UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-K





x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended May 31, 2009





o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from   to.





Commission File No. 333-132429





SOKO FITNESS & SPA GROUP, INC.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

80-0122921(State or Other Jurisdiction
of  Incorporation or Organization)

(I.R.S. Employer Identification No.)





No.194,Guogeli Street, Harbin,
Heilongjiang Province, China 150001
(Address of Principal Executive Offices, including zip code)
011-86-451-87702255
(Registrant’s Telephone Number, Including Area Code)





Securities registered under Section 12(b) of the Exchange Act:  None





Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes o  No þ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes o  No þ





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


Yes þ  No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.þ





Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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  oNon-accelerated filer    o(Do not check if a smaller reporting company)

Smaller reporting company   þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o  No þ





On August 27, 2009, 17,000,000 shares of the registrant’s common stock were outstanding.


The aggregate market value of the voting stock held by non-affiliates as of November 28, 2008 was approximately $6,400,000.





Documents Incorporated by Reference


None












The statements contained in this Annual Report on Form 10-K that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business, which can be identified by the use of
forward-looking terminology, such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties.  Management wishes to caution the reader of the forward-looking statements that such statements, which are contained in this annual report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors,
including, but not limited to, economic, competitive, regulatory, technological, key employee, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors discussed in our other filings with the Securities and Exchange Commission ("SEC"), and that these statements are only estimates or predictions.  No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing us,
and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.





These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in "Risk Factors" in Item 1A of this annual report.





These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this annual report that are attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.  Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about
our intentions contained in this document is a statement of our intention as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.  Unless otherwise denoted herein, all financial information is provided in US
Dollars.





PART I





In this Annual Report on Form 10-K, 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 Annual Report, 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, Shenyang Beauty Demonstration Center and Harbin Queen Beauty Vocational
Skill Training School.





Item 1.  Business.





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 became our wholly owned subsidiary. Through Tissakin, we were a manufacturer of bags for packaging agricultural products in the Democratic Republic of Congo.






1







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 Co., Ltd. ("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 "Corporate History" beginning on page 13.





Wealthlink was organized under the laws of the Cayman Islands on March 27, 2007 and is headquartered in Harbin, Heilongjiang Province, China.  As a result of our acquisition of Wealthlink, we are engaged in the business of providing professional fitness, beauty salon and spa services through ten facilities located in the
northeast region of China.





Our Business





We are in the business of operating distinctive destination centers in the Northeast region of the People's Republic of China ("China") that offer professional fitness and yoga services as well as beauty salon and spa services. We are currently the largest
multi-facility operator of fitness centers and beauty salons and spas in Northeast China.  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 13,000 members in total and our nine beauty salons and spas are visited by approximately 19,500 clients annually.  We have one beauty school in Harbin, Heilongjiang Province,
China. Our goal is to provide programs, services, and products that uniquely combine exercise, education, and nutrition to assist our members and clients achieve their fitness and beauty goals and to help them to lead a healthy way of life and to achieve a richer lifestyle.




The Company has 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 our fitness club members spend more than $700 per year. The fast expansion of urban middle class population and continuous economics growth in China will provide the fitness industry with sustainable growth for a 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 ("AASFP") as of November 30, 2008, 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, 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 areas of operation, SOKO currently has market shares of approximately 16% and 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 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.  SOKO is the only multi-spa owner in the Northeast region of China. 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. According to the National
Bureau of Statistics of China, the first quarter of 2009, urban residents' disposable income rose 11.2%. However, if Chinese economic condition starts to show deterioration and Chinese stimulation program fails to achieve its goal, we may see a slowdown in our business. In the short-term, we face challenge of pricing war from 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 balance of nutrition, exercises and way of living, rather than simple fitness.  Currently, about 81% of our fitness club members renew their contracts and about 84% of our beauty salon clients return and book additional treatments.






2





Although the fitness and beauty markets are fast developing in China, such market faces certain challenges. In China, the markets for fitness clubs 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 spas only compete on pricing.  SOKO, however, believes that market segmentation similar to the segmentation in the US will be the future. The majority of customers of fitness clubs and beauty 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 in slower development for our brand.





As the market entry costs are relatively low and new clubs can attract considerable customers by massive advertising before opening, SOKO faces 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. As a result, many new clubs leave the market after one to two years. In order to maintain our membership 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.





SOKO sees loyal members and clients as long term investment, whose value is increasing over years.  While many competitors may be willing to enter into a price war, SOKO positions itself 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 fulfills its members and clients growing demands.  Although SOKO’s membership fees and spa treatment fees are not cheap on average in 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 about 11.2 million, which ranks number one in third 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."





SOKO has been in the beauty and spa industry more than 17 years. SOKO is a leader in Harbin’s beauty and spa industry and dominates the mid-high end market.  In Harbin we serve approximately 19,500 clients while, according to our internal marketing research, we believe our next largest competitor only serves about
1,500 clients.






3





For the year ended May 31, 2009, our beauty and spa operations accounted for about 76% of our revenue, fitness operations accounted for about 15% of our revenue and miscellaneous activities (including our beauty school) accounted for the remaining 9% of our
revenue.   We believe that this revenue breakdown will continue in the future. We generally open our facilities to members 12 hours a day, 7 days a week.  Currently, our fitness centers average 33,150 visits per month and our beauty salons and spas average about 21,000 visits per month.





Our services and products are tailored to high end customers who appreciate quality, 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 the region.  However, in the event that economic conditions continue to deteriorate, our business may be affected.





Plan of Operations





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 two majority (51%) owned operating subsidiaries as well as through an association with seven 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 comprise 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’s 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.  The following is a complete list of the fitness centers and beauty salons and spas currently operated by Mege Union as of June 1, 2009, together with their recognized facility name and relationship to Mege
Union:





Fitness Centers





Legal Name of Entity
Commercial Name
OwnershipShenyang Letian Yoga Fitness Center
Yoga Wave
Owned 51% by Mege Union and 49% by an unaffiliated third partyShenyang Starway Fitness Co., Ltd.
Yoga Wave II
Owned 51% by Mege Union and 49% by an unaffiliated third partyHarbin Huang Emperor & Golden Gym Club Co., Ltd.
SOKO International Fitness Center
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege Union





Beauty Salons and Spas





Legal Name of Entity
Commercial Name
OwnershipHarbin Mege Union Beauty Management Ltd.
Legend Spa
Owned 100% by WealthlinkHarbin Tai Ai Beauty Co. Ltd.
Lea Spa
Owned 100% by Mege UnionHarbin Queen Beauty Demonstration Center ("Harbin Demonstration Center")
Daowai Spa
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege UnionHarbin Queen Beauty Demonstration Center Nangang Branch
Nangang Spa
A branch of Harbin Demonstration Center and as such part of Queen GroupHarbin Queen Beauty Demonstration Center Xuanhua Branch
Xuanhua Spa
A branch of Harbin Demonstration Center and as such part of Queen Group   4
   Harbin Daoli Queen Demonstration Beauty Parlor
Daoli Spa
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege UnionHarbin Xinyang Spa
(same as legal name)
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege UnionHarbin SOKO Spa
(same as legal name)
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege UnionShenyang Queen Beauty Demonstration Co. Ltd.
Shenyang Queen Beauty Spa
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege Union




Beauty School





Legal Name of Entity
Commercial Name
OwnershipHarbin Queen Beauty Vocational Skill Training School
(same as legal name)
Part of Queen Group - owned 100% by Mr. Liu and operated under agreements between entity and Mege Union





In addition, Mege Union currently has one new beauty salon & spa facility under construction. This facility will operate under the name Da Qing and is scheduled to open in May 2010.  We plan to expand our brand through the establishment of additional directly owned subsidiaries of Mege Union.





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 fiscal year 2009, we had approximately 13,000 members
at our fitness centers and approximately 19,500 clients at our beauty salons and spas. 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 our fitness club members 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. Our members enjoy professional fitness, beauty salon and spa services provided by our facilities.  The attrition rate in our fitness centers is currently about 19%, the attrition rate in our beauty salons and spas (clients
not returning after booking a single treatment or a multiple treatment package) is currently about 11%. 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 treatments developed as follows:




May 31,2007


2008


2009Fitness Memberships


6,800



10,000



13,000New memberships






2,980



4,890Old memberships that were renewed


6,800



7,020



8,110Memberships that were not renewed






340



1,890Beauty Salon and Spa Clients


5,000



10,000



19,500New clients






2,140



11,068Recurring clients


5,000



7,860



8,432Clients that did not purchase additional treatments






340



1,568






5





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 clubs, as well as varying price packages at our beauty salons and spas and beauty school.





