SBC Medical Group Holdings Inc 10-Q

ITEM 1. FINANCIAL STATEMENTS SBC MEDICAL GROUP HOLDINGS INCORPORATED INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 (Unaudited) F-2 Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2024 and 2023 (Unaudited) F-4 Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023 (Unaudited) F-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 (Unaudited) F-6 Notes to Unaudited Consolidated Financial Statements F-8 F- 1 SBC MEDICAL GROUP HOLDINGS INCORPORATED UNAUDITED CONSOLIDATED BALANCE SHEETS September 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 137,393,070 $ 103,022,932 Accounts receivable 1,944,604 1,437,077 Accounts receivable – related parties 27,835,179 33,676,672 Accounts receivable 27,835,179 33,676,672 Inventories 1,985,883 3,090,923 Finance lease receivables, current – related parties 8,443,338 6,143,564 Customer loans receivable, current 16,125,086 8,484,753 Prepaid expenses and other current assets 8,372,668 10,050,005 Total current assets 202,099,828 165,905,926 Non-current assets: Property and equipment, net 13,194,414 13,582,017 Intangible assets, net 16,218,233 19,739,276 Long-term investments 4,905,115 849,434 Goodwill, net 3,545,391 3,590,791 Finance lease receivables, non-current – related parties 4,629,047 3,420,489 Operating lease right-of-use assets 5,251,418 5,919,937 Deferred tax assets 624,564 — Customer loans receivable, non-current 6,590,301 6,444,025 Long-term prepayments 4,308,810 4,099,763 Long-term investments in MCs – related parties 19,561,069 19,811,555 Other assets 15,550,402 15,442,058 Total non-current assets 94,378,764 92,899,345 Total assets $ 296,478,592 $ 258,805,271 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 14,873,829 $ 26,531,944 Current portion of long-term loans 136,683 156,217 Notes payable, current – related parties 10,202,360 3,369,203 Advances from customers 565,495 2,074,457 Advances from customers – related parties 18,994,015 23,058,175 Advances from customers 18,994,015 23,058,175 Income tax payable 8,000,808 8,782,930 Operating lease liabilities, current 4,060,844 3,885,812 Accrued liabilities and other current liabilities 12,054,047 21,009,009 Due to related party 3,532,453 3,583,523 Total current liabilities 72,420,534 92,451,270 F- 2 SBC MEDICAL GROUP HOLDINGS INCORPORATED UNAUDITED CONSOLIDATED BALANCE SHEETS — (Continued) September 30, 2024 December 31, 2023 Non-current liabilities: Long-term loans 686,470 1,062,722 Notes payable, non-current – related parties 11,659,022 11,948,219 Deferred tax liabilities 3,515,825 6,013,565 Operating lease liabilities, non-current 1,528,972 2,444,316 Other liabilities 1,147,345 1,074,930 Total non-current liabilities 18,537,634 22,543,752 Total liabilities 90,958,168 114,995,022 Stockholders’ equity: Preferred stock ($ 0.0001 par value, 20,000,000 shares authorized; no shares issued and outstanding as of September 30, 2024 and December 31, 2023) ** — — Common stock ($ 0.0001 par value, 400,000,000 shares authorized, 103,020,816 and 94,192,433 shares issued and outstanding as of September 30, 2024 and December 31, 2023) ** 10,302 9,419 Additional paid-in capital ** 60,825,115 36,879,281 Treasury stock receivable ( 270,000 shares of common stock) - related party ( 2,700,000 ) — Retained earnings 182,923,786 142,848,732 Accumulated other comprehensive loss ( 36,078,149 ) ( 37,578,255 ) Total SBC Medical Group Holdings Incorporated’s stockholders’ equity 204,981,054 142,159,177 Non-controlling interests 539,370 1,651,072 Total stockholders’ equity 205,520,424 143,810,249 Total liabilities and stockholders’ equity $ 296,478,592 $ 258,805,271 ** Retrospectively restated for effect of reverse recapitalization on September 17, 2024. The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 3 SBC MEDICAL GROUP HOLDINGS INCORPORATED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Revenues, net – related parties $ 51,209,243 $ 45,119,709 $ 152,718,488 $ 125,336,653 Revenues, net 1,875,640 2,158,976 8,276,517 5,856,076 Total revenues, net 53,084,883 47,278,685 160,995,005 131,192,729 Cost of revenues 9,845,793 13,780,309 38,816,865 37,256,066 Gross profit 43,239,090 33,498,376 122,178,140 93,936,663 Operating expenses: Selling, general and administrative expenses 16,597,032 13,446,618 43,784,637 46,885,138 Stock-based compensation 12,807,455 — 12,807,455 — Misappropriation loss — 28,516 — 380,766 Total operating expenses 29,404,487 13,475,134 56,592,092 47,265,904 Income from operations 13,834,603 20,023,242 65,586,048 46,670,759 Other income (expenses): Interest income 7,950 10,234 37,283 86,345 Interest expense ( 5,466 ) ( 3,978 ) ( 15,898 ) ( 37,380 ) Other income 65,922 1,138,869 721,894 3,875,723 Other expenses ( 795,158 ) ( 98,314 ) ( 2,746,450 ) ( 581,239 ) Gain on disposal of subsidiary — — 3,813,609 — Total other income (expenses) ( 726,752 ) 1,046,811 1,810,438 3,343,449 Income before income taxes 13,107,851 21,070,053 67,396,486 50,014,208 Income tax expense 10,273,384 13,012,262 27,254,478 25,683,244 Net income 2,834,467 8,057,791 40,142,008 24,330,964 Less: net income (loss) attributable to non-controlling interests 1,573 ( 298,623 ) 66,954 ( 696,812 ) Net income attributable to SBC Medical Group Holdings Incorporated $ 2,832,894 $ 8,356,414 $ 40,075,054 $ 25,027,776 Other comprehensive income (loss): Foreign currency translation adjustment $ 20,783,646 $ ( 974,249 ) $ 1,543,245 $ ( 19,825,222 ) Reclassification of unrealized gain on available-for-sale debt security to net income when realized, net of tax effect of nil and $ ( 97,856 ) for the three months ended September 30, 2024 and 2023, respectively; nil and $ ( 97,856 ) for the nine months ended September 30, 2024 and 2023, respectively — ( 205,383 ) — ( 8,760 ) Total comprehensive income 23,618,113 6,878,159 41,685,253 4,496,982 Less: comprehensive income (loss) attributable to non-controlling interests 180,093 ( 387,948 ) 110,093 ( 1,129,475 ) Comprehensive income attributable to SBC Medical Group Holdings Incorporated $ 23,438,020 $ 7,266,107 $ 41,575,160 $ 5,626,457 Net income per share attributable to SBC Medical Group Holdings Incorporated** Basic and diluted $ 0.03 $ 0.09 $ 0.42 $ 0.27 Weighted average shares outstanding** Basic and diluted 95,095,144 94,192,433 94,495,533 94,192,433 ** Retrospectively restated for effect of reverse recapitalization on September 17, 2024. The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 4 SBC MEDICAL GROUP HOLDINGS INCORPORATED UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Common Stock Additional Paid-in Treasury Stock Retained Accumulated Other Comprehensive Total SBC Medical Group Holdings Incorporated’s Stockholders’ Non- controlling Total Stockholders’ Number Amount Capital Receivable Earnings Loss Equity Interests Equity Balance as of December 31, 2023, previously reported 7,949,000 $ 795 $ 36,887,905 — $ 142,848,732 $ ( 37,578,255 ) $ 142,159,177 $ 1,651,072 $ 143,810,249 Effect of reverse recapitalization 86,243,433 8,624 ( 8,624 ) — — — — — — Balance as of December 31, 2023, restated 94,192,433 9,419 36,879,281 — 142,848,732 ( 37,578,255 ) 142,159,177 1,651,072 143,810,249 Disposal of subsidiary — — — — — — — ( 1,221,795 ) ( 1,221,795 ) Net income (loss) — — — — 18,757,752 — 18,757,752 ( 7,536 ) 18,750,216 Foreign currency translation adjustment — — — — — ( 10,109,388 ) ( 10,109,388 ) ( 84,464 ) ( 10,193,852 ) Balance as of March 31, 2024, restated 94,192,433 9,419 36,879,281 — 161,606,484 ( 47,687,643 ) 150,807,541 337,277 151,144,818 Net income — — — — 18,484,408 — 18,484,408 72,917 18,557,325 Foreign currency translation adjustment — — — — — ( 8,995,632 ) ( 8,995,632 ) ( 50,917 ) ( 9,046,549 ) Balance as of June 30, 2024, restated 94,192,433 9,419 36,879,281 — 180,090,892 ( 56,683,275 ) 160,296,317 359,277 160,655,594 Reverse recapitalization, net of transaction costs 5,080,820 508 8,407,380 — — — 8,407,888 — 8,407,888 Issuance of common stock to settle convertible note 270,000 27 2,699,973 ( 2,700,000 ) — — — — — Issuance of common stock as incentive shares 339,565 34 ( 34 ) — — — — — — Stock-based compensation — — 12,807,455 — — — 12,807,455 — 12,807,455 Issuance of common stock from exercise of stock warrants 3,137,998 314 31,060 — — — 31,374 — 31,374 Net income — — — — 2,832,894 — 2,832,894 1,573 2,834,467 Foreign currency translation adjustment — — — — — 20,605,126 20,605,126 178,520 20,783,646 Balance as of September 30, 2024 103,020,816 $ 10,302 $ 60,825,115 ( 2,700,000 ) $ 182,923,786 $ ( 36,078,149 ) $ 204,981,054 $ 539,370 $ 205,520,424 Common Stock * Additional Paid-in Retained Accumulated Other Comprehensive Total SBC Medical Group Holdings Incorporated’s Stockholder’s Non- controlling Total Stockholder’s Number Amount Capital * Earnings Loss Equity Interests Equity Balance as of December 31, 2022, previously reported 1 $ — $ 26,624,694 $ 103,478,696 $ ( 24,853,275 ) $ 105,250,115 $ 2,599,968 $ 107,850,083 Effect of reverse recapitalization 11 — — — — — — — Balance as of December 31, 2022, restated 12 — 26,624,694 103,478,696 ( 24,853,275 ) 105,250,115 2,599,968 107,850,083 Issuance of common stock 11,850 1 9 — — 10 — 10 Net income — — — 6,002,440 — 6,002,440 415,451 6,417,891 Unrealized gain on available-for-sale debt security, net of tax effect of $ 15,575 — — — — 30,062 30,062 — 30,062 Foreign currency translation adjustment — — — — ( 10,945,737 ) ( 10,945,737 ) ( 26,603 ) ( 10,972,340 ) Balance as of March 31, 2023, restated 11,862 1 26,624,703 109,481,136 ( 35,768,950 ) 100,336,890 2,988,816 103,325,706 Net income (loss) — — — 10,668,922 — 10,668,922 ( 813,640 ) 9,855,282 Unrealized gain on available-for-sale debt security, net of tax effect of $ 86,150 — — — — 166,561 166,561 — 166,561 Foreign currency translation adjustment — — — — ( 7,561,898 ) ( 7,561,898 ) ( 316,735 ) ( 7,878,633 ) Balance as of June 30, 2023, restated 11,862 1 26,624,703 120,150,058 ( 43,164,287 ) 103,610,475 1,858,441 105,468,916 Balance 11,862 1 26,624,703 120,150,058 ( 43,164,287 ) 103,610,475 1,858,441 105,468,916 Issuance of common stock 94,180,571 9,418 ( 8,623 ) — — 795 — 795 Net income (loss) — — — 8,356,414 — 8,356,414 ( 298,623 ) 8,057,791 Reclassification of unrealized gain on available-for-sale debt security to net income when realized, net of tax effect of $ ( 97,856 ) — — — — ( 205,383 ) ( 205,383 ) — ( 205,383 ) Deemed contribution in connection with disposal of property and equipment — — 9,620,453 — — 9,620,453 — 9,620,453 Deemed contribution in connection with reorganization — — 642,748 — — 642,748 — 642,748 Foreign currency translation adjustment — — — — ( 884,924 ) ( 884,924 ) ( 89,325 ) ( 974,249 ) Balance as of September 30, 2023, restated 94,192,433 $ 9,419 $ 36,879,281 $ 128,506,472 $ ( 44,254,594 ) $ 121,140,578 $ 1,470,493 $ 122,611,071 Balance 94,192,433 $ 9,419 $ 36,879,281 $ 128,506,472 $ ( 44,254,594 ) $ 121,140,578 $ 1,470,493 $ 122,611,071 * Retrospectively restated for effect of share issuances on September 8, 2023. The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 