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Item 8. Financial Statements and Supplementary Data

2025-03-31 compared with 2024-03-29 · 1142 added, 902 removed, 436 unchanged (82% of the section changed)

Financial Statements and Supplementary Data

The financial

statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K.

The financial statements

required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K.

An index of those financial statements

is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.

Changes in and Disagreements

with Accountants on Accounting and Financial Disclosure

Changes in and Disagreements with

Accountants on Accounting and Financial Disclosure

Controls and Procedures.

Evaluation of Disclosure Controls

and Procedures

Our management, including our Chief Executive Officer and Chief Financial

Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under

the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Annual Report

on Form 10-K.

Based on management’s evaluation as of the year ended December 31, 2023, our Chief Executive Officer and Chief Financial

Officer have concluded that, as a result of the material weaknesses in our internal control over financial reporting as described below

and in Part II, Item 1A.

Risk Factors, our disclosure controls and procedures were not effective as of December 31, 2023.

In connection

with the preparation of our consolidated financial statements for the year ended December 31, 2023, we identified material weaknesses

(i) lack of communication within management and internal departments regarding complex and unusual arrangements.

This resulted in

communication failures of relevant facts necessary for the accounting group to properly conclude and apply the required accounting treatment

of certain stock transactions;

(ii) the Company did not maintain adequately designed controls to ensure the proper recording of operating

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Financial Officer, has evaluated

the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange

Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Annual Report on Form 10-K.

on management’s evaluation as of the year ended December 31, 2024, our Chief Financial Officer has concluded that we successfully

remediated the material weaknesses related to (i) our lack of communication within management and internal departments regarding complex

and unusual arrangements and (ii) that the Company did not maintain adequately designed controls to ensure the proper recording of operating

expenses, related accruals and unbilled revenue in the correct period.

As a result, certain control activities in the accrual and unbilled

revenue processes were not designed and implemented effectively;

and (iii) our financial statement close process controls which relate

to all financial statement accounts, did not consistently operate effectively or lacked appropriate evidence, to ensure account reconciliations,

However, our remediation and testing continue for the material

weakness (iii) that our financial statement close process controls which relate to all financial statement accounts, did not consistently

operate effectively or lacked appropriate evidence, to ensure account reconciliations, transactions, and journal entries were performed

or reviewed at the appropriate level of precision and on a timely basis.

As a result of the material weakness in our internal control

over financial reporting as described below and in Part II, Item 1A.

Risk Factors, our disclosure controls and procedures were not effective

as of December 31, 2024.

As a result, certain control activities in our financial statement close process controls which relate to all

financial statement accounts, did not consistently operate effectively or lacked appropriate evidence, to ensure account reconciliations,

transactions, and journal entries were performed or reviewed at the appropriate level of precision and on a timely basis.

These control

deficiencies could result in a material misstatement of our accounts or disclosures that would not be prevented or detected on a timely

deficiency could result in a material misstatement of our accounts or disclosures that would not be prevented or detected on a timely

basis, and accordingly, we determined that these control deficiencies in aggregate constitute a material weakness.

Notwithstanding

the identified material weaknesses, our management believes that the condensed consolidated financial statements included in this

Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows as

of and for the periods presented in accordance with U.S.

Notwithstanding the identified

material weaknesses, our management believes the consolidated financial statements included in this Annual Report on Form 10-K fairly

present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented

in accordance with U.S.

Remediation Plan for Material Weaknesses

generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period

of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency.

In response to the material

weaknesses, we implemented, and are continuing to implement, measures designed to improve our internal control over financial reporting.

Remediation generally requires making changes to how controls are designed

and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated

with an appropriate amount of consistency.

In response to the material weakness, we implemented, and are continuing to implement, measures

designed to improve our internal control over financial reporting.

These efforts include:

engaging a professional accounting services firm to help us assess and commence documentation of our internal controls for complying with the Sarbanes-Oxley Act of 2002;

engaging a professional

accounting services firm to help us assess and commence documentation of our internal controls for complying with the Sarbanes-Oxley

strengthening, formalizing,

documenting and testing accounting processes and internal controls, specifically regarding accrued expenses and contract reviews and

improving the information flow throughout the organization to allow for timely communication of new agreements and transactions;

enhancing functionality of our enterprise resource planning system to support certain key financial processes and controls and enforce certain segregation of duties through automation and approval workflows.

measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee

Management and the Audit Committee remain committed to the implementation of remediation efforts to address the material weaknesses.

We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts

will be successful or avoid potential future material weaknesses.

In addition, until remediation steps have been completed and are operated

for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses previously disclosed,

and as described above, will continue to exist.

documenting and testing accounting processes and internal controls, specifically regarding accrued expenses and contract reviews

and improving the information flow throughout the organization to allow for timely communication of new agreements and transactions;

engaging consultants to

provide additional technical accounting expertise;

enhancing functionality

of our enterprise resource planning system to support certain key financial processes and controls and enforce certain segregation

of duties through automation and approval workflows.

The measures we are implementing are subject to continued management

review supported by confirmation and testing, as well as Audit Committee oversight.

Management and the Audit Committee remain committed

to the implementation of remediation efforts to address the material weakness.

We will continue to implement measures to remedy our internal

control deficiencies, though there can be no assurance that our efforts will be successful or avoid potential future material weaknesses.

In addition, until remediation steps have been completed and are operated for a sufficient period of time, and subsequent evaluation of

their effectiveness is completed, the material weakness previously disclosed, and as described above, will continue to exist.

Annual Report on Internal Control over Financial Reporting

management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023.

In making this assessment,

our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal

Control-Integrated 2013 Framework.

on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was not effective

at the reasonable assurance level, due to the material weaknesses outlined above.

Our management assessed

the effectiveness of our internal control over financial reporting as of December 31, 2024.

In making this assessment, our management

used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated

2013 Framework.

Based on this assessment, our management concluded that, as of December

31, 2024, our internal control over financial reporting was not effective at the reasonable assurance level, due to the material weakness

outlined above.

We believe progress was made in 2024 to enhance and strengthen our

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and testing, as well as Audit Committee oversight.

Management remains committed to remediating these material weaknesses.

Management remains committed to remediating this material weakness.

We will continue

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or avoid potential future material weaknesses.

Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control

over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”

This Annual Report on Form

10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting

due to an exemption established by the JOBS Act for “emerging growth companies.”

Changes in Internal Control over Financial

Except for the remediation efforts in connection with the material

weaknesses described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the

Exchange Act) that occurred during the fourth quarter of the year ended December 31, 2023 that has materially affected, or is reasonably

likely to materially affect, our internal control over financial reporting.

Except for the remediation

efforts in connection with the material weaknesses described above, there were no changes in our internal control over financial reporting

(as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth quarter of the year ended December 31, 2024 that has

materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.

Disclosure Regarding Foreign Jurisdictions that Prevent

Not Applicable.

Directors, Executive Officers and Corporate Governance .

The information required

by this Item 10 is set forth under the captions “Executive Officers of the Registrant”, “Proposal No.

of Directors” and “Board of Directors and Committees” in our Definitive Proxy Statement with respect to our 2024 Annual

Meeting of Stockholders and is incorporated herein by reference.

information required by this Item 10 is set forth under the captions “Executive Officers of the Registrant”, “Proposal

1 – Election of Directors” and “Board of Directors and Committees” in our Definitive Proxy Statement with

respect to our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.

Executive Compensation .

As an “emerging growth

company” as defined in the JOBS Act, we are not required to include a Compensation Discussion and Analysis section and have opted

to comply with the scaled disclosure requirements applicable to emerging growth companies.

The information required by

this Item 11 is set forth under the caption “Executive Officer and Director Compensation” in our Definitive Proxy Statement

with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .

an “emerging growth company” as defined in the JOBS Act, we are not required to include a Compensation Discussion and Analysis

section and have opted to comply with the scaled disclosure requirements applicable to emerging growth companies.

information required by this Item 11 is set forth under the caption “Executive Officer and Director Compensation” in our

Definitive Proxy Statement with respect to our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters .

information required by this Item 12 is set forth under the captions “Share Ownership” and “Outstanding Equity Awards

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by reference.

Certain Relationships and Related Transactions, and Director Independence .

Certain Relationships and Related Transactions, and Director

Independence .

information required by this Item 13 is set forth under the captions “Certain Relationships and Related Transactions” and

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Principal Accountant Fees and Services .

The information required

by this Item 14 will be set forth under the caption “Proposal No.

Ratification of Independent Registered Public Accounting Firm”

in our Definitive Proxy Statement with respect to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.

information required by this Item 14 will be set forth under the caption “Proposal No.

Ratification of Independent Registered

Public Accounting Firm” in our Definitive Proxy Statement with respect to our 2025 Annual Meeting of Stockholders and is incorporated

herein by reference.

Exhibits, Financial Statement Schedules .

(a) The following documents are filed as part of this Annual Report on

following documents are filed as part of this Annual Report on Form 10-K:

SPECTRAL AI, INC.

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Notes to Consolidated Financial Statements F-7

2323 Ross Avenue

Dallas, TX 75201-2721

Report of Independent Registered Public Accounting

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Spectral

and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations

and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended

December 31, 2023, and the related notes (collectively, the consolidated financial statements).

We have audited the accompanying consolidated

balance sheets of Spectral AI, Inc.

and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements

of operations and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year

period ended December 31, 2024, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated

financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023

and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023,

in conformity with U.S.

financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023,

and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity

generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the

Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required

to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations

of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements

are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform,

an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal

control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal

control over financial reporting.

These consolidated financial statements are the

responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements

based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

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We believe that our audits provide a reasonable basis for

We have served as the Company’s auditor since 2021.

We have served as the Company’s

auditor since 2021.

Dallas, Texas

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Accounts receivable, net

Unbilled revenue

Deferred offering costs

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Notes payable

Notes payable – at fair value

Warrant liabilities

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Total Liabilities

Stockholders’ Equity (Deficit)

Stockholders’ Deficit

Preferred stock ($ 0.0001 par value);

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Accumulated deficit

Total Stockholders’ Equity (Deficit)

Total Liabilities and Stockholders’ Equity (Deficit)

The accompanying notes

are an integral part of these consolidated financial statements

Total Stockholders’ Deficit

Total Liabilities and Stockholders’ Deficit

The accompanying notes are an integral

part of these consolidated financial statements

SPECTRAL AI, INC.

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Net interest income

Change in fair value of warrant liability

Borrowing related costs

Change in fair value of warrant liabilities

Change in fair value of notes payable

Foreign exchange transaction loss, net

Transaction costs

Other expenses, including transaction costs

Total other expense, net

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Stockholders’

Balance at December 31, 2021

Retroactive application of recapitalization

( 121,937,160 )

Balance at December 31, 2022, after effect of Business Combination

Stock-based compensation

Balance at December 31, 2022

Issuance of common stock upon Business Combination

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Balance at December 31, 2023

Stock-based compensation

Issuance of common stock under the SEPA

Issuance of shares under convertible note - related party

Sale of common stock

Stock option exercises

Vesting of restricted stock units

Cumulative translation adjustment

Balance at December 31, 2024

The accompanying notes

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Change in fair value of warrant liabilities

Change in fair value of notes payable

Costs from issuance of common stock

Issuance of shares for borrowing related costs

Changes in operating assets and liabilities:

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Cash flows from financing activities:

Proceeds from issuance of common stock for Equity Raise

Proceeds from issuance of common stock

Cash received in Business Combination

Proceeds from notes payable

Proceeds from notes payable - related party

Payments for notes payable

Stock option exercises

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net decrease in cash

Net increase (decrease) in cash

Cash, beginning of period

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Noncash operating and financing activities disclosure:

Recognition of Right-of-use assets and related lease liabilities upon adoption of ASC 842

Recognition of Right-of-use assets and related lease liabilities upon lease amendment

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Prepaid asset acquired, net of cancellation, for debt and accounts payable

Issuance of common stock to settle accounts payable

Issuance of common stock to settle accounts and notes payable

Deferred offering costs included in accrued expenses

Issuance of common stock to settle deferred offering costs

The accompanying notes

are an integral part of these consolidated financial statements

NATURE OF THE BUSINESS

Business Combination

Spectral AI, Inc., a Delaware corporation formerly

known as Rosecliff Acquisition Corp I (“Spectral AI” or the “Company”) was formed as a blank check company on

November 17, 2020.

The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase,

reorganization or similar business combination with one or more businesses.

On September 11, 2023, the Company consummated

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

“Business Combination Agreement”) by and among the Company, Ghost Merger Sub I, a Delaware Corporation, Ghost Merger Sub II,

a Delaware corporation and Spectral MD Holdings, Ltd., a Delaware corporation incorporated on March 9, 2009 and headquartered in Dallas,

Texas (“Legacy Spectral”).

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

Ghost Merger Sub I merged with and into the Legacy Spectral, with Legacy Spectral continuing as the surviving company as a wholly owned

subsidiary of the Company (the “Spectral Merger”) and then, (b) Legacy Spectral merged with and into Ghost Merger Sub II (renamed

Spectral MD Holdings LLC) (the “SPAC Merger”, together with the Spectral Merger (the “Business Combination”)),

with Ghost Merger Sub II surviving the SPAC Merger as a direct wholly-owned subsidiary of the Company.

Upon the Closing, the

Company changed its name from Rosecliff Acquisition Corp I to Spectral AI, Inc.

In conjunction with the Business Combination,

the Company cancelled the redeemable warrants that it issued to Rosecliff Acquisition Sponsor I LLC, a Delaware limited liability company

(the “Sponsor”), in a private placement (the “Private Warrants”) in connection with the Company’s initial

public offering on February 17, 2021 (the “Initial Public Offering”) at Closing, but the 8,433,333 redeemable warrants issued

to the public in the Initial Public Offering (the “Public Warrants”) remain outstanding.

the Business Combination, Rosecliff Acquisition Corp I (“Rosecliff”) had 280,485

shares of Class A common stock, par value $ 0.0001 per share, issued and outstanding and held by public shareholders (the “Public

Shares”) and 6,325,000 shares of Class B common stock, par value $ 0.0001 per share, issued and outstanding and held by the Sponsor

(the “Sponsor Shares”).

Upon the Closing, 5,445,000 of the Sponsor Shares were forfeited, in accordance with a letter agreement

with the Sponsor, and the remaining 880,000 Sponsor Shares and 280,485 Public Shares, no longer designated Class A and Class B, were included

in shares of the Company’s common stock, par value $ 0.0001 per share (the “Company Common Stock”).

Prior to the Business Combination, Legacy Spectral's

shares of common stock, par value $ 0.001 per share (“Legacy Spectral Common Stock”) were listed on the AIM market on the London

Stock Exchange (delisted on September 7, 2023).

In September 2023, prior to the Closing, Legacy

Spectral issued 7,679,198 shares of Legacy Spectral Common Stock to certain investors in a private placement, in exchange for

$ 3.4 million (the “Equity Raise”).

Upon the Closing, a ll of Legacy Spectral’s issued

and outstanding 145,380,871 shares of Legacy Spectral Common Stock, including the shares from the Equity Raise, were exchanged for 14,094,450

shares of Company Common Stock at an exchange ratio of 10.31 (the “Exchange Ratio”), meaning that the Company issued

one share of Company Common Stock in exchange for 10.31 shares of Legacy Spectral Common Stock.

12, 2023, the Company began trading the Company Common Stock and the Public Warrants on the NASDAQ Capital Market (“NASDAQ”)

under the symbols “MDAI” and “MDAIW”, respectively.

Prior to the Business Combination, the Company’s

shares of Company Common Stock and Public Warrants were listed on the NASDAQ under the symbols “RCLF” and “RCLFW”,

respectively.

Spectral AI, Inc., a Delaware

corporation formerly known as Rosecliff Acquisition Corp I (“Spectral AI” or the “Company”) was formed as a blank

check company on November 17, 2020.

The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,

stock purchase, reorganization or similar business combination with one or more businesses.

On September 11, 2023, the

Company consummated a business combination (the “Business Combination”), pursuant to the business combination agreement dated

April 11, 2023 (the “Business Combination Agreement”) by and among the Company, Ghost Merger Sub I, a Delaware Corporation,

Ghost Merger Sub II, a Delaware corporation and Spectral MD Holdings, Ltd., a Delaware corporation incorporated on March 9, 2009 and

headquartered in Dallas, Texas (“Legacy Spectral”).

Upon closing of the Business Combination (the “Closing”),

in sequential order:

(a) Ghost Merger Sub I merged with and into the Legacy Spectral, with Legacy Spectral continuing as the surviving

company as a wholly owned subsidiary of the Company (the “Spectral Merger”) and then, (b) Legacy Spectral merged with and

into Ghost Merger Sub II (renamed Spectral MD Holdings LLC) (the “SPAC Merger”, together with the Spectral Merger (the “Business

Combination”)), with Ghost Merger Sub II surviving the SPAC Merger as a direct wholly-owned subsidiary of the Company.

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

In conjunction with the

Business Combination, the Company cancelled the redeemable warrants that it issued to Rosecliff Acquisition Sponsor I LLC, a Delaware

limited liability company (the “Sponsor”), in a private placement (the “Private Warrants”) in connection with

the Company’s initial public offering on February 17, 2021 (the “Initial Public Offering”) at Closing, but the 8,433,333

redeemable warrants issued to the public in the Initial Public Offering (the “Public Warrants”) remain outstanding.

Prior to the Business Combination,

Rosecliff Acquisition Corp I (“Rosecliff”) had 280,485 shares of Class A common stock, par value $ 0.0001 per share, issued

and outstanding and held by public shareholders (the “Public Shares”) and 6,325,000 shares of Class B common stock, par value

$ 0.0001 per share, issued and outstanding and held by the Sponsor (the “Sponsor Shares”).

Upon the Closing, 5,445,000 of

the Sponsor Shares were forfeited, in accordance with a letter agreement with the Sponsor, and the remaining 880,000 Sponsor Shares and

280,485 Public Shares, no longer designated Class A and Class B, were included in shares of the Company’s common stock, par value

$ 0.0001 per share (the “Company Common Stock”).

Prior to the Business Combination,

Legacy Spectral’s shares of common stock, par value $ 0.001 per share (“Legacy Spectral Common Stock”) were listed on the

AIM market on the London Stock Exchange (delisted on September 7, 2023).

In September 2023, prior to the Closing, Legacy Spectral issued 7,679,198 shares

of Legacy Spectral Common Stock to certain investors in a private placement, in exchange for $ 3.4 million (the “Equity Raise”).Upon

the Closing, all of Legacy Spectral’s issued and outstanding 145,380,871 shares of Legacy Spectral Common Stock, including

the shares from the Equity Raise, were exchanged for 14,094,450 shares of Company Common Stock at an exchange ratio of 10.31

(the “Exchange Ratio”), meaning that the Company issued one share of Company Common Stock in exchange for 10.31 shares of

Legacy Spectral Common Stock.

On September 12, 2023, the

Company began trading the Company Common Stock and the Public Warrants on the NASDAQ Capital Market (“NASDAQ”) under the

symbols “MDAI” and “MDAIW”, respectively.

Prior to the Business Combination, the Company’s shares of Company

Common Stock and Public Warrants were listed on the NASDAQ under the symbols “RCLF” and “RCLFW”, respectively.

Nature of Operations

AI is devoting substantially all of its efforts towards research and development of its DeepView® Wound Imaging System, currently

focused on burn wounds and diabetic foot ulcer (“DFU”) indications, specifically engineered to allow physicians to make a

more accurate, timely and informed decision for treatment options.

The Company has not generated any product revenue to date.

currently generates revenue from contract development and research services by providing such services to governmental agencies, primarily

to the Biomedical Advanced Research and Development Authority (“BARDA”) and under a contract with Medical Technology Enterprise

Consortium (“MTEC”).

In September 2023, the Company

executed its third contract with BARDA for a multi-year Project BioShield (“PBS”) 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 marketing and distribution purposes.

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

on predictive medical diagnostics.

Our DeepView System uses proprietary AI algorithms to distinguish between fully damaged, partially

damaged and healthy human tissue characters invisible to the naked eye, at the initial time point of wound presentation.

System delivers a binary prediction on the wound’s capacity to heal by a specified time point in the future.

Our DeepView System’s

output is specifically engineered to assist the physician in making a more accurate, timely and informed decision regarding the treatment

of the patient’s wounds.

Spectral AI is devoting

substantially all of its efforts towards research and development of its DeepView® Wound Imaging System, currently focused on burn

wounds, specifically engineered to allow physicians to make a more accurate, timely and informed decision for treatment options.

Company has not generated any product revenue to date.

The Company currently generates revenue from contract development and research

services by providing such services to governmental agencies, primarily to the Biomedical Advanced Research and Development Authority

(“BARDA”) and under a contract with Medical Technology Enterprise Consortium (“MTEC”).

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

for a multi-year Project BioShield (“PBS”) contract, 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 development and distribution purposes.

The PBS BARDA Contract also includes options, similar to our prior BARDA contracts,

with an additional total value of approximately $ 95.1 million which can be exercised for additional product development, procurement

and the expanded deployment of DeepView Systems at emergency rooms, trauma and burn centers.

The Company completed the second contract

with BARDA, referred to as BARDA Burn II, which was signed in July 2019 and completed in November 2023.

Under this contract,

the Company furthered the DeepView System design, developed the AI algorithm, and took steps to obtain FDA approval for its DeepView GEN

2023, the Company received a $ 4.0 million grant from MTEC for a project that is expected to be completed by April 2025 (the “MTEC

The MTEC project is for the development of a handheld device for 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;

Under this contract, the Company

furthered the DeepView System design, developed the AI algorithm, and took steps to obtain FDA approval.

As of December 31, 2024, the

Company has $ 22.9 million remaining under the initial award under the PBS BARDA Contract.

In April 2023, the Company received a $ 4.0 million grant from MTEC

for a project that is expected to be completed by April 2025 (the “MTEC Agreement”).

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;

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

and then the manufacturing of the

handheld device.

operates in one segment.

and Uncertainties

The Company is subject to a number of risks common

to development stage companies in the medical technology industry, including, but not limited to, risks of failure of preclinical studies

and clinical trials, dependence on key personnel, protection of proprietary technology, reliance on third party organizations, risks of

obtaining regulatory approval for any products that it may develop, development by competitors of technological innovations, compliance

with government regulations and the need to obtain additional financing.

As of December 31, 2023 and

December 31, 2022, the Company had approximately $ 4.8 million and $ 14.2 million, respectively, in cash, and an accumulated deficit of

$ 32.8 million and $ 11.9 million, respectively.

The Company has historically funded its operations through the issuance of notes and the

sale of preferred stock and common stock.

In December 2023, the Company entered into a Common Stock Purchase Agreement (the “Purchase

Agreement”) and a related Registration Rights Agreement (the “Registration Rights Agreement”), each dated as of December

26, 2023, with B.

and then the manufacturing of the handheld device.

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 Defense Health Agency (“DHA”) to further this development.

As of December 31, 2024, the Company has $ 1.9 million

and $ 0.1 million remaining to receive under the MTEC and DHA awards, respectively.

On March 7, 2024, the Company

formed a new wholly-owned subsidiary, Spectral IP, Inc., a Delaware corporation (“Spectral IP”), to be utilized to advance

artificial intelligence 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.

The 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

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.

On 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.

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

Risks and Uncertainties

The Company is subject to

a number of risks common to development stage companies in the medical technology industry, including, but not limited to, risks of failure

of preclinical studies and clinical trials, dependence on key personnel, protection of proprietary technology, reliance on third party

organizations, risks of obtaining regulatory approval for any products that it may develop, development by competitors of technological

innovations, compliance with government regulations and the need to obtain additional financing.

of December 31, 2024 the Company had approximately $ 5.2 million in cash, and an accumulated deficit of $ 48.1 million.

As of December

31, 2024, the Company had approximately $ 2.8 million in notes payable and no long-term debt as of either period.

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.

Riley Principal Capital II”).

Upon the terms and subject to the satisfaction

of the conditions set forth in the Purchase Agreement, the Company will have the right, in its sole discretion, to sell to B.

Riley Principal

Capital II up to $ 10.0 million in aggregate gross purchase price of newly issued shares of the Company’s common stock, par value

$ 0.0001 per share (the “B.

Riley Common Stock”).

This amount of newly issued shares is subject to the 19.99 % threshold of the aggregate number of shares of Common Stock issued pursuant to the relative agreement (the “Exchange Cap”), unless approval of the Company’s shareholders is otherwise received.

Together with the new PBS BARDA Contract, executed

in September 2023, for a total value of up to approximately $ 150.0 million, the Company’s total potential support from BARDA is

nearly $ 251.0 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, for the 2013, 2019, and 2023 BARDA contracts, the Company has committed

funding of $ 155.9 million of which the Company has received $ 106.5 million.

In April 2023, the Company received a $ 4.0 million grant under

the MTEC Agreement.

In March 2024, the

Company entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, Ltd.

(“Yorkville”), whereby

the Company has the right, but not the obligation, to sell to Yorkville up to $ 30.0 million of Common Stock.

This amount of newly issued shares is

subject to the Exchange Cap (as previously defined), unless approval of the Company’s shareholders is otherwise received.

connection with the SEPA, Yorkville has agreed to a prepaid advance of $ 12.5 million (the “Pre-Paid Advance”), $ 5.0

million of which was funded on March 20, 2024 with a fixed conversion price of $ 3.16 for newly issued shares of the Company’s

Common Stock, par value $ 0.0001 per share (“Yorkville Common Stock”).

The Purchase Price for the Pre-Paid Advance is

92.0 % of the principal amount of the Pre-Paid Advance.

With the PBS BARDA Contract,

the MTEC Agreement, the B.

Riley financing, and the Yorkville financing, 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation

The Company’s

consolidated financial statements have been prepared in conformity with U.S.

generally accepted accounting principles (“GAAP”)

as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) or

an Accounting Standards Update (“ASU”).

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

Legacy Spectral was determined as the accounting

acquirer and the Company as the acquired company for financial reporting purposes.

Accordingly, for accounting purposes, the Business

Combination is treated as the equivalent of a capital transaction in which Legacy Spectral issued stock for the net assets of the Company.

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

We have previously raised $ 2.7 million from share issuances under the B.

Riley transaction.

The Company maintained

the right to raise up to $ 3.0 million 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 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.

In March 2024, the Company received an additional $ 0.5 million award

from the Defense Health Agency to further the development related to the DHA Agreement.

On June 3, 2024, the Company received a letter from the Listing Qualifications

Staff of the Nasdaq Stock Market, LLC (“Nasdaq”) that the Company was not in compliance with the listing requirement relating

to a minimum market value of its listed securities of $ 35.0 million.

On December 20, 2024, the Company received a “moot” letter

from Nasdaq confirming that the Company has regained compliance with all applicable listing standards for its continued listing on the

Nasdaq Capital Market.

We cannot assure you that our securities will continue to be listed on Nasdaq.

If any of our securities are delisted

from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect such securities

could be quoted on an over-the-counter market.

If our securities are delisted, we may face limitations in utilizing the SEPA and the ELOC.

As of December 31, 2024, 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,

and certain research and development cost-saving measures, 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.

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 control.

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

ELOC and Yorkville Transaction as currently structured, including if the Company is no longer listed on Nasdaq or another securities exchange.

On March 24, 2025, the Company completed an equity financing and entered into a long-term debt financing agreement with Avenue Venture

Opportunities Fund II, L.P., a fund of Avenue Capital Group, with an initial draw-down of $ 8.5 million.

In connection with the debt financing,

the Company also raised $ 2.7 million of equity financing from institutional investors as well as existing UK investors.

The financing

includes the potential for up to almost $ 25.0 million after the completion of certain development and financing milestones for the second

tranche of debt financing.

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.

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Basis of Presentation

The Company’s consolidated

financial statements have been prepared in conformity with U.S.

generally accepted accounting principles (“GAAP”) as determined

by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) or an Accounting

Standards Update (“ASU”).

The Business Combination

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

Legacy Spectral was determined as the accounting acquirer and

the Company as the acquired company for financial reporting purposes.

Accordingly, for accounting purposes, the Business Combination

is treated as the equivalent of a capital transaction in which Legacy Spectral issued stock for the net assets of the Company.

the Closing, the net assets of the Company are stated at fair value, with no goodwill or other intangible assets recorded.

Spectral was determined to be the accounting acquiror based on evaluation of the following facts and circumstances:

(i) Legacy Spectral’s former

shareholders have a majority of the voting power of Spectral AI;

(ii) Legacy Spectral’s senior

management comprises all of the senior management of Spectral AI;

(iii) Legacy Spectral selected five

of the six directors for the Board of Directors of Spectral AI;

(iv) Legacy Spectral’s relative

size of assets and operations compared to Rosecliff;

(v) Legacy Spectral’s operations

comprise the ongoing operations of Spectral AI.

All historical

financial information presented in the consolidated financial statements represents the accounts of Legacy Spectral at their historical

values as if Legacy Spectral is the predecessor to the Company.

The consolidated financial statements following the Closing reflect the

results of the combined entity’s operations.

and outstanding shares of Legacy Spectral Common Stock and warrants, stock options, restricted stock units (“RSUs”) and restricted

stock awards (“RSAs”) of Legacy Spectral and the per share amounts contained in the consolidated financial statements for

the periods presented prior to the Closing have been retroactively restated to reflect the Exchange Ratio (as defined in Note 1).

– Recapitalization .

Legacy Spectral was determined

to be the accounting acquiror based on evaluation of the following facts and circumstances:

Legacy Spectral’s

former shareholders have a majority of the voting power of Spectral AI;

Legacy Spectral’s

senior management comprises all of the senior management of Spectral AI;

Legacy Spectral selected

five of the six directors for the Board of Directors of Spectral AI;

Legacy Spectral’s

relative size of assets and operations compared to Rosecliff;

Legacy Spectral’s

operations comprise the ongoing operations of Spectral AI.

All historical financial

information presented in the consolidated financial statements represents the accounts of Legacy Spectral at their historical values

as if Legacy Spectral is the predecessor to the Company.

The consolidated financial statements following the Closing reflect the results

of the combined entity’s operations.

All issued and outstanding

shares of Legacy Spectral Common Stock and warrants, stock options, restricted stock units (“RSUs”) and restricted stock

awards (“RSAs”) of Legacy Spectral and the per share amounts contained in the consolidated financial statements for the periods

presented prior to the Closing have been retroactively restated to reflect the Exchange Ratio (as defined in Note 1).

Principles of Consolidation

The consolidated

financial statements include the accounts of the Company and its wholly owned subsidiaries, Spectral MD Holdings LLC, Spectral MD Inc.,

Spectral MD UK Limited (“Spectral MD UK”), and Spectral DeepView Limited.

Significant inter-company transactions and balances

have been eliminated in consolidation.

The preparation

of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the

amounts reported in the consolidated financial statements and accompanying notes.

The Company bases its estimates and judgments on historical

experience and on various other assumptions that it believes are reasonable under the circumstances.

The amounts of assets and liabilities

reported in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by

estimates and assumptions, which are used for, but not limited to, revenue recognition, warrant liabilities, stock-based compensation

expense, stock issued for transaction costs, the net realizable value of inventory, right-of-use assets and income tax valuation allowances.

Actual results could differ from these estimates.

segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief

operating decision-maker in deciding how to allocate resources and assess performance.

The Company has one operating segment.

The Company’s

chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on an aggregate basis for the purpose

of allocating resources.

considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

is held in US, UK, & Ireland financial institutions.

Receivable, Net and Unbilled Revenue

receivable represent amounts due from US government agencies pursuant to research and development contracts associated with the Company’s

DeepView ® Wound Imaging System.

evaluates the collectability of its receivables based on a variety of factors, including the length of time the receivables are past due,

the financial health of its customers and historical experience.

Based upon the review of these factors, the Company recorded no allowance

for doubtful accounts as of December 31, 2023 and December 31, 2022.

Certain third-party costs that

are prepaid per the terms of the contract are billable to customers prior to recognition of related expenses.

The Company records deferred

revenue when the customers have been billed prior to recognizing revenue.

The Company records unbilled revenue when revenue is recognized

prior to billing customers.

The consolidated financial

statements include the accounts of the Company and its wholly owned subsidiaries, Spectral MD Holdings LLC, Spectral MD Inc., Spectral

MD UK Limited (“Spectral MD UK”), Spectral IP, Inc.

and Spectral DeepView Limited.

Significant inter-company transactions

and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated

financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in

the consolidated financial statements and accompanying notes.

The Company bases its estimates and judgments on historical experience

and on various other assumptions that it believes are reasonable under the circumstances.

The amounts of assets and liabilities reported

in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates

and assumptions, which are used for, but not limited to, revenue recognition, warrant liabilities, the fair value of short term notes

payable, fair value of the B.

Riley and Yorkville derivative instruments, stock-based compensation expense, stock issued for transaction

costs, the net realizable value of inventory, right-of-use assets, and income tax valuation allowances.

Actual results could differ from

these estimates.

Operating segments are defined

as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker

in deciding how to allocate resources and assess performance.

The Chairman of the Board in conjunction with the Company’s executive

management team manages the Company’s operations on an aggregate basis for the purpose of allocating resources.

The Company has one operating

The accounting policies of the Company’s single operating and reportable segment are the same as those described in the

summary of significant accounting policies.

The Company’s method for measuring profitability includes net

income (loss), which the chief operating decision-maker uses to assess performance and make decisions for resource allocation, consistent

with the measurement principals for net income(loss) as reported on the Company’s consolidated statement of operations.

The significant

expenses regularly reviewed by the chief operating decision-maker are consistent with those reported on the Company’s consolidated

statement of operations as well as research and development expenses which are disclosed in the footnotes to these financial statements.

Certain expenses are reviewed for purposes of assessing operating activities and resource allocation for the Company.

The measure of segment

assets is reported on the consolidated balance sheets as total assets.

The Company considers all

highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

All cash is held in

US, UK, and Ireland financial institutions.

Accounts Receivable, Net and Unbilled Revenue

Accounts receivable represent

amounts due from US government agencies pursuant to research and development contracts associated with the Company’s DeepView ®

The Company evaluates the

collectability of its receivables based on a variety of factors, including the length of time the receivables are past due, the financial

health of its customers and historical experience.

Based upon the review of these factors, the Company recorded no allowance for doubtful

accounts as of December 31, 2024 and December 31, 2023.

Certain third-party costs

that are prepaid per the terms of the contract are billable to customers prior to recognition of related expenses.

The Company records

deferred revenue when the customers have been billed prior to recognizing revenue.

The Company records unbilled revenue when revenue

is recognized prior to billing customers.

Comprehensive Loss

Comprehensive loss includes net loss, as well

as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders.

Concentrations

of Credit Risk

instruments which potentially subject the Company to credit risk consist principally of cash and accounts receivable.

Primarily all cash

is held in US financial institutions which, at times, exceed federally insured limits.

The Company has not recognized any losses from

credit risks on such accounts.

Comprehensive loss includes

net loss, as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than

those with stockholders.

Concentrations of Credit Risk

Financial instruments which

potentially subject the Company to credit risk consist principally of cash and accounts receivable.

Primarily all cash is held in US

financial institutions which, at times, exceed federally insured limits.

The Company has not recognized any losses from credit risks

on such accounts.

The Company believes it is not exposed to significant credit risk on cash.

credit risk is related to the Company’s concentration of receivables.

As of December 31, 2023 and December 31, 2022, receivables

were concentrated from one customer (which is a US.

Additional credit risk is

related to the Company’s concentration of receivables.

As of December 31, 2024 and December 31, 2023, receivables were concentrated

from one customer (which is a US.

government agency) representing 85 % and 92 % of total net receivables, respectively.

for doubtful accounts were recorded as of December 31, 2023 and December 31, 2022.

(which is a U.S.

One customer (which is a

government agency) accounted for 94 % for the year ended December 31, 2024 and 95 % for the year ended December 31, 2023

of the recognized research and development revenue.

is comprised of finished goods, purchased from a third-party manufacturer, and is stated at the lower of cost (average cost) or net realizable

Inventory is comprised of

finished goods, purchased from a third-party manufacturer, and is stated at the lower of cost (average cost) or net realizable value.

For the year ended December 31, 2024, the Company did not have write-downs for obsolete inventory.

is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal

or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs

used to measure fair value.

Fair value is defined as

the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous

market for the asset or liability in an orderly transaction between market participants at the measurement date.

Assets and liabilities

that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair

This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs.

levels of inputs used to measure fair value are as follows:

Unadjusted quoted prices in active markets that are assessable at the measurement date for identical, unrestricted assets or liabilities.

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The reporting

currency for the consolidated financial statements of the Company is the US dollar.

The functional currency of the Company and its wholly

owned subsidiaries Spectral MD Holdings LLC and Spectral MD, Inc.

is the US dollar.

The functional currency of Spectral MD UK is its local

currency, the British pound.

The functional currency of Spectral DeepView Ltd.

is its local currency, the Euro.

The assets and liabilities

of Spectral MD UK and Spectral DeepView Ltd, are translated into US.

The three levels of inputs

used to measure fair value are as follows:

Level 1 Unadjusted

quoted prices in active markets that are assessable at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Quoted

prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term

of the asset or liability;

Level 3 Prices

or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little

or no market activity).

Foreign Currency

The reporting currency for the consolidated financial statements of

the Company is the US dollar.

The functional currency of the Company and its wholly-owned subsidiaries Spectral MD Holdings LLC, Spectral

MD, Inc., and Spectral IP is the US dollar.

The functional currency of Spectral MD UK is its local currency, the British pound.

The functional

currency of Spectral DeepView Limited, an Irish private limited company, is its local currency, the Euro.

The assets and liabilities of

Spectral MD UK and Spectral DeepView Limited, are translated into US.

Dollars at exchange rates in effect at the end of each reporting

period, and the revenues and expenses are translated at average exchange rates in effect during the applicable period.

Translation adjustments

are included in accumulated other comprehensive income as a component of stockholders’ equity.

As of December 31, 2023 and December

31, 2022, the Company’s translation adjustments are not material.

assets and liabilities denominated in currencies other than the functional currency are translated at exchange rates in effect at the

balance sheet date.

Resulting unrealized gains and losses are included in other income (expense), net in the consolidated statements of

For the year ended December 31, 2023 the Company recorded approximately $ 24,000 of net foreign exchange transaction losses.

For the year ended December 31, 2022, the Company recorded approximately $ 0.2 million of net foreign exchange transaction losses

primarily related to the Company’s bank account denominated in British Pounds and accounts payable denominated in British Pounds.

and Equipment, Net

period, and the revenues and expenses are translated at average exchange rates in effect during the applicable reporting period.

adjustments are included in accumulated other comprehensive income as a component of stockholders’ equity.

As of December 31, 2024

and December 31, 2023, the Company’s translation adjustments are not material.

Monetary assets and liabilities

denominated in currencies other than the US dollar are translated at exchange rates in effect as of the balance sheet date.

unrealized gains and losses are included in other income (expense), net in the consolidated statements of operations.

For the year ended

December 31, 2024, the Company recorded approximately $ 43,000 of net foreign exchange transaction losses.

For the year ended December

31, 2023, the Company recorded approximately $ 24,000 of net foreign exchange transaction losses.

These amounts primarily relate to one

of the Company’s bank accounts being denominated in British Pounds and certain accounts payable denominated in British Pounds.

Property and Equipment, Net

Property and equipment,

3 unchanged sentences

Estimated Useful Life

Computer equipment

Manufacturing equipment

Furniture and equipment

Laboratory equipment

Leasehold improvements

Shorter of remaining lease term or useful life

Purchased assets that

are not yet in service are recorded to construction-in-process and no depreciation expense is recorded.

Computer equipment 3 years

Manufacturing equipment 5 years

Furniture and equipment 5 years

Laboratory equipment 5 years

Leasehold improvements Shorter of remaining lease term or useful life

Purchased assets that are

not yet in service are recorded to construction-in-process and no depreciation expense is recorded.

Once they are placed in service,

5 unchanged sentences

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment.

The Company continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life

of its long-lived assets may warrant revision or that the carrying value of these assets may not be recoverable.

If circumstances require

that a long-lived asset or asset group be tested for impairment, the Company first compares the estimated undiscounted future cash flows

expected to result from the use or disposition of that asset or asset group to its carrying amount.

If the carrying amount of the long-lived

asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss would be recognized to the extent the carrying

value exceeds its fair value.

Fair value is determined through various valuation techniques including discounted cash flow models, quoted

market prices and third-party independent appraisals, as considered necessary.

Under lease guidance, arrangements meeting the definition of a lease

are classified as operating or financing leases.

Operating leases are recorded in the consolidated balance sheets as both a right-of-use

asset and a lease liability, calculated by discounting fixed lease payments at the rate implicit in the lease or the Company’s incremental

borrowing rate factoring the term of the lease.

The incremental borrowing rate used by the Company is an estimate of the interest rate

the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.

the Company does not generally borrow on a collateralized basis, it uses the interest rate it pays on its noncollateralized borrowings

as an input to deriving an appropriate incremental borrowing rate, adjusted for the amount of lease payments, the lease term and the effect

on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.

Lease liabilities are

increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term.

For operating

leases, interest on the lease liability and the amortization of the right-of-use asset results in straight-line rent expense over the

Long-lived assets consist

of property and equipment.

The Company continually evaluates whether events or circumstances have occurred that indicate that the estimated

remaining useful life of its long-lived assets may warrant revision or that the carrying value of these assets may not be recoverable.

If circumstances require that a long-lived asset or asset group be tested for impairment, the Company first compares the estimated undiscounted

future cash flows expected to result from the use or disposition of that asset or asset group to its carrying amount.

If the carrying

amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss would be recognized

to the extent the carrying value exceeds its fair value.

Fair value is determined through various valuation techniques including discounted

cash flow models, quoted market prices and third-party independent appraisals, as considered necessary.

Under lease guidance, arrangements

meeting the definition of a lease are classified as operating or financing leases.

Operating leases are recorded in the consolidated

balance sheets as both a right-of-use asset and a lease liability, calculated by discounting fixed lease payments at the rate implicit

in the lease or the Company’s incremental borrowing rate factoring the term of the lease.

The incremental borrowing rate used by

the Company is an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized

basis over the term of the lease.

Because the Company does not generally borrow on a collateralized basis, it uses the interest rate

it pays on its noncollateralized borrowings as an input to deriving an appropriate incremental borrowing rate, adjusted for the amount

of lease payments, the lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease

payments for that lease.

Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset

is amortized over the lease term.

For operating leases, interest on the lease liability and the amortization of the right-of-use asset

results in straight-line rent expense over the lease term.

Variable lease expenses are recorded when incurred.

In calculating the right-of-use assets and lease liabilities, the Company

has elected to combine lease and non-lease components.

The Company excludes short-term leases having initial terms of 12 months or less

from the requirement to capitalize right-of-use assets and liabilities as an accounting policy election.

During the years ended December 31, 2023 and

2022, the Company did not have any financing leases.

In calculating the right-of-use

assets and lease liabilities, the Company has elected to combine lease and non-lease components.

The Company excludes short-term leases

having initial terms of 12 months or less from the requirement to capitalize right-of-use assets and liabilities as an accounting policy

During the years ended December

31, 2024 and 2023, the Company did not have any financing leases.

Warrant Liabilities

On September 11, 2023, in conjunction with the Business Combination,

the Company assumed the Public Warrants which have an exercise price of $ 11.50 per share, are exercisable 30 days after the Business Combination

and expire five years after the Business Combination or upon redemption.

The Company may redeem the Public Warrants if the Company’s

common stock equals or exceeds $ 18.00 per share for 20 trading days within a 30-trading day period ending on the third trading day prior

to the date on which the Company sends the notice of redemption to the holders of Public Warrants.

As of December 31, 2023, there are

8,433,333 Public Warrants Outstanding.

Each warrant entitles the registered holder to purchase one share of Common Stock at a price of

$ 11.50 per full share.

Pursuant to the Warrant Agreement, a holder of Warrants may exercise its Warrants only for a whole number of shares.

This means that only a whole warrant may be exercised at any given time by a holder of Warrants.

The Company maintains a redemption right

with respect to the warrants in that the Company can redeem some or all of the warrants for $ 0.10 per warrant based on certain market

conditions and the market price of the Common Stock.

On September 11, 2023, in

conjunction with the Business Combination, the Company assumed the Public Warrants which had an exercise price of $ 11.50 per share, are

exercisable 30 days after the Business Combination and expire five years after the Business Combination or upon redemption.

may redeem the Public Warrants if the Company’s common stock equals or exceeds $ 18.00 per share for 20 trading days within a 30-trading

day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the holders of Public

In November 2024, the Company amended the Public Warrants to have an exercise price of $ 2.75 per share.

As of December 31,

2024, there are 8,433,333 Public Warrants Outstanding.

Each warrant entitles the registered holder to purchase one share of Company Common

Stock at an exercise price of $ 2.75 per full share.

Pursuant to the Warrant Agreement, a holder of Public Warrants may exercise its Public

Warrants only for a whole number of shares of Company Common Stock.

This means that only a whole warrant may be exercised at any given

time by a holder of Public Warrants.

The Company maintains a redemption right with respect to the Public Warrants in that the Company

can redeem some or all of the Public Warrants for $ 0.10 per Public Warrant based on certain market conditions and the market price of

the Company Common Stock.

In September 2021, Legacy

1 unchanged sentence

Angel”), who acted as nominated adviser and broker to the Company for the purposes of the AIM Rules (“Angel Warrants”).

In conjunction with the Business Combination, the Angel Warrants were converted into warrants to purchase Company Common Stock based on

the Exchange Ratio.

In conjunction with the Business Combination, the Angel Warrants were converted into warrants to purchase Company Common Stock based

on the Exchange Ratio.

As of December 31, 2024, there are 73,978 Angel Warrants to purchase Company Common Stock outstanding.

The Company accounts for its Public Warrants

and the Angel Warrants as derivative liabilities.

Accordingly, the Company recognizes the instruments as liabilities at fair value, determined

using the closing price of the observable market quote in an active market (the NASDAQ) for the Public Warrants and the Black-Scholes

option-pricing model for the Angel Warrants, and adjusts the instruments to fair value at the end of each reporting period.

The liabilities

are subject to re-measurement at each balance sheet date until exercised, redeemed or expired, and any change in fair value is recognized

in the Company’s consolidated statements of operations within other income (expense).

The Company accounts for

its Public Warrants and the Angel Warrants as derivative liabilities.

Accordingly, the Company recognizes the instruments as liabilities

at fair value, determined using the closing price of the observable market quote in an active market (the NASDAQ) for the Public Warrants

and the Black-Scholes option-pricing model for the Angel Warrants, and adjusts the instruments to fair value at the end of each reporting

The liabilities are subject to re-measurement at each balance sheet date until exercised, redeemed or expired, and any change

in fair value is recognized in the Company’s consolidated statements of operations within other income (expense).

Research and Development Revenue

The Company recognizes revenue when the Company’s

customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive

in exchange for those goods or services by analyzing the following five steps:

(1) identify the contract with a customer(s);

the performance obligations in the contract;

The Company recognizes revenue

when the Company’s customers obtain control of promised goods or services, in an amount that reflects the consideration which the

Company expects to receive in exchange for those goods or services by analyzing the following five steps:

(1) identify the contract with

a customer(s);

(2) identify the performance obligations in the contract;

(3) determine the transaction price;

(4) allocate the transaction price to the performance

obligations in the contract;

(4) allocate the transaction

price to the performance obligations in the contract;

and (5) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company generates research and development

revenue, primarily from the contracts with BARDA and MTEC.

Each contract for BARDA and MTEC has a single performance obligation.

The contracts with BARDA are cost-plus-fee contracts

associated with development of certain product candidates.

BARDA reimburses the Company based on allowable costs plus any recognizable

The Company generates research

and development revenue, primarily from the contracts with BARDA and MTEC.

Each contract for BARDA and MTEC has a single performance

The contracts with BARDA

are cost-plus-fee contracts associated with development of certain product candidates.

BARDA reimburses the Company based on allowable

costs plus any recognizable earned fee.

Revenues from these reimbursable costs are recognized as the costs are incurred.

The MTEC Agreement provides for installment payments

after the completion of milestone events.

The installment payments are considered variable consideration as the entitlement depends on

successful completion of research.

However, the payments are not constrained from inclusion in the transaction price as it not probable

that a significant reversal of cumulative revenue will be reversed when the underlying uncertainty is resolved.

Revenue for the MTEC

Agreement is recognized over time based upon the cost-to-cost measure of progress, using this input method to measure progress as the

customer has the benefit of access to the development research under these projects and therefore benefits from the Company’s performance

incrementally as research and development activities occur under each project.

The Company measures progress of performance by comparing

the actual costs incurred to-date to the total estimated cost of the project.

The Company will adjust the measure of progress at the

end of each reporting period and reflect any changes to the estimated cost of the project on a prospective basis.

receive funding from a contract by the DHA within the U.S.

Department of Defense, which enables us to research and develop a fully portable,

handheld version of our DeepView System and has been extended through the second quarter

We were previously awarded a $ 1.1 million Sequential Phase II STTR contract by the DHA within the U.S.

of Defense, which is paid to us monthly, as well as a STTR Phase I and initial Phase II contract from the DHA.

The MTEC Agreement provides

for installment payments after the completion of milestone events.

The installment payments are considered variable consideration as

the entitlement depends on successful completion of research.

However, the payments are not constrained from inclusion in the transaction

price as it not probable that a significant reversal of cumulative revenue will be reversed when the underlying uncertainty is resolved.

Revenue for the MTEC Agreement is recognized over time based upon the cost-to-cost measure of progress, using this input method to measure

progress as the customer has the benefit of access to the development research under these projects and therefore benefits from the Company’s

performance incrementally as research and development activities occur under each project.

The Company measures progress of performance

by comparing the actual costs incurred to-date to the total estimated cost of the project.

The Company will adjust the measure of progress

at the end of each reporting period and reflect any changes to the estimated cost of the project on a prospective basis.

The Company elected the

4 unchanged sentences

Research and Development Expense

The Company expenses research and development

costs as incurred.

These expenses include salaries for research and development personnel, consulting fees, product development, pre-clinical

studies, clinical trial costs, and other fees and costs related to the development of the technology.

For the years ended December 31,

2023 and 2022, research and development expense was $ 15.1 million and $ 16.5 million, respectively, of which $ 10.2 million

and $ 14.5 million, respectively, is related to the combined BARDA and MTEC contracts and included in cost of revenue and $ 5.3 million

and $ 2.0 million, respectively, is included in general and administrative expenses.

The Company expenses research and development costs as incurred.

expenses include salaries for research and development personnel, consulting fees, product development, pre-clinical studies, clinical

trial costs, and other fees and costs related to the development of the technology.

For the years ended December 31, 2024 and 2023, research

and development expense was $ 19.3 million and $ 15.1 million, respectively, of which $ 16.3 million and $ 10.2 million,

respectively, is related to the combined BARDA and MTEC contracts and included in cost of revenue and $ 3.0 million and $ 4.9 million,

respectively, is included in general and administrative expenses.

Stock-Based Compensation

The Company accounts for all stock-based payments to employees and

non-employees, including grants of stock options, RSUs and RSAs based on their respective grant date fair values.

The Company estimates

the fair value of stock option grants using the Black-Scholes option pricing model.

The RSUs and RSAs are valued based on the fair value

of the Company’s common stock on the date of grant.

The assumptions used in calculating the fair value of the Company’s stock-based

awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

The Company expenses stock-based compensation related to stock options, RSUs and RSAs over the requisite service period.

As the PSOs have

performance conditions, compensation expense is recognized for each award if and when the Company’s management deems it probable

that the performance conditions will be satisfied.

The Company accounts for

all stock-based payments to employees and non-employees, including grants of stock options and RSUs based on their respective grant date

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model.

The RSUs are valued

based on the fair value of the Company’s common stock on the date of grant.

The fair value of RSUs with market based vesting conditions

were determined using a Monte-Carlo Simulation to reflect the effects of the market conditions.

The assumptions used in calculating the

fair value of the Company’s stock-based awards represent management’s best estimates and involve inherent uncertainties and

the application of management’s judgment.

The Company expenses stock-based compensation related to stock options and RSUs over

the requisite service period.

Forfeitures are recorded as they occur.

Compensation previously recorded for unvested

equity awards that are forfeited is reversed upon forfeiture.

The Company expenses stock-based compensation to employees over the requisite

service period, on a straight-line basis, based on the estimated grant-date fair value of the awards.

The Company records its deferred taxes using

an asset and liability approach.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences

of events that have been included in the consolidated financial statements or tax returns.

Deferred tax assets and liabilities are determined

based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for

the year in which the differences are expected to reverse.

Valuation allowances are provided, if based upon the weight of available evidence,

it is more likely than not that some or all of the deferred tax assets will not be realized.

When uncertain tax positions exist, the Company

recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination

by the taxing authority.

The determination as to whether the tax benefit will more likely than not be realized is based upon the technical

merits of the tax position as well as consideration of the available facts and circumstances.

The Company has no uncertain tax positions

as of December 31, 2023 and December 31, 2022 that qualify for either recognition or disclosure in the consolidated financial statements

under this guidance.

The Company’s policy is to classify assessments,

if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements

of operations.

The Company did not have any interest and penalties during the years ended December 31, 2023 and 2022 and did not have

any interest or penalties accrued as of December 31, 2023.

Compensation previously recorded for unvested equity awards that

are forfeited is reversed upon forfeiture.

The Company expenses stock-based compensation to employees over the requisite service period,

on a straight-line basis, based on the estimated grant-date fair value of the awards.

For RSUs with market-based conditions, compensation

is not reversed if these awards are forfeited based solely on failing to meet such market-based conditions.

The Company records its

deferred taxes using an asset and liability approach.

The Company recognizes deferred tax assets and liabilities for the expected future

tax consequences of events that have been included in the consolidated financial statements or tax returns.

Deferred tax assets and liabilities

are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates

in effect for the year in which the differences are expected to reverse.

Valuation allowances are provided, if based upon the weight

of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

When uncertain tax positions

exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized

assuming examination by the taxing authority.

The determination as to whether the tax benefit will more likely than not be realized is

based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

The Company has

no uncertain tax positions as of December 31, 2024 and December 31, 2023 that qualify for either recognition or disclosure in the consolidated

financial statements under this guidance.

The Company’s policy is to classify assessments, if any, for

tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations.

The Company did not have any interest or penalties during the years ended December 31, 2024 and 2023 and did not have any interest or

penalties accrued as of December 31, 2024.

Net Loss per Share of Common Stock

Basic net loss per share of common stock is computed by dividing the

net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

net loss per share of common stock adjusts basic earnings per share for the potentially dilutive impact of unvested restricted stock,

stock options and warrants.

Securities having an anti-dilutive effect on diluted net earnings per share are excluded from the calculation.

The dilutive effect of the unvested restricted stock and stock options is calculated using the treasury stock method.

For warrants that

are liability-classified, during periods when the impact is dilutive, the Company assumes share settlement of the instruments as of the

beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the

denominator to include the dilutive shares calculated using the treasury stock method.

Basic net loss per share

of common stock is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of

common stock outstanding during the period.

Diluted net loss per share of common stock adjusts basic earnings per share for the potentially

dilutive impact of unvested restricted stock, stock options and warrants.

Securities having an anti-dilutive effect on diluted net earnings

per share are excluded from the calculation.

The dilutive effect of the unvested restricted stock and stock options is calculated using

the treasury stock method.

For warrants that are liability-classified, during periods when the impact is dilutive, the Company assumes

share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair

value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income

(loss) and other comprehensive income (loss), which includes foreign currency translation adjustments.

For the purposes of comprehensive

income (loss) disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation

adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiaries.

Accumulated other comprehensive

income (loss) is reported as a component of stockholders' equity.

Comprehensive income (loss)

consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments.

purposes of comprehensive income (loss) disclosures, the Company does not record deferred taxes for the net changes in the foreign currency

translation adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiaries.

Accumulated other

comprehensive income (loss) is reported as a component of stockholders' equity.

Recently Adopted Accounting Standards

In September 2016, the FASB issued ASU No.

Financial Instruments - Credit Losses, which was subsequently amended by ASU 2018-19 and ASU 2019-10.

This standard requires the measurement

of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience,

current conditions and reasonable forecasts.

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale

debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount

of credit loss to the difference between a security’s amortized cost basis and its fair value.

In addition, the length of time

a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses

on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

In September 2016, the FASB

issued ASU No.

2016-13, Financial Instruments — Credit Losses, which was subsequently amended by ASU No.

2018-19, ASU No.

2019-05, ASU 2019-10, ASU No.

2019-11, ASU No.

2020-03, and ASU No.

These ASUs have provided for various minor technical

corrections and improvements to the codification as well as other transition matters.

Smaller reporting companies who file with the SEC

are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.

standard requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting

date based on historical experience, current conditions and reasonable forecasts.

The updated guidance also amends the current other-than-temporary

impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through

an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair

In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of

whether a credit loss exists.

The main objective of this ASU is to provide financial statement users with more decision-useful information

about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting

The Company adopted this standard on January 1, 2023, with no impact on its consolidated financial statements and related disclosures.

In August 2020, the

FASB issued ASU No.

2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives

and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and

Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models

required under current GAAP.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for

the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas.

The Company adopted

this standard on January 1, 2024, with no impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842)

(“ASU 2016-02”).

ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing

and operating leases.

ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial

statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASU 2016-02

on January 1, 2022.

The Company recorded right-of-use assets and lease liabilities each of approximately $ 0.6 million upon the adoption

of ASU 2016-02.

In June 2022, the FASB

issued ASU 2022-03, ASC Subtopic 820 Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU

The FASB issued this update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring

the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend

a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale

restrictions that are measured at fair value in accordance with Topic 820.

For public business entities, the amendments in this

update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

The Company adopted this standard on January 1, 2024, with no impact on its consolidated financial statements and related disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic

Improvements to Reportable Segment Disclosures (“ASU 2023-07”).

ASU 2023-07 updates reportable segment disclosure requirements,

primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance.

adopted this guidance in the year ended December 31, 2024 with no material impact on the consolidated financial statements and disclosures.

See Segment policy above for additional information.

Recently Issued Accounting Standards

In August 2020,

the FASB issued ASU No.

2020 -06 , Debt — Debt with Conversion and Other Options

(Subtopic 470 -20 ) and Derivatives and Hedging — Contracts in Entity’s

Own Equity (Subtopic 815 -40 ):

Accounting for Convertible Instruments and Contracts in an Entity’s

Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP.

ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it

also simplifies the diluted earnings per share calculation in certain areas.

The ASU is effective for the Company on January 1,

Early adoption is permitted, but no earlier than January 1, 2021.

The Company is currently evaluating the impact of this standard

on its consolidated financial statements and related disclosures.

In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”).

The FASB issued this

update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security

subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and

(3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at

fair value in accordance with Topic 820.

For public business entities, the amendments in this update are effective for fiscal years

beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted for both interim

and annual financial statements that have not yet been issued or made available for issuance.

The Company is still evaluating the impact

of this pronouncement on the consolidated financial statements.

In October 2023, the FASB

7 unchanged sentences

not expect ASU 2023-06 to have a material impact on the consolidated financial statements.

In November 2023, the FASB

issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (“ASU 2023-07”).

updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information

used to assess segment performance.

This update is effective for the Company in the consolidated financial statements for the year ending

December 31, 2024, and interim periods beginning after January 1, 2025.

The Company is currently evaluating the impact that the adoption

of this standard will have on its consolidated financial statements and disclosures.

In December 2023, the FASB

10 unchanged sentences

financial statements and disclosures.

In November 2024, the FASB

issued ASU No.

2024-03, Income Statement- Reporting Comprehensive Income- Expense Disaggregation Disclosures (Subtopic 220-40),

requiring public business entities to disclose additional information about specific expense categories in the notes to financial statements

at interim and annual reporting periods.

ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim

reporting periods beginning after December 15, 2027, with early adoption permitted.

The disclosures required under the guidance can be

applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any

or all periods presented in the financial statements.

The Company is currently evaluating the impact of adopting this guidance on its

consolidated financial statements and disclosures.

RECAPITALIZATION

As discussed in Note 1, on September 11, 2023,

the Company consummated the Business Combination, with Legacy Spectral surviving the merger as a wholly-owned subsidiary of the Company.

On the date of the Business Combination, the

Company recorded net liabilities of $ 2.4 million, with an offsetting decrease to additional paid-in capital.

The following table provides

the elements of the Business Combination and reconciles these elements to the consolidated statements of stockholders’ equity and

the consolidated statements of cash flows for the year ended December 31, 2023:

As discussed in Note 1,

on September 11, 2023, the Company consummated the Business Combination, with Legacy Spectral surviving the merger as a wholly-owned

subsidiary of the Company.

On the date of the Business

Combination, the Company recorded net liabilities of $ 2.4 million, with an offsetting decrease to additional paid-in capital.

The following

table provides the elements of the Business Combination:

Other current assets

4 unchanged sentences

Non-cash net liabilities assumed in exchange for common stock

Upon the Closing, the Company issued 33,333 shares

of Company Common Stock, with a fair value of $ 0.2 million, to settle an assumed liability to the Sponsor as a payment for an administrative

The Company recorded transaction costs, consisting

of legal, accounting and other professional services incurred by Legacy Spectral related to the Business Combination, of $ 7.6 million

(the “Transaction Costs”), in other income (expense) in the consolidated statement of operations for the year ended December

31, 2023 and no costs were capitalized.

As of December 31, 2023, $ 0.8 million of the Transaction Costs are included accounts payable

and $ 0.5 million are included in accrued expenses.

The Company paid $ 1.9 million of Transaction Costs in cash and issued 966,667 shares

of Company Common Stock with a fair value of $ 4.4 million.

Prior to the Business Combination the Company

incurred $ 0.7 million of transaction costs, included in other income (expense) in the consolidated statement of operations for the year

ended December 31, 2023, for professional services incurred by Legacy Spectral that were related to potential business combinations that

did not occur.

Upon the Closing, the Company

issued 33,333 shares of Company Common Stock, with a fair value of $ 0.2 million, to settle an assumed liability to the Sponsor as a payment

for an administrative fee.

The Company recorded transaction

costs, consisting of legal, accounting and other professional services incurred by Legacy Spectral related to the Business Combination,

of $ 7.6 million (the “Transaction Costs”), in other income (expense) in the consolidated statement of operations for the

year ended December 31, 2023 and no costs were capitalized.

During the year ended December 31, 2023, the Company paid $ 1.9 million of

Transaction Costs in cash and issued 966,667 shares of Company Common Stock with a fair value of $ 4.4 million.

Prior to the Business Combination

the Company incurred $ 0.7 million of transaction costs, included in other income (expense) in the consolidated statement of operations

for the year ended December 31, 2023, for professional services incurred by Legacy Spectral that were related to potential business combinations

that did not occur.

FAIR VALUE MEASUREMENTS

The following table presents information about

the Company’s financial liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and December 31,

2022, by level within the fair value hierarchy (in thousands):

The following table presents

information about the Company’s financial liabilities that are measured at fair value on a recurring basis as of December 31, 2024

and December 31, 2023, by level within the fair value hierarchy (in thousands):

Fair value measured as of December

Quoted prices

Significant other

Fair value at

Warrant liabilities

Short-term notes payable- Yorkville

Fair value measured as of December

Quoted prices

Significant other

Fair value at

Warrant liabilities

There were no transfers between Level 1, 2 or

3 during the years ended December 31, 2023 and 2022.

Fair values of cash, accounts receivable, accounts

payable, accrued expenses and short-term debt are carried at cost, which management believes approximates fair value due to the short-term

nature of these instruments.

The fair value of the Public Warrants, which trade in active markets, is based on quoted market prices and

classified in Level 1 of the fair value hierarchy.

The Angel Warrants are classified within Level 3 of the fair value hierarchy because

their fair values are based on significant inputs that are unobservable in the market.

The following table presents changes in Level

3 liabilities measured at fair value for the years ended December 31, 2023 and 2022 (in thousands):

There were no transfers

between Level 1, 2 or 3 during the years ended December 31, 2024 and 2023.

Fair values of cash, accounts

receivable, accounts payable, accrued expenses, and short-term debt (other than the notes payable with Yorkville) are carried at cost,

which management believes approximates fair value due to the short-term nature of these instruments.

The fair value of the Public Warrants,

which trade in active markets, is based on quoted market prices and classified in Level 1 of the fair value hierarchy.

The SP Angel Warrants

are classified within Level 3 of the fair value hierarchy because their fair values are based on significant inputs that are unobservable

in the market.

The following table presents

changes in Level 3 warrant liabilities measured at fair value for the years ended December 31, 2024 and 2023 (in thousands):

Balance - January 1, 2023

3 unchanged sentences

Balance - December 31, 2024

Both observable and unobservable inputs were

used to determine the fair value of warrants that the Company has classified within the Level 3 category.

Unrealized gains and losses

associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g.,

changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.

The following table provides quantitative information

regarding Level 3 fair value measurements inputs at their measurement:

Both observable and unobservable

inputs were used to determine the fair value of warrants that the Company has classified within the Level 3 category.

Unrealized gains

and losses associated with warrant liabilities within the Level 3 category include changes in fair value that were attributable to both

observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.

The following table provides

quantitative information regarding Level 3 warrant liability fair value measurements inputs at their measurement:

Strike price (per share)

3 unchanged sentences

Dividend yield (per share)

Valuation of short-term

notes payable – Yorkville

Company elected the fair value option to account for the financial instrument with Yorkville signed on March 20, 2024 (see Note 7).

estimate of the fair value as of December 31, 2024 was determined using a binomial lattice model.

The fair value measurement of the debt

is determined using Level 3 inputs and assumptions unobservable in the market.

Changes in the fair value of debt that is accounted for at fair value,

inclusive of related accrued interest expense, are presented as gains or losses as a component of other income (expense) in the accompanying

consolidated statements of operations and comprehensive loss under change in fair value of debt.

The actual settlement of the short-term

debt could differ from current estimates based on the timing of when and if Yorkville elects to convert amounts into common shares, potential

cash repayment by the Company prior to maturity, and movements in the Company’s common stock price.

following table provides a rollforward of the aggregate fair values of the Company’s Yorkville debt for which fair values are determined

using Level 3 inputs (in thousands):

Balance as of January 1, 2024

Addition of short-term notes payable

Principal repayments

Fair value adjustment

Balance as of December 31, 2024

The following table provides

quantitative information regarding Level 3 fair value measurements inputs at their measurement:

Expected term (years)

Volatility (annual)

Risk-free rate

4.34 – 4.35 %

Valuation of forward options in B.

ELOC and Yorkville SEPA

Riley ELOC and Yorkville SEPA are accounted for as derivatives

and will be recognized at fair value.

The Company has determined the fair value of the purchase put option in the Company’s shares

to be immaterial.

Any changes in fair value between the carrying amount of the forward issuance contracts and the settlement amounts will

be recognized in other income (expense) in the consolidated statement of operations and comprehensive loss.

For the year ended December

31, 2024, the Company determined there were immaterial changes in derivative liability fair value related to the B.

Riley ELOC the Yorkville

The Company recorded no liability for the forward issuance contract, as there are no such contracts outstanding at December 31,

RESEARCH AND DEVELOPMENT REVENUE

For the years ended December 31, 2023 and 2022,

the Company’s revenues disaggregated by the major sources was as follows (in thousands):

For the years ended December

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

Other U.S governmental authorities

Total revenue

The following table

presents the activity in the Company’s contract liabilities during the year ended December 31, 2024 (in thousands):

Contract liabilities:

Deferred revenue

Total contract liabilities

ACCRUED EXPENSES

Accrued expenses consist of the following as

of December 31, 2023 and December 31, 2022 (in thousands):

Accrued expenses consist

of the following as of December 31, 2024 and December 31, 2023 (in thousands):

Salary and wages

Operating expenses

Non-operating expenses

Total accrued expenses

NOTES PAYABLE

Insurance Note

The Company entered into financing arrangements

for a portion of its Directors and Officers (“D&O”) insurance premiums, as follows (in thousands):

The Company entered into

the Yorkville Convertible Notes, the Related Party Note, and financing arrangements for a portion of its Directors and Officers insurance

premiums, as follows (in thousands):

Principal Repayments

3 unchanged sentences

Interest Rate

New 2023 Insurance Note

Yorkville Convertible Notes

Related Party Note

2024 Insurance Note

New 2023 Insurance Note

2023 Insurance Note

2022 Insurance Note

In September 2023, in connection with the Business

Combination, the Company cancelled the 2023 Insurance Note and replaced it with the New 2023 Insurance Note.

Accordingly, the Company

reversed the unpaid balance of approximately $ 38,000 from notes payable and prepaid expenses.

The Company determined that the carrying amounts

Yorkville Convertible Notes

On 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.

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 .

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.

The purchase 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 Notes.

paid no interest relating to the Convertible Notes.

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 , provided however, in respect of any Installment Date prior to the closing of the second Pre-Paid

Advance, $ 750,000 (the “Installment Principal Amount”), 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 issued

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, the aggregate outstanding

principal balance of the Yorkville Convertible Notes is $ 2.1 million.

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

of the Pre-Paid Advances has been 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.

As the SEPA is an equity-linked contract that does not qualify for

equity classification, any expenses incurred will be recognized in the consolidated statements of operations and comprehensive loss within

borrowing related costs.

For the year ended December 31, 2024, the Company recognized $ 1.1 million in issuance costs related to the 8 %

original issue discount for the SEPA.

Related Party Note

March 19, 2024, the Company announced that Spectral IP received a $ 1.0 million investment from an affiliate of its largest shareholder

for the acquisition and development of a health care related artificial intelligence intellectual property portfolio.

The investment

is structured as a note payable with a one-year maturity, at 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.

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.

Insurance Notes

The Company finances its

director and officer liability insurance premiums over a term of less than one year.

The Company has determined that the carrying amounts

of all of the insurance notes approximate fair value due to the short-term nature of borrowings and current market rates of interest.

On April 13, 2020, the Company entered into a

promissory note with JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus

Aid, Relief, and Economic Security Act (“CARES Act”) for $ 0.7 million (the “PPP Loan”).

The PPP Loan matured

on April 13, 2022 and bore interest at 1 % per annum.

Beginning on September 13, 2021, the Company was required to make

equal monthly payments of principal and interest until the loan maturity on April 13, 2022.

The PPP Loan was subject to customary terms

for payment defaults and breaches of representations and warranties.

The Company did not request the PPP Loan to be forgiven.

the year ended December 31, 2022, the Company repaid the remaining $ 0.4 million of principal and interest for the PPP Loan.

was no outstanding balance for the PPP Loan as of December 31, 2022.

COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is not a party to any material legal proceedings or pending

The Company is aware of a material threatened claim that it believes is without merit.

From time to time, the Company may be subject

to various legal proceedings and claims that arise in the ordinary course of its business activities, none of which we believe are material

or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows

or results of operations.

The Company adopted ASC 842 on January 1, 2022 using the modified retrospective

approach with no restatement of prior periods or cumulative adjustment to accumulated deficit.

The reported results for 2023 and 2022

reflect the application of ASC 842.

Upon adoption, the Company elected the package of transition practical expedients, which allowed the

Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification

for any expired or existing leases, and initial direct costs for existing leases.

The Company also made an accounting policy election

not to recognize leases with an initial term of 12 months or less within its consolidated balance sheets and to recognize those lease

payments on a straight-line basis in its consolidated statements of operations and comprehensive loss over the lease term.

The Company leases office space for its principal

office in Dallas, Texas, which was extended during 2022 to expire in May 2024.

This lease was extended again in 2023 to expire in December

During 2022, the Company entered into a lease for office space in the United Kingdom under a lease that expired in May 2023.

During 2023, the Company entered into a lease

for office space in the United Kingdom for annual payments of $ 0.1 million under a lease that expires in March 2024.

The lease has

been excluded from the tables below as the term is twelve months .

The following table summarizes quantitative information

about the Company’s operating leases for the years ended December 31, 2023 and 2022 (dollars in thousands):

The Company is not a party

to any material legal proceedings or pending claims.

The Company is aware of a material threatened claim that it believes is without

From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its

business activities, none of which we believe are material or would be expected to have, individually or in the aggregate, a material

adverse effect on our business, financial condition, cash flows or results of operations.

The Company leases office

space for its principal office in Dallas, Texas, which was amended in April 2024 to extend the lease term to expire in February 2028.

The lease amendment also included a landlord-provided tenant improvement allowance of up to $ 0.3 million to be applied to the costs of

the construction of leasehold improvements.

The Company determined that it owns the leasehold improvements under the lease and, as such,

reflected the $ 0.3 million lease incentive as a reduction in lease liabilities and right-of-use assets.

As of December 31, 2024, the

Company has not yet incurred any leasehold improvement costs that were paid for by the lessor.

During 2023, the Company

entered into a lease for office space in the United Kingdom for annual payments of $ 0.1 million under a lease that expired in March

The lease was renewed in March 2024, however the Company has excluded this lease from the tables below as the term is twelve

The following table summarizes

quantitative information about the Company’s operating leases for the years ended December 31, 2024 and 2023 (in thousands):

Operating cash flows used in operating leases $ 894 $ 744

2 unchanged sentences

Weighted average discount rate 8.5 % 8.5 %

The following table provides the components of

the Company’s lease cost included in general and administrative expense in the consolidated statement of operations (in thousands):

The following table provides

the components of the Company’s lease cost included in general and administrative expense in the consolidated statement of operations

(in thousands):

Operating leases

4 unchanged sentences

Total rent expense

Variable lease cost is primarily attributable

to amounts paid to lessors for utility charges, parking, and property taxes under an office space lease.

As of December 31, 2023, future minimum payments

under the non-cancelable operating leases were as follows (in thousands):

Year ending December 31, 2024

Variable lease cost is primarily

attributable to amounts paid to lessors for utility charges, parking, and property taxes under an office space lease.

As of December 31, 2024,

future minimum payments under the non-cancelable operating leases were as follows (in thousands):

Year ended December 31, 2025

Year ended December 31, 2026

Year ended December 31, 2027

Year ended December 31, 2028

imputed interest

tenant improvement allowance

Operating lease liabilities

STOCKHOLDERS’ EQUITY

In conjunction with the Closing, the Company’s

certificate of incorporation was amended and restated to authorize the issuance of 80,000,000 shares of Company Common Stock, $ 0.0001

par value and 1,000,000 shares of preferred stock, $ 0.0001 par value (the “Company Preferred Stock”).

In conjunction with the

Closing, the Company’s certificate of incorporation was amended and restated to authorize the issuance of 80,000,000 shares of

Company Common Stock, $ 0.0001 par value and 1,000,000 shares of preferred stock, $ 0.0001 par value (the “Company Preferred Stock”).

November and December 2024, the Company issued 2,415,900 shares for aggregate net proceeds of approximately $ 3.1 million to certain institutional

investors through at-the market equity issuances.

STOCK-BASED COMPENSATION

Each option and warrant to purchase common stock

of Legacy Spectral was converted into an option and warrant, respectively, to purchase Spectral AI’s common stock based on the

Exchange Ratio, with corresponding adjustments to the exercise price.

Each option and warrant

to purchase common stock of Legacy Spectral was converted into an option and warrant, respectively, to purchase Spectral AI’s common

stock based on the Exchange Ratio, with corresponding adjustments to the exercise price.

Accordingly, the options and warrants to purchase 46,592,862

4 unchanged sentences

2018 Long Term Incentive Plan

On July 24, 2018, Legacy Spectral’s Board

of Directors adopted the 2018 Long Term Incentive Plan (the “2018 Plan”) which permits granting of incentive stock options

(which must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units,

performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards.

Pursuant to the 2018 Plan,

stock options must expire within 10 years and must be granted with exercise prices of no less than the fair value of the common

stock on the grant date, as determined by Legacy Spectral’s Board of Directors.

As of December 31, 2023, 3,526,200 shares of common

stock were authorized for issuance under the 2018 Plan, of which 193,889 remain available for issuance.

On July 24, 2018, Legacy

Spectral’s Board of Directors adopted the 2018 Long Term Incentive Plan (the “2018 Plan”) which permitted granting

of incentive stock options (which must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted

stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards.

2024, all awards outstanding under the 2018 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan, as discussed

below, and no new grants will be made under the 2018 Plan.

2022 Long Term Incentive Plan

On September 27, 2022, Legacy

Spectral’s stockholders approved the adoption of the 2022 Long Term Incentive Plan (the “2022 Plan”) which permits granting

of incentive stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted

stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards.

to the 2022 Plan, stock options must expire within 10 years and must be granted with exercise prices of no less than the fair

value of the common stock on the grant date, as determined by Legacy Spectral’s Board of Directors.

As of December 31, 2023, under

the 2022 Plan, 88,749 shares of common stock were issuable upon the exercise of outstanding options and 58,197 restricted stock

units (“RSUs”) were issuable.

Under the 2022 Plan, 1,792,918 shares remain available for issuance through grants of future

Restricted Stock Awards

The RSAs generally vest over four years.

summary of RSA activities for the year ended December 31, 2023 are presented below:

Nonvested as of January 1, 2023

Nonvested as of December 31, 2023

Spectral’s stockholders approved the adoption of the 2022 Long Term Incentive Plan (the “2022 Plan”) which permitted

granting of incentive stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights,

restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards.

In May 2024, all awards outstanding under the 2022 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan,

as discussed below, and no new grants will be made under the 2022 Plan.

2023 Long Term Incentive Plan

On May 14, 2024, the Company’s shareholders approved the adoption

of the 2023 Long Term Incentive Plan (the “2023 Plan”) which permits granting of incentive stock options (they must meet all

statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance

units, incentive bonus awards, and other cash-based or stock-based awards.

The options, restricted stock units and other securities issued

pursuant to the 2018 Plan and 2022 Plan have been replaced with a corresponding award issued pursuant to the 2023 Plan.

No new grants

will be made under the 2022 Plan and the 2018 Plan and all outstanding grants under the 2018 Plan and 2022 Plan will be assumed by the

The maximum aggregate number of shares that may be issued under the Plan shall not exceed 8,000,000 , plus the number of shares

that are automatically added on January 1st of each year for a period of up to ten years, commencing on January 1, 2024 and ending on

(and including) January 1, 2033, in an amount equal to the lesser of (i) five percent ( 5 %) of the total number of shares of stock outstanding

on December 31st of the preceding calendar year, and (ii) an amount determined by the Board of Directors.

Pursuant to the 2023 Plan, stock

options must expire within 10 years and must be granted with exercise prices of no less than the fair value of the common stock

on the grant date, as determined by the Board of Directors.

As of December 31, 2024, under the 2023 Plan, 3,594,488 shares of common

stock were issuable upon exercise of outstanding options and 169,400 restricted stock units (“RSUs”) were issuable.

the 2023 Plan, 4,236,112 shares remain available for issuance through grants of future options.

The 2023 Plan provides that the Compensation

Committee shall determine the vesting conditions of awards granted under the 2023 Plan, and the Compensation Committee has from time-to-time

approved vesting schedules for certain awards that deviate from the vesting conditions described in the previous sentence.

Restricted Stock Units

The RSUs generally vest over three years.

summary of RSU activities for the year ended December 31, 2023 are presented below:

On January 3, 2024, pursuant to the 2022 Plan, the Company granted

its then-CFO a market condition RSU of up to 150,000 shares of the Company’s common stock.

The award had a grant date fair value

of approximately $0.4 million using a Monte Carlo simulation model.

The RSUs under this market-based award will vest partially based on

achievement of stock price targets of the Company’s common stock.

50,000 RSUs vest when the 180-day VWAP meets or exceeds $ 8.00

per share, 50,000 RSUs vest when the 180-day VWAP meets or exceeds $ 12.00 per share, and 50,000 RSUs are not market-based and will vest

over the continued service period of three years.

These market-based conditions must be met in order for portions of the RSU award to

vest, and it is therefore possible that certain awards ultimately would not vest.

The grant date fair value of each RSU grant is expensed

over the requisite service period.

Compensation expense relating to share-based awards with market-based conditions is not reversed if

these awards are forfeited based solely on failing to meet such market-based conditions.

On February 29, 2024, pursuant to the 2022 Plan, the Company granted

both its CFO and CEO awards of RSUs up to 150,000 shares of the Company’s common stock.

The two awards together had a grant date

fair value of approximately $ 0.6 million using a Monte Carlo simulation model.

The portion of RSUs that are market-based awards will vest

partially based on achievement of stock price targets of the Company’s common stock.

37,500 RSUs vest when the 180-day VWAP meets

or exceeds $ 8.00 per share, 37,500 RSUs vest when the 180-day VWAP meets or exceeds $ 10.00 per share.

The market-based conditions must

be met in order for the market-based portion of the RSU awards to vest, and it is therefore possible that certain awards ultimately would

75,000 RSUs are not market-based and will vest over the continued service period of three years.

The grant date fair value of

each RSU grant is expensed over the requisite service period.

Compensation expense relating to share-based awards with market-based conditions

is not reversed if these awards are forfeited based solely on failing to meet such market-based conditions.

On February 29, 2024, the

Company amended the terms of the January 3, 2024 RSU grant to its then-CFO to provide for identical vesting terms to those provided in

the February 29, 2024 RSU grant.

The Company determined the amended RSU grant represents a modification of the original award, however,

the incremental compensation cost of the amendment was not material.

In October 2024, in connection with the resignation of the then-CEO,

300,000 unvested RSUs were forfeited and the Company granted 100,000 RSUs that immediately vested to the then-CEO.

The previously recognized compensation cost related to the forfeited RSUs

was reversed upon forfeiture, and the fair value of the awards granted in October 2024 was expensed as of the grant date.

A summary of RSU activities

for the year ended December 31, 2024 are presented below:

Nonvested as of January 1, 2024

Nonvested as of December 31, 2024

During the year ended December

31, 2024 and 2023, the Company granted 550,000 and 58,197 restricted stock units, respectively, with a weighted-average grant date fair

value of $ 1.98 per share and $ 4.65 per share, respectively.

As of December 31, 2024, total unrecognized compensation expense related

to restricted stock units was $ 0.3 million, which is expected to be recognized over a weighted-average period of 1.5 years.

Stock Options

The fair value of each employee and non-employee

stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

Legacy Spectral’s stock became

publicly traded on July 22, 2021 on the AIM, and lacks company-specific historical and implied volatility information.

On September 11,

2023 the Company completed the Business Combination and was listed on the NASDAQ under symbol MDAI.

Legacy Spectral estimated its expected

stock volatility based on the historical volatility of a publicly traded set of peer companies.

Spectral AI continues to estimate its

expected stock volatility based on the historical volatility of a publicly traded set of peer companies.

Due to the lack of historical

exercise history, the expected term of the Legacy Spectral’s and Spectral AI’s stock options for employees has been determined

utilizing the simplified method by taking an average of the vesting periods and the original contractual terms for each award.

term of stock options granted to non-employees is equal to the contractual term of the option award.

The risk-free interest rate is determined

by reference to the US.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the

expected term of the award.

Expected dividend yield is zero based on the fact that Legacy Spectral and Spectral AI have never

paid cash dividends and Spectral AI does not expect to pay any cash dividends in the foreseeable future.

The Company’s stock options generally vest ratably annually over

3 years and have a contractual term of 10 years.

The weighted-average assumptions used in determining the fair value of options granted

were as follows in the years ended December 31, 2023 and 2022:

The fair value of each employee and non-employee stock option grant

is estimated on the date of grant using the Black-Scholes option-pricing model.

Legacy Spectral’s stock became publicly traded on

June 22, 2021 on the AIM Market of the London Stock Exchange, and lacks company-specific historical and implied volatility information.

On September 11, 2023 the Company completed the Business Combination and was listed on NASDAQ under the symbol MDAI.

Legacy Spectral estimated

its expected stock volatility based on the historical volatility of a publicly traded set of peer companies.

Spectral AI continues to

estimate its expected stock volatility based on the historical volatility of a publicly traded set of peer companies.

Due to the lack

of historical exercise history, the expected term of Legacy Spectral’s and Spectral AI’s stock options for employees has been

determined utilizing the simplified method by taking an average of the vesting periods and the original contractual terms for each award.

The expected term of stock options granted to non-employees is equal to the contractual term of the option award.

The risk-free interest

rate is determined by reference to the US.

Treasury yield curve in effect at the time of grant of the award for time periods approximately

equal to the expected term of the award.

Expected dividend yield is zero based on the fact that Legacy Spectral and Spectral

AI have never paid cash dividends and Spectral AI does not expect to pay any cash dividends in the foreseeable future.

The Company’s stock

options generally vest ratably annually over 3 years and have a contractual term of 10 years.

In applying the Black Scholes option pricing

model, the Company used the following assumptions for stock options granted during the years ended December 31, 2024 and 2023:

2024 Year ended

Fair value of common stock $ 1.51 $ 4.57

Expected term (years) 4.8 6.0

Expected volatility (annual)

Risk-free interest rate

Volatility (annual) 66 % 72 %

Risk-free rate 4.2 % 3.6 %

Dividend yield (per share) 0 % 0 %

A summary of stock options activity for the year

ended December 31, 2023 is presented below:

Stock Options

A summary of stock options

activity for the year ended December 31, 2024 is presented below:

Stock Options Weighted

Price Weighted

Contractual Life

(in years) Aggregate

Intrinsic Value

7 unchanged sentences

Options vested and exercisable as of December 31, 2024 2,941,842 $ 1.87 5.5 3,285

The aggregate intrinsic value

of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common

stock for those stock options that had exercise prices lower than the fair value of the common stock as of the respective date.

The weighted-average grant

date fair value of stock options granted during the years ended December 31, 2023 and 2022 was $ 3.20 and $ 2.79 per share, respectively.

The Company recorded stock-based compensation

expense for stock options, RSUs and restricted stock awards of $ 1.2 million for the years ended December 31, 2023 and December 31,

2022 in general and administrative expenses in the consolidated statements of operations.

As of December 31, 2023, there was approximately

$ 1.2 million and $ 0.2 million of unrecognized stock-based compensation related to stock option grants and restricted stock

unit grants, respectively, that will be amortized over a weighted average period of 0.8 years and 1.0 years, respectively.

During the year ended December 31, 2018, the

Company granted of 973,803 stock options to investors (the “Investor Options”) that were approved by the Board of Directors

outside of the 2018 Plan, of which 939,024 Investor Options were outstanding as of December 31, 2022.

The aggregate intrinsic

value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s

common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the respective date.

The weighted-average grant date fair value of stock options granted

during the years ended December 31, 2024 and 2023 was $ 0.90 and $ 3.20 per share, respectively.

As of December 31, 2024,

there was approximately $ 0.7 million of unrecognized stock-based compensation related to stock option grants that will be amortized

over a weighted average period of 0.8 years.

The Company recorded stock-based

compensation expense for stock options, RSUs, and restricted stock awards of $ 1.03 million for the year ended December 31, 2024

and $ 1.2 million for the year ended December 31, 2023 in general and administrative expenses in the consolidated statements of operations.

During the year ended December

31, 2023, 34,779 of the Investor Options were exercised and the remaining 904,245 Investor Options expired in November 2023.

31, 2018, the Company granted 973,803 stock options to investors (the “Investor Options”) that were approved by the Board

of Directors outside of the 2018 Plan.

During the year ended December 31, 2023, 34,779 of the Investor Options were exercised and the

remaining 904,245 Investor Options expired in November 2023.

The Investor Options had an exercise price of $ 2.06 per share.

As of December 31, 2023, there is no unrecognized stock-based compensation

expense related to the Investor Options.

As of December 31, 2023, the stock options issued

to an investor to purchase 20,368 shares of the Company’s common stock (the “Options”) at a price of $ 1.96 per

share expired.

The Options had a grant date fair value of $ 2.17 per share and were equity-classified stock options.

As of December

31, 2023, there is no unrecognized stock-based compensation expense related to the Investor Options.

On December 26, 2023, the Company entered into

the Purchase Agreement and related Registration Rights Agreement with B.

Riley Principal Capital II.

Upon the terms and subject to the

satisfaction of the conditions contained in the Purchase Agreement, the Company has the right to sell to B.

Riley Principal Capital II

up to $ 10.0 million of shares of Common Stock.

In accordance with the Company’s obligations under the Registration Rights Agreement,

the Company filed the registration statement to register under the Securities Act, the offer and resale by B.

Riley Principal Capital

II of up to 3,249,360 shares of Common Stock, consisting of (i) up to 3,209,360 shares of Common Stock that the Company may elect sell

Riley Principal Capital II, from time to time and (ii) 40,000 shares of Common Stock the Company issued to B.

Riley Principal Capital

II upon the execution of the Purchase Agreement on December 26, 2023.

On March 20, 2024, the Company entered into the SEPA and related Registration

Rights Agreement with Yorkville.

Upon the terms and subject to the conditions contained in the SEPA, the Company has the right to sell

to Yorkville up to $ 30.0 million of shares of Common Stock.

In accordance with the Company’s obligations under the Registration

Rights Agreement, the Company is required to file a registration statement to register under the Securities Act, the offer and resale

by Yorkville of up to 6,369,937 shares of Common Stock, consisting of (i) up to 6,275,000 shares of Common Stock (the “Purchase

Shares”) that the Company may elect sell to Yorkville from time to time and (ii) 94,937 shares of Common Stock the Company issued

to Yorkville upon the execution of the SEPA on March 20, 2024.

As of December 31, 2024, there is no unrecognized stock-based compensation expense related to the Investor Options.

Effective Tax Rate

The overall effective tax rate (“ETR”)

for the Company, as calculated under ASC 740 guidance for the tax period ended December 31, 2023, and 2022 is ( 0.05 %) and ( 3.80 %), respectively.

The following table reconciles the federal statutory income rate to the Company’s effective income tax rate:

The overall effective tax rate (“ETR”) for the Company,

as calculated under ASC 740 guidance for the years ended December 31, 2024, and 2023 is ( 1.78 %) and ( 0.10 %), respectively.

The following

table reconciles the federal statutory income rate to the Company’s effective income tax rate:

Federal income tax rate

State income tax benefit

Impact of non-U.S.

Permanent items

Return to provision adjustments

Non-deductible stock compensation

Non-deductible executive compensation

Difference and changes in tax rates

Change in valuation allowance

Effective income tax rate

The above schedule beaks out the key components

The main drivers between the federal statutory rate of 21.00 % and ETR of ( 0.06 %) are permanent adjustments and change in

valuation allowance.

Components of Income Tax Expense

The components of income tax expense for the

periods ended December 31, 2023 and 2022 are as follows (in thousands):

The above schedule beaks

out the key components of the ETR.

The main drivers between the federal statutory rate of 21 % and ETR of ( 1.78 %) are permanent adjustments

and change in valuation allowance.

Components of Income Tax Expense/(Benefit)

The components of income

tax expense/(benefit) for the years ended December 31, 2024 and 2023 are as follows (in thousands):

Total current provision

Total provision for income taxes

The company is in a taxable loss position for

the year ending December 31, 2023.

The current tax expense results from the gross margin tax for the Company's state filing in Texas.

The Company is in a

taxable loss position for the year ending December 31, 2024.

The current tax expense of $ 271,000 is resulting from a reversal of a

federal income tax refund and the gross margin tax for the Company’s state filing in Texas.

Deferred Income Taxes

The main components of deferred tax assets/(liabilities)

for the periods ended December 31, 2023 and 2022, are as follows (in thousands):

The main components of deferred

tax assets/(liabilities) for the periods ended December 31, 2024 and 2023, are as follows (in thousands):

Deferred income tax assets:

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Capitalized research expenses

Intangible assets

Stock-based compensation

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Total deferred income tax assets

Valuation allowance

Net deferred tax assets

Deferred income tax liabilities:

Right-of-use assets

Lease liabilities

Total deferred income tax liabilities

Net deferred income tax assets

Valuation allowance

Deferred income tax assets, net of valuation allowance

Valuation Allowance Considerations

A valuation allowance against a deferred tax

asset must be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.

A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities,

projected future taxable income, and tax planning strategies.

After consideration of all the information available, management believes

that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation

allowance as of December 31, 2023 and 2022.

The net change in valuation allowance for the years ended December 31, 2023 and 2022 was

an increase of $ 2.9 million and $ 0.3 million, respectively.

ASC 740, “Income Taxes”

requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax

assets will not be realized.

A review of all available positive and negative evidence needs to be considered, including the scheduled

reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.

After consideration of all the information

available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore,

established a full valuation allowance as of December 31, 2024, and 2023.

The net change in valuation allowance for the years ended December

31, 2024 and 2023 was an increase of $ 1.8 million and $ 3.0 million, respectively.

Section 174 Capitalization

The Tax Cuts and Jobs Act of 2017 (“TCJA”)

made a significant change to Section 174 that went into effect for taxable years beginning after December 31, 2021.

The change eliminated

the ability to currently deduct R&D expenses.

The Tax Cuts and Jobs Act of 2017 (TCJA) made a significant change

to Section 174 that went into effect for taxable years beginning after December 31, 2021.

The change eliminated the ability to currently

deduct R&D expenses.

Instead, taxpayers must now capitalize and amortize these costs.

Capitalized Section

174 costs must be amortized over 5 years ( 15 years for expenditures attributable to foreign research) beginning with the midpoint of

the tax year in which the expenditures are paid or incurred.

The Company had an estimated $ 3.0 million and $ 1.7 million of domestic

R&D expenses for the tax years ending December 31, 2023 and 2022, respectively.

Capitalized Section 174 costs must be amortized

over five years ( 15 years for expenditures attributable to foreign research) beginning with the midpoint of the tax year in which the

expenditures are paid or incurred.

The Company had an estimated

$ 1.7 million of domestic R&D expenses for the tax year ending December 31, 2024.

The domestic R&D expenses will be capitalized

and amortized over a five-year period for federal income tax purposes.

and amortized over a five-year period.

Net Operating Losses

As of December 31, 2023 and 2022, the Company

had available federal net operating loss carryforwards (“NOLs”) of $ 11.0 million and $ 3.1 million, respectively, which are

available to offset future federal taxable income.

Under the TCJA, all NOLs incurred after December 31, 2017 are carried forward indefinitely

for federal tax purposes.

Utilization of net operating losses and credits may be subject to substantial annual limitations due to the

“change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.

The annual limitations

may result in the expiration of net operating losses before utilization.

Section 382 of the Internal Revenue Code

limits the utilization of U.S.

NOL carryforwards following a change of control.

The Company has not performed an analysis of whether

a change of control defined under Section 382 may have occurred.

Upon performing an analysis of whether an ownership change has

occurred, any future NOL deductions may be limited.

However, the NOL carryforward discussed above does not expire.

The Company is subject to taxation in the U.S

and in various state, local and foreign jurisdictions.

The Company’s tax returns for years 2020 through present are open to tax

examinations by U.S.

As of December 31, 2024

and 2023, the Company had available federal net operating loss carryforwards (“NOLs”) of $ 19.2 million and $ 11.0 million,

respectively, which are available to offset future federal taxable income.

Under the Tax Cuts and Jobs Act (“TCJA”), all

NOLs incurred after December 31, 2017 are carried forward indefinitely for federal tax purposes.

Utilization of net operating losses

and credits may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal

Revenue Code of 1986 and similar state provisions.

The annual limitations may result in the expiration of net operating losses before

of the Internal Revenue Code limits the utilization of U.S.

net operating loss (“NOL”) carryforwards following a change of

We have not performed an analysis of whether a change of control defined under Section 382 may have occurred.

Upon performing

an analysis of whether an ownership change has occurred, any future NOL deductions may be limited.

However, our NOL carryforward

as discussed above does not expire.

Company is subject to taxation in the U.S and in various state, local and foreign jurisdictions.

The Company’s tax returns for

years 2021 through present are open to tax examinations by U.S.

Federal, state, local and foreign tax authorities;

however, carryforward attributes that were generated prior to

January 1, 2018, remain subject to adjustment upon examination if they either have been utilized or will be utilized in a future period.

however, carryforward

attributes that were generated prior to January 1, 2018, remain subject to adjustment upon examination if they either have been utilized

or will be utilized in a future period.

NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share attributable

to common stockholders are the same for the years ended December 31, 2023 and 2022, since the inclusion of all potential shares of common

stock outstanding would have been anti-dilutive due to the Company’s net loss.

The table below summarizes potentially dilutive

securities that were excluded from the computation of net loss per common share as of the periods presented because including them would

be anti-dilutive.

Basic and diluted net loss

per common share attributable to common stockholders are the same for the years ended December 31, 2024 and 2023, since the inclusion

of all potential shares of common stock outstanding would have been anti-dilutive due to the Company’s net loss.

The table below summarizes

potentially dilutive securities that were excluded from the computation of net loss per common share as of the periods presented because

including them would be anti-dilutive.

Common stock options

4 unchanged sentences

RELATED PARTY TRANSACTIONS

For the years ended December 31, 2023 and 2022,

On March 7, 2024, the Company

formed a new wholly-owned subsidiary, Spectral IP, to be utilized to advance 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.

The 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 (the “Note”).

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 IP Protocol 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.

In December 2024, the Company

issued 540,996 shares of common stock to settle its outstanding obligations under the Note.

For the year ended December

31, 2023, the Company did not have any transactions with related parties.

SUBSEQUENT EVENTS

Proceeds from sales of Common Stock through B.

Riley Committed Equity

Through March 25, 2024, the Company utilized

the B Riley Committed Equity Facility to sell 1,187,398 shares of Common Stock for proceeds totaling $ 2.7 million.

The Company incurred

$ 0.7 million in offering costs associated with these transactions with $ 0.6 million payable in cash and $ 0.1 million payable in Common

Proceeds from New Government Contract

On March 12, 2024, the Company entered into a new contract with the

Defense Health Agency that provides significant additional support for the development of the handheld version of the Company’s

Deepview System.

The contract was valued at approximately $ 500,000 and will build on the previous awards from other governmental agencies

focused on advancing the handheld version of the Deepview System.

Spectral IP, Inc.

On March 7, 2024, the Company formed a new wholly-owned subsidiary,

Spectral IP, Inc., a Delaware corporation (“Spectral IP”), to be utilized to advance 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.

The 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.

Yorkville Standby Equity Purchase Agreement

On 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 Common Stock,

subject to certain limitations and conditions set forth in the SEPA, from time to time during the term of the SEPA.

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, and the Company is

under no obligation to sell any shares of Common Stock to Yorkville under the SEPA except in connection with notices that may be submitted

by Yorkville, as described 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 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.

purchase 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 Notes.

The maturity date of the Convertible Note issue in connection with each Pre-Paid Advance will be 12 months after

the issuance date of such Convertible Note.

(b) Exhibits:

The exhibits listed in the accompanying index to

exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

On March 24, 2025, the

Company completed an equity financing and entered into a long-term debt financing agreement with Avenue Venture Opportunities Fund

II, L.P., a fund of Avenue Capital Group, with an initial draw-down of $ 8.5 million.

In connection with the debt financing, the

Company also raised approximately $ 2.7 million of equity financing from institutional investors, as well as existing UK investors.

The financing includes the potential for up to almost $ 25.0 million with the completion of the milestones for the second tranche of

debt financing.

The term of the

financing agreement is for three years , with an interest-only payment period of no less than 15 months, which can be extended to 24

months upon achieving the milestones for the second financing tranche.

The second financing tranche, which includes an additional

$ 6.5 million in debt financing from Avenue Capital Group is contingent upon;

(i) FDA clearance of the DeepView System and (ii) the

Company completing a $ 7.0 million equity raise.

The Company also issued 768,072 warrants to Avenue Capital Group which

was equal to 8.5 % of the total funding

commitment, with an exercise price of $ 1.66 per share as part of the debt financing.

listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Exhibit Index

45 unchanged sentences

Spectral AI, Inc.

2023 Long Term Incentive Plan

Code of Business Conduct and Ethics

Insider Trading Policy

2023 Long Term Incentive Plan (Incorporated by reference to Exhibit 10.12 of Registrants Form 10-K, filed with the SEC on March 29, 2024)

Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14 of Registrants Form 10-K, filed with the SEC on March 29, 2024)

Insider Trading Policy (Incorporated by reference to Exhibit 19 of Registrants Form 10-K, filed with the SEC on March 29, 2024)

List of Subsidiaries of the Registrant as of December 31, 2024.

Consent of KPMG LLP.

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002

Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer

Policy relating to recovery of erroneously awarded compensation

Section 1350 Certifications of the Principal Executive Officer and the Chief Financial Officer

Policy relating to recovery of erroneously awarded compensation (Incorporated by reference to Exhibit 97 of Registrants Form 10-K, filed with the SEC on March 29, 2024)

Inline XBRL Instance Document

5 unchanged sentences

Cover Page Interactive Data File

** Previously filed.

† Certain portions of this Exhibit have been omitted pursuant

to Regulation S-K Item 601(a)(5), Item 601(a)(6) or Item 601(b)(10), as applicable, promulgated under

the Exchange Act.

The Registrant agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request.

** Previously

portions of this Exhibit have been omitted pursuant to Regulation S-K Item 601(a)(5), Item 601(a)(6) or Item 601(b)(10),

as applicable, promulgated under the Exchange Act.

The Registrant agrees to furnish supplementally a copy of any omitted schedule

to the SEC upon request.

Form 10-K Summary.

Pursuant to the requirements of Section 13 or 15(d)

of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto

duly authorized.

Director and Chief Executive Officer

Pursuant to the requirements of Section 13 or

15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,

thereunto duly authorized.

Michael DiMaio

Chairman of the Board of

March 31, 2025

( Principal Executive Officer )

Michael DiMaio

( Principal Executive

/s/ Vincent Capone

4 unchanged sentences

And Principal Accounting Officer )

/s/ Cynthia Cai

March 29, 2024

/s/ Richard Cotton

Chairman of the Board of Directors

March 31, 2025

9 unchanged sentences

Erich Spangenberg

Michael DiMaio

/s/ Marion Snyder

March 31, 2025

Michael DiMaio

Marion Snyder

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 8. Financial Statements and Supplementary Data