119,746
|
||||
Weighted average
number of common share outstanding-basic
|
17,000,000
|
17,000,000
|
||||||
Effect of diluted
warrants
|
1,141,132
|
-
|
||||||
Effect of diluted
options
|
27,311
|
-
|
||||||
Weighted average
number of common share outstanding-diluted
|
18,168,443
|
17,000,000
|
||||||
Earnings per
share-diluted
|
$
|
0.31
|
$
|
0.18
|
The
Company had outstanding warrants of 2,160,000 on November 30, 2009 and 2008, and
outstanding options of 110,000 and 50,000 on November 30, 2009 and 2008,
respectively. As of November 30, 2009, because the market price was
higher than the exercise price, both the warrants and options were dilutive and
included in diluted weighted average share calculation on November 30,
2009.
NOTE
18-COMMITMENTS AND CONTINGENCIES
1)
Commitments
i.
|
The
Company leases offices and fitness facilities under non-cancellable
operating leases. The Company recognizes rent expense on a straight-line
basis over the term of the lease in accordance to ASC 840 “Accounting for
Leases.” The Company has entered into eleven tenancy agreements for
the lease of the premises.
|
The
Company’s commitments for minimum rental payments under these lease agreements
are as follows:
As
of November 30, 2009
|
||||
2010
|
1,205,907 | |||
2011
|
1,518,960 | |||
2012
|
1,517,962 | |||
2013
|
1,483,624 | |||
2014
|
1,404,837 | |||
2015
|
1,427,922 | |||
2016
|
1,474,620 | |||
2017
|
1,521,700 | |||
2018
|
1,280,347 | |||
2019
|
884,984 | |||
Total
|
13,720,863 |
Rent
expense for the six months ended November 30, 2009 and 2008 was $518,511 and
$295,902, respectively.
ii.
|
According
to the warrant agreement to investors, the warrants contain a cashless
exercise provision, which entitle the holders to receive a certificate for
the number of warrant shares if any time after 180 days from the Closing
there is no effective Registration Statement registering pursuant to the
Registration Rights Agreement entered into by the Company and the Holders,
or no current prospectus available for, the resale of the Warrant Shares
by the Holders.
|
2)
Contingencies
The
Registration Rights Agreement between the Company and security purchaser in
association with the private placement which was closed on April 11, 2008 (the
“Closing Date”) provides for liquidated damages to the extent that the Company
does not attain certain milestones within specified time frames. Specifically,
if the Company had failed to file a registration statement within 60 calendar
days after the Closing Datre (a milestone which was met by the Company), or in
the event that it fails to file a pre-effective amendment and otherwise respond
in writing to comments made by the Commission in respect of such Registration
Statement within 10 Trading Days after the receipt of comments by or notice from
the Commission that such amendment is required in order for such Registration
Statement to be declared effective, or registration statement is not declared
effective within 180 calendar days after the Closing Date, or in the
event that such Registration Statement ceases for any reason to remain
continuously effective as to all Registrable Securities included in such
Registration Statement, or the holders are otherwise not permitted to utilize
the Prospectus therein to resell such Registrable Securities, for more than 10
consecutive calendar days or more than an aggregate of 30 calendar days during
any 12-month period (which need not be consecutive calendar days), liquidated
damages amounting to approximately $20,000 per month would have been payable to
purchasers, and such liquidated damages are payable for each 30 calendar day
period on a daily pro-rata for any portion of a month prior to cure of an event.
The maximum amount of liquidation damage payable to security purchaser is
$200,000. As first round comment letter dated July 8, 2008, which was responded
to SEC by September 5, 2008, liquidated damages for the delay amounting to
approximately $28,810 has been accrued in the first quarter of fiscal year 2009.
At that time, the estimate effective date of the registration statement was
November 20, 2008; we accrued registration payment approximately $26,800 for
late effectiveness. In second quarter, our estimated response to second round
comment dated October 11, 2008 was around January 15, 2009,
additional $56,950 liquidation damage had been accrued for late response, also
our estimated effective date of the registration statement was to be February
20, 2009; the estimated penalty approximately $40,200 for additional delay had
been accrued. In the third quarter, the response to second round comment was
sent out on February, 17, 2009, one month later than the previous estimation and
the estimated effective date will be April 30, 2009. The liquidation damage and
registration payment liability reached the maximum amount $200,000 as of
November 30, 2009. Any capitalized term used but not defined herein shall have
the meaning specified in the Registration Rights Agreement which was filed with
the SEC as Exhibit 10.3 of the Company’s Current Report on Form 8-K on April 17,
2008.
3)
Guarantee
Mege
Union agrees to, whenever necessary, act as the guarantor for Queen Group, its
variable interest entities, in all contracts, agreements or transactions in
connection with Queen Group’s operation between Queen Group and any third party,
to provide full guarantee for the performance of such contracts, agreements or
transactions by Queen Group. In return, Queen Group agrees to pledge all of its
assets, including accounts receivable, to Mege Union. As of November 30, 2009,
Mege Union has not provided any guarantee to any third party on behalf of Queen
Group. Therefore, the Company is currently not exposed to any guarantor’s
obligations under this guarantee arrangement.
NOTE
19-RESTATEMENT
We have
restated the unaudited consolidated financial statements for the three months
period ended November 30, 2008 for the following reasons:
The
$300,000 payment made to Mr. Husain for consulting fees, which was a part of the
$650,000 payment made out of the financing proceeds from the private placement,
was previously treated as a reduction of proceeds. Upon further review, the
Company determined that this payment of $300,000 should have been recognized as
expense over the service period of six months starting in April 2008, rather
than a reduction of the financing proceeds. The Company accounted $100,000 as
consulting expenses for the year ended May 31, 2008 and amortized the remaining
$200,000 as consulting expenses for the six months period ended November 30,
2008. Thus, the net effect of this adjustment on the Company’s net income for
the six months ended November 30, 2008 was $200,000.
The
impact of this restatement on the financial statements as originally reported is
summarized below:
For
the Six Months Ended
November
30, 2008
|
||||||||
As
Reported
|
As
Restated
|
|||||||
Selling,
General and Administrative expenses
|
$ |
2,376,336
|
$ |
2,576,336
|
||||
Net
income attributable to SOKO Fitness & Spa Group, Inc
|
$
|
3,319,746
|
$
|
3,119,746
|
||||
Net
income per common share
|
||||||||
Basic
|
$
|
0.20
|
$
|
0.18
|
||||
Diluted
|
$
|
0.20
|
$
|
0.18
|
For
the Six Months Ended
August
31, 2008
|
||||||||
As
Reported
|
As
Restated
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$ |
3,172,202
|
$
|
2,972,202
|
||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Prepaid
expense
|
(130,166
|
)
|
69,834
|
NOTE
20-SUBSEQUENT EVENT
On
December 1, 2009, Mege Union entered into an equity transfer agreement with
Beijing Natural Beauty Fitness Services Ltd. for the acquisition of 51% of the
equity interest in two fitness clubs in Beijing for RMB 10 million
(approximately U.S. $1.50 million). The results of operations of the
majority-owned Beijing Natural Beauty Services Limited and its branch First
Subsidiary of Beijing Natural Beauty Services Limited will be included in the
quarterly report on Form 10-Q for the quarter ended February 28,
2010.
The
Company evaluated subsequent events through the date the financial statements
were issued, which was January 14, 2010. There were no
subsequent
events that required
recognition or disclosure
other
than as
discussed above.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of
SOKO
Fitness & SPA Group, Inc.
(Formerly
American Business Holdings, Inc)
We have
audited the accompanying consolidated balance sheets of SOKO Fitness & SPA
Group, Inc. as of May 31 2009 and 2008 and the related consolidated statements
of income and other comprehensive income, changes in stockholders’ equity, and
cash flows for the years ended May 31, 2009 and 2008. SOKO Fitness
& SPA Group, Inc.’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with standards established by of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SOKO Fitness & SPA
Group, Inc. as of May 31, 2009 and 2008 and the results of its operations,
changes in stockholders’ equity, and cash flows for the years ended May 31, 2009
and 2008 in conformity with accounting principles generally accepted in the
United States of America.
As
discussed in Note 19 to the financial statements, the accompanying financial
statements for the years ended May 31, 2009 have been
restated.
/s/
Bagell Josephs, Levine & Company, LLC
Bagell
Josephs, Levine & Company, LLC
Marlton,
New Jersey
August
27, 2009 (November 18, 2009 as to the effects of the restatement discussed in
Note 19)
SOKO
FITNESS & SPA GROUP, INC.
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
FOR
THE FISCAL YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)
|
||||||||
(IN US
DOLLARS)
|
||||||||
AS
OF MAY 31,
|
||||||||
2009
|
2008
|
|||||||
(RESTATED)
|
(RESTATED)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
& cash equivalents
|
$
|
1,907,640
|
$
|
1,563,709
|
||||
Restricted
cash
|
7,233
|
-
|
||||||
Accounts
receivable, net
|
110,541
|
682,694
|
||||||
Inventories
|
1,391,302
|
1,048,788
|
||||||
Advances
to suppliers
|
993,084
|
1,467,861
|
||||||
Employee
advance
|
54,783
|
249,900
|
||||||
Prepaid
expense
|
146,959
|
340,993
|
||||||
Total
Current Assets
|
4,611,542
|
5,353,945
|
||||||
Property,
plant and equipment, net of accumulated depreciation
|
19,674,394
|
12,782,918
|
||||||
Other
Assets
|
||||||||
Security
Deposit
|
47,853
|
-
|
||||||
Deferred
Rent
|
589,188
|
-
|
||||||
Deposit
to suppliers
|
1,464,530
|
720,461
|
||||||
Investment
advance
|
399,750
|
1,152,738
|
||||||
Goodwill
|
2,525,778
|
1,505,710
|
||||||
Total
Other Assets
|
5,027,099
|
3,378,909
|
||||||
Total
Assets
|
29,313,035
|
21,515,772
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Short-term
loans
|
2,196,795
|
2,547,244
|
||||||
Accounts
payable, accrued expenses and other payable
|
471,457
|
1,020,232
|
||||||
Unearned
revenue
|
1,909,755
|
514,965
|
||||||
Taxes
payable
|
360,229
|
339,555
|
||||||
Contingent
Liability
|
200,000
|
-
|
||||||
Total
Current Liabilities
|
5,138,236
|
4,421,996
|
||||||
Stockholders’
Equity
|
||||||||
Preferred
Stock, $.001 par value; 10,000,000 shares authorized;
|
||||||||
-
0 - shares issued and outstanding at May 31,2009 and 2008
|
-
|
-
|
||||||
Common
stock, $0.001 Par value; 500,000,000 shares authorized;
|
||||||||
17,000,000
shares issued and outstanding
|
||||||||
at
May 31, 2009 and 2008
|
17,000
|
17,000
|
||||||
Additional
paid-in-capital
|
2,346,397
|
2,297,776
|
||||||
Additional
paid-in-capital - Warrants
|
639,253
|
639,253
|
||||||
Accumulated
other comprehensive income
|
1,910,752
|
1,625,829
|
||||||
Retained
earnings
|
19,215,114
|
12,184,614
|
||||||
Total
Stockholders’ Equity
|
24,128,516
|
16,764,472
|
||||||
Noncontrolling
interest
|
46,283
|
329,304
|
||||||
Total
Equity
|
24,174,799
|
17,093,776
|
||||||
Total Liabilities and
Stockholders’ Equity
|
$
|
29,313,035
|
$
|
21,515,772
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements
SOKO
FITNESS & SPA GROUP, INC.
|
||||||||
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||
FOR
THE FISCAL YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)
|
||||||||
(IN
US DOLLAR)
|
||||||||
FOR
THE FISCAL YEARS
ENDED
MAY 31,
|
||||||||
2009
(RESTATED)
|
2008
(RESTATED)
|
|||||||
Net
Sales
|
$
|
19,569,108
|
$
|
13,963,130
|
||||
Cost
of Sales
|
(6,591,906
|
)
|
(5,010,643
|
)
|
||||
Gross
Profit
|
12,977,202
|
8,952,487
|
||||||
Selling,
General and Administrative Expenses:
|
5,902,059
|
4,009,497
|
||||||
Operating
income
|
7,075,143
|
4,942,990
|
||||||
Other
Income and Expenses
|
||||||||
Interest
expenses
|
(66,121
|
)
|
(49,177
|
)
|
||||
Other
income
|
47,012
|
2,357
|
||||||
Penalty
for investors’ liquidated damages
|
(200,000
|
)
|
-
|
|||||
Other
expenses
|
(70,731
|
)
|
(10,328
|
)
|
||||
Total
Other Income and (Expense)
|
(289,840
|
)
|
(57,148
|
)
|
||||
Income
Before Income Taxes
|
6,785,303
|
4,885,842
|
||||||
Provision
for Income Taxes
|
42,667
|
74,381
|
||||||
Net
Income
|
6,742,636
|
4,811,461
|
||||||
Less:
net income (loss) attributable to the noncontrolling
interest
|
(287,865
|
)
|
108,481
|
|||||
Net
Income attributable to SOKO Fitness & Spa Group, Inc.
