What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2026-03-25 compared with 2025-03-31 · 413 added, 382 removed, 207 unchanged (79% of the section changed)

2 unchanged sentences

You should read the following

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

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

Some of the information contained

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

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

As a result of many factors, including those

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

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

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

on predictive medical diagnostics.

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

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

Some of the information contained in this

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

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

As a result of many factors, including those factors

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

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

We are an artificial intelligence

(“AI”) company focused on predictive medical diagnostics.

We operate in one segment.

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

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

FDA breakthrough device designation status for an earlier version.

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

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

Our DeepView System uses proprietary algorithms

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

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

the treatment of the patient’s wound.

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

Currently, we are devoting substantially

all of our efforts towards research and development of our DeepView ® System, an internally developed multi-spectral imaging

device that has previously received FDA breakthrough device designation status for an earlier version.

Given our receipt of the UKCA mark

for burn indication on our DeepView System, we expect to begin commercialization activities in the United Kingdom in 2026.

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

One” healing assessments.

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

and informed decision regarding the treatment of the patient’s wound.

Our focus has been on the burn indication which is supported

by the BARDA PBS contract.

For burn wounds, a non-healing assessment

1 unchanged sentence

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

We have conducted three large clinical studies with

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

Through these studies,

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

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

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

By the end of 2024, the Company had completed

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

sites across the United States.

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

another 42 pediatric patients were included from emergency departments.

We have not generated any product revenue to date.

We have received

substantial support from the U.S.

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

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

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

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

We have also received funding from the National

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

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

from BARDA, which accounts for $272.9 million.

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

The Company has completed the enrollment of 164 patients,

including 49 pediatric subjects, representing the full enrollment requirements in its validation study for the De Novo submission.

participants, the DeepView System has shown superiority in sensitivity and met non-inferiority margin in specificity compared to

clinician assessment.

These findings were corroborated by the AI model’s cross-validation in identifying non-healing burn regions.

represents a significant improvement above the diagnostic accuracy of burn physicians assessing the same population.

to our validation study, we have conducted three large clinical studies with multiple sites across the United States, enrolling more

than 400 patients, including adult and pediatric burn patients.

We have not generated any

product revenue to date.

We have received substantial support from the U.S.

government for our DeepView System’s application

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

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

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

emerging infectious diseases.

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

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

Since 2013, we have received approximately

$281.9 million in funding awards from government contracts, primarily from BARDA, which accounts for $272.9 million.

This has allowed

us to develop our technology and further our clinical trials.

In September 2023, we executed

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

million (the “PBS BARDA Contract”).

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

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

continue through the first quarter of 2026.

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

the important nature of our mission and technology.

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

(the “PBS BARDA Contract”).

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

validation and FDA clearance of our DeepView System for commercial marketing and distribution purposes, which we expect to continue

through the first quarter of 2026.

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

nature of our mission and technology.

In addition to our PBS BARDA

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

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

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

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

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

In March 2024, we received an additional

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

Once commercialized, we anticipate that the DeepView System will have

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

The SaMD model applies a SaaS (software

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

and access to algorithm updates.

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

to house multiple clinical applications.

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

heightened customer adoption.

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

the DeepView System (the “MTEC Agreement”).

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

to run through December 2025 with funding dependent on various milestones.

In December 2025, the MTEC contract was extended to run through

In March 2024, we received an additional $0.5 million award from the DHA to further this development, for a total contract

value of approximately $2.8 million.

Once commercialized, we anticipate

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

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

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

The proprietary imaging device accesses artificial intelligence

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

Pricing for these components will be evaluated and strategically

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

Business Combination

On September 12, 2023, following

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

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

September 12, 2023, following completion of the Business Combination, the Company began trading its shares of the Company Common Stock

and the Public Warrants on the Nasdaq Global Market (the “Nasdaq”) under the symbols “MDAI” and “MDAIW”,

respectively.

Financial Operations Overview

Research and Development Revenue

To date we have not generated

any revenues from the sale or license of our products.

Our primary source of revenue is research and development revenue.

