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Analysis of SOKO's 8K legal documents

|Includes: SOKO Fitness & Spa Group, Inc. (SOKF)

As a lawyer, I figured I'd at least take a quick look at the legal documents relating to the recent 10million USD financing. You can sometimes find good information buried in these documents.  The documents as filed can be found here or here

Below, I quote some of the more interesting language and follow up with commentary on issues that were not discussed in the press release. I'm not a corporate lawyer, and I scanned the documents really fast, so my analysis is by no means complete.

 7.1.     Make Up Shares  .  If the audited financial statements of the Company for the fiscal year commencing on June 1, 2009 and ending on May 31, 2010 as reported in the Company’s Annual Report on Form 10-K for such fiscal year (the “  2010 Annual Report  ”) shows that the Company’s income: (i) before income tax, (ii) excluding income/loss attributable to noncontrolling interest, and (iii) excluding costs associated with any facility acquisitions undertaken by the Company (“  SOKO’s Income  ”), is less than $10,450,000 (the “  Income Target  ”), the Investors shall be entitled to receive (pro rata between the Investors in accordance with their respective Purchase Prices) an additional number of shares of Common Stock up to an aggregate of 60% of the Shares issued pursuant to Section 2, or 1,875,000 shares of Common Stock in the aggregate (the “  Make Up Shares  ”), according to the following formula:

(a)   If SOKO’s Income equals or exceeds the Income Target, no Make Up Shares will be issued.

(b)   If SOKO’s Income is less than the Income Target, then within thirty (30) days following the filing with the SEC of the 2010 Annual Report, the Company shall issue to the Investors an aggregate number of shares of Common Stock equal to the product of the number of the Make Up Shares multiplied by X, where X is 1.00 minus the percentage of the Income Target actually achieved, which shares will be divided pro rata among the Investors in accordance with their respective Purchase Prices as set forth on Schedule A hereto.

>>It looks like SOKO is expecting at least $10,450,000 in annual income before tax for the fiscal year ending this month. If SOKO does not meet that target, the new investors get additional shares.  SOKO should not have any problem meeting that target as income before tax for 9 months ending Feb 28 was already 8.2 million.

7.3.     Board Observer  .  For so long as IDG-Accel China Growth Fund II L.P. and IDG-Accel China Investors II L.P. and their Affiliates collectively     continue to hold two and one half percent (2.5%) or more of the outstanding shares of Common Stock, a designee of such Investors (who shall be satisfactory to the Company in its reasonable discretion) (the “  Observer  ”) shall have the right to attend and participate in meetings of the Company’s Board of Directors.  The Observer shall not be appointed as a member of the Company’s Board of Directors, shall have no vote as a director of the Company and shall have no approval rights with respect to any action of the Company.

>>New investor IDG gets to appoint a person to participate in SOKO board meetings.  The observer won't get to vote, but should bring valuable insight as IDG is a sophisticated investor.

7.8.     Listing of Shares.    The Company agrees that: (i) if the Company applies to have the Common Stock traded on any Trading Market other than the OTC Bulletin Board, it will include in such application the Shares and the Make Up Shares, and will take such other action as is necessary or desirable to cause the Shares and the Make Up Shares to be listed on such other Trading Market as promptly as possible, and (ii) it will take all action reasonably necessary to continue the listing and trading of its Common Stock on a Trading Market and will comply in all material respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Trading Market.

>>This might be a standard provision, but it shows that uplisting is at least somewhere on the radar screen.

7.10.     Use of Proceeds.     The Company shall use the net proceeds from the sale of the Shares hereunder for working capital purposes and for potential acquisitions, facility development and other potential strategic initiatives.

>>This is nice.  It means the company cannot waste the $10million by simply spending it on a huge bonus for employees.