|
$
|
7,030,500
|
$
|
4,702,980
|
||||
Other
Comprehensive Income
|
||||||||
Foreign
currency translation adjustment
|
284,923
|
1,217,693
|
||||||
Comprehensive
Income
|
$
|
7,315,423
|
$
|
5,920,672
|
||||
Basic
and Diluted Income per common share
|
||||||||
Basic
|
$
|
0.41
|
$
|
0.34
|
||||
Diluted
|
$
|
0.41
|
$
|
0.33
|
||||
Weighted
average common share outstanding
|
||||||||
Basic
|
17,000,000
|
13,816,986
|
||||||
Diluted
|
17,297,931
|
14,118,795
|
The
accompanying notes are an integral part of these consolidated financial
statements
SOKO
FITNESS & SPA GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE FISCAL YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)
(IN
US DOLLARS)
Preferred
Stock
|
Common
Stock
|
Warrants
|
Accumulated
Other
|
Total
|
|||||||||||||||||||||||||||||||
par
value $0.001
|
par
value $0.001
|
Subscrip-
|
Additional
|
Number
|
Additional
|
Comprehe-
|
Non |
Stockhol-
|
|||||||||||||||||||||||||||
tion
|
Paid-in
|
of
|
Paid
in
|
nsive
|
Retained
|
controlling
|
ders’
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Receivable
|
Capital
|
Warrants
|
Capital
|
Income
|
Earnings
|
Interest |
Equity
|
||||||||||||||||||||||||
Balance
at May 31,2007
|
-
|
$
|
-
|
13,300,000
|
$
|
13,300
|
$
|
(1,000,000
|
)
|
$
|
1,140,279
|
-
|
$
|
-
|
$
|
408,136
|
$
|
7,481,634
|
$
|
-
|
$
|
8,043,349
|
|||||||||||||
Purchase
of subsidiary shares
|
|||||||||||||||||||||||||||||||||||
from
a third party
|
218,153
|
218,153
|
|||||||||||||||||||||||||||||||||
Paid
in capital received
|
1,000,000
|
1,000,000
|
|||||||||||||||||||||||||||||||||
Acquisition
of net asset from SOKO in the reverse merger
|
3,000,000
|
3,000
|
(3,000
|
)
|
-
|
||||||||||||||||||||||||||||||
Issuance
of common stock and warrants
|
|||||||||||||||||||||||||||||||||||
in
connection with private placement
|
2,510,000
|
2,510
|
1,076,737
|
2,160,000
|
639,253
|
1,718,500
|
|||||||||||||||||||||||||||||
Issuance
of common stock
|
|||||||||||||||||||||||||||||||||||
in
connection with share exchange
|
765,000
|
765
|
481,185
|
481,950
|
|||||||||||||||||||||||||||||||
Buyback
and cancellation of common stock
|
(2,575,000
|
)
|
(2,575
|
)
|
(397,425
|
)
|
(400,000
|
)
|
|||||||||||||||||||||||||||
Net
Income
|
4,702,980
|
108,481
|
4,811,461
|
||||||||||||||||||||||||||||||||
Other
comprehensive income, net of tax
|
1,217,693
|
2,670
|
1,220,363
|
||||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
|||||||||||||||||||||||||||||||||||
Balance
at May 31, 2008
(Restated)
|
-
|
$
|
-
|
17,000,000
|
$
|
17,000
|
$
|
-
|
$
|
2,297,776
|
2,160,000
|
$
|
639,253
|
$
|
1,625,829
|
$
|
12,184,614
|
$
|
329,304
|
$
|
17,093,776
|
||||||||||||||
Issuance
of stock options
|
48,621
|
48,621
|
|||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||
Net
Income
|
7,030,500
|
(287,865
|
)
|
6,742,635
|
|||||||||||||||||||||||||||||||
Other
comprehensive income, net of tax
|
|||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
284,923
|
4,844 |
289,767
|
||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||
Balance
at May 31, 2009
(Restated)
|
- | $ |
17,000,000
|
$ |
17,000
|
$ | - | $ |
2,346,397
|
2,160,000
|
$ |
639,253
|
$ |
1,910,752
|
$ |
19,215,114
|
$ |
46,284
|
$ |
24,174,799
|
The
accompanying notes are an integral part of these consolidated financial
statements
SOKO
FITNESS & SPA GROUP, INC.
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
FOR
THE FISCAL YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)
|
||||||||
(IN
US DOLLARS)
|
||||||||
FOR
THE FISCAL YEARS ENDED MAY 31,
|
||||||||
2009
|
2008
(RESTATED)
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$
|
6,742,363
|
$
|
4,811,461
|
||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided by operating activities:
|
||||||||
Stock
based compensation
|
48,621
|
481,950
|
||||||
Depreciation
|
1,719,398
|
1,016,855
|
||||||
Liquidated
damage penalty
|
200,000
|
-
|
||||||
Loss
from disposal of fixed assets
|
54,809
|
-
|
||||||
Rent
expense converted from leasehold improvement
|
163,229
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
(7,219
|
)
|
-
|
|||||
Accounts
receivable
|
605,326
|
(270,326
|
)
|
|||||
Inventories
|
(302,677
|
)
|
(584,845
|
)
|
||||
Advances
to suppliers
|
503,705
|
(279,736
|
)
|
|||||
Employee
advance
|
198,831
|
(163,600
|
)
|
|||||
Prepaid
expense
|
265,225
|
(254,681
|
)
|
|||||
Security
deposit
|
(47,761
|
)
|
-
|
|||||
Deferred
Rent
|
(588,061
|
)
|
-
|
|||||
Deposit
to suppliers
|
(730,864
|
)
|
6,816
|
|||||
Accounts
payable
|
7,283
|
(33,815
|
)
|
|||||
Unearned
revenue
|
1,367,451
|
6,948
|
||||||
Taxes
payable
|
15,018
|
203,532
|
||||||
Accrued
expenses and other payables
|
(829,923
|
)
|
(82,086
|
)
|
||||
Cash
provided by operating activities
|
9,385,023
|
4,858,473
|
||||||
Cash
Flows From Investing Activities:
|
||||||||
Addition
in construction in progress
|
(5,312,845
|
)
|
(2,665,759
|
)
|
||||
Purchase
of property and equipment
|
(3,061,979
|
)
|
(3,293,245
|
)
|
||||
Proceeds
received from disposal of fixed assets
|
1,316
|
|||||||
Investment
in subsidiary
|
-
|
(1,687,408
|
)
|
|||||
Cash
acquired from subsidiaries
|
97,594
|
124,447
|
||||||
Investment
advance
|
(399,750
|
)
|
(1,090,545
|
)
|
||||
Cash
used in investing activities
|
(8,675,665
|
)
|
(8,612,510
|
)
|
||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from capital contribution
|
-
|
1,000,000
|
||||||
Net
proceeds from issuance of common stock
|
-
|
1,718,500
|
||||||
Proceeds
from short-term loan
|
2,196,795
|
2,409,815
|
||||||
Repayment
of short-term loan
|
(2,588,227
|
)
|
-
|
Payment to buy back common stock
|
-
|
(400,000)
|
||||||
Cash
provided by (used in) financing activities
|
(391,432
|
)
|
4,728,315
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
26,005
|
133,316
|
||||||
Increase
in cash and cash equivalents
|
343,931
|
1,107,594
|
||||||
Cash
and Cash Equivalents - Beginning of the year
|
1,563,709
|
456,115
|
||||||
Cash
and Cash Equivalents - Ending of the year
|
$
|
1,907,640
|
$
|
1,563,709
|
||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$
|
66,121
|
$
|
49,042
|
||||
Income
Taxes paid
|
$
|
74,135
|
$
|
9,427
|
||||
Non-cash
investing and financing activities:
|
||||||||
Option
issued for directors
|
$
|
109,898
|
$
|
-
|
||||
Common
stock issued for share exchange
|
-
|
$
|
481,950
|
The
accompanying notes are an integral part of these consolidated financial
statements
SOKO
FITNESS & SPA GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE FISCAL YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)
NOTE
1- DESCRIPTION OF BUSINESS AND ORGANIZATION
SOKO
Fitness & Spa Group, Inc., (“SOKO” or the “Company”) was incorporated in the
State of Delaware on September 9, 2004 under the original name of American
Business Holdings, Inc. as a holding vehicle to own and control a textile and
plastic packaging company in Central and East Africa. On September 12, 2004, the
Company completed a Stock Purchase Agreement and Share Exchange in which it
purchased all of the outstanding membership shares in Tissakin Ltd., a
Democratic Republic of Congo corporation. Through Tissakin Ltd., the Company was
a manufacturer of bags for packaging agricultural products in the Democratic
Republic of Congo.
On April
11, 2008 (the “Closing Date”), the Company entered into a Share Exchange
Agreement with Wealthlink Co., Ltd. (“Wealthlink”) and its shareholders
(including Mr. Tong Liu, the Company’s current Chairman of the Board and Chief
Executive Officer, collectively, the “Wealthlink Shareholders”) pursuant to
which the Company issued an aggregate of 13,300,000 shares of common stock of
the Company to the Wealthlink Shareholders in exchange for all of the
outstanding shares of common stock of Wealthlink.
Concurrently
with the Share Exchange, the Company provided $400,000 to Mr. Tong Liu to
purchase 1,000,000 shares of Company common stock from Mr. Syed Idris Husain
(“Idris Husain”), then director and the principal stockholder of the Company,
and an aggregate of 1,575,000 shares of Company common stock from certain other
original shareholders of the Company, with the understanding that Mr. Liu would
immediately return these 2,575,000 shares to the Company for
cancellation. Following the purchase of these 2,575,000 shares by Mr.
Tong Liu on the Closing Date, Mr. Liu immediately returned them to the Company
as agreed for cancellation.
Also on
the Closing Date, the Company entered into a Consulting Agreement with Idris
Husain pursuant to which he was engaged to provide the Company with regular and
customary consulting advice as requested by the Company for a period of six
months from the Closing Date. Pursuant to this Consulting Agreement,
the Company paid Idris Husain $300,000 in consideration of such services on the
Closing Date.
Also, on
the Closing Date, immediately prior to and as a condition to the completion of
the Share Exchange, the Company entered into a Stock Purchase Agreement with
each of Syed Irfan Husain, the Company’s then President and Chief Executive
Officer, Idris Husain, and Verifica International, Ltd. (collectively, the
“Buyers”). Pursuant to this agreement, the Buyers purchased all
issued and outstanding shares of Tissakin Ltd., a Democratic Republic of Congo
corporation and a wholly-owned subsidiary of the Company, in consideration of
79,000,000 shares of common stock of the Company owned by the
Buyers.
Additionally,
on the Closing Date, SOKO entered into a Securities Purchase Agreement, Warrant,
Registration Rights Agreement and Lock-Up Agreement with three investors (the
“Purchasers”) for an aggregate of $2,000,000 (the “Financing”). On the Closing
Date, upon the terms and subject to the conditions set forth in the Securities
Purchase Agreement, SOKO sold, and the Purchasers purchased, in the aggregate,
2,000,000 shares of our common stock and warrants to purchase an additional
2,000,000 shares. The warrants have an exercise price of $1.25 and are
exercisable at any time through the third anniversary of the Closing Date.
Additionally, each Purchaser’s ability to exercise the warrant is limited to the
extent such Purchaser’s beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) would exceed
4.99% of the SOKO’s outstanding common stock. From the Closing Date and through
the twelve-month anniversary of the Closing Date, certain SOKO shareholders
agreed not to sell any of their shares of our common stock. The Company is
obligated to file a registration statement with respect to the shares and
warrants acquired by the Purchasers within 60 calendar days of the Closing
Date.