With respect to our fitness centers, 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, he or
she is required to prepay the membership fee for the entire term. Such prepaid membership fee is non-refundable if the member decides to cancel membership before the term expires.  No other fees have to be paid by the member to maintain his or her membership. For our Yoga Wave and Yoga Wave II fitness centers, each 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 our Yoga Wave and Yoga Wave II fitness club members 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.





The clients of the beauty salons and spas do not need to pay any upfront initiation fee or monthly service fee in order to receive services.  Clients can receive services as walk-ins and by appointment. They can choose between one-time treatments at our regular rates and multiple treatments at discounted rates. If a client
chooses multiple treatments, he or she 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 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 clubs, 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 the industry in China, the bulk of our working capital is created through non-refundable membership fees and prepaid, non-refundable fees for memberships 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 achieve their fitness and beauty goals.   We have elected to take advantage of the synergies among our core business lines, locating many of our
beauty salons within our spa 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.






6





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 spas and salons. 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 club 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 club or beauty salon and spa. As a new fitness club or beauty salon and spa increases its customer base, fixed costs are typically spread over an increasing
revenue base and its club contribution tends to improve. Based on our experience, revenues of a fitness club increase significantly during its first three years of operation. By the end of the first full year of operations, a fitness club has typically achieved modest club contribution and is cash flow positive. By the end of the second full year of operations, a fitness club has typically generated significantly better club 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 club 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 six to eight 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 client base
grows with minimal incremental fixed operating costs. Based on the historical performance of our mature fitness clubs and beauty salons and spas, we expect that, even in difficult economic times, our newer fitness clubs and beauty salons and spas will grow significantly faster over the first two to three years than our average mature fitness clubs or beauty salons and spas, while requiring only a minimal level of additional working capital. We expect growth in revenues to continue as recently opened fitness clubs
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 clubs 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.






7





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 last year.





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 our fitness members 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.





Services, Programs and Products Services





We provide programs, services, and products that are uniquely combined with exercise, education, and nutrition to assist our members with achieving fitness and beauty goals that may help them achieve a richer lifestyle, including:





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
·Swimming
·Hair, nail and skin care
·Body re-shaping
·Whirlpool, sauna and steam rooms
·Therapeutic and other massages
·Professional skill training
·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.




8







As of the end of our most recent fiscal year, our revenues from each of our business segments was:





May 31,2009


2008Professional Services

$
11,284,644


$
10,296,518Sales of Products


3,624,257



1,229,363Membership Fees


2,977,462



1,498,503Tuition


1,682,744



938,746Total

$
19,569,108


$
13,963,130





Acquisitions of Lea Spa and Yoga Wave II





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 to purchase a 51% interest in Shenyang Starway Fitness Co., Ltd (Yoga Wave II) for RMB2,718,300 (approximately $0.4 million at the date of signing). The acquisition was completed in June 2009.





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 73% and 86% of our total revenue for fiscal years 2009 and 2008, respectively.  The Queen Group consists of independently
owned variable interest entities through which we operate successful salons and fitness centers.  Our Chairman, Mr. Liu, is the sole owner of each of the Queen Group entities.  The companies comprising the Queen Group are:





·
Harbin Huang Emperor & Golden Gym Club Co., Ltd. (SOKO International Fitness Center);





·
Harbin Daoli Queen Demonstration Beauty Parlor;





·
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;





·
Shenyang Queen Beauty Demonstration Co. Ltd.; 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;






9





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 interest of the shareholders in the their shares, 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.  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 May 31, 2009, there was no existing indebtedness of the Queen Group.





Key Characteristics





Combined with over 17 years of knowledge and experience with beauty salon operations, advanced western management, and Chinese consumers’ habit, we have has developed a localized managing system that supports our leading position in our current fitness & spa operations as well 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.






10





We have instituted a number of incentive plans that are designed to attract and motivate customers, 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.  As
of May 31, 2009, corporate clients contributed approximately 2.8% to our total revenue.





Marketing Strategy





We strategically target the following individual customer groups to differentiate ourselves from our competitors:





·
Management level group from various enterprises (this 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 group tends to be the most active group of population in pursuit of the newest trends in fashion and sport activities. They also have high quality lifestyles and are considered one of the strongest consumption power groups);





·
Government group (this group tends to contain the more senior portion of the population which has comparatively higher demands on their conditions); and





·
Foreigner group (this group is the mature-stage-consumer group who usually have higher incentives and initiatives to become the member of beauty salons and spas and fitness center).





We not only engage in traditional marketing tools to advertise in the marketplace, but also develop mutually beneficial platforms through our institutional customers to further enhance our marketing strategy:


·
Direct Telemarketing: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.


·
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, Songlei Commercial Group.





·
Traditional Media:we also use traditional media channels such as television, magazine, radio and newspaper advertising to reach our target audience.





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  salons and spas discounts for customers.





Competition





China’s health and fitness market is highly segmented and isstill 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 in 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.






11







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 shall be in charge of the operation of physical culture and sports throughout China. Other relevant departments under Chinese State Council
shall administer the operation of physical culture and sports within their respective functions and powers.





China practices a skill-grading system for social sports instructors, who guide social sports activities.  The social sports instructors are classified into four classes: Class III, Class II, Class I and State Level. Each class of instructor must be trained accordingly. State Level instructors (the highest class) must have
a minimum of five years relevant experience.





According to "Heilongjiang Provincial Administration Regulation in respect of Physical Exercise Related Business," the physical exercise related business shall be 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; and (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 shall be in charge of the work of national beauty treatment and hairdressing industry.





Pursuant to the Beauty Order, business operators undertaking beauty treatment and hairdressing operations shall meet the following basic conditions: (1) capacity for bearing civil liabilities; (2) have a fixed place of business; (3) have established facilities tailored to the services they provide; and (4) professional technicians
who have obtained the corresponding qualification certificates.






12







The beauticians, hairdressers and other professional technicians who undertake beauty treatment and hairdressing services shall obtain the qualification certificate issued by the relevant governmental department of China.  The business operator of beauty treatment and hairdressing shall display 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 shall comply with the relevant sanitation provisions and standards and have the corresponding sanitary and sterilizing facilities and measures. The practitioner shall 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.





Employees





As of May 31, 2009, we had 800 full-time employees. Of these employees, 290 employees are employed by Mege Union and 510 employees are employed by the Queen Group. Our employees work in the functional units as indicated in the table below.





Department

Total NumberManagement


30All administration


70Sales


148Beauty and Spa Professionals


456Fitness Professionals


96





We have not experienced any work stoppages and we consider relations with our employees to be good.





Corporate History





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., a Democratic Republic of Congo corporation ("Tissakin"), so that Tissakin became our wholly owned subsidiary. Through Tissakin, the Company was a manufacturer of bags for packaging agricultural products in the Democratic Republic of Congo.





On April 11, 2008 (the "Closing Date"), we entered into a Share Exchange Agreement with Wealthlink and the shareholders of Wealthlink (the "Wealthlink Shareholders") pursuant to which we issued an aggregate of 13,300,000 shares of common stock of the Company to the Wealthlink Shareholders, including Mr. Tong Liu, our current Chairman
of the Board and Chief Executive Officer, in exchange for all of the outstanding shares of common stock of Wealthlink and a cash payment of $300,000 by Wealthlink to the Company.  Concurrently with the share exchange, we provided $400,000 to Mr. Tong Liu to purchase 1,000,000 shares of common stock from Mr. 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 them to the Company as agreed for cancellation.  These transactions are collectively referred to as the "share exchange."





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, Syed Idris Husain, and Verifica International, Ltd. (collectively, the "Buyers").  Pursuant
to this agreement, the Buyers purchased all issued and outstanding shares of Tissakin in consideration of 79,000,000 shares of common stock of the company owned by the Buyers.






13





In consideration for structuring the share exchange with Wealthlink, we agreed to compensate E-Tech International, Inc. with (i) a retainer of $20,000 and (ii) shares of our common stock equal to two percent (2%) of total number of shares outstanding after the stock exchange transaction with Wealthlink and the placement of the Financing
(as defined below) (340,000 shares). Further, in consideration of services provided to the Company in association with the consummation of the foregoing transactions, an aggregate of 935,000 shares were issued to several other advisors in lieu of cash compensation, totaling the number of shares issued to the advisors in connection with the foregoing transactions to 1,275,000 shares of our common stock.





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"). 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 filed a registration statement with respect to the shares and warrants acquired by the Purchasers with the SEC on June 10, 2008.  This registration statement remains subject to SEC review.





In consideration for acting as placement agent for the Financing, SOKO agreed to compensate 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).  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.





