Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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 the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2024 (the "2024 Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly 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," in our 2024 Annual Report and in other reports we have filed or may file with the SEC, 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 AI company focused on predictive medical diagnostics. We operate in one segment. Currently, we are devoting substantially all our efforts towards research and development of our DeepView System, an internally developed multi-spectral imaging ("MSI") device that has previously received FDA breakthrough device designation ("BDD") status. 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.

For burn wounds, a non-healing assessment could aid the clinician in making an immediate and objective determination for appropriate candidates for surgery, as well as determining what specific areas of the burn wound will require excision and skin grafting. We have conducted three large clinical studies with multiple sites across the United States, enrolling 413 burn patients, including 329 adult and 84 pediatric patients. Through these studies, we were able to quantify the burn assessment accuracy in patients undergoing both surgical and non-surgical treatment. In December 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.

The Company has not generated any product revenue to date. The Company currently generates revenue from contract development and research services by providing such services to governmental agencies, primarily to the Biomedical Advanced Research and Development Authority ("BARDA") and under a contract with the Medical Technology Enterprise Consortium ("MTEC").

We have received substantial support from the U.S. government for our DeepView System's application for burn wounds from BARDA, which is part of the Department of Health and Human Services 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 National Institute of Health and the Defense Health Agency ("DHA"), an agency within the Department of Defense. On September 27, 2023, the Company executed a new contract with BARDA, providing the Company with additional funding of up to $150.0 million, including an initial award of approximately $54.9 million to support the clinical validation study, include the distribution of up to 30 DeepView Systems in various emergency rooms and burn centers to support the study and for the Company's FDA De Novo submission of our DeepView AI - Burn software, which was completed on June 30, 2025. The contract also includes options, similar to our prior BARDA contracts, with an additional total value of approximately $95.1 million which can be exercised for additional product development, procurement and the expanded deployment of DeepView Systems at emergency rooms, trauma and burn centers. These deployments will enable the Company to conduct health economic and outcome research to support the broader clinical adoption of the DeepView System.

In addition to our BARDA contract, we received a $4.0 million grant award from MTEC in April 2023, is to be used to support military battlefield burn evaluation via a handheld DeepView System device. In August 2024, the MTEC award was increased to $4.9 million and is currently intended to run through December 2025 with funding dependent on various milestones. In March 2024, we received an additional $0.5 million award from the DHA.

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.

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, 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 Three and Nine Months Ended September 30, 2025 and 2024

The following table summarizes these metrics for the three and nine months ended September 30, 2025 and 2024 (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
		(In thousands)
Research and development revenue		$	3,792			$	8,173			$	15,564			$	21,977
Gross profit			1,621				3,667				7,079				9,926
Gross margin			42.7	%			44.9	%			45.5	%			45.2	%
Operating loss			(3,341	)			(886	)			(6,360	)			(5,471	)
Net loss			(3,552	)			(1,504	)			(8,623	)			(7,573	)
Adjusted EBITDA			(3,050	)			(711	)			(5,446	)			(4,606	)

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

Research and Development Revenue

We define research and development revenue as revenue generated from the research, testing and development of our DeepView System as utilized in connection with our burn indication. This research and development revenue reflects applied research and experimental development costs relating to our burn application as developed in connection with our BARDA, MTEC, and DHA contracts.

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.

Components of Consolidated Statements of Operations

Research and Development Revenue

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. 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. During 2023, we received a grant under the MTEC Agreement which we earn based on the achievement of milestones. Our revenue growth is dependent on a number of factors including expanding the research and development expense 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.

Cost of Revenue

Our cost of revenues consists primarily of direct and indirect costs associated with the research and development expenses relating to the BARDA and MTEC contracts. Our revenue costs are affected by the extent of research and development expenses as well as expansion of work on other U.S. governmental projects and the expanded applications for our DeepView System.

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, as well as the percentage of revenue related to the BARDA contract as compared to the MTEC project. These reimbursement rates are fixed under each contact award. Our gross profit represents this reimbursement rate plus a variable component relating to non-reimbursed expenses incurred in connection with the work completed on these contracts.

Operating Costs and Expenses

Operating costs and expenses consist of general and administrative expense. 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)

Other income (expense) primarily consists of transaction costs, primarily related to the Business Combination, net interest income, change in fair value of warrant liabilities and foreign exchange transaction gains/losses. Historic foreign exchange transaction loss primarily relates to changes in the exchange rate between the U.S. 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 buying British pound sterling for payment of our employees and vendors in the UK.