Prior
to the consummation of the foregoing transactions, the Company had
82,000,000 shares of common stock outstanding. As a result of
the consummation of all of the foregoing transactions, the following
changes in the outstanding shares of the Company were
recorded:
|
●
|
the
Company reacquired 79,000,000 shares from its original shareholders in
connection with the acquisition by such shareholders of Tissakin
Ltd.;
|
||
●
|
Mr.
Liu acquired, with funds provided by the Company, 2,575,000 shares from
certain original shareholders of the Company and returned such shares to
the Company for cancellation; and
|
||
●
|
an
additional 425,000 shares remained held by certain original shareholders
of the Company.
|
||
From
the 81,575,000 shares that were reacquired and acquired as described
above:
|
|||
●
|
the
Company issued an additional 13,300,00 shares to Wealthlink Shareholders,
including Mr. Liu;
|
||
●
|
the
Company issued an aggregate of 765,000 shares to several advisors of the
Company for structuring the Share Exchange;
|
||
●
|
the
Purchasers acquired 2,000,000 shares and warrants to purchase up to an
additional 2,000,000 shares;
|
||
●
|
the
Company issued an aggregate of 510,000 shares to Luck Eagle for
structuring the Financing;
|
||
●
|
E-Tech
Securities Inc. was issued a warrant to purchase up to 160,000 shares for
structuring the Financing; and
|
||
●
|
the
Company cancelled 65,000,000 shares.
|
||
As
a result, the Company now has 17,000,000 shares of common stock
outstanding, which is comprised of 16,575,000 shares issued in connection
with the foregoing and 425,000 shares held by certain original
shareholders of the Company.
|
As a
result of the aforementioned transactions, there has been a change in control of
the Company as the shareholders of Wealthlink became the majority shareholders
of the Company.
For
accounting purpose, the transaction has been accounted for as a reverse
acquisition under the purchase method. Accordingly, Wealthlink and its
subsidiaries are treated as the continuing entity for accounting purposes.
Following the merger, the Company changed its name from American Business
Holdings, Inc. to SOKO Fitness & Spa Group, Inc.
As a
result of the merger, the Company is now engaged in the business of operating
distinctive destination centers that offer professional fitness, beauty salon
and spa services in China. The Company provides programs, services and products
that uniquely combine exercise, education and nutrition to help its members and
clients to lead a healthy way of life and achieve their fitness
goals.
Wealthlink
was incorporated under the laws of the Cayman Islands on March 27, 2007. On June
19, 2007, Wealthlink invested $1,000,000 to form a wholly-owned subsidiary,
Harbin Mege Union Beauty Management Ltd. (“Mege Union”), a wholly foreign-owned
entity incorporated under the laws of the People’s Republic of China
(“China”).
Except
for its directly owned Lea Spa, and majority-owned subsidiary, Yoga Wave, Mege
Union has not carried on any other substantive operations of its own. Instead,
it has entered certain exclusive agreements with Harbin Daoli Queen
Demonstration Beauty Parlor, Harbin Huang Emperor & Golden Gym Club Co.
Ltd., Harbin Queen Beauty Demonstration Center, Shenyang Queen Demonstration
Center, Harbin Xinyang Spa, Harbin SOKO Spa and Harbin Queen Beauty Vocational
Skill Training School (collectively, the “Queen Group”). The entities in Queen
Group are all organized in China as either limited liability companies or sole
proprietorships.
The
paid-in capital of Queen Group was funded by the majority stockholders of Mege
Union. China law currently has limits on foreign ownership of companies. To
comply with these foreign ownership restrictions, on August 3, 2007, Mege Union
entered into certain exclusive agreements with Queen Group and its stockholders.
Pursuant to these agreements, Mege Union provides exclusive consulting and other
general business operation services to Queen Group, in return for a consulting
services fee which is equal to Queen Group’s revenue. In addition, Queen Group’s
shareholders have pledged their equity interest in Queen Group to Mege Union,
irrevocably granted Mege Union an exclusive option to purchase, to the extent
permitted under China law, all or part of the equity interests in Queen Group
and agreed to entrust all the rights to exercise their voting power to the
person(s) appointed by Mege Union. Through these contractual arrangements, Mege
Union has the ability to substantially influence Queen Group’s daily operations
and financial affairs, appoint its senior executives and approve all matters
requiring stockholders’ approval.
As a
result of these contractual arrangements, which obligate Mege Union to absorb a
majority of the risk of loss from Queen Group’s activities and enable Mege Union
to receive a majority of its expected residual returns, Mege Union accounts for
Queen Group as a variable interest entity under ASC 810 Consolidation.
Accordingly, Mege Union consolidates Queen Group’s results, assets and
liabilities.
Since
Mege Union and Queen Group are under common control, the consolidation of Mege
Union and Queen Group has been accounted for at historical cost and prepared on
the basis as if the aforementioned exclusive agreements between Mege Union and
Queen Group had become effective as of the beginning of the first period
presented in the accompanying consolidated financial statements.
On May
13, 2008, the Board of Directors of SOKO approved an amendment to the Company’s
Bylaws to change the Company’s fiscal year from a fiscal year ending on December
31 to a fiscal year ending on May 31.
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the financial statements of SOKO,
Wealthlink, Mege Union and its wholly-owned subsidiaries, Lea Spa and
majority-owned Yoga Wave as well as Mege Union’s variable interest entity, Queen
Group. The Company, its subsidiaries and the Queen Group are collectively
referred to as the “Group.” All significant inter-company transactions and
balances among the Company, its subsidiaries and the Queen Group are eliminated
upon consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and
liabilities
and disclosures of contingent assets and liabilities at the dates of the
financial statements, as well as the reported amounts of revenues and expenses
during the reporting year. Significant estimates, required by management,
include the recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Acquisitions
The
purchase method of accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any minority
interest. The excess of the cost of acquisition over the fair value of the
Group’s share of the identifiable net assets acquired is recorded as goodwill.
If the cost of acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is allocated as a pro rata reduction of the
amounts of the acquired assets, except for financial assets and current assets.
The residual amount, if any, is recognized directly in the consolidated
statements of operations and comprehensive income.
Cash and Cash
Equivalents
For
purposes of the statement of cash flow, the Group considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts
and Other Receivables
Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible amounts, as
needed.
The Group
uses the aging method to estimate the valuation allowance for anticipated
uncollectible receivable balances. Under the aging method, bad debt percentages
determined by management based on historical experience as well as current
economic climate are applied to customers’ balances categorized by the number of
months the underlying invoices have remained outstanding. The valuation
allowance balance is adjusted to the amount computed as a result of the aging
method. When facts subsequently become available to indicate that the allowance
provided requires an adjustment, then the adjustment will be classified as a
change in estimate. There is no allowance for uncollectible amounts for the
fiscal years ended May 31, 2009 and 2008.
Inventories
Inventory
is mainly composed of hair care supplies and skin care supplies. Inventories are
stated at the lower of cost or market, as determined on a first-in, first-out
basis, or market. Costs of inventories include unused purchases and supplies for
providing the beauty treatment. No allowance for inventories is considered
necessary for the fiscal years ended May 31, 2009 and 2008,
respectively.
Property,
Equipment and Construction in Progress
Property
and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Estimated useful lives of the
assets are as follows:
Buildings
|
15
years
|
Buildings
improvement
|
10
years
|
Machinery
and equipment
|
5 years
|
Computer,
office equipment and furniture
|
5 years
|
Automobiles
|
5 years
|
The
carrying value of property, plant and equipment is assessed annually and when
factors indicating impairment is present, the carrying value of the fixed assets
is reduced by the amount of the impairment. The Group determines the existence
of such impairment by measuring the expected future cash flows (undiscounted and
without interest charges) and comparing such amount to the net asset carrying
value. An impairment loss, if exists, is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use. For the fiscal years ended May 31, 2009 and 2008, the Group had
total accumulated costs involved with construction in progress in the amount of
$1,534,827 and $3,687,591, respectively.
Interest
capitalization
Interest
capitalization is reported in accordance with the provisions of ASC 835,
“Capitalization of Interest Cost.”
For loans
to finance constructions and provide for working capital, the Group charges the
borrowing costs related to working capital loans to interest expense when
incurred and capitalize interest costs related to construction developments as a
component of the construction costs. The interest to be capitalized for a
construction is based on the amount of borrowings related specifically to such
construction. Interest for any period is capitalized based on the amounts of
accumulated expenditures and the interest rate of the loans. The interest
capitalization period begins when expenditures have been incurred and activities
necessary to prepare the asset (including administrative activities before
construction) have begun, and ends when the construction is substantially
completed. Interest Capitalized is limited to the amount of interest
incurred. The interest rate used in determining the amount of
interest capitalized is the weighted average rate applicable to the
construction-specific borrowings.
The
Company’s significant judgments and estimates related to interest capitalization
include the determination of the appropriate borrowing rates for the
calculation, and the point at which capitalization is started and discontinued.
Changes in the rates used or the timing of the capitalization period may affect
the balance of property under development and the costs of sales recorded.
Capitalized interest included in construction in progress amounted to $61,432
and $26,060 for the fiscal years ended May 31, 2009 and May 31, 2008,
respectively.
Goodwill
Goodwill
and other intangible assets are accounted for in accordance with the provisions
of ASC 350. Under ASC 350, goodwill, including any goodwill included in the
carrying value of investments accounted for using the equity method of
accounting, and certain other intangible assets deemed to have indefinite useful
lives are not amortized. Rather, goodwill and such indefinite-lived intangible
assets are assessed for impairment at least annually based on comparisons of
their respective fair values to their carrying values.
Goodwill
impairment is determined using a two-step process. The first step compares the
fair value of each reporting unit to its carrying amount, including goodwill. If
the fair value of each reporting unit exceeds its carrying amount, goodwill is
not considered to be impaired and the second step will not be required. If the
carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting
unit’s goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of
goodwill. An impairment loss is recognized for any excess in the carrying value
of goodwill over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the primary technique
being a discounted cash flow.
Impairment
of Long-lived Assets
In
evaluating long-lived assets, other than goodwill for recoverability, the Group
uses its best estimate of future cash flows expected to result from the use of
the asset and eventual disposition in accordance with ASC 360. To the extent
that estimated future, undiscounted cash inflows attributable to the asset, less
estimated future, undiscounted cash outflows, are less than the carrying amount,
an impairment loss is recognized in an amount equal to the difference between
the carrying value of such asset and its fair value. Assets to be disposed of
and for which there is a committed plan of disposal, whether through sale or
abandonment, are reported at the lower of carrying value or fair value less
costs to sell. There were no impairment losses recognized for the fiscal years
ended May 31, 2009 and 2008.
Stock-Based
Compensation
The Group
records stock based compensation expense pursuant to ASC 718. The Group
estimates the fair value of the award using the Black-Scholes Option Pricing
Model. Under ASC 718, the Group’s expected volatility assumption is based on the
historical volatility of Group’s stock. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock compensation expense recognized is based on awards expected to vest, and
there were no estimated forfeitures. ASC 718requires forfeitures to be estimated
at the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
Revenue
Recognition
The
Group’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is generally recognized when the
services are provided and payments of the customers are received or collections
are reasonably assured. Payments received in advance from membership fees but
not yet earned are recorded as deferred revenue.”
Non-refundable
membership fees, non-refundable initial membership fees and monthly membership
fees that are prepaid on a non refundable basis are recognized on a
straight-line basis over the respective membership term.
Cost
of Sales
Costs of
sales include costs of the products sold and used, inbound freight costs, cost
of direct labor and overhead. Write-down of inventory to lower of cost or market
is also recorded in cost of sales.
Selling,
General and Administrative Costs
Selling,
general and administrative costs consist primarily of salaries and commissions
for sales representatives, salaries for administrative staffs, rent expenses,
depreciation expense and employee benefits for administrative
staffs.
Comprehensive
Income
ASC 220,
“Reporting Comprehensive Income,” requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Accumulated other comprehensive income arose from the changes
in foreign currency exchange rates.