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;





·
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;





·
The Company issued an additional 13,300,000 shares to Wealthlink Shareholders, including Mr. Liu;





·
The company issued an aggregate of 1,275,000 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 cancelled 65,000,000 shares; and





·
E-Tech Securities Inc. was issued a warrant to purchase up to 160,000 shares.





An additional 425,000 shares remain held by certain original shareholders of the company.





On the Closing Date, we also entered into a Consulting Agreement with Syed Idris Husain, pursuant to which Mr. Husain agreed to provide us with regular and customary consulting advise as may be requested by us for a period of six months from the Closing Date.  Pursuant to this agreement, on the Closing Date, the Company
paid to Mr. Husain the lump sum of $300,000 in consideration of such services.





After the completion of the transactions described above, we changed our name to SOKO Fitness & Spa Group, Inc.






14





Item 1A.  Risk Factors.





You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company and some risks and uncertainties are inherent in our business. Additional risks not presently known to us or that we currently believe are immaterial may
also impair our business operations. Our business could be harmed by any of these risks. The following sets forth factors related to our business, operations, financial position or future financial performance or cash flows which could cause an investment in our securities to decline and result in a loss. In assessing these risks, you should also refer to the other information contained in this annual report, including our consolidated financial statements and related notes.





Risks Related to Our Business and Industry





We face competition from other health and fitness facilities and service-providers.





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. If our competitors are successful in providing similar or better facilities, services and products, we could experience a significant decline in clientele or members. Any such decline could negatively affect our revenues.





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 Risk Factors, and the following factors may affect our operating results:





·
Our ability to continue to attract clientele to our health, fitness and spa facilities;





·
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.






15





If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenues and operating results could suffer.





Our success depends on providing products and services that make our members and clientele in the health and fitness community enjoy a more satisfying and enjoyable experience. Our competitors are constantly developing new facilities, products and services. As a result, we must continue to  enhance our facilities and our
existing products and services and introduce new products and services that people can enjoy and use. We spent approximately $100,000 and $130,000, on research and development in fiscal years 2008 and 2009, respectively.  If we are unable to provide quality products and services, then our clients and members may become dissatisfied and move to a competitor’s products and services. Our operating results would also suffer if our innovations are not responsive to the needs of our clients and members.





Our business and operations are experiencing growth. If we fail to effectively manage our growth, by managing our employees and operations and developing our clientele, our business and operating results could be harmed.





We have experienced, and continue to experience, growth in our operations. This has placed, and will continue to place, demands on our management, as well as on our operational and financial infrastructure. If we do not effectively manage our growth, the quality of our products and services could suffer, which could negatively affect
our brand and operating results. To effectively manage this growth, we need to continue to improve our operational, financial and management controls and our reporting systems and procedures. These systems enhancements and improvements will require significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.





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 and managers. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. 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.





We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.





Capital requirements are difficult to plan in our rapidly changing industry.  Although we currently expect to have sufficient funding for the next 12 months, we expect that we will need additional capital to fund our future growth.





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 our industry;





·
Investors' perceptions of, and demand for, companies operating in China;





·
Conditions of the U.S. and other capital markets in which we may seek to raise funds;





·
Our future results of operations, financial condition and cash flows;





·
Governmental regulation of foreign investment in companies in particular countries;





·
Economic, political and other conditions in the United States, China, and other countries; and





·
Governmental policies relating to foreign currency borrowings.






16





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 successful in locating a suitable financing transaction in a timely fashion or at all. In addition, there is no assurance that we will be successful
in obtaining 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 will incur significant costs as a result of operating as a public company, our management will be required to devote substantial time to new compliance initiatives.





While we are a public company, our compliance costs to date have not been substantial in light of our limited operations.  SOKO has never operated as a public company.  As a public company with substantial operations, we will incur increased legal, accounting and other expenses.  The costs of preparing
and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is time-consuming and costly.





It will also be time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act").  Certain members of our management have limited or no experience operating a company whose securities are traded or listed
on an exchange, nor with SEC rules and requirements, including SEC reporting practices and requirements that are applicable to a publicly traded company.  We will need to recruit, hire, train and retain additional financial reporting, internal controls and other personnel in order to develop and implement appropriate internal controls and reporting procedures.  If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent
accountant certifications required by the Sarbanes-Oxley Act.





If we fail to establish and maintain an effective system of internal control, 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 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 SOKO 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.






17





New rules, 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 those 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 perceived
personal risk associated with the Sarbanes-Oxley Act may deter qualified individuals from accepting roles as directors and executive officers.





Further, some of these recent changes heighten the requirements for board or committee membership, particularly with respect to an individual's independence and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. 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 successful in obtaining such listing) could be adversely affected.





We are a holding company that depends on cash flow from Mege Union and Queen Group to meet our obligations.





After the consummation of the share exchange, 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 and Queen Group.  We currently expect that the earnings and cash flow of our subsidiary will primarily
be retained and used by us in its operations.





Risks Related to Conducting Our Business in China





We are subject to international economic and political risks 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.





Our business is conducted in China. 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. 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.





China’s economic policies could affect our business.





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





While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. China's government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the
overall economy of China, but they may also have a negative effect on us. For example, operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of China has been changing from a planned economy to a more market-oriented economy. In recent years China government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets,
and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by our government. In addition, China government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and
the provision of preferential treatment to particular industries or companies.






18





We may have difficulty establishing adequate management, legal and financial controls in China.





China historically has not adopted a Western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.





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.





As we have limited business insurance coverage in China, any loss which we suffer may not be insured or may be insured to only a limited extent.





The insurance industry in China is still in an early state of development and insurance companies located in China offer limited business insurance products. In the event of damage or loss to our properties, our insurance may not provide as much coverage as if we were insured by insurance companies in the United States.





We may face judicial corruption in China.





Another obstacle to foreign investment in China is corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business, if desired, through China’s poorly developed and sometimes corrupt 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.





The government of China could change our policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our and your investment.





Our business is subject to significant political and economic uncertainties and may be affected by political, economic and social developments in China. Over the past several years, the government of China has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization.
The government of China may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice. Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, or devaluations of currency could cause a decline in the price of our common stock, should a market for our common stock ever develop.
Nationalization or expropriation could even result in the total loss of your investment.






19





The nature and application of many laws of China create an uncertain environment for business operations and they could have a negative effect on us.





The legal system in China is a civil law system. Unlike the common law system, the civil law system is based on written statutes and decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on
economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could cause a decline in the price of our common stock. Since these laws, regulations and legal requirements are relatively recent,
their interpretation and enforcement involve significant uncertainty.





We face risks associated with currency exchange rate fluctuations.





Although we use the United States dollar for financial reporting purposes, all of the transactions effected by our operating subsidiaries are denominated in RMB. The value of the RMB fluctuates and is subject to changes in China’s political and economic conditions. We do not currently engage in hedging activities to protect
against foreign currency risks. Even if we chose to engage in such hedging activates, we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China.





It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.





As our executive officers and several of our directors, including the chairman of our Board of Directors, are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or our officers and directors by a stockholder or group of stockholders
in the United States. Also, because our operating subsidiaries and assets are located in China, it may be extremely difficult or impossible for you to access those assets to enforce judgments rendered against us or our directors or executive offices by United States courts. In addition, the courts in China may not permit the enforcement of judgments arising out of United States federal and state corporate, securities or similar laws. Accordingly, United States investors may not be able to enforce judgments against
us for violation of United States securities laws.





We may face obstacles from the communist system in China.





Foreign companies conducting operations in China face significant political, economic and legal risks. The Communist regime in China, including a cumbersome bureaucracy, may hinder Western investment.





Capital outflow policies in China may hamper our ability to declare and pay dividends to our shareholders.





China has adopted currency and capital transfer regulations. These regulations may require us to comply with complex regulations for the movement of capital. Although our management believes that we will be in compliance with these regulations, we may not be able to pay dividends to our shareholders outside of China if these regulations
or the interpretations of them by courts or regulatory agencies change. In addition, under current China 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.





Risks Related to Ownership of our Common Stock





Our common stock price is subject to significant volatility, which could result in substantial losses for investors.





Prices for our shares are determined in the marketplace and may accordingly be influenced by many factors, including, but not limited to:





·
the depth and liquidity of the market for the shares;






20





·
quarter-to-quarter variations in our operating results;





·
announcements about our performance as well as the announcements of our competitors about the performance of their businesses;





·
investors’ evaluations of our future prospects and the food industry generally;





·
changes in earnings estimates by, or failure to meet the expectations of, securities analysts;





·
our dividend policy; and





·
general economic and market conditions.





In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. These market fluctuations could adversely affect the trading price of our shares.





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.





Shares of our common stock lack a significant trading market.





Shares of our common stock are not eligible as yet for trading on any national securities exchange. Our common stock is eligible for quotation in the over-the-counter market on the Over-The-Counter Bulletin Board ("OTCBB") pursuant to Rule 15c2-11 of the Exchange Act. 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.