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

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

to our contract with BARDA and other U.S.

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

on the achievement of milestones.

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

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

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

See “Liquidity and Capital Resources” for additional

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

Our primary source of revenue is research and development

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

and other U.S.

government awards.

The Company recognizes revenue from the sale of its products in accordance with ASC 606, Revenue

from Contracts with Customers (“ASC 606”).

The provisions of ASC 606 require the following steps to determine revenue recognition:

(1) identify the contract(s) with a customer; (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; and (5) recognize revenue when (or

as) the entity satisfies a performance obligation.

The Company’s product revenue is recognized at a point in time when the performance

obligation is satisfied by transferring control of the promised goods or services to a customer.

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

contract with BARDA and other U.S.

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

achievement of milestones and performance milestones.

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

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

awards from U.S.

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

See “Liquidity and Capital

Resources” for additional information.

Cost of Revenue

18 unchanged sentences

Other Income (Expense)

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

with the Yorkville transaction and B.

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

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

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

transaction gains/losses.

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

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

Historic foreign exchange transaction

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

dollar and the British pound sterling for our deposit accounts

that are denominated in British pound sterling.

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

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

In 2025, other income (expense)

consists of net interest expense, borrowing related costs related to the Avenue Financing, fees related to the Hudson Bay Financing, change

in the fair value of warrant liability, and foreign exchange transaction gains/losses.

In 2024, other income (expense) consists of fees

incurred in connection with the Yorkville transaction and B.

Riley purchase agreement, net interest income, borrowing related costs related

to the Yorkville convertible notes, including the 8% original issue discount per each Pre-Paid Advance, change in fair value of notes

payable, change in fair value of warrant liabilities, changes in fair value of derivatives, and foreign exchange transaction gains/losses.

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

dollar and the British

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

In addition, this amount includes costs associated

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

Key Operating and Financial Metrics

We regularly review a

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

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

We believe the operating and financial

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

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

and prospects.

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

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

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

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

Comparison of

Years Ended December 31, 2024 and 2023

We regularly review a number

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

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

We believe the operating and financial metrics presented

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

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

Adjusted EBITDA

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

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

See “Non-GAAP Financial Measures” for additional information

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

Comparison of Years

Ended December 31, 2025 and 2024

The following table summarizes

3 unchanged sentences

Adjusted EBITDA

(1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024.

See further discussion in

See “Non-GAAP Financial

6 unchanged sentences

Gross Profit and Gross Margin

We define gross profit as research and development revenue, less cost

of revenue, and define gross margin, expressed as a percentage, as the ratio of gross profit to revenue.

Gross profit and gross margin

can be used to understand our financial performance and efficiency and as we begin commercialization, it will allow investors to evaluate

our pricing strategy and compare against our competitors.

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

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

We define gross profit as

research and development revenue, less cost of revenue, and define gross margin, expressed as a percentage, as the ratio of gross profit

Gross profit and gross margin can be used to understand our financial performance and efficiency and as we begin commercialization,

it will allow investors to evaluate our pricing strategy and compare against our competitors.

Our management uses these metrics to make

strategic decisions, pricing decisions, identifying areas for improvement, set targets for future performance and make informed decisions

about how to allocate resources going forward.

Adjusted EBITDA

We define adjusted earnings

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

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

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

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

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

Key Factors that May Influence Future

Results of Operations

Key Factors that May Influence Future Results

of Operations

Our financial results of

7 unchanged sentences

or other awards.

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

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

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

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

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

15 unchanged sentences

Results of Operations

The following table summarizes our results of operations for the years

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

The following table summarizes

of our results of operations for the years ended December 31, 2025 and 2024 (in thousands):

Research and development revenue

5 unchanged sentences

Other income (expense):

Net interest income

Borrowing related costs

Change in fair value of warrant liability

Net interest income (expense)

Financing related costs

Amortization of debt discount

Change in fair value of warrant liabilities

Change in fair value of notes payable

Foreign exchange transaction loss

Foreign exchange transaction loss, net

Transaction costs

Total other expense, net

Total other income (expense), net

Loss before income taxes

Income tax provision

(1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024.