Income
Taxes
The Group
accounts for income tax under the provisions of ASC 740 “Accounting for Income
Taxes”, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Fair
Value of Financial Instruments
The
Group’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
Earnings
per Share
The Group
computes EPS in accordance with ASC 260. ASC 260 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS is
measured as net income divided by the weighted average common shares outstanding
for the period. Diluted EPS is similar to basic EPS but presents the
dilutive effect on a per share basis of potential common shares (e.g.,
convertible securities, options and warrants) as if they had been converted at
the beginning of the periods presented, or issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the
calculation of diluted EPS.
Foreign
Currency Translation
The Group
uses the United States dollar for financial reporting purposes. Mege Union, its
subsidiaries and the Queen Group maintain their books and records in their
functional currency, Chinese Renminbi (“RMB”), being the primary currency of the
economic environment in which their operations are conducted.
In
general, for consolidation purposes, the Group translates its assets and
liabilities into US Dollars using the applicable exchange rates prevailing at
the balance sheet date, and the statement of income and cash flows are
translated at average exchange rates during the reporting period. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the financial statements are
recorded as accumulated other comprehensive income.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. At May 31, 2009, the exchange rate was $1.00 =
RMB6.8281. The weighted average translation rate of $1.00 = RMB6.8412 was
applied to the Group’s annual income statement ended May 31, 2009.
Statement
of Cash Flows
In
accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Group’s
operations is calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
Risks
of Losses
The
Company is potentially exposed to risks of losses that may result from business
interruptions, injury to others (including employees) and damage to
property. These losses may be uninsured, especially due to the fact
that the Company’s operations are in China, where business insurance is not
readily available. If: (i) information is available before the
Company’s financial statements are issued or are available to be issued
indicates that such loss is probable and (ii) the amount of the loss can be
reasonably estimated, an estimated loss will be accrued by a charge to
income. If such loss is probable but the amount of loss cannot be
reasonably estimated, the loss shall be charged to the income of the period in
which the loss can be reasonably estimated and shall not be charged
retroactively to an earlier period. As of May 31, 2009 and 2008, the
Company has not experienced any uninsured losses from injury to others or other
losses.
New
Accounting Pronouncements
In
May 2009, the FASB issued guidance related to subsequent events under ASC
855-10, Subsequent Events. This guidance sets forth the period after the balance
sheet date during which management or a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We have included the required disclosures in our consolidated condensed
financial statements.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include onl
y two levels of U.S. GAAP:
authoritative and non-authoritative. This is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We
adopted ASC 105 as of September 30, 2009 and thus have incorporated
the new Codification citations in place of the corresponding references to
legacy accounting pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
In
September 2009, the Financial Accounting Standards Board (FASB) amended existing
authoritative guidance to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The amended guidance is effective
for fiscal annual reporting periods beginning after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The Company is currently assessing the
impact, if any, adoption may have on its financial statements or
disclosures.
NOTE
3-ADVANCES TO SUPPLIERS
The Group
makes advances to certain vendors for inventory purchases. The Advances to
Suppliers were $993,084 and $1,467,861 as of May 31, 2009 and 2008,
respectively.
Below is
the breakdown of advances to major suppliers:
As
of May 31,
|
||||||||
2009
|
2008
|
|||||||
Major
supplier A
|
$
|
993,084
|
$
|
882,295
|
||||
Major
supplier B
|
-
|
164,387
|
||||||
Major
supplier C
|
-
|
110,690
|
||||||
Others
|
-
|
310,488
|
||||||
Total
|
$
|
993,084
|
$
|
1,467,861
|
NOTE
4-INVENTORIES
The
inventories consist of the following:
As
of May 31,
|
||||||||
2009
|
2008
|
|||||||
Skin
Care supplies
|
$
|
1,348,105
|
$
|
1,018,517
|
||||
Hair
Care supplies
|
39,965
|
30,271
|
||||||
Others
|
3,232
|
-
|
||||||
Total
|
$
|
1,391,302
|
$
|
1,048,788
|
No
allowance for inventories was made for the fiscal years ended May 31, 2009 and
2008.
The
Employee Advance was $54,783 and $249,900 as of May 31, 2009 and
2008. The Employee Advance was made to certain employees by the Group
in order for them to pay the travel expenses, office supplier expenses or any
other miscellaneous expenses in future.
NOTE
6-PROPERTY AND EQUIPMENT, NET
As
of May 31,
|
||||||||
2009
|
2008
|
|||||||
Machinery
& Equipments
|
$
|
3,289,848
|
$
|
1,830,649
|
||||
Office
Equipment & Furniture
|
1,116,610
|
526,221
|
||||||
Automobiles
|
92,379
|
86,639
|
||||||
Buildings
|
1,772,081
|
1,743,516
|
||||||
Leasehold
improvements
|
15,004,204
|
7,156,757
|
||||||
Sub-total
|
21,275,122
|
11,343,781
|
||||||
Less:
Accumulated Depreciation
|
(3,135,554
|
)
|
(2,248,454
|
)
|
||||
Construction
in progress
|
1,534,827
|
3,687,591
|
||||||
Total
|
$
|
19,674,394
|
$
|
12,782,918
|
Depreciation
expense for the fiscal years ended May 31, 2009 and May 31, 2008 was $1,719,398
and $1,016,855, respectively.
NOTE
7-DEPOSITS TO SUPPLIERS
The
Deposits to Suppliers of $1,464,530 and $720,461 as of May 31, 2009 and 2008
represents deposit made to two major suppliers, with whom the Group has long
standing business relationships. In order to maintain the relationships and
purchase the products and equipment under the most favorable condition, the
Group made the deposit. Since the Group expects the entire amount
will be repaid, no allowance has been established.
NOTE
8-INVESTMENT ADVANCE
On May
31, 2009, Mege Union entered into an acquisition agreement with Starway Asia
Limited to purchase 51% interest of the Yoga Wave II, a Yoga studio located in
the city of Shenyang. The consideration paid was RMB2,042,040
(approximately $0.3 million). Mege Union also loaned RMB676,260
(approximately $0.1 million) to Yaga Wave II for business operations on May 31,
2009. Once the transaction is completed, the Group will reclassify
the full amount to proper accounts.
NOTE
9-GOODWILL
On March
1, 2008, the Group’s subsidiary Mege Union entered into an acquisition agreement
with Shenyang Shengchao Management & Advisory Co., Ltd (“the Seller”) to
acquire 51% of the Seller’s interest in Yoga Wave. The consideration paid was
RMB 12,000,000 (approximately $1.7 million). Goodwill of $1.5 million was
recorded to reflect the excess of the purchase price over the fair value of the
net tangible and identifiable intangible assets of the acquired interest in Yoga
Wave. The acquisition of a majority interest in Yoga Wave allowed the
Company to expand its business into upscale yoga studios, offering synergistic
opportunities for growth and expansion in accordance with its business
model. As a result, the Company deemed that the inclusion of goodwill
in the premium paid for the interest was valuable consideration. The
results of operations of Yoga Wave were included in the consolidated results of
operations commencing March 1, 2008.
On July
1, 2008, the Group acquired 100% interest of Harbin Tai Ai for RMB 8,000,000
(approximately $1.2 million). Goodwill of $1 million was recorded for the excess
of the purchase price over the fair value of the net tangible and identifiable
intangible assets of the acquired interest in Tai Ai. The acquisition of Harbin
Tai Ai allowed the Company to expand its business into upscale hotels, offering
further synergistic opportunities for growth
and
expansion in accordance with its business model. As a result, the
Company deemed that the inclusion of goodwill in the premium paid for the
interest was valuable consideration. The results of operations for
Tai Ai are included in the consolidated results of operations of the Group
commencing July 1, 2008.
The
accompanying consolidated financial statements include the allocation of the
acquisition cost to the net assets acquired based on their respective fair
values. The net assets were valued by the Company’s management giving
consideration to the valuation services provided by an independent third
party.
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible acquired. None of the goodwill recognized
is expected to be deductible for income tax purpose in China.
The
following represents the allocation of the acquisition costs to the net assets
acquired based on their respective fair values:
As
of May 31,
|
||||||||||||
2008
|
2009
|
|||||||||||
Addition
|
||||||||||||
Yoga
Wave
|
Harbin
Tai Ai
|
Total
|
||||||||||
Current
assets
|
$
|
449,970
|
$
|
217,866
|
$
|
667,836
|
||||||
Fixed
assets
|
1,370,824
|
233,753
|
1,604,577
|
|||||||||
Total
liabilities assumed
|
(1,382,761
|
)
|
(275,394
|
)
|
(1,658,155
|
)
|
||||||
Net
assets acquired
|
438,033
|
176,225
|
614,258
|
|||||||||
Noncontrolling
interest
|
(214,636
|
)
|
-
|
(214,636
|
)
|
|||||||
Total
consideration paid
|
1,729,107
|
1,171,624
|
2,900,731
|
|||||||||
Goodwill
recognized from acquisition
|
$
|
1,505,710
|
$
|
995,399
|
$
|
2,501,109
|
||||||
Impact
of foreign currency translation
|
--
|
24,669
|
||||||||||
Total
Goodwill
|
$
|
1,505,710
|
$
|
2,525,778
|
The
impact of foreign currency translation was due to the fluctuation of exchange
rate between May 31, 2009 and May 31, 2008.
The
following unaudited pro forma combined statements of income for the fiscal years
ended May 31, 2009 and 2008 have been prepared as if the acquisition had
occurred at the beginning of each period presented. The unaudited pro forma
combined statements are based on accounting for the business acquisition under
purchase accounting. The unaudited pro forma information may not be indicative
of the results that actually would have occurred if the merger had been in
effect from and on the dates indicated or which may be obtained in the
future:
Unaudited
Pro Forma
|
||||||
Combined
Fiscal Year Ended
|
||||||
May
31,
|
||||||
2009
|
2008
|
|||||
Revenue
|
$
|
20,942,170
|
$
|
14,258,711
|
||
Gross
Profit
|
13,935,729
|
9,168,328
|
||||
Net
Income
|
7,458,518
|
4,910,708
|
||||
Noncontrolling
Interest
|
(287,865
|
)
|
108,481
|
|||
Net
Income attributable to SOKO Fitness & Spa Group, Inc
|
$
|
7,746,383
|
$
|
4,802,227
|
||
Net
income per share
|
||||||
Basic
|
$
|
0.46
|
$
|
0.35
|
||
Diluted
|
$
|
0.45
|
$
|
0.34
|
||
Weighted
average number of shares outstanding
|
||||||
Basic
|
17,000,000
|
13,816,986
|
||||
Diluted
|
17,297,931
|
14,118,795
|
NOTE
10-TAXES
1)
|
Corporate
Income Tax
|
The
Company is a Delaware corporation and conducts all of its business through Mege
Union and Queen Group, both Chinese subsidiaries. All business is conducted in
China.
As of May
31, 2009, Queen Group consists of seven individually-owned sole proprietorships
(one of which has two additional branches), which, under the Chinese Laws, are
generally exempt from paying corporate level income taxes unless they are
assessed by the local authority otherwise. Two of the entities under Queen Group
were assessed by the local tax authority to be subject to a fixed-rate income
tax. Under the fixed-rate income tax system, generally 10% of the annual gross
revenues from each entity are deemed Taxable Net Income (“TNI”) for income tax
purpose, without giving consideration to the costs and operating expenses. The
income tax is then levied at 27% of the TNI.
Legend Spa
and Lea Spa, both wholly-owned subsidies of Harbin Mege Union, are also subject
to a fixed-rate income tax system similar to that imposed on the Queen Group
entities. While Legend Spa’s TNI is taxed at 25%, Lea Spa’s TNI is currently
levied at only 20%.
Yoga Wave
is subject to a 25% income tax rate on all of its net income.
Our
provisions for income taxes for the fiscal years ended May 31, 2009 and 2008
were $42,667 and $74,381, respectively.
The
following table reconciles the U.S. statutory rates to the Group’s effective tax
rate for the fiscal years ended May 31, 2009 and 2008:
For
the Year Ended May 31,
|
||||||||
2009
|
2008
|
|||||||
US
Statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Foreign
income not recognized in USA
|
-34.0
|
%
|
-34.0
|
%
|
||||
China
income tax
|
25.0
|
%
|
25.0
|
%
|
||||
Tax
exemption
|
-24.4
|
%
|
-23.5
|
%
|
||||
Total
provision for income tax
|
0.6
|
%
|
1.5
|
%
|
The
Company was incorporated in Delaware. It incurred a net operating loss,
including amortization of share-based compensation, of $611,825 and $100,000 for
U.S. income tax purposes for the fiscal years ended May 31, 2009 and 2008,
respectively. The net operating loss carry forwards may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
beginning in 2028 through 2029. Management believes that the realization of the
benefits arising from these losses appear to be uncertain due to Company’s
limited operating history and continuing losses for United States income tax
purposes. Accordingly, the Company has provided a 100% valuation allowance at
May 31, 2009 for the temporary difference related to loss carry-forwards. The
valuation allowances for the fiscal years ended May 31, 2009 and 2008 were
$208,021 and $34,000, respectively.