Future sales of shares of our common stock by our stockholders could cause our stock price to decline.





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 significantly reduce the equity interest of investors in this offering; and





·
may adversely affect prevailing market prices for our common stock.







21


The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.





Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules. Shares of our common stock are subject to rules adopted by the SEC that regulate broker-dealer practices in connection with transaction in "penny stocks." Penny stocks are generally
equity securities with a price of less than $5.00 which are not registered on a national securities exchange, provided that current price and volume information with respect to transaction in those securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which contains the following:





·
a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;





·
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities laws;





·
a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the "bid" and "ask" price;





·
a toll-free telephone number for inquiries on disciplinary actions;





·
definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and





·
such other information and is in such form (including language, type, size and format), as the SEC shall require by rule or regulation.





Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer with the following:





·
the bid and offer quotations for the penny stock;





·
the compensation of the broker-dealer and our salesperson in the transaction;





·
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and





·
monthly account statements showing the market value of each penny stock held in the customer’s account.





In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser.  The broker-dealer must receive the purchaser’s written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules.






22





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.





Our management and directors own a large percentage 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.





We have not paid dividends in the past and do not expect to pay dividends in the future.  Any return on investment may be limited to the value of our common stock.





We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future.  The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant.  If
we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.





Item 2.  Properties.





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 (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, 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. (Shenyang Queen Beauty Spa)
96 Zhonghua Road, Heping District, Shenyang, China;(11)
Harbin Xinyang Spa
330 Xinyang Road, Daoli District, Harbin, China; and(12)
Shenyang Starway Fitness Co., Ltd. (Yoga Wave II)
124 Huigong St. Shenhe District, Shenyang, China





In addition we entered into a standard lease agreement for the new Da Qing facility at 1 Lishui Road, Daqing District, Harbin, China.






23





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.





Item 3.  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 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 owner of record of the beneficially or 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.





Item 4.  Submission of Matters to a Vote of Security Holders.





There were no matters submitted to the vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended May 31, 2009.






24







PART II





Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities.





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


LowFiscal 2008Fourth Quarter (May 28, 2008 - May 31, 2008)

$
12.00


$
1.25Fiscal 2009First Quarter (through August 31, 2008)

$
2.25


$
0.50Second Quarter (through November 30, 2008)

$
1.02


$
0.40Third Quarter (through February 28, 2009)

$
1.20


$
0.80Fourth Quarter (through May 31, 2009)

$
1.55


$
0.10Fiscal 2010First Quarter (through August 27, 2009)

$
4.00


$
0.10





On August 27, 2009, the closing price of our common stock as reported on the OTCBB was $2.50.





Holders





As of August 27, 2009, there were 17,000,000 shares of our common stock outstanding held by approximately 19 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.





Securities Authorized for Issuance under Equity Compensation Plans





Information regarding securities authorized for issuance under our equity compensation plans is disclosed in the section captioned, "Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."






25





Repurchases of Equity Securities





None





Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities





None





Item 6.  Selected Financial Data.





Not required.





Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.





Safe Harbor Declaration





The comments made throughout this annual report 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 annual report.





Overview





We are in the business of operating distinctive destination centers that offer professional fitness, beauty salon and spa services in China. Our beauty salons provide services that include, but are not limited to, skincare, hair dressing, manicure, pedicure, body care, massage, and weight loss therapy. We currently have approximately
13,000 fitness members and approximately 19,500 beauty and spa clients within three fitness centers and nine beauty and spa facilities located in the northeast region of China.  We have one beauty school in Harbin, Heilongjiang Province, China.  For a complete list of our facilities, please see Item 1. "Business - Plan of Operations" on page 4.





Our goal is to provide programs, services, and products that are uniquely combined with exercise, education, and nutrition to assist our members and clients with achieving fitness and beauty goals that may help them achieve a richer lifestyle.  We generally open our facilities 12 hours a day, 7 days a week.  Currently,
our members average 33,150 visits per month to our fitness centers and clients average about 21,000 visits per month to our beauty salons and spas.





We have been in the beauty and spa industry more than 17 years.  We are in a leading role in the Harbin’s beauty and spa industry and dominate the mid-high end market.  Based on the marketing research of our marketing department, in Harbin we currently have a market share of 66% serving approximately 19,500
customers while our next largest competitor only serves about 1,500 customers.  Our services and products are tailored to high end customers who appreciate quality, 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 the region.  However, in the event that economic conditions continue to deteriorate, our business may be affected.





For the year ended May 31, 2009, our beauty and spa operations accounted for about 76% of our revenue, fitness accounted for about 15% of our revenue and miscellaneous activities accounted for the remaining 9% of our revenue.






26





Results of Operation





For the Fiscal Years Ended May 31, 2009 Compared to May 31, 2008





Year Ended May 31,


$


%2009


2008


Change


ChangeRevenuesProfessional 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



3,536,547



2,365,512



66.9
%Income tax provision


42,667



74,381



(31,714
)


(42.6
)%Net income


7,030,500



5,175,930



1,854,570



35.8
%





Revenues:





Revenues for the 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 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 customers, sales of add-on services to
customers and our continued efforts to add new customers in new and existing facilities.





Our customer base increased as follows:





Year Ended May 31,2009


2008Fitness Memberships


13,000



10,000New Memberships


4,890



2,980Old memberships that were renewed


8,110



7,020Memberships that were not renewed


1,890



340Beauty & Spa Clients


19,500



10,000New Clients


11,068



2,140Recurring clients that purchased additional treatments


8,432



7,860Clients that did not purchase additional treatments


1,568



340





Compared to fiscal year 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 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 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.






27







Operating Expenses:





Our operating expenses, consisting of selling, general and administrative expenses, increased by approximately $2.4 million to $5.9 million for the year ended May 31, 2009 from $3.5 million for the previous year. This increase in selling, general and administrative expenses by 66.9% 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 year ended May 31, 2009 from $57,148 for the previous year. This increase is mainly attributable to an 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:





Our provisions for income taxes for the year 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:





Net income for the year ended May 31, 2009 increased by approximately $1.9 million to $7.0 million as compared to $5.2 million for the previous year, representing a 35.8% 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 clientele base turns over at rate of about 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 more
higher margin offerings (such as spa services), our profits and margins should continue to grow going forward.





We have begun to implement some significant 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.






28





Liquidity and Capital Resources





Year Ended May 31,2009


2008Cash provided by (used in):Operating Activities

$
9,385,023


$
4,849,473Investing Activities

$
(8,675,665
)

$
(8,612,510
)Financing Activities

$
(391,432
)


4,737,315





Operations





Cash provided by operating activities totaled approximately $9.4 million for the 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 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 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.





Interest expense paid for the above short term loans totaled $66,121 and $49,042 for the 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 Shanghai Pudong Development Bank is willing to provide new and/or additional short-term facilities in the future.





Capital Expenditures





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 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 RMB2,718,300 (approximately $0.4 million at the date of signing), payable on signing. The transaction was completed
in June 2009.






29





The general purpose of the Lea Spa, Yoga Wave and Yoga Wave II acquisitions is to expand our business presence in the Shenyang and Harbin markets, resulting in a maximization of profits. The funds used for the acquisitions came from the following sources:





Fund Source

Amount


Percentage of Acquisition CostShort-term loans

$
811,125



24.9Corporate funds raised in financing


793,711



24.4Existing profits


1,652,057



50.7Total

$
3,256,893



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 more sophisticated 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 a new lease for our new Da Qing facility. Currently, all renovations and constructions except the construction of the new Da Qing facility have been completed and all our facilities except Da Qing are fully accessible. The construction of the Da Qing facility is expected to be completed in May 2010. The estimated
construction costs for Da Qing are $1,534,827. During the construction, the Da Qing facility is not open to customers.





The funds for the 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 beauty salons, spas and fitness centers to expand our territory 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 at Item 15, 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.






30





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 years ended May 31, 2009 and 2008.





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. 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 yearsBuildings improvement
10 yearsMachinery and equipment
5   yearsComputer, office equipment and furniture
5   yearsAutomobiles
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 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.






31





Goodwill





Goodwill and other intangible assets are accounted for in accordance with the provisions of Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other Intangible Assets." Under FAS No. 142, 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 years ended May 31, 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. 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.





Recent Accounting Pronouncements





In June 2009, the Financial Accounting Standards Board ("FASB") issued FAS No. 168, "TheFASB Accounting Standards CodificationTMand
the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162." FAS No. 168 provides that TheFASB Accounting Standards CodificationTM("Codification")will
become the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of FAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. FAS No.
168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of FAS No. 168 is not expected to have a material impact on the Company’s results of operations or financial position.






