Spectral AI (NASDAQ: MDAI) wins FDA De Novo nod but faces revenue drop
Spectral AI, Inc. reported lower research and development revenue as it transitions from government-funded development toward commercialization of its DeepView System. Revenue was $3.5 million for the quarter and $7.5 million for the first half of 2026, down 30.4% and 36.2% from 2025, mainly due to reduced reimbursed costs under the PBS BARDA contract and cost-share provisions in the follow-on phase.
The company posted a quarterly net loss of $4.2 million and a year‑to‑date net loss of $7.6 million, with operating expenses rising on non‑reimbursed R&D, higher stock‑based compensation and commercialization spending. Cash and cash equivalents were $14.0 million and total debt $14.9 million, contributing to a stockholders’ deficit of $12.1 million. Management expects existing cash, the PBS BARDA contract and the Yorkville SEPA to fund operations for at least one year, but notes potential need for additional capital.
Strategically, the FDA granted De Novo classification for DeepView for burn indications on May 26 2026, allowing U.S. commercial distribution, with first sales expected by year‑end 2026 and U.K. commercialization following UKCA marking. BARDA accelerated $31.7 million of funding under the up‑to‑$150 million PBS contract, while a previously disclosed material weakness in internal control over financial reporting remains under remediation.
Positive
- FDA De Novo classification for the DeepView System on May 26, 2026 authorizes U.S. commercial distribution for burn indications, supporting planned first commercial sales by late 2026.
- BARDA accelerated $31.7 million of funding within an up‑to‑$150 million PBS contract, with $86.6 million committed to date, providing substantial non‑dilutive support.
- Management states that cash of $14.0 million, BARDA commitments and the Yorkville SEPA together provide working capital for at least one year under the current operating plan.
Negative
- Research and development revenue declined 30.4% in the quarter and 36.2% year‑to‑date to $3.5 million and $7.5 million, respectively, as BARDA reimbursement tapered.
- Net cash used in operating activities increased to $7.8 million for the first half of 2026 from $4.9 million a year earlier, reflecting higher losses and working‑capital outflows.
- The company reports a continuing material weakness in internal control over financial reporting related to the financial close process and disclosure controls.
- Balance sheet remains highly leveraged, with $14.9 million of debt and a stockholders’ deficit of $12.1 million, increasing financial risk ahead of commercialization.
Filing Explained
As of August 11, 32,184,928 shares were outstanding, with additional warrants and options potentially adding shares; the company also added $6.5 million of debt financing.
This Form 10-Q provides unaudited interim financial statements and updates through
The largest completed issuance was 935,000 shares from pre-funded warrants exercised at
On
The company reported approximately
The material weakness in financial-reporting controls remained unresolved as of June 30; management said testing in the second half of 2026 is intended to support a remediation conclusion. The Yorkville SEPA is scheduled to expire in
Key Figures
Key Terms
De Novo classification regulatory
Project BioShield regulatory
warrant liabilities financial
stockholders’ deficit financial
material weakness financial
standby equity purchase agreement financial
AI-generated analysis. How Rhea-AI works. Not financial advice.
FAQ
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
For the quarterly period ended
For the transition period from to
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
| (State or other jurisdiction of incorporation or organization) |
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(Address of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Smaller Reporting Company | ||
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 11, 2026, there were
SPECTRAL AI, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2026
TABLE OF CONTENTS
| Page | ||
| Part I. Financial Information | 1 | |
| Item 1. Interim Financial Statements | 1 | |
| Unaudited Condensed Consolidated Balance Sheets as of June 30, 2026 and December 31, 2025 | 1 | |
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2026 and 2025 | 2 | |
| Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and six months ended June 30, 2026 and 2025 | 3 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2026 and 2025 | 4 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 22 | |
| Item 4. Controls and Procedures | 23 | |
| Part II. Other Information | 24 | |
| Item 1. Legal Proceedings | 24 | |
| Item 1A. Risk Factors | 24 | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 24 | |
| Item 3. Defaults Upon Senior Securities | 24 | |
| Item 4. Mine Safety Disclosures | 24 | |
| Item 5. Other Information | 24 | |
| Item 6. Exhibits | 24 | |
| Part III. Signatures | 25 | |
i
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that are forward-looking and as such are not historical facts, including statements regarding our strategy, plans, objectives, initiatives, expected commercialization activities and financial outlook. These statements constitute projections, forecasts and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, that may cause actual results or performance to differ materially from those expressed or implied by these statements. Investors should carefully consider the risks and uncertainties described in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2025 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
ii
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| June 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Lease liabilities, short-term | ||||||||
| Notes payable | ||||||||
| Warrant liabilities | ||||||||
| Total current liabilities | ||||||||
| Notes payable, long-term | ||||||||
| Lease liabilities, long-term | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock ($ | - | - | ||||||
| Common stock ($ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
1
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Research and development revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Net interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Financing related costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of notes payable | - | - | - | |||||||||||||
| Foreign exchange transaction loss, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share of common stock | ||||||||||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
2
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
| Accumulated | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in |
Other Comprehensive |
Accumulated | Total Stockholders’ |
||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Deficit | |||||||||||||||||||
| Balance at December 31, 2025 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Stock option exercises | - | - | - | |||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | |||||||||||||||||||
| Cumulative translation adjustment | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Pre-funded warrant exercises | - | - | - | - | - | |||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Balance at March 31, 2026 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Stock option exercises | - | - | - | |||||||||||||||||||||
