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Item 7. Management’s Discussion and Analysis

2025-03-31 compared with 2024-03-29 · 490 added, 423 removed, 99 unchanged (90% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations .

read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial

statements and related notes included elsewhere in this Annual Report on Form 10-K (the “Annual Report”).

Some of the information

contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans

and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many factors,

including those factors set forth in the section titled “Risk Factors,” our actual results could differ materially from the

results described in or implied by the forward-looking statements contained in the following discussion and analysis.

company focused on predictive medical diagnostics.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations .

You should read the following

discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and

related notes included elsewhere in this Annual Report on Form 10-K (the “Annual Report”).

Some of the information contained

in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy

for our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many factors, including those

factors set forth in the section titled “Risk Factors,” our actual results could differ materially from the results described

in or implied by the forward-looking statements contained in the following discussion and analysis.

We are an artificial intelligence (“AI”) company focused

on predictive medical diagnostics.

We operate in one segment.

Currently, we are devoting substantially all of our efforts

towards research and development of our DeepView System, an internally developed multi-spectral imaging (“MSI”) device that

has FDA breakthrough device designation (“BDD”) status.

Currently, we are devoting substantially all of our efforts towards research

and development of our DeepView ® System, an internally developed multi-spectral imaging device that has previously received

FDA breakthrough device designation status for an earlier version.

Given our recent receipt of the UKCA mark for burn indication on our

DeepView System, we expect to begin commercialization activities in the United Kingdom in the second half of 2024.

Our DeepView System

uses proprietary algorithms to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One”

healing assessments.

DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed

decision regarding the treatment of the patient’s wound.

Our focus from 2013 through 2021 was on the burn indication, which we expanded

to also include the diabetic foot ulcer (“DFU”) indication in 2022.

In the case of

DFUs, our DeepView System provides an assessment in seconds as to the non-healing portions of a DFU.

The non-healing assessment would

provide the physician with an objective assessment to use an advanced wound care therapy on “Day One” as opposed to the current

approach that involves waiting up to 30 days to see how the wound develops before making such clinical assessment.

For burn wounds,

a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for

surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting.

DeepView’s current

accuracy for burn wounds is 92% for adults and 88% for pediatrics, compared with current physician accuracy in evaluation of all burn

wounds of 50% to 75%, respectively, at best, according to industry literature.

addition, in head-to-head clinical trial evaluations, our DeepView System provided higher accuracy to “ground truth”

on burn wound analysis than the accuracy of burn specialists, who reported 70-80% accuracy, or non-burn specialist physicians, who

reported 50-60% accuracy.

2 We have conducted three large

clinical studies with multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients.

Through these studies, we were able to quantify the burn assessment accuracy in both surgical and non-surgical treatment.

in 2023, we have initiated a pivotal clinical study seeking enrollment of 240 patients, including 180 adult and 60 pediatric patients

through multiple sites across the United States.

We have not generated

any product revenue to date.

We have received substantial support from the U.S.

government for our DeepView System’s application

for burn wounds, particularly from the Biomedical Advanced Research and Development Authority (“BARDA”) ,

which is part of the HHS Office of the Assistant Secretary for Preparedness and Response in the United States, established to aid

in securing the United States from chemical, biological, radiological, and nuclear threats, as well as from pandemic influenza and

emerging infectious diseases.

We have also received funding from the National Science Foundation (the “NSF”), the National

Institute of Health (the “NIH”) and the Defense Health Agency (the “DHA”).

Since 2013, we have received approximately

$279.6 million in funding commitments from government contracts, primarily from BARDA, which accounts for $272.9 million.

This has allowed

us to develop our technology and further our clinical trials.

In September 2023, we executed our third contract with BARDA for a

multi-year Project BioShield (“PBS”) agreement, valued at up to approximately $150.0 million (the “PBS BARDA Contract”).

This multi-year contract includes an initial award of nearly $54.9 million to support the clinical validation and FDA clearance of DeepView® for

commercial marketing and distribution purposes, which we expect to continue through the first quarter of 2026.

This grant funding is non-dilutive to

our shareholders, and we believe it validates the important nature of our mission and technology.

In addition to our BARDA contract, we received a $4.0 million

grant award from the Medical Technology Enterprise Consortium (“MTEC”) in April 2023, which, building on prior awards from

DHA, is to be used to support military battlefield burn evaluation via a handheld DeepView device (the “MTEC Agreement”).

The MTEC Agreement is currently intended to run through April 2025 with funding dependent on various milestones.

Once commercialized,

we anticipate that the DeepView System will have two revenue streams, a SaMD (software as a medical device) model, and an imaging device

The SaMD model applies a SaaS (software as a service) treatment for the DeepView System which will feature a software licensing

fee that includes maintenance, image hosting, and access to algorithm updates.

The proprietary imaging device accesses artificial intelligence

algorithms and is a universal platform to house multiple clinical applications.

Pricing for these components will be evaluated and strategically

set per country and site-of-service for heightened customer adoption.

DeepView System, we expect to begin commercialization activities in the United Kingdom in 2025.

Our DeepView System uses proprietary algorithms

to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One” healing assessments.

DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed decision regarding

the treatment of the patient’s wound.

Our focus has been on the burn indication which is supported by the BARDA PBS contract.

For burn wounds, a non-healing assessment

could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining

what specific areas of the burn wound will require excision and skin grafting.

We have conducted three large clinical studies with

multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients.

Through these studies,

we were able to quantify the burn assessment accuracy in patients undergoing both surgical and non-surgical treatment.

2023, we initiated a pivotal clinical study seeking enrollment of 240 patients, including 180 adult and 60 pediatric patients through

multiple sites across the United States in both burn center and emergency departments.

By the end of 2024, the Company had completed

the enrollment of the pivotal clinical study with 267 patients, including 146 at burn centers, 121 at emergency departments across 22

sites across the United States.

As part of the total 267 patients enrolled, 42 pediatric patients were included from burn centers and

another 42 pediatric patients were included from emergency departments.

We have not generated any product revenue to date.

We have received

substantial support from the U.S.

government for our DeepView System’s application for burn wounds, particularly from the Biomedical

Advanced Research and Development Authority (“BARDA”), which is part of the HHS Office of the Assistant Secretary for Preparedness

and Response in the United States, established to aid in securing the United States from chemical, biological, radiological,

and nuclear threats, as well as from pandemic influenza and emerging infectious diseases.

We have also received funding from the National

Science Foundation (the “NSF”), the National Institute of Health (the “NIH”) and the Defense Health Agency (the

Since 2013, we have received approximately $281.9 million in funding awards from government contracts, primarily

from BARDA, which accounts for $272.9 million.

