Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 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 II, Item 1A. Risk Factors" of this Quarterly Report, "Part I, Item 1A. Risk Factors" of the Annual Report and the section entitled "Cautionary Note Regarding Forward-Looking Statements" herein.

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 its VIE (prior to its deconsolidation), following the Business Combination.

Overview

SBC Medical Group, Inc. (formerly known as SBC Medical Group Holdings Incorporated), a Delaware corporation and subsidiary of the Company ("Legacy SBC"), is a management company headquartered in Irvine, California and Tokyo, Japan, that provides management services to cosmetic treatment centers mainly in Japan.

On September 17, 2024, Legacy SBC consummated its going-public business combination with Pono Capital Two, Inc. ("Business Combination"). In connection with the closing of the Business Combination, Pono Capital Two, Inc. changed its name to SBC Medical Group Holdings Incorporated and the Company's common stock began trading on Nasdaq under the ticker symbol "SBC".

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), and 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, trademarks 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.

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.

The Company's subsidiaries have entered into franchisor-franchisee contracts and service contracts (including business consignment agreements of the same nature) 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.

* "Members (or shain) of general meeting of members (or shain)" means one of the organs of a Japanese Medical Corporation, and element of general meeting of members (as explained below) of the Medical Corporation. Each member (or shain) of general meeting of members (or shain) has one voting right.

** "General meeting of members (or shain)" means one of the organs of a Japanese Medical Corporation, and the highest decision-making body of the Medical Corporation, of which the main duties include the election and dismissal of directors (or riji) and corporate auditors (or kanji) of the Medical Corporation, and the approval of financial statements and statutory business reports of the Medical Corporation.

*** "Equity interest (or mochibun)" means the right to receive distribution of the residual assets of a Japanese Medical Corporation in proportion to the amount of contribution (Article 10.3.3.2 brackets of the Supplementary Provision of the Japanese Medical Care Act.). However, the procedures for an equity interest (or mochibun) holder to exercise and realize the right to receive distribution of the residual assets of the Medical Corporation is more complicated than that of a stock corporation due to the restrictions under the Medical Care Act.

Financial Overview

For the three months ended September 30, 2026 and 2025, we generated revenues of $58,581,520 and $43,353,235, respectively, and we reported net income attributable to SBC Medical Group Holdings Incorporated of $15,692,742 and $12,824,636, respectively. For the nine months ended September 30, 2026 and 2025, we generated revenues of $150,830,150 and $134,040,783, respectively, and we reported net income attributable to SBC Medical Group Holdings Incorporated of $37,693,635 and $36,785,322, respectively, and cash flows provided by (used in) operating activities of $50,247,388 and $(27,295,426), respectively. As of September 30, 2026, we had retained earnings of $278,142,255.

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.

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

Results of Operations

Comparison of Results of Operations for the Three Months Ended September 30, 2026 and 2025

Because we acquired control of Waqoo, Inc. ("Waqoo") on December 19, 2025 and consolidated the financial information of Waqoo and its subsidiary on a three-month reporting lag, our consolidated results for the three months ended September 30, 2026 include Waqoo's results of operations for the period from April 1, 2026 to June 30, 2026. For comparative purposes, the 2025 segment amounts presented in the tables below relate entirely to the SBC Core Segment, as Waqoo was not consolidated during that period.

The following table summarizes our results of operations as reflected in our unaudited consolidated statements of operations and comprehensive income for the three months ended September 30, 2026 and 2025, and presents information regarding amounts and percentage changes during those periods.

Note: Percentages are calculated as a percentage of total revenues and may not sum due to rounding. NM (not meaningful) is used when the prior-period amount is zero or when the amounts have opposite signs between periods.

Revenues, Net

Revenues, net generated from different revenue streams consist of the following:

Revenues, net, increased by 35.13% from $43,353,235 for the three months ended September 30, 2025 to $58,581,520 for the three months ended September 30, 2026.

