SBC Medical Group Holdings Inc

Previous wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANAL YSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Current wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Previous wording

The following discussion and analysis summarize the significant factors affecting our operating results, financial condition, liquidity, and cash flows for the periods presented below, which should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). The forward-looking statements contained herein are based on management’s judgment, assumptions made by management and information currently available to it. Actual results could differ materially from those discussed or implied in the forward-looking statements as a result of various factors, including those described elsewhere in this Quarterly Report and the Annual Report, particularly in “Part I, Item 1A. Risk Factors” of the Annual Report and the section entitled “Cautionary Note Regarding Forward-Looking Statements” herein.

Current wording

The following discussion and analysis summarize the significant factors affecting our operating results, financial condition, liquidity, and cash flows for the periods presented below. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). The forward-looking statements contained herein are based on management’s judgment, assumptions made by management and information currently available to it. Actual results could differ materially from those discussed or implied in the forward-looking statements as a result of various factors, including those described elsewhere in this Quarterly Report and the Annual Report, particularly in “Part I, Item 1A. Risk Factors” of the Annual Report and the section entitled “Cautionary Note Regarding Forward-Looking Statements” herein.

Previous wording

Unless the context otherwise requires, any reference in this section of this Quarterly Report to the “Company,” “SBC,” “we,” “us” or “our” refers to Legacy SBC (defined below) and its consolidated subsidiaries and variable interest entity (“VIE”), prior to the consummation of the Business Combination and to SBC Medical Group Holdings Incorporated and its consolidated subsidiaries and VIE, following the Business Combination.

Current wording

Unless the context otherwise requires, any reference in this section of this Quarterly Report to the “Company,” “SBC,” “we,” “us” or “our” refers to Legacy SBC (defined below) and its consolidated subsidiaries and variable interest entity (“VIE”), prior to the consummation of the Business Combination and to SBC Medical Group Holdings Incorporated, together with its consolidated subsidiaries and VIE, following the Business Combination.

Previous wording

The Company and its subsidiaries are primarily focused on providing comprehensive management services to franchisee clinics, including but not limited to advertising and marketing needs across various platforms (such as social media networks), staff management (such as recruitment and training), booking reservations for franchisee clinic customers, assistance with franchisee employee housing rentals and facility rentals, construction and design of franchisee clinics, medical equipment and medical consumables procurement (resale), the provision of cosmetic products to franchisee clinics for resale to clinic customers, licensure of the use of patent-pending and non-patented medical technologies, trademark and brand use, IT software solutions (including but not limited to remote medical consultations), management of the franchisee clinic’s customer rewards program (customer loyalty point program), and payment tools for the franchisee clinics.

Current wording

The Company and its subsidiaries are primarily focused on providing comprehensive management services to franchisee clinics. These services include advertising and marketing across various platforms (such as social media networks), staff management (such as recruitment and training), booking and reservation services for franchisee clinic customers. We also support franchisee clinics through assistance with employee housing rentals and facility rentals, leasehold improvement services and design of clinics, medical equipment and medical consumables procurement (resale), the provision of cosmetic products to clinics for resale to clinic customers, licensure of the use of patent-pending and non-patented medical technologies, trademark and brand use, IT software solutions (including but not limited to remote medical consultations), management of the customer rewards program (customer loyalty point program), and payment tools.

Previous wording

Our wholly owned subsidiary, SBC Medical Group Co., Ltd., a Japan corporation (“SBC Medical Sub”, or “SBC Japan”) is designated as a “medical service corporation” in Japan. In Japan, a medical service corporation is a legal entity that provides management service to “medical corporations”. The management services are conducted through franchisor-franchisee contracts and/or service contracts between SBC Medical Sub and the medical corporations that own all 258 of the treatment centers in Japan as of September 30, 2025. These clinics provide include but are not limited to breast augmentation, liposuction, rejuvenation treatments (including treatment of wrinkles, acne, scars, cellulite, excess fat, discoloration, and signs of aging), laser skin toning and spot removal, eyes double fold surgery, rhinoplasty, treatment of osmidrosis and hyperhidrosis, hair transplants, gynecological formation treatments, laser hair removal, face line surgeries, cosmetical dental procedures, tattoo removal, lasik eye surgery, lateral canthoplasty, brow lift procedures, androgenetic alopecia treatment, and cheek sagging prevention methods. In addition, similar management services are provided to four independently operated clinics.