The
Company intends to invest undistributed earnings in foreign subsidiaries
indefinitely and these undistributed earnings are essentially permanent in
duration.
2)
Business Sales Tax
General
business sales taxes are levied on business under both Queen Group and Mege
Union. Except the Harbin Huang Emperor & Golden Gym Club Co.,
Ltd. which is subject to 3% of actual revenue and Yoga Wave which is subject to
5% of actual revenue, all other business is subject to either 3% or 5% on
pre-determined fixed revenue.
3)
Taxes payable at May 31, 2009 and 2008 consisted of the following:
As
of May 31,
|
||||||||
2009
|
2008
|
|||||||
Business
sales tax payable
|
$
|
296,887
|
$
|
244,680
|
||||
Corporate
income tax
|
11,692
|
68,853
|
||||||
Other
|
51,650
|
26,022
|
||||||
Total
taxes payable
|
$
|
360,229
|
$
|
339,555
|
NOTE
11-SHORT TERM LOANS
The short
term loans include the following:
Balance
at May 31,
|
|||||||||||
2009
|
2008
|
||||||||||
a
|
)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
February 29, 2008 to January 29, 2009 at a fixed interest rate of 0.62%
per month
|
--
|
$
|
1,729,107
|
||||||
b
|
)
|
Loan
payable to Shanghai Pudong Development Bank with a one year term from
November 21, 2008 to November 20, 2009 at a fixed interest rate of 0.4995%
per month
|
$
|
1,025,171
|
--
|
||||||
c
|
)
|
Loan
payable to an unrelated party with a one year term from October 23, 2007
to October 28, 2008 at a fixed interest payment of RMB4,000 per quarter.
This loan was extended to December 7, 2008 at a fixed interest rate of 2%
per month
|
--
|
288,184
|
|||||||
|
|||||||||||
d
|
)
|
Loan
payable to a related party with a one year term from April 1, 2008 to
March 31, 2009 free of interest
|
--
|
529,953
|
|||||||
|
|||||||||||
e
|
)
|
Loan
payable to Shanghai Pudong Development Bank with an 11-month term from
January 5, 2009 to November 20, 2009 at a fixed interest rate of 0.4995%
per month
|
1,171,624
|
--
|
|||||||
Total
|
$
|
2,196,795
|
$
|
2,547,244
|
Interest
expense paid for the above short term loans totaled $66,121 and $49,042 for the
fiscal years ended May 31, 2009 and 2008, respectively. The loans from Shanghai
Pudong Development Bank are secured by the building owned by Queen
Group.
NOTE
12-DEFERRED REVENUE
Deferred
revenue represents cash received from members, but not yet earned. The summary
set forth below of the activity and balances in deferred revenue at May 31, 2009
and 2008 respectively. Cash additions include all cash received for membership
fees and advance payments for services. Revenue recognized includes all revenue
earned during the periods from membership services and other
services.
A
reconciliation of deferred revenue as of May 31, 2009 is as
follows:
As
of May 31,
|
||||||||||||||||
2008
|
2009
|
|||||||||||||||
Balance
|
Cash
Additions
|
Revenue
Recognized
|
Balance
|
|||||||||||||
Membership
fees & advance payment collected
|
$
|
514,965
|
$
|
20,252,609
|
$
|
(18,885,155
|
)
|
$
|
1,882,419
|
|||||||
Receipts
collected & earned without deferral during period
|
683,953
|
(683,953
|
)
|
|||||||||||||
514,965
|
20,936,562
|
(19,569,108
|
)
|
1,882,419
|
||||||||||||
Impact
of foreign currency translation
|
27,336
|
|||||||||||||||
Total
|
$
|
1,909,755
|
NOTE
13-SEGMENT REPORTING
The Group
has a single operating segment in accordance with the provisions of ASC 280,
“Disclosures about Segments of an Enterprise and Related Information.” Although
the Group provides and markets various products and services, the Group’s chief
operating decision maker reviews and evaluates one set of combined financial
information deciding how to allocate resources and in assessing
performance.
For the
fiscal years ended May 31, 2009 and 2008, the Group’s sales revenue from various
products and services are as follows:
Years
ended May 31,
|
||||||||
2009
|
2008
|
|||||||
Professional
services
|
$
|
11,284,644
|
$
|
10,296,518
|
||||
Sales
of products
|
3,624,257
|
1,229,363
|
||||||
Membership
fees
|
2,977,462
|
1,498,503
|
||||||
Tuition
|
1,682,744
|
938,746
|
||||||
Total
|
$
|
19,569,108
|
$
|
13,963,130
|
NOTE
14-STOCK OPTIONS
On March
2, 2009, the Board of Directors of the Company authorized the issuance of stock
options for 60,000 shares of the Company’s common stock to its three independent
directors (each option was for 20,000 shares of the Company’s common stock). The
options granted to two of the directors vest over a three year period, with 20%
vesting on the grant date and 40% vesting on the first and second anniversaries
of the grant date. These options are exercisable for three years from the date
of grant, provided that the directors remain associated with the Company during
the period. The option granted to the third director was fully vested on the
grant date and is exercisable for three years from the date of grant, regardless
of continued association with the Company. 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 life 3 years,
expected volatility 100%, dividend yield 0%, risk free interest rate 1.28% and
the exercise price of $1.47. The fair value of the 60,000 options was $53,945 at
the grant date.
In July
2008, the Board of Directors of the Company authorized the issuance of 50,000
shares of stock options to one of its independent directors. The options vest
over a three year period, with one-third vesting on each of the grant date, and
the first and second anniversaries of the grant date. The option is exercisable
for five years from the date of grant. 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 life 5 years, expected volatility 100%,
dividend yield 0%, risk free interest rate 3.91% and the exercise price of
$1.47. The fair value of the 50,000 options was $55,953 at the grant
date.
The Group
determined its expected volatility and dividend yield based on the historical
changes in stock price and dividend payments. The risk –free interest rate for
the expected term of the options is based on the U.S. Treasury yield curve in
effect at the time of grant.
Following
is a summary of the stock option activity:
Options
Outstanding
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
||||||||||
Outstanding
as of May 31, 2008
|
--
|
--
|
--
|
|||||||||
Granted
|
110,000
|
$
|
1.47
|
$
|
--
|
|||||||
Forfeited
|
--
|
--
|
--
|
|||||||||
Exercised
|
--
|
--
|
--
|
|||||||||
Outstanding
as of May 31, 2009
|
110,000
|
$
|
1.47
|
$
|
--
|
Stock
compensation expense recognized for the period is based on awards expected to
vest, and there were no estimated forfeitures as the Group has a short history
of issuing options. Stock compensation expense amounted to $48,621 for the year
ended May 31, 2009. All the options granted have no intrinsic value at May 31,
2009. As of May 31, 2009, the Group has 44,667 outstanding vested stock options,
with an exercise price above market, are excluded from the Group’s diluted
computation. The unvested stock options are expected to be expensed
for an aggregate amount of $61,277 over a weighted average period of 2.29
years.
NOTE
15- STOCKHOLDERS’ EQUITY
A.
Issuance of Common Stock
On April
11, 2008, in connection with the Share Exchange discussed in detail under NOTE
1, the Company issued an aggregate of 13,300,000 shares of our common stock to
the Wealthlink Shareholders. In consideration of services provided to
the Company in association with the consummation of the Share Exchange, an
aggregate of 765,000 shares were issued to certain advisors with an aggregate
fair value of $481,950, which was recognized as expenses in the Company’s
consolidated financial statement. Concurrently with the Share Exchange, the
Company provided $400,000 to Mr. Tong Liu to purchase 1,000,000 shares of common
stock from Idris Husain, then director of the Company, and an aggregate of
1,575,000 shares of common stock from certain other original shareholders of the
Company with the understanding that Mr. Tong Liu would immediately return these
2,575,000 shares to the Company for cancellation. Following the purchase
of these 2,575,000 shares by Mr. Tong Liu on the Closing Date, Mr. Tong Liu
immediately returned the 2,575,000 shares as agreed to the Company for
cancellation. Additionally, on April 11, 2008, SOKO sold in the
aggregate, 2,000,000 shares of its common stock to certain accredited investors,
at a purchase price of $1.00 per share. The Company received net proceeds of
$1,718,500 in connection with this private placement after the reduction
of $84,000 in legal expenses, $170,000 paid to E-Tech Securities, Inc. as
a cash fee ($30,000 as a cash retainer fee and $140,000 success fee) for
structuring the Financing, and $27,500 paid to the escrow agent and transfer
agent in connection with the Financing. There were 17,000,000 shares of common
stock issued and outstanding on May 31, 2009 and 2008. In consideration for
acting as placement agent, the Company also issued to Luck Eagle Limited, an
affiliate of E-Tech Securities, 510,000 shares of common stock, with a fair
value of $321,300.
In
consideration for structuring the Share Exchange with Wealthlink, SOKO agreed to
compensate E-Tech International, Inc. with (i) a retainer of $20,000 and (ii)
shares of common stock of the Company equal to two percent (2%) of total number
of shares outstanding after the Share Exchange with Wealthlink and the placement
of the Financing (total of 340,000 shares). having an aggregate fair value at
the time of issuance (applying a per share fair value of $0.63 computed for the
shares issued in the Financing to the Purchasers described below) of $214,200.
Further, in consideration of services provided to the Company in association
with the consummation of the Share Exchange, an aggregate of 425,000 shares,
having an aggregate fair value at the time of issuance (applying a per share
fair value of $0.63 computed for the shares issued in the Financing to the
Purchasers described below) of $267,750 were issued to two other advisors
(85,000 shares to Sichenzia Ross Friedman Ference LLP and 340,000 shares to
Fortune Badge Limited) in lieu of cash compensation, totaling the number of
shares issued to the advisors in connection with the Share Exchange to 765,000
shares of common stock of the Company, having an aggregate fair value at the
time of issuance (applying a per share fair value of $0.63 computed for the
shares issued in the Financing to the Purchasers described below) of
$481,950.
In
consideration for acting as placement agent for the Financing, SOKO agreed to
compensate (a) E-Tech Securities Inc. with (i) a retainer of $30,000, (ii) a
cash placement fee equal to seven percent (7%) of the proceeds of the Financing
described below ($140,000) and (iii) warrants to purchase an amount of
securities equal to eight percent (8%) of the total shares issued to the
Purchasers (160,000 shares), having an aggregate fair value at the time of
issuance (applying a per warrant share fair value of $0.37 computed for the
warrant shares issued in the Financing to the Purchasers) of
$59,200 and (b) Luck Eagle Limited shares of common stock the Company
equal to three percent (3%) of total number of shares outstanding after the
Share Exchange with Wealthlink and the placement of the Financing (510,000
shares), having an aggregate fair value at the time of issuance (applying a per
share the fair value of $0.63 computed for the shares issued in the Financing to
the Purchasers) of $321,300. The warrants issued to E-Tech Securities Inc. have
an exercise price of $1.25 and are exercisable at any time through the third
anniversary of the Closing Date.
B.
Warrants
With the
warrants attached to the stocks sold in the private placement, the investors are
entitled to purchase an aggregate of 2,000,000 shares of common stock at an
exercise price of $1.25 per share. All these warrants are exercisable for three
years from the effective date of registration statement. Moreover, the placement
agent is entitled to purchase an aggregate of 160,000 shares of common stock at
an exercise price of $1.25 per share. All these warrants are exercisable for
three years from the issuance date April 11, 2008. In accordance with EITF
00-19, the warrants are classified in the equity section as an offset to
additional paid-in capital.