Item 8.01        Other Events.
On April 16, 2010, the Company and the 2008 Private Placement Investors entered into a Settlement Agreement, pursuant to which the parties: (i) settled a disagreement regarding a US$200,000 penalty payment incurred as a result of the Company’s failure to effect a registration statement on Form S-1 on time pursuant to a prior Registration Rights Agreement, dated April 7, 2008, between them; and (ii) terminated an escrow agreement, dated as of April 7, 2008, between the Company and 2008 Private Placement Investors (the “ 2008 Escrow Agreement ”) and agreed to release to members of the Company’s management an aggregate of 8,000,000 shares of Common Stock which were deposited with the escrow agent under the 2008 Escrow Agreement to secure the Company’s obligation to the 2008 Private Placement Investors to achieve certain financial performance thresholds which were met.  In satisfaction of the Company’s obligations under the Settlement Agreement, the Company issued 62,222 shares of Common Stock to Guerrilla Partners, L.P., 17,778 shares of Common Stock to Hua-Mei 21st Century Partners, LP and 8,889 shares of Common Stock to James J. Fuld, Jr. IRA.

>>I hadn't heard of this before, and I'm not too pleased with it.  It basically seems like SOKO missed a deadline, resulting in $200k worth of dilution.  IDG, with their observer, will probably make sure something stupid like this doesn't happen again.

8.1  Notices...
If to the Company:

No.194, Guogeli Street
Harbin, Heilongjiang Province
China 150001
Attention: Tong Liu
Fax Number: 86-451-8770-5544
With a copy (which shall not constitute notice) to:

Ellenoff Grossman & Schole LLP
150 East 42 nd Street, 11 th Floor
New York, NY 10017
Attention: Barry I. Grossman, Esq.
Fax Number: (212) 370-7889

>>On the face of it at least, SOKO seems to have retained reasonably qualified and ethical lawyers. It's not a one man shop.

Schedule A
Share Allocation
Purchase Price   
Number of Shares

IDG-Accel China Growth Fund II L.P.

IDG-Accel China Investors II L.P.

Hua-Mei 21st Century Partners, LP
656, 250

Guerrilla Partners, L.P.

James J. Fuld, Jr. IRA


>>Who is this James J. Fuld, Jr? 

5.3.     Founder Lock-Up  .  The Founder and the Company shall have duly executed and delivered the Lock-Up and such Lock-Up shall remain in full force and effect.

3.     Lockup .  From and after the date of this Agreement and through and including  the twelve (12) month anniversary of the Closing Date under the Stock Purchase Agreement (the “ Lockup Period ”), the Holder irrevocably agrees it will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or announce the offering of, any of the Holder’s Shares (including any securities convertible into, or exchangeable for, or representing the rights to receive, the Holder’s Shares).  In furtherance thereof, the Company will (x) place a stop order on all of the Holder’s Shares, (y) notify its transfer agent in writing of the stop order and the restrictions on the Holder’s Shares under this Agreement and direct the transfer agent not to process any attempts by the Holder to resell or transfer any of the Holder’s Shares in violation of this Agreement.  Notwithstanding the foregoing, the undersigned may sell or otherwise transfer Holder’s Shares: (i) as a bona fide gift or gifts or pledge or pledges, provided that the Holder provides prior written notice of such gift or gifts or pledge to the Company and the Investors and the donee or donees or pledgee or pledgees (as the case may be) thereof agree to be bound by the restrictions set forth herein; provided, that any such gifts or pledges shall not, in the aggregate (adding up all such gifts and pledges), exceed eight percent (8%) of the outstanding shares of Common Stock at the time of any such gift or pledge; and (ii) on death by will or intestacy to the undersigned’s immediate family or to a trust, the beneficiaries of which are exclusively the undersigned and a member or members of the undersigned’s immediate family, provided that the transferee thereof agrees to be bound by the restrictions set forth herein.

>>The lockup agreement and provisions may be the most interesting part.  The CEO and Chairman Tong Liu is not able to sell his shares for 1 year.  As I recall, he owns over 50% of the company.  No insider selling for 1 year!  If he is that confident in his company, I sure am too!  I am buying more.

Disclosure: Long SOKF