Current wording

Our wholly owned subsidiary, SBC Medical Group Co., Ltd., a Japanese corporation (“SBC Medical Sub”, or “SBC Japan”), is designated as a “medical service corporation”. In Japan, a medical service corporation is a legal entity that provides management services to “medical corporations”. The management services are conducted through franchisor-franchisee contracts and/or service contracts between SBC Medical Sub and the medical corporations (and, where applicable, other entities) that own domestic franchisee treatment centers in Japan. These treatment centers provide services including but are not limited to breast augmentation, liposuction, rejuvenation treatments (including treatment of wrinkles, acne, scars, cellulite, excess fat, discoloration, and signs of aging), laser skin toning and spot removal, eyes double fold surgery, rhinoplasty, treatment of osmidrosis and hyperhidrosis, hair transplants, gynecological formation treatments, laser hair removal, face line surgeries, cosmetic dental procedures, tattoo removal, lasik eye surgery, lateral canthoplasty, brow lift procedures, androgenetic alopecia treatment, and cheek sagging prevention methods. Separately, we also enter into franchise arrangements with certain independently operated clinics in Japan pursuant to our Partner Doctor Independence Support Program Agreements, which differ in certain respects from our arrangements with the medical corporations and/or general incorporated associations.

Previous wording

The Company’s subsidiaries have entered into franchisor-franchisee contracts and service contracts with six medical corporations, consisting of Medical Corporation Shobikai, Medical Corporation Kowakai, Medical Corporation Nasukai, Medical Corporation Aikeikai, Medical Corporation Jukeikai and Medical Corporation Ritz Cosmetic Surgery. In addition, the Company has entered into service contracts since September 2023 with Medical Corporation Association Furinkai and Medical Corporation Association Junikai; and in July 2025 with Medical Corporation Misakikai and General Incorporated Association Miotokai, following the acquisition of MB Career Lounge Co., Ltd. (collectively with the six franchisee medical corporations, the “Medical Corporations and/or General Incorporated Associations” or “MCs”). All of the Medical Corporations and General Incorporated Associations are deemed to be related parties of the Company since relatives of the CEO of the Company are the members* of general meetings of members** of the Medical Corporations or General Incorporated Associations. The CEO of the Company was previously a member* of the six franchisee Medical Corporations until he ceased being a member* in July 2023. The Company, through SBC Medical Sub, owns equity interests*** of the six franchisee medical corporations. Although the Company, through SBC Medical Sub, has an equity interest*** to the rights to receive a distribution of residual assets in proportion to the amount of contribution in certain circumstances as provided in the Japanese Medical Care Act and in the articles of incorporation (except Medical Corporation Association Furinkai, Medical Corporation Association Junikai, Medical Corporation Misakikai and General Incorporated Association Miotokai), the Company or SBC Medical Sub does not have voting control over the corporate actions at general meetings of members** of the Medical Corporations or General Incorporated Associations per the requirements of the Japanese Medical Care Act.