Following
is a summary of the status of warrants outstanding as of May 31,
2009:
Warrants
Outstanding
|
Weighted
Average Exercise Price
|
Average
Remaining Life
|
||||||||||
Outstanding
as of May 31, 2008
|
2,160,000
|
$
|
1.25
|
2.92
|
||||||||
Granted
|
--
|
--
|
--
|
|||||||||
Forfeited
|
--
|
--
|
--
|
|||||||||
Exercised
|
--
|
--
|
--
|
|||||||||
Outstanding
as of May 31, 2009
|
2,160,000
|
$
|
1.25
|
1.92
|
By using
the Black-Scholes model to calculate the fair market value of the warrants
issued to the Purchasers in the Financing, SOKO computed that the effective fair
market value of each of the 2,000,000 share issued to the investors at the time
of issuance was $0.63 and that the effective fair market value of each warrant
share issued to the investors at the time of issuance was $0.37.
NOTE
16-RELATED TRANSACTIONS
The Group
rents the premises for certain locations from Mr. Tong Liu, our Chairman and
CEO. Mr. Liu has leased Mege Union’s office, as well as two stores to the Group
pursuant to the terms of binding written lease agreements containing terms no
less favorable to the Group than the Group could have negotiated in an arm’s
length transaction with a motivated landlord, including substantially the
following terms:
i.
|
Harbin
Daoli Queen Demonstration Beauty Parlor: 5-year lease from January 1, 2007
through December 31, 2011 for $47,300 per
year;
|
ii.
|
Harbin
Queen Beauty Demonstration Center: 5-year lease from January 1, 2007
through December 31, 2011 for $20,300 per
year;
|
iii.
|
Mege
Union office: 10-year lease from January 1, 2009 through
December 31, 2018 for $73,212 per
year.
|
NOTE
17-EARNINGS PER SHARE
EPS for
the periods ended May 31, 2009 and 2008 is determined by dividing net income
attributable to SOKO Fitness & Spa Group, Inc. for the periods by the
weighted average number of both basic and diluted shares of common stock and
common stock equivalents outstanding. The following is an analysis of the
differences between basic and diluted EPS in accordance with ASC 128, “Earnings
Per Share.”
The
following demonstrates the calculation for EPS for the fiscal years ended May
31, 2009 and 2008:
Year
ended May 31,
|
||||||||
2009
|
2008
|
|||||||
Basic
and diluted earnings per share
|
||||||||
Net
income attributable to SOKO Fitness & Spa Group, Inc.
|
$
|
7,030,500
|
$
|
4,702,980
|
||||
Weighted
average common share outstanding
|
||||||||
Basic
|
17,000,000
|
13,816,986
|
||||||
Diluted
|
17,297,931
|
14,118,795
|
||||||
Earnings
per share
|
||||||||
Basic
|
$
|
0.41
|
$
|
0.34
|
||||
Diluted
|
$
|
0.41
|
$
|
0.33
|
The Group
had outstanding warrants of 2,160,000 on each of May 31, 2009 and 2008. As of
May 31, 2008, the warrants were anti-dilutive because the exercise price was
higher than market price. The warrants are included in diluted weighted average
shares calculation at May 31, 2009. The Group had outstanding options of 110,000
and 0, on May 31, 2009 and 2008, respectively. As of May 31, 2009 and 2008, the
options are anti-dilutive because the exercise prices are higher than market
price.
NOTE
18-COMMITMENTS AND CONTINGENCIES
1)
Commitments
i.
|
The
Group leases offices and fitness facilities under non-cancellable
operating leases. The Group recognizes rent expense on a straight-line
basis over the term of the lease in accordance to ASC 840 “Accounting for
Leases.” As of May 31, 2009, the Group has entered into eleven tenancy
agreements for the lease of the premises.
The
Group’s commitments for minimum rental payments under these lease
agreements are as follows:
|
As
of May 31, 2009
|
||||
2010
|
$
|
776,079
|
||
2011
|
851,563
|
|||
2012
|
830,632
|
|||
2013
|
793,787
|
|||
2014
|
685,986
|
|||
2015
|
656,878
|
|||
2016
|
674,735
|
|||
2017
|
706,108
|
|||
2018
|
512,313
|
|||
2019
|
263,310
|
|||
Total
|
$
|
6,751,392
|
Rent
expense for the fiscal years ended May 31, 2009 and 2008 was $687,386 and
$289,040, respectively.
|
|
ii.
|
According
to the warrant agreement to investors, the warrants contain a cashless
exercise provision, which entitle the holders to receive a certificate for
the number of warrant shares if any time after 180 days from the Closing
there is no effective Registration Statement registering pursuant to the
Registration Rights Agreement entered into by the Group and the Holders,
or no current prospectus available for, the resale of the Warrant Shares
by the Holders.
|
2)
Contingencies
The
Registration Rights Agreement between the Group and security purchaser provides
for liquidated damages to the extent that the Group does not attain certain
milestones within specified time frames. Specifically, if the Group had failed
to file a registration statement within 60 calendar days after the Closing (a
milestone which was met by the Group), or in the event that it fails to file a
pre-effective amendment and otherwise respond in writing to comments made by the
SEC in respect of such Registration Statement within 10 Trading Days after the
receipt of comments by or notice from the SEC that such amendment is required in
order for such Registration Statement to be declared effective, or registration
statement is not declared effective within 180 calendar days after the Closing,
or in the event that such Registration Statement ceases for any reason to remain
continuously effective as to all Registrable Securities included in such
Registration Statement, or the Holders are otherwise not permitted to utilize
the Prospectus therein to resell such Registrable Securities, for more than 10
consecutive calendar days or more than an aggregate of 30 calendar days during
any 12-month period (which need not be consecutive calendar days), liquidated
damages amounting to approximately $20,000 per month would have been payable to
purchasers, and such liquidated damages are payable for each 30 calendar day
period on a daily pro-rata for any portion of a month prior to cure of an event.
The maximum amount of liquidation damage payable to security purchaser is
$200,000. As first round comment letter dated July 8, 2008, which was responded
to SEC by September 5, 2008, liquidated damages for the delay amounting to
approximately $28,810 has been accrued in the first quarter of fiscal year 2009.
At that time, the estimate effective date of the registration statement was
November 20, 2008; we accrued registration payment approximately $26,800 for
late effectiveness. In second quarter, our estimated response to second round
comment dated October 11, 2008 was around January 15, 2009,
additional $56,950 liquidation damage had been accrued for late response, also
our estimated effective date of the registration statement was to be February
20, 2009; the estimated penalty approximately $40,200 for additional delay had
been accrued. In the third quarter, the response to second round comment was
sent out on February, 17, 2009, one month later than the previous estimation and
the estimated effective date will be April 30, 2009. The liquidation damage and
registration payment liability reaches the maximum amount $200,000 as of May 31,
2009.
3)
Guarantee
Mege
Union agrees to, whenever necessary, act as the guarantor for Queen Group, its
variable interest entities, in all contracts, agreements or transactions in
connection with Queen Group’s operation between Queen Group and any third party,
to provide full guarantee for the performance of such contracts, agreements or
transactions by Queen Group. In return, Queen Group agrees to pledge all of its
assets, including accounts receivable, to Mege Union. As of May 31, 2009, Mege
Union has not provided any guarantee to any third party on behalf of Queen
Group. Therefore, the Company is currently not exposed to any guarantor’s
obligations under this guarantee arrangement.
NOTE
19-RESTATEMENT
The
Company has restated the consolidated financial statements for the fiscal year
ended May 31, 2009 for the following reasons:
The
retained earnings as of May 31, 2009 were restated due to a charge of $472,950
into expenses as a result of restatement for the fiscal year ended May 31,
2008. This amount was previously recorded as an offset to the
financing proceeds. Thus, the revision also affected the balance of additional
paid-in capital account for the same amount.
The
Company reconciled net income instead of net income attributable to SOKO Fitness
& Spa Group, Inc to net cash flows from operating activities upon further
review.
The
impact of this restatement on the financial statements as originally reported as
of May 31, 2009 is summarized below:
May
31, 2009
|
||||||||
As
Reported
|
As
Restated
|
|||||||
Additional
paid-in-capital
|
$
|
2,139,786
|
$
|
2,346,397
|
||||
Additional
paid in-capital-warrants
|
372,914
|
639,253
|
||||||
Retained
earnings
|
19,688,064
|
19,215,114
|
For
the year Ended
May
31, 2009
|
||||||||
As
Reported
|
As
Restated
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income attributable to SOKO Fitness & Spa Group, Inc.
|
$
|
7,030,500
|
$
|
-
|
||||
Net
income
|
-
|
6,742,636
|
||||||
Adjustments
to reconcile net income to net cash
|
||||||||
Minority
interest
|
287,864
|
-
|
The
Company also restated the consolidated financial statements for the fiscal year
ended May 31, 2008, previously amended and filed on July 30, 2009, for the
following reasons:
(a)
|
The
1,275,000 shares issued to advisors in connection with the Share Exchange
and private placement was previously treated as
recapitalization. Upon further review, the Company determined
that only 765,000 shares of the 1,275,000 shares issued to advisors were
issued in connection with the Share Exchange, the remaining 510,000 shares
issued to advisors were issued in connection with the private
placement. Thus, the Company accounted for the value of the
shares issued for the services provided by advisors in connection with the
Share Exchange in the amount of $481,950 as expenses for the fiscal year
ended May 31, 2008.
|
(b)
|
A
300,000 payment made to Idris Husain for consulting fees, which was a part
of the $650,000 payment made out of the financing proceeds from the
Company’s April 2008 private placement, was previously treated as a
reduction of proceeds. Upon further reviews of the various
agreements, the Company has determined that this payment of $300,000
should be recognized as expenses over the service period of six months
starting April 2008, rather than a reduction of the financing
proceeds. This change has an effect on previously reported
assets, retained earnings and net income for the fiscal year ended May 31,
2008. Thus, the Company accounted $100,000 as consulting
expenses and $200,000 as prepaid expenses for the fiscal year ended May
31, 2008.
|
(c)
|
The
Company reclassified $66,000 payment made to its attorney for their
services associated with the Share Exchange to expense. The
payment was previously offset against the financing
proceeds.
|
The
aggregate value of the above adjustments amounted to $647,950. After
deducting $50,000 deposits paid in advance for consulting fees to Idris Husain
and deducting a $25,000 deposit paid in advance for other expenses related to
the Financing, which had previously been recognized as expenses, the net effect
of the above adjustments on the Company’s net income for the year ended May 31,
2008 amounted to $572,950.
During
the course of its review, the Company also determined that a revision was
required to the description of the Share Exchange, related to the buyback of
2,575,000 shares by Mr. Liu on behalf of the Company. This revision
affected the calculation of the basic and diluted weighted average common shares
outstanding, as well as earnings per share, for the fiscal year ended May 31,
2008.
The
impact of this restatement on the financial statements as previously reported is
summarized below:
May
31, 2008
|
||||||||
As
Previously
Reported
|
As
Restated
|
|||||||
Current
assets
|
$
|
5,153,945
|
$
|
5,353,945
|
||||
Total
Assets
|
21,315,772
|
21,515,772
|
||||||
Additional
paid-in capital
|
1,875,439
|
2,297,776
|
||||||
Additional
paid-in-capital -Warrants
|
288,640
|
639,253
|
||||||
Retained
earnings
|
12,757,564
|
12,184,614
|
||||||
Total
Liabilities and Stockholders’ Equity
|
21,315,772
|
21,515,772
|
||||||
Selling,
General and Administrative expenses
|
3,436,547
|
4,009,497
|
||||||
Net
income attributable to SOKO Fitness & Spa Group, Inc.
|
$
|
5,275,930
|
$
|
4,702,980
|
||||
Net
income per common share
|
||||||||
Basic
|
$
|
0.45
|
$
|
0.34
|
||||
Diluted
|
$
|
0.44
|
$
|
0.33
|
||||
Weighted
average common share outstanding
|
||||||||
Basic
|
11,601,781
|
13,816,986
|
||||||
Diluted
|
11,903,589
|
14,118,795
|
|
For
the year ended
May
31, 2008
|
|||||||
As
Previously
Reported
|
As
Restated
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income attributable to SOKO Fitness & Spa Group, Inc.
|
$
|
5,275,930
|
$
|
--
|
||||
Net
Income
|
4,811,461
|
|||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Stock compensation for consulting services
|
-
|
481,950
|
||||||
Minority interest
|
108,481
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Prepaid
expense
|
(54,681
|
)
|
(254,681
|
)
|
||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from issuance of common stock
|
1,027,500
|
1,718,500
|
||||||
Payment
to buy back common stock
|
-
|
(400,000)
|
NOTE
20-QUARTERLY DATA (UNAUDITED)
The
tables below list the quarterly financial information for the year ended May 31,
2009.
Quarters
Ended
|
||||||||||||||||||||||||||||||||
August
31, 2008
|
November
30, 2008
|
February
28, 2009
|
May
31, 2009
|
|||||||||||||||||||||||||||||
As
reported
|
As
restated
|
As
reported
|
As
restated
|
As
reported
|
As
restated
|
As
reported
|
As
restated
|
|||||||||||||||||||||||||
Balance
sheets:
|
||||||||||||||||||||||||||||||||
Total
assets
|
$ | 23,897,557 | $ | 23,897,557 | $ | 24,859,745 | $ | 24,859,745 | $ | 27,261,781 | $ | 27,261,781 | $ | 29,313,035 | $ | 29,313,035 | ||||||||||||||||
Additional
paid- in capital
|
903,332 | 2,297,776 | 903,332 | 2,297,776 | 1,894,090 | 2,297,776 | 2,139,786 | 2,346,397 | ||||||||||||||||||||||||
Additional
paid-in-capital - warrants
|
1,279,398 | 657,904 | 1,279,398 | 657,904 | 288,640 | 657,904 | 372,914 | 639,253 | ||||||||||||||||||||||||
Retained
earnings
|
14,400,905 | 13,627,955 | 16,077,310 | 15,304,360 | 17,932,785 | 17,159,835 | 19,688,064 | 19,215,114 | ||||||||||||||||||||||||
Income
statements:
|
||||||||||||||||||||||||||||||||
Revenues
|
4,276,867 | 4,276,867 | 4,608,291 | 4,608,291 | 5,110,861 | 5,110,861 | 5,573,089 | 5,573,089 | ||||||||||||||||||||||||
Gross
profit
|
2,851,711 | 2,851,711 | 3,018,010 | 3,018,010 | 3,303,777 | 3,303,777 | 3,803,704 | 3,803,704 | ||||||||||||||||||||||||
Selling,
General and Administrative expenses
|
1,142,184 | 1,342,184 | 1,234,151 | 1,234,151 | 1,438,622 | 1,438,622 | 1,887,102 | 1,887,102 | ||||||||||||||||||||||||
Net
income attributable to SOKO Fitness & Spa Group, Inc
|
$ | 1,643,341 | $ | 1,443,341 | $ | 1,676,405 | $ | 1,676,405 | $ | 1,855,475 | $ | 1,855,475 | $ | 2,055,279 | $ | 2,055,279 | ||||||||||||||||
Basic
net income per share
|
0.10 | 0.08 | 0.10 | 0.10 | 0.11 | 0.11 | 0.12 | 0.12 | ||||||||||||||||||||||||
Diluted
net income per share
|
0.10 | 0.08 | 0.10 | 0.10 | 0.11 | 0.11 | 0.12 | 0.12 |
You
should rely only on the information contained in this
document. We have not authorized anyone to provide you with
information that is different. This document may only be used
where it is legal to sell these securities. The information in
this document may only be accurate on the date of this
document.
Additional
risks and uncertainties not presently known or that are currently deemed
immaterial may also impair our business operations. The risks
and uncertainties described in this document and other risks and
uncertainties which we may face in the future will have a greater impact
on those who purchase our common stock. These purchasers will
purchase our common stock at the market price or at a privately negotiated
price and will run the risk of losing their entire
investment.
SOKO FITNESS & SPA GROUP,
INC.
4,200,000
Shares of
Common
Stock
_______________
PROSPECTUS
________________
,
2010
|
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
Nature
of Expense
|
Amount
|
|||
SEC
registration fee
|
$
|
701
|
||
Legal
fees and expenses
|
$
|
75,000
|
||
TOTAL
|
$
|
75,701
|
Item
14. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses including attorneys’ fees, judgments, fines and amounts paid in
settlement in connection with various actions, suits or proceedings, whether
civil, criminal, administrative or investigative other than an action by or in
the right of the corporation, a derivative action, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses including attorneys’ fees
incurred in connection with the defense or settlement of such actions, and the
statute requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation’s certificate of incorporation, bylaws, agreement, a
vote of stockholders or disinterested directors or otherwise.
The
Company’s Certificate of Incorporation and By-Laws provide that it will
indemnify and hold harmless, to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, as amended from time to time, each person
that such section grants us the power to indemnify.
The
Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability
for:
●
|
any
breach of the director’s duty of loyalty to the corporation or its
stockholders;
|
●
|
acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
|
●
|
payments
of unlawful dividends or unlawful stock repurchases or redemptions;
or
|
●
|
any
transaction from which the director derived an improper personal
benefit.
|
The
Company’s Certificate of Incorporation and By-Laws provide that, to the fullest
extent permitted by applicable law, none of our directors will be personally
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director. Any repeal or modification of this provision will be
prospective only and will not adversely affect any limitation, right or
protection of a director of our company existing at the time of such repeal or
modification
Item
15. Recent Sales of Unregistered Securities
In
connection with the consummation of the transactions contemplated by the share
exchange agreement, which is described in detail in the section of the
accompanying prospectus captioned “Prospectus Summary - April 2008 Share
Exchange and Financing Transactions”, on April 11, 2008:
●
|
the
Company reacquired 79,000,000 shares from its original shareholders in
connection with the acquisition by such shareholders of Tissakin
Ltd.;
|
●
|
Mr.
Liu acquired, with funds provided by the Company, 2,575,000 shares from
certain original shareholders of the Company and returned such shares to
the Company for cancellation;
|
●
|
an
additional 425,000 shares remained held by certain original shareholders
of the Company.
|
●
|
the
Company issued an additional 13,300,00 shares to Wealthlink Shareholders,
including Mr. Liu;
|
●
|
the
Company issued an aggregate of 765,000 shares to several advisors of the
Company for structuring the Share Exchange;
and
|
●
|
the
Company cancelled 65,000,000
shares.
|
Additionally,
in connection with the consummation of the Financing, which is described in
detail in the section of the accompanying prospectus captioned “Prospectus
Summary - April 2008 Share Exchange and Financing Transactions”, on April 11,
2008, the Company issued an additional 2,000,000 shares and warrants to purchase
an additional 2,000,000 shares to 3 accredited investors. These
shares, together with the shares issuable upon exercise of the warrants, are
being registered under the registration statement of which this prospectus is a
part.
In
consideration for acting as placement agent for the Financing, SOKO agreed to
compensate (a) E-Tech Securities Inc. with (i) a retainer of $30,000, (ii) a
cash placement fee equal to seven percent (7%) of the proceeds of the Financing
($140,000) and (iii) warrants to purchase an amount of securities equal to eight
percent (8%) of the total shares issued to the Purchasers (160,000 shares), and
(b) Luck Eagle Limited shares of common stock the Company equal to three percent
(3%) of total number of shares outstanding after the Share Exchange with
Wealthlink and the placement of the Financing (510,000 shares). The warrant
issued to E-Tech Securities Inc. has an exercise price of $1.25 and is
exercisable at any time through the third anniversary of the Closing
Date.
All
securities were issued pursuant to an exemption from the registration
requirements of the Securities Act, as amended, under Section 4(2) thereunder,
as they were issued in reliance on the recipients’ representation that they were
accredited (as such term is defined in Regulation D), without general
solicitation and represented by certificates that were imprinted with a
restrictive legend. In addition, all recipients were provided with
sufficient access to Company information.
In July
2008, the Board of Directors of the Company authorized the issuance of stock
options for 50,000 shares of the Company’s common stock to one of its
independent directors. The options have an exercise price of $1.47 per share,
vest over a three year period, with one-third vesting on each of the grant date,
and the first and second anniversaries of the grant date. The option is
exercisable for five years from the date of grant.
In March
2, 2009, the Board of Directors of the Company authorized the issuance of stock
options for 60,000 shares of the Company’s common stock to its three independent
directors (each option was for 20,000 shares of the Company’s common stock). The
options have an exercise price of $1.47 per share. The options
granted to two of the directors vest over a three year period, with 20% vesting
on the grant date and 40% vesting on the first and second anniversaries of the
grant date. These options are exercisable for three years from the date of
grant, provided that the directors remain associated with the Company during the
period. The option granted to the third director was fully vested on the grant
date and is exercisable for three years from the date of grant, regardless of
continued association with the Company.
Item
16. Exhibits
Exhibit
Number
|
Description
|
||
3(i).1
|
Certificate
of Incorporation of American Business Holdings Inc. (incorporated by
reference to Exhibit 3.1 of SOKO’s Registration Statement on Form SB-2,
filed with the SEC on March 15, 2006 (SEC File No.
333-132429))
|
||
3(i).2
|
Certificate
of Ownership and Merger merging SOKO Fitness & Spa Group, Inc. into
American Business Holdings Inc. (incorporated by reference to Exhibit 3.1
of SOKO’s Current Report on Form 8-K, filed with the SEC on June 6, 2008
(SEC File No. 333-132429))
|
||
3(ii).1
|
Amended
and Restated Bylaws of SOKO Fitness & Spa Group, Inc. (incorporated by
reference to Exhibit 3(ii) of SOKO’s Annual Report on Form 10-K for the
fiscal year ended May 31, 2008, filed with the SEC on August 29, 2008 (SEC
File No. 333-132429))
|
||
4.1
|
Specimen
Stock Certificate (incorporated by reference to Exhibit 4.1 of SOKO’s
Annual Report on Form 10-K for the fiscal year ended May 31, 2008, filed
with the SEC on August 29, 2008 (SEC File No.
333-132429))
|
||
5.1
|
Opinion
of Ellenoff Grossman & Schole LLP (filed herewith)
|
||
10.1
|
Stock
Purchase Agreement dated April 11, 2008 betwen American Business Holdings,
Inc and each of Syed Irfan Husain, Syed Idris Husain and Verifica
International, Ltd (incorporated by reference to Exhibit 10.1 of SOKO’s
Amendment No. 5 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on December 4, 2009)
|
||
10.2
|
Share
Exchange Agreement dated April 11, 2008 by and among American Business
Holdings, Inc., Wealthlink Co., Ltd. and each of the shareholders of
Wealthlink Co., Ltd. (incorporated by reference to Exhibit 10.2 of SOKO’s
Current Report on Form 8-K, filed with the SEC on April 17, 2008 (SEC File
No. 333-132429))
|
||
10.3
|
Securities
Purchase Agreement dated April 11, 2008 between Samar Khan, on behalf of
the persons listed on Exhibit A thereto, and Liu
Tong (incorporated by reference to Exhibit 10.1 of SOKO’s
Amendment No. 5 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on December 4, 2009)
|
||
10.4
|
Securities
Purchase Agreement dated April 11, 2008 between Syed Idris Husain and Liu
Tong (incorporated by reference to Exhibit 10.1 of SOKO’s
Amendment No. 5 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on December 4, 2009
|
||
10.5
|
Form
of Securities Purchase Agreement dated April 11, 2008 among American
Business Holdings, Inc., Tong Liu, and the persons listed on the signature
pages thereto. (incorporated by reference to Exhibit 10.2 of SOKO’s
Current Report on Form 8-K, filed with the SEC on April 17, 2008 (SEC File
No. 333-132429))
|
||
10.6
|
Form
of Registration Rights Agreement dated April 11, 2008 between American
Business Holdings, Inc. and the several purchasers signatory thereto.
(incorporated by reference to Exhibit 10.3 of SOKO’s Current Report on
Form 8-K, filed with the SEC on April 17, 2008 (SEC File No.
333-132429))
|
||
10.7
|
Form
of Lock-up Agreement dated April 11, 2008 between American Business
Holdings, Inc. and the stockholder signatory thereto. (incorporated by
reference to Exhibit 10.4 of SOKO’s Current Report on Form 8-K, filed with
the SEC on April 17, 2008 (SEC File No. 333-132429))
|
||
10.8
|
Form
of Warrant issued by American Business Holdings, Inc. (incorporated by
reference to Exhibit 10.5 of SOKO’s Current Report on Form 8-K, filed with
the SEC on April 17, 2008 (SEC File No.
333-132429))
|
10.9
|
Form
of Escrow Agreement dated April 11, 2008 between American Business
Holdings, Inc., certain officers of the company, and Crone Rozynko, LLP.