Results of Operations

The following table summarizes our results of operations for the three and nine months ended September 30, 2025 and 2024 (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
		(In thousands)
Research and development revenue		$	3,792			$	8,173			$	15,564			$	21,977
Cost of revenue			(2,171	)			(4,506	)			(8,485	)			(12,051	)
Gross profit			1,621				3,667				7,079				9,926
Operating costs and expenses:
General and administrative			4,962				4,553				13,439				15,397
Total operating costs and expenses			4,962				4,553				13,439				15,397
Operating loss			(3,341	)			(886	)			(6,360	)			(5,471	)
Other income (expense):
Net interest expense			(300	)			(8	)			(597	)			-
Borrowing related costs			(164	)			(1,059	)			(869	)			(2,034	)
Change in fair value of warrant liability			264				350				(932	)			718
Change in fair value of notes payable			-				94				220				(7	)
Foreign exchange transaction loss, net			(9	)			(9	)			(31	)			(34	)
Other income (expenses), including transaction costs			-				51				-				(617	)
Total other expense, net			(209	)			(581	)			(2,209	)			(1,974	)
Loss before income taxes			(3,550	)			(1,467	)			(8,569	)			(7,445	)
Income tax provision			(2	)			(37	)			(54	)			(128	)
Net loss		$	(3,552	)		$	(1,504	)		$	(8,623	)		$	(7,573	)

Research and Development Revenue

		Three Months Ended September 30,								Change in								Nine Months Ended September 30,								Change in
		2025				2024				$				%				2025				2024				$				%
		(In thousands, except percentages)
Research and development revenue		$	3,792			$	8,173			$	(4,381	)			-53.6	%		$	15,564			$	21,977			$	(6,413	)			-29.2	%

Research and development revenue was $3.8 million and $15.6 million for the three and nine months ended September 30, 2025, respectively, a decrease of 53.6% and 29.2%, respectively, compared to the same periods in 2024, reflecting reduced research and development as we approached DeNovo submission under the PBS BARDA Contract.

For the three and nine months ended September 30, 2025 and 2024, the Company's revenues disaggregated by the major sources were as follows (in thousands):

		Three Months Ended September 30,								Change in								Nine Months Ended September 30,								Change in
		2025				2024				$				%				2025				2024				$				%
		(In thousands, except percentages)
BARDA		$	3,442			$	7,567			$	(4,125	)			-54.5	%		$	14,472			$	20,734			$	(6,262	)			-30.2	%
Other U.S. governmental authorities			350				606				(256	)			-42.2	%			1,092				1,243				(151	)			-12.1	%
Total research and development revenue		$	3,792			$	8,173			$	(4,381	)			-53.6	%		$	15,564			$	21,977			$	(6,413	)			-29.2	%

Cost of Revenues and Gross Profit

		Three Months Ended September 30,								Change in								Nine Months Ended September 30,								Change in
		2025				2024				$				%				2025				2024				$				%
		(In thousands, except percentages)
Cost of revenue		$	2,171			$	4,506			$	(2,335	)			-51.8	%		$	8,485			$	12,051			$	(3,566	)			-29.6	%
Gross profit			1,621				3,667				(2,046	)			-55.8	%			7,079				9,926				(2,847	)			-28.7	%
Gross margin			42.7	%			44.9	%											45.5	%			45.2	%

Cost of revenue for the three and nine months ended September 30, 2025 was $2.1 million and $8.5 million, respectively, a decrease of 51.8% and 29.6%, respectively, compared to the same periods in 2024, due to reduced research and development as we approached DeNovo submission to fulfill our U.S. governmental contracts, in conjunction with decreased research and development revenue.

Gross margin for the three and nine months ended September 30, 2025 was 42.7% and 45.5%, respectively, a decrease of 2.1% and increase of 0.3%, respectively, as compared to the same periods in 2024, due to a higher concentration of direct labor as a component of our overall revenue.

General and Administrative Expense

		Three Months Ended September 30,								Change in								Nine Months Ended September 30,								Change in
		2025				2024				$				%				2025				2024				$				%
		(In thousands, except percentages)
General and administrative expense		$	4,962			$	4,553			$	(409	)			9.0	%		$	13,439			$	15,397			$	(1,958	)			-12.7	%

General and administrative expense was $5.0 million for the three months ended September 30, 2025, an increase of 9.0%, as compared to the same period in 2024 due to the shift from BARDA research and development to administrative work for FDA submission. Non-revenue generating research and development activities, primarily related to salaries and related costs and consulting fees. Additionally, the Company incurred less put option and premium expense for financing transactions in the current year.

General and administrative expense was $13.4 million, for the nine months ended September 30, 2025, respectively, a decrease of 12.7% as compared to the same period in 2024, from the reduction in research and development as the Company completed its FDA DeNovo submission in the end of the second quarter of 2025. Non-revenue generating research and development activities, primarily related to salaries and related costs and consulting fees, have decreased by approximately $2.5 million for the nine months ended September 30, 2025 compared to the same period in 2024.

Other income (expense)

		Three Months Ended September 30,								Change in				Nine Months Ended September 30,								Change in
		2025				2024				$				2025				2024				$
		(In thousands, except percentages)
Net interest expense		$	(300	)		$	(8	)		$	(292	)		$	(597	)		$	-			$	(597	)
Borrowing related costs			(164	)			(1,059	)			895				(869	)			(2,034	)			1,165
Change in fair value of warrant liability			264				350				(86	)			(932	)			718				(1,650	)
Change in fair value of notes payable			-				94				(94	)			220				(7	)			227
Foreign exchange transaction loss, net			(9	)			(9	)			-				(31	)			(34	)			3
Other income (expenses), including transaction costs			-				51				(51	)			-				(617	)			617
Total other income (expense), net		$	(209	)		$	(581	)		$	372			$	(2,209	)		$	(1,974	)		$	(235	)

Net interest expense for the three and nine months ended September 30, 2025 primarily relate to interest expense associated with the Avenue Financing as well as costs related to the Company's insurance policy financing.

Change in fair value of warrant liability decreased by approximately $86 thousand for the three months ended September 30, 2025 as compared to the same period in 2024. Change in fair value of warrant liability was an expense of $0.9 million for the nine months ended September 30, 2025, as compared to a benefit of $0.7 million for same period in 2024. The changes reflect fluctuations in the fair value of the Company's warrants during the three-month and nine-month period ended September 30, 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.

Foreign exchange transaction loss for three and nine months ended September 30, 2025 are 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 three and nine months ended September 30, 2024 relates to the increased 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 buying British pound sterling for payment of our employees and vendors in the UK.

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.

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 three and nine months ended September 30, 2025 and 2024 (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
		(In thousands)
Net loss		$	(3,552	)		$	(1,504	)		$	(8,623	)		$	(7,573	)
Adjust:
Depreciation expense			30				2				42				7
Provision for income taxes			2				37				54				128
Net interest expense			300				8				597				-
EBITDA			(3,220	)			(1,457	)			(7,930	)			(7,438	)
Additional adjustments:
Stock-based compensation			261				173				872				858
Borrowing related costs			164				1,059				869				2,034
Change in fair value of warrant liability			(264	)			(350	)			932				(718	)
Change in fair value of notes payable			-				(94	)			(220	)			7
Foreign exchange transaction loss			9				9				31				34
Other (income) expenses, including transaction costs			-				(51	)			-				617
Adjusted EBITDA		$	(3,050	)		$	(711	)		$	(5,446	)		$	(4,606	)

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2025 we had approximately $10.5 million in cash, which is flat when compared to the second quarter of 2025. We had notes payable of $7.8 million, and no other long-term debt. We had an accumulated deficit of approximately $56.9 million.

We have historically funded our operations through the issuance of notes and common stock, along with payments under governmental contracts for research and development activity.

The new PBS BARDA Contract, executed in September 2023, has a total value of up to approximately $150.0 million if all future options are executed. The base phase of the PBS BARDA Contract, valued at $54.9 million, was exercised concurrently with the contract award in September 2023. To date, our total potential support from BARDA is nearly $272.9 million for our 2013, 2019, and 2023 awards. In April 2023, we received a $4.0 million grant under 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. See "Research and Development Revenue" above. With the PBS BARDA Contract, the recent $7.6 million common stock offering and funding available through the Avenue Financing (as described below), the Company believes it will have sufficient working capital to fund operations for at least one year beyond the release date of the condensed consolidated financial statements.

On March 21, 2025, the Company entered into (i) a 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) a 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 October 2025, the Company entered into a securities purchase agreement 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.

Our future capital requirements will depend on many factors, including the revenue growth rate, the success of future product development and capital investment required, and the timing and extent of spending to support further sales and marketing and research and development efforts. In addition, we expect to incur additional costs as a result of operating as a U.S. public company. There can be no assurance that we will be successful in raising any additional capital. If additional financing is required from outside sources, we cannot be sure that any additional financing will be available to us on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2025 and 2024 (in thousands):

		Nine Months Ended September 30,
		2025				2024
Net cash used in operating activities		$	(7,368	)		$	(9,668	)
Net cash provided by (used in) financing activities			12,670				8,567

Cash Flows Used in Operating Activities

Net cash used in operating activities decreased by approximately $2.3 million for the nine months ended September 30, 2025, as compared to the nine months ended September 30, 2024, primarily driven by decreased staffing levels and consulting costs and expenses resulting from the change in focus to DeepView Burn.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities increased to approximately $12.7 million for the nine months ended September 30, 2025 as compared to $8.6 million for the nine months ended September 30, 2024. This was primarily attributable to proceeds from the Avenue Financing of $8.3 million, proceeds from the exercise of common stock warrants of $2.0 million and the attendant equity raise of $3.1 million partially, offset by the loan repayments on the Yorkville debt facility.

Current Indebtedness

The Company has the ability with 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.

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. FD A's 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 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 intelligent intellectual property with a specific emphasis on healthcare. On March 19, 2024, the Company announced that Spectral IP received a $1.0 million investment from an affiliate of its largest stockholder for the development of its artificial intelligence intellectual property portfolio. The investment was 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 stockholders or if Spectral IP is sold to a third party (the "Spectral IP Note").

On October 1, 2024, the Spectral IP Note was amended to (i) reduce the annual interest rate from 8% to 4%, (ii) extend the term of the Spectral IP 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 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. 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 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. There were no outstanding obligations due and owing under the Spectral IP Note as of September 30, 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 management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which include, but are not limited to, revenue recognition, warrant liabilities, fair value of certain debt, stock-based compensation expense, stock issued for transaction costs, the net realizable value of inventory, right-of-use assets, and income tax valuation allowances. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on March 31, 2025. During the nine months ended September 30, 2025, there were no material changes to our critical accounting policies from those previously disclosed.

Recent Accounting Pronouncements

See Note 2, Recent Accounting Pronouncements, of the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q 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-Q.

Emerging Growth Company

We are an emerging growth company, as defined in 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:

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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";

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

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

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

We may take advantage of these provisions until the last day of the fiscal year ending after the fifth anniversary of the Company's initial public offering or such earlier time that we no longer qualify as an emerging growth company. We will cease to qualify as an emerging growth company on the date that is the earliest of: (i) December 31, 2026; (ii) the last day of the fiscal year in which we have more than $1.235 billion in total annual gross revenues; (iii) the date on which we are deemed to be a "large accelerated filer" under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and we have been a public company for at least 12 months and have filed one annual report on Form 10-K; or (iv) the date on which we have issued more than $1.0 billion of non-convertible debt over the prior three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. Accordingly, the information contained herein may be different than you might obtain from other public companies in which you hold equity interests.

We are also a "smaller reporting company." If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, credit and inflation risks.

Interest Rate Sensitivity

We maintain a large amount of our assets in cash. Our cash is held primarily in cash deposits. The fair value of our cash would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. Additionally, changes to interest rates will impact on the cost of any future borrowings. With respect to our current borrowings, the interest rates on the notes are Prime plus 5%. Changes in prevailing interest rates could have a material impact on our results of operations.

Foreign Currency Risk

Our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States and United Kingdom, with an insignificant portion of expenses incurred in our wholly owned subsidiaries in the UK and denominated in British pound sterling.

Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and accounts receivable. The vast majority of our cash is held in U.S. financial institutions which, at times, exceed federally insured limits. We have not recognized any losses from credit risks on such accounts. We believe we are not exposed to significant credit risk on cash.

Additional credit risk is related to our concentration of receivables and revenues. One customer (which is a U.S. government agency) represents the majority of our research and development revenue and accounts receivable.

Inflation Risk

If the cost of our products, employee costs, or other costs continue to be subject to significant inflationary pressures, such inflationary pressure may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expense. As a result, our inability to quickly respond to inflation could harm our cash flows and results of operations in the future.