| Issuance of common stock under the SEPA | - | - | - | |||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | |||||||||||||||||||
| Cumulative translation adjustment | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||
| Warrant exercises | - | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2026 | ( |
) | ( |
) | ||||||||||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Deficit | |||||||||||||||||||
| Balance at December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Issuance of Common Stock from debt offering (net of $ | - | - | - | |||||||||||||||||||||
| Issuance of common stock to pay convertible debt | - | - | - | |||||||||||||||||||||
| Sale of common stock (net of $ | - | - | ||||||||||||||||||||||
| Exercise of stock options | - | - | ||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | ||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||
| Balance at March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Issuance of common stock from debt offering | - | - | - | - | - | |||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | |||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2025 | ( |
) | ( |
) | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
3
SPECTRAL AI, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of debt issuance costs | ||||||||
| Stock-based compensation | ||||||||
| Amortization of right-of-use assets | ||||||||
| Change in fair value of warrant liabilities | ||||||||
| Change in fair value of notes payable | - | ( | ) | |||||
| Issuances of shares for borrowing related costs | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock and warrants | ||||||||
| Proceeds from notes payable | ||||||||
| Payments for notes payable | ( | ) | ( | ) | ||||
| Proceeds from warrant exercises | - | |||||||
| Stock option exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Noncash investing and financing activities disclosure: | ||||||||
| Tenant improvement allowance payments made by the lessor directly to a third party | $ | - | $ | ( | ) | |||
| Issuance of common stock to settle notes payable | $ | - | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
SPECTRAL AI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF THE BUSINESS AND PRESENTATION
Overview
Spectral AI, Inc., a Delaware corporation (the “Company”) is an Artificial Intelligence (“AI”) company focused on predictive medical diagnostics. Our DeepView® System uses proprietary AI algorithms to distinguish between healthy, partially damaged and fully damaged human tissue characteristics invisible to the naked eye, at the initial time of wound presentation. The DeepView System delivers a binary prediction on the wound’s capacity to heal or not-heal by a specified time in the future. Our DeepView System’s output is specifically engineered to assist the physician in making a more accurate, timely and informed diagnostic decision regarding the treatment of the patient’s wounds. Our focus is on our burn indication.
In February 2024, our DeepView System, comprised of the multispectral imaging component integrated with the predictive AI-Burn® software component, received United Kingdom Conformity Assessed (“UKCA”) marking for use in the United Kingdom for burn indications. In June 2025, we filed a De Novo application for the DeepView System with the United States Food and Drug Administration (“FDA”) so that it may achieve Class II medical device designation. On May 26, 2026, the FDA granted De Novo Classification for the DeepView System allowing the Company to commence commercial distribution activities in the United States.
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. On September 27, 2023, the Company executed a new contract with BARDA, providing the Company with additional funding of up to approximately $
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) or an Accounting Standards Update (“ASU”).
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s audited consolidated financial statements as of and for the years ended December 31, 2025 and 2024. The condensed consolidated balance sheet as of December 31, 2025 included herein was derived from the audited consolidated financial statements as of that date.
5
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods. The results for the six months ended June 30, 2026 are not necessarily indicative of the results to be expected for any subsequent quarter, the year ending December 31, 2026, or any other period.
Beginning on April 1, 2026, the Company changed the presentation of certain costs on its condensed consolidated statement of operations. This voluntary change in classification of certain research and development and selling and marketing costs, resulted in a decrease in general and administrative expenses and offsetting increases in research and development and selling and marketing costs. Selling and marketing expense consists primarily of personnel-related costs associated with the Company’s commercial organization, allocated facilities costs, and commercialization readiness activities, including external consulting services, market access initiatives, and pricing studies. Refer to Note 4 for details of the composition of research and development expense. The Company believes this presentation is preferable as it will provide greater transparency regarding its operating expenses and aligns with how the business is managed.
In addition, the Company reclassified the amortization of debt issuance costs from financing related costs to net interest expense on its condensed consolidated statement of operations. The reclassification increased net interest expense and decreased financing related costs by $
These changes in classification have been applied retrospectively to all periods presented. These changes in presentation had no impact to revenue, cost of revenue, loss from operations, income (loss) before income taxes, income tax provision (benefit), net income (loss), earnings (loss) per common share, or other components of equity or cash flows. In addition, other expense information disclosed in Note 12 – Segment Information was adjusted for these changes.
Except as described elsewhere in Note 2 under the heading “Recently adopted accounting pronouncements,” there have been no material changes to the Company’s significant accounting policies as described in the audited consolidated financial statements as of December 31, 2025.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Spectral MD Holdings LLC, Spectral MD, Inc., Spectral MD UK Limited, and Spectral IP, Inc. (“Spectral IP”). Inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, revenue recognition (including the measure of progress of completion), warrant liabilities, the 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. Actual results could differ from these estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable. Primarily all cash and cash equivalents is held in US financial institutions which, at times, exceed federally insured limits. The Company has not recognized any losses from credit risks on such accounts. The Company believes it is not exposed to significant credit risk on cash and cash equivalents.