This has allowed us to develop our technology and further our clinical trials.

In September 2023, we executed

our third contract with BARDA for a multi-year Project BioShield (“PBS”) agreement, valued at up to approximately $150.0

million (the “PBS BARDA Contract”).

This multi-year contract includes an initial award of nearly $54.9 million to support

the clinical validation and FDA clearance of DeepView® for commercial marketing and distribution purposes, which we expect to

continue through the first quarter of 2026.

This contract funding is non-dilutive to our shareholders, and we believe it validates

the important nature of our mission and technology.

In addition to our PBS BARDA

Contract, we received a $4.0 million grant award from the Medical Technology Enterprise Consortium (“MTEC”) in April

2023, which, building on prior awards from DHA, is to be used to support military battlefield burn evaluation via a handheld version

of the DeepView ® System (the “MTEC Agreement”).

In August 2024, the MTEC award was increased to $4.9 million

and is currently intended to run through December 2025 with funding dependent on various milestones.

In March 2024, we received an additional

$0.5 million award from the DHA to further this development, for a total contract value of approximately $2.8 million.

Once commercialized, we anticipate that the DeepView System will have

two revenue streams, a SaMD (software as a medical device) model, and an imaging device component.

The SaMD model applies a SaaS (software

as a service) treatment for the DeepView System which will feature a software licensing fee that includes maintenance, image hosting,

and access to algorithm updates.

The proprietary imaging device accesses artificial intelligence algorithms and is a universal platform

to house multiple clinical applications.

Pricing for these components will be evaluated and strategically set per country and site-of-service for

heightened customer adoption.

Business Combination

On September 11, 2023, we consummated a business combination, pursuant

to the business combination agreement dated April 11, 2023 (the “Business Combination Agreement”)

by and among the Company (previously, Rosecliff Acquisition Corp I (“Rosecliff”)), Ghost Merger Sub I (a wholly owned subsidiary

of Rosecliff), Ghost Merger Sub II (a wholly owned subsidiary of Rosecliff) and Spectral MD Holdings, Ltd.

(“Legacy Spectral”).

Upon the closing of the Business Combination (the “Closing”), in sequential order:

(a) Ghost Merger Sub I merged with and

into Legacy Spectral, with Legacy Spectral continuing as the surviving company as our wholly owned subsidiary (the “Spectral Merger”)

and then, (b) Legacy Spectral merged with and into Ghost Merger Sub II (the “SPAC Merger”, together with the Spectral Merger

(the “Business Combination”)), with Ghost Merger Sub II (renamed Spectral MD Holdings LLC) surviving the SPAC Merger as our

direct wholly-owned subsidiary.

Upon the Closing, we changed our name from Rosecliff Acquisition Corp I to Spectral AI, Inc .

In addition to our Common Stock, we currently have 8,433,333 redeemable warrants (the “Public Warrants”) and 73,978 warrants

(“Angel Warrants”) to SP Angel Corporate Finance LLP (“SP Angel”) remaining outstanding.

1 Henk Hoeksema, Karlien Van de Sijpe, Thiery Tondu, Moustapha

Hamdi, Koenraad Van Landuyt, Phillip Blondeel, Stan Monstrey, Accuracy of early burn depth assessment by laser Doppler imaging on different

days post burn, Burns, Volume 35, Issue 1, 2009, Pages 36-45, ISSN 0305-4179.

The above article was exploring laser doppler imaging as

an objective technique to determine the depth of a burn wound and states “as has been demonstrated in several studies, a purely

clinical, bedside evaluation of the burn depth in dermal burns is accurate only in about 50-75% of the cases.”

2 Rise of the (Learning) Machines:

An Interim Analysis Assessing

Burn Wound Healing;

Carter, MD, FACS, et.al., https://clinicaltrials.gov/ct2/show/NCT05023135 .

September 12, 2023, the Company began trading its shares of the Company Common Stock and the Public Warrants on the Nasdaq Global Market

(the “Nasdaq”) under the symbols “MDAI” and “MDAIW”, respectively.

Combination was accounted for as a reverse recapitalization in accordance with GAAP.

Under the guidance in Accounting Standards Codification

(“ASC”) 805, Business Combinations, Rosecliff, which is the legal acquirer, has been treated as the “acquired”

company for financial reporting purposes and the Company has been treated as the accounting acquirer.

This determination was primarily

based on the following:

(i) Legacy Spectral’s former

shareholders maintained a majority of the voting power of the Company;

(ii) Legacy Spectral’s senior

management comprises all of the senior management of the Company;

(iii) Legacy Spectral selected five

of the six of the directors for the Board of Directors of the Company;

(iv) Legacy Spectral’s relative

size of assets and operations compared to Rosecliff;

(v) Legacy Spectral’s operations

comprised the ongoing operations of the Company.

Accordingly, for accounting purposes,

the Business Combination was treated as the equivalent of a capital transaction in which Legacy Spectral issued stock for the net assets

of Rosecliff prior to the Closing.

Upon the Closing, the net assets of Rosecliff are stated at fair value, with no goodwill or other

intangible assets recorded.

All historical financial information presented in the consolidated financial

statements represents the accounts of Legacy Spectral at their historical cost as if Legacy Spectral is the predecessor to the Company.

Upon consummation of the Business Combination, Spectral AI has continued as an SEC-registered and Nasdaq-listed company.

The consolidated financial statements following the Closing reflect the results of the Combined

Company’s operations.

On September 12, 2023, following

completion of the Business Combination, the Company began trading its shares of the Company Common Stock and the Public Warrants on the

Nasdaq Global Market (the “Nasdaq”) under the symbols “MDAI” and “MDAIW”, respectively.

Financial Operations Overview

Research and Development

date we have not generated any revenues from the sale or license of our products.

Our primary source of revenue is research and development

Currently, we are highly dependent upon the reimbursements from BARDA for the burn diagnostic testing of our DeepView System

and other U.S.

government awards.

Our research and development revenue is affected by the amount of research and development that is expended

each month with respect to our contract with BARDA and other U.S.

governmental contract awards, such as our grant under the MTEC Agreement

which we earn based on the achievement of milestones.

Our revenue growth is dependent upon a number of factors including expanding the

research and development activities under the BARDA contract, research and development reimbursed expenses relating to other contract

awards from U.S.

governmental agencies and the intended future commercial sales of our DeepView System.

See “Liquidity and Capital

Resources” for additional information.

Research and Development Revenue

To date we have not generated

any revenues from the sale or license of our products.

Our primary source of revenue is research and development revenue.

we are highly dependent upon the reimbursements from BARDA for the burn diagnostic testing of our DeepView System and other U.S.

