SBC Medical Group Holdings Inc (SBC)

Item
7. 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 consolidated financial statements
and related notes included elsewhere in this Annual 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 below and elsewhere in
this Annual Report, particularly in “Part I, Item 1A. Risk Factors” and the section entitled “Cautionary Note Regarding
Forward-Looking Statements.”

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

Our
wholly owned subsidiaries, SBC Medical Group Co., Ltd., a Japan corporation (“SBC Medical Sub”), L’Ange Cosmetique
Co., Ltd., a Japan corporation (“Lange Sub”), and Shobikai Co., Ltd., a Japan corporation (“Shobikai Sub”), are
each 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 certain subsidiaries of the Company (SBC Medical Sub, Lange Sub, and Shobikai Sub) and the
medical corporations that own all 241 of the treatment centers in Japan. 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.

104

There
are currently six medical corporations that the Company’s subsidiaries have entered into franchisor-franchisee contracts and service
contracts, 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 two additional medical corporations, Medical Corporation Association Furinkai and Medical Corporation
Association Junikai (collectively with the six franchisee medical corporations, the “Medical Corporations” or “MCs”).
All of the Medical Corporations are deemed to be related parties of the Company since relatives of the CEO of the Company are the members
(or shain) of general meetings of members of the Medical Corporations. 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 “deposit”
interests (or mochibun) of the Medical Corporations (except Medical Corporation Association Furinkai and Medical Corporation Association
Junikai). Although the Company, through SBC Medical Sub, has an equity “deposit” 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 articles of incorporation
of each of the Medical Corporations (except Medical Corporation Association Furinkai and Medical Corporation Association Junikai), the
Company or SBC Medical Sub does not have voting control over the corporate actions at general meetings of members (or shain) of
the Medical Corporations per the requirements of the Japanese Medical Care Act.

Financial
Overview

For
the years ended December 31, 2024 and 2023, we generated revenues of $205,415,542 and $193,542,423, respectively, we reported net income
attributable to SBC Medical Group Holdings Incorporated of $46,614,275 and $39,370,036, respectively, and cash flow provided by operating
activities of $20,582,933 and $50,670,322, respectively. As of December 31, 2024, we had retained earnings of $ 189,463,007.

Our
primary mission is to provide quality comprehensive management services to the Medical Corporations 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 the United States, and by growing our presence globally.

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

Results
of Operations

Comparison
of Results of Operations for the Years Ended December 31, 2024 and 2023

The
following table summarizes our operating income as reflected in our audited consolidated statements of operations and comprehensive income
for the years ended December 31, 2024 and 2023, and presents information regarding amounts and percentage changes during those periods.

105

Revenues,
Net

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

Revenues,
net, increased by 6.13% from $193,542,423 for the year ended December 31, 2023 to $205,415,542 for the year ended December 31, 2024.

Japanese
Yen (“JPY”) against the U.S. dollar depreciated during the year ended December 31, 2024, compared to the year ended December
31, 2023. The spot rate against the dollar was 156.7890 yen on December 31, 2024 compared to 141.0350 yen on December 31, 2023 and the
average rate against the dollar was 151.4405 yen for the year ended December 31, 2024 compared to 140.5261 yen for the same period in
2023. For the years ended December 31, 2024 and 2023, we generated net revenues of $205,415,542 (JPY31,108 million) and $193,542,423
(JPY 27,198 million), respectively. For the years ended December 31, 2024 and 2023, we reported net income of $46,689,892 (JPY7,059 million)
and $38,560,606 (JPY 5,419 million), respectively. Overall, the unfavorable impacts of the year-to-year foreign exchange rate changes
on net revenues and net income were $15,954,241 and $3,545,053, respectively, for the year ended December 31, 2024.

The
main reasons for the variance of $11,873,119 in revenues, net per revenue stream are as follows:

Franchising
Revenue

Franchising
revenue for the year ended December 31, 2024 increased to $61,033,032 by $18,929,652 or 44.96% from $42,103,380 for the same period in
2023. This increase was mainly due to (i) a change in the billing base of royalty fees from a percentage of sales of MCs to a fixed amount
for each clinic of MCs since April 2023 combined with an increase in the number of clinics operated by MCs, (ii) authorizing the six
MCs, which are our main recurring customers, to use our patents and trademarks starting from September 2023, and (iii) the business expansion
of the MCs, partially offset by the depreciation of JPY.

106

Procurement
Revenue

The
procurement revenue for the year ended December 31, 2024 increased to $54,814,399 by $1,627,737 or 3.06% from $53,186,662 for the same
period in 2023. This increase was mainly due to the increase in the demand on medical materials due to the business expansion of MCs,
partially offset by the depreciation of JPY.

Management
Services Revenue

The
management services revenue for the year ended December 31, 2024 decreased to $53,113,155 by $19,169,394 or 26.52% from $72,282,549 for
the same period in 2023. This decrease was mainly due to (i) the discontinuation of clinic operation staff supporting services provided
by Shobikai Sub to MCs since the third quarter of 2024, because the Company plans to merge Shobikai Sub with and into Lange Sub and the
related business license, held by Shobikai Sub, will be invalid upon the merger, (ii) a significant decline in loyalty program management
services revenue compared with 2023, primarily because the charge rate of handling fee decreased from 5% to 4%, and there were more free
point redemptions, and (iii) the depreciation of JPY, partially offset by (i) the increase in revenue generated from management consulting
services and loyalty program management services provided to two MCs that the Company started to conduct business since September 2023
(Medical Corporation Association Furinkai and Medical Corporation Association Junikai), (ii) the business expansion of MCs and (iii)
the increase in the number of the clinics of MCs.

Rental
Services Revenue

The
rental services revenue for the year ended December 31, 2024 increased to $16,141,714 by $8,804,946 or 120.01% from $7,336,768 for the
same period in 2023. This increase was mainly due to the increased demand for medical equipment from MCs due to the business expansion
of MCs, partially offset by the depreciation of JPY.

Others

The
other revenues for the year ended December 31, 2024 increased to $20,313,242 by $1,680,178 or 9.02% from $18,633,064 for the same period
in 2023. This increase was mainly due to the business expansion of the subsidiary acquired in April 2023, partially offset by the depreciation
of JPY.

Cost
of Revenues

Cost
of revenues, for the year ended December 31, 2024, was $49,365,035 compared to $56,238,385 for the same period in 2023. The decrease
by $6,873,350 or 12.22% was mainly due to the Company’s effort of the cost reduction for the year ended December 31, 2024, as well
as the discontinuation of clinic operation supporting services provided by Shobikai Sub to MCs since the third quarter of 2024, and the
Company then terminated the employment of the related staff. As a result, labor cost significantly decreased.

Gross
Profit

Gross
profit, for the year ended December 31, 2024, was $156,050,507 compared to $137,304,038 for the same period in 2023. The increase in
gross profit by $18,746,469 or 13.65% was mainly due to the increase in franchising revenue with a relatively high gross margin as a
result of the factors described above, offset by the decrease in management services revenue as a result of the factors described above.

107

Operating
Expenses

Operating
expenses for the years ended December 31, 2024 and 2023 were as follows:

The
operating expenses increased to $85,746,797 for the year ended December 31, 2024 by $19,102,825 or 28.66% from $66,643,972 for the same
period in 2023.The increase in operating expenses was mainly attributed to the increase in impairment loss on intangible asset, the
increase in stock-based compensation, and the increase in consulting and professional service fees, partially offset by the decrease
in depreciation and amortization expenses.

Depreciation
and amortization expense decreased to $2,258,364 by $8,666,088 or 79.33% for the year ended December 31, 2024 from $10,924,452 for the
same period in 2023, mainly because the decrease in amortization expense incurred from the intangible assets owned by Cell Pro Japan
Co., Ltd. (“Cellpro”), a former subsidiary of the Company, due to the disposal of Cellpro on January 1, 2024.

Consulting
and professional service fees increased to $14,555,087 by $5,073,368 or 53.51% for the year ended December 31, 2024 from $9,481,719 for
the same period in 2023, mainly due to the increase of the professional service fees incurred related to the business combination transaction.

108

Stock-based
compensation relates to the warrants issued to the service provider that supported SBC’s listing process. These warrants were issued
in November 2022 and became exercisable upon the consummation of business combination with Pono Two Capital, Inc., and the fair value
was recognized as an expense.

For
the year ended December 31, 2024, the Company fully impaired an intangible asset, patent use right, because the estimated cash flows
from the use and its eventual disposal of this intangible asset were determined to be negligible. This conclusion was reached through a careful decision-making process and was approved by the Company’s board
of directors.

Other
Income (Expenses)

Other
income (expenses) for the years ended December 31, 2024 and 2023, were as follows:

Although
an unrealized loss was recognized from the Company’s investment in a public entity with readily determinable fair value under other expenses, a gain on disposal of subsidiary was recorded due to the disposal of Cellpro on January 1, 2024. The total other
income (expenses) for the year ended December 31, 2024 was $3,152,107, compared to $2,919,269 for the same period in 2023, reflecting
only a minor overall fluctuation.

Income
Tax Expense

Income
tax expense, for the year ended December 31, 2024, was $26,765,925 compared to $35,018,729 for the same period in 2023. The decrease
in income tax expense by $8,252,804 or 23.57% was mainly due to the increase in the deferred tax benefit as no valuation allowance on
deferred tax assets of Lange Sub was reserved during the year ended December 31, 2024. It was mainly due to the merger among SBC Medical
Sub, Lange Sub and Shobikai Sub, with Lange Sub as the surviving entity after the merger, that expected to be effective in January 2025,
resulting in the potential ability of Lange Sub to generate income and utilize the carried forward net operating loss.

109

The
effective tax rate for the fiscal year ended December 31, 2024 was 36.44%, a decrease of 11.16% compared to the 47.59% rate for the fiscal
year ended December 31, 2023. This decrease was mainly due to a reduction in valuation allowance on deferred tax assets as described
in the income tax expense comparison above.

Net
Income

As
a result of the foregoing, we reported a net income of $46,689,892 for the year ended December 31, 2024, representing an increase of
$8,129,286 from $38,560,606 for the year ended December 31, 2023.

Net
Income (Loss) Attributable to Non-controlling Interests

Net
Income attributable to non-controlling interests was $75,617 for the year ended December 31, 2024, as compared to the net loss attributable
to non-controlling interests of $809,430 for the year ended December 31, 2023, which was mainly due to the disposal of Cellpro on January
1, 2024.

Liquidity
and Capital Resources

As
of December 31, 2024, the Company had $125,044,092 in cash and cash equivalents compared to $103,022,932 as of December 31, 2023. In
addition, the Company had $30,260,113 in accounts receivable as of December 31, 2024 compared to $35,113,749 as of December 31, 2023.
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 December 31, 2024, the Company’s working capital balance was $123,259,130. 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 audited financial statements included in this Annual
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 and stockholder working capital, as needed.

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.

110

Cash
Flows for the Years Ended December 31, 2024 and 2023

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

Operating
Activities

Net
cash provided by operating activities for the year ended December 31, 2024 was $20,582,933, compared to net cash provided in operating
activities of $50,670,322 for the year ended December 31, 2023, reflecting a decrease of $30,087,389. The decrease was mainly due to
a decrease in changes in notes payable - related parties of $34.7 million, finance lease receivables – related parties of $22.6
million and accounts payable of $21.8 million, partially offset by an increase in changes in accounts receivable - related parties of
$23.8 million and accrued retirement compensation expense – related party of $22.1 million.

Investing
Activities

During
the year ended December 31, 2024, net cash used in investing activities of $10,102,410 was mainly the result of payments made on behalf
of a related party of $5.6 million, cash paid for acquisition of a subsidiary, net of cash received of $4.2 million, purchase of property
and equipment of $2.6 million and purchase of convertible note of $1.7 million, partially offset by repayments from related parties of
$6.6 million. During the year ended December 31, 2023, net cash provided by investing activities of $1,793,631 was mainly the result
of proceeds from disposal of property and equipment of $8.0 million, sales of short-term investments of $4.1 million, and proceeds from
surrender of life insurance policies of 4.0 million, and offset by payments made for the purchase of property and equipment of $8.5 million,
purchase of short-term investments of $2.1 million and advances to related parties of $2.3 million.

Financing
Activities

During
the year ended December 31, 2024, net cash provided by financing activities of $22,965,400 was the result of proceeds from reverse recapitalization,
net of transaction costs of $11.7 million, borrowings from a long-term loan of $6.6 million and borrowings from related parties of $5.5
million. During the year ended December 31, 2023, net cash provided by financing activities of $6,135,368 was the result of borrowings
from related parties of $12.3 million and deemed contribution in connection with disposal of property and equipment of $9.6 million and
offset by repayments of long-term loans of $8.7 million and repayments to related parties of $7.7 million.

111

Recent
Developments

Upcoming
Changes to Service Fee Structure

The Company has decided to
revise the fee structure to pursue a long-term growth strategy aimed at expanding and stabilizing the business foundation by creating
an environment that can better facilitate the establishment of new clinics by MCs.

If
the revised fee structure had been applied starting in April 2024, it is estimated that total revenues for fiscal year 2024 would have
decreased by approximately 10%. However, the Company expects the impact on total revenues and income from operations for fiscal year
2025 to be offset by the absence of one-time losses that were recorded in fiscal year 2024, which were impairment loss on intangible
asset and stock-based compensation. Nevertheless, the ultimate financial impact remains uncertain and will depend on a number of factors,
many of which are beyond the Company’s control.

Upcoming
Insurance Policy Maturing

Certain
corporate-owned life insurance policies that the Company purchased to insure its CEO and a key officer will mature on March 29, 2025,
according to the contract term.

The
policies of these life insurances were structured so that the surrender value was equivalent to 50% of the initial premium before
the maturity of the contract and the initial premium was paid out in a lump sum at the inception of the contract. The surrender
value as of the contract mature date agreed to be the initial premium or accumulated initial premium amount considering interest, which is larger. As
of December 31, 2024, the insurance policies were recorded at their cash surrender values, included in other assets in the
consolidated balance sheets with changes in cash surrender value during the period recorded in selling, general and administrative
expenses.

The
Company expected the maturity of these policies would result in a gain on surrender of life insurance policies of approximately $9.3
million in the first quarter of fiscal year 2025.

Misappropriations
of Funds

In
January 2024, before the issuance of the Company’s consolidated financial statements as of December 31, 2023 and for the year
then ended, in connection with a routine tax examination of the Company’s income tax returns, the Japanese tax authority
discovered misappropriations of Company funds by a former director of general affairs and legal department of L’Ange
Cosmetique Co., Ltd., which is a subsidiary of the Company (the “former director”), not a relative of the CEO of the
Company or any identified related party, who received kickbacks from multiple vendors of SBC Japan (collectively with the former
director, the “participants”) possibly beginning as early as 2012 until the misappropriations were discovered. The
former director was suspended immediately upon the discovery and was terminated effective February 23, 2024. The Company has
commenced a criminal complaint in Tokyo against the participants, which was accepted by the police on February 25, 2025.

112

Shortly
after this discovery, the Company engaged independent legal counsel and forensic consultants to investigate the misappropriations. The
investigation, which was completed in March 2024, revealed that the participants had misappropriated approximately JPY632 million ($5.6
million), including consumption tax, from the Company of which the former director received approximately JPY335 million ($3.0 million),
between April 2016 and the discovery of the misappropriations in January 2024. The amount misappropriated prior to April 2016 could not
be accurately determined because certain data for the period prior to April 2016 was unavailable, the Company does not expect such amount
to be material based on current estimates.

The
Company found no evidence that any other employee of the Company was aware of, or colluded in, the misappropriations of Company
funds or that there was any unlawful activity apart from that associated with the participants’ misappropriations of Company
funds. The misappropriated amounts, excluding the consumption tax, representing advertising services purchased on behalf of a
related-party MC, were originally included in the revenues reported on a net basis. After discovery of the misappropriations, the
amounts were reported as a misappropriation loss. For the year ended December 31, 2023, the Company recorded
a misappropriation loss of $409,030.

Contractual
Obligations

Lease
Agreements

The
Company has 95 leases classified as operating leases for offices and sublease purposes.

As
of December 31, 2024, the future maturity of lease liabilities is as follows:

Bank
and Other Borrowings

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

As
of December 31, 2024, future minimum borrowing payments are as follows:

113

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

There
are no off-balance sheet arrangements as of December 31, 2024 and 2023.

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 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. Some of
our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting
estimates. We believe that critical accounting policies as disclosed in this Annual Report reflect the more significant judgements and
estimates used in preparation of our consolidated financial statements.

The
following descriptions of critical accounting policies and estimates should be read in conjunction with our consolidated financial statements
and other disclosures included in this Annual Report. When reviewing our consolidated financial statements, you should consider our selection
of critical accounting policies, the judgments and other uncertainties affecting the application of such policies and the sensitivity
of reported results to changes in conditions and assumptions.

Revenue
Recognition

The
Company recognizes revenue from franchising services, procurement services, management services and other services under ASC Topic 606,
“Revenue from Contracts with Customers”.

To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation. Revenue amount represents the invoiced value, net of consumption tax and applicable local government levies, if any. The
consumption tax on sales is calculated at 10% of gross sales. The Company does not have significant remaining unfulfilled performance
obligations or contract balances.

114

The
Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or
agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on the evaluation
of whether (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company
has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer
and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not
indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated
revenues are recognized on a net basis.

The
Company recognizes revenue from rental services under ASC Topic 842, “Leases”.

The
Company currently generates its revenue from the following main sources:

Franchising
Revenue

The
Company generates franchising revenue (royalty income) by licensing its intellectual properties, including but not limited to the Company’s
brand name (“Shonan Beauty Clinic”), trade name, patents, and trademarks, as a franchisor pursuant to franchise agreements
with certain MCs (the “MCs”) in Japan. Prior to April 2023, Franchising Revenue is based on a percentage of sales and recognized
at the time when the related sales occurred; since April 2023, it is based on a fixed amount to each clinic of the MCs; since September
2023, it is based on a fixed amount to each MC and a fixed amount to each clinic of the MCs and recognized over time as services are
rendered.

Procurement
Revenue

The
Company generates procurement revenue by purchasing primarily advertising services and medical materials from qualified vendors on behalf
of MCs to maintain brand quality consistency. Procurement revenue is recognized at the point in time upon the delivery of products or
over time as services are performed. Occasionally, the Company receives vendor discounts on certain large purchases. It recognizes revenue
based on actual payments and will return the over-collection resulting from such discounts to MCs.

Management
Services Revenue

The
Company provides loyalty program management services, labor supporting services, function supporting services and management consulting
services to MCs.

115

The
Company awards loyalty points on behalf of MCs to MCs’ customers, who earn loyalty points from each qualified purchase made at
the loyalty program participating clinics of MCs, in exchange for a handling fee. The revenue is based on a percentage of the related
payment amount made by MCs’ customers and is recognized when the loyalty points are awarded.

At
the time loyalty points are awarded, a MC pays the Company cash in an amount equivalent to the awarded loyalty points, which is recorded
as advances from customers. When a MC’s customers redeem the loyalty points, the Company returns the cash back to the MC in an
amount equivalent to the redeemed loyalty points. The awarded loyalty points expire if a MC’s customer does not make any additional
qualified purchase at a participating clinic within a year. The Company accumulates and tracks the points on behalf of MCs until the
loyalty points expire, at which time the Company recognizes an amount equivalent to the expired loyalty points as revenue, which is normally
not significant.

The
Company also awards certain points to MCs’ customers on behalf of MCs for free in order to increase the volume of MC’s sales,
from which the Company earns other types of revenues, such as franchising revenue. When a MC’s customers redeem such points, the
Company reimburses MC in an amount equivalent to the used free points and records it as a reduction of the revenue recognized.

The
Company is an agent in the management of loyalty programs, and as a result, revenues are recognized net of the cost of redemptions.

The
Company generates revenue by dispatching staff to MCs to provide a range of services, primarily including clinic operation, IT, and administrative
services, among which, clinic operation service has been fully terminated since October 2024. The Company recognizes the revenue over
the time when services are rendered.

The
revenue is derived from providing functional supporting services to MCs, such as accounting and human resources services. The Company
recognizes the revenue over the time when services are rendered.

The
Company generates revenue by providing consulting services to MCs in relation to business operations of cosmetic dermatology. The Company
recognizes the revenue over the time when services are rendered.

Rental
Services Revenue

The
Company generates rental income from operating leases and sales-type leases, which is accounted for under ASC Topic 842. Operating lease
revenue is generally recognized on straight-line basis over the terms of the lease agreements and sales-type leases revenue is generally
recognized on the lease commitment date.

116

Other
Revenues

The
Company generates other miscellaneous revenues such as accommodation services income, medicine dispensed sales revenue, brokerage services
revenue, construction services revenue, pilot training services revenue, interest income, etc. These revenues are recognized when the
Company satisfies performance obligations.

Long-term
Investments in MCs — Related Parties

Long-term
investments in MCs — related parties represent the payments to obtain equity interests of the MCs in Japan, made by the Company
through SBC Japan, a company designated as a MSC in Japan. In accordance with the Japanese Medical Care Act and articles of incorporation
of the MCs, which are non-profit organizations, the equity interest holders of MCs are prohibited from receiving any profit distribution
from MCs but have the right to receive distribution of the residual assets of the MCs in proportion to the amount of their contribution.
As of the balance sheet dates, the investments represent probable future benefit to be realized at the time of dissolution of MCs or
the equity interests being sold. The payments made for such investments are classified as investing activities in the consolidated statements
of cash flows. The MCs are considered related parties as the relatives of the Chief Executive Officer (“CEO”) of the Company
being the Members of the MCs.

The
investments in MCs — related parties are accounted for using a measurement alternative, under which the investments are measured
at cost, less impairment, and adjusted for observable price changes. The Company reviews the investments in MCs for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable, especially the investments in Medical Corporation
Jukeikai (“MC Jukeikai”) and Medical Corporation Ritz Cosmetic Surgery (“MC Ritz”), which represent the vast
majority of the Company’s investments in MCs balance.

Impairment
Consideration of Investments in MC Jukeikai and MC Ritz

Although
these two MCs are non-profit entities, their principal operations are providing health care services and they derive primary source of
their revenue from the sale of goods and services, rather than the fund contributions.

No
indicator of impairment was noticed based on the Company’s qualitative assessment of impairment. As the Company provides comprehensive
management services to these two MCs, including accounting and bookkeeping services, the Company has access to MCs’ unaudited financial
information. In addition to the external market conditions and trends within the MCs’ industry, the Company considered the MCs’
operating performance, such as sales, increase in sales, and net income (loss) when performing its qualitative assessment. As of December
31, 2024, the carrying value of the investments in the two MCs was higher than their net assets, respectively, because the Company acquired
the equity interests with the considerations paid higher than the net asset values at the respective purchase dates due to the expected
growth and expansion of the MCs.

For
management’s additional internal analysis purposes, the Company estimates the residual values of the two MCs at dissolution when
needed, using the income approach with the discounted cash flow method, which estimates the fair values of the MCs by the present worth
of the net economic benefit to be received by MCs. Management applies significant judgment and assumptions related to estimation, including
but not limited to the forecasted revenues, the selection of an expected EBITDA margin assumption for the forecast period, forecasted
future cash flows, and the discounted rate. The Company currently expects the residual values at the dissolution of the MCs will not
be less than the carrying values of the investments in MCs. The management is not aware of any legal or regulatory limitations on the
Company’s ability to realize the full amount of proceeds generated from a liquidation of the MCs.

117

Stock
Based Compensation

The
Company accounts for stock-based compensation awards in accordance with ASC Topic 718, “Compensation — Stock Compensation”,
under which the Company determines whether stock-based compensation awards should be classified and accounted for as an equity award.
There were no liability awards granted during any of the periods stated herein. For all grants of stock-based compensation classified
as equity awards, the cost of services received from employees and non-employees in exchange for awards is recognized in the consolidated
statements of operations and comprehensive income based on the estimated fair value of those awards on the grant date and amortized on
a straight-line basis over the requisite service period or vesting period. The Company records forfeitures and cancellations as they
occur.

The
Company, with the assistance of an independent valuation specialist, determined the fair value of the warrants recognized in the consolidated
financial statements using the binomial option pricing model, and the equity value as of the grant date was estimated using 1) income
approach with the discounted cash flow valuation method, which requires management to make significant estimates and assumptions related
to forecasted revenues and cash flows and the discount rates, and 2) market approach with metrics of publicly traded companies or historically
completed transactions of comparable businesses. The Company applied a weighting to the income approach and market approach to determine
the fair value. We believe the accounting estimate for valuation of stock-based compensation is a critical accounting estimate because
our estimates of fair value of stock-based compensation are based upon assumptions believed to be reasonable, but which are inherently
uncertain and, as a result, actual results may differ from estimates.

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 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 until the last day of the fiscal year in which (i) the market value of our common stock held
by non-affiliates exceeds $250 million as of the last business day of our second fiscal quarter, or (ii) our annual revenue exceeded
$100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as
of the last business day of our second fiscal quarter. 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.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References
in this report (the “Annual Report”) to “we,” “us,” “Pono,” or the
“Company” refer to Pono Capital Two,
Inc. References to our “management” or our “management team” refer to
our officers and directors, and references to the “Sponsor” refer to Mehana Capital LLC.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in
conjunction with the consolidated financial statements and the notes thereto contained
elsewhere in this Annual Report. Certain information contained in the discussion and analysis set forth below includes
forward-looking statements that involve risks and uncertainties. Please see “Special Note Regarding Forward-Looking
Statements” elsewhere in this report for a description of these risks and uncertainties.

Overview

We
are a blank check company incorporated in Delaware on March 11, 2022 formed for the purpose of entering into a merger, share exchange,
asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. We intend to effectuate
our initial business combination using cash from the proceeds of our initial public offering (the “Initial Public Offering”)
and the sale of the private placement units, the proceeds of the sale of our shares in connection with our initial business combination
pursuant to the shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target, or a combination
of the foregoing or other sources.

On
January 31, 2023, the Company entered into an Agreement and Plan of Merger, as amended and restated on June 21, 2023 (the “Merger
Agreement”), by and among the Company, Pono Two Merger Sub, Inc., a Delaware corporation incorporated in January 2023, and a wholly-owned
subsidiary of the Company (“Merger Sub”), SBC Medical Group Holdings Incorporated, a Delaware corporation (“SBC”),
Mehana Capital, LLC, in its capacity as Purchaser Representative, and Yoshiyuki Aikawa, in his personal capacity and his capacity as
Seller Representative.

Pursuant
to the Merger Agreement, at the closing of the transactions contemplated by the Merger Agreement (the “Closing”), Merger
Sub will merge with and into SBC, with SBC continuing as the surviving corporation. The transactions contemplated by the Merger Agreement
are referred to herein as the “Business Combination.”

As
a condition to closing of the Business Combination, SBC will complete certain restructuring transactions pursuant to which SBC Medical
Group Co., Ltd., a Japanese corporation (“SBC-Japan”) and certain affiliated service companies, medical corporations, and
other entities, which collectively carry on the business of SBC-Japan and such other related entities, will become subsidiaries of SBC.

As
consideration for the Business Combination, the holders of SBC securities collectively will be entitled to receive from the Company,
in the aggregate, a number of the Company’s securities with an aggregate value equal to (a) $1,000,000,000, minus (b) the amount,
if any, by which $3,000,000 exceeds SBC’s Net Working Capital, plus (c) the amount, if any, by which SBC’s Net Working Capital
exceeds $3,000,000, minus (d) the aggregate amount of any outstanding indebtedness (minus cash held by SBC) of SBC at Closing, minus
(e) specified transaction expenses of SBC associated with the Business Combination.

In
connection with the Merger Agreement, 1,200,000 Sponsor Shares will be issued to the Sponsor on the date that is the earlier of (a) the
six (6) month anniversary of the Closing or (b) the expiration of the “Founder Shares Lock-up Period” (as defined in the
Company’s Insider Letter with the initial stockholders); provided that, the Sponsor in its sole discretion may direct Pono to issue
all or a portion of the Sponsor Shares on such earlier or later date as it shall determine (which date shall not be earlier than the
Closing).

9

On
May 5, 2023, the Company held a special meeting of stockholders (the “Special Meeting”), and the chairman adjourned the Special
Meeting to May 8, 2023. On May 8, 2023, the Company held the Special Meeting. During the Special Meeting, stockholders approved an amendment
to the Company’s amended and restated certificate of incorporation (i) to extend the date by which the Company has to consummate
a business combination from May 9, 2023 to February 9, 2024 for no additional amount to be paid by the Sponsor into the Trust Account,
and (ii) to provide for the right of a holder of Class B common stock to convert such shares into shares of Class A common stock on a
one-for-one basis prior to the closing of a business combination at the election of the holder. As approved by the stockholders of the
Company, the Company filed an amendment to its Amended and Restated Certificate of Incorporation with the Delaware Secretary of State
on May 8, 2023. The Company’s stockholders elected to redeem an aggregate of 9,577,250 shares of Class A common stock of the Company
in connection with the Special Meeting. Following such redemptions, the amount of funds remaining in the trust account is approximately
$20 million.

In
connection with the Special Meeting, the Company and the Sponsor entered into non-redemption agreements with certain unaffiliated stockholders
owning, in the aggregate, 998,682 shares of the Company’s Class A common stock, pursuant to which such stockholders agreed, among
other things, not to redeem or exercise any right to redeem such public shares in connection with the Extension Amendment. In connection
with the non-redemption agreements, the Sponsor agreed to transfer to the stockholders that entered into such agreements Sponsor Shares
upon the consummation of the Company’s initial business combination.

On
May 8, 2023, the Sponsor converted 2,874,999 Founder Shares of Class B common stock into 2,874,999 shares of Class A common stock.

On
September 8, 2023, Pono entered into the First Amendment to the A&R Merger Agreement (the “Amendment”) with the parties
thereto. Prior to the Amendment, the A&R Merger Agreement provided for the holders of SBC securities collectively to be entitled
to receive from Pono, in the aggregate, a number of Pono securities with an aggregate value equal to (the “Merger Consideration”)
(a) $1,200,000,000, minus (b) the amount, if any, by which $3,000,000 exceeds SBC’s Net Working Capital, plus (c) the amount, if
any, by which SBC’s Net Working Capital exceeds $3,000,000, minus (d) the aggregate amount of any outstanding indebtedness (minus
cash held by SBC) of SBC at Closing, minus (e) specified transaction expenses of SBC associated with the Business Combination. Pursuant
to the Amendment, the $1,200,000,000 amount in the Merger Consideration calculation above was reduced to $1,000,000,000.

On
October 26, 2023, the parties entered into the Second Amendment to the A&R Merger Agreement (the “Second Amendment”)
with the parties thereto. Prior to the Second Amendment, the Company’s board of directors as of the Closing was to be designated
as follows: (i) three persons designated prior to the Closing by SBC, two of whom must qualify as independent directors; (ii) one person
designated prior to the Closing by the Company; and (iii) one person mutually agreed upon and designated prior to the Closing by the
Company and SBC, who must qualify as an independent director. Following the Second Amendment, the Company’s board of directors
as of the Closing will be designated as follows: (i) three persons designated prior to the Closing by SBC, at least one of whom must
qualify as an independent director; (ii) one person designated prior to the Closing by the Company, who must qualify as an independent
director; and (iii) one person mutually agreed upon and designated prior to the Closing by the Company and SBC, who must qualify as an
independent director.

On
December 28, 2023, the parties entered into the Third Amendment to the A&R Merger Agreement (the “Third Amendment”) with
the parties thereto. The Third Amendment was entered into solely to extend the Outside Date (as defined in the A&R Merger Agreement)
from December 31, 2023 to March 31, 2024.

On
February 5, 2024, the Company held another special meeting of stockholders (the “Second Special Meeting”). During the Second
Special Meeting, stockholders approved another amendment to the Company’s amended and restated certificate of incorporation to
extend the date by which the Company has to consummate a business combination (the “Combination Period”) from February 9,
2024 to November 9, 2024 for no additional amount to be paid by the Sponsor into the Trust Account. As approved by the stockholders of
the Company, the Company filed another amendment to its Amended and Restated Certificate of Incorporation with the Delaware Secretary
of State on February 5, 2024. The Company’s stockholders elected to redeem an aggregate of 273,334 shares of Class A common stock
of the Company in connection with the Second Special Meeting. Following such redemptions, the amount of funds remaining in the trust
account is approximately $17.9 million.

In
connection with the Second Special Meeting, we entered into a non-redemption agreement with an unaffiliated investor (the
“Holder”) which agreed to acquire from public stockholders of the Company 1,500,000 to 1,700,000 shares of Class A
common stock in the open market, at a prices no higher than the redemption price per share payable to stockholders who exercise
redemption rights in connection with the stockholder vote to approve the Company’s proposed business combination with SBC,
prior to the Second Special Meeting and to agree to waive its redemption rights and hold the shares until after the closing of the
business combination. In consideration of the Holder’s agreement to waive its redemption rights with respect to the shares,
and subject to (i) the Holder acquiring 1,500,000 to 1,700,000 shares of Class A common stock in the open market, and (ii)
Holder’s satisfaction of its other obligations under the non-redemption agreement, the Company, on the closing date of the
business combination, provided that Holder has continued to hold the Holder’s shares through the closing date, SBC and
Yoshiyuki Aikawa, the chief executive officer of SBC, shall cause to be issued or transferred to Holder a number of shares of Class
A common stock held by Dr. Aikawa (the “Incentive Shares”), which will equal one (1) Incentive Share for each public
share purchased in the open market pursuant to the non-redemption agreement that is continuously owned by Holder until the closing
date of the business combination. This non-redemption agreement terminates on the earliest to occur of (i) the closing date of the
business combination, (ii) the termination of the related business combination agreement, or (iii) April 30, 2024 (the
“Clearance Date”) if the Company has not cleared all SEC comments to its proxy statement in connection with the business
combination by that date. On March 15, 2024, the parties to the non-redemption agreement entered into an amendment to the non-redemption agreement
to extend the Clearance Date to June 30, 2024, and to agree to close the business combination on or before August 31, 2024.

10

Issuance
of Convertible Promissory Note

On
May 18, 2023, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with SBC. On May 26, 2023, we issued
and sold to SBC a convertible promissory note (the “Note”) of $1,000,000 in aggregate principal amount (the “Principal
Amount”). The Note is convertible into shares of our Class A common stock. On May 26, 2023, the closing date of the purchase and
sale of the Note, SBC delivered the Note reflecting the Principal Amount and SBC deposited $1,000,000 by wire transfer into a specified
Company. The Note does not bear interest (unless otherwise required by applicable law, in which event interest will accrue at the minimum
rate required by applicable law) and the Principal Amount may be prepaid at any time. On February 27, 2024, we entered into an Amendment to the Note Purchase Agreement (the “Amended Note Purchase
Agreement”) with SBC, which increased the purchase price of the Note from $1,000,000 to $2,700,000.

Immediately
prior to the merger being effected in connection with the consummation of the Business Combination, the outstanding Principal Amount
will be converted automatically into the number of shares of common stock equal to the quotient obtained by dividing (x) the Principal
Amount by (y) $10.00, subject to customary adjustments for any stock splits or combinations occurring prior to conversion.

Results
of Operations

We
have neither engaged in any operations nor generated any revenues to date. Our only activities
from March 11, 2022 (inception) through December 31, 2023 were organizational activities, those necessary to prepare for the Initial
Public Offering, described below, and, after our Initial Public Offering, identifying a target company for a business combination. We
do not expect to generate any operating revenues until after the completion of our initial business combination. We will generate non-operating
income in the form of interest income from the proceeds derived from the Initial Public Offering. We incur expenses as a result of being
a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.

For
the year ended December 31, 2023, we had net income of $339,767, which resulted from interest and
dividend income on investments held in the Trust Account of $2,641,407, partially offset by operating and formation costs of $1,635,452,
franchise tax expense of $137,379, and income tax expense of $528,809.

For
the period from March 11, 2022 (inception) through December 31, 2022, we had net income of $552,813, which resulted from operating and
formation costs of $382,051, income tax expenses of $248,508 and franchise tax expenses of $161,644, partially offset by interest and
dividend income on investments held in the Trust Account for $1,345,016.

Liquidity,
Capital Resources, and Going Concern

For
the year ended December 31, 2023, net cash used in operating activities was $2,132,921, which
was due to interest and dividends earned on marketable securities held in the Trust Account of $2,641,407, offset by net income
of $339,767, and a change in operating assets and liabilities of $168,719.

For
the period from March 11, 2022 (inception) through December 31, 2022, net cash used in operating
activities was $462,816, which was due to interest earned on marketable securities held in the Trust Account of $1,345,016, offset by
net income of $552,813 and a change in operating assets and liabilities of $329,387.

For
the year ended December 31, 2023, net cash provided by investing activities was $101,010,630, which was due to proceeds from the Trust
Account for payment to redeeming shareholders of $100,078,879, proceeds from the Trust Account to pay franchise taxes of $931,751.

For
the period from March 11, 2022 (inception) through December 31, 2022 net cash used in investing activities was $117,875,000 which was
due to the investment of cash in the Trust Account.

For
the year ended December 31, 2023, net cash used in financing activities was $99,078,879, which was due to payment to redeeming shareholders
of $100,078,879, partially offset by proceeds from convertible promissory note of $1,000,000.

11

For
the period from March 11, 2022 (inception) through December 31, 2022, net cash provided by financing
activities was $118,823,380, which was due to the proceeds from the sale of Units (as defined below) (net of the underwriting discount)
of $113,045,000, proceeds from the sale of Placement Units (as defined below) of $6,343,750, and proceeds from the issuance of Class
B common stock to the Sponsor of $25,000, offset in part by payment of offering costs of $590,370.

The
registration statement for the Company’s Initial Public Offering was declared effective on August 4, 2022. On August 9, 2022, the
Company consummated the Initial Public Offering of 11,500,000 units, (the “Units” and, with respect to the shares of Class
A common stock included in the Units sold, the “Public Shares”), including 1,500,000 Units issued pursuant to the exercise
of the underwriters’ over-allotment option in full, generating gross proceeds of $115,000,000.

Simultaneously
with the closing of the Initial Public Offering, the Company consummated the sale of 634,375 units (the “Placement
Units”) at a price of $10.00 per Placement Unit in a private placement to Mehana Capital
LLC (the “Sponsor”), including 63,000 Placement Units issued
pursuant to the exercise of the underwriters’ over-allotment option in full, generating gross proceeds of $6,343,750.

Following
the closing of the Initial Public Offering on August 9, 2022, an amount of $117,875,000 ($10.25 per Unit) from the net proceeds of the
sale of the Units in the Initial Public Offering and the sale of the Placement
Units was placed in a trust account.

We
intend to use substantially all of the funds held in the trust account, including any amounts representing interest earned on the funds
held in the trust account and not previously released to us to pay our taxes (which interest shall be net of taxes payable and excluding
deferred underwriting commissions) to complete our initial business combination. We may withdraw interest to pay our taxes, if any. Our
annual income tax obligations will depend on the amount of interest and other income earned on the amounts held in the trust account.
We expect the interest earned on the amount in the trust account will be sufficient to pay our taxes. We expect the only taxes payable
by us out of the funds in the trust account will be income and franchise taxes, if any. To the extent that our common stock or debt is
used, in whole or in part, as consideration to complete our initial business combination, the remaining proceeds held in the trust account
will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our
growth strategies.

As
of December 31, 2023, the Company had $284,394 in cash held outside of the Trust Account, working capital deficit, net of income tax
payable and franchise tax payable of $1,129,417 and accumulated deficit of $5,995,269. The Company has incurred and expects to continue
to incur significant costs in pursuit of the Company’s financing and acquisition plans. For the year ended December 31, 2023 the
Company had loss from operations of $(1,772,831) and net cash used in operating activities was $2,132,921. The Company has further satisfied
liquidity needs through a Convertible Promissory Note of $1,000,000. The Company expects that it will need additional capital to satisfy
its liquidity needs beyond the net proceeds from the consummation of the Initial Public Offering held outside of the Trust Account for
paying existing accounts payable and consummating the Business Combination. Although certain of the Company’s initial stockholders,
officers and directors or their affiliates have committed up to $1,500,000 Working Capital Loans (see Note 5) from time to time or at
any time, there is no guarantee that the Company will receive such funds. In addition, the Company will have until November 9, 2024 to
consummate a business combination. If a business combination is not consummated by November 9, 2024, less than one year after the date
these consolidated financial statements are issued, there will be a mandatory liquidation and subsequent dissolution
of the Company. Management has determined that the mandatory liquidation, along with the lack of liquidity, should a business combination
not occur, and potential subsequent dissolution, raises substantial doubt about the Company’s ability to continue as a going concern.
No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after November
9, 2024. The Company intends to complete the initial business combination before the mandatory liquidation date. However, there can be
no assurance that the Company will be able to consummate any business combination by November 9, 2024.

12

Off-Balance
Sheet Arrangements

As
of December 31, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements.

Contractual
Obligations

Registration
and Stockholder Rights Agreement

The
holders of the Founder Shares and Placement Units (including securities contained therein) and Units (including securities contained
therein) that may be issued upon conversion of working capital loans and extension loans, and any shares of Class A common stock issuable
upon the exercise of the Placement Warrants and any shares of Class A common stock and warrants (and underlying Class A common stock)
that may be issued upon conversion of the Units issued as part of the working capital loans and extension loans and Class A common stock
issuable upon conversion of the Founder Shares, will be entitled to registration rights pursuant to a registration rights agreement signed
on the effective date of the Initial Public Offering, requiring the Company to register such securities for resale (in the case of the
Founder Shares, only after conversion to the Class A common stock). The holders of these securities are entitled to make up to two demands,
excluding short form demands, that the Company registers such securities. In addition, the holders have certain “piggy-back”
registration rights with respect to registration statements filed subsequent to the completion of the initial business combination and
rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act.

Administrative
Support Agreement

The
Company’s Sponsor has agreed, commencing from the date of the Initial Public Offering through the earlier of the Company’s
consummation of a business combination and its liquidation, to make available to the Company certain general and administrative services,
including office space, utilities and administrative services, as the Company may require from time to time. The Company has agreed to
pay to Mehana Capital LLC, the Sponsor, $10,000 per month for these services to complete a business combination. For the year ended December
31, 2023, $120,000 was incurred and paid to Mehana Capital LLC for these services. For the period from March 11, 2022 (inception) through
December 31, 2022, $50,000 was paid to Mehana Capital LLC for these services.

Underwriting
Agreement

Simultaneously
with the Initial Public Offering, the underwriters fully exercised the over-allotment option to purchase an additional 1,500,000 Units
at an offering price of $10.00 per Unit for an aggregate purchase price of $15,000,000.

The
underwriters were paid a cash underwriting discount of $0.17 per Unit, or $1,955,000 in the aggregate, upon the closing of the Initial
Public Offering. In addition, $0.35 per unit, or $4,025,000 in the aggregate will be payable to the underwriters for deferred underwriting
commissions. The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event
that the Company completes a business combination, subject to the terms of the underwriting agreement.

Promissory
Note - Related Party

On
April 25, 2022, the Sponsor agreed to loan the Company an aggregate of up to $300,000 to cover expenses related to the Initial Public
Offering pursuant to a promissory note (the “Promissory Note”). This loan is non-interest bearing and payable on the earlier
of (i) March 31, 2023 or (ii) the date on which Company consummates the Initial Public Offering. Prior to the Initial Public Offering,
the Company had borrowed $300,000 under the Promissory Note. The outstanding balance under the Promissory Note of $300,000 was repaid
at the closing of the Initial Public Offering on August 9, 2022.

Critical
Accounting Estimates

We
prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management
to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there
are material differences between these estimates and actual results, our financial condition or results of operations would be affected.
We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our
circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.

We
consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from
period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact
on our financial condition or results of operations. There are items within our financial statement that require estimation but are not
deemed critical, as defined above.

For
a detailed discussion of our significant accounting policies and related judgments, see Note 2 of the Notes to Consolidated Financial
Statements in "Item 15. Exhibits and Financial Statement Schedules" of this report.

13

Recent
Accounting Standards

In
December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires
public entities to disclose consistent categories and greater disaggregation of information in the rate reconciliation and for income
taxes paid. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The guidance is effective
for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The accounting pronouncement
is not expected to have a material impact on our consolidated financial statements and related disclosures.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References
in this report (the “Annual Report”) to “we,” “us” or the “Company” refer to Pono
Capital Two, Inc. References to our “management” or our “management team”
refer to our officers and directors, and references to the “Sponsor” refer to Mehana Capital LLC.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction
with the financial statements and the notes thereto contained elsewhere in this Annual Report. Certain information contained in the discussion
and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking
Statements” elsewhere in this report for a description of these risks and uncertainties.

Overview

We
are a blank check company incorporated in Delaware on March 11, 2022 formed for the purpose of entering into a merger, share exchange,
asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. We intend to effectuate our initial business combination using cash from
the proceeds of our initial public offering (the “Initial Public Offering”) and the sale of the private placement units,
the proceeds of the sale of our shares in connection with our initial business combination pursuant to the shares issued to the owners
of the target, debt issued to bank or other lenders or the owners of the target, or a combination of the foregoing or other sources.

Results
of Operations

We
have neither engaged in any operations nor generated any revenues to date. Our only activities
for the period from March 11, 2022 (inception) through December 31, 2022 were organizational activities, those necessary to prepare
for the Initial Public Offering, described below, and, after our Initial Public Offering, identifying a target company for a business
combination. We do not expect to generate any operating revenues until after the completion of our initial business combination. We will
generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering. We incur expenses
as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence
expenses.

For
the period from March 11, 2022 (inception) through December 31, 2022, we had net income
of $552,813, which resulted from interest and dividend income on investments held in the Trust
Account for $1,345,016, partially offset by operating and formation costs of $382,051, franchise tax expense of $161,644, and income
tax expense of $248,508.

8

Liquidity
and Capital Resources

For
the period from March 11, 2022 (inception) through December 31, 2022, net cash used in operating
activities was $462,816, which was due to interest earned on marketable securities held in the Trust Account of $1,345,016, offset by
net income of $552,813 and a change in operating assets and liabilities of $329,387.

For
the period from March 11, 2022 (inception) through December 31, 2022, net cash used in investing activities was $117,875,000 which was
primarily due to the investment of cash in the Trust Account.

For
the period from March 11, 2022 (inception) through December 31, 2022, net cash provided by financing
activities was $118,823,380, which was due to the proceeds from the sale of Units (as defined below) (net of the underwriting discount)
of $113,045,000, proceeds from the sale of Placement Units (as defined below) of $6,343,750, and proceeds from the issuance of Class
B common stock to the Sponsor of $25,000, offset in part by payment of offering costs of $590,370.

The
registration statement for the Company’s Initial Public Offering was declared effective on August 4, 2022. On August 9, 2022, the
Company consummated the Initial Public Offering of 11,500,000 units, (the “Units” and, with respect to the shares of Class
A common stock included in the Units sold, the “Public Shares”), including 1,500,000 Units issued pursuant to the exercise
of the underwriters’ over-allotment option in full, generating gross proceeds of $115,000,000.

Simultaneously
with the closing of the Initial Public Offering, the Company consummated the sale of 634,375 units (the “Placement
Units”) at a price of $10.00 per Placement Unit in a private placement to Mehana Capital
LLC (the “Sponsor”), including 63,000 Placement Units issued
pursuant to the exercise of the underwriters’ over-allotment option in full, generating gross proceeds of $6,343,750.

Following
the closing of the Initial Public Offering on August 9, 2022, an amount of $117,875,000 ($10.25 per Unit) from the net proceeds of the
sale of the Units in the Initial Public Offering and the sale of the Placement
Units was placed in a trust account.

We
intend to use substantially all of the funds held in the trust account, including any amounts representing interest earned on the funds
held in the trust account and not previously released to us to pay our taxes (which interest shall be net of taxes payable and excluding
deferred underwriting commissions) to complete our initial business combination. We may withdraw interest to pay our taxes, if any. Our
annual income tax obligations will depend on the amount of interest and other income earned on the amounts held in the trust account.
We expect the interest earned on the amount in the trust account will be sufficient to pay our taxes. We expect the only taxes payable
by us out of the funds in the trust account will be income and franchise taxes, if any. To the extent that our common stock or debt is
used, in whole or in part, as consideration to complete our initial business combination, the remaining proceeds held in the trust account
will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our
growth strategies.

We
do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating
our business. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating
an initial business combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate
our business prior to our initial business combination. Moreover, we may need to obtain additional financing either to complete our initial
business combination or because we become obligated to redeem a significant number of our public shares upon completion of our initial
business combination, in which case we may issue additional securities or incur debt in connection with such business combination.

9

The
accompanying financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going
concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred
and expects to continue to incur significant costs in pursuit of the Company’s financing and acquisition plans. Management plans
to address this uncertainty with the successful closing of the business combination. The Company will have until May 9, 2023 (or up to
February 9, 2024, as applicable) to consummate a business combination. If a business combination is not consummated by May 9, 2023, less
than one year after the date the accompanying financial statements are issued, there will be a mandatory liquidation and subsequent dissolution
of the Company. Management has determined that the mandatory liquidation, should a business combination not occur, and potential subsequent
dissolution, raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made
to the carrying amounts of assets or liabilities should the Company be required to liquidate after May 9, 2023. The Company intends to
complete the initial business combination before the mandatory liquidation date. However, there can be no assurance that the Company
will be able to consummate any business combination by May 9, 2023.

Off-Balance
Sheet Arrangements

As
of December 31, 2022, we did not have any off-balance sheet arrangements.

Contractual
Obligations

Registration
and Stockholder Rights Agreement

The
holders of the Founder Shares and Placement Units (including securities contained therein) and Units (including securities contained
therein) that may be issued upon conversion of working capital loans and extension loans, and any shares of Class A common stock issuable
upon the exercise of the Placement Warrants and any shares of Class A common stock and warrants (and underlying Class A common stock)
that may be issued upon conversion of the Units issued as part of the working capital loans and extension loans and Class A common stock
issuable upon conversion of the Founder Shares, will be entitled to registration rights pursuant to a registration rights agreement to
be signed prior to or on the effective date of the Proposed Offering, requiring the Company to register such securities for resale (in
the case of the Founder Shares, only after conversion to the Class A common stock). The holders of these securities are entitled to make
up to two demands, excluding short form demands, that the Company registers such securities. In addition, the holders have certain “piggy-back”
registration rights with respect to registration statements filed subsequent to the completion of the initial business combination and
rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act.

Administrative
Support Agreement

The
Company’s Sponsor has agreed, commencing from the date of the Initial Public Offering through the earlier of the Company’s
consummation of a business combination and its liquidation, to make available to the Company certain general and administrative services,
including office space, utilities and administrative services, as the Company may require from time to time. The Company has agreed to
pay to Mehana Capital LLC, the Sponsor, $10,000 per month for these services during the 9-month period to complete a business combination.
For the period from March 11, 2022 (inception) through December 31, 2022, $50,000 was paid to Mehana Capital LLC for these services.

10

Underwriters
Agreement

Simultaneously
with the Initial Public Offering, the underwriters fully exercised the over-allotment option to purchase an additional 1,500,000 Units
at an offering price of $10.00 per Unit for an aggregate purchase price of $15,000,000.

The
underwriters were paid a cash underwriting discount of $0.17 per Unit, or $1,955,000 in the aggregate, upon the closing of the Initial
Public Offering. In addition, $0.35 per unit, or $4,025,000 in the aggregate will be payable to the underwriters for deferred underwriting
commissions. The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event
that the Company completes a business combination, subject to the terms of the underwriting agreement.

Critical
Accounting Policies

The
preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual
results could materially differ from those estimates. We have identified the following critical accounting policies:

Derivative
Financial Instruments

The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued
at each reporting date, with changes in the fair value reported in the statements of operations. For derivative instruments that are
classified as equity, the derivative instruments are initially measured at fair value (or allocated value), and subsequent changes in
fair value are not recognized as long as the contracts continue to be classified in equity.

Warrants

The
Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the warrants are freestanding
financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all
of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common
stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted
at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For
issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component
of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification,
the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date
thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations.

The
warrants are not precluded from equity classification, and are accounted for as such on the date of issuance, and each balance sheet
date thereafter.

11

Common
Stock Subject to Possible Redemption

All
of the Class A common stock sold as part of the Units in the Initial Public Offering contain a redemption feature which allows for the
redemption of such Public Shares in connection with the Company’s liquidation, if there is a stockholder vote or tender offer in
connection with the business combination and in connection with certain amendments to the Company’s amended and restated certificate
of incorporation. In accordance with ASC 480, conditionally redeemable Class A common stock (including shares of Class A common stock
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control) is classified as temporary equity. Ordinary liquidation events, which involve the
redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although the
Company did not specify a maximum redemption threshold, its charter provides that currently, the Company will not redeem its Public Shares
in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001. However, the threshold
in its charter would not change the nature of the underlying shares as redeemable and thus Public Shares would be required to be disclosed
outside of permanent equity. The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value
of redeemable common stock to equal the redemption value at the end of each reporting period. Such changes are reflected in additional
paid-in capital, or in the absence of additional paid-in capital, in accumulated deficit.

Net
Income Per Share

Net
income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Therefore,
the income per share calculation allocates income shared pro rata between Class A and Class B common stock. As a result, the calculated
net income per share is the same for Class A and Class B common stock. The Company has not considered the effect of the Public Warrants
and Placement Warrants, to purchase an aggregate of 12,134,375 shares in the calculation of income per share, since the exercise of the
warrants is contingent upon the occurrence of future events.

Recent
Accounting Standards

In
August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic
470-0) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify
accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion
and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible
debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings
per share guidance, including the requirement to use the if-convened method for all convertible instruments. ASU 2020-06 is effective
for fiscal years beginning after December 15, 2023 and should be applied on a full or modified retrospective basis, with early adoption
permitted for fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 effective March 11, 2022 (inception). The
adoption of ASU 2020-06 did not have a material impact on the financial statements.

Management
does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material
effect on the Company’s financial statements.