32





In June 2009, FASB issued FAS No. 167, "Amendments to FASB Interpretation No. 46(R)", which improves financial reporting by enterprises involved with variable interest entities. FAS No. 167 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities , as a result of the elimination of the qualifying special-purpose entity concept in FAS No. 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FAS No. 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period
that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Adoption of FAS No. 167 is not expected to have a material impact on the Company’s results of operations or financial position.





In May 2009, FASB issued FAS No. 165, "Subsequent Events," which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. An entity should apply the requirements of FAS No. 165 to interim or annual
financial periods ending after June 15, 2009. Adoption of FAS No. 165 is not expected to have a material impact on the Company’s results of operations or financial position.





On October 10, 2008, FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of FAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results.





In June 2008, FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”.   FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents
are participating securities, and thus, should be included in the two-class method of computing EPS.  FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years.  It also requires that all prior-period EPS data be adjusted retrospectively.  Its adoption did not have a material impact on our financial position or results.





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 variable interest entity, Queen Group. The share exchange transaction 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 May 31, 2009, Queen Group consisted of seven individual-owned sole proprietorships (one or which had two additional branches), which, under 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 27% of the TNI.  Legend Spa is also subject to the same fixed-rate income tax as the two entities under Queen Group.  Yoga Wave is subject to an income tax rate of 25%
on all net income.






33





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 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 years ended May 31, 2009 and 2008 were $208,021
and $34,000, 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.





Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.





We are exposed to market risks related to changes in interest rates and foreign currency exchange rates, however, we believe those risks to be not material in relation to our operations. We do not have any derivative financial instruments.





Interest Rate Risk





As of May 31, 2009, we held no money market securities or short term available for sale marketable securities. Due to the short term duration of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio, therefore, we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.





Foreign Currency Exchange Risk





All of our revenues are denominated in RMB and, as a result, we have certain exposure to foreign currency exchange risk with respect to current revenues. A majority of our expenses are payable in foreign currency. We do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative
financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows.





Item 8.  Financial Statements and Supplementary Data.





The information required by this Item 8 is filed at Item 15. "Exhibits, Financial Statement Schedules" as part of this annual report.





INDEX TO FINANCIAL STATEMENTS


PageReport of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets as of May 31 2009 and 2008 (Restated)
F-2Consolidated Statements of Income for the Years Ended May 31, 2009 and 2008 (Restated)
F-3Statements of Changes in Stockholders’ Equity for the Years Ended May 31, 2009 and 2008 (Restated)
F-4Statements of Cash Flows for the Years Ended May 31, 2009 and 2008 (Restated)
F-5Notes to Consolidated Financial Statements  for the Years Ended May 31, 2009 and 2008 (Restated)
F-6






34





Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.





None





Item 9A.  Controls and Procedures.





Disclosure Controls and Procedures.





Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Based on that
evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective as of May 31, 2009 based on the significant deficiencies described below.





Our internal controls over financial reporting are designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting, and includes those policies and procedures that:





1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;





2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and





3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.





Management’s Report on Internal Control Over Financial Reporting





Management has evaluated the effectiveness of our internal control over financial reporting (ICFR) as of May 31, 2009 based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Based on our assessment and those criteria, our management has concluded that our internal control over financial reporting has the following significant deficiencies as of May 31, 2009:





1.
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.





2.
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.





In summary, management believes that the magnitude of any financial statement misstatement resulting from these control deficiencies shall be more than inconsequential, but less than material.  Accordingly, management has determined that each of the control deficiencies described above constitute significant deficiencies.






35





Remediation of Significant Deficiencies





As of May 31, 2009, there were control deficiencies which constitute as significant deficiencies in our internal control over financial reporting.





We have authorized (i) the education and training of our existing accounting personnel, especially in the application of US GAAP standards and new accounting pronouncements and (ii) the addition of staff members to our accounting department to ensure that it has the depth and experience to implement and monitor the appropriate level
of control procedures related to all of our locations and corporate office.  In addition, we are in the process of planning and implementing more appropriate internal control policies and procedures in all of our locations and subsidiaries to provide adequate segregation of duties in critical control areas.





Through these steps, we believe we are addressing the deficiencies that affected our internal control over financial reporting as of May 31, 2009. Because the remedial actions require hiring of additional personnel and relying extensively on manual review and approval, the successful operation of these controls for at least several
quarters may be required before management may be able to conclude that the significant deficiencies have been remediated.  We intend to continue to evaluate and strengthen our ICFR systems. These efforts require significant time and resources.  If we are unable to establish adequate ICFR systems, we may encounter difficulties in the audit or review of our financial statements by our independent public accountants, which in turn may have a material adverse effect on our ability to prepare
financial statements in accordance with US GAAP and to comply with our SEC reporting obligations.





Inherent Limitations Over Internal Controls





Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or misstatements and all fraud. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance that the objectives of the policies and procedures are met. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide
only management's report in this annual report.





Changes in Internal Control Over Financial Reporting





SOKO was, until mid-2008 when it merged with and into American Business Holdings, Inc., an operating business existing in and subject to, the laws of the People's Republic of China.  As a Chinese company, we developed minimal ICFR for the operation of our businesses.  As a result of the merger, SOKO became
subject to US GAAP financial reporting standards, and the rules and regulations of the SEC with respect to the development of internal controls over financial reporting.  There were no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the quarter ended May 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  Our management has initiated
the steps outlined above under “Remediation of Significant Deficiencies.”





Item 9B.  Other Information.





None.






36







PART III





Item 10.  Directors, Executive Officers and Corporate Governance





Executive Officers and Directors





The following sets forth certain biographical information concerning our directors and executive officers as of August 1, 2008:





Name
Position
AgeTong Liu
Chief Executive Officer, Chairman of the Board, Director
41Xia Yu
Chief Financial Officer, Director
39Yang Chen
Director
32Su Zhang
Director
38Gideon E. Kory
Director
49





Tong Liu, 41, has served as our Chief Executive Officer, Chairman of the Board and a Director 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, 39, 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, 32, 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, 38, 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,49, has served as a Director of SOKO since the consummation of the share exchange on April 11, 2008.  Mr. Kory has served as a Managing Director of Freedom Investors Corp., 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.






37





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.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Exchange Act requires our directors, executive officers and any persons beneficially holding more than ten percent of our common stock to report their ownership of common stock and any changes in that ownership to the SEC.  The SEC has established specific due dates for these reports, and we are required
to report in this document any failure to file by these dates.  Based solely on a review of the copies of the reports furnished to us and written representations that no other such statements were required, we believe that all such reports were filed on a timely basis, except as follows:  Guerrilla Capital Management, L.L.C. did not timely report the acquisition during September 2008 by its principal, Peter Siris, of an aggregate of 52,000 shares of our common stock for the benefit of his
child.  This acquisition has subsequently been reported on a Form 4.





Code of Ethics





Our board of directors understands the importance of having a well thought out and meaningful code of conduct and ethics that applies to our directors, chief executive officer, chief financial officer and all of our officers and employees.  We are in the process of preparing and approving a code of ethics that deters wrongdoing
and promotes, among other things, honest and ethical behavior.  Upon adoption we will post the text of our code of conduct on our website at www.sokofitness.com.





Committees of the Board of Directors





Audit Committee





The 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 SEC and NASDAQ regulations. Mr. Kory qualifies as an "audit committee financial expert" as that term is defined in applicable regulations of the SEC. The Audit Committee’s responsibilities include:





·
The appointment, replacement, compensation, and oversight of work of the independent auditor, including resolution of disagreements between management and the independent auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services.





·
Reviewing and discussing with management and the independent auditor various topics and events that may have significant financial impact on our company or that are the subject of discussions between management and the independent auditors.





The board of directors is in the process of preparing a written charter for the Audit Committee that sets forth the foregoing and further defined the duties and responsibilities of the Audit Committee.





Compensation Committee





The board of directors has an Compensation Committee, which is comprised of Messrs. Chen (Chair), Kory and 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.




38







Nominating and Corporate Governance Committee





The board of directors has a Nominating and Corporate Governance Committee, which is comprised Messrs. Zhang (Chair), Chen and 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.





Audit Committee Financial Expert





The board of directors has an Audit Committee, which is comprised of Messrs. Kory, Chen and Zhang. The board of directors has examined the composition of the Audit Committee in light of the listing standards of the Nasdaq Stock Market and the regulations under the Exchange Act 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 such listing standards and the Exchange Act and the rules and regulations thereunder. Mr. Kory qualifies as an "audit committee financial expert" as that term is defined in applicable regulations of the SEC.