Japanese Yen ("JPY") depreciated against the U.S. dollar during the three months ended September 30, 2026, compared to the three months ended September 30, 2025. The average rate against the dollar for the SBC Core Segment was 159.1066 yen for the three months ended September 30, 2026 compared to 147.4096 yen for the same period in 2025. Financial results for the Waqoo Segment are consolidated on a three-month lag basis, and the average rate applied for its reporting period was 159.1734 yen. For the three months ended September 30, 2026 and 2025, we generated net revenues of $58,581,520 (JPY 9,321 million) and $43,353,235 (JPY 6,391 million), respectively, and we reported net income of $16,416,759 (JPY 2,610 million) and $12,833,326 (JPY 1,896 million), respectively. Overall, the unfavorable impacts of the period-to-period foreign exchange rate changes on net revenues and net income were $4,207,735 and $1,391,504, respectively, for the three months ended September 30, 2026.

The main reasons for the variance of $15,228,285 in revenues, net per revenue stream are as follows:

SBC Core Segment

Franchising Revenue

Franchising revenue for the three months ended September 30, 2026 decreased to $9,572,091 by $357,296, or 3.60%, from $9,929,387 for the same period in 2025. This decrease was mainly due to the depreciation of JPY.

Procurement Revenue

The procurement revenue for the three months ended September 30, 2026 increased to $14,174,222 by $767,317, or 5.72%, from $13,406,905 for the same period in 2025. This increase was mainly due to an increase in demand from MCs for marketing and advertising services, partially offset by the depreciation of JPY.

Management Services Revenue

The management services revenue for the three months ended September 30, 2026 increased to $16,396,201 by $6,934,018, or 73.28%, from $9,462,183 for the same period in 2025. This increase was mainly due to revisions to management service and call-center service fee structures with certain medical corporations, effective June 1, 2026 and July 1, 2026, respectively. These increases were partially offset by the depreciation of JPY.

Rental Services Revenue

The rental services revenue for the three months ended September 30, 2026 increased to $8,062,918 by $1,843,273, or 29.64%, from $6,219,645 for the same period in 2025. This increase was mainly due to revenue from high-value medical equipment leased to newly opened clinics under the NEO Skin Clinic brand, partially offset by a decline in revenue from rentals of laser hair removal equipment to existing clinics as well as the depreciation of JPY. NEO Skin Clinic is an aesthetic dermatology brand within the SBC Medical Group network that opened its first clinic in Ebisu in April 2025 and has since expanded to Ginza, Nagoya and Kobe. These clinics are operated by MCs, which are related parties of the Company.

Others

The other revenues for the three months ended September 30, 2026 increased to $4,821,926 by $486,811, or 11.23%, from $4,335,115 for the same period in 2025. This increase was mainly due to higher revenue from leasehold improvement services, partially offset by the depreciation of JPY.

Waqoo Segment

Waqoo Segment revenue for the three months ended September 30, 2026 was $5,554,162. There was no comparable revenue for the same period in 2025 because Waqoo and its subsidiary, Cell Pro Japan Co., Ltd. ("Cell Pro"), were not consolidated during that period. This revenue was primarily derived from medical support services and direct-to-consumer product sales.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2026 was $16,402,500 compared to $12,741,748 for the same period in 2025. The increase was mainly due to the recognition of costs associated with high-value medical equipment supplied to newly opened clinics under the NEO Skin Clinic brand, as well as the inclusion of costs attributable to Waqoo and Cell Pro, whose operating results were consolidated beginning in the current-year period. These increases were partially offset by lower costs in the SBC Core Segment associated with the decline in revenue from rentals of laser hair removal equipment to existing clinics as well as the depreciation of JPY.

Gross Profit

Gross profit for the three months ended September 30, 2026 was $42,179,020 compared to $30,611,487 for the same period in 2025. The increase in gross profit by $11,567,533 or 37.79% was mainly due to increases in management services revenue and rental services revenue and the inclusion of operation results from the Waqoo Segment, partially offset by the depreciation of JPY, as a result of the factors described above.

Operating Expenses

Operating expenses for the three months ended September 30, 2026 and 2025 were as follows:

Operating expenses increased to $15,761,753 for the three months ended September 30, 2026 by $1,031,506, or 7.00%, from $14,730,247 for the same period in 2025. The increase was mainly due to the increase in advertising expense and salaries and welfare, partially offset by the decrease in consulting and professional service fees.

Advertising expense increased by $1,327,450, or 441.49%, to $1,628,125 for the three months ended September 30, 2026 from $300,675 for the same period in 2025, mainly due to increased spending on sponsorship and promotional activities aimed at enhancing brand awareness.