(incorporated by reference to Exhibit 10.6 of SOKO’s Current Report on
Form 8-K, filed with the SEC on April 17, 2008 (SEC File No.
333-132429))
|
||
10.10
|
Consulting
Agreement dated April 11, 2008 between Syed Idris Husain and American
Business Holdings, Inc. (incorporated by reference to Exhibit 10.7 of
SOKO’s Current Report on Form 8-K, filed with the SEC on April 17, 2008
(SEC File No. 333-132429))
|
||
10.11
|
Stock
Purchase Agreement dated April 11, 2008 between American
Business Holdings, Inc. and each of Syed Irfan Husain, Syed Idris Husain
and Verifica International, Ltd. (incorporated by reference to Exhibit
10.8 of SOKO’s Current Report on Form 8-K, filed with the SEC on April 17,
2008 (SEC File No. 333-132429))
|
||
10.12
|
Form
of Consulting Services Agreement between Mege Union and each of the
Queen Group entities (incorporated by reference to Exhibit 10.9 of SOKO’s
Amendment No. 1 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on September 5, 2008)
|
||
10.13
|
Form
of Operating Agreement between Mege Union and each of the Queen Group
entities (incorporated by reference to Exhibit 10.10 of SOKO’s Amendment
No. 1 Registration Statement on Form S-1/A (SEC File No. 333-151563),
filed with the SEC on September 5, 2008)
|
||
10.14
|
Form
of Option Agreement among Mege Union, each of the Queen Group
entities and the shareholders of such Queen Group entity (incorporated by
reference to Exhibit 10.11 of SOKO’s Amendment No. 1 Registration
Statement on Form S-1/A (SEC File No. 333-151563), filed with the SEC on
September 5, 2008)
|
||
10.15
|
Form
of Equity Pledge Agreement among Mege Union, each of the Queen Group
entities and the shareholders of such Queen Group entity (incorporated by
reference to Exhibit 10.12 of SOKO’s Amendment No. 1 Registration
Statement on Form S-1/A (SEC File No. 333-151563), filed with the SEC on
September 5, 2008)
|
||
10.16
|
Form
of Proxy Agreement between Mege Union and the shareholders of each of
the Queen Group entities (incorporated by reference to Exhibit 10.13 of
SOKO’s Amendment No. 1 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on September 5, 2008)
|
||
10.17
|
Form
of Warrant issued by American Business Holdings, Inc. to E-Tech Securities
Inc. (incorporated by reference to Exhibit 10.14 of SOKO’s Amendment No. 2
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on February 17, 2009)
|
||
10.18
|
Stock
Option Agreement, dated July 8, 2008, between the Company and Gideon Kory
(incorporated by reference to Exhibit 10.15 of SOKO’s Amendment No. 2
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on February 17, 2009)
|
||
10.19
|
English
Translation of Placement Agent Engagement Letter, dated February 7, 2007,
between Etech Securities Inc. and Harbin Mege Union (HK) International
Group (incorporated by reference to Exhibit 10.16 of SOKO’s Amendment No.
2 Registration Statement on Form S-1/A (SEC File No. 333-151563), filed
with the SEC on February 17, 2009)
|
||
10.20
|
English
Translation of Financial Consulting Agreement, dated February 7, 2007,
between Etech International, Inc. and Mege Union (incorporated by
reference to Exhibit 10.17 of SOKO’s Amendment No. 2 Registration
Statement on Form S-1/A (SEC File No. 333-151563), filed with the SEC on
February 17, 2009)
|
10.21
|
Unofficial
English translation of Leasing Contract, dated January 1, 2007, between
Tong Liu, as lessor, and Harbin Queen Beauty Demonstration Center, as
lessee, related to the property located at 107 Jingyang Street, Daowai
District, Harbin, China (incorporated by reference to Exhibit 10.18 of
SOKO’s Amendment No. 2 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on February 17, 2009)
|
|
10.24
|
Unofficial
English translation of Leasing Contract, dated January 1, 2007, between
Tong Liu, as lessor, and Harbin Daoli Queen Beauty Demonstration Center,
as lessee, related to the property located at 24 Xishidao Street, Daoli
District, Harbin, China (incorporated by reference to Exhibit 10.19 of
SOKO’s Amendment No. 2 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on February 17, 2009)
|
|
10.25
|
Unofficial
English translation of Share Transfer Agreement, dated March 1, 2008,
between Shenyang Shengchao Management Consulting Co., Ltd and
Harbin Union Beauty Management Ltd. relating to the purchase of 51%
interest in Yoga Wave (incorporated by reference to Exhibit 10.20 of
SOKO’s Amendment No. 2 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on February 17, 2009)
|
|
10.26
|
Unofficial
English translation of Share Transfer Agreement, dated March 1, 2008,
between Harbin Union Beauty Management Ltd. and Harbin Tai Ai Beauty
Co., Ltd relating to the purchase of Harbin Tai Ai (incorporated by
reference to Exhibit 10.21 of SOKO’s Amendment No. 2 Registration
Statement on Form S-1/A (SEC File No. 333-151563), filed with the SEC on
February 17, 2009)
|
|
10.27
|
Unofficial
English translation of Leasing Agreement, dated March 30, 2007, covering a
lease term from May 20, 2007 to May 19, 2013, between Zhejiang Fine Steel
Structure Co., Ltd, as lessor, and Harbin Mege Union Management Co., Ltd.,
as lessee, related to the property located at 389 Hanshui Road, Nangang
District, Harbin, China (incorporated by reference to Exhibit 10.22 of
SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15, 2009)
|
|
10.28
|
Unofficial
English translation of Leasing Agreement, dated April 17, 2008, between
Wei Jing, as lessor, and Harbin Queen Beauty Demonstration Center, as
lessee, related to the property located at 400 Xuanhua Street, Nangang
District, Harbin, China (incorporated by reference to Exhibit 10.23 of
SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15, 2009)
|
|
10.29
|
Unofficial
English translation of House Leasing Agreement, dated November 30, 2008,
covering a lease term from December 1, 2008 to November 30, 2018, between
Yu Weibin, as lessor, and Harbin Queen Beauty Demonstration Center, as
lessee, related to the property located at No. 330, Xinyang Road, Daoli
District, Harbin, China (incorporated by reference to Exhibit 10.24 of
SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15, 2009)
|
|
10.30
|
Unofficial
English translation of Agreement, dated July 25, 2007, between Harbin
Shijifeng Entertainment Tec. Co., Ltd., as lessor, and Harbin Taiai Beauty
Co., Ltd., as lessee, related to the property located at 68 Ganshui Road,
Kaifa District, Harbin, China (incorporated by reference to Exhibit 10.25
of SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File
No. 333-151563), filed with the SEC on July 15, 2009)
|
|
10.31
|
Unofficial
English translation of Lease Agreement, dated December 24, 2003 (as
amended December 28, 2007), between Harbin Mengke Assets Development Co.,
Ltd, as lessor, and Harbin Huang Emperor & Golden Gym Club Ltd, as
lessee, related to the property located at 7 Yushan Road, Nangang
District, Harbin, China (incorporated by reference to Exhibit 10.26 of
SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15,
2009)
|
10.32
|
Unofficial
English translation of Lease Agreement, dated December 30, 2008, covering
a lease term from January 1, 2009 to January 1, 2013, between
Qingyou Quan, as lessor, and Harbin Queen Beauty Demonstration Center, as
lessee, related to the property located at 108 Jiejing Street, Nangang
District, Harbin, China (incorporated by reference to Exhibit 10.27 of
SOKO’s Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15, 2009)
|
||
10.33
|
Unofficial
English translation of House Leasing Agreement, dated June 6, 2007,
between Shenyang Nanyang Shopping Mall, as lessor, and Harbin Mege Union
Management Co., Ltd., as lessee, related to the property located at No.
96, Zhonghua Road, Heping District, Shenyang, China (incorporated by
reference to Exhibit 10.28 of SOKO’s Amendment No. 3 Registration
Statement on Form S-1/A (SEC File No. 333-151563), filed with the SEC on
July 15, 2009)
|
||
10.34
|
Unofficial
English translation of Lease Agreement, dated October 27, 2008, between
Liaoning Changqingteng Edu. Development Co., Ltd, as lessor, and Shenyang
Sitewei Fitness Co., Ltd, as lessee, related to first and fourth floors of
the property located at 124 Huigong Street, Shenhe District, Shenyang,
China (incorporated by reference to Exhibit 10.29 of SOKO’s Amendment No.
3 Registration Statement on Form S-1/A (SEC File No. 333-151563), filed
with the SEC on July 15, 2009)
|
||
10.35
|
Unofficial
English translation of Lease Agreement, dated October 27, 2008, between
Liaoning Bohai Trading Co., Ltd, as lessor, and Shenyang Sitewei Fitness
Co., Ltd, as lessee, related to fifth and B1 floors of the property
located at 124 Huigong Street, Shenhe District, Shenyang, China
(incorporated by reference to Exhibit 10.30 of SOKO’s Amendment No. 3
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on July 15, 2009)
|
||
10.36
|
Unofficial
English translation of Agreement of Transfer of Equity, dated May 31,
2009, between Starway Asia Limited, Hong Kong and Harbin Mege Union
Management Co., Ltd. relating to the purchase of 51% interest in Yoga Wave
II Spa (incorporated by reference to Exhibit 10.31 of SOKO’s
Amendment No. 3 Registration Statement on Form S-1/A (SEC File No.
333-151563), filed with the SEC on July 15, 2009)
|
||
10.37
|
Letter
Agreement, dated February 2, 2008, between Etech International and Fortune
Badge Limited with acknowledgement of Harbin Mege Union (HK) International
Group (incorporated by reference to Exhibit 10.1 of SOKO’s Amendment No. 5
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on December 4, 2009)
|
||
10.38
|
Letter
Agreement, dated February 2, 2008, between Etech International and Luck
Eagle Limited with acknowledgement of Harbin Mege Union (HK) International
Group (incorporated by reference to Exhibit 10.1 of SOKO’s Amendment No. 5
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on December 4, 2009)
|
||
10.39
|
Form
of Stock Option Agreement between the Company and Option Holder governing
the issuance of stock options to certain Directors on March 2, 2009
(incorporated by reference to Exhibit 10.1 of SOKO’s Amendment No. 5
Registration Statement on Form S-1/A (SEC File No. 333-151563), filed with
the SEC on December 4, 2009)
|
||
14.1
|
Code
of Ethical Conduct (Filed herewith)
|
||
21.1
|
List
of subsidiaries of the Company (Filed herewith)
|
||
23.1
|
Consent
of Bagell, Josephs, Levine & Company, LLC (Filed
herewith)
|
||
23.2
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit
5.1)
|
||
24.1
|
Power
of Attorney (included in signature page of Registration Statement on Form
S-1 (SEC File No. 333-151563), filed with the SEC on June 10,
2008)
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2)
That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4)
That, for the purpose of determining liability under the Securities
Act to any purchaser:
(i) If
the registrant is relying on Rule 430B:
(A)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(B)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B relating to
an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating to the
securities in the registration statement to which that prospectus relates, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such effective date; or
(ii) If
the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
(5)
That, for the purpose of determining liability of the registrant under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such
purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
(iv)
Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused Amendment No. 6 to this registration statement to be signed on its behalf
by the undersigned, in the City of Harbin, Heilongjiang Province, China on
February 2, 2010.
SOKO
Fitness & Spa Group, Inc.
|
|
By:
|
/s/ Tong
Liu
|
Tong
Liu
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
By:
|
/s/
Xia Yu
|
Xia
Yu
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
|
Title
|
Date
|
||
/s/
Tong Liu
|
Chief
Executive Officer, Chairman of the Board
|
February
2, 2010
|
||
Tong
Liu
|
(Principal
Executive Officer)
|
|||
/s/
Xia Yu
|
Chief
Financial Officer
|
February
2, 2010
|
||
Xia
Yu
|
(Principal
Financial and Accounting Officer)
|
|||
*
|
Director
|
February
2, 2010
|
||
Yang
Chen
|
||||
*
|
Director
|
February
2, 2010
|
||
Su
Zhang
|
||||
*
|
Director
|
February
2, 2010
|
||
Gideon
Efim Kory
|
||||
* /s/
Tong Liu
|
||||
Tong
Liu
Attorney-in-Fact
|
II-9