See further discussion in

Research and development revenue

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

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

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

Research and development

revenue was $19,650, for the year ended December 31, 2025, a decrease of 33.6% compared to the comparable period in 2024, reflecting a

decrease in the completed work under the PBS BARDA Contract as the contract progressed to the end of the base phase of such contract and

consistent revenue in the awards and work performed under the Company’s other U.S.

governmental contracts.

5 unchanged sentences

Cost of revenue

Cost of revenue for the

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

Cost of revenue for the year

ended December 31, 2025 was $10.7 million, a decrease of 34.2% compared to the comparable period in 2024, due to decreased development

activity to fulfill our U.S.

governmental contracts, consistent with increased research and development revenue.

governmental contracts, consistent with the decrease in research and development revenue.

Gross margin for the year

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

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

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

ended December 31, 2025 was 45.4%, an increase from 44.9% as compared to the comparable period in 2024, due to slightly more direct labor

attributed to the PBS BARDA Contract as a component of the overall development activity.

General and Administrative Expense

General and administrative expense

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

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

Non-revenue generating research and development

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

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

The reduction was offset by an increase

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

period in 2023.

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

General and administrative

expense was $17.5 million, for the year ended December 31, 2025, a decrease of 11.7% as compared to the comparable period in 2024.

generating research and development activities have decreased by approximately $2.6 million for the year ended December 31, 2025 compared

to the comparable period in 2024 offset by an increase of approximately $0.6 million related to other administrative expenses for the

year ended December 31, 2025, compared to the comparable period in 2024.

This expense also reflects a decrease in the overall headcount

at the Company from the prior year.

Other income (expense)

Net interest income

Borrowing related costs

Net interest (expense) income

Financing related costs

Amortization of debt discount

Change in fair value of warrant liabilities

1 unchanged sentence

Foreign exchange transaction loss, net

Other income (expenses), including transaction costs

Other expenses, including transaction costs

Total other income (expense), net

Net interest income for

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

Borrowing related costs increased

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

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

Change in fair value of

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

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

December 2024.

Change in fair value of

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

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

Net interest expense for

the year ended December 31, 2025 primarily relates to interest expense associated with the Avenue Financing.

Financing related costs decreased

$1.9 million for the year ended December 31, 2025, as compared to the comparable period in 2024 primarily due to the elimination of the

expenses relating to the Company’s prior financings that were expensed during fiscal year 2024.

Amortization of debt discount of

$0.5 million for the year ended December 31, 2025 relates to amortization of the discount on the Avenue note payable.

Change in fair value of warrant

liabilities increased by approximately $7.9 million for the year ended December 31, 2025 as compared to the comparable period in 2024.

Change in fair value of warrant liabilities was an expense of $3.2 million for the year ended December 31, 2025, as compared to a benefit

of ($4.6) million for same period in 2024.

The changes reflect fluctuations in the fair value of the Company’s warrants during the

year ended December 31, 2025.

The Company’s warrants are classified as liabilities and remeasured to fair value at each reporting

period, with changes recognized in net loss.

As a result, fluctuations in the warrant price of Public Warrants and fluctuations in the

fair value of other outstanding warrants may cause significant non-cash gains or losses, leading to volatility in reported net loss.

Change in fair value of notes

payable increased by approximately $0.4 million for the year ended December 31, 2025, as compared to the comparable period in 2024, which

reflects the change in fair value of the Yorkville convertible note accounted for under the fair value option.

Foreign exchange transaction

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

loss for the year ended December 31, 2025 and 2024 is immaterial due to lower balances in our deposit accounts and accounts payable denominated

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

dollar and the British pound sterling.

Foreign exchange

transaction loss for the year ended December 31, 2023 relates to the decreased exchange rate between the U.S.

dollar and the British

pound sterling during 2023 for our deposit accounts that are denominated in British pound sterling.

In addition, this amount includes

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

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

Other income (expenses),

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

connection with the Yorkville transaction and B.

including transaction costs for the year ended December 31, 2024 primarily relating to non-recurring legal, professional, and service

fees incurred in connection with the Yorkville transaction and B.

Riley purchase agreement.

Other income (expenses), including transaction costs for the

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

Non-GAAP Financial Measures

1 unchanged sentence

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

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

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

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

a substitute for, or superior to, GAAP results.

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

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

or trends that it fails to address.

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

trends that it fails to address.

Because of their non-standardized

10 unchanged sentences

Provision for income taxes

Net interest expense

Net interest expense (income)

Additional adjustments:

Stock-based compensation

Borrowing related costs

Change in fair value of warrant liability

Financing related costs

Amortization of debt discount

Change in fair value of warrant liabilities

Change in fair value of notes payable

Foreign exchange transaction (gain) loss

Foreign exchange transaction loss, net

Other (income) expenses, including transaction costs

Adjusted EBITDA

(1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024.

See further discussion in

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2024, we had approximately $5.2 million in cash,

notes payable of $2.8 million, and no long-term debt.

We had an accumulated deficit of approximately $48.1 million.

The Company incurred

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

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

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

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

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

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

(“Spectral IP”), convertible

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

On December 26, 2023, we

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

Riley Principal Capital II, LLC (“B.

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

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

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

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

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

of its Common Stock from the B.

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

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

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

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

set forth in the SEPA.

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

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

which will be paid in three tranches.

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

fixed conversion price of $3.16.

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

On May 14, 2024, the

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

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

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

with a fixed conversion price of $2.03.

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

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

As of December 31, 2025,

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

under the SEPA.

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

The sales of the shares of Common Stock to Yorkville

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

we had approximately $15.4 million in cash, notes payable of $8.4 million, of which $5.5 million represents long-term debt.

accumulated deficit of approximately $55.8 million.

The Company incurred a net loss of $7.6 million during the year ended December 31,

2025 and had working capital (current assets less current liabilities) of approximately ($1.2) million as of December 31, 2025.

used in operating activities was $9.9 million for the year ended December 31, 2025.

On October 22, 2025, the

Company entered into a securities purchase agreement, by and between Spectral AI, Inc.

and Hudson Bay Master Fund Ltd., which provided

for the issuance and sale of 3.1 million shares of Common Stock, at an offering price of $1.90 per share.

In addition, in a concurrent

private placement, the Company issued and sold warrants for the purchase of up to 4.0 million shares of Common Stock and pre-funded warrants

to purchase up to 0.9 million shares of common stock, for aggregate gross proceeds of $7.6 million (such transaction, the “Hudson

Bay Financing”).

Each warrant has an exercise price per share of $2.51 and will be exercisable on the earlier of (a) the effective

date of stockholder approval for the issuance of shares of Common Stock underlying the warrants and (b) the date that is six months following

the issuance date of the warrants and will have a term of five (5) years from such issuance date.

On March 21, 2025, the Company

entered into a (i) Loan and Security Agreement (the “LSA”), by and among the Company, Spectral MD Holdings LLC, Spectral MD,

and Avenue Venture Opportunities Fund II, L.P., a fund of Avenue Capital Group, as administrative agent and collateral agent and

as a lender (“Avenue”) and (ii) Supplement to Loan and Security Agreement (the “Supplement”), by and among the

Company, Spectral MD Holdings LLC, Spectral MD, Inc.

Pursuant to the LSA and Supplement, the Company has the ability to borrow

up to $15.0 million in funding from Avenue with an initial draw down of $8.5 million (such transaction, the “Avenue Financing”).

The loans under the LSA mature

on March 1, 2028, with an interest-only payment period of no less than 15 months, which can be extended to 24 months upon the achievement

of certain milestones prior to the end of such 15-month period as described in the Tranche 2 Milestone Date (as defined in the Supplement).

The Tranche 2 Commitment (as defined in the Supplement) includes an additional $6.5 million in debt financing and is contingent upon,

among other things, (i) U.S.

Food and Drug Administration’s (FDA) clearance of the Company’s DeepView System and (ii) an additional

$7.0 million equity raise to be completed by the Company.