Salaries and welfare increased by $804,650, or 12.20%, to $7,402,798 for the three months ended September 30, 2026 from $6,598,148 for the same period in 2025, mainly due to the inclusion of personnel costs attributable to Waqoo and Cell Pro, which were consolidated beginning in the current-year period, and higher social insurance premiums driven by an increase in headcount at a Japanese subsidiary.

Consulting and professional service fees decreased by $1,120,053, or 25.38%, to $3,293,151 for the three months ended September 30, 2026 from $4,413,204 for the same period in 2025, primarily due to higher advisory fees incurred in the prior-year period with the assessment of the Company's internal control over financial reporting.

Income From Operations

Income from operations for the three months ended September 30, 2026 and 2025 were as follows:

Income from operations for the three months ended September 30, 2026 was $26,417,267 compared to $15,881,240 for the same period in 2025. The increase in income from operations of $10,536,027, or 66.34%, was mainly due to an increase in management services revenue and rental services revenue and the inclusion of operation results from the Waqoo Segment, partially offset by the depreciation of JPY.

Other Income (Expenses)

Other income (expenses) for the three months ended September 30, 2026 and 2025, were as follows:

Other income (expenses), net was $(35,734) for the three months ended September 30, 2026 compared to $2,625,624 for the same period in 2025. The decrease in other income (expenses) of $2,661,358 was mainly due to a shift from foreign currency exchange gain in the prior-year period to loss in the current-year period, primarily resulting from the appreciation of JPY from June 30 to September 30, 2026, which led to foreign currency exchange loss on U.S. dollar-denominated bank deposits held by the Company's Japanese subsidiary. The decrease also reflected the absence of the unrealized gain of $1,071,026 on the Company's investment in Waqoo, which the Company held as an equity investment with a readily determinable fair value prior to acquiring a controlling interest in December 2025,and which had been included in other income in the prior-year period, partially offset by an increase of $506,276 in the unrealized gain on the Company's investment in another public entity.

Income Tax Expense

Income tax expense for the three months ended September 30, 2026 was $9,378,075 compared to $5,673,538 for the same period in 2025. The increase in income tax expense of $3,704,537, or 65.30%, was mainly due to the increase in income before income taxes.

The effective tax rate was 35.55% and 30.66% for the three months ended September 30, 2026 and 2025, respectively. The increase of 4.89 percentage points was mainly due to valuation allowance against certain deferred tax assets of entities for which it is more likely than not that such deferred tax assets will not be realized due to insufficient future taxable income.

Net Income

As a result of the foregoing, we reported net income of $16,416,759 for the three months ended September 30, 2026, representing an increase of $3,583,433, or 27.92%, from $12,833,326 for the three months ended September 30, 2025.

Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests was $724,017 for the three months ended September 30, 2026, as compared to net income attributable to non-controlling interests of $8,690 for the three months ended September 30, 2025.

Comparison of Results of Operations for the Nine Months Ended September 30, 2026 and 2025

Because we acquired control of Waqoo on December 19, 2025 and consolidated the financial information of Waqoo and its subsidiary on a three-month reporting lag, our consolidated results for the nine months ended September 30, 2026 include Waqoo's results of operations for the period from January 1, 2026 to June 30, 2026. For comparative purposes, all 2025 amounts in the tables below are attributable to the SBC Core Segment, as Waqoo was not consolidated during that period.

The following table summarizes our results of operations as reflected in our unaudited consolidated statements of operations and comprehensive income for the nine months ended September 30, 2026 and 2025, and presents information regarding amounts and percentage changes during those periods.

Note: Percentages are calculated as a percentage of total revenues and may not sum due to rounding. NM (not meaningful) is used when the prior-period amount is zero or when the amounts have opposite signs between periods.

Revenues, Net

Revenues, net generated from different revenue streams consist of the following:

Revenues, net, increased by 12.53% from $134,040,783 for the nine months ended September 30, 2025 to $150,830,150 for the nine months ended September 30, 2026.

Japanese Yen ("JPY") depreciated against the U.S. dollar during the nine months ended September 30, 2026, compared to the nine months ended September 30, 2025. The average rate against the dollar for the SBC Core Segment was 158.5070 yen for the nine months ended September 30, 2026 compared to 148.1284 yen for the same period in 2025. Financial results for the Waqoo Segment are consolidated on a three-month lag basis, and the average rate applied for its reporting period was 158.1586 yen. For the nine months ended September 30, 2026 and 2025, we generated net revenues of $150,830,150 (JPY 23,904 million) and $134,040,783 (JPY 19,855 million), respectively, and we reported net income of $38,908,070 (JPY 6,168 million) and $36,765,128 (JPY 5,458 million), respectively. Overall, the unfavorable impacts of the period-to-period foreign exchange rate changes on net revenues and net income were $9,862,438 and $2,910,466, respectively, for the nine months ended September 30, 2026.

The main reasons for the variance of $16,789,367 in revenues, net per revenue stream are as follows:

SBC Core Segment

Franchising Revenue

Franchising revenue for the nine months ended September 30, 2026 decreased to $28,178,892 by $7,477,358, or 20.97%, from $35,656,250 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 as well as the depreciation of JPY.

Procurement Revenue

The procurement revenue for the nine months ended September 30, 2026 decreased to $39,919,628 by $3,576,579, or 8.22%, from $43,496,207 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 as well as the depreciation of JPY.

Management Services Revenue

The management services revenue for the nine months ended September 30, 2026 increased to $41,175,237 by $17,846,373, or 76.50%, from $23,328,864 for the same period in 2025. This increase was mainly due to lower point redemptions, which were accounted for as a reduction of loyalty program management revenue, resulting from the revision of program policy effective in June 2025, as well as revisions to management service and call center service fee structure with certain medical corporations, effective June 1, 2026 and July 1, 2026, respectively. These increases were partially offset by the depreciation of JPY.

Rental Services Revenue

The rental services revenue for the nine months ended September 30, 2026 decreased to $15,374,700 by $3,336,635, or 17.83%, from $18,711,335 for the same period in 2025. This decrease was mainly due to a decline in revenue from rentals of laser hair removal equipment to existing clinics, as the prior-year period included a higher level of such rentals primarily associated with clinic openings and equipment upgrades at existing clinics, as well as the depreciation of JPY.

Others

The other revenues for the nine months ended September 30, 2026 increased to $16,113,023 by $3,264,896, or 25.41%, from $12,848,127 for the same period in 2025. This increase was mainly due to higher leasehold improvement services revenue as well as higher revenues from Aesthetic Healthcare Holdings Pte. Ltd. and its subsidiaries, which were acquired in November 2024 and consolidated in the Company's financial statements with a three-month reporting lag, as the current-year period reflected nine months of their results compared with only seven months in the prior-year period, partially offset by the depreciation of JPY.

Waqoo Segment

Waqoo Segment revenue for the nine months ended September 30, 2026 was $10,068,670. There was no comparable revenue for the same period in 2025 because Waqoo and its subsidiary, Cell Pro, were not consolidated during that period. This revenue was primarily derived from medical support services and direct-to-consumer product sales.

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2026 was $42,327,080 compared to $35,685,635 for the same period in 2025. The increase was mainly due to the recognition of costs associated with high-value medical equipment supplied to newly opened clinics under the NEO Skin Clinic brand, the inclusion of costs attributable to Waqoo and Cell Pro, which were consolidated beginning in the current-year period, as well as higher costs related to leasehold improvement services, the inclusion of nine months of costs from Aesthetic Healthcare Holdings Pte. Ltd. and its subsidiaries in the current-year period under the Company's three-month reporting lag, compared with only seven months in the prior-year period, and higher personnel costs resulting from an increase in headcount to support newly established departments since April 2025. These increases were partially offset by lower costs associated with the decline in revenue from rentals of laser hair removal equipment to existing clinics.

Gross Profit

Gross profit for the nine months ended September 30, 2026 was $108,503,070 compared to $98,355,148 for the same period in 2025. The increase in gross profit of $10,147,922, or 10.32%, was mainly due to the inclusion of operation results from the Waqoo Segment and increases in management services revenue, as a result of the factors described above. These increases were partially offset by the decrease in franchising revenue and procurement revenue, with relatively high gross margin, as well as the depreciation of JPY.

Operating Expenses

Operating expenses for the nine months ended September 30, 2026 and 2025 were as follows:

Operating expenses increased to $45,405,238 for the nine months ended September 30, 2026 by $1,687,596, or 3.86%, from $43,717,642 for the same period in 2025. The increase was mainly due to the increase in salaries and welfare and advertising expense, partially offset by the decrease in depreciation and amortization expense.

Salaries and welfare increased by $1,586,050, or 8.01%, to $21,391,457 for the nine months ended September 30, 2026 from $19,805,407 for the same period in 2025, mainly due to the inclusion of personnel costs attributable to Waqoo and Cell Pro, which were consolidated beginning in the current-year period, and higher social insurance premiums driven by an increase in headcount at a Japanese subsidiary.

Advertising expense increased by $706,303, or 36.10%, to $2,663,077 for the nine months ended September 30, 2026 from $1,956,774 for the same period in 2025, mainly due to the increased spending on sponsorship and promotional activities aimed at enhancing brand awareness.

Depreciation and amortization expense decreased by $635,406, or 38.66%, to $1,008,182 for the nine months ended September 30, 2026 from $1,643,588 for the same period in 2025, mainly due to the disposal of an aircraft held by the Company's subsidiary in September 2025, resulting in lower depreciation expense in the current-year period.

Income From Operations

Income from operations for the nine months ended September 30, 2026 and 2025 were as follows:

Income from operations for the nine months ended September 30, 2026 was $63,097,832 compared to $54,637,506 for the same period in 2025. The increase in income from operations of $8,460,326, or 15.48%, was mainly due to the inclusion of operation results from the Waqoo Segment and increases in management services revenue, as a result of the factors described above. These increases were partially offset by the decrease in franchising revenue and procurement revenue, with relatively high gross margin, as well as the depreciation of JPY.

Other Income (Expenses)

Other income (expenses) for the nine months ended September 30, 2026 and 2025, were as follows:

Other income (expenses), net was $1,694,998 for the nine months ended September 30, 2026 compared to $8,861,126 for the same period in 2025. The decrease in other income (expenses) of $7,166,128, or 80.87%, was mainly due to a gain on redemption of life insurance policies of $8,746,138 recognized in the prior-year period with no comparable gain recognized in the current-year period, partially offset by a shift from foreign currency exchange loss in the prior-year period to gain in the current-year period.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2026 was $24,729,409 compared to $26,733,504 for the same period in 2025. The decrease in income tax expense of $2,004,095, or 7.50%, was mainly due to the absence of a significant tax expense recognized in the three months ended June 30, 2025, which was associated with a deemed contribution treated as a taxable gain under Japanese tax law.

The effective tax rate was 38.17% and 42.10% for the nine months ended September 30, 2026 and 2025, respectively. The decrease of 3.93 percentage points was mainly due to the absence of the specific event that occurred in the same period in 2025; specifically, the deemed contribution in connection with the price modification on disposal of an aircraft to General Incorporated Association SBC, an entity controlled by the CEO of the Company, who is also the controlling shareholder of the Company, was treated as a taxable gain under Japanese tax law and increased the effective tax rate for the same period in 2025.

Net Income

As a result of the foregoing, we reported net income of $38,908,070 for the nine months ended September 30, 2026, representing an increase of $2,142,942, or 5.83%, from $36,765,128 for the nine months ended September 30, 2025.

Net Income (Loss) Attributable to Non-controlling Interests

Net income attributable to non-controlling interests was $1,214,435 for the nine months ended September 30, 2026, as compared to net loss attributable to non-controlling interests of $20,194 for the nine months ended September 30, 2025.

Liquidity and Capital Resources

As of September 30, 2026, the Company had $198,428,275 in cash and cash equivalents compared to $163,773,838 as of December 31, 2025. In addition, the Company had $33,471,736 in accounts receivable as of September 30, 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.

As of September 30, 2026, the Company's working capital balance was $199,190,891. 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, cash flows from operations and available bank borrowings 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.

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.

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. On December 29, 2025, the Company's board of directors authorized a share repurchase program of up to $20.0 million, pursuant to which the Company may repurchase shares of its common stock from time to time. The program terminates on December 31, 2026. As of September 30, 2026, the Company had not repurchased any shares under the program. The actual timing, manner and value of any such repurchases 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.

Cash Flows for the Nine Months Ended September 30, 2026 and 2025

The following table provides a summary of our cash flows for the periods indicated.

Operating Activities

Net cash provided by operating activities was $50,247,388 for the nine months ended September 30, 2026, mainly derived from net income of $38,908,070 for the period, reconciled by a non-cash lease expense of $4,239,772 and deferred income tax benefit of $4,386,410, and net changes in operating assets and liabilities, which mainly included an increase in accounts receivable - related parties of $3,502,443, an increase in finance lease receivables - related parties of $4,050,925, an increase in accounts payable of $6,551,564, an increase in income tax payable of $7,711,189, a decrease in customer loans receivable of $7,158,848 and a decrease in operating lease liabilities of $4,279,802.

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 payable - 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.

Investing Activities

During the nine months ended September 30, 2026, net cash used in investing activities of $5,040,845 mainly reflected the $0.9 million of prepayments for property and equipment, $1.2 million of purchases of property and equipment, $4.0 million of placement of time deposits, and offset by $1.0 million of net proceeds received from deconsolidation of VIE.

During the nine months ended September 30, 2025, net cash provided by investing activities of $3,239,523 was mainly the result of proceeds from redemption of life insurance policies of $17.7 million, offset by the cash paid for acquisition of subsidiary, net of cash acquired of $14.9 million.

Financing Activities

During the nine months ended September 30, 2026, net cash used in financing activities of $8,940,299 was mainly due to the repayments of bank and other borrowings of $8.9 million.

During the nine months ended September 30, 2025, net cash provided by financing activities of $18,470,001 was mainly due to the borrowings from long-term loans of $14.9 million and the deemed contribution in connection with the price modification on disposal of property and equipment of $9.7 million, offset by repurchase of common stock of $5.0 million.

Non-GAAP Financial Measures

The Company uses Adjusted EBITDA and Adjusted EBITDA margin in evaluating its operating results and for financial and operational decision-making purposes. The Company believes these non-GAAP financial measures help identify underlying trends in its business, provide useful information about the Company's results of operations, enhance the overall understanding of the Company's past performance and future prospects, and allow for greater visibility with respect to key metrics used by the Company's management in its financial and operational decision-making.

The non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The presentations of these measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company.

The following table reconciles net income attributable to SBC Medical Group Holdings Incorporated to adjusted EBITDA for the periods presented:

Adjusted EBITDA is a non-GAAP financial measure defined as net income attributable to SBC Medical Group Holdings Incorporated adjusted for net income (loss) attributable to non-controlling interests, equity in losses of equity method investees, net of tax, income tax expense, gain on redemption of life insurance policies, other expenses, other income, foreign currency exchange loss (gain), net, interest expense, interest income, and depreciation and amortization expense.

Net income margin is defined as net income attributable to SBC Medical Group Holdings Incorporated divided by total revenues, net. Adjusted EBITDA margin is defined as adjusted EBITDA divided by total revenues, net.

Contractual Obligations

Lease Agreements

The Company holds a significant number of leases classified as operating leases for offices and sublease purposes.

As of September 30, 2026, the future maturity of operating lease liabilities is as follows:

Bank and Other Borrowings

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

As of September 30, 2026, future minimum borrowing payments are as follows:

Investment Commitment

The Company has committed to make an additional $5.0 million cash investment in OT Midco, payable in December 2026 or such other month as may be mutually agreed upon by the Company and the investee. See Note 19 to the unaudited consolidated financial statements.

Off-Balance Sheet Arrangements (Off-Balance Sheet Transactions)

As of September 30, 2026 and December 31, 2025, the Company did not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. For information regarding a guarantee provided by SBC Sealane Co., Ltd., a wholly owned subsidiary of the Company, on the debt of the Representative Director of SBC Sealane Co., Ltd., see Note 19 to the unaudited consolidated financial statements.

Foreign Exchange Rate Risk

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.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

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.

Emerging Growth Company

We are an "emerging growth company," as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we will take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

Smaller Reporting Company

Additionally, we are a "smaller reporting company," as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company unless, as of an applicable annual determination date, (i) the market value of our common stock held by non-affiliates is $250 million or more and (ii) either our annual revenues are $100 million or more or the market value of our common stock held by non-affiliates is $700 million or more. If we continue to be a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from these certain reduced disclosure requirements that are available to smaller reporting companies.