Current wording

The Company’s subsidiaries have entered into franchisor-franchisee contracts and service contracts with seven medical corporations, consisting of Medical Corporation Shobikai, Medical Corporation Kowakai, Medical Corporation Nasukai, Medical Corporation Aikeikai, Medical Corporation Jukeikai, Medical Corporation Ritz Cosmetic Surgery and, effective as of June 2025, Medical Corporation Association Furinkai. In addition, the Company has entered into service contracts since September 2023 with Medical Corporation Association Furinkai and Medical Corporation Association Junikai; and in July 2025 with Medical Corporation Misakikai and General Incorporated Association Miotokai, following the acquisition of MB career lounge Co., Ltd. (collectively with the seven franchisee medical corporations, the “Medical Corporations and/or General Incorporated Associations” or “MCs”). All of the Medical Corporations and General Incorporated Associations are deemed to be related parties of the Company since relatives of the CEO of the Company are the members* of general meetings of members** of the Medical Corporations or General Incorporated Associations. The CEO of the Company was previously a member* of the six franchisee Medical Corporations until he ceased being a member* in July 2023. The Company, through SBC Medical Sub, owns equity interests*** of six franchisee medical corporations. Although the Company, through SBC Medical Sub, has an equity interest*** to the rights to receive a distribution of residual assets in proportion to the amount of contribution in certain circumstances as provided in the Japanese Medical Care Act and in the articles of incorporation (except Medical Corporation Association Furinkai, Medical Corporation Association Junikai, Medical Corporation Misakikai and General Incorporated Association Miotokai), the Company or SBC Medical Sub does not have voting control over the corporate actions at general meetings of members** of the Medical Corporations or General Incorporated Associations per the requirements of the Japanese Medical Care Act.

Previous wording

For the three months ended September 30, 2025 and 2024, we generated revenues of $43,353,235 and $53,084,883, respectively, we reported net income attributable to SBC Medical Group Holdings Incorporated of $12,824,636 and $2,832,894, respectively. For the nine months ended September 30, 2025 and 2024, we generated revenues of $134,040,783 and $160,995,005, respectively, we reported net income attributable to SBC Medical Group Holdings Incorporated of $36,785,322 and $40,075,054, respectively, and cash flows provided by (used in) operating activities of $(27,295,426) and $27,886,231, respectively. As of September 30, 2025, we had retained earnings of $226,248,329.

Current wording

For the three months ended March 31, 2026 and 2025, we generated revenues of $43,060,562 and $47,328,701, respectively, we reported net income attributable to SBC Medical Group Holdings Incorporated of $11,308,071 and $21,502,446, respectively, and cash flows provided by operating activities of $9,231,938 and $1,928,621, respectively. As of March 31, 2026, we had retained earnings of $251,756,691.

Previous wording

Our primary mission is to provide quality comprehensive management services to the MCs and expand our “Shonan Beauty Clinic” brand. We plan to achieve the mission by maintaining and strengthening our market position and brand in the cosmetic medical treatment management market in Japan, Vietnam and Singapore, and by growing our presence globally.

Current wording

Our primary mission is to provide high-quality comprehensive management services to the MCs and expand our “Shonan Beauty Clinic” brand. We plan to achieve the mission by maintaining and strengthening our market position and brand in the cosmetic medical treatment management market in Japan, Vietnam and Singapore, and by growing our presence globally.

Previous wording

Further information regarding our business is provided in “Description of Business” of our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 28, 2025.

Current wording

Further information regarding our business is provided in “Part I, Item 1. Business” of our Annual Report.

Previous wording

Revenues, net, decreased by 18.33% from $53,084,883 for the three months ended September 30, 2024 to $43,353,235 for the three months ended September 30, 2025.

Current wording

Revenues, net, decreased by 9.02% from $47,328,701 for the three months ended March 31, 2025 to $43,060,562 for the three months ended March 31, 2026.

Previous wording

Japanese Yen (“JPY”) against the U.S. dollar appreciated during the three months ended September 30, 2025, compared to the three months ended September 30, 2024. The average rate against the dollar was 147.4096 yen for the three months ended September 30, 2025 compared to 148.9730 yen for the same period in 2024. For the three months ended September 30, 2025 and 2024, we generated net revenues of $43,353,235 (JPY6,391 million) and $53,084,883 (JPY7,908 million), respectively, we reported net income of $12,833,326 (JPY1,896 million) and $2,834,467 (JPY379 million), respectively. Overall, the favorable impacts of the period-to-period foreign exchange rate changes on net revenues and net income were $454,958 and $107,787, respectively, for the three months ended September 30, 2025.