5 SBC MEDICAL GROUP HOLDINGS INCORPORATED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 2024 2023 For the Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 40,142,008 $ 24,330,964 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 2,867,781 9,688,640 Non-cash lease expense 2,908,990 2,424,220 Provision for (reversal of) credit losses ( 127,196 ) 282,934 Stock-based compensation 12,807,455 — Impairment loss on property and equipment — 204,026 Realized gain on short-term investments — ( 223,164 ) Fair value change of long-term investments 1,682,282 — Gain on disposal of subsidiary ( 3,813,609 ) — Loss (gain) on disposal of property and equipment and intangible assets 185,284 ( 249,532 ) Deferred income taxes ( 2,154,837 ) ( 1,379,922 ) Changes in operating assets and liabilities: Accounts receivable ( 804,000 ) ( 924,061 ) Accounts receivable – related parties 4,971,911 ( 19,979,099 ) Inventories 763,075 ( 4,038,874 ) Finance lease receivables – related parties ( 3,430,267 ) 17,241,740 Customer loans receivable 12,860,220 — Prepaid expenses and other current assets 902,230 8,173,153 Long-term prepayments 432,380 ( 1,991,626 ) Other assets ( 348,178 ) ( 1,884,352 ) Accounts payable ( 10,511,619 ) 6,712,977 Notes payable – related parties ( 14,030,092 ) — Advances from customers ( 1,401,437 ) ( 681,973 ) Advances from customers – related parties ( 3,565,778 ) ( 7,430,332 ) Advances from customers ( 3,565,778 ) ( 7,430,332 ) Income tax payable ( 549,446 ) 16,518,062 Operating lease liabilities ( 2,971,946 ) ( 2,335,113 ) Accrued liabilities and other current liabilities ( 9,010,270 ) 298,743 Accrued retirement compensation expense – related party — ( 22,082,643 ) Other liabilities 81,290 79,215 NET CASH PROVIDED BY OPERATING ACTIVITIES 27,886,231 22,753,983 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 1,974,285 ) ( 2,299,045 ) Purchase of intangible assets — ( 1,683,030 ) Purchase of convertible note ( 1,700,000 ) ( 1,000,000 ) Prepayments for property and equipment ( 843,740 ) ( 417,353 ) Advances to related parties ( 617,804 ) ( 1,017,292 ) Payments made on behalf of a related party ( 5,245,990 ) — Purchase of short-term investments — ( 2,106,720 ) Purchase of long-term investments ( 331,496 ) — Long-term investments in MCs - related parties — ( 26,780 ) Cash received for acquisition of subsidiary, net of cash received — 722,551 Long-term loans to others ( 80,793 ) ( 421,429 ) Repayments from related parties 5,990,990 734,358 Repayments from others 62,927 47,356 Proceeds from sales of short-term investments — 4,125,813 Proceeds from surrender of life insurance policies — 3,954,760 Disposal of subsidiary, net of cash disposed of ( 815,819 ) — Proceeds from disposal of property and equipment 1,971 8,046,007 NET CASH PROVIDED BY (USD IN) INVESTING ACTIVITIES ( 5,554,039 ) 8,659,196 F- 6 SBC MEDICAL GROUP HOLDINGS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) For the Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM FINANCING ACTIVITIES Borrowings from related parties — 12,310,106 Proceeds from reverse recapitalization, net of transaction costs 11,707,417 — Proceeds from issuance of common stock — 10 Proceeds from exercise of stock warrants 31,374 — Repayments of long-term loans ( 89,448 ) ( 8,691,462 ) Repayments to related parties ( 65,305 ) ( 7,619,266 ) Deemed contribution in connection with disposal of property and equipment — 9,620,453 Deemed contribution in connection with reorganization — 642,748 NET CASH PROVIDED BY FINANCING ACTIVITIES 11,584,038 6,262,589 Effect of changes in foreign currency exchange rate 453,908 ( 11,982,793 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 34,370,138 25,692,975 CASH AND CASH EQUIVALENTS AS OF THE BEGINNING OF THE PERIOD 103,022,932 51,737,994 CASH AND CASH EQUIVALENTS AS OF THE END OF THE PERIOD $ 137,393,070 $ 77,430,969 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest expense $ 15,898 $ 37,380 Cash paid for income taxes $ 31,332,123 $ 12,608,072 NON-CASH INVESTING AND FINANCING ACTIVITIES Property and equipment transferred from long-term prepayments $ 164,781 $ 7,681,830 An intangible asset transferred from long-term prepayments $ — $ 17,666,115 Settlement of loan payable to a related party in connection with disposal of property and equipment $ — $ 4,163,604 Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ — $ 1,029,518 Remeasurement of operating lease liabilities and right-of-use assets due to lease modifications $ 2,408,752 $ 2,110,079 Issuance of promissory notes to related parties in connection with loan services provided $ 20,398,301 $ — Issuance of common stock to a related party to settle convertible note $ 2,700,000 $ — Settlement of loan payable to a related party in connection with issuance of common stock $ — $ 795 Non-cash purchase consideration for an asset acquisition $ — $ 705,528 The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 7 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS Business Overview SBC Medical Group Holdings Incorporated (“SBC Holding”) was originally incorporated under the laws of the state of Delaware on March 11, 2022 as a special purpose acquisition corporation under the name Pono Two Capital, Inc. (“Pono”) for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. SBC Medical Group, Inc. (formerly known as SBC Medical Group Holdings Incorporated, “SBC USA”, “Legacy SBC”), through its consolidated subsidiaries and variable interest entity (“VIE”), is principally engaged in medical industry to provide comprehensive management services to the medical corporations and their clinics, including but not limited to licensure of the use of the trademark and brand name of “Shonan Beauty Clinic”, sales of medical equipment, medical consumables procurement services, and management of customer’s loyalty program, etc. Reverse Recapitalization On September 17, 2024, Pono consummated the merger transaction pursuant to the agreement by and among Pono, Pono Two Merger Sub, Inc., a Delaware corporation (“Merger Sub”) and a wholly-owned subsidiary of Pono, and SBC USA (the “Merger Agreement”), whereby Merger Sub merged with and into SBC USA, the separate corporation existence of Merger Sub ceased and SBC USA survived the merger as a wholly owned subsidiary of Pono (“Pono Merger”). In connection with the consummation of Pono Merger, Pono changed its name to “SBC Medical Group Holdings Incorporated” and SBC USA changed its name to “SBC Medical Group, Inc.” and, among other transactions contemplated by the Merger Agreement, the existing equity holders of SBC USA exchanged their equity interests of SBC USA for equity interests of Pono. On September 17, 2024, the Company received net cash of $ 11,707,417 from Pono Merger. The Company also assumed $ 416,799 in prepaid expenses and other current assets, $ 1,108 in accounts payable, $ 14,431 in income tax payable, $ 2,700,000 in convertible note payable, which was subsequently converted to 270,000 shares upon the consummation of Pono Merger, $ 1,000,789 in accrued liabilities and other current liabilities, common stock of $ 508 and additional paid-in capital of $ 8,407,380 . The total funds from Pono Merger of $ 11,707,417 were available to repay certain indebtedness, transaction costs and for general corporate purposes, which primarily consisted of investment banking, legal, accounting, and other professional fees as follows: SCHEDULE OF PROCEEDS FROM MERGER Cash—Pono working capital cash $ 766,735 Cash—Pono trust 16,731,409 Less: transaction costs and advisory fees 5,790,727 Net proceeds from Pono Merger $ 11,707,417 Pono Merger was accounted for as a reverse recapitalization under the accounting principles generally accepted in the United States of America (“U.S. GAAP”). SBC USA was determined to be the accounting acquirer and Pono was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of the combined company represent a continuation of the financial statements of SBC USA. Unless the context indicates otherwise, any references herein to the “Company”, “we”, “us” and “our” refer to 1) SBC USA and its consolidated subsidiaries and VIE prior to the consummation of Pono Merger and to 2) SBC Holding and its consolidated subsidiaries and VIE following Pono Merger; and reference herein to “Pono” refers to SBC Holding prior to the consummation of Pono Merger. Reorganization In June 2020 and April 2022, SBC Inc., a company incorporated in Japan in June 2007, and Advice Innovation Co., Ltd., a company incorporated in Japan in December 2018, were merged with and into SBC Medical Group Co., Ltd. (“SBC Japan”), respectively, with SBC Japan being the surviving entity in such mergers. SBC Japan is a company incorporated in Japan in September 2017 and previously known as Aikawa Medical Management Co., Ltd. In April 2023, SBC Japan acquired 100 % equity interest of L’Ange Cosmetique Co., Ltd. (“L’Ange Sub”), a company incorporated in Japan in June 2003, and Shobikai Co., Ltd. (“Shobikai Sub”), a company incorporated in Japan in June 2014, through share exchange. As a result, L’Ange Sub and Shobikai Sub become wholly owned subsidiaries of SBC Japan. In August 2023, SBC Japan and L’Ange Sub disposed of their entire equity interest in Ai Inc. and Lange Inc., respectively, both incorporated in the Federated States of Micronesia in January 2022, for cash. As a result, Ai Inc. and Lange Inc. cease to be subsidiaries of the Company, with the related investment in capital being treated as a deemed distribution and the disposal proceeds treated as a deemed contribution. In September 2023, SBC USA acquired 100 % equity interest of SBC Japan through share exchange with one share of its common stock. As a result, SBC Japan becomes a wholly owned subsidiary of SBC USA. The above reorganization has been accounted for as a recapitalization among entities under common control since the same controlling shareholder controlled these entities before and after the reorganization. The consolidation of the Company has been accounted for at historical cost and prepared on the basis as if the transactions had become effective as of the beginning of the earliest period presented in the accompanying consolidated financial statements. Corporate Structure As of September 30, 2024, the Company’s major subsidiaries and VIE are as follows: SCHEDULE OF MAJOR SUBSIDIARIES Name Place of Incorporation Date of Incorporation or Acquisition Percentage of Ownership Principal Activities SBC Medical Group, Inc. United States January 20, 2023 100 % Investment holding SBC Medical Group Co., Ltd. Japan September 29, 2017 100 % Franchising, procurement and management services for the medical corporations L’Ange Cosmetique Co., Ltd. Japan June 18, 2003 100 % Management and rental services for the medical corporations Shobikai Co., Ltd. Japan June 4, 2014 100 % Procurement, management and rental services for the medical corporations F- 8 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS (cont.) Name Place of Incorporation Date of Incorporation or Acquisition Percentage of Ownership Principal Activities Liesta Co., Ltd. Japan December 15, 2020 100 % Real estate brokerage services Skynet Academy Co., Ltd. Japan April 1, 2022 78 % Pilot training services SBC Sealane Co., Ltd. Japan June 7, 2022 100 % Construction services SBC Marketing Co., Ltd. Japan June 30, 2022 100 % Internet marketing services Medical Payment Co., Ltd. Japan June 30, 2022 75 % Loan services SBC Medical Consulting Co., Ltd. Japan August 2, 2022 100 % Human resource services Shoubikai Medical Vietnam Co., Ltd. Vietnam August 29, 2013 100 % Cosmetic clinic SBC Healthcare Inc. United States December 16, 2019 100 % Management services for cosmetic clinic in the United States SBC Irvine, LLC* United States December 27, 2018 100 % Management services for cosmetic clinic in the United States Kijimadairakanko Inc. Japan April 3, 2023 100 % Ski resorts and tourism services Aikawa Medical Management, Inc. United States May 10, 2017 VIE Management services for cosmetic clinic in the United States * A subsidiary of SBC Healthcare Inc. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation and Principles of Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements do not include all of the information and disclosure required by U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of a normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2023. The unaudited consolidated financial statements include the financial statements of the Company, its subsidiaries, and consolidated VIE for which the Company is the primary beneficiary. The results of the subsidiaries are consolidated from the date on which the Company obtained control and continue to be consolidated until the date that such control ceases. All significant transactions and balances among the Company’s subsidiaries, including the VIE, have been eliminated upon consolidation. Variable Interest Entities In accordance with ASC Topic 810, “Consolidation”, the Company identifies its variable interests and analyzes to determine if the entity in which the Company has a variable interest is a VIE. Determination if a variable interest is a VIE includes both quantitative and qualitative consideration. For those entities determined to be VIEs within the scope of the VIE model, a further quantitative and qualitative analysis is performed to determine if the Company is deemed the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant. F- 9 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) The Company would consolidate those entities in which it is determined to be the primary beneficiary. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. The Company evaluates its relationship with its VIE on an ongoing basis to determine whether it continues to be the primary beneficiary of its consolidated VIE, or whether it has become the primary beneficiary of the VIE it does not consolidate. Voting Model If a legal entity fails to meet any of the three characteristics of a VIE, we then evaluate such entity under the voting model. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting rights and that other equity holders do not have substantive participating rights. Assessment of Medical Corporations in Japan SBC Japan, L’Ange Sub and Shobikai Sub are each designated as a medical service corporation (the “MSC”) to provide services to the Medical Corporations (the “MCs”) in Japan. To maintain and strengthen the business relationship and to secure the source of revenues from the MCs, the Company acquired equity interests in the following MCs throughout the years. SCHEDULE OF ACQUIRED EQUITY INTERESTS Name of the MC Percentage of Equity Interest Acquired Percentage of Voting Interest Held Medical Corporation Shobikai 100 % 0 % Medical Corporation Kowakai 100 % 0 % Medical Corporation Nasukai 100 % 0 % Medical Corporation Aikeikai 100 % 0 % Medical Corporation Jukeikai 100 % 0 % Medical Corporation Ritz Cosmetic Surgery 100 % 0 % As non-profit organizations, MCs are required to comply with the medical-related laws and regulations of the Japanese Medical Care Act (the “Act”, “Medical Care Act”). In accordance with the Act, the highest authority of MCs is its general meeting of members (the “Members”), with each Member having one voting right. The Company, through the MSCs, has no right to elect the Members, no decision-making ability and no right to dividend or any profit distribution, but has the right to receive distribution of the residual assets of the MCs. Since the not-for-profit entities scope exception to the variable interest model is applicable to the MCs, the Company evaluates its business relationship, franchisor-franchisee agreements and/or services agreements with the MCs in Japan under the voting model. The Company has concluded that consolidation of the MCs is not appropriate for the periods presented as it does not have a majority voting interest in the Members of the MCs nor does it have a controlling financial interest in the MCs. The equity interests in the MCs held by the Company are recorded as long-term investments in MCs — related parties on the unaudited consolidated balance sheets. The transactions between the Company and the MCs are disclosed in Note 17 Related Party Transactions. (b) Foreign Currency The Company maintains its books and record in its local currency, Japanese YEN (“JPY” or “¥”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in other income (expenses) in the unaudited statements of operations and comprehensive income. F- 10 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) The reporting currency of the Company is the United States Dollars (“US$” or “$”), and the accompanying financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translations of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive loss within the unaudited statements of changes in stockholders’ equity. Translation of amounts from local currency of the Company into US$1 has been made at the following exchange rates: SCHEDULE OF LOCAL CURRENCY EXCHANGE RATES September 30, 2024 September 30, 2023 Current JPY:US$1 exchange rate 142.8410 149.3680 Average JPY:US$1 exchange rate 151.1271 138.1015 Exchange rate 151.1271 138.1015 (c) Use of Estimates In preparing the unaudited consolidated financial statements in conformity U.S. GAAP, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, useful lives and impairment of long-lived assets, impairment of goodwill, impairment of long-term investments in MCs — related parties, valuation of stock-based compensation, valuation allowance of deferred tax assets, uncertain income tax positions, the recognition and measurement of impairment of investments in securities, allowance for credit losses and implicit interest rate of operating leases. Management bases its estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results could differ from those estimates. (d) Customer Loans Receivable and Note Payables — Related Parties In February 2023, the Company started to provide loan services to certain customers of the related-party MCs (“End Customers”). When a loan is granted to finance an End Customer’s purchase, the Company issues a promissory note to the MC to pay off the purchase transaction on behalf of the End Customer, and the End Customer is required to repay the Company in monthly installments. The loans provided to the End Customers are unsecured, interest-bearing, and due in three months to five years, depending on the End Customers’ choice of the loan service term. The Company records the customer loans receivables at gross loan receivables less unamortized costs of issuance fees or discounts, which are amortized over the life of the loan to interest income. During the nine months ended September 30, 2024 and 2023, the Company generated interest income of $ 798,263 and $ 4,374 , respectively, from the loan services, which were included in revenues. Management periodically evaluates individual End Customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when necessary. Customer loans receivable are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of September 30, 2024 and December 31, 2023, the Company determined no allowance for doubtful accounts was necessary for customer loans receivable. The Company repays each promissory note issued to the MCs when the End Customer fully repays the corresponding loan receivable or at an earlier date agreed by the parties. The promissory notes are unsecured, bear no interest, and are due in three months to five years, depending on the term of the loans provided to the corresponding End Customers. F- 11 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (e) Intangible Assets, Net Intangible assets with an indefinite life are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. Intangible assets with finite lives are initially recorded at cost and amortized on a straight-line basis over the estimated economic useful lives of the respective assets. Acquired intangible assets from business combinations are recognized and measured at fair value at the time of acquisition. Those assets represent assets with finite lives are further amortized on a straight-line basis over the estimated economic useful lives of the respective assets. The estimated useful lives of intangible assets are as follows: SCHEDULE OF ESTIMATED USEFUL LIVES OF INTANGIBLE ASSETS Useful Life Patent use right 16 years (f) Goodwill, Net Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in the business combination. In accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. The Company would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. When performing the annual impairment test, the Company has the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would be required to perform a quantitative impairment analysis for goodwill. The quantitative analysis requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The fair value is generally determined using the income approach with the discounted cash flow valuation method, which requires management to make significant estimates and assumptions related to forecasted revenues and cash flows and the discount rates. (g) Impairment of Long-lived Assets Other Than Goodwill Long-lived assets with finite lives, primarily property and equipment, intangible assets, and operating lease right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. (h) Long-term Investments Investments in equity securities with readily determinable fair values The Company holds investments in equity securities of publicly listed companies, for which the Company does not have significant influence. Investments in equity securities with readily determinable fair values are measured at fair value and any changes in fair value are recognized in other income (expenses). F- 12 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Investments in privately held companies and organizations that do not report Net Asset Value (the “NAV”) per share The Company’s long-term investments in privately held entities that do not report NAV per share are accounted for using a measurement alternative, under which these investments are measured at cost, adjusted for observable price changes and impairments, with changes recognized in other income (expenses). The Company recognizes both realized and unrealized gain and losses in its unaudited consolidated statements of operations and comprehensive income, classified with other income (expenses). Unrealized gains and losses represent observable price changes for investments in privately held entities that do not report NAV per share. Realized gains and losses represent the difference between proceeds received upon disposition of investments and their historical or adjusted cost. Impairments are realized losses, which result in an adjusted cost, and represent charges to reduce the carrying values of investments in privately held entities that do not report NAV per share, if impairments are deemed other than temporary, to their estimated fair values. (i) Long-term Investments in MCs — Related Parties Long-term investments in MCs — related parties represent the payments to obtain equity interests of the MCs in Japan, made by the Company through SBC Japan, a company designated as a MSC in Japan. In accordance with the Act and articles of incorporation of the MCs, which are non-profit organizations, the equity interest holders of MCs are prohibited from receiving any profit distribution from MCs but have the right to receive distribution of the residual assets of the MCs in proportion to the amount of their contribution. As of the balance sheet dates, the investments represent probable future economic benefit to be realized at the time of dissolution of MCs or the equity interests being sold. The investments in MCs — related parties are accounted for using a measurement alternative, under which these investments are measured at cost, less impairment, and adjusted for observable price changes. The Company reviews the investments in MCs for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The payments made for such investments are classified as investing activities in the unaudited consolidated statements of cash flows. The MCs are considered related parties as the relatives of the Chief Executive Officer (“CEO”) of the Company being the Members of the MCs. Also see Note 2(a) for further details. (j) Lease The Company determines if an arrangement is or contains a lease at inception or modification of the arrangement. An arrangement is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period in exchange for consideration. Control over the use of the identified assets means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. The Company classifies its leases as either finance leases or operating leases if it is the lessee, or sales-type, direct financing, or operating leases if it is the lessor. The following criteria is used to determine if a lease is a finance lease (as a lessee) or sales-type or direct financing lease (as a lessor): (i) ownership is transferred from lessor to lessee by the end of the lease term; (ii) an option to purchase is reasonably certain to be exercised; (iii) the lease term is for the major part of the underlying asset’s remaining economic life; (iv) the present value of lease payments equals or exceeds substantially all of the fair value of the underlying assets; or (v) the underlying asset is specialized and is expected to have no alternative use at the end of the lease term. F- 13 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) If any of the above criteria is met, the Company accounts for the lease as a finance, a sales-type, or a direct financing lease. If none of the criteria is met, the Company accounts for the lease as an operating lease. Lessee accounting The Company recognizes right-of-use assets and lease liabilities for all leases other than those with a term of twelve months or less as the Company has elected to apply the short-term lease recognition exemption. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are classified and recognized at the commencement date of a lease. Lease liabilities are measured based on the present value of fixed lease payments over the lease term. Right-of-use assets consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. As the rates implicit on the Company’s leases for which it is the lessee are not readily determinable, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments. When determining the incremental borrowing rate, the Company assesses multiple variables such as lease term, collateral, economic conditions, and its creditworthiness. From time to time, we may enter into sublease agreements with third parties. Our subleases generally do not relieve us of our primary obligations under the corresponding head lease. As a result, we account for the head lease based on the original assessment at lease inception. We determine if the sublease arrangement is either a sales-type, direct financing, or operating lease at inception of the sublease. If the total remaining lease cost on the head lease for the term of the sublease is greater than the anticipated sublease income, the right-of-use asset is assessed for impairment. Our subleases are generally operating leases and we recognize sublease income on a straight-line basis over the sublease term. Lessor accounting — operating leases The Company accounts for the revenue from its lease contracts by utilizing the single component accounting policy. This policy requires the Company to account for, by class of underlying asset, the lease component and nonlease component(s) associated with each lease as a single component if two criteria are met. (i) the timing and pattern of transfer of the lease component and the nonlease component(s) are the same; and (ii) the lease component would be classified as an operating lease if it were accounted for separately. Lease components consist primarily of fixed rental payments, which represent scheduled rental amounts due under our leases. Nonlease components consist primarily of tenant recoveries representing reimbursements of rental operating expenses, including recoveries for utilities, repairs and maintenance and common area expenses. If the lease component is the predominant component, we account for all revenues under such lease as a single component in accordance with the lease accounting standard. Conversely, if the nonlease component is the predominant component, all revenues under such lease are accounted for in accordance with the revenue recognition accounting standard. Our operating leases qualify for the single component accounting, and the lease component in each of our leases is predominant. Therefore, we account for all revenues from our operating leases under the lease accounting standard and classify these revenues as rental income. The Company commences recognition of rental income related to the operating leases at the date the property is ready for its intended use by the tenant and the tenant takes possession or controls the physical use of the leased asset. Income from rentals related to fixed rental payments under operating leases is recognized on a straight-line basis over the respective operating lease terms. Any amounts received but will be recognized as revenue in future periods are classified in advances from customers in the Company’s unaudited consolidated balance sheets. F- 14 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Lessor accounting — sales-type leases The Company purchases medical equipment from vendors and leases it to its customers, who are required to pay installments throughout the term of the leases. The lease agreements include lease payments that are fixed, do not contain residual value guarantees or variable lease payments. The lease terms are based on the non-cancellable term of the lease and the buyer may have options to terminate the lease in advance when meets certain conditions. The customers obtain control of the medical equipment when they physically possess the equipment. The Company recognizes sales from sales-type leases equal to the present value of the minimum lease payments discounted using the implicit interest rate in the lease and cost of sales equal to carrying amount of the asset being leased and any initial direct costs incurred, less the present value of the unguaranteed residual. Interest income from the leases is recognized over the lease terms and included in revenues, net. The Company excludes from the measurement of its lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. (k) Revenue Recognition The Company recognizes revenue from franchising services, procurement services, management services and other services or product sales under ASC Topic 606, “Revenue from Contracts with Customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of consumption tax and applicable local government levies, if any. The consumption tax on sales is calculated at 10% of gross sales. The Company does not have significant remaining unfulfilled performance obligations or contract balances. The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on the evaluation of whether (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis. The Company recognizes revenue from rental services under ASC Topic 842, “Leases”. The Company currently generates its revenue from the following main sources: Franchising Revenue The Company generates franchising revenue (royalty income) by licensing its intellectual properties, including but not limited to the Company’s brand name (“Shonan Beauty Clinic”), trade name, patents, and trademarks, as a franchisor pursuant to franchise agreements with the medical corporations (the “MCs”) in Japan. Prior to April 2023, royalty income was based on a percentage of sales and recognized at the time when the related sales occurred; since April 2023, it is based on a fixed amount to each clinic of the MCs; since September 2023, it is based on a fixed amount to each MC and a fixed amount to each clinic of the MCs and recognized over time as services are rendered. F- 15 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Procurement Revenue The Company generates procurement services revenue by purchasing primarily advertising services and medical materials from qualified vendors on behalf of MCs to maintain brand quality consistency. Procurement services revenue is recognized at the point in time upon the delivery of products or over time as services are performed. Occasionally, the Company receives vendor discounts on certain large purchases. It recognizes revenue based on actual payments and will return the over-collection resulting from such discounts to MCs. Management Services Revenue The Company provides loyalty program management services, labor supporting services, function supporting services, and management consulting services to MCs. Loyalty program management services The Company awards loyalty points on behalf of MCs to MCs’ customers, who earn loyalty