Item 11.  Executive Compensation





Summary Compensation Table





The table below summarizes all compensation awards to, earned by, or paid to our current principal executive officer and our current principal financial 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



17,5742008


17,291



0



17,2912007


15,683



0



15,683Xia Yu, Chief Financial Officer (3)
2009


8,084



0



8,0842008


7,954



0



7,9542007


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.






39







Employment Agreements





We do not have any written employment agreements, aside from those entered into between our subsidiaries in China and all employees in China.





Outstanding Equity Awards at Fiscal Year-End





There were no individual grants of stock options to purchase our common stock made to our named executive officers during the fiscal year ended May 31, 2009.





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)

9,509Su Zhang (2)

3,515

5,994 (3)

9,509Gideon 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 FAS 123R (disregarding any estimates of forfeitures relating to service-based vesting conditions).  See Note 14 to the consolidated
financial statements in Item 15. "Exhibits, Financial Statement Schedules" on page F-18 of this annual report 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 onMarch 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 onMarch 2, 2009 was immediately exercisable in full and is exercisable for three years from the date of grant.





Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.





Security Ownership of Certain Beneficial Owners and Management.





The table below sets forth information, as of August 21, 2009, concerning (a) each person that is known to us to be the beneficial owner of more than 5% of SOKO’s 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.




At the close of business on August 21, 2009, we had 17,000,000 shares of common stock outstanding.  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 August 21, 2009 are counted as outstanding, while these shares are not counted as
outstanding for computing the percentage ownership of any other person.




40






Name and Address of Beneficial Owner(1)

Number of
Shares
Beneficially
Owned

Percentage of
Shares
Beneficially
Owned(2)5% ShareholdersGuerilla 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 ExecutivesTong 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 August 21, 2009, as follows:  Mr. Chen, 4,000 shares, Mr. Kory, 53,333 and Mr. Zhang, 4,000 shares.






41







Equity Compensation Plan Information





We have no stock option plan.  However, we have granted compensatory stock options to our non-management directors, as set forth in the table below.





Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(a)

(b)

(c)Equity compensation plans not approved by security holders


110,000


$1.47


N/ATotal


110,000


$1.47


N/A





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.





Item 13.  Certain Relationships and Related Transactions, and Director Independence





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 us pursuant to the terms of binding written lease agreements containing terms no less favorable to us than we could have negotiated in an arm’s length transaction with a motivated landlord, including
substantially the following terms:





·
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.





·
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.





·
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 companies 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);




42







·
Harbin Queen Beauty Demonstration Center (consisting of three facilities, the Daowai Spa and two branches, the Nangang Spa and the Xuanhua Spa);





·
Harbin Xinyang Spa;





·
Harbin SOKO Spa;





·
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 interest of the shareholders in the their shares, 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.





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."






43





Item 14.  Principal Accounting Fees and Services.





The firm of Bagell Josephs, Levine & Company, LLC ("BJL") has been selected by the audit committee of our board as the independent registered certified public accounting firm to audit the books and accounts of our company and its subsidiaries for the fiscal year ending May 31, 2009. This firm has served as independent public accountants
for our company since May 14, 2008.




The following table sets forth fees billed to us by BJL for professional services rendered for fiscal year 2009 and 2008:





2009


2008Audit Fees

$
95,000


$
85,000Audit-Related Fees

$
5,000


$
5,000Total

$
100,000


$
90,000





Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of our financial statements for fiscal years 2009 and 2008, respectively, for the reviews of the financial statements included in our quarterly reports on
Form 10-Q and for services that are normally provided by BJL in connection with statutory and regulatory filings or engagements for the relevant fiscal year.





Audit-Related Fees. This category includes the aggregate fees billed during the period for fiscal years 2009 and 2008, respectively, for assurance and related services by BJL that are reasonably related to the performance of the audits or reviews of the financial
statements and are not reported above under “Audit Fees,” and generally consist of fees for due diligence accounting consultation with respect to our registration statements and agreed-upon procedure reports.





The audit committee has considered the compatibility of the non-audit services performed by and fees paid to BJL in fiscal year 2009 and has determined that such services and fees were compatible with the independence of the accountants. During fiscal year 2009, BJL did not utilize any personnel in connection with the audit other
than its full-time, permanent employees.





Policy for Approval of Audit and Non-audit Services. The audit committee has adopted an approval policy regarding the approval of audit and non-audit services provided by the independent accountants, which approval policy describes the procedures and the conditions
pursuant to which the Audit Committee may grant general pre-approval for services proposed to be performed by our independent accountants. All services provided by our independent accountants, both audit and non-audit, must be pre-approved by the Audit Committee.





In determining whether to approve a particular audit or permitted non-audit service, the Audit Committee will consider, among other things, whether such service is consistent with maintaining the independence of the independent accountant. The audit committee will also consider whether the independent accountant is best positioned
to provide the most effective and efficient service to our company and whether the service might be expected to enhance our ability to manage or control risk or improve audit quality.






44





PART IV





Item 15.  Exhibits, Financial Statement Schedules.





(a)(1)(2) Financial Statements and Financial Statement Schedule.





The financial statements and financial statement schedules listed in the Index to Financial Statements beginning on the next page are filed as part of this annual report.





(a)(3) Exhibits.





The exhibits required by this item are set forth on the Exhibit Index immediately following the signature page of this annual report.





45






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











The Board of Directors and Stockholders of


SOKO Fitness & SPA Group, 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 year ended May 31, 2008 have been restated.





/s/ Bagell Josephs, Levine & Company, LLC





Bagell Josephs, Levine & Company, LLC


Marlton, New Jersey








August 27, 2009








F-1
 
  SOKO FITNESS & SPA GROUP, INC.CONSOLIDATED BALANCE SHEETS(IN US DOLLARS)AS OF MAY 31,2009


2008(RESTATED)ASSETSCurrent assets:Cash & cash equivalents

$
1,907,640


$
1,563,709Restricted cash


7,233



-Accounts receivable, net


110,541



682,694Inventories


1,391,302



1,048,788Advances to suppliers


993,084



1,467,861Employee advance


54,783



249,900Prepaid expense


146,959



340,993Total Current Assets


4,611,542



5,353,945Property, plant and equipment, net of accumulated depreciation


19,674,394



12,782,918Other AssetsSecurity Deposit


47,853



-Deferred Rent


589,188



-Deposit to suppliers


1,464,530



720,461Investment advance


399,750



1,152,738Goodwill


2,525,778



1,505,710Total Other Assets


5,027,099



3,378,909Total Assets


29,313,035



21,515,772LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Short-term loans


2,196,795



2,547,244Accounts payable, accrued expenses and other payable


471,457



1,020,232Unearned revenue


1,909,755



514,965Taxes payable


360,229



339,555Contingent Liability


200,000



-Total Current Liabilities


5,138,236



4,421,996Stockholders' EquityPreferred 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 outstandingat May 31, 2009 and 2008


17,000



17,000Additional paid-in-capital


2,139,786



2,091,165Additional paid-in-capital - Warrants


372,914



372,914Accumulated other comprehensive income


1,910,752



1,625,829Retained earnings


19,688,064



12,657,564Total Stockholders' Equity


24,128,516



16,764,472Noncontrolling interest


46,283



329,304Total Equity


24,174,799



17,093,776Total Liabilities and Stockholders' Equity

$
29,313,035


$
21,515,772
  The accompanying notes are an integral part of these consolidated financial statements
 F-2
  SOKO FITNESS & SPA GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME(IN US DOLLAR)FOR THE YEARS ENDED MAY 31,2009


2008(RESTATED)Net Sales

$
19,569,108


$
13,963,130Cost of Sales


(6,591,906
)


(5,010,643
)Gross Profit


12,977,202



8,952,487Selling, General and Administrative Expenses:


5,902,059



3,536,547Operating income


7,075,143



5,415,940Other Income and ExpensesInterest expenses


(66,121
)


(49,177
)Other income


47,012



2,357Penalty 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



5,358,792Provision for Income Taxes


42,667



74,381Net Income


6,742,636



5,284,411Less: net income (loss) attributable to the noncontrolling interest


(287,865
)


108,481Net Income Attributable to SOKO Fitness & Spa Group, Inc.

$
7,030,500


$
5,175,930Other Comprehensive IncomeForeign currency translation adjustment


284,923



1,217,693Comprehensive Income

$
7,315,423


$
6,393,622Basic and Diluted Income per common shareBasic

$
0.41


$
0.45Diluted

$
0.41


$
0.43Weighted average common share outstandingBasic


17,000,000



11,601,781Diluted


17,297,931



11,903,589
  The accompanying notes are an integral part of these consolidated financial statements
  F-3
   SOKO FITNESS & SPA GROUP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYFOR THE YEARS ENDED MAY 31, 2009 AND 2008( IN US DOLLARS)Preferred Stock


Common Stock





Additional


Warrants


Accumulated Other








Totalpar value $0.001


par value $0.001


Subscription


Paid-in


Number of


Additional


Comprehensive


Retained


Noncontrolling


Stockholders'Shares


Amount


Shares


Amount


Receivable


Capital


Warrants


Paid in Capital


Income


Earnings


Interest


EquityBalance at May 31,2007


-


$
-



10,725,000


$
10,725


$
(1,000,000
)

$
1,142,854



-


$
-


$
408,136


$
7,481,634


$
-


$
8,043,349Purchase of subsidiary sharesfrom a third party










































218,153



218,153Paid in capital received


















1,000,000



























1,000,000Acquisition of net asset from SOKO in the reverse merger










3,000,000



3,000







(3,000
)






















-Issuance of common stock and warrants










3,275,000



3,275







951,311



2,160,000



372,914















1,327,500Net Income






































5,175,930



108,481



5,284,411Other comprehensive income, net of tax


































1,217,693







2,670



1,220,363Foreign currency translation adjustmentBalance at May 31, 2008  (Restated)


-


$
-



17,000,000.00


$
17,000


$
-


$
2,091,165



2,160,000


$
372,914


$
1,625,829


$
12,657,564


$
329,304


$
17,093,776Issuance of stock options






















48,621























48,621-Net Income






































7,030,500



(287,865
)


6,742,635Other comprehensive income, net of taxForeign currency translation adjustment


































284,923







4,844



289,767Balance at May 31, 2009


-


$
-



17,000,000.00


$
17,000


$
-


$
2,139,786



2,160,000


$
372,914


$
1,910,752


$
19,688,064


$
46,284


$
24,174,799
  The accompanying notes are an integral part of these consolidated financial statements
  F-4
     SOKO FITNESS & SPA GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS( IN US DOLLARS)FOR THE YEARS ENDED MAY 31,2009


2008(RESTATED)Cash Flows From Operating Activities:Net income

$
7,030,500


$
5,175,930Adjustments to reconcile net income to net cashprovided by operating activities:Stock based compensation


48,621



-Depreciation


1,719,398



1,016,855Minority interest


(287,865
)


108,481Liquidated 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
)


6,816Accounts payable


7,283



(33,815
)Unearned revenue


1,367,451



6,948Taxes payable


15,018



203,532Accrued expenses and other payables


(829,923
)


(82,086
)Cash provided by operating activities


9,385,023



4,849,473Cash 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


1,316Investment in subsidiary


-



(1,687,408
)Cash acquired from subsidiaries


97,594



124,447Investment 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


-



1,000,000Net proceeds from issuance of common stock


-



1,327,500Proceeds from short-term loan


2,196,795



2,409,815Repayment of short-term loan


(2,588,227
)


-Cash provided by (used in) financing activities


(391,432
)


4,737,315Effect of exchange rate changes on cash and cash equivalents


26,005



133,316Increase in cash and cash equivalents


343,931



1,107,594Cash and Cash Equivalents - Beginning of the year


1,563,709



456,115Cash and Cash Equivalents - Ending of the year

$
1,907,640


$
1,563,709Supplemental disclosures of cash flow information:Interest paid

$
66,121


$
49,042Income Taxes paid

$
74,135


$
9,427Non-cash investing and financing activities:Option issued for directors

$
109,898


$
-
 The accompanying notes are an integral part of these consolidated financial statements
 F-5
  SOKO FITNESS & SPA GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE 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"), SOKO entered into a Share Exchange Agreement with Wealthlink and 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, including Mr. Tong Liu, our current Chairman of the Board and Chief Executive
Officer, in exchange for all of the outstanding shares of common stock of Wealthlink and a cash payment of $300,000 by Wealthlink to the Company.  Concurrently with the share exchange, SOKO provided $400,000 to Mr. Tong Liu to purchase 1,000,000 shares of common stock from Mr. 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 them to the Company as agreed for cancellation.





On the Closing Date, the Company also entered into a Consulting Agreement with Syed Idris Husain, the Company’s then President and Chief Executive Officer, pursuant to which Mr. Husain was engaged to provide the Company with regular and customary consulting advise as is requested by the Company for a period of six months from the
Closing Date.  Pursuant to this agreement, the Company agreed to pay to Mr. Husain the sum of $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, Syed 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.





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;





·
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;






F-6




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





·
The Company issued an additional 13,300,000 shares to Wealthlink Shareholders, including Mr. Liu;





·
The Company issued an aggregate of 1,275,000 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 cancelled 65,000,000 shares; and





·
E-Tech Securities Inc. was issued a warrant to purchase up to 160,000 shares.





An additional 425,000 shares remain 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 Financial Accounting Standards Board ("FASB")
Interpretation No. 46R (“FIN 46R”) “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. Accordingly, Mege Union consolidates Queen Group’s results, assets and liabilities.






F-7




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





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.






F-8




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)








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 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 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 yearsBuildings improvement
10 yearsMachinery and equipment
5 yearsComputer, office equipment and furniture
5 yearsAutomobiles
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 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 FAS No. 34, “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.




F-9


SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





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 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 FAS No. 142, “Goodwill and Other Intangible Assets”. Under FAS No. 142, 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 FAS No.144. 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 years ended May 31, 2009 and 2008.





Stock-Based Compensation





The Group records stock based compensation expense pursuant to FAS 123R. The Group estimates the fair value of the award using the Black-Scholes Option Pricing Model. Under FAS 123R, 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. FAS No. 123R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.






F-10




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





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





FAS No. 130, “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 FAS No.109 "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 FAS No. 128, “Earnings per Share,” and SAB 98.  FAS No. 128 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.






F-11


SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)






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 FAS No. 95, “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.





New Accounting Pronouncements





In June 2009, FASB issued FAS No. 168, "The FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162." The FASB Accounting Standards CodificationTM (“Codification”)
will become the source of authoritative US GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. On the effective date of FAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. FAS
No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of FAS No. 168 is not expected to have a material impact on the Company’s results of operations or financial position.





In June 2009, FASB issued FAS No. 167, "Amendments to FASB Interpretation No. 46(R)," which improves financial reporting by enterprises involved with variable interest entities. FAS No. 167 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities," as a result of the elimination of the qualifying special-purpose entity concept in FAS No. 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FAS No. 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period
that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Adoption of FAS No. 167 is not expected to have a material impact on the Company’s results of operations or financial position.





In May 2009, FASB issued FAS No. 165, "Subsequent Events," which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. An entity should apply the requirements of FAS No. 165 to interim or annual financial
periods ending after June 15, 2009. Adoption of FAS No. 165 is not expected to have a material impact on the Company’s results of operations or financial position.




F-12




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)




On October 10, 2008, FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of FAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results.





In June 2008, FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”  FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are
participating securities, and thus, should be included in the two-class method of computing EPS.  FSP EITF 03-6-1 was effective for fiscal years beginning after December 15, 2008, and interim periods within those years.  It also requires that all prior-period EPS data be adjusted retrospectively.  Its adoption did not have a material impact on our financial position or results.





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


2008Major supplier A

$
993,084


$
882,295Major supplier B


-



164,387Major supplier C


-



110,690Others


-



310,488Total

$
993,084


$
1,467,861





NOTE 4-INVENTORIES





The inventories consist of the following:





As of May 31,2009


2008Skin Care supplies

$
1,348,105


$
1,018,517Hair Care supplies


39,965



30,271Others


3,232



-Total

$
1,391,302


$
1,048,788





No allowance for inventories was made for the year ended May 31, 2009 and 2008.





NOTE 5-EMPLOYEE ADVANCE





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.






F-13




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





NOTE 6-PROPERTY AND EQUIPMENT, NET





As of May 31,2009


2008Machinery & Equipments

$
3,289,848


$
1,830,649Office Equipment & Furniture


1,116,610



526,221Automobiles


92,379



86,639Buildings


1,772,081



1,743,516Leasehold improvements


15,084,204



7,156,757Sub-total


21,275,122



11,343,781Less: Accumulated Depreciation


(3,135,554
)


(2,248,454
)Construction in progress


1,534,827



3,687,591Total

$
19,674,394


$
12,782,918





Depreciation expense for the 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 acquisition cost is RMB2,718,300 (approximately $0.4 million at the date of signing), payable on signing. 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 (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 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 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.






F-14




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)


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





2009AdditionYoga Wave


Harbin Tai Ai


TotalCurrent assets

$
449,970


$
217,866


$
667,836Fixed assets


1,370,824



233,753



1,604,577Total liabilities assumed


(1,382,761
)


(275,394
)


(1,658,155
)Net assets acquired


438,033



176,225



614,258Noncontrolling interest


(214,636
)


-



(214,636
)Total consideration paid


1,729,107



1,171,624



2,900,731Goodwill recognized from acquisition

$
1,505,710


$
995,399


$
2,501,109Impact of foreign currency translation










24,669Total Goodwill

$
1,505,710






$
2,525,778





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.





Harbin Mege Union Lea Spa is also subject to the same fixed-rate income tax as the two entities under Queen Group, while Harbin Tai Ai’s income tax is currently levied at 20%, instead of 27%, of its TNI determined by the same fixed-rate system.





Yoga Wave is subject to a 25% income tax rate on all of its net income.





Our provisions for income taxes for the year 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 years ended May 31, 2009 and 2008:





For the Year Ended May 31,2009


2008US Statutory rates


34.0
%


34.0
%Foreign income not recognized in USA


-34.0
%


-34.0
%China income tax


25.0
%


33.0
%Tax exemption


-24.4
%


-23.5
%Total provision for income tax


0.6
%


1.5
%








F-15





SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)






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 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 years ended May 31, 2009 and 2008 were $208,021 and
$34,000, respectively.





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


2008Business sales tax payable

$
296,887


$
244,680Corporate income tax


11,692



68,853Other


51,650



26,022Total taxes payable

$
360,229


$
339,555





NOTE 11-SHORT TERM LOANS





The short term loans include the following:





Balance atMay 31,2009


2008a) 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


--


$
1,729,107b) 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


--



288,184d) Loan payable to a related party with a one year term from April 1, 2008 to March 31, 2009 free of interest


--



529,953e) 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






F-16


SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)




Interest expense paid for the above short term loans totaled $66,121 and $49,042 for the 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








2009Balance


Cash Additions


Revenue Recognized


BalanceMembership fees & advance payment collected

$
514,965


$
20,252,609


$
(18,885,155
)

$
1,882,419Receipts collected & earned without deferral during period






683,953



(683,953
)514,965



20,936,562



(19,569,108
)


1,882,419Impact of foreign currency translation














27,336Total


$
1,909,755





NOTE 13-SEGMENT REPORTING





The Group has a single operating segment in accordance with the provisions of FAS No. 131, “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 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


2008Professional services

$
11,284,644


$
10,296,518Sales of products


3,624,257



1,229,363Membership fees


2,977,462



1,498,503Tuition


1,682,744



938,746Total

$
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.






F-17


SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)




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 ValueOutstanding 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. 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.





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.  Concurrently with the share exchange, the Company provided $400,000 to Mr. Tong Liu to purchase 1,000,000 shares of common stock from
Mr. 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.  Further, in consideration of services
provided to the Company in association with the consummation of these transactions, an aggregate of 1,275,000 shares were issued to certain advisors in connection with the share exchange transaction and the Financing. 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 $1,027,500 in connection with this private placement after the reduction of $225,000 that
were used to pay a part of the $300,000 consulting fee to Mr. Husain, $400,000 that were provided to Mr. Tong Liu for the purchase of the 2,575,000 shares from original shareholders of the Company that were then returned by Mr. Tong Liu to the Company for cancellation, $140, 000 in legal expenses, $180,000 in fees paid to E-Tech International, Inc. and E-Tech Securities, Inc. for structuring the share exchange transaction and $27,500 in other company related expenses and fees.  There were 17,000,000
shares of common stock issued and outstanding on May 31, 2009 and 2008.






F-18




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





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 LifeOutstanding as of May 31, 2008


2,160,000


$
1.25


$
1.92Granted


-



-



-Forfeited


-



-



-Exercised


-



-



-Outstanding as of May 31, 2009


2,160,000


$
1.25


$
1.92





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 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 FAS No. 128, “Earnings
Per Share.”






F-19




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)





The following demonstrates the calculation for EPS for the year ended May 31, 2009 and 2008:





Year ended May 31,2009


2008Basic and diluted earnings per shareNet income

$
7,030,500


$
5,175,930Weighted average common share outstandingBasic


17,000,000



11,601,781Diluted


17,297,931



11,903,589Earnings per shareBasic

$
0.41


$
0.45Diluted

$
0.41


$
0.43





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 FAS No.13 “Accounting for Leases.” 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, 20092010

$776,0792011

851,5632012

830,6322013

793,7872014

685,9862015

656,8782016

674,7352017

706,1082018

512,3132019

263,310Total

$6,751,392





Rent expense for the 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.






F-20




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)


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 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, 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





We have restated the consolidated financial statements for the year ended May 31 2008 for the following reasons:





The 300,000 payment made to Mr. Husain for consulting fees, which was a part of the $625,000 payment made out of the financing proceeds from the private placement, was previously treated as a reduction of proceeds. Upon further reviews of the various agreements and SEC comments, 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 year ended May 31, 2008. Thus, The Company accounted $100,000 as consulting expenses and $200,000 as prepaid expenses for the year ended May 31, 2008.




F-21




SOKO FITNESS & SPA GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED MAY 31, 2009 AND 2008 (RESTATED)


The impact of this restatement on the financial statements as originally reported as of May 31, 2008 is summarized below:





May 31, 2008As Reported


As RestatedCurrent assets

$
5,153,945


$
5,353,945Total assets


21,315,772



21,515,772Retained earnings


12,757,564



12,657,564Selling, general and administrative expenses


3,436,547



3,536,547Net income

$
5,275,930


$
5,175,930Net income per common shareBasic

$
0.45


$
0.45Diluted

$
0.44


$
0.43Cash provided by operating activities

$
5,149,473


$
4,849,473






F-22








SIGNATURES





Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of August, 2009 .





SOKO Fitness & Spa Group, Inc./s/ Tong LiuTong LiuChief Executive Officer(Principal Executive Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.  The undersigned hereby appoints Tong Liu and Xia Yu, each with full power of substitution, as his or her true and lawful
attorney-in-fact and agent, for him or her and in his or her name and place, to sign the name of the undersigned in the capacity or capacities indicated below to the Annual Report of SOKO Fitness & Spa Group, Inc. on Form 10-K for the year ended May 31, 2009 and any and all amendments to such Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with all necessary or appropriate governmental or other entities, including, but not limited to, the Securities and
Exchange Commission, granting to such attorney-in-fact and agent full power and authority to perform each act necessary to be done as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.








Signature

Title(s)

Date/s/ Tong Liu

Chief Executive Officer, Chairman of the Board

August 28, 2009Tong Liu

(Principal Executive Officer)/s/ Xia Yu

Chief Financial Officer

August 28, 2009Xia Yu

(Principal Financial and Accounting Officer)/s/ Yang Chen

Director

August 28, 2009Yang Chen/s/ Su Zhang

Director

August 28, 2009Su Zhang/s/ Gideon E. Kory

Director

August 28, 2009Gideon E. Kory















INDEX TO EXHIBITS





Exhibit Number

Description of Exhibit3(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 (Commission 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 (Commission 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 year ended May 31, 2008, filed with the SEC on August 29, 2008 (Commission 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 year ended May 31, 2008, filed with the SEC on August 29, 2008 (Commission File No. 333-132429))5.1

Opinion of Sichenzia Ross Friedman Ference LLP (incorporated by reference to Exhibit 5.1 of SOKO's Registration Statement on Form S-1 (Commission File No. 333-151563), filed with the SEC on June 10, 2008)10.1

Form of 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 10.1 of SOKO's Current Report on Form 8-K, filed with the SEC on April 17, 2008 (Commission File No. 333-132429))10.2

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 (Commission File No. 333-132429))10.3

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 (Commission File No. 333-132429))10.4

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 (Commission File No. 333-132429))10.5

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 (Commission File No. 333-132429))10.6

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 (Commission File No. 333-132429))10.7

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 (Commission File No. 333-132429))   
   10.8

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 (Commission File No. 333-132429))10.9

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 (Commission File No. 333-151563), filed with the SEC on September 5, 2008)10.10

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 (Commission File No. 333-151563), filed with the SEC on September 5, 2008)10.11

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 (Commission File No. 333-151563), filed with the SEC on September 5, 2008)10.12

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 (Commission File No. 333-151563), filed with the SEC on September 5, 2008)10.13

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 (Commission File No. 333-151563), filed with the SEC on September 5, 2008)10.14

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 (Commission File No. 333-151563), filed with the SEC on February 17, 2009)10.15

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 (Commission File No. 333-151563), filed with the SEC on February 17, 2009)10.16

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 (Commission File No. 333-151563), filed with the SEC on February 17, 2009)10.17

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 (Commission File No. 333-151563), filed with the SEC on February 17, 2009)21.1

List of Subsidiaries24.1

Power of Attorney (included in signature page)31.1

Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended31.2

Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended32.1

Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002