Additional credit risk is related to the Company’s concentration of accounts receivable. As of June 30, 2026 and December 31, 2025, accounts receivable were concentrated from one customer (which is a U.S. government agency) representing approximately
6
Risks and Uncertainties
The Company is subject to a number of risks common to development stage companies in the medical technology industry, including, but not limited to, risks of failure of preclinical studies and clinical trials, dependence on key personnel, protection of proprietary technology, reliance on third party organizations, risks of obtaining regulatory approval for any products that it may develop, development by competitors of technological innovations, compliance with government regulations and the need to obtain additional financing.
Liquidity
As of June 30, 2026 and December 31, 2025, the Company had approximately $
On March 18, 2026, the Company received a contract modification from BARDA for the acceleration of $
As of June 30, 2026, based on our current operating plan, our cash and cash equivalents, together with commitments under the PBS BARDA Contract, and availability under the Yorkville SEPA, provide sufficient working capital to fund operations for at least one year beyond the release date of the condensed consolidated financial statements. Refer to Note 5 for the terms of the Company’s outstanding debt and Note 6 for details on the Company’s warrants.
We have based this determination on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Changing circumstances could also cause us to consume capital significantly faster than we currently anticipate, and we may need to raise capital sooner or in greater amounts than currently expected because of circumstances beyond our control. 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Standards
In July 2025, the FASB issued ASU No. 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets, (“ASU 2025-05”) which provides a practical expedient to measure credit losses on accounts receivable and contract assets. The Company adopted this guidance prospectively in the three months ended March 31, 2026. The adoption of ASU 2025-05 did not have a material impact on the consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In October 2023, the FASB issued ASU 2023-06 Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”), which modifies certain disclosure and presentation requirements of a variety of Topics in the Codification and is intended to both clarify or improve such requirements and align the requirements with the SEC’s regulations. The effective date for each amendment is the effective date of the removal of the related disclosure from Regulation S-X or Regulation S-K, with early adoption prohibited. The Company will apply the provisions prospectively as such provisions become effective and does not expect ASU 2023-06 to have a material impact on the consolidated financial statements.
7
3. RESEARCH AND DEVELOPMENT REVENUE
For the three and six months ended June 30, 2026 and 2025, the Company’s revenues disaggregated by the major sources were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| BARDA | $ | $ | $ | $ | ||||||||||||
| Other U.S. governmental authorities | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
The following table presents the activity in the Company’s contract liabilities during the six months ended June 30, 2026:
| December 31, 2025 Balance | Additions | Reductions | June 30, 2026 Balance | |||||||||||||
| (in thousands) | ||||||||||||||||
| Contract liabilities: | ||||||||||||||||
| Deferred revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Total contract liabilities | $ | $ | $ | ( | ) | $ | ||||||||||
Unbilled revenue is included in other current assets in the condensed consolidated balance sheets.
| December 31, 2025 Balance | Additions | Reductions | June 30, 2026 Balance | |||||||||||||
| (in thousands) | ||||||||||||||||
| Contract assets: | ||||||||||||||||
| Unbilled revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Total contract assets | $ | $ | $ | ( | ) | $ | ||||||||||
On March 18, 2026, the Company announced that it has received a contract modification from the Biomedical Advanced Research and Development Authority (BARDA) for the advancement of $
Research and Development Expense
The Company expenses research and development costs as incurred. These expenses include salaries for research and development personnel, consulting fees, product development, pre-clinical studies, clinical trial costs, and other fees and costs related to the development of our technology.
8
For the three and six months ended June 30, 2026, research and development expense was $
4. ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30, 2026 and December 31, 2025 (in thousands):
| June 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Salary and wages | $ | $ | ||||||
| Operating expenses | ||||||||
| Benefits | ||||||||
| Non-operating expenses | - | |||||||
| Taxes | ||||||||
| Total accrued expenses | $ | $ | ||||||
5. NOTES PAYABLE
The Company entered into the Avenue Financing (defined below) and financing arrangements for a portion of its Directors and Officers insurance premiums, as follows (in thousands):
| Principal Repayments | Outstanding Balance | |||||||||||||||||||||||
| Amount | Six Months Ended June 30, | June 30 | December 31, | |||||||||||||||||||||
| Financed | Interest Rate | 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||
| Avenue Capital Note Principal and Final Payment Fee | $ | Prime + | % | $ | - | $ | - | $ | $ | |||||||||||||||
| Yorkville Convertible Notes, at fair value | | % | - | - | - | |||||||||||||||||||
| 2025 Insurance Note | % | - | ||||||||||||||||||||||
| 2024 Insurance Note | % | - | - | - | ||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||
| Less: current portion of notes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Unamortized debt discounts and debt issuance costs | ( | ) | ( | ) | ||||||||||||||||||||
| Notes payable. long term | $ | $ | ||||||||||||||||||||||
Avenue Capital Financing
On March 24, 2025, the Company completed the Avenue Financing, with an initial draw-down of $
The term of the financing with Avenue Capital Group (the “Avenue Financing”) is for three years, with an interest-only payment period of no less than 15 months, which was extended to 24 months upon the Company’s achievement of the milestones for the second financing tranche during the three months ended June 30, 2026. The second financing tranche, which includes an additional $
9
Up to $
As part of the Avenue Financing the Company issued
On June 18, 2026, the Company drew down the second financing tranche under the Avenue Financing following the achievement of the required funding conditions. The Company received net proceeds of approximately $
Repayment of Yorkville Convertible Notes
During the six months ended June 30, 2025, the Company paid the remaining $
Insurance Notes
The Company determined that the carrying amounts of all of the insurance notes approximate fair value due to the short-term nature of borrowings and current market rates of interest.
6. WARRANT LIABILITIES
In September 2023, in conjunction with the business combination with Rosecliff Acquisition Corp I (the “Business Combination”), the Company assumed the public warrants which had an exercise price of $
In September 2021, the Company issued
Investor Warrants: On March 21, 2025, the Company entered into the purchase agreements with certain stockholders for the sale of an aggregate of
During the year ended December 31, 2025,
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Avenue Warrants: On March 24, 2025, the Company completed the Avenue Financing, with an initial draw-down of $
As of June 30, 2026, there were
Hudson Warrants: On October 22, 2025, the Company entered into a securities purchase agreement with a certain investor for the sale of
During the six months ended June 30, 2026,
The Company accounts for its Public Warrants, Angel Warrants, Investor Warrants, Avenue Warrants and Hudson Warrants as derivative liabilities. Accordingly, the Company recognizes the instruments as liabilities at fair value, and adjusts the instruments to fair value at the end of each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, redeemed or expired, and any change in fair value is recognized in the Company’s consolidated statements of operations within other income (expense).
Fair Value Measurements
The following table presents information about the Company’s financial liabilities that are measured at fair value on a recurring basis as of June 30, 2026 and December 31, 2025, by level within the fair value hierarchy (in thousands):
| Fair value measured as of June 30, 2026 | |||||||||||||||
| Quoted prices | Significant other | Significant | |||||||||||||
| Fair value at June 30, 2026 | in active markets (Level 1) | observable inputs (Level 2) | unobservable inputs (Level 3) | ||||||||||||
| Warrant liabilities | $ | - | |||||||||||||
| Fair value measured as of December 31, 2025 | |||||||||||||||
| Quoted prices | Significant other | Significant | |||||||||||||
| Fair value at December 31, 2025 | in active markets (Level 1) | observable inputs (Level 2) | unobservable inputs (Level 3) | ||||||||||||
| Warrant liabilities | $ | $ | $ | - | $ | | |||||||||
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There were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2026.
Fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and short-term debt are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The fair value of the Public Warrants, which trade in active markets, is based on quoted market prices and classified in Level 1 of the fair value hierarchy. The Angel Warrants, Avenue Warrants, Investor Warrants, and Hudson Warrants are classified within Level 3 of the fair value hierarchy because their fair values are based on significant inputs that are unobservable in the market.
The fair value of the Angel Warrants and Avenue Warrants at June 30, 2026 were estimated using a Black-Scholes option pricing model. The fair value of the Investor Warrants and Hudson Warrants were estimated using a simulation model.
The following table presents changes in Level 3 liabilities measured at fair value for the six months ended June 30, 2026 and 2025 (in thousands):
| Balance - January 1, 2025 | $ | |||
| Fair value at issuance | ||||
| Change in fair value | ( | ) | ||
| Balance - March 31, 2025 | $ | |||
| Change in fair value | ||||
| Balance - June 30, 2025 | $ |
| Balance - January 1, 2026 | $ | |||
| Change in fair value | ||||
| Balance - March 31, 2026 | $ | |||
| Exercise of warrants | ( | ) | ||
| Change in fair value | ( | ) | ||
| Balance - June 30, 2026 | $ |
Both observable and unobservable inputs were used to determine the fair value of warrants that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement:
| June 30, 2026 | ||||||||||||||||
| Angel Warrants |
Investor Warrants |
Avenue Warrants |
Hudson Warrants |
|||||||||||||
| Valuation Method | Black Scholes | Monte Carlo | Black Scholes | Monte Carlo | ||||||||||||
| Strike price (per share) | $ | $ | $ | $ | ||||||||||||
| Contractual term (years) | ||||||||||||||||
| Volatility (annual) | % | % | % | % | ||||||||||||
| Risk-free rate | % | % | % | % | ||||||||||||
| Dividend yield (per share) | % | % | % | % | ||||||||||||
| Probability assessment (1) | N/A | % | % | % | ||||||||||||
| December 31, 2025 | ||||||||||||||||
| Angel Warrants |
Investor Warrants |
Avenue Warrants |
Hudson Warrants |
|||||||||||||
| Valuation Method | Black Scholes | Monte Carlo | Black Scholes | Monte Carlo | ||||||||||||
| Strike price (per share) | $ | $ | $ | $ | ||||||||||||
| Contractual term (years) | ||||||||||||||||
| Volatility (annual) | % | % | % | % | ||||||||||||
| Risk-free rate | % | % | % | % | ||||||||||||
| Dividend yield (per share) | % | % | % | % | ||||||||||||
| Probability assessment (1) | N/A | % | % | % | ||||||||||||
| (1) |
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7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space for its corporate headquarters in Dallas, Texas under a single operating lease that expires in February 2028. As of June 30, 2026, remaining undiscounted lease payments were approximately $
Legal Matters
The Company is not a party to any material legal proceedings or pending claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
8. INCOME TAXES
The Company is subject to taxation in the United States, in various state and local jurisdictions, and in the United Kingdom. The current income tax expense recorded in each period presented relates principally to the Texas franchise tax, which is assessed on gross margin rather than on taxable income.
The Company recorded income tax expense of approximately $
The provision for income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the period. The Company’s effective tax rate differs from the U.S. federal statutory rate of
There have been no material changes to the Company’s deferred tax assets, valuation allowance or unrecognized tax benefits since December 31, 2025. The Company evaluates its tax positions on a quarterly basis and revises its estimates as appropriate.
9. STOCKHOLDERS’ DEFICIT
The Company’s certificate of incorporation, as amended and restated, authorizes the issuance of
During the six months ended June 30, 2026,
During the six months ended June 30, 2026,
The Company is party to a standby equity purchase agreement with YA II PN, Ltd., an affiliate of Yorkville Advisors Global, LP (the “Yorkville SEPA”), under which the Company may, at its option and subject to the conditions and limitations of that agreement, sell shares of Common Stock to Yorkville from time to time. The Yorkville SEPA expires in March 2027. Shares sold under the Yorkville SEPA are issued at a discount to prevailing market prices, and the Company’s ability to draw on the facility is limited by the number of shares registered for resale, by ownership limitations applicable to Yorkville and by the Company’s ability to satisfy the conditions to each advance.
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As of June 30, 2026,
10. STOCK-BASED COMPENSATION
As of June 30, 2026, there were
Restricted Stock Units
In April 2026, the Company granted
A summary of RSU activities for the six months ended June 30, 2026 are presented below:
| Number of Shares | Weighted Average Grant Date Fair Value per Share | |||||||
| Nonvested as of January 1, 2026 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | - | $ | - | |||||
| Nonvested as of June 30, 2026 | $ | |||||||
As of June 30, 2026, total unrecognized compensation expense related to restricted stock units was $
Stock Options
A summary of stock options activity for the six months ended June 30, 2026 is presented below:
| Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at January 1, 2026 | $ | $ | ||||||||||||||
| Options granted | $ | |||||||||||||||
| Options forfeited | ( | ) | $ | |||||||||||||
| Options cancelled | ( | ) | $ | |||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Outstanding as of June 30, 2026 | $ | $ | ||||||||||||||
| Options vested and exercisable as of June 30, 2026 | $ | $ | ||||||||||||||
As of June 30, 2026, total unrecognized compensation expense related to stock options was $
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Stock-based compensation expense, by expense category, during the three and six months ended June 30, 2026 and 2025 consisted of the following (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Selling and marketing | ( | ) | ||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
11. NET (LOSS) INCOME PER COMMON SHARE
The table below summarizes potentially dilutive securities that were excluded from the above computation of net loss per common share as of the periods presented because including them would be anti-dilutive.
| Six Months Ended June, | ||||||||
| 2026 | 2025 | |||||||
| Common stock options | ||||||||
| Common stock warrants | ||||||||
| Unvested restricted stock units | ||||||||
| Convertible notes payable | ||||||||
| Total | ||||||||
12. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker (the “CODM”) in deciding how to allocate resources and assess performance. Through March 31, 2026 the CODM was the Chairman of the Board in conjunction with the Company’s executive management team as they managed the Company’s operations on an aggregate basis for the purpose of allocating resources. Beginning April 1, 2026, in connection with the appointment of a new Chief Executive Officer (“CEO”), the Company determined that its CEO is the CODM as he has ultimate decision-making authority over the Company’s operations, regulatory affairs, commercial strategy, and back-office (finance, accounting, and administrative) functions, which are the Company’s key operating departments. He is the individual who regularly reviews the Company’s consolidated operating results, assesses performance against budget, and determines how the Company’s capital and personnel resources are allocated across these functions.
The Company continues to have one operating segment. The accounting policies of the Company’s single operating and reportable segment are the same as those described in the summary of significant accounting policies.
The Company’s method for measuring profitability
includes net loss, which
13. SUBSEQUENT EVENTS
On July 24, 2026, Spectral IP, a wholly-owned subsidiary of the Company, requested the withdrawal of its registration statement on Form S-1 (File No. 333-285935), which had been filed with the Securities and Exchange Commission on March 20, 2025 in connection with a proposed initial public offering of its common stock. No securities were sold under the registration statement. Spectral IP remains a wholly-owned subsidiary of the Company and continues to be consolidated in the Company’s condensed consolidated financial statements. The withdrawal did not result in any adjustment to the condensed consolidated financial statements as of and for the six months ended June 30, 2026.
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Item 2. 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, 2025 (the “2025 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 2025 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 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. On May 26, 2026, the FDA granted De Novo classification for the DeepView System for the burn indication, which authorizes the Company to commence commercial distribution activities in the United States. We expect to generate our first commercial sales in the United States by the end of 2026. Given our receipt of the UKCA mark for the burn indication, we also 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 National Institute of Health and the Defense Health Agency (the “DHA”). Since 2013, we have been awarded approximately $282.5 million in funding from government contracts, substantially all of which is from BARDA, which accounts for $272.9 million. This has allowed us to develop our technology and further our clinical trials.
In September 2023, we executed our third contract with BARDA for a multi-year Project BioShield (“PBS”) agreement, valued at up to approximately $150.0 million (the “PBS BARDA Contract”). This included an initial award of approximately $54.9 million to support the clinical validation study and the distribution of up to 30 DeepView Systems in various burn centers and emergency departments to support our validation study and approximately another $95.1 million for further follow-on development and procurement activities related to the DeepView System. The funding also supported the Company’s FDA De Novo submission of our DeepView AI – Burn software, which was completed on June 30, 2025. In March 2026, BARDA exercised a portion of its contractual options under the contract, providing the Company with (i) a no-cost extension of the base phase of the contract from March 2026 to June 2026 and (ii) accelerated funding of approximately $31.7 million for further follow-on development and procurement activities related to the DeepView System. The contract continues to provide additional options, similar to our prior BARDA contracts, with an additional total value of approximately $63.4 million which can be exercised for additional product development, and the expanded procurement and deployment of DeepView Systems at emergency rooms, trauma and burn centers. These deployments will enable the Company to conduct health economic and outcome research studies to support the broader clinical adoption of the DeepView System. 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 contract funding is non-dilutive to our shareholders, and we believe it validates the important nature of our mission and technology.
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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 the DHA, is to be used to support military battlefield burn evaluation via a handheld version of the DeepView System device (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 Agreement was extended to run through December 31, 2026. In March 2024, we received an additional $0.5 million award from the DHA to further this development, bringing the total value of our DHA awards supporting the handheld device to 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.
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.
Operating Expenses. Following regulatory approval of the DeepView System, we expect operating expenses to increase as we invest in commercialization activities, including sales and marketing, manufacturing scale-up, and personnel growth. Operating expenses may fluctuate from period to period based on the timing of commercialization initiatives, product enhancements, hiring activities, and other strategic investments, which may impact the comparability of our results of operations.
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
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 in accordance with ASC 606, Revenue from Contracts with Customers. 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.
17
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. 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 Costs and Expenses
Operating costs and expenses consist of research and development, general and administrative and selling and marketing 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)
Other income (expense) consists of net interest expense, financing 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. 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 six months ended June 30, 2026 and 2025 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Research and development revenue | $ | 3,524 | $ | 5,065 | $ | 7,515 | $ | 11,772 | ||||||||
| Cost of revenue | (2,411 | ) | (2,775 | ) | (4,375 | ) | (6,314 | ) | ||||||||
| Gross profit | 1,113 | 2,290 | 3,140 | 5,458 | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Research and development | 1,696 | 1,457 | 3,258 | 2,770 | ||||||||||||
| General and administrative | 3,088 | 2,616 | 5,316 | 5,061 | ||||||||||||
| Selling and marketing | 653 | 340 | 861 | 646 | ||||||||||||
| Total operating costs and expenses | 5,437 | 4,413 | 9,435 | 8,477 | ||||||||||||
| Operating loss | (4,324 | ) | (2,123 | ) | (6,295 | ) | (3,019 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Net interest (expense) income | (378 | ) | (397 | ) | (815 | ) | (417 | ) | ||||||||
| Financing related costs | (5 | ) | (4 | ) | (12 | ) | (585 | ) | ||||||||
| Change in fair value of warrant liability | 711 | (5,449 | ) | (291 | ) | (1,196 | ) | |||||||||
| Change in fair value of notes payable | - | - | - | 220 | ||||||||||||
| Foreign exchange transaction loss, net | (10 | ) | (14 | ) | (15 | ) | (22 | ) | ||||||||
| Other income (expenses), including transaction costs | - | - | - | - | ||||||||||||
| Total other expense, net | 318 | (5,864 | ) | (1,133 | ) | (2,000 | ) | |||||||||
| Loss before income taxes | (4,006 | ) | (7,987 | ) | (7,428 | ) | (5,019 | ) | ||||||||
| Income tax provision | (170 | ) | 19 | (160 | ) | (52 | ) | |||||||||
| Net loss | $ | (4,176 | ) | $ | (7,968 | ) | $ | (7,588 | ) | $ | (5,071 | ) | ||||
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Research and Development Revenue
Research and development revenue was $3.5 million and $7.5 million for the three and six months ended June 30, 2026, respectively, a decrease of 30.4% and 36.2%, respectively compared to the same periods in 2025, reflecting the anticipated reduction in reimbursed costs under the PBS BARDA Contract following the FDA’s De Novo authorization of the DeepView System, as the remaining scope of work narrowed to specific development projects, together with the cost-share provisions applicable to the follow-on development phase of that contract. Revenue from the Company’s other U.S. governmental contracts declined in the three months ended June 30, 2026 and which was offset by an increase primarily related to work on the Company’s handheld device, in the six months ended June 30, 2026.
For the three and six months ended June 30, 2026 and 2025, the Company’s revenues disaggregated by the major sources were as follows (in thousands):
| Three Months Ended June 30, | Change in | Six Months Ended June 30, | Change in | ||||||||||||||||||||||||||||
| 2026 | 2025 | $ | % | 2026 | 2025 | $ | % | ||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||
| BARDA | $ | 3,279 | $ | 4,649 | $ | (1,370 | ) | (29.5 | )% | $ | 6,589 | $ | 11,030 | $ | (4,441 | ) | (40.3 | )% | |||||||||||||
| Other U.S. governmental authorities | 245 | 416 | (171 | ) | (41.1 | )% | 926 | 742 | 184 | 24.8 | % | ||||||||||||||||||||
| Total research and development revenue | $ | 3,524 | $ | 5,065 | $ | (1,541 | ) | (30.4 | )% | $ | 7,515 | $ | 11,772 | $ | (4,257 | ) | (36.2 | )% | |||||||||||||
Cost of Revenues and Gross Profit
Cost of revenue for the three and six months ended June 30, 2026 was $2.4 million and $4.4 million, respectively, a decrease of 13.1% and 30.7%, respectively, compared to the same periods in 2025, due to the cost share provisions applicable to the follow-on development phase of the PBS BARDA Contract, under which the Company funds a portion of the development costs it incurs.
Gross margin for the three and six months ended June 30, 2026 was 31.6% and 41.8%, respectively, a decrease of 13.6 percentage points and 4.6 percentage points, respectively, as compared to the same periods in 2025, reflecting the cost-share provisions of the follow-on development phase of the PBS BARDA Contract, under which the Company continues to incur development costs that are not fully reimbursable, and a lower margin on the Company’s fixed-fee MTEC contract. For the six months ended June 30, 2026, the decrease primarily reflects the lower proportion of costs billed under the follow-on development phase of that contract, partially offset by the higher gross margin realized in the first quarter of 2026 prior to the commencement of that phase.
Operating Expense
Research and development expense was $1.7 million and $3.3 million for the three and six months ended June 30, 2026, respectively, an increase of 16.4% and 17.6%, respectively, as compared to the same period in 2025 due to an increase in non-revenue generating research and development activities.
General and administrative expense was $3.1 million and $5.3 million for the three and six months ended June 30, 2026, respectively, an increase of 18.0% and 5.0%, respectively, as compared to the same period in 2025 due to higher stock-based compensation associated with awards granted in the second quarter of 2026, partially offset for the six-month period by lower consultant fees.
Selling and marketing expense was $0.7 million and $0.9 million for the three and six months ended June 30, 2026, respectively, an increase of 92.1% and 33.3%, respectively, as compared to the same period in 2025 due to increased sales and marketing activities in advance of first commercial sales, including a third-party pricing study.
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Other income (expense)
Net interest expense for the three and six months ended June 30, 2026 primarily relate to interest expense associated with the Avenue Financing as well as costs related to the Company’s insurance policy financing.
Financing related costs increased $0.1 million and decreased $0.6 million, respectively, for the three and six months ended June 30, 2026, as compared to the comparable period in 2025 primarily due to the elimination of the expenses relating to the Company’s prior financings that were expensed during fiscal year 2025. Amortization of debt discount of $0.1 million and $0.3 million, respectively for the three and six months ended June 30, 2026 relates to amortization of the discount on the Avenue note payable.
Change in fair value of warrant liability reflected a favorable change of approximately $6.2 million and $0.9 million, respectively, for the three and six months ended June 30, 2026 as compared to the comparable periods in 2025. Change in fair value of warrant liability was a benefit of $0.7 million and expense of $0.3 million, respectively, for the three and six months ended June 30, 2026, as compared to an expense of $5.4 million and expense of $1.2 million, respectively, for same periods in 2025. The changes reflect fluctuations in the fair value of the Company’s warrants during the three and six month periods ended June 30, 2026. 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.
Liquidity and Capital Resources
Sources of Liquidity
As of June 30, 2026 and December 31, 2025, the Company had approximately $14.0 million and $15.4 million, respectively, in cash and cash equivalents, and an accumulated deficit of $63.4 million and $55.8 million, respectively. As of June 30, 2026 and December 31, 2025, the Company had approximately $14.9 million and $8.4 million, respectively, of debt outstanding of which $11.1 million and $5.5 million represented long-term debt as of such periods, respectively. The Company also had approximately $1.4 million of remaining undiscounted operating lease payments as of June 30, 2026, extending through February 2028.
On March 18, 2026, the Company announced that it has received a contract modification from BARDA for the acceleration 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 $86.6 million to date under the contract with an overall value of approximately $150 million.
The Company also has an effective shelf registration statement on Form S-3 with an aggregate capacity of $50.0 million, of which approximately $12.1 million had been utilized as of June 30, 2026. Because the aggregate market value of the Common Stock held by non-affiliates is less than $75.0 million, the Company’s ability to sell securities in primary offerings under that registration statement is limited, in any twelve-month period, to one-third of the aggregate market value of the Common Stock held by non-affiliates. After giving effect to approximately $5.8 million of securities sold under that registration statement in the preceding twelve months, approximately $10.9 million remained available to the Company under that limitation based on the Company’s public float as of August 11, 2026. The amount available is not fixed and will increase or decrease with the Company’s share price and public float.
As of June 30, 2026, based on our current operating plan, our cash and cash equivalents, together with the PBS BARDA Contract, and the Yorkville SEPA, provide sufficient working capital to fund operations for at least one year beyond the release date of the condensed consolidated financial statements. We have based this determination on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Changing circumstances could also cause us to consume capital significantly faster than we currently anticipate, and we may need to raise capital sooner or in greater amounts than currently expected because of circumstances beyond our control. 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.
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Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2026 and 2025 (in thousands):
| Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Net cash used in operating activities | $ | (7,825 | ) | $ | (4,867 | ) | ||
| Net cash provided by (used in) financing activities | 6,422 | 10,185 | ||||||
Cash Flows Used in Operating Activities
Net cash used in operating activities increased to approximately $7.8 million for the six months ended June 30, 2026, as compared to $4.9 million for the six months ended June 30, 2025, primarily driven by higher net loss and higher cash used from changes in operating assets and liabilities, primarily due to a decrease in accounts payable and accrued expenses.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2026 reflects proceeds received from Avenue Financing and stock option and warrant exercises, offset by repayments of insurance notes payable. Net cash provided by financing activities of $10.2 million for the six months ended June 30, 2025 was primarily attributable to proceeds from the Avenue Financing of $8.3 million partially offset by the loan repayments on the Yorkville debt facility and 2024 Insurance Note.
Current Indebtedness
The Company has the ability under its Avenue Financing agreement to borrow up to $15.0 million. The Company initially drew down $8.5 million in March 2025. On June 18, 2026, the Company drew down the second financing tranche under the Avenue Financing following the achievement of the required funding conditions. The Company received net proceeds of approximately $6.5 million.
The loans under the Avenue Financing mature on March 1, 2028, with an interest-only payment period of no less than 15 months, which has been 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 to the Loan Agreement). The Company achieved the Tranche 2 Milestone during the three months ended June 30, 2026, and as such, the interest-only period was extended to 24 months.
The Avenue Financing also includes warrant coverage equal to 8.5% of the total funding commitment from Avenue, with an exercise price equal to $1.66.
Related Party Transactions
For the six-month period ended June 30, 2026, the Company did not have any related party transactions.
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.
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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, 2025, which was filed with the SEC on March 25, 2026. During the six months ended June 30, 2026, 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:
| ● | 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 |
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K, the Company is a smaller reporting company and is not required to provide the information required by this Item.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
Material Weakness: Our financial statement close process controls, including controls over account reconciliations, transaction processing, and financial reporting review, did not operate consistently or with sufficient precision to ensure timely performance and review, including appropriate oversight of financial statement reporting. In conducting our evaluation, management used the updated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, management concluded that, as of June 30, 2026, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting described below. As discussed in Item 9A of our Form 10-K for the year ended December 31, 2025, we identified a material weakness in our internal control over financial reporting as well as a lack of effective controls over the COSO principles including control environment, risk assessment, control activities, information and communications and monitoring as of December 31, 2025.
Remediation Plan for Material Weakness
Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. In response to the material weakness, we implemented, and are continuing to implement and monitor, measures designed to improve our internal control over financial reporting. These efforts include:
| ● | appointing a new Chief Financial Officer with extensive technical accounting and public company financial reporting experience, with remediation of the material weakness as a specific objective, and supplemented accounting personnel to address capacity gaps; |
| ● | completing a full-scope documentation and assessment of the design of our internal control over financial reporting, including controls over the financial statement close process and account reconciliations; | |
| ● | during 2025, enhancing the functionality of our enterprise resource planning system to support certain key financial processes and controls and to enforce certain segregation of duties through automation and approval workflows; and | |
| ● | with appropriate accounting staffing now in place, engaging external specialists where their use is warranted, including in the areas of technical accounting, SEC reporting, valuation and tax. Management retains responsibility for the work of those specialists, evaluating their qualifications and objectivity and reviewing and approving their analyses and conclusions. |
The measures we implemented are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management and the Audit Committee remain committed to the implementation of remediation efforts to address the material weakness. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed and are operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses previously disclosed, and as described above, will continue to exist. These controls have been implemented and management is performing its own testing of their operation for the first and second quarters of 2026. Management expects that this testing, together with the testing performed in the second half of 2026, will support a conclusion that the controls are appropriately designed and operating effectively and that the material weakness has been remediated.
Changes in Internal Control over Financial Reporting
Except for the remediation efforts in connection with the material weakness described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings or pending claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Quarterly Report include the risk factors described in our Annual Report on Form 10-K filed with the SEC on March 25, 2026 and in the Registration Statement on Form S-4 filed with the SEC on January 5, 2024, as amended. Any of those factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 25, 2026 and in the Registration Statement on Form S-4 filed with the SEC on January 5, 2024, as amended. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Use of Proceeds
There has been no material change in the planned use of the proceeds from the Business Combination, as is described in the Company’s final prospectus (Registration No. 333-275218), as filed with the SEC on January 2, 2024. Additionally, there has been no material change in the planned use of proceeds from the Avenue Financing, as is described in the Company’s Current Report on Form 8-K as filed with the SEC on March 26, 2025 or the planned use of proceeds from the Hudson Financing, as described in the prospectus supplement to the Form S-3 (Registration No. 333-282681), filed on October 22, 2025.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:
| No. | Description of Exhibit | |
| 2.1 | Business Combination Agreement, dated as of April 11, 2023, by and among Rosecliff Acquisition Corp I, Ghost Merger Sub I Inc., Ghost Merger Sub II and Spectral MD Holdings Ltd. (incorporated by reference to the Company’s Form 8-K, filed with the SEC on April 17, 2023). | |
| 31.1* | Certification of Principal Executive Officer | |
| 31.2* | Certification of Chief Financial Officer (Principal Financial and Accounting Officer) | |
| 32** | 18 U.S.C. Section 1350 Certification | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SPECTRAL AI, INC. | ||
| Date: August 11, 2026 | By: | /s/ Vincent S. Capone |
| Name: | Vincent S. Capone | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: August 11, 2026 | By: | /s/ David McGuire |
| Name: | David McGuire | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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