Item 9A. Controls and Procedures
Item
9A. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual
Report. Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of December
31, 2024 to provide reasonable assurance that information required to be disclosed in periodic SEC filings is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Specifically, as previously disclosed, as of the fiscal year ended December 31, 2023, and as described below, we
identified material weaknesses in our internal control over financial reporting.
Despite
the identified material weaknesses, we believe that our consolidated financial statements and other information contained in this Annual
Report fairly present, in all material respects, our financial condition, and results of operations for the periods presented.
We
remain committed to ongoing improvements in our disclosure controls and internal control over financial reporting, as outlined in the
remediation plan below.
119
Material
Weaknesses
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely
basis.
In
connection with the discovery of the misappropriations of funds as described in more details under “Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Misappropriations of Funds”, we
have identified material weaknesses as of December 31, 2023, which remain un-remediated as of December 31, 2024, in our internal control
over financial reporting resulting from our failure to maintain an effective control environment, risk assessment processes and monitoring
activities.
Our
system of internal control failed to detect the misappropriations of funds due to the following material weaknesses of the Company:
1.
Control Environment . We did not maintain an effective control environment that fully emphasized the establishment of adherence
to effective internal control over financial reporting throughout our management. We did
not give sufficient consideration to the risk of senior management override of internal control. We
had not ensured that certain personnel were adequately trained to properly execute critical internal control.
2.
Control Activities . We did not effectively implement or maintain control activities, such as ensuring a sufficient functioning
of the mechanism of reconciliation of invoices to contracts and multi-level approvals of contracts, invoices and payments. We did not maintain sufficient segregation of duties with respect to certain activities and did not maintain adequate
monitoring and oversight for those activities.
3.
Risk Assessment . We did not have an effective risk assessment process and the related documentation.
4.
Information and Communication . We did not adequately communicate to all employees of the organization information regarding
the importance of internal control over financial reporting and employees’ duties and responsibilities, including segregation of
duties.
5.
Monitoring Activities . We did not maintain effective monitoring controls related to the evaluation and testing of our internal
control over financial reporting.
In
addition, the Company completed its business combination in September 2024. Prior to the business combination, the Company operated as
a private corporation with limited accounting personnel and supervisory resources necessary to support its accounting processes and address
its internal control over financial reporting requirements. As a result, the existing internal control are no longer sufficient to meet
the post-business combination financial reporting demands, and the Company is actively updating these controls. The design and implementation
of internal control over financial reporting in a post-business combination environment has required, and will continue to require, significant
time and resources from management and other personnel.
During
the process of assessing the Company’s internal controls, management has summarized the material
weaknesses in our internal control over financial reporting as follows:
●
Lack
of sufficient controls implemented to ensure all the related party transactions are identified, approved and reported in compliance with the established related party
policy.
●
Lack
of sufficient financial reporting and accounting personnel to formalize, design, implement and operate key controls over financial
reporting process in order to report financial information in accordance with U.S. GAAP and SEC reporting requirements.
●
Lack
of well-established procedures to ensure all the services provided by subcontractors or vendors are reviewed and verified before
the approval of payments.
●
Lack
of well-established procedures to prevent and detect fraudulent transactions or override of control activities, specifically failure
to maintain sufficient segregation of duties with respect to certain activities of its former manager of general affairs and legal
department of one of its subsidiaries and failure to maintain adequate monitoring and oversight of the work performed by this former
manager.
120
Remediation
Plan
With
respect to the material weaknesses identified in connection with the misappropriations of funds, management has implemented, or is in
the process of implementing, the following changes to our internal control systems and procedures:
●
We
established a related party policy in September 2024 to identify, approve, and report related party transactions; and implemented
the corresponding procedures since November 2024.
●
We
will clarify the organization structure and employee positions promoting (i) segregation of duties, (ii) monitoring and oversight,
(iii) reconciliation of invoices to contracts and (iv) multi-level approvals of contracts, invoices and payments.
●
We
will communicate to all employees of the organization information regarding the importance of internal control and employees’
duties and responsibilities, including segregation of duties.
●
We
have updated our delegation of authority over banking activities and are establishing a new treasury function. This improvement enhances
the segregation of duties related to the general manager role, thereby strengthening the safeguarding of cash.
●
We
are progressing with a project, led by our Head of Internal Control and Internal Audit Office, to design, implement, and
document internal controls to address risks related to financial reporting. This year, our activities are focused on “laying
the foundation to complete our response to key financial reporting risks by the end of 2025,” and we are making progress as
planned.
Furthermore,
management is fully committed to addressing the control deficiencies that contributed to the material weaknesses in a post-business combination
environment. The steps we have already taken in 2024, and those we plan to take in 2025, are as follows:
●
We
added accounting and finance personnel to strengthen our team. This has allowed us to enhance segregation of duties in the preparation
and review of financial reporting, while improving oversight, structure, and reporting lines.
●
We
have improved the financial reporting process of our group, including consolidated subsidiaries. As a result, the monitoring
function over the application of U.S. GAAP, including financial statement disclosures, has been enhanced, allowing for more accurate
and timely reporting than before.
●
To
support the execution of the aforementioned project for designing, implementing, and documenting internal controls, we have engaged
external consultants with expertise in SOX (The Sarbanes-Oxley Act of 2002）compliance. As a result, we expect to complete
our response to key financial reporting risks by the end of 2025.
We
plan to confirm at the end of the fiscal year (end of 2025) that internal controls are operating effectively as a result of the implementation
of the above remediation plans. In particular, we plan to focus on verifying the remediation status of the identified material weaknesses.
Thereafter,
under the direction of our Audit Committee, management will continue to strengthen corporate governance and aim to establish a system
in which internal controls operate effectively throughout the year. During this process, we may adjust our remediation plans or take
additional measures to address control deficiencies as necessary. We believe that these continuous efforts will remediate the deficiencies
in internal controls, including the identified material weaknesses, and significantly improve our internal control over financial reporting.
121
Management’s
Report on Internal Control over Financial Reporting
As
discussed elsewhere in this Annual Report, we completed the Business Combination on September 17, 2024. Prior to the Business Combination,
Pono was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more businesses. As a result, previously existing internal
controls are no longer applicable or comprehensive enough as of the assessment date as the operations prior to the Business Combination
were insignificant compared to those post-Business Combination. The design of internal controls over financial reporting for the Company
post-Business Combination has required and will continue to require significant time and resources from management and other personnel.
As a result, management was unable, without incurring unreasonable effort or expense to conduct an assessment
of our internal control over financial reporting as of December 31, 2024. Accordingly, we are excluding management’s report on internal
control over financial reporting pursuant to Section 215.02 of the SEC Division of Corporation Finance’s Regulation S-K Compliance &
Disclosure Interpretations.
Inherent
Limitation on the Effectiveness of Internal Control
The
effectiveness of any system of internal control over financial reporting is subject to inherent limitations. These include the exercise
of judgment in designing, implementing, and operating controls, as well as the inherent inability to completely eliminate the risk of
misconduct or error. Accordingly, while we aim to establish robust controls, any system, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
Additionally,
the design of our disclosure controls and procedures is impacted by resource constraints and the necessity for management to balance
the benefits of potential controls against their associated costs. Moreover, projections of effectiveness into future periods are subject
to risks that controls may become inadequate over time due to evolving conditions or diminished compliance. We will continue to monitor
and enhance our internal control as necessary or appropriate, but we cannot provide assurance that these improvements will fully eliminate
all risks of material misstatement.
Changes
in Internal Control over Financial Reporting
Other
than the remediation efforts described above, there have been no material changes in our internal control over financial reporting during
the three months ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item
9B. Other Information.
None
On March 27, 2025, the Company’s Board of Directors
approved certain executive officer updates, including the replacement of Ryoji Murata, the Company’s current Chief Financial Officer
(principal financial officer), effective April 1, 2025. Yuya Yoshida, 46, the Company’s current Chief Operating Officer will
continue in that role and also serve as Chief Financial Officer (principal financial officer), effective April 1, 2025. Mr. Murata
will continue to serve as the Company’s principal accounting officer.
Mr. Yoshida has served as our Chief Operating Officer
and member of our Board of Directors since September 17, 2024, and in the same positions, since September 29, 2023, with SBC Medical Group, Inc. (the legacy business that because the Company’s business). Mr. Yoshida has also served as the Executive Vice President and the Chief Financial Officer of SBC Medical Group Co., Ltd. (Japan)
since July 1, 2023. From January 2016 to June 2023, Mr. Yoshida worked in Corporate Development (Global Head and Director of Corporate
Development in 2018) at Rakuten Group Co., Ltd. From 2003 to 2016, Mr. Yoshida worked in securities, principal M&A, and investment
banking at Mitsubishi UFJ Financial Group. Mr. Yoshida has extensive knowledge in E-Commerce, logistics, settlement, finance, mergers
and acquisitions and divestiture transactions. Mr. Yoshida graduated with a Master of Law degree from Keio University in 2003. Mr. Yoshida
also graduated with a Master of Business Administration degree from UCLA Anderson Business School in 2014.