points from each qualified purchase made at the loyalty program participating clinics of MCs, in exchange for a handling fee. The revenue is based on a percentage of the related payment amount made by MCs’ customers and is recognized when the loyalty points are awarded. At the time loyalty points are awarded, a MC pays the Company cash in an amount equivalent to the awarded loyalty points, which is recorded as advances from customers. When a MC’s customers redeem the loyalty points, the Company returns the cash back to the MC in an amount equivalent to the redeemed loyalty points. The awarded loyalty points expire if a MC’s customer does not make any additional qualified purchase at a participating clinic within a year. The Company accumulates and tracks the points on behalf of MCs until the loyalty points expire at which time the Company recognizes an amount equivalent to the expired loyalty points as revenue, which is normally not significant. The Company also awards certain points to MCs’ customers on behalf of MCs for free in order to increase the volume of MC’s sales, from which the Company earns other types of revenues, such as royalty income. When a MC’s customers redeem such points, the Company reimburses MC in an amount equivalent to the used free points and records it as a reduction of the revenue recognized. The Company is an agent in the management of loyalty programs, and as a result, revenues are recognized net of the cost of redemptions. Labor supporting services The Company generates revenue by dispatching staff to MCs to provide a range of services, primarily including clinic operation, IT, and administrative services. The Company recognizes the revenue over the time when services are rendered. Function supporting services The revenue is derived from providing functional supporting services to MCs, such as accounting and human resources services. The Company recognizes the revenue over the time when services are rendered. Management consulting services The Company generates revenue by providing consulting services to MCs in relation to business operations of cosmetic dermatology. The Company recognizes the revenue over the time when services are rendered. F- 16 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Rental Services Revenue The Company generates rental income from operating leases and sales-type leases, which is accounted for under ASC Topic 842. Operating lease revenue is generally recognized on straight-line basis over the terms of the lease agreements and sales-type leases revenue is generally recognized on the lease commitment date. Also see Note 2(j). Other Revenues The Company generates other miscellaneous revenues such as accommodation services income, medicine dispensed sales revenue, brokerage services revenue, construction services revenue, pilot training services revenue, interest income, etc. These revenues are recognized when the Company satisfies performance obligations. (l) Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents, accounts receivable, customer loans receivable and other receivables. The Company places its cash and cash equivalents with financial institutions. The Company does not require collateral or other security to support financial instruments subject to credit risk. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable. For the nine months ended September 30, 2024, customer A, B and C represent 27 %, 22 % and 24 % of the Company’s total revenues, respectively. For the nine months ended September 30, 2023, customer A, B, C and D represent 31 %, 24 %, 23 % and 11 % of the Company’s total revenues, respectively. As of September 30, 2024, customer A, B and C account for 30 %, 21 % and 20 % of the Company’s total outstanding accounts receivable, respectively. As of December 31, 2023, customer A, B, C and D account for 26 %, 24 %, 22 % and 13 % of the Company’s total outstanding accounts receivable, respectively. For the nine months ended September 30, 2024 and 2023, vendor A represents 14 % and 13 % of the Company’s total purchases, respectively. As of September 30, 2024, vendor A and B represent 23 % and 13 % of the Company’s total outstanding accounts payable, respectively. As of December 31, 2023, vendor A, B and C represent 19 %, 14 % and 14 % of the Company’s total outstanding accounts payable, respectively. (m) Related Parties and Transactions The Company identifies related parties, and accounts for, discloses related party transactions in accordance with ASC Topic 850, “Related Party Disclosures,” and other relevant ASC standards. Parties, which can be an entity or individual, are considered to be related if they have the ability, directly or indirectly, to control the Company or exercise significant influence over the Company in making financial and operational decisions. Entities are also considered to be related if they are subject to common control or common significant influence. F- 17 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. (n) Fair Value Measurements The Company performs fair value measurements in accordance with ASC Topic 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value: ● Level 1: quoted prices in active markets for identical assets or liabilities; ● Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or ● Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. As of September 30, 2024 and December 31, 2023, the carrying values of current assets and current liabilities approximated their fair values reported in the unaudited consolidated balance sheets due to the short-term maturities of these instruments. Debt that bears variable interest rates index to prime also approximates fair value as it reprices when market interest rates change. Assets measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 are summarized below. SCHEDULE OF FAIR VALUE ON A RECURRING BASIS Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Fair Value at September 30, 2024 Fair Value Measurements as of September 30, 2024 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Fair Value at September 30, 2024 Long-term investments: Equity investments at fair value with readily determinable fair value $ 3,715,695 — — $ 3,715,695 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Fair Value at December 31, 2023 Fair Value Measurements as of December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Fair Value at December 31, 2023 Long-term investments: Equity investments at fair value with readily determinable fair value — — — — F- 18 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (o) Stock-Based Compensation The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, “Compensation — Stock Compensation”, under which the Company determines whether stock-based compensation awards should be classified and accounted for as an equity award. There were no liability awards granted during any of the periods stated herein. For all grants of stock-based compensation classified as equity awards, the cost of services received from employees and non-employees in exchange for awards is recognized in the consolidated statements of operations and comprehensive income based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures and cancellations as they occur. (p) Recent Accounting Pronouncements In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU No. 2023-09 is effective for public entities for annual reporting periods beginning after December 15, 2023, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvement to Income Tax Disclosures” to enhance the transparency and decision usefulness of income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, and for annual periods beginning after December 15, 2025 for all other entities, on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. In November 2024, the FASB issued ASU No. 2024-03, “ Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses ” to improve disclosures about the nature of expenses in commonly presented financial statement captions. ASU 2024-03 is effective for all public business entities for annual reporting periods beginning after December 15, 2026, on either a prospective or retrospective basis. Early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. NOTE 3 — VARIABLE INTEREST ENTITY A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company followed ASC Topic 810, “Consolidation”, utilizing a qualitative approach, and determined that it is the primary beneficiary of its VIE, Aikawa Medical Management, Inc. (“AMM”) and consolidated the result of operations, financial conditions, and cash flows of AMM in the consolidated financial statements. The following amounts and balances of AMM were included in the Company’s unaudited consolidated financial statements as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023: SCHEDULE OF CONSOLIDATED FINANCIAL STATEMENTS OF VARIABLE INTEREST ENTITY September 30, 2024 December 31, 2023 ASSETS Current assets Cash and cash equivalents $ 44,974 $ 28,934 Accounts receivable 26,768 26,916 Prepaid expenses and other current assets — 11,074 Total Current Assets 71,742 66,924 Property and equipment, net 1,799,372 1,799,372 Loans receivables from subsidiaries of the Company 3,101,764 3,060,581 Other assets 2,275 2,275 Total Non-current Assets 4,903,411 4,862,228 Total Assets $ 4,975,153 $ 4,929,152 LIABILITIES Current Liabilities Accounts payable $ 18,856 $ 17,942 Accrued liabilities and other current liabilities 17,824 17,824 Due to related party 2,810,803 2,875,408 Total Current Liabilities 2,847,483 2,911,174 Loan payable to a subsidiary of the Company 8,897,215 9,157,660 Total Non-current Liabilities 8,897,215 9,157,660 Total Liabilities $ 11,744,698 $ 12,068,834 F- 19 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 — VARIABLE INTEREST ENTITY (cont.) 2024 2023 2024 2023 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Revenues $ 40,470 $ 41,736 $ 229,330 $ 122,676 Cost of revenues $ — $ 15,412 $ 56,510 $ 46,235 Total operating expenses $ 118,009 $ 28,228 $ 373,729 $ 45,281 Net income (loss) $ 17,461 $ ( 1,904 ) $ ( 105,909 ) $ 31,160 Net cash provided by (used in) operating activities $ ( 18,640 ) $ 28,772 $ ( 120,365 ) $ 161,677 Net cash provided by (used in) investing activities $ 45,000 $ ( 10,000 ) $ 95,000 $ ( 90,000 ) Net cash used in financing activities $ ( 15,181 ) $ ( 31,462 ) $ ( 64,605 ) $ ( 114,688 ) NOTE 4 — DISPOSAL OF SUBSIDIARY Cellpro Japan Co., Ltd. On January 1, 2024, the Company disposed of its subsidiary, Cellpro Japan Co., Ltd. (“Cellpro”), to Waqoo Inc. (“Waqoo”), a Japanese company listed on the Tokyo Stock Exchange, of which the CEO of the Company is a non-controlling shareholder with more than 10 % ownership interest, in exchange for 353,600 shares of Waqoo’s common stock through a share exchange agreement. The disposal of Cellpro did not constitute a strategic shift that would have a major effect on the Company’s operations and financial results. After the stock exchange, SBC Japan became a shareholder with less than 10 % ownership interest