Our research and development revenue is affected by the amount of research and development that is expended each month with respect

to our contract with BARDA and other U.S.

governmental contract awards, such as our grant under the MTEC Agreement which we earn based

on the achievement of milestones.

Our revenue growth is dependent upon a number of factors including expanding the research and development

activities under the BARDA contract, research and development reimbursed expenses relating to other contract awards from U.S.

agencies and the intended future commercial sales of our DeepView System.

See “Liquidity and Capital Resources” for additional

Cost of Revenue

Our cost of revenues consists primarily of direct and indirect costs

associated with the research and development activities relating to the BARDA and MTEC contracts.

Our cost of revenue is affected by the

extent of research and development activities as well as expansion of work on other U.S.

governmental projects and the expanded applications

for our DeepView System.

Gross profit may vary from period-to-period and is primarily affected

by the current reimbursement rates under the BARDA contract and other U.S.

governmental contract awards.

These reimbursement rates are

fixed under the BARDA contract.

Under the BARDA contract our gross profit represents this reimbursement rate plus a fixed fee component

relating to non-reimbursed expenses incurred in connection with the work completed.

Under the other fixed fee U.S.

Our cost of revenues consists

primarily of direct and indirect costs associated with the research and development activities relating to the BARDA and MTEC contracts.

Our cost of revenue is affected by the extent of research and development activities as well as expansion of work on other U.S.

projects and the expanded applications for our DeepView System.

Gross profit may vary from

period-to-period and is primarily affected by the current reimbursement rates under the BARDA contract and other U.S.

governmental contract

awards our gross profit corresponds to the achievement of pre-determined milestones.

These reimbursement rates are fixed under the BARDA contract.

Under the BARDA contract our gross profit represents this reimbursement

rate plus a fixed fee component relating to non-reimbursed expenses incurred in connection with the work completed.

Under the other fixed

governmental contract awards our gross profit corresponds to the achievement of pre-determined milestones.

Operating Expenses

Operating costs

and expenses consist of general and administrative expenses.

Operating costs and expenses

consist of general and administrative expenses.

These expenses primarily relate to salaries and related costs of our organization’s

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expenses, primarily related to salaries and related costs and consulting fees.

Other income (expense) primarily consists of transaction costs, primarily

related to the Business Combination, net interest income, change in fair value of warrant liabilities and foreign exchange transaction

gains/losses.

Historic foreign exchange transaction loss primarily relates to changes in the exchange rate between the U.S.

Euro and the British pound sterling for our deposit accounts that are denominated in British pound sterling.

In addition, this amount

includes costs associated with buying British pound sterling for payment of our employees and vendors in the UK.

Other Income (Expense)

In 2024, other income (expense) consists of fees incurred in connection

with the Yorkville transaction and B.

Riley purchase agreement, net interest income, borrowing related costs related to the Yorkville

convertible notes, including the 8% original issue discount and 7% repayment premium as may be applicable per each Pre-Paid Advance, change

in fair value of notes payable, change in fair value of warrant liabilities, changes in fair value of derivatives, and foreign exchange

transaction gains/losses.

In 2023, other income (expense) consists of transaction costs related to the Business Combination, net interest

income, change in fair value of warrant liabilities and foreign exchange transaction gain/losses.

Historic foreign exchange transaction

loss primarily relates to changes in the exchange rate between the U.S.

dollar and the British pound sterling for our deposit accounts

that are denominated in British pound sterling.

In addition, this amount includes costs associated with currency translation costs associated

with purchasing British pound sterling for payment of our employees and vendors in the UK.

Key Operating and Financial Metrics

review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance,

We regularly review a

number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance,

identify trends in our business, prepare financial projections and make strategic decisions.

We believe the operating and financial metrics

presented are useful in evaluating our operating performance, as they are similar to measures by our public competitors and are regularly

used by security analysts, institutional investors, and other interested parties in analyzing operating performance and prospects.

EBITDA is a non-GAAP measure, as it is not a financial measure calculated in accordance with GAAP and should not be considered as

a substitute for net (loss) income, calculated in accordance with GAAP.

See “Non-GAAP Financial Measures” for additional

information on adopted non-GAAP financial measures and a reconciliation of these non-GAAP measures to the most comparable GAAP

of Years Ended December 31, 2023 and 2022

The following

table summarizes these metrics for the years ended December 31, 2023 and 2022 (in thousands):

We believe the operating and financial

metrics presented are useful in evaluating our operating performance, as they are similar to measures by our public competitors and

are regularly used by security analysts, institutional investors, and other interested parties in analyzing operating performance

and prospects.

Adjusted EBITDA is a non-GAAP measure, as it is not a financial measure calculated in accordance with GAAP and

should not be considered as a substitute for net (loss) income, calculated in accordance with GAAP.

“Non-GAAP Financial Measures” for additional information on adopted non-GAAP financial measures and a

reconciliation of these non-GAAP measures to the most comparable GAAP measures.

Comparison of

Years Ended December 31, 2024 and 2023

The following table summarizes

these metrics for the years ended December 31, 2024 and 2023 (in thousands):

Research and development revenue

1 unchanged sentence

Adjusted EBITDA

See “Non-GAAP

Financial Measures” below for a reconciliation of net loss to Adjusted EBITDA.

See “Non-GAAP Financial

Measures” below for a reconciliation of net loss to Adjusted EBITDA.

Research and Development Revenue

We define research

and development revenue as revenue generated from the research, testing and development of our DeepView System as utilized in connection

with our burn indication.

This research and development revenue reflects applied research and experimental development costs relating

to our burn application as developed in connection with our BARDA, MTEC and DHA contracts.

We define research and development

revenue as revenue generated from the research, testing and development of our DeepView System as utilized in connection with our burn

This research and development revenue reflects applied research and experimental development costs relating to our burn application

as developed in connection with our BARDA, MTEC and DHA contracts.

Gross Profit and Gross Margin

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Our management uses these metrics to make strategic decisions, pricing decisions,

identifying areas for improvement, set targets for future performance and make informed decisions about how to allocate resources going

identify areas for improvement, set targets for future performance and make informed decisions about how to allocate resources going forward.

Adjusted EBITDA

We define adjusted

earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as net loss excluding income taxes, depreciation

We define adjusted earnings

before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as net loss excluding income taxes, depreciation

of property and equipment, net interest income, stock compensation, transaction costs and any non-operating financial income and expense.

See “Non-GAAP Financial Measures” for a reconciliation of GAAP net loss to Adjusted EBITDA.

Key Factors that May Influence

Future Results of Operations

Our financial

results of operations may not be comparable from period to period due to several factors.

Key factors affecting our results of operations

are summarized below.

Key Factors that May Influence Future

Results of Operations

Our financial results of

operations may not be comparable from period to period due to several factors.

Key factors affecting our results of operations are summarized

Revenue Sources.

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or other awards.

Our operating results may not be comparable between periods as the timing and amount of awards or procurements from the

government may be inconsistent with the timing of prior awards and the phasing of the development study schedules may be different.

Our operating results may not be comparable between periods as the timing and amount of awards or procurements from

government may be inconsistent with the timing of prior awards and the phasing of the development study schedules may be

Our revenues may continue to be almost exclusively dependent upon the terms of those awards.

Gross Margin.

When we begin commercial sales of the DeepView System, we may need

to determine lower pricing and incentives to accelerate adoption and implementation of the DeepView System, which may negatively impact

future revenue and gross margin percentages.

Supply Chain.

We are reliant on contract manufacturers and suppliers to produce our

While we have not been subject to any disruptions in our current limited production, we may be subject to component shortages,

which may cause delays in critical components and inventory, longer lead times, increased costs and delays in product shipments.

to grow depends, in part, on the ability of our contract manufacturers and suppliers to provide high quality services and deliver components

and finished products on time and at reasonable costs.

While we do not maintain sole-source suppliers, there is a concentration of

suppliers which could lead to supply shortages, long lead times for components and supply changes.

In the event we are unable to mitigate

the impact of delays and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and

installation of our products, which would adversely impact our cash flows and results of operations, including revenue and gross margin.

we begin commercial sales of the DeepView System, we may need to determine lower pricing and incentives to accelerate adoption and implementation

of the DeepView System, which may negatively impact future revenue and gross margin percentages.

Managing our Supply Chain.

are reliant on contract manufacturers and suppliers to produce our components.

While we have not been subject to any disruptions in our

current limited production, we may be subject to component shortages, which may cause delays in critical components and inventory, longer

lead times, increased costs and delays in product shipments.

Our ability to grow depends, in part, on the ability of our contract manufacturers

and suppliers to provide high quality services and deliver components and finished products on time and at reasonable costs.

do not maintain sole-source suppliers, there is a concentration of suppliers which could lead to supply shortages, long lead times

for components and supply changes.

In the event we are unable to mitigate the impact of delays and/or price increases in raw materials,

electronic components and freight, it could delay the manufacturing and installation of our products, which would adversely impact our

cash flows and results of operations, including revenue and gross margin.

Results of Operations

The following

table summarizes of our results of operations for the years ended December 31, 2023 and 2022 (in thousands):

The following table summarizes our results of operations for the years

ended December 31, 2024 and 2023 (in thousands):

Research and development revenue

6 unchanged sentences

Net interest income

Borrowing related costs

Change in fair value of warrant liability

Change in fair value of notes payable

Foreign exchange transaction loss

5 unchanged sentences

Research and development revenue

development revenue was $18.1 million, for the year ended December 31, 2023, a decrease of 28.8% compared to the comparable period in

2022, reflecting less activity as we completed work under the BARDA Burn II contact.

Additionally, we initiated work on the BARDA PBS

contract in the fourth quarter of 2023.

ended December 31, 2023 and 2022, the Company’s revenues disaggregated by the major sources was as follows:

Research and development revenue was $29,581 for the year ended December

31, 2024, an increase of 63.8% compared to the comparable period in 2023, reflecting more activity as we completed work under the PBS

BARDA Contract and in the awards and work performed under the Company’s other U.S.

governmental contracts.

For the year ended December

31, 2024 and 2023, the Company’s revenues disaggregated by the major sources was as follows:

governmental authorities

2 unchanged sentences

Cost of revenue

for the year ended December 31, 2023 was $10.2 million, a decrease of 30.0% compared to the comparable period in 2022, due to decreased

Cost of revenue for the

year ended December 31, 2024 was $16.3 million, an increase of 60.2% compared to the comparable period in 2023, due to increased development

activity to fulfill our U.S.

governmental contracts, consistent with decreased research and development revenue.

for the year ended December 31, 2023 was 43.6%, an increase of 0.9% as compared to the comparable period in 2022.

The reimbursement rate

under the BARDA PBS Contract, executed in September 2023, is higher than the rate in the BARDA Burn II contact.

governmental contracts, consistent with increased research and development revenue.

Gross margin for the year

ended December 31, 2024 was 44.9%, an increase from 43.6% as compared to the comparable period in 2023, due to more direct labor attributed

to the PBS BARDA Contract as a component of the overall development activity and the higher reimbursement rate under the PBS BARDA Contract,

executed in September 2023, than the rate in the BARDA Burn II contact.

General and Administrative Expense

1 unchanged sentence

General and administrative expense was $19.9 million, for the year

ended December 31, 2023, an increase of 54.7% as compared to the comparable period in 2022.

The increase reflects.

our headcount growth

from 71 employees as of December 31, 2022 to 78 full-time employees as of December 31, 2023.

Increased personnel cost in general

and administrative expense was approximately $3.8 million for the year ended December 31, 2023.

Additionally, non-revenue generating research

and development activities, primarily related to salaries and related costs and consulting fees, have increased by approximately $3.3

million for the year ended December 31, 2023 compared to the comparable period in 2022.

ended December 31, 2024, a decrease of 4.8% as compared to the comparable period in 2023.

Non-revenue generating research and development

activities have decreased by approximately $2.1 million for the year ended December 31, 2024 compared to the comparable period in 2023

due to an overall increase in the percentage of work performed on the PBS BARDA Contract in 2024.

The reduction was offset by an increase

of approximately $1.1 million related to other administrative expenses for the year ended December 31, 2024, compared to the comparable

period in 2023.

This expense also reflects the consistent headcount at the Company from the prior year.

Other income (expense)

Net interest income

Change in fair value of warrant liability

Foreign exchange transaction loss

Transaction costs

Total other expense, net

income for the year ended December 31, 2023 primarily relates to cash interest received by us from our deposit accounts.

Change in fair value of warrant liability increased by approximately

$0.3 million for the year ended December 31, 2023 as compared to the comparable period in 2022.

The decrease reflects changes in the fair

value of the Public Warrants from the closing of the Business Combination in September 2023.

Foreign exchange

transaction loss for year ended December 31, 2023 is immaterial due to lower balances in our deposit accounts and accounts payable denominated

Borrowing related costs

Change in fair value of warrant liabilities

Change in fair value of notes payable

Foreign exchange transaction loss, net

Other income (expenses), including transaction costs

Total other income (expense), net

Net interest income for

the year ended December 31, 2024 primarily relates to cash interest received or (paid) by us from our deposit accounts.

Borrowing related costs increased

$3.0 million for the year ended December 31, 2024, as compared to the comparable period in 2023 due to debt issuance costs and payments

of the discount and premium related to the Yorkville Convertible Notes that were expensed during fiscal year 2024.

Change in fair value of

warrant liabilities decreased by approximately $5.0 million for the year ended December 31, 2024 as compared to the comparable period

The decrease reflects changes in the fair value of the Public Warrants, which were issued in September 2023 and repriced in

December 2024.

Change in fair value of

notes payable decreased by approximately $0.2 million for the year ended December 31, 2024, as compared to the comparable period in 2023,

which reflects the total change in the fair value of the Yorkville notes issued in 2024.

Foreign exchange transaction

loss for the year ended December 31, 2024 is immaterial due to lower balances in our deposit accounts and accounts payable denominated

in British pound sterling and less fluctuation in the exchange rate between the U.S.

6 unchanged sentences

costs associated with buying British pound sterling for payment of our employees and vendors in the UK.

Transaction costs

for the year ended December 31, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business

Other income (expenses),

including transaction costs for the year ended December 31, 2024 primarily relate to legal, professional, and service fees incurred in

connection with the Yorkville transaction and B.

Riley purchase agreement.

Other income (expenses), including transaction costs for the

year ended December 31, 2023 primarily relate to non-recurring legal, accounting, and consulting costs expended for the Business Combination.

Non-GAAP Financial Measures

We use Adjusted

EBITDA as a non-GAAP metric when measuring performance, including when measuring current period results against prior periods’ Adjusted

This non-GAAP financial measure should be considered in addition to results prepared in accordance with GAAP and should not

be considered as a substitute for, or superior to, GAAP results.

In addition, Adjusted EBITDA should not be construed as an indicator

of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant

factors or trends that it fails to address.

Because of their

non-standardized definitions, non-GAAP measures (unlike GAAP measures) may not be comparable to the calculation of similar measures of

other companies.

We use Adjusted EBITDA as

a non-GAAP metric when measuring performance, including when measuring current period results against prior periods’ Adjusted EBITDA.

non-GAAP financial measure should be considered in addition to results prepared in accordance with GAAP and should not be considered

as a substitute for, or superior to, GAAP results.

In addition, Adjusted EBITDA should not be construed as an indicator of our operating

performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors

or trends that it fails to address.

Because of their non-standardized

definitions, non-GAAP measures (unlike GAAP measures) may not be comparable to the calculation of similar measures of other companies.

We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions.

Supplemental non-GAAP measures are presented solely to permit investors to more fully understand how Spectral AI’s management assesses

underlying performance.

non-GAAP measures are presented solely to permit investors to more fully understand how Spectral AI’s management assesses underlying

Adjusted EBITDA

We define Adjusted

EBITDA as net loss excluding income taxes, depreciation of property and equipment, net interest income, stock compensation, transaction

costs and any non-operating financial income and expense.

The following

table presents our Adjusted EBITDA for the years ended December 31, 2023 and 2022 (in thousands):

We define Adjusted EBITDA

as net loss excluding income taxes, depreciation of property and equipment, net interest income, stock compensation, transaction costs

and any non-operating financial income and expense.

The following table presents

our Adjusted EBITDA for the years ended December 31, 2024 and 2023 (in thousands):

Depreciation expense

Provision for income taxes

Net interest income

Net interest expense

Additional adjustments:

Stock-based compensation

Borrowing related costs

Change in fair value of warrant liability

Foreign exchange transaction loss

Transaction costs

Change in fair value of notes payable

Foreign exchange transaction (gain) loss

Other (income) expenses, including transaction costs

Adjusted EBITDA

4 unchanged sentences

We had an accumulated deficit of approximately $48.1 million.

Additionally, on December

26, 2023, we entered into a Common Stock Purchase Agreement and related Registration Rights Agreement with B.

Riley Principal Capital

Upon the terms and subject to the satisfaction of the conditions set forth in the Common Stock Purchase Agreement, the Company

has the right, in our sole discretion, to sell to B.

Riley Capital II up to $10.0 million in aggregate gross purchase price of newly issued

The Company incurred

a net loss of $15.3 million during the year ended December 31, 2024 and had working capital (current assets less current liabilities)

of approximately ($7.5) million as of December 31, 2024.

Net cash used in operating activities was $9.1 million for the year ended December

In November and December 2024, the Company issued 3,896,781 shares

for gross proceeds of approximately $4.5 million to certain institutional investors through at-the market equity issuances, stock option

exercises and the conversion of the Company’s wholly-owned subsidiary, Spectral IP, Inc.

(“Spectral IP”), convertible

promissory note into shares of the Company’s common stock.

On December 26, 2023, we

entered into a Common Stock Purchase Agreement and related Registration Rights Agreement with B.

Riley Principal Capital II, LLC (“B.

Upon the terms and subject to the satisfaction of the conditions set forth in the Common Stock Purchase Agreement, the

Company has the right, in our sole discretion, to sell to B.

Riley up to $10.0 million in aggregate gross purchase price of newly issued

shares of the Company’s Common Stock (the “ELOC”).

On March 20, 2024, the Company also entered into a Standby Equity

Purchase Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands exempt limited partnership (“Yorkville”) pursuant

to which the Company has the right to sell to Yorkville up to $30.0 million of its shares of Common Stock, subject to certain limitations

and conditions set forth in the SEPA.

In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed

to advance to the Company in the form of convertible promissory notes an aggregate principal amount of up to $12.5 million (the “Pre-Paid

Advance”), which will be paid in three tranches.

The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0

million with a fixed conversion price of $3.16, the second Pre-Paid Advance shall be in a principal amount of $5.0 million and advanced

after the earlier of the registration statement registering the resale of the shares of Common Stock issuable under the SEPA being declared

effective and or shareholder approval to exceed the 19.99% threshold of the aggregate number of shares of Common Stock issued pursuant

to the SEPA (the “Exchange Cap”) (the “Second Pre-Advance Closing”), and the third Pre-Paid Advance shall be in

a principal amount of $2.5 million and advanced sixty days following the Second Pre-Advance Closing.

The Company is authorized to drawdown

an additional $3.0 million from the ELOC prior to utilizing the SEPA.

have historically funded our operations through the issuance of notes and the sale of preferred stock and common stock, along with payments

under governmental contracts for research and development activity.

The new PBS BARDA Contract, executed in September 2023, has a total

value of up to approximately $150.0 million if all future options are executed.

The base phase of the PBS BARDA Contract, valued at $54.9

million, was exercised concurrently with the contract award in September 2023.

To date, our total potential support from BARDA is nearly

$251.0 million for our 2013, 2019, and 2023 awards.

In April 2023, we received a $4.0 million

grant under the MTEC Agreement.

See “ Research and Development Revenue ” above.

the PBS BARDA Contract, the ELOC and funding available through the SEPA, the Company believes it will have sufficient working capital

to fund operations for at least one year beyond the release date of the consolidated financial statements.

Our future capital requirements will depend

on many factors, including the revenue growth rate, the success of future product development and capital investment required, and the

timing and extent of spending to support further sales and marketing and research and development efforts.

In addition, we expect to incur

additional costs as a result of operating as a U.S.

public company.

There can be no assurance that we will be successful in raising

any additional capital.

If additional financing is required from outside sources, we cannot be sure that any additional financing will

be available to us on acceptable terms, if at all.

If we are unable to raise additional capital when desired, our business, operating

results, and financial condition could be adversely affected.

The following

table summarizes our cash flows for the year ended December 31, 2023 and 2022 (in thousands):

The Company maintained the right to raise up to $3,000,000 of shares

of its Common Stock from the B.

Riley transaction upon execution of the SEPA with Yorkville, which is described in more detail below.

On March 20, 2024, the Company also entered into a Standby Equity Purchase

Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands exempt limited partnership (“Yorkville”) pursuant to which

the Company has the right to sell to Yorkville up to $30.0 million of its shares of Common Stock, subject to certain limitations and conditions

set forth in the SEPA.

In connection with the SEPA, and subject to the conditions set forth therein, Yorkville has agreed to advance to

the Company in the form of convertible promissory notes an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”),

which will be paid in three tranches.

The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a

fixed conversion price of $3.16.

The Company received $4.6 million in cash, net of the 8% original issue discount.

On May 14, 2024, the

shareholders voted to approve the reservation and issuance of shares to Yorkville to exceed the 19.99% of the shares of Common stock outstanding

immediately prior to the execution of the SEPA (the “Exchange Cap”) and the second Pre-Paid Advance was disbursed on May 16,

2024 in the amount of $4.6 million, which is the $5.0 million second Pre-Paid Advance net of $0.4 million of the 8% original issue discount,

with a fixed conversion price of $2.03.

The third Pre-Paid Advance was disbursed on July 17, 2024 in the principal amount of $2.3 million,

which is the $2.5 million third Pre-Paid Advance net of the $0.2 million of the 8% original issue discount.

As of December 31, 2024, $7.8

million of the outstanding balance of the Pre-Paid Advances was paid in cash and $2.4 million was paid in shares of the Company issued

under the SEPA.

The Company still has access to the remaining funds under the SEPA.

The sales of the shares of Common Stock to Yorkville

under the SEPA, and the timing of any such sales, are at the Company’s option.

We have historically funded

our operations through the issuance of notes and the sale of common stock, along with payments under governmental contracts for research

and development activity.

In September 2023, the Company executed its third contract with BARDA

for a multi-year PBS BARDA Contract, valued at up to approximately $150.0 million.

This multi-year contract includes an initial award

of nearly $54.9 million to support the clinical validation and FDA clearance of DeepView for commercial development and distribution purposes.

The Company completed the second contract with BARDA, referred to as BARDA Burn II, which was signed in July 2019 and completed in November

Under this contract, the Company furthered the DeepView System design, developed the AI algorithm, and took steps to obtain FDA

In April 2023, the Company

received a $4.0 million grant under the MTEC Agreement, which was increased to $4.9 million in August 2024 and is currently intended

to run through December 2025.

The MTEC Agreement is for the development of a handheld version of the DeepView® System which is to

be used to support military battlefield burn evaluation.

The project has three phases, beginning with planning, design and testing;

by development, design modification and buildout of the handheld device;

and then the manufacturing of the handheld device.

Based on our current operating

plan, we believe that our cash and cash equivalents, together with the PBS BARDA Contract, the MTEC Agreement, the B.

Riley ELOC, and

the Yorkville Transaction, will be sufficient to fund operations for at least one year beyond the release date of these consolidated

financial statements.

We have based this determination on assumptions that may prove to be wrong, and we could utilize our available

capital resources sooner than we currently expect.

The Company may continue to conserve our working capital and to focus our efforts

primarily on the burn indication.

Changing circumstances could also cause us to consume capital significantly faster than we currently

anticipate, and we may need to raise capital sooner or in greater amounts than currently expected because of circumstances beyond our

Changes in the current equity markets may also limit our ability to utilize the B.

Riley ELOC and Yorkville SEPA as currently

To the extent additional capital is necessary, there are no assurances that we will be able to raise additional capital on

favorable terms or at all, and therefore we may not be able to execute our business plans and the continued work on indications beyond

expanding our burn indication.

Our future capital requirements

will depend on many factors, including the revenue growth rate, the success of future product development and capital investment required,

and the timing and extent of spending to support further sales and marketing and research and development efforts.

If we are unable to

raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

following table summarizes our cash flows for the years ended December 31, 2024 and 2023 (in thousands):

Net cash used in operating activities

Net cash provided by (used in) financing activities

Used in Operating Activities

Net cash used in operating activities increased by approximately $12.1 million

for the year ended December 31, 2023, as compared to the year ended December 31, 2022 primarily driven by (a) increased spending on general

and administrative expenses of approximately $3.6 million for our increased staff and approximately $3.3 million for our higher non-revenue

generating research and development costs, (b) decreased gross profit of approximately $2.7 million from less research and development

work performed pursuant to the BARDA Burn II contract as clinical trials under this contract were nearing completion, partially offset

by cash receipts in excess of cash payments, and (c) cash paid for transaction costs for the Business Combination of $0.8 million.

Provided by (Used in) Financing Activities

Net cash provided by financing activities increased approximately $4.6 million

for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This was primarily attributable to the proceeds of

$3.4 million from the Equity Raise and operating cash received upon the Closing of the Business Combination of $0.7 million.

In September 2023,

we entered into a financing arrangement for a portion of our insurance premium for approximately $0.6 million (the “Note”).

The Note bears interest at 8.6% per annum and is payable in equal monthly payments of principal and interest, maturing in June 2024.

of December 31, 2023, we owed $0.4 million for the Note.

Related Party

For the years

ended December 31, 2023 and 2022, we did not have any transactions with related parties.

Sheet Arrangements

During the periods

presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Net cash provided by financing activities

Cash Flows Used in

Operating Activities

cash used in operating activities decreased by approximately $4.0 million for the year ended December 31, 2024, as compared to the year

ended December 31, 2023 primarily driven by changes in operating liabilities including accrued expenses and deferred revenue, partially

offset by a decrease in net loss.

The lower net loss is a result of higher research and development revenue due to increased BARDA activity

and lower non-operating transaction costs in the year ended December 31, 2024 compared to the year ended December 31, 2023.

Cash Flows Provided

by Financing Activities

cash provided by financing activities increased approximately $5.7 million for the year ended December 31, 2024 compared to the year ended

December 31, 2023.

This was primarily attributable to the proceeds of $2.7 million from the ELOC, proceeds of $13.1 received from the

sale of the Company’s Common Stock and the principal amount of the notes payable from the Pre-Paid Advances under the SEPA, partially

offset by $7.8 million of repayments of notes payable as compared to proceeds of $3.4 million from the issuance of Common Stock and operating

cash received upon closing of the Business Combination of $0.7 million during the year ended December 31, 2023.

Current Indebtedness

March 20, 2024, the Company entered into the SEPA with Yorkville pursuant to which the Company has the right to sell to Yorkville up

to $30.0 million of its shares of Company Common Stock, subject to certain limitations and conditions set forth in the SEPA, from time

to time during the term of the SEPA (such transaction, the “Yorkville Transaction”).

In connection with the SEPA, and subject

to the conditions set forth therein, Yorkville has agreed to advance to the Company in the form of convertible promissory notes (the

“Convertible Notes”) an aggregate principal amount of up to $12.5 million (the “Pre-Paid Advance”), which will

be paid in three tranches.

The first Pre-Paid Advance was disbursed on March 20, 2024 in the amount of $5.0 million with a fixed conversion

price of $3.16.

The Company received $4.6 million in cash, net of the 8% original issue discount.

On May 14, 2024, the shareholders voted

to approve the reservation and issuance of shares to Yorkville to exceed the Exchange Cap and the second Pre-Paid Advance was disbursed

on May 16, 2024 in the amount of $4.6 million, which is the $5.0 million second Pre-Paid Advance net of $0.4 million of the 8% original

issue discount, with a fixed conversion price of $2.03.

The third Pre-Paid Advance was disbursed on July 17, 2024 in the principal amount

of $2.3 million, which is the $2.5 million third Pre-Paid Advance net of the $0.2 million of the 8% original issue discount, with a fixed

conversion price equal to 120% of the average VWAP during the three trading days immediately prior to the issuance of the note.

price for the Pre-Paid Advance is 92.0% of the principal amount of the Pre-Paid Advance.

Interest shall accrue on the outstanding balance

of any Pre-Paid Advance at an annual rate equal to 0%, subject to an increase to 18% upon an event of default as described in the Convertible

Beginning on the forty-fifth (45th) day following the issuance date

of the Convertible Note issued in connection with the first Pre-Paid Advance, and continuing on the same day of each successive month

thereafter, (each, an “Installment Date”), the Company shall repay a portion of the outstanding balance of the Pre-Paid Advance

in an amount equal to (i) $1,750,000, plus (ii) the a payment premium of 7% of such Installment Principal Amount, and (iii) accrued and

unpaid interest hereunder as of each Installment Date.

The maturity date of the Convertible Notes issue in connection with each Pre-Paid

Advance will be 12 months after the issuance date of such Convertible Notes.

In October 2024, the Company and Yorkville agreed to amend

the dates and the allocation of installment amounts to be paid pursuant to the Pre-Paid Advances, such that the outstanding balance of

the Pre-Paid Advances is to be paid by February 2025.

As of December 31, 2024, the Company has made aggregate installment payments on

the Pre-Paid Advances in the amount of $10.2 million, of which $7.8 million was settled in cash and $2.4 million was settled in shares.

Of the aggregate installment payments, $9.4 million relates to the repayment of the principal, $0.8 million relates to the 8% original

issue discount and $0.6 million relates to the 7% payment premium.

As of December 31, 2024, $7.8 million of the outstanding balance of

the Pre-Paid Advances was paid in cash and $2.4 million has been paid in shares of the Company issued under the SEPA.

The Company still

has access to the remaining funds under the SEPA.

The sales of the shares of Common Stock to Yorkville under the SEPA, and the timing

of any such sales, are at the Company’s option.

Related Party Transactions

March 7, 2024, the Company formed a new wholly-owned subsidiary, Spectral IP, to be utilized to acquire artificial intelligent intellectual

property with a specific emphasis on healthcare.

On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment

from an affiliate of its largest shareholder for the development of its artificial intelligence intellectual property portfolio.

investment is structured as a note payable with a one-year maturity, an interest rate of 8%, and requiring earlier prepayment if the

Company spins off Spectral IP to the Company’s shareholders or if Spectral IP is sold to a third party.

On October 1, 2024, the

note was amended to (i) reduce the annual interest rate from 8% to 4%, (ii) extend the term of the Note through the second

anniversary of the issuance date, March 18, 2026, (iii) include a conversion feature at the option of either the holder or Spectral IP

to convert the then outstanding principal and accrued but unpaid interest into shares of the Company at any time (into such number of

shares calculated by taking a five percent (5.00%) discount to the closing price of the Company’s common stock on the day prior

to the date of notice to the Company of the exercise of the conversion right) and at maturity, respectively, and (iv) provide for registration

rights of any shares of the Company issued in satisfaction of the outstanding obligations.

October 1, 2024, Spectral IP amended its existing $1,000,000 promissory note to extend the term from one to two years, reduce the interest

rate from 8.00% to 4.00% per annum and to provide a conversion feature for shares of the Company’s common stock in satisfaction

of the outstanding principal and accrued but unpaid interest.

The holder of the Spectral IP Note exercised a number of conversion rights

throughout the fourth quarter of 2024 for the full conversion of the Spectral IP Note in exchange for a total of 540,996 shares of the

Company’s common stock, which represents a 5.00% discount to the closing price of the Company’s shares of Common Stock on

the day prior to the date of notice of the holder’s exercise of its conversion right.

the year ended December 31, 2023, we did not have any transactions with related parties.

Off-Balance Sheet

the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting

There have been

no material changes to the Company’s critical accounting policies and estimates discussed in Legacy Spectral’s Management’s

Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies for the years ended December 31,

2022 and 2021 included in the Prospectus.

Our significant accounting policies are described in more detail in

Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report.

We believe that the following accounting

policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Research and Development

As part of the

process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses

as of each balance sheet date.

This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel

to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred

for the service when we have not yet been invoiced or otherwise notified of actual costs.

The majority of our service providers invoice

us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met;

however, some require advance

We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts

and circumstances known to us at that time.

We periodically confirm the accuracy of the estimates with the service providers and make

adjustments if necessary.

Determination of the Fair Value

of Equity-Based Awards

We measure stock options and other stock-based awards granted to directors,

employees, and non-employees based on their fair value on the date of the grant and recognize the corresponding compensation expense of

those awards over the requisite service period, which is generally the vesting period of the respective award.

We have only issued stock

options, restricted stock awards and restricted stock units with time-based vesting conditions and record the expense for these awards

using the ratable method.