Mr. Yoshida was not
appointed pursuant to any arrangement or understanding with any other person, has no family relationships with any director or
executive officer of the Company, and other than his previously reported employment arrangement with the Company, and other than his
previously reported employment arrangement with the Company, and there are no transactions involving Mr. Yoshida that would be
required to be reported under Item 404(a) of Regulation S-K.
Item
9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not
applicable.
122
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
information required by this Item will be set forth in our definitive proxy statement for our 2025 Annual Meeting of Stockholders (the
“Proxy Statement”) and is incorporated herein by reference.
Item
11. Executive Compensation.
The
information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
The
information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item
14. Principal Accountant Fees and Services.
The
information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.
123
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
a) Financial
Statements and Schedules: The required information is set forth in “Part II, Item 8
- Financial Statements and Supplementary Data” in this Annual Report.
b) Exhibits:
The following exhibits are filed or furnished as an exhibit to this Annual Report on Form
10-K.
Exhibit
No.
Description
2.1
Agreement
and Plan of Merger, dated January 31, 2023, by and among Pono Capital Two, Inc., Pono Two Merger Sub, Inc., SBC Medical Group Holdings
Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders of Pono Capital Two, Inc., and Yoshiyuki
Aikawa in his personal capacity and his capacity as the representative of the stockholders of SBC Medical Group Holdings Incorporated
(incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Pono Capital Two, Inc. with the SEC on February
2, 2023).
2.2
First
Amendment to the Agreement and Plan of Merger, dated April 26, 2023, by and among Pono Capital Two, Inc., Pono Two Merger Sub, Inc.,
SBC Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders of Pono Capital
Two, Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders of SBC Medical
Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Pono Capital Two,
Inc. with the SEC on May 1, 2023).
2.3
Second
Amendment to the Agreement and Plan of Merger, dated May 30, 2023, by and among Pono Capital Two, Inc., Pono Two Merger Sub, Inc.,
SBC Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders of Pono Capital,
Two Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders of SBC Medical
Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Pono Capital Two,
Inc. with the SEC on June 2, 2023).
2.4
Third
Amendment to the Agreement and Plan of Merger, dated June 15, 2023, by and among Pono Capital Two, Inc., Pono Two Merger Sub, Inc.,
SBC Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders of Pono Capital
Two Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders of SBC Medical
Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Pono Capital Two,
Inc. with the SEC on June 16, 2023).
2.5
Amended
and Restated Agreement and Plan of Merger, dated June 21, 2023, by and among Pono Capital Two, Inc., Pono Two Merger Sub, Inc., SBC
Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders of Pono Capital
Two, Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders of SBC Medical
Group Holdings Incorporated (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Pono Capital Two,
Inc. with the SEC on June 22, 2023).
2.6
First
Amendment to the Amended and Restated Agreement and Plan of Merger, dated September 8, 2023, by and among Pono Capital Two, Inc.,
Pono Two Merger Sub, Inc., SBC Medical Group Medical Holdings Incorporated, Mehana Capital LLC in its capacity as the representative
of the stockholders of Pono Capital Two, Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative
of the stockholders of SBC (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Pono Capital Two,
Inc. with the SEC on September 11, 2023).
2.7
Second
Amendment to the Amended and Restated Agreement and Plan of Merger, dated October 26, 2023, by and among Pono Capital Two Inc., Pono
Two Merger Sub, Inc., SBC Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the stockholders
of Pono Capital Two Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders
of SBC Medical Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to Form 8-K filed by Pono Capital Corp. with
the SEC on October 26, 2023).
2.8
Third
Amendment to the Amended and Restated Agreement and Plan of Merger, dated December 28, 2023, by and among Pono Capital Two, Inc.,
Pono Two Merger Sub, Inc., SBC Medical Group Holdings Incorporated, Mehana Capital LLC in its capacity as the representative of the
stockholders of Pono Capital Two, Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the
stockholders of SBC Medical Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K
filed by Pono Capital Two, Inc. with the SEC on December 29, 2023).
2.9
Fourth
Amendment to the Amended and Restated Agreement and Plan of Merger, dated April 22, 2024, by and among Pono Capital, Two Inc., Pono
Two Merger Sub, Inc., SBC Medical Group Holdings Incorporated Mehana Capital LLC in its capacity as the representative of the stockholders
of Pono Capital, Two Inc., and Yoshiyuki Aikawa in his personal capacity and his capacity as the representative of the stockholders
of SBC Medical Group Holdings Incorporated (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Pono
Capital Two, Inc. with the SEC on April 23, 2024).
3.1
Fourth
Amended and Restated Certificate of Incorporation of SBC Medical Group Holdings Incorporated (incorporated by reference to Exhibit
3.1 to the Current Report on Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024) .
3.2
Amended
and Restated Bylaws of SBC Medical Group Holdings Incorporated (incorporated by reference to Exhibit 3.2 to the Current Report on
Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024).
4.1
Warrant
Agreement, dated August 4, 2022, by and between Pono Capital Two, Inc. and Continental Stock Transfer & Trust Company, as warrant
agent (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Pono Capital Two, Inc. with the SEC on
August 9, 2022).
124
4.2
Specimen
Warrant Certificate (incorporated by reference to Exhibit 4.4 to the Amendment No. 1 to the Registration Statement on Form S-1, filed
by Pono Capital Two, Inc. on July 22, 2022).
4.3*
Description of Securities
10.1+*
Form of SBC Medical Group Holdings Incorporated Equity Incentive Plan.
10.2
Form
of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by SBC Medical Group
Holdings Incorporated on September 20, 2024).
10.3*
Form of Registration Rights Agreement by certain SBC Medical Group Holdings Incorporated equity holders.
10.4*
Form of Lock-Up Agreement by certain SBC Medical Group Holdings Incorporated equity holders .
10.5
Letter
Agreement, dated August 4, 2022, by and among Pono Capital Two Inc., its officers, directors, and Mehana Capital LLC (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Pono Capital Two, Inc. with the SEC on August 9, 2022).
10.6
Purchaser
Support Agreement, dated January 31, 2023 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by Pono
Capital Two, Inc. with the SEC on February 2, 2023).
10.7
Voting
Agreement, dated January 31, 2023 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by Pono Capital
Two, Inc. with the SEC on February 2, 2023).
10.8+
Executive
Employment Agreement between SBC Medical Group Holdings and Yoshiyuki Aikawa, dated September 17, 2024 (incorporated by reference
to Exhibit 10.8 to the Current Report on Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024).
10.9+
Executive
Employment Agreement between SBC Medical Group Holdings and Yuya Yoshida, dated September 17, 2024 (incorporated by reference to Exhibit
10.9 to the Current Report on Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024).
10.10+
Executive
Employment Agreement between SBC Medical Group Holdings and Ryoji Murata, dated September 17, 2024 (incorporated by reference to Exhibit
10.10 to the Current Report on Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024).
10.11+
Executive
Employment Agreement between SBC Medical Group Holdings and Akira Komatsu, dated September 17, 2024 (incorporated by reference to
Exhibit 10.11 to the Current Report on Form 8-K filed by SBC Medical Group Holdings Incorporated on September 20, 2024).
10.12*
Form of Non-Competition and Non-Solicitation Agreement.
19.1*
Policy on Insider Trading
21.1*
List
of Subsidiaries of the Registrant
31.1*
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2*
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1**
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2**
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
97.1*
Clawback
Policy
101.INS
Inline
XBRL Instance Document.
101.SCH
Inline
XBRL Taxonomy Extension Schema Document.
101.CAL
Inline
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline
XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed
herewith
**
Furnished
herewith
+
Indicates
a management or compensatory plan
†
Schedules
to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby agrees to furnish a copy of
any omitted schedules to the SEC upon request.
Item
16. Form
10-K Summary
None.
125
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SBC
Medical Group Holdings Incorporated
Dated:
March 28, 2025
/s/ Yoshiyuki Aikawa
Name:
Yoshiyuki
Aikawa
Title:
Director,
Chairman and Chief Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name
Position
Date
/s/ Yoshiyuki Aikawa
Director,
Chairman and Chief Executive Officer
March
28, 2025
Yoshiyuki
Aikawa
(Principal
Executive Officer)
/s/ Ryoji Murata
Chief
Financial Officer
March
28, 2025
Ryoji
Murata
(Principal
Financial and Accounting Officer)
/s/ Yuya Yoshida
Director
and Chief Operating Officer
March
28, 2025
Yuya
Yoshida
/s/
Ken Edahiro
Independent
Director
March
28, 2025
Ken
Edahiro
/s/ Mike Sayama
Independent
Director
March
28, 2025
Mike
Sayama
/s/
Fumitoshi Fujiwara
Independent
Director
March
28, 2025
Fumitoshi
Fujiwara
126