of Waqoo. The common stock of Waqoo was recorded as an investment in a public entity with readily determinable fair value, which was included in long-term investments. Also see Note 9 for further details. The following table summarizes the assets and liabilities disposed of at the disposal date. SCHEDULE OF DISPOSAL OF ASSETS AND LIABILITIES Cash and cash equivalents $ 815,819 Accounts receivable 307,127 Accounts receivable – related parties 146,857 Accounts receivable 146,857 Inventories 244,440 Prepaid expense and other current assets 8,115 Property and equipment, net 300,779 Intangible assets, net 2,249,706 Other assets 84,763 Accounts payable ( 191,343 ) Current portion of long-term loans ( 28,418 ) Income tax payable ( 99,266 ) Accrued liabilities and other current liabilities ( 175,012 ) Long-term loans ( 260,978 ) Deferred tax liabilities ( 776,249 ) Net assets of the subsidiary 2,626,340 Non-controlling interest of the subsidiary ( 1,221,795 ) Net assets of the subsidiary attributable to the Company 1,404,545 Reclassification of accumulated translation adjustment into gain on disposal 347,784 Fair value of consideration received – Waqoo’s common stock 5,565,938 Gain on disposal of subsidiary $ 3,813,609 F- 20 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS As of September 30, 2024 and December 31, 2023, prepaid expenses and other current assets consist of the following: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS September 30, 2024 December 31, 2023 Advances to suppliers $ 6,971,779 $ 6,497,608 Convertible note receivable * — 1,000,000 Other receivables ** 1,077,620 2,390,276 Others 323,269 162,121 Total $ 8,372,668 $ 10,050,005 * In May 2023, the Company purchased from Pono, a special purpose acquisition company, a convertible promissory note (“Pono Promissory Note”) in aggregate principal amount of $ 1,000,000 , which will automatically convert into shares of Class A common stock of Pono at a conversion price of $ 10.00 per unit immediately prior to the expected Pono Merger. In February 2024, the Company and Pono entered into an Amendment to the Note Purchase Agreement, which increased the principal amount of the convertible promissory note from $ 1,000,000 to $ 2,700,000 . On September 17, 2024, upon the consummation of Pono Merger, the promissory note was converted into 270,000 common shares. See Note 15 for further details. ** Represent a refundable deposit to be returned by a supplier, reimbursement receivables from a business partner, and other miscellaneous receivables. NOTE 6 — FINANCE LEASE RECEIVABLES As of September 30, 2024 and December 31, 2023, finance lease receivables consist of the following: SCHEDULE OF FINANCE LEASE RECEIVABLES September 30, 2024 December 31, 2023 Future minimum lease payments receivable $ 13,103,913 $ 9,586,741 Estimated residual value — — Gross finance lease receivables 13,103,913 9,586,741 Less: unearned interest income ( 31,528 ) ( 22,688 ) Finance lease receivables $ 13,072,385 $ 9,564,053 Finance lease receivables, current $ 8,443,338 $ 6,143,564 Finance lease receivables, non-current $ 4,629,047 $ 3,420,489 As of September 30, 2024, maturities of the Company’s gross finance lease receivables are as follows: SCHEDULE OF MATURITIES OF THE FINANCE LEASE RECEIVABLES Years ending December 31, Remaining of 2024 $ 1,093,235 2025 6,222,043 2026 4,462,787 2027 1,325,848 Total $ 13,103,913 F- 21 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 — PROPERTY AND EQUIPMENT, NET As of September 30, 2024 and December 31, 2023, property and equipment, net consist of the following: SCHEDULE OF PROPERTY AND EQUIPMENT September 30, 2024 December 31, 2023 Land $ 1,926,391 $ 1,799,443 Buildings and facilities attached to buildings 8,648,252 8,412,348 Machinery, equipment and automobiles 5,563,016 5,539,542 Aircraft 4,040,038 4,091,772 Software 4,419,556 3,778,911 Construction in progress 1,125,947 591,306 Subtotal 25,723,200 24,213,322 Less: accumulated depreciation ( 9,743,272 ) ( 8,231,990 ) Less: accumulated impairment ( 2,785,514 ) ( 2,399,315 ) Property and equipment, net $ 13,194,414 $ 13,582,017 Depreciation expense was $ 745,802 and $ 1,895,399 for the three months ended September 30, 2024 and 2023, respectively, and $ 2,061,341 and $ 5,368,421 for the nine months ended September 30, 2024 and 2023, respectively. The Company recognized an impairment loss of nil and $ 9,690 for the three months ended September 30, 2024 and 2023, respectively, and nil and $ 204,026 for the nine months ended September 30, 2024 and 2023, respectively. The Company recognized a gain on disposal of property and equipment of $ 902 and $ 249,532 for the nine months ended September 30, 2024 and 2023, respectively. NOTE 8 — INTANGIBLE ASSETS, NET As of September 30, 2024 and December 31, 2023, intangible assets, net consist of the following: SCHEDULE OF INTANGIBLE ASSETS September 30, 2024 December 31, 2023 Assembled workforce $ — $ 8,976,567 Patent use right 18,202,057 18,435,140 Others 7,026 212,190 Subtotal 18,209,083 27,623,897 Less: accumulated amortization ( 1,990,850 ) ( 7,884,621 ) Intangible assets, net $ 16,218,233 $ 19,739,276 Amortization expense was $ 272,557 and $ 1,392,410 for the three months ended September 30, 2024 and 2023, respectively, and $ 806,440 and $ 4,320,219 for the nine months ended September 30, 2024 and 2023, respectively. Other intangible assets consist of miscellaneous intangible assets with indefinite useful life. Estimated future amortization expense related to intangible assets as of September 30, 2024 is as follows: SCHEDULE OF FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS Years ending December 31, Amortization expense Remaining of 2024 $ 284,407 2025 1,137,629 2026 1,137,629 2027 1,137,629 2028 1,137,629 Thereafter 11,376,284 Total $ 16,211,207 F- 22 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 — INVESTMENTS As of September 30, 2024 and December 31, 2023, investments consist of the following: SCHEDULE OF INVESTMENTS September 30, 2024 December 31, 2023 Investments in private entities or organizations that do not report NAV per share: Entities or organizations without observable price changes $ 1,888,401 $ 1,557,366 Investment in a public entity with readily determinable fair value – related party 3,715,695 — Less: accumulated impairment ( 698,981 ) ( 707,932 ) Long-term investments $ 4,905,115 $ 849,434 The Company reclassified unrealized gain on available-for-sale debt security of $ 205,383 and $ 8,760 for the three and nine months ended September 30, 2023, respectively; and recognized a realized gain on available-for-sale debt securities of $ 223,164 for the three and nine months ended September 30, 2023, respectively. No such reclassification or realized gain was recognized for the three and nine months ended September 30, 2024. In January 2024, the Company acquired 353,600 shares of common stock of Waqoo, representing less than 10 % ownership interest, a related-party company listed on the Tokyo Stock Exchange, with a fair value of $ 5,565,938 through a share exchange agreement. During the three and nine months ended September 30, 2024, the Company recognized an unrealized loss of $ 636,725 and $ 1,682,282 on the investment in Waqoo, respectively. NOTE 10 — OTHER ASSETS As of September 30, 2024 and December 31, 2023, other assets consist of the following: SCHEDULE OF OTHER ASSETS September 30, 2024 December 31, 2023 Security deposits $ 2,952,314 $ 3,049,112 Corporate-owned life insurance policies 11,730,214 11,529,700 Long-term loans receivable, primarily student loans 658,354 647,641 Others 209,520 215,605 Total $ 15,550,402 $ 15,442,058 NOTE 11 — ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES As of September 30, 2024 and December 31, 2023, accrued liabilities and other current liabilities consist of the following: SCHEDULE OF ACCRUED AND OTHER CURRENT LIABILITIES September 30, 2024 December 31, 2023 Individual income tax withheld on behalf of employees $ 1,336,101 $ 943,195 Wages and bonus payables 3,368,479 6,264,711 Consumption tax payable 5,555,456 12,968,580 Liabilities assumed in connection with purchase of property and equipment 591,986 656,508 Excise and franchise tax payable 1,015,884 — Others 186,141 176,015 Total $ 12,054,047 $ 21,009,009 F- 23 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 — LONG-TERM LOANS As of September 30, 2024 and December 31, 2023, the Company’s long-term loans from banks and other financial institution consist of the following: SCHEDULE OF LONG TERM LOANS Indebtedness Weighted Average Interest Rate* Weighted Average Years to Maturity* September 30, 2024 December 31, 2023 Guaranteed loans Fixed rate loans 1.12 % 3.70 $ 499,555 $ 575,191 Variable rate loans 0.18 % 0.43 113,574 289,226 Subtotal 1.30 % 4.13 613,129 864,417 Unsecured loans Fixed rate loans 0.13 % 2.68 210,024 354,522 Subtotal 0.13 % 2.68 210,024 354,522 Total long-term loans 1.43 % 6.81 823,153 1,218,939 Less: current portion ( 136,683 ) ( 156,217 ) Non-current portion $ 686,470 $ 1,062,722 * Pertained to information for loans outstanding as of September 30, 2024. The Company borrowed loans from various banks and a financial institution for working capital purposes. Interest expense was $ 5,466 and $ 3,978 for the three months ended September 30, 2024 and 2023, respectively, and $ 15,898 and $ 37,380 for the nine months ended September 30, 2024 and 2023, respectively. The guarantee information of the Company’s outstanding loans as of September 30, 2024 and December 31, 2023 consists of the following: SCHEDULE OF OUTSTANDING LOANS September 30, 2024 December 31, 2023 Co-guaranteed by CEO of subsidiaries within the Company’s organizational structure and Tokyo Credit Guarantee Association $ 613,129 $ 747,474 Co-guaranteed by CEO of a subsidiary within the Company’s organizational structure and Kanagawa Credit Guarantee Association $ — $ 116,943 As of September 30, 2024, future minimum payments for long-term loans are as follows: SCHEDULE OF MATURITIES OF LONG TERM DEBT Years ending December 31, Principal Repayment Remaining of 2024 $ 31,546 2025 141,934 2026 147,185 2027 140,898 2028 77,121 Thereafter 284,469 Total $ 823,153 F- 24 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 — OPERATING LEASES — AS A LESSEE The Company has entered into operating leases for offices and sublease purposes, with terms ranging from two to nine years. The estimated effect of lease renewal and termination options, as applicable, that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right-of-use assets and lease liabilities was included in the unaudited consolidated financials. During the nine months ended September 30, 2024 and 2023, certain operating leases were guaranteed by related parties of the Company. Operating lease expenses for lease payments are recognized on a straight-line basis over the lease term. Leases with an initial term of twelve months or less are not recorded on the unaudited consolidated balance sheets. The components of lease costs are as