Current wording

Japanese Yen (“JPY”) depreciated against the U.S. dollar during the three months ended March 31, 2026, compared to the three months ended March 31, 2025. The average rate against the dollar was 156.9101 yen for the three months ended March 31, 2026 compared to 152.5417 yen for the same period in 2025. For the three months ended March 31, 2026 and 2025, we generated net revenues of $43,060,562 (JPY 6,757 million) and $47,328,701 (JPY 7,220 million), respectively, we reported net income of $11,329,020 (JPY 1,778 million) and $21,491,950 (JPY 3,252 million), respectively. Overall, the unfavorable impacts of the period-to-period foreign exchange rate changes on net revenues and net income were $1,233,130 and $324,425, respectively, for the three months ended March 31, 2026.

Previous wording

The main reasons for the variance of $9,731,648 in revenues, net per revenue stream are as follows:

Current wording

The main reasons for the variance of $4,268,139 in revenues, net per revenue stream are as follows:

Previous wording

Franchising revenue for the three months ended September 30, 2025, decreased to $9,929,387 by $5,759,141, or 36.71%, from $15,688,528 for the same period in 2024. This decrease was mainly due to the revision of the fee structure for determining service fees for each clinic of MCs based on the size, scale and performance of each clinic effective as of April 1, 2025, partially offset by the appreciation of JPY.

Current wording

Franchising revenue for the three months ended March 31, 2026 decreased to $9,091,740 by $6,627,542, or 42.16%, from $15,719,282 for the same period in 2025. This decrease was mainly due to the revision of the fee structure for determining service fees for each clinic of MCs based on the size, scale and performance of each clinic effective as of April 1, 2025.

Previous wording

The procurement revenue for the nine months ended September 30, 2025 decreased to $43,496,207 by $807,684, or 1.82%, from $44,303,891 for the same period in 2024. This decrease was mainly due to the decrease in the orders from MCs for the medical materials which reflected a temporary increase in procurement activities associated with the opening of multiple new clinics in the same period of the prior year.

Current wording

The procurement revenue for the three months ended March 31, 2026 decreased to $12,344,366 by $1,988,417, or 13.87%, from $14,332,783 for the same period in 2025. This decrease was mainly due to a decline in orders from MCs for medical materials, reflecting a temporary increase in procurement activities associated with the business expansion of MCs in the same period of the prior year.

Previous wording

Gross profit for the three months ended September 30, 2025 was $30,611,487 compared to $43,239,090 for the same period in 2024. The decrease in gross profit by $12,627,603 or 29.20% was mainly due to the decrease in franchising revenue, procurement revenue and management services revenue with relatively high gross margin as a result of the factors described above.

Current wording

Gross profit for the three months ended March 31, 2026 was $30,346,734 compared to $37,733,084 for the same period in 2025. The decrease in gross profit by $7,386,350 or 19.58% was mainly due to the decrease in franchising revenue with relatively high gross margin as a result of the factors described above.

Previous wording

The operating expenses decreased to $14,730,247 for the three months ended September 30, 2025 by $14,674,240, or 49.90%, from $29,404,487 for the same period in 2024. The decrease was mainly due to the decrease in stock-based compensation, consulting and professional service fees, and office, utility and other expenses.

Current wording

The operating expenses decreased to $12,626,719 for the three months ended March 31, 2026 by $904,291, or 6.68%, from $13,531,010 for the same period in 2025. The decrease was mainly due to the decrease in office, utility and other expenses and the depreciation of JPY, partially offset by the increase in consulting and professional service fees.

Previous wording

As a result of the foregoing, we reported a net income of $12,833,326 for the three months ended September 30, 2025, representing an increase of $9,998,859 or 352.76% from $2,834,467 for the three months ended September 30, 2024.

Current wording

As a result of the foregoing, we reported net income of $11,329,020 for the three months ended March 31, 2026, representing a decrease of $10,162,930 or 47.29% from $21,491,950 for the three months ended March 31, 2025.

Previous wording

Net loss attributable to non-controlling interests was $20,194 for the nine months ended September 30, 2025, as compared to net income attributable to non-controlling interests of $66,954 for the nine months ended September 30, 2024.

Current wording

Net income attributable to non-controlling interests was $20,949 for the three months ended March 31, 2026, as compared to net loss attributable to non-controlling interests of $10,496 for the three months ended March 31, 2025.

Previous wording

As of September 30, 2025, the Company had $127,431,318 in cash and cash equivalents compared to $125,044,092 as of December 31, 2024. In addition, the Company had $61,194,381 in accounts receivable as of September 30, 2025 compared to $30,260,113 as of December 31, 2024. The Company’s accounts receivable includes balances due from customers for the services and goods provided by the Company and accepted by customers.

Current wording

As of March 31, 2026, the Company had $167,305,095 in cash and cash equivalents compared to $163,773,838 as of December 31, 2025. In addition, the Company had $36,764,725 in accounts receivable as of March 31, 2026 compared to $29,899,751 as of December 31, 2025. The Company’s accounts receivable includes balances due from customers for the services and goods provided by the Company and accepted by customers.

Previous wording

As of September 30, 2025, the Company’s working capital balance was $182,618,388. In assessing liquidity, management monitors and analyzes the Company’s cash and cash equivalents, ability to generate sufficient future earnings, and operating and capital investment commitments. The Company believes that its current cash and cash equivalents from operations and borrowings from banks will be sufficient to meet its working capital needs for the next 12 months from the date of issuance of the unaudited financial statements included in this Quarterly Report.

Current wording

As of March 31, 2026, the Company’s working capital balance was $176,212,567. In assessing liquidity, management monitors and analyzes the Company’s cash and cash equivalents, ability to generate sufficient future earnings, and operating and capital investment commitments. The Company believes that its current cash and cash equivalents from operations and borrowings from banks will be sufficient to meet its working capital needs for the next 12 months from the date of issuance of the unaudited consolidated financial statements included in this Quarterly Report.

Previous wording

To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of indebtedness, equity financings or a combination of these potential sources of funds. While we face uncertainties regarding the size and timing of our fundraising, which will be affected by general economic, financial, and other factors that may be beyond our control, we believe that we will be able to continue to meet our current business needs through the use of cash flows generated from operations and stockholder working capital, as needed.

Current wording

To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of indebtedness, equity financings or a combination of these potential sources of funds. While we face uncertainties regarding the size and timing of our fundraising, which will be affected by general economic, financial, and other factors that may be beyond our control, we believe that we will be able to continue to meet our current business needs through the use of cash flows generated from operations.

Previous wording

The Company evaluates its capital allocation practices with the objective of enhancing shareholder value, while considering performance, the business environment, macroeconomic conditions and other relevant factors. The Company expects to deploy capital for investment opportunities that align with its growth strategy, selectively pursuing prospects in the expanding global medical aesthetics market. Additionally, the Company continues to evaluate alternative methods for deployment of capital, including in the form of dividends to stockholders and repurchases of shares of common stock. The actual timing, manner and value of any such options will depend on several factors, including the market price of our stock, general market and economic conditions, our liquidity requirements, applicable legal requirement and other business considerations.

Current wording

The Company evaluates its capital allocation practices with the objective of enhancing stockholder value, while considering performance, the business environment, macroeconomic conditions and other relevant factors. The Company expects to deploy capital for investment opportunities that align with its growth strategy, selectively pursuing prospects in the expanding global medical aesthetics market. Additionally, the Company continues to evaluate alternative methods for deployment of capital, including in the form of dividends to stockholders and repurchases of shares of common stock. The actual timing, manner and value of any such options will depend on several factors, including the market price of our stock, general market and economic conditions, our liquidity requirements, applicable legal requirements and other business considerations.

Previous wording

Net cash provided by operating activities was $27,886,231 for the nine months ended September 30, 2024, mainly derived from net income of $40,142,008 for the period, reconciled by stock-based compensation of $12,807,455, a gain on disposal of subsidiary of $3,813,609, and net changes in operating assets and liabilities, which mainly included a decrease in customer loans receivable of $12,860,220, a decrease in accounts payable of $10,511,619, a decrease in notes and other payables – related parties of $14,030,092, and a decrease in accrued liabilities and other current liabilities of $9,010,270.

Current wording

Net cash provided by operating activities was $9,231,938 for the three months ended March 31, 2026, mainly derived from net income of $11,329,020 for the period, reconciled by a non-cash lease expense of $1,420,824 and deferred income tax benefit of $1,086,473, and net changes in operating assets and liabilities, which mainly included an increase in accounts receivable - related parties of $6,821,339, an increase in accounts payable of $2,484,437, a decrease in customer loans receivable of $3,270,347, and a decrease in operating lease liabilities of $1,424,716.

Previous wording

Net cash used in operating activities was $27,295,426 for the nine months ended September 30, 2025, mainly derived from net income of $36,765,128 for the period, reconciled by a gain on redemption of life insurance policies of $8,746,138 and deferred income tax expense of $9,104,235, and net changes in operating assets and liabilities, which mainly included an increase in accounts receivable - related parties of $28,031,690, an increase in finance lease receivables – related parties of $9,227,612, a decrease in customer loans receivable of $12,153,263, a decrease in notes and other payables - related parties of $12,759,536, a decrease in advances from customers – related parties of $5,470,844, and a decrease in income tax payable of $19,936,155.

Current wording

Net cash provided by operating activities was $1,928,621 for the three months ended March 31, 2025, mainly derived from net income of $21,491,950 for the period, reconciled by a gain on redemption of life insurance policies of $8,746,138 and deferred income tax expense of $7,016,227, and net changes in operating assets and liabilities, which mainly included an increase in finance lease receivables – related parties of $2,779,253, a decrease in customer loans receivable of $4,501,760, an increase in prepaid expenses and other current assets of $3,150,243, an increase in accounts payable of $3,235,017, a decrease in advances from customers – related parties of $2,114,829, and a decrease in income tax payable of $17,635,239.

Previous wording

During the nine months ended September 30, 2024, net cash used in investing activities of $5,554,039 was mainly the result of payments made on behalf of a related parties of $5.2 million, purchase of convertible note of $1.7 million, purchase of property and equipment of $2.0 million, and disposal of subsidiary, net of cash disposed of $0.8 million, offset by the repayments from related parties of $6.0 million.

Current wording

During the three months ended March 31, 2026, net cash used in investing activities of $528,025 was mainly the result of prepayments for property and equipment of $0.4 million and purchase of property and equipment of $0.1 million.

Previous wording

The Company holds a significant number of leases classified as operating leases for offices and sublease purposes, and finance leases for certain medical equipment.

Current wording

The Company holds a significant number of leases classified as operating leases for offices and sublease purposes, and finance leases for certain medical and office equipment.

Previous wording

The Company borrowed loans from various banks and a financial institution for working capital purpose.

Current wording

The Company borrowed funds from various banks and other financial institutions for working capital, securities investments, and mergers and acquisitions purposes.

Previous wording

We are exposed to foreign currency exchange rate fluctuations because our business is primarily conducted in Japan and most of our revenues and costs are denominated in Japanese yen, whereas our reporting currency is U.S. dollar. The weakening of the Japanese yen against the U.S. dollar would have a negative impact on our financial results and vice versa.

Current wording

We are exposed to foreign currency exchange rate fluctuations because our business is primarily conducted in Japan and most of our revenues and costs are denominated in Japanese yen, whereas our reporting currency is the U.S. dollar. The weakening of the Japanese yen against the U.S. dollar would have a negative impact on our financial results and vice versa.

Previous wording

We believe that there have been no material changes to our critical accounting policies and estimates from those disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 28, 2025.

Current wording

We believe that there have been no material changes to our critical accounting policies and estimates from those disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” of our Annual Report.