We determine the fair value of restricted stock awards granted based on the fair value of our common stock.

We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair

value of our common stock and subjective assumptions we make, including the expected stock price volatility, the expected term of the

award, the risk-free interest rate and expected dividends.

significant accounting policies are described in Note 2 to our audited consolidated financial statements included elsewhere in this Annual

We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation

of our consolidated financial statements.

Accrued Research and Development Expenses

part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development

expenses as of each balance sheet date.

This process involves reviewing open contracts and purchase orders, communicating with our applicable

personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated

cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs.

The majority of our service providers

invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met;

however, some require

advance payments.

We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based

on facts and circumstances known to us at that time.

We periodically confirm the accuracy of the estimates with the service providers

and make adjustments if necessary.

Determination of the Fair Value of

Equity-Based Awards

measure stock options and other stock-based awards granted to directors, employees, and non-employees based on their fair value on

the date of the grant and recognize the corresponding compensation expense of those awards over the requisite service period, which

is generally the vesting period of the respective award.

We have issued stock options, restricted stock awards and restricted stock

units with time-based vesting conditions and record the expense for these awards using the ratable method.

We have also issued

restricted stock units that vest upon the achievement of certain market conditions.

We determine the fair value of time-based

vesting restricted stock awards granted based on the fair value of our common stock.

We estimate the fair value of stock option

awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and subjective

assumptions we make, including the expected stock price volatility, the risk-free interest rate and expected dividends, and the

contractual term as the expected term of the award.

We determine the fair value of restricted stock units that vest upon the

achievement of certain market conditions using a Monte Carlo simulation model, which uses as inputs the fair value of our common

stock and subjective assumptions we make, including the expected stock price volatility, the expected term of the award, the

risk-free interest rate and expected dividends.

to insufficient trade history of our common stock, we are unable to estimate the future volatility of our share price and instead estimate

6 unchanged sentences

data to provide a reasonable basis upon which to estimate the expected term.

For grants to non-employees, ASU 2018-07 allows entities

to use the expected term to measure non-employee options or elect to use the contractual term as the expected term, on an award-by-award

For grants to non-employees, the relevant accounting literature

allows entities to use the expected term to measure non-employee options or elect to use the contractual term as the expected term, on

an award-by-award basis.

The risk-free interest rate is based on a U.S.

treasury instrument whose term is consistent with the expected term of the stock

The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends

on our common stock.

treasury instrument whose term is consistent with the expected

term of the stock options.

The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current

plans to pay any dividends on our common stock.

Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report for information concerning certain

1 unchanged sentence

options granted in the years ended December 31, 2024 and 2023.

Accounting Pronouncements

See Note 2, Summary

of Significant Accounting Policies, of the notes to our consolidated financial statements included elsewhere in this Form 10-K for recently

adopted accounting standards and recently issued accounting standards as of the dates of the statement of financial position included

in this Form 10-K.

Emerging Growth

Company and Smaller Reporting Company Status

We are an emerging growth company, as defined in the Jumpstart Our

Business Startups Act of 2012 (the “JOBS Act”).

The JOBS Act provides that an emerging growth company can take advantage of

an extended transition period for complying with new or revised accounting standards.

This provision allows an emerging growth company

to delay the adoption of some accounting standards until those standards would otherwise apply to private companies.

We have elected to

use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we

(i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period

provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply more promptly with new

or revised accounting pronouncements as of public company effective dates.

as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable

generally to public companies.

Recent Accounting

Pronouncements

Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included elsewhere in this

Form 10-K for recently adopted accounting standards and recently issued accounting standards as of the dates of the statement of financial

position included in this Form 10-K.

Emerging Growth Company

and Smaller Reporting Company Status

are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting

This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards

would otherwise apply to private companies.

We have elected to use the extended transition period under the JOBS Act for the adoption

of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively

and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be

comparable to companies that comply more promptly with new or revised accounting pronouncements as of public company effective dates.

addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise

applicable generally to public companies.

These provisions include:

● being permitted to present only two years of audited consolidated financial statements in addition to

any required unaudited interim consolidated financial statements, with correspondingly reduced disclosure in the section titled “Management’s

Discussion and Analysis of Financial Condition and Results of Operations”;

● an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley

Act of 2002, as amended;

● reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements

and registration statements;

● exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden

parachute arrangements;

We may take advantage of these provisions until the last day of the

fiscal year ending after the fifth anniversary of Rosecliff’s initial public offering or such earlier time that we no longer qualify

as an emerging growth company.

We will cease to qualify as an emerging growth company on the date that is the earliest of:

(ii) the last day of the fiscal year in which we have more than $1.235 billion in total annual gross revenues;

(iii) the date

on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common

stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and we have been a public company for at least 12

months and have filed one annual report on Form 10-K;

or (iv) the date on which we have issued more than $1.0 billion of non-convertible

debt over the prior three-year period.

We may choose to take advantage of some but not all of these reduced reporting burdens.

the information contained herein may be different than you might obtain from other public companies in which you hold equity interests.

We are also a “smaller reporting company.” If we are a

smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure

requirements that are available to smaller reporting companies.

Specifically, as a smaller reporting company, we may choose to present

only the two most recent fiscal years of audited consolidated financial statements in our Annual Report and, similar to emerging growth

companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

being permitted to present

only two years of audited consolidated financial statements in addition to any required unaudited interim consolidated financial

statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial

Condition and Results of Operations”;

an exception from compliance

with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

reduced disclosure about

our executive compensation arrangements in our periodic reports, proxy statements and registration statements;

exemptions from the requirements

of holding non-binding advisory votes on executive compensation or golden parachute arrangements;

may take advantage of these provisions until the last day of the fiscal year ending after the fifth anniversary of our initial public

offering or such earlier time that we no longer qualify as an emerging growth company.

We will cease to qualify as an emerging growth

company on the date that is the earliest of:

(i) December 31, 2026;

(ii) the last day of the fiscal year in which we have more than $1.235

billion in total annual gross revenues;

(iii) the date on which we are deemed to be a “large accelerated filer” under the

rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior

June 30th and we have been a public company for at least 12 months and have filed one annual report on Form 10-K;

or (iv) the date on

which we have issued more than $1.0 billion of non-convertible debt over the prior three-year period.

We may choose to take advantage

of some but not all of these reduced reporting burdens.

Accordingly, the information contained herein may be different than you might

obtain from other public companies in which you hold equity interests.

We are also a “smaller

reporting company.” If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue

to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

Specifically, as a smaller

reporting company, we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our

Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive

compensation.

Quantitative and Qualitative Disclosures

about Market Risk

Not required.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis