Spectral AI, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (the “Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section titled “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview 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 receipt of the UKCA mark for burn indication on our DeepView System, we expect to begin commercialization activities in the United Kingdom in 2026. Our DeepView System uses proprietary algorithms to distinguish between damaged and healthy human tissue invisible to the naked eye, providing “Day One” healing assessments. DeepView’s output is specifically engineered to allow the physician to make a more accurate, timely and informed decision regarding the treatment of the patient’s wound. Our focus has been on the burn indication which is supported by the BARDA PBS contract. For burn wounds, a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting. 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. In 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. This represents a significant improvement above the diagnostic accuracy of burn physicians assessing the same population. In addition 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. 56 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 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 was extended to run through December 2025 with funding dependent on various milestones. In December 2025, the MTEC contract was extended to run through June 2026. 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. 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. 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. 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 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 Our cost of revenues consists primarily of direct and indirect costs associated with the research and development activities relating to the BARDA and MTEC contracts. Our cost of revenue is affected by the extent of research and development activities as well as expansion of work on other U.S. governmental projects and the expanded applications for our DeepView System. 57 Gross Profit Gross profit may vary from period-to-period and is primarily affected by the current reimbursement rates under the BARDA contract and other U.S. governmental contract awards. These reimbursement rates are fixed under the BARDA contract. Under the BARDA contract our gross profit represents this reimbursement rate plus a fixed fee component relating to non-reimbursed expenses incurred in connection with the work completed. Under the other fixed fee U.S. governmental contract awards our gross profit corresponds to the achievement of pre-determined milestones. Operating Expenses Operating costs and expenses consist of general and administrative expenses. These expenses primarily relate to salaries and related costs of our organization’s support and operations staff, consulting fees, rent, insurance and office expenses, and our non-revenue generating research and development expenses, primarily related to salaries and related costs and consulting fees. Other Income (Expense) 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. 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 these metrics for the years ended December 31, 2025 and 2024 (in thousands): Year Ended December 31, 2025 2024 (1) Change Research and development revenue $ 19,650 $ 29,581 $ (9,931 ) Gross profit 8,925 13,274 (4,349 ) Gross margin 45.4 % 44.9 % 0.5 % Operating loss (8,603 ) (6,582 ) (2,021 ) Net loss (7,571 ) (15,158 ) 7,587 Adjusted EBITDA (7,417 ) (5,540 ) (1,877 ) (1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024. See further discussion in Note 1. See “Non-GAAP Financial Measures” below for a reconciliation of net loss to Adjusted EBITDA. 58 Research and Development Revenue We define research and development revenue as revenue generated from the research, testing and development of our DeepView System as utilized in connection with our burn indication. This research and development revenue reflects applied research and experimental development costs relating to our burn application as developed in connection with our BARDA, MTEC and DHA contracts. 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, 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. See “Non-GAAP Financial Measures” for a reconciliation of GAAP net loss to Adjusted EBITDA. Key Factors that May Influence Future Results of Operations Our financial results of operations may not be comparable from period to period due to several factors. Key factors affecting our results of operations are summarized below. Revenue Sources. As a pre-commercialization company, we currently generate revenue almost exclusively from two U.S. governmental agencies. We are highly dependent upon the continuation of the existing U.S. governmental contract awards, as well as future governmental procurement or other awards. Our operating results may not be comparable between periods as the timing and amount of awards or procurements from the U.S. 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. Gross Margin. When we begin commercial sales of the DeepView System, we may need to determine lower pricing and incentives to accelerate adoption and implementation of the DeepView System, which may negatively impact future revenue and gross margin percentages. Managing our Supply Chain. We are reliant on contract manufacturers and suppliers to produce our components. While we have not been subject to any disruptions in our current limited production, we may be subject to component shortages, which may cause delays in critical components and inventory, longer lead times, increased costs and delays in product shipments. Our ability to grow depends, in part, on the ability of our contract manufacturers and suppliers to provide high quality services and deliver components and finished products on time and at reasonable costs. While we do not maintain sole-source suppliers, there is a concentration of suppliers which could lead to supply shortages, long lead times for components and supply changes. In the event we are unable to mitigate the impact of delays and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our products, which would adversely impact our cash flows and results of operations, including revenue and gross margin. 59 Results of Operations The following table summarizes of our results of operations for the years ended December 31, 2025 and 2024 (in thousands): Year Ended December 31, 2025 2024 (1) Change Research and development revenue $ 19,650 $ 29,581 $ (9,931 ) Cost of revenue (10,725 ) (16,307 ) 5,582 Gross profit 8,925 13,274 (4,349 ) Operating costs and expenses: General and administrative 17,528 19,856 (2,328 ) Total operating costs and expenses 17,528 19,856 (2,328 ) Operating loss (8,603 ) (6,582 ) (2,021 ) Other income (expense): Net interest income (expense) (886 ) 14 (900 ) Financing related costs (1,051 ) (2,965 ) 1,914 Amortization of debt discount (455 ) - (455 ) Change in fair value of warrant liabilities 3,249 (4,633 ) 7,882 Change in fair value of notes payable 220 (220 ) 440 Foreign exchange transaction loss, net (34 ) (43 ) 9 Transaction costs - (615 ) 615 Total other income (expense), net 1,043 (8,462 ) 9,505 Loss before income taxes (7,560 ) (15,044 ) 7,484 Income tax provision (11 ) (114 ) 103 Net loss $ (7,571 ) $ (15,158 ) $ 7,587 (1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024. See further discussion in Note 1. Research and development revenue Year Ended December 31, Change in 2025 2024 $ % Research and development revenue $ 19,650 $ 29,581 $ (9,931 ) (33.6 )% 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. 60 For the year ended December 31, 2025 and 2024, the Company’s revenues disaggregated by the major sources was as follows: Year Ended December 31, Change in 2025 2024 $ % BARDA $ 17,700 $ 27,903 $ (10,203 ) (36.6 )% Other U.S. governmental authorities 1,950 1,678 272 16.2 % Total research and development revenue $ 19,650 $ 29,581 $ (9,931 ) (33.6 )% Cost of Revenues and Gross Profit Year Ended December 31, Change in 2025 2024 $ % Cost of revenue $ 10,725 $ 16,307 $ (5,582 ) (34.2 )% Gross profit 8,925 13,274 (4,349 ) (32.8 )% Gross margin 45.4 % 44.9 % 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 the decrease in research and development revenue. Gross margin for the year 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 Year Ended December 31, Change in 2025 2024 $ % General and administrative expense $ 17,528 $ 19,856 $ (2,328 ) (11.7 )% 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. Non-revenue 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. 61 Other income (expense) Year Ended December 31, Change in 2025 2024 $ Net interest (expense) income $ (886 ) $ 14 $ (900 ) Financing related costs (1,051 ) (2,965 ) 1,914 Amortization of debt discount (455 ) - (455 ) Change in fair value of warrant liabilities 3,249 (4,633 ) 7,882 Change in fair value of notes payable 220 (220 ) 440 Foreign exchange transaction loss, net (34 ) (43 ) 9 Other expenses, including transaction costs - (615 ) 615 Total other income (expense), net $ 1,043 $ (8,462 ) $ 9,505 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, 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. In addition, 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 relating to non-recurring legal, professional, and service fees incurred in connection with the Yorkville transaction and B. Riley purchase agreement. Non-GAAP Financial Measures We use Adjusted EBITDA as a non-GAAP metric when measuring performance, including when measuring current period results against prior periods’ Adjusted EBITDA. This non-GAAP financial measure should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, Adjusted EBITDA should not be construed as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that it fails to address. 62 Because of their non-standardized definitions, non-GAAP measures (unlike GAAP measures) may not be comparable to the calculation of similar measures of other companies. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Supplemental non-GAAP measures are presented solely to permit investors to more fully understand how Spectral AI’s management assesses underlying performance. Adjusted EBITDA We define Adjusted EBITDA as net loss excluding income taxes, depreciation of property and equipment, net interest income, stock compensation, transaction costs and any non-operating financial income and expense. The following table presents our Adjusted EBITDA for the years ended December 31, 2025 and 2024 (in thousands): Year Ended December 31, 2025 2024 (1) Net loss $ (7,571 ) $ (15,158 ) Adjust: Depreciation expense 71 10 Provision for income taxes 11 114 Net interest expense (income) 886 (14 ) EBITDA (6,603 ) (15,048 ) Additional adjustments: Stock-based compensation 1,115 1,032 Financing related costs 1,051 2,965 Amortization of debt discount 455 - Change in fair value of warrant liabilities (3,249 ) 4,633 Change in fair value of notes payable (220 ) 220 Foreign exchange transaction loss, net 34 43 Other (income) expenses, including transaction costs - 615 Adjusted EBITDA $ (7,417 ) $ (5,540 ) (1) Reflects an adjustment of $157,000 to the income tax provision during the year ended December 31, 2024. See further discussion in Note 1. Liquidity and Capital Resources Sources of Liquidity As of December 31, 2025, we had approximately $15.4 million in cash, notes payable of $8.4 million, of which $5.5 million represents long-term debt. We had an 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. Net cash 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. 63 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, Inc. 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. and Avenue. 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 IP, Inc. (“Spectral IP”), convertible promissory note into shares of the Company’s common stock. We have historically funded our operations through the issuance of notes and the sale of common stock, along with payments under governmental contracts for research and development activity. In September 2023, the Company executed its third contract with BARDA for a multi-year PBS BARDA Contract, valued at up to approximately $150.0 million. This multi-year contract includes an initial award of nearly $54.9 million to support the clinical validation and FDA clearance of DeepView® for commercial development and distribution purposes. The Company completed the second contract with BARDA, referred to as BARDA Burn II, which was signed in July 2019 and completed in November 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. 64 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. 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 and testing; followed by development, design modification and buildout of the handheld device; and then the manufacturing of the handheld device. Based on our current operating plan, we believe that our cash and cash equivalents, together with the PBS BARDA Contract, the MTEC Agreement, the 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 control. 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 will depend on many factors, including the revenue growth rate, the success of future product development and capital investment required, and the timing and extent of spending to support further sales and marketing and research and development efforts. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected. Cash Flows The following table summarizes our cash flows for the years ended December 31, 2025 and 2024 (in thousands): Year Ended December 31, 2025 2024 Net cash used in operating activities $ (9,920 ) $ (9,199 ) Net cash provided by financing activities 20,120 9,575 Cash Flows Used in Operating Activities Net 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 Net 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 in 2024. Current Indebtedness The 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. 65 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. 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. The 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 On 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. 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. 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 Arrangements During the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Critical Accounting Policies Our significant accounting policies are described in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report. We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Determination of the Fair Value of Equity-Based Awards We measure stock options and other stock-based awards granted to directors, employees, and non-employees based on their fair value on the date of the grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We have 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 dividends. 66 Due 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 to date. 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 of the time-to-vesting and the contractual life of the options. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For grants to non-employees, the relevant accounting literature allows entities to use the expected term to measure non-employee options or elect to use the contractual term as the expected term, on an award-by-award basis. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock 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. See 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 The 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. The 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 model. 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. See 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 The 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. 67 Revenue under the MTEC Agreement is recognized over time using the cost-to-cost input method to measure progress toward completion. The Company 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 basis. Adjustments to these estimates could materially impact the timing and amount of recognized revenue. Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included elsewhere in this Form 10-K for recently adopted accounting standards and recently issued accounting standards as of the dates of the statement of financial position included in this Form 10-K. Emerging Growth Company and Smaller Reporting Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply more promptly with new or revised accounting pronouncements as of public company effective dates. In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include: ● being permitted to present only two years of audited consolidated financial statements in addition to any required unaudited interim consolidated financial statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; ● an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended; ● reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; ● exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and 68 We may take advantage of these provisions until the last day of the fiscal year ending after the fifth anniversary of our initial public offering or such earlier time that we no longer qualify as an emerging growth company. We will cease to qualify as an emerging growth company on the date that is the earliest of: (i) December 31, 2026; (ii) the last day of the fiscal year in which we have more than $1.235 billion in total annual gross revenues; (iii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and we have been a public company for at least 12 months and have filed one annual report on Form 10-K; or (iv) the date on which we have issued more than $1.0 billion of non-convertible debt over the prior three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. Accordingly, the information contained herein may be different than you might obtain from other public companies in which you hold equity interests. We are also a “smaller reporting company.” If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. Item 7.A. Quantitative and Qualitative Disclosures about Market Risk Not required.