SBC Medical Group Holdings Inc. — 2023 Q3 SEC Filing Summary
Filing identity: The provided Form 10-Q is filed by Pono Capital Two, Inc., not SBC Medical Group Holdings Inc. It covers the three and nine months ended September 30, 2023 and was filed November 13, 2023. Pono was a blank-check company and had not commenced operations or generated operating revenue.
Business Context and Reporting Period
Pono was formed to complete a business combination. It entered into a merger agreement with SBC Medical Group Holdings Incorporated in January 2023, subsequently amended and restated in June 2023 and amended in September 2023. The proposed transaction would combine Pono with SBC, with SBC-Japan and related entities becoming subsidiaries following specified restructuring transactions.
The merger consideration was revised from $1.2 billion to $1.0 billion, subject to adjustments for net working capital, debt, cash and specified transaction expenses. The amended agreement extended the expected closing date to December 31, 2023. Subsequent to quarter-end, the parties amended proposed board composition provisions on October 26, 2023.
Financial Condition and Results
| Metric | Three months ended September 30, 2023 | Nine months ended September 30, 2023 | Comparable prior period |
|---|---|---|---|
| Operating revenue | $0 | $0 | $0 |
| Operating and formation costs | $282,917 | $1,088,247 | $177,865 for Q3 2022; $179,485 from inception through Q3 2022 |
| Franchise tax expense | $40,444 | $96,935 | $125,753 |
| Loss from operations | $(323,361) | $(1,185,182) | $(303,618) for Q3 2022; $(305,238) from inception through Q3 2022 |
| Trust-account interest and dividend income | $266,244 | $2,367,607 | $350,850 |
| Net income (loss) | $(104,535) | $705,584 | $(11,419) for Q3 2022; $(13,039) from inception through Q3 2022 |
| Net income (loss) per share | $(0.02) | $0.07 | $(0.00) in the prior comparable periods |
| Net cash used in operating activities | Not separately reported | $(1,715,587) | $(368,410) from inception through Q3 2022 |
Margins and operating performance are not meaningful because the company had no operating revenue. The nine-month net income was generated by interest income on Trust Account investments and did not reflect operating profitability.
As of September 30, 2023, total assets were $21.45 million, including $20.70 million in marketable securities held in the Trust Account and $574,336 of cash outside the Trust Account. Total liabilities were $6.47 million, including a $1.0 million convertible promissory note, $1.00 million of excise tax payable, $4.03 million of deferred underwriting fees and other current liabilities. Accumulated deficit was $5.57 million and stockholders’ deficit was $5.57 million.
Public shares subject to possible redemption totaled $20.55 million, representing 1,922,750 shares at a redemption value of $10.69 per share. The company had 12,134,375 outstanding public and placement warrants, with public warrants exercisable at $11.50 per share subject to their terms.
Material Changes Versus Prior Comparable Period
- Q3 2023 net loss increased to $104,535 from $11,419, primarily because operating and formation costs increased to $282,917 from $177,865 and Trust Account interest income decreased to $266,244 from $350,850.
- Nine-month 2023 net income was $705,584 versus a $13,039 loss for the comparable period from inception through September 30, 2022, primarily due to $2.37 million of Trust Account interest income.
- Trust Account investments declined from $119.22 million at December 31, 2022 to $20.70 million at September 30, 2023, following the redemption of 9,577,250 Class A shares for $100.08 million in May 2023.
- The Sponsor converted 2,874,999 Class B founder shares into Class A shares in May 2023.
- The company issued a $1.0 million non-interest-bearing convertible promissory note to SBC in May 2023. The note automatically converts into Class A shares at $10 per share immediately before the proposed merger, subject to customary adjustments.
- The company recorded a $1.00 million excise tax liability associated with the May 2023 redemptions.
Liquidity, Outlook, Risks and Unusual Items
- Cash outside the Trust Account was $574,336, while the company reported a working capital deficit of $643,843, excluding the excise tax payable and franchise tax payable as described in the filing.
- Management stated that additional capital would likely be required to meet liquidity needs, pay existing obligations and complete the business combination. Potential working-capital loans of up to $1.5 million were available from insiders or affiliates, but there was no guarantee that such funding would be provided.
- The company had until February 9, 2024 to complete a business combination. Failure to close by that date would require liquidation and dissolution, subject to applicable law. Management concluded that the deadline and liquidity position raised substantial doubt about the company’s ability to continue as a going concern.
- If liquidation occurs, public shareholders generally would receive their pro rata share of the Trust Account, net of taxes and permitted expenses. The filing cautions that the per-share distribution could be below the original $10.00 unit price.
- The proposed merger remained subject to restructuring, definitive closing conditions, financing, shareholder and regulatory matters, and other contractual requirements. The filing provides no assurance that the transaction would close.
- The $4.03 million deferred underwriting fee would generally become payable only if a business combination is completed; the underwriters agreed to waive the fee if the company liquidates within the applicable period.
- The filing identifies risks from market volatility, financing availability, geopolitical developments, redemption levels, the Internal Revenue Code excise tax and the company’s limited cash outside the Trust Account.
- Management reported that disclosure controls and procedures were effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Confirm the correct issuer and filing: the supplied document is Pono Capital Two’s Form 10-Q, although the requested company is SBC Medical Group Holdings Inc.
- Verify the current status, closing conditions and any subsequent amendments or termination of the proposed Pono-SBC business combination.
- Reconcile the Trust Account balance, remaining redeemable shares, redemption price and any subsequent distributions or financing.
- Assess whether the $1.0 million convertible note converted, was repaid or remained outstanding, and determine its resulting dilution.
- Evaluate the February 9, 2024 liquidation deadline and whether an extension, business combination or liquidation occurred.
- Review the final merger consideration, including adjustments for SBC working capital, debt, cash, transaction expenses and the 3% escrow provision.
- Consider dilution from founder shares, Sponsor Shares, public warrants, placement warrants and any additional financing issued in connection with the transaction.
- Obtain SBC’s operating financial information separately; this filing does not provide SBC’s revenue, profit, cash flow or operating margins.