follows: SCHEDULE OF LEASE COSTS 2024 2023 For the Nine Months Ended September 30, 2024 2023 Operating lease costs $ 2,914,366 $ 2,960,243 Short-term lease costs 239,673 333,062 Total lease costs $ 3,154,039 $ 3,293,305 The following table presents supplemental information related to the Company’s operating leases: SCHEDULE OF SUPPLEMENTAL INFORMATION OPERATING LEASES 2024 2023 For the Nine Months Ended September 30, 2024 2023 Operating cash flows from operating leases $ 3,107,447 $ 2,988,222 Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ — $ 1,029,518 Remeasurement of operating lease liabilities and right-of-use assets due to lease modifications $ 2,408,752 $ 2,110,079 Weighted average remaining lease term (years) 2.05 2.00 Weighted average discount rate (per annum) 0.19 % 0.19 % F- 25 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 — OPERATING LEASES — AS A LESSEE (cont.) As of September 30, 2024, the future maturity of lease liabilities is as follows: SCHEDULE OF MATURITY OF LEASE LIABILITIES Years ending December 31, Lease Payment Remaining of 2024 $ 1,079,267 2025 3,430,730 2026 459,579 2027 180,494 2028 171,043 Thereafter 277,567 Total undiscounted lease payments 5,598,680 Less: imputed interest ( 8,864 ) Total operating lease liabilities $ 5,589,816 NOTE 14 — INCOME TAXES United States SBC Holding, SBC USA, SBC Healthcare Inc., SBC Irvine, LLC, and Aikawa Medical Management, Inc. are incorporated in the United States and subject to federal income tax rate at 21 % statutory tax rate with respect to the assessable income generated from the United States. Japan The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. During the nine months ended September 30, 2024 and 2023, substantially all the taxable income of the Company is generated in Japan. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments, and in the aggregate resulted in an effective statutory rate of 34.69 % and 34.58 % for the nine months ended September 30, 2024 and 2023, respectively. F- 26 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 — INCOME TAXES (cont.) Vietnam Shoubikai Medical Vietnam Co., Ltd. is incorporated in Vietnam and subject to income tax rate at 20 % statutory tax rate with respect to the assessable income generated from Vietnam. For the nine months ended September 30, 2024 and 2023, the Company’s income tax expenses are as follows: SCHEDULE OF INCOME TAX EXPENSES Income Tax Expense 2024 2023 For the Nine Months Ended September 30, Income Tax Expense 2024 2023 Current $ 29,409,315 $ 27,063,166 Deferred ( 2,154,837 ) ( 1,379,922 ) Total $ 27,254,478 $ 25,683,244 In 2023, the Company changed the tax year end of SBC Japan, L’Ange Sub and Shobikai Sub from March 31 to December 31. During the nine months ended September 30, 2024, the Company made income tax payments of $ 31,332,123 , including enterprise tax payments of $ 8,681,315 , which were deductible for tax purpose. The effective tax rate was 40.44 % and 51.35 % for the nine months ended September 30, 2024 and 2023, respectively. Since October 2023, the Company has been undergoing a tax examination conducted by the Japanese tax authority for the income tax returns filed by SBC Japan for the years ended March 31, 2016 through March 31, 2023, the income tax returns filed by L’Ange Sub for the years ended February 28, 2021 through February 28, 2023, and the income tax returns filed by Shobikai Sub for the years ended March 31, 2021 through March 31, 2023. The tax examination was completed, the subsidiaries of the Company filed the amended tax returns or received the correction notices from the Japanese tax authority in May 2024. There was no material difference between the final result and the income tax liabilities recorded by the Company for the year ended December 31, 2023. NOTE 15 — SHAREHOLDERS’ EQUITY The Company is authorized to issue 400,000,000 shares of common stock, par value of $ 0.0001 per share (“Common Stock”), and 20,000,000 shares of undesignated preferred stock, par value of $ 0.0001 per share. Shares issued under Pono Merger On September 17, 2024, upon the consummation of Pono Merger, the Company issued 94,192,433 shares of common stock to the former shareholder of SBC USA as merger consideration, and the Company gave effect to the issuance of 5,080,820 shares of common stock for the Class A common stock that were previously issued by Pono and outstanding at the closing date of Pono Merger. In addition, Pono Promissory Note of $ 2,700,000 was automatically converted to 270,000 shares of common stock and issued to Yoshiyuki Aikawa, the former shareholder of SBC USA and the CEO of the Company, instead of SBC USA itself. As of September 30, 2024, the Company has not received the 270,000 shares, which have been recorded as treasury stock receivable on the unaudited consolidated balance sheet. On September 18, 2024, the Company issued 339,565 shares of common stock for no proceeds as follows: (i) 83,250 shares to Wolverine Flagship Fund Trading Limited, (ii) 96,030 shares to Amethyst Arbitrage International Master Fund, (iii) 100,000 shares to Radcliffe SPAC Master Fund, L.P. and (iv) 60,285 shares to Verition Multi-Strategy Master Fund Ltd. as incentive shares pursuant to the Non-Redemption Agreements, entered into in May 2023, by and among Pono, Mehana Capital LLC and certain unaffiliated stockholders, including Wolverine Flagship Fund Trading Limited, Amethyst Arbitrage International Master Fund, Radcliffe SPAC Master Fund, L.P. and Verition Multi-Strategy Master Fund Ltd. As of September 30, 2024 and December 31, 2023, there were 103,020,816 and 94,192,433 , respectively, shares of common stock issued and outstanding, and no preferred stock issued and outstanding, after giving retrospective effects of reverse recapitalization on September 17, 2024. Stock-based compensation On November 18, 2022 (“Effective Date”), the Company entered into a Common Stock Purchase Warrant Agreement (the “Warrant Agreement”) with HeartCore Enterprise, Inc. (“HeartCore”) pursuant to which it agreed to compensate HeartCore with common stock purchase warrants (the “Warrants”) in exchange for professional services to be provided by HeartCore in connection with its merger or other transaction with a special purpose acquisition company (“SPAC”) wherein the Company becomes a subsidiary of the SPAC (the “Merger”). The Warrants were fully vested as of the Effective Date, however, HeartCore can exercise the Warrants in 10 years only upon the Company’s consummation of the Merger or the occurrence of other fundamental events defined in the Warrant Agreement to purchase 2.7% of the fully diluted shares of the Company’s common stock as of the date of the Merger, for an exercise price per share of $ 0.01 . As the performance condition of exercisability was satisfied upon the consummation of Pono Merger , the Company recognized stock-based compensation of $ 12,807,455 during the three and nine months ended September 30, 2024. On September 27, 2024, the Warrants were fully exercised, and 3,137,998 shares of common stock were issued. In January 2024, the Company terminated 449,190 common stock options granted to doctors of related-party MCs (the “Holders”) in September 2023. In connection with the termination, the Company entered into a common stock purchase warrant agreement (the “Warrant Agreement III”) pursuant to which the Company issued to the Holders warrants to acquire an equal number of shares of common stock as previously subject to the options issued to each of the Holders in September 2023. The warrants may be exercised on the three-month, fifteen-month, and twenty-seven-month anniversary of the date of the Company completes its merger or other transaction with a special purpose acquisition company (“SPAC”) wherein the Company becomes a subsidiary of the SPAC (the “Merger”) or the occurrence of other fundamental events defined in the Warrant Agreement III (the “Trigger Date”), to acquire an amount equal to one-third of the applicable shares of common stock, respectively, with an exercise price per share of $ 0.0001 . The warrants were fully vested on the grant date and will expire on the tenth anniversary of the Trigger Date. In June and July 2024, the Company terminated all common stock options and warrants ever granted, except for Warrants granted to HeartCore in November 2022. As of September 30, 2024 and December 31, 2023, there were nil and 1,131,810 common stock options and warrants granted to related parties of the Company, respectively. F- 27 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 — SHAREHOLDERS’ EQUITY (cont.) The following table summarizes the stock option/warrant activities and related information for the nine months ended September 30, 2024 and 2023: SCHEDULE OF STOCK OPTION/WARRANTS ACTIVITIES Number of Warrants * Weighted Average Exercise Price Weighted Average Remaining Term (Years) Intrinsic Value As of January 1, 2023 3,137,998 $ 0.01 10.00 $ — Granted 1,781,000 0.0001 10.00 — Exercised — — — — Forfeited — — — — As of September 30, 2023 4,918,998 $ 0.0064 10.00 $ — As of January 1, 2024 4,918,998 $ 0.0064 10.00 $ — Granted 449,190 0.0001 10.00 — Additions pursuant to Pono Merger ** 12,134,375 11.50 5.00 — Exercised ( 3,137,998 ) 0.01 — — Forfeited/Cancelled ( 2,230,190 ) 0.0001 — — As of September 30, 2024 ** 12,134,375 $ 11.50 5.00 $ — Vested and exercisable as of September 30, 2024 — $ — — $ — * The number of Warrants granted to HeartCore was updated to reflect the adjustment upon the consummation of Pono Merger. ** As of September 30, 2024, there were 12,134,375 warrants issued by Pono, prior to Pono Merger, among which 11,500,000 warrants were issued through its initial public offering (“IPO”) (“Public Warrants”) and 634,375 were issued through a private placement (“Placement Warrants”). Each warrant entitles the registered holder to purchase one share of common stock at a price of $ 11.50 per share at any time commencing on October 17, 2024 until October 17, 2029, or earlier upon redemption or liquidation. The fair value of the stock-based compensation recognized in the consolidated financial statements was estimated using the binomial option pricing model, and based on the equity value estimated using 1) income approach with the discounted cash flow valuation method, which requires management to make significant estimates and assumptions related to forecasted revenues and cash flows and the discount rates, and 2) market approach with metrics of publicly traded companies or historically completed transactions of comparable businesses, with the assistance of an independent valuation specialist. The Company applied a weighting to the income approach and market approach to determine the fair value. NOTE 16 — DISAGGREGATION OF REVENUES Revenues generated from different revenue streams consist of the following: SCHEDULE OF DISAGGREGATION OF REVENUE 2024 2023 2024 2023 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Royalty income $ 15,688,528 $ 8,606,999 $ 45,425,052 $ 25,446,040 Procurement services 17,571,299 8,959,689 44,303,891 34,662,934 Management services 12,110,764 22,969,187 44,471,031 53,693,948 Rental services 4,124,774 1,337,803 11,195,888 4,681,213 Others 3,589,518 5,405,007 15,599,143 12,708,594 Total $ 53,084,883 $ 47,278,685 $ 160,995,005 $ 131,192,729 During the nine months ended September 30, 2024 and 2023, the Company recognized revenue of $ 1,970,889 and $ 743,223 from the opening balance of advances from customers, respectively; and recognized revenue of nil and $ 1,382,803 from the opening balance of advances from customers — related parties, respectively. As of September 30, 2024 and December 31, 2023, and for the nine months ended September 30, 2024 and 2023, substantially all of our long-lived assets and revenues generated are attributed to the Company’s operation in Japan. F- 28 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — RELATED PARTY TRANSACTIONS The related parties had material transactions for the nine months ended September 30, 2024 and 2023 consist of the following: Name of Related Parties Nature of Relationship as of September 30, 2024 Yoshiyuki Aikawa Controlling shareholder, director and CEO of the Company Yoshiko Aikawa Representative director of a subsidiary of the Company Mizuho Yamashita Director of a subsidiary of the Company Medical Corporation Shobikai The relatives of CEO of the Company being the Members of the MC Medical Corporation Kowakai The relatives of CEO of the Company being the Members of the MC Medical Corporation Nasukai The relatives of CEO of the Company being the Members of the MC Medical Corporation Aikeikai The relatives of CEO of the Company being the Members of the MC Medical Corporation Jukeikai The relatives of CEO of the Company being the Members of the MC Medical Corporation Ritz Cosmetic Surgery The relatives of CEO of the Company being the Members of the MC Medical Corporation Association Junikai The relatives of CEO of the Company being the Members of the MC Medical Corporation Association Furinkai The relatives of CEO of the Company being the Members of the MC Japan Medical & Beauty Inc. Controlled by the CEO of the Company SBC Inc., previously known as SBC China Inc. Controlled by the CEO of the Company Hariver Inc. Controlled by the CEO of the Company Public Interest Foundation SBC Medical Promotion Foundation The relative of CEO of the Company being a Member of Public Interest Foundation SBC Medical Promotion Foundation AI Med Inc. Controlled by the CEO of the Company General Incorporated Association SBC The CEO of the Company being the Member of General Incorporated Association SBC Amulet Inc. Controlled by Mizuho Yamashita, a director of a subsidiary of the Company SBC Irvine MC Significantly influenced by the Company SBC Tokyo Medical University, previously known as Ryotokuji University The CEO of the Company is the chairman of SBC Tokyo Medical University SBC Shonan Osteopathic Clinic Co., Ltd. The CEO of the Company is a principal shareholder of SBC Shonan Osteopathic Clinic Co., Ltd. Waqoo Inc. The CEO of the Company is a principal shareholder of Waqoo Inc. General Incorporated Association Taiseikai The relatives of CEO of the Company being the Members of General Incorporated Association Taiseikai F- 29 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — RELATED PARTY TRANSACTIONS (cont.) During the nine months ended September 30, 2024 and 2023, the revenue transactions with related parties are as follows: SCHEDULE OF RELATED PARTY TRANSACTIONS For the Nine Months Ended September 30, 2024 2023 Medical Corporation Shobikai $ 43,637,973 $ 41,167,021 Medical Corporation Kowakai 37,846,051 30,136,659 Medical Corporation Nasukai 34,722,269 31,847,843 Medical Corporation Aikeikai 15,025,186 14,545,313 Medical Corporation Jukeikai 4,819,541 2,149,228 Medical Corporation Ritz Cosmetic Surgery 4,016,818 1,404,970 Japan Medical & Beauty Inc. 29,776 157,276 Hariver Inc. 14,888 16,691 SBC Inc., previously known as SBC China Inc. 2,166 369 Public Interest Foundation SBC Medical Promotion Foundation 85 1,005 General Incorporated Association SBC 802 579 SBC Tokyo Medical University, previously known as Ryotokuji University 44,792 244,321 Yoshiyuki Aikawa 77,374 56,320 Mizuho Yamashita — 19,551 Amulet Inc. — 3,649 AI Med Inc. 726 1,684,703 SBC Irvine MC 960,938 971,404 Medical Corporation Association Furinkai 7,985,014 729,898 Medical Corporation Association Junikai 3,510,845 199,853 General Incorporated Association Taiseikai 2,527 — SBC Shonan Osteopathic Clinic Co., Ltd. 20,717 — Total $ 152,718,488 $ 125,336,653 Revenue transactions with related parties $ 152,718,488 $ 125,336,653 As of September 30, 2024 and December 31, 2023, the balances with related parties are as follows: Accounts receivable September 30, 2024 December 31, 2023 Medical Corporation Shobikai $ 9,006,704 $ 9,251,427 Medical Corporation Nasukai 6,348,783 8,447,448 Medical Corporation Kowakai 5,859,012 7,841,059 Medical Corporation Aikeikai 2,071,943 4,661,649 Medical Corporation Jukeikai 626,376 1,358,213 Medical Corporation Association Furinkai 1,625,567 1,039,074 Medical Corporation Ritz Cosmetic Surgery 680,866 520,891 Medical Corporation Association Junikai 1,181,369 348,187 Japan Medical & Beauty Inc. — 139,767 SBC Tokyo Medical University, previously known as Ryotokuji University 3,580 66,546 AI Med Inc. — 2,329 SBC Inc., previously known as SBC China Inc. 42 45 Public Interest Foundation SBC Medical Promotion Foundation — 37 SBC Shonan Osteopathic Clinic Co., Ltd. 3,444 — SBC Irvine MC 426,565 — General Incorporated Association Taiseikai 343 — General Incorporated Association SBC 585 — Total $ 27,835,179 $ 33,676,672 Accounts receivable with related parties $ 27,835,179 $ 33,676,672 F- 30 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — RELATED PARTY TRANSACTIONS (cont.) Finance lease receivables September 30, 2024 December 31, 2023 Medical Corporation Shobikai $ 2,234,930 $ 2,568,709 Medical Corporation Kowakai 2,834,875 2,779,347 Medical Corporation Nasukai 3,777,961 2,019,117 Medical Corporation Aikeikai 1,748,170 1,782,124 Medical Corporation Jukeikai 694,175 335,317 Medical Corporation Ritz Cosmetic Surgery 1,782,274 79,439 Total $ 13,072,385 $ 9,564,053 Finance lease receivables $ 13,072,385 $ 9,564,053 Less: current portion 8,443,338 6,143,564 Finance lease receivables Less: current portion 8,443,338 6,143,564 Non-current portion $ 4,629,047 $ 3,420,489 Finance lease receivables Non-current portion $ 4,629,047 $ 3,420,489 Due from related party, net September 30, 2024 December 31, 2023 SBC Irvine MC $ 3,111,013 $ 3,238,209 Less: allowance for credit loss ( 3,111,013 ) ( 3,238,209 ) Total $ — $ — Due from related party, net $ — $ — Long-term investments in MCs – related parties September 30, 2024 December 31, 2023 Medical Corporation Shobikai $ 7,001 $ 7,090 Medical Corporation Kowakai 7,001 7,090 Medical Corporation Nasukai 7,001 7,090 Medical Corporation Aikeikai 7,001 7,090 Medical Corporation Jukeikai 7,529,763 7,626,184 Medical Corporation Ritz Cosmetic Surgery 12,003,302 12,157,011 Total $ 19,561,069 $ 19,811,555 Long-term investments in MCs – related parties $ 19,561,069 $ 19,811,555 Advances from customers September 30, 2024 December 31, 2023 Medical Corporation Shobikai $ 9,225,862 $ 13,438,645 Medical Corporation Kowakai 3,566,378 4,237,765 Medical Corporation Nasukai 3,884,143 4,117,597 Medical Corporation Aikeikai 914,864 1,168,947 Medical Corporation Jukeikai 83,188 85,044 Medical Corporation Ritz Cosmetic Surgery 80,978 10,177 SBC Shonan Osteopathic Clinic Co., Ltd. 9,656 — Medical Corporation Association Furinkai 432,863 — Medical Corporation Association Junikai 796,083 — Total $ 18,994,015 $ 23,058,175 Advances from customers $ 18,994,015 $ 23,058,175 F- 31 SBC MEDICAL GROUP HOLDINGS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — RELATED PARTY TRANSACTIONS (cont.) Notes payable – related parties September 30, 2024 December 31, 2023 Medical Corporation Shobikai $ 11,173,364 $ 5,264,101 Medical Corporation Kowakai 7,042,663 3,855,650 Medical Corporation Nasukai 2,036,020 4,099,032 Medical Corporation Aikeikai 478,489 1,561,642 Medical Corporation Jukeikai 486,040 268,552 Medical Corporation Ritz Cosmetic Surgery 644,806 268,445 Total $ 21,861,382 $ 15,317,422 Notes payable – related parties $ 21,861,382 $ 15,317,422 Less: current portion 10,202,360 3,369,203 Notes payable – related parties Less: current portion 10,202,360 3,369,203 Non-current portion $ 11,659,022 $ 11,948,219 Notes payable – related parties Non-current portion $ 11,659,022 $ 11,948,219 Due to related party September 30, 2024 December 31, 2023 Yoshiyuki Aikawa $ 3,532,453 $ 3,583,523 Total $ 3,532,453 $ 3,583,523 Due to related party $ 3,532,453 $ 3,583,523 For the Nine Months Ended September 30, Allowance for credit loss movement 2024 2023 Beginning balance $ 3,238,209 $ 2,867,455 Provision for credit loss 617,804 282,934 Recovery of credit loss ( 745,000 ) — Ending balance $ 3,111,013 $ 3,150,389 The balances of due to and due from related parties represent the outstanding loans to and from related parties, respectively, as of September 30, 2024 and December 31, 2023. These loans are non-secured, interest-free and due on demand. The Company made a prepayment of JPY 2.4 billion (approximately $ 18.32 million when payment was made) in December 2022 to purchase a patent use right ready to be used on January 1, 2023 with the useful life of sixteen years from SBC Tokyo Medical University, previously known as Ryotokuji University. SBC Tokyo Medical University later became a related party of the Company in March 2023 when the CEO of the Company became the chairman of the university. As SBC Tokyo Medical University was not a related party at the time the patent use right was purchased, this was not identified as a related party transaction. In February 2023, the Company paid off the retirement compensation expense accrued to Yoshiko Aikawa. During the nine months ended September 30, 2024 and 2023, the Company purchased medical equipment and cosmetics of $ 7,452,954 and $ 2,041,663 , respectively, from Japan Medical & Beauty Inc., which was recognized and included in the cost of revenues. Also see Note 2(a), 4, 7, 9, 12, 13 and 15 for more transactions with related parties. NOTE 18 — SUBSEQUENT EVENTS The Company evaluated subsequent events through the date that the unaudited consolidated financial statements are issued, and concluded that no subsequent events have occurred that would require recognition or disclosure in the financial statements other than as disclosed below. On November 12, 2024, the Company entered into an agreement to acquire 100 % equity interests of Aesthetic Healthcare Holdings, a company incorporated in Singapore and principally engaged in medical aesthetics business, with a cash consideration of approximately SGD$ 7.8 million (equivalent to approximately US$ 6.0 million). As of the date of this report, the transaction has not yet been completed. F- 32