The Avenue Financing also

included warrant coverage equal to 8.5% of the total funding commitment from Avenue, with an exercise price equal to the lower of (i)

average of the daily volume weighted average price of Common Stock as reported for each of five (5) consecutive trading days, determined

as of the end of the trading on the last trading day before the date of issuance, which was $1.66 and (ii) the lowest price per share

paid to the Company by cash investors for Common Stock issued in any sale of Common Stock in a bona-fide equity raising that closes at

any time commencing from March 21, 2025 through (but excluding) December 31, 2025.

On March 21, 2025, as a condition

to the Avenue Financing, the Company entered into securities purchase agreements with certain investors in the United States and the United

Kingdom for the sale of an aggregate of 2,076,923 shares of the Company’s Common Stock, at an offering price of $1.30 per Share

which raised an additional $2.7 million.

In November and December

2024, the Company issued 3,896,781 shares for aggregate net proceeds of approximately $4.5 million to certain institutional investors

through at-the market equity issuances, stock option exercises and the conversion of the Company’s wholly-owned subsidiary, Spectral

(“Spectral IP”), convertible promissory note into shares of the Company’s common stock.

We have historically funded

1 unchanged sentence

and development activity.

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

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

This multi-year contract includes an initial award

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

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

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

In September 2023, the Company

executed its third contract with BARDA for a multi-year PBS BARDA Contract, valued at up to approximately $150.0 million.

This multi-year

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

development and distribution purposes.

The Company completed the second contract with BARDA, referred to as BARDA Burn II, which was signed

in July 2019 and completed in November 2023.

Under this contract, the Company furthered the DeepView® System design, developed the

AI algorithm, and took steps to obtain FDA approval.

On March 18, 2026, the Company

announced that it has received a contract modification from BARDA for the advancement of $31.7 million from its existing contract

with BARDA which included (i) a no-cost extension of the base phase of the contract, and (ii) the acceleration of certain parts of the

next phase of such contract.

As part of this funding advance, the Company has committed to fund $9.7 million of the total overall

development costs associated with these feature advancements.

This funding comes as part of an ongoing partnership with BARDA, which

has committed $54.9 million to date under the contract with an overall value of approximately $150 million.

In April 2023, the Company

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

to run through December 2025.

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

be used to support military battlefield burn evaluation.

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

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

and then the manufacturing of the handheld device.

received a $4.0 million grant under the MTEC Agreement, which was increased to $4.9 million in August 2024.

In December 2025, the MTEC

contract was extended to run through June 2026.

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

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

and then the manufacturing of the handheld

Based on our current operating

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

Riley ELOC, and

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

financial statements.

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

capital resources sooner than we currently expect.

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

primarily on the burn indication.

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

Yorkville SEPA and the Hudson Bay Financing, will be sufficient to fund operations for at least one year beyond the release date of these

consolidated financial statements.

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

available capital resources sooner than we currently expect.

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

efforts primarily on the burn indication.

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

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

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

Riley ELOC and Yorkville SEPA as currently

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

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

expanding our burn indication.

Changes in the current equity markets may also limit our ability to utilize the Company’s resale registration statement

pursuant to Form S-3 as currently structured.

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

to raise additional capital on favorable terms or at all, and therefore we may not be able to execute our business plans and the continued

work on indications beyond expanding our burn indication.

Our future capital requirements

8 unchanged sentences

Operating Activities

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

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

offset by a decrease in net loss.

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

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

cash used in operating activities increased by approximately $1.4 million for the year ended December 31, 2025, as compared to the year

ended December 31, 2024 primarily driven by changes in accounts receivable, prepaid expenses, operating liabilities including accrued

expenses and deferred revenue.

The higher net loss is a result of reduced reimbursed research and development revenue based on lower BARDA

activity and lower non-operating transaction costs in the year ended December 31, 2025 compared to the year ended December 31, 2024.

Cash Flows Provided

by Financing Activities

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

December 31, 2023.

