SOKO Fitness reports 58% increase in third-quarter of fiscal 2010 revenues

SOKO Fitness & Spa Group, Inc. (OTC Bulletin Board: SOKF) ("SOKO"), an operator of fitness centers and beauty salons and spas in Northeast China as well as suburban Beijing, today announced financial results for the third quarter and first nine months of fiscal 2010, ended February 28, 2010.

Third Quarter Financial Highlights -- Revenue increased 58% year-over-year to $8.1 million, and improved 9% on a sequential quarter basis. -- Gross profit improved to $5.8 million, or 72% of revenue, compared with $3.3 million, or 65% of revenue in the third quarter of fiscal 2009, and $5.2 million, or 69% of revenue in the second quarter of fiscal 2010. -- Operating income improved by 49% year-over-year to $2.8 million, and compares with operating income of $3.1 million in the second quarter of fiscal 2010. -- Net income improved by 49% year-over-year to $2.8 million, or $0.15 per diluted share, compared with $1.9 million, or $0.11 per diluted share in the third quarter of fiscal 2009, and compares with $3.2 million, or $0.17 per diluted share in the second quarter of fiscal 2010; and, -- As of February 28, 2010, cash and cash equivalents were $4.8 million, an increase of 153% over $1.9 million as of May 31, 2009. Third Quarter Business Highlights -- Secured 51% interest in two fitness centers in suburban Beijing, marking the company's entry into the Beijing market; and, -- Completed construction on and opened first yoga center in Harbin.

"We continue to grow our top and bottom line, improve our margins and increase our operating cash flow," said Tong Liu, Chief Executive Officer of SOKO. "We are focused on an aggressive growth strategy to build or acquire new facilities, and we are seeing the results in our revenue and profit growth. As we pursue this strategy, we expect our SG&A and other costs to increase as we ramp up new facilities. In particular, during the quarter we incurred various one-time expenses related to our Beijing fitness center acquisition, as well as other existing and new facilities. With our newly opened Harbin Yoga Wave facility, we are already attracting significant business and expect this center to make a meaningful contribution to our revenue growth in future periods to offset our investment in the facility.

"Of our three segments, our beauty and spa services continue to be the leader, accounting for 75% of our revenue in the third quarter. Our non-surgical medical beauty spa, which we opened in September 2009, is already generating revenue. We believe that this relatively high-margin business adds to our already robust beauty and spa offering, further diversifies our services and provides us with a promising market advantage, as we believe we are among the few providers of these procedures in the areas in which we operate. As such, we see significant opportunity to continue to grow the beauty and spa portion of our business as we continue to build the company and our brand. We also expect to see healthy growth from our fitness center business as those facilities move toward maturity, and expect that this segment will complement our spa and salon operations, which we believe will remain central to our growth for the foreseeable future," Mr. Liu concluded.

SOKO currently operates 17 facilities in key cities in Northeastern China and suburban Beijing including nine beauty salons and spas, one non-surgical medical beauty center, six fitness centers and yoga studios, including two fitness centers in suburban Beijing, and one beauty school. At the end of the third quarter ended February 28, 2010, SOKO had 16,158 fitness club members, and 20,536 beauty salon and spa clients. In addition, SOKO has completed construction and is engaging in pre-opening activities for the Daoli Fitness and Legend Spa Central Club, both of which are located in the Long Dian Building in Harbin, as well as the Lea Spa Xishan Club in Beijing.

Third Quarter Financial Summary

Total revenue for the third quarter of fiscal 2010 ended February 28, 2010 was $8.1 million, an increase of 58%, compared with revenue of $5.1 million in the third quarter of fiscal 2009. The increase in revenue was attributed to an increase in the number of SOKO-operated facilities from 11 in the third quarter 2009 period to 17 in the third quarter 2010 period, expanded service offerings with the addition of SOKO's first medical beauty salon in September 2009, increased sales from existing members and clients, the addition of new clients, sales of add-on services to members and clients, and continued efforts to cross sell and add new members and clients to new and existing facilities.

Among the company's three business segments, spa and beauty services and products accounted for 75% of revenue, fitness centers accounted for 21% of revenue and the beauty school accounted for 4% of revenue.

-- Total professional services were $4.7 million, up 79% year-over-year and down 11% sequentially; the sequential quarter decrease was due to promotional activities conducted in the second quarter of fiscal 2010, which drove an increase in revenue during that period; -- Total product sales were $1.4 million, down 6% year-over-year and up 127% sequentially. The year-over-year decrease was due to normal fluctuation in this business segment, offset by the Company's increase in its professional services business as products sold in conjunction with services are recorded as revenue under SOKO's professional services business segment; -- Membership fees grew to $1.7 million, up 215% year-over-year and up 55% sequentially; and, -- Revenue from beauty school tuition was $350,000, compared with $513,000 in the third quarter of fiscal 2009 and $392,000 in the second quarter of fiscal 2010. The decrease was due to SOKO's strategic cut back in some of its short-term administration courses and transition to increase its longer term training programs to support its core beauty and spa business operations.

Gross profit for the third quarter of fiscal 2010 was $5.8 million, or 72% of revenue, compared with $3.3 million, or 65% of revenue for the comparable quarter in fiscal 2009, and compared with $5.2 million, or 69% of revenue in the second quarter of fiscal 2010. The increase in margins for the period was primarily the result of the addition of SOKO's non-surgical medical beauty service offering, which carries relatively high margins.

Selling, general and administrative expenses were $3.0 million, compared with $1.4 million in the third quarter of fiscal 2009 and $2.0 million in the second quarter of fiscal 2010. The increase in SG&A expense was related to an increase in one-time expenses related to the Beijing fitness center acquisition and other activities related to both new and existing facilities, as well as increased costs directly related to the growth in revenue.

Net Income increased 49% to $2.8 million, or $0.15 per diluted share, based on 18.2 million weighted average shares outstanding, compared with $1.9 million, or $0.11 per share, based on 17.0 million weighted average shares outstanding, for the year-ago period. The increase in net income was primarily related to the increase in revenue. This also compares with a net income of $3.2 million, or $0.17 per diluted share based on 18.2 million weighted average shares outstanding in the second quarter of fiscal 2010.

As of February 28, 2010, SOKO had cash and cash equivalents of $4.8 million, a 33% increase compared with $3.6 million in the prior quarter, and a 153% increase over $1.9 million as of May 31, 2009.

Company and Market Outlook

"We are still in our initial stages of growth," said Mr. Liu. "Currently only nine of our 16 facilities have been operated under the SOKO brand for more than two years. With four new facilities already open during calendar 2010, and three facilities engaged in pre-opening activities, we are well on our way to meet our previously announced expansion goals of opening seven to nine new facilities this calendar year, all of which we believe can be funded by current operating cash flow and cash flow from organic growth.

"We will continue to seek new opportunities to construct or acquire facilities in areas where we can implement our business strategy of penetrating underserved markets to quickly capture market share and achieve a positive returns on our investment as we continue to build our brand and our business," Mr. Liu concluded.