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

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

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

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

cash provided by financing activities increased approximately $11.2 million for the year ended December 31, 2025 compared to the year

ended December 31, 2024.

This was primarily attributable to $8.3 million of proceeds from the Avenue Financing and, $10.7 million of proceeds

from the sale of the Company’s Common Stock and warrants, partially offset by $1.5 million of repayments of notes payable issued

Current Indebtedness

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

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

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

In connection with the SEPA, and subject

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

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

be paid in three tranches.

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

price of $3.16.

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

On May 14, 2024, the shareholders voted

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

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

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

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

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

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

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

Interest shall accrue on the outstanding balance

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

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

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

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

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

unpaid interest hereunder as of each Installment Date.

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

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

In October 2024, the Company and Yorkville agreed to amend

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

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

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

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

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

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

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

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

The Company still

has access to the remaining funds under the SEPA.

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

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

Company has the ability under the LSA to borrow up to $15.0 million in funding from Avenue with an initial draw down of $8.5 million from

the Avenue Financing occurring in 2025.

loans under the LSA mature on March 1, 2028, with an interest-only payment period of no less than 15 months, which can be extended to

24 months upon the achievement of certain milestones prior to the end of such 15-month period as described in the Tranche 2 Milestone

Date (as defined in the Supplement).

The Tranche 2 Commitment (as defined in the Supplement) includes an additional $6.5 million in debt

financing and is contingent upon, among other things, (i) U.S.

FDA’s approval of the Company’s De Novo submission of the DeepView

System and (ii) an additional $7.0 million equity raise to be completed by the Company.

Avenue Financing also includes warrant coverage equal to 8.5% of the total funding commitment from Avenue, with an exercise price equal

to the lower of (i) average of the daily volume weighted average price of Common Stock as reported for each of five (5) consecutive trading

days, determined as of the end of the trading on the last trading day before the date of issuance, which was $1.66 and (ii) the lowest

price per share paid to the Company by cash investors for Common Stock issued in any sale of Common Stock in a bona-fide equity raising

that closes at any time commencing from March 21, 2025 through (but excluding) December 31, 2025.

Related Party Transactions

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

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

property with a specific emphasis on healthcare.

1 unchanged sentence

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

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

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

On October 1, 2024, the

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

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

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

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

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

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

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

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

of the outstanding principal and accrued but unpaid interest.

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

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

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

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

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

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.

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.

In 2024, the holder of the note converted all of the outstanding

principal and interest due and owing into shares of the Company’s Common Stock.

On May 5, 2025, the

Company entered into an intellectual property license agreement pursuant to which Spectral IP received a worldwide, non-exclusive, license

to one international patent asset of the Company for the purposes of commercializing and monetizing outside the core areas of focus of

the Company on market terms and conditions that are to be finalized.

There were no other related party transactions for the year ended

December 31, 2025.

Off-Balance Sheet

4 unchanged sentences

of our consolidated financial statements.

Accrued Research and Development Expenses

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

expenses as of each balance sheet date.

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

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

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

The majority of our service providers

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

however, some require

advance payments.

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

on facts and circumstances known to us at that time.

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

and make adjustments if necessary.

Determination of the Fair Value of

Equity-Based Awards

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

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

is generally the vesting period of the respective award.

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

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

We have also issued

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

We determine the fair value of time-based

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

We estimate the fair value of stock option

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

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

contractual term as the expected term of the award.

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

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

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

risk-free interest rate and expected dividends.

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

our expected volatility from the historical volatility of a representative group of publicly traded companies for which historical information

is available.

Determination of the Fair Value of Equity-Based

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

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

the vesting period of the respective award.

We have issued stock options, restricted stock awards and restricted stock units with time-based

vesting conditions and record the expense for these awards using the ratable method.

We have also issued stock options and restricted

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

We determine the fair value of time-based vesting restricted

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

We estimate the fair value of time-based vesting stock option awards

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

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

the expected term of the award.

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

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

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

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

instead estimate our expected volatility from the historical volatility of a representative group of publicly traded companies for which

historical information is available.

Beginning in the year ended December 31, 2025, we utilized the Company’s historical volatility

The historical volatility is generally calculated based on a period of time commensurate with the expected term assumption.

We use the simplified method to calculate the expected term for options granted to employees and directors, which is based on the average

use the simplified method to calculate the expected term for options granted to employees and directors, which is based on the average

of the time-to-vesting and the contractual life of the options.

7 unchanged sentences

term of the stock options.

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

plans to pay any dividends on our common stock.

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

of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock

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

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

to pay any dividends on our common stock.

Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report for information concerning certain of

the specific assumptions we used in applying the Black-Scholes option pricing model and Monte Carlo simulation model to determine the

estimated fair value of our stock options granted in the years ended December 31, 2025 and 2024.

Determination of

the Fair Value of Warrant Liabilities

Company’s Public Warrants, Angel Warrants, Investor Warrants, Avenue Warrants and Hudson Warrants are accounted for as liabilities

in accordance with ASC 815-40 and are presented within warrant liabilities in our audited consolidated financial statements included elsewhere

in this Annual Report.

warrant liabilities are measured at fair value at inception and on a recurring basis until exercised, with changes in fair value presented

within the consolidated statement of operations.

The fair value of the Public Warrants is determined using the closing price of the warrants

in an active market (the NASDAQ), which is considered a Level 1 fair value measurement.

We determine the value of the Angel Warrants and

the Avenue Warrants using a Black-Scholes option pricing model and the Investor Warrants and Hudson Warrants using a Monte Carlo simulation

The valuation of the Angel Warrants, Avenue Warrants, Investor Warrants, and Hudson Warrants are considered Level 3 fair value

measurements because the valuations are based on significant inputs that are unobservable in the market.

These models consider several

variables and assumptions in estimating the fair value of financial instruments, including the per-share fair value of the underlying

common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the expected term, and expected

annual dividend yield.

The Company also makes certain assumptions about the probability of certain change of control or financing events

as of each valuation date.

Certain inputs utilized in our valuation models may fluctuate in future periods based upon factors which are

outside of the Company’s control.

A significant change in one or more of these inputs used in the calculation of the fair value

may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being

reported in our consolidated statement of operations.

Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report for information concerning certain of

the specific assumptions we used in applying the Black-Scholes option pricing model and Monte Carlo simulation model to determine the

estimated fair value of the warrants as of December 31, 2025 and 2024.

Revenue Recognition

for MTEC Agreement

Company generates research and development revenue, including revenue under a grant agreement with MTEC, whereby the Company is developing

a handheld version of the DeepView System which is to be used to support military battlefield burn evaluation.

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.

under the MTEC Agreement is recognized over time using the cost-to-cost input method to measure progress toward completion.

believes this method best reflects the transfer of services to the customer, as it directly correlates incurred costs with the value delivered

to the customer.

Because the customer receives and benefits from ongoing access to the Company’s research and development efforts

as they are performed, revenue is recognized incrementally as research activities occur.

The Company measures progress of performance

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

Estimated costs include our latest estimates

using judgments with respect to research hours and materials costs.

This method requires us to make estimates of the total costs we expect

to incur and the total length of time it will take us to complete our promised research and development services.

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

Adjustments to these estimates could materially impact the timing and amount of recognized revenue.

Recent Accounting

Pronouncements

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

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

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

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

position included in this Form 10-K.

2 unchanged sentences

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

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

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

would otherwise apply to private companies.

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

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

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

As a result, our financial statements may not be

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

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

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

otherwise apply to private companies.

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

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

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

As a result, our financial statements may not be comparable

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

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

1 unchanged sentence

These provisions include:

being permitted to present

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

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

Condition and Results of Operations”;

an exception from compliance

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

reduced disclosure about

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

exemptions from the requirements

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

being permitted to present only two years of audited consolidated financial statements in addition to any required unaudited interim consolidated financial statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

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

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

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

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

21 unchanged sentences

compensation.

Quantitative and Qualitative Disclosures

about Market Risk

Quantitative and Qualitative Disclosures about Market

Not required.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis