AI Financial Corp 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the fiscal year ended December 27, 2025, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Part II, Item 8 of this 10-K for the fiscal year ended December 27, 2025. Note about Forward-Looking Statements This Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates”, or “anticipates” or similar expressions that concern our strategy, plans or intentions. Any statements we make relating to our future operations, performance and results, and anticipated liquidity are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. In addition, the foregoing factors may generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our website www.alt5sigma.com or any other websites referenced in this Form 10-K are not part of this Form 10-K. Our Company Through our Fintech segment, we provide next generation blockchain-powered technologies to enable a migration to a new global financial paradigm, and, through our Biotechnology segment, we are focused on finding treatments for conditions that cause chronic pain and bringing to market drugs with non-addictive and non-sedative pain-relieving properties. During the periods disclosed in this Annual Report, we operated three segments: Fintech Our Fintech segment provides next-generation blockchain-powered technologies for tokenization, trading, clearing, settlement, payment, and safe-keeping of digital assets. 26 Table of Contents Biotechnology Our Biotechnology segment is focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties. We have previously announced our intention to capitalize a subsidiary with certain of our biotechnology assets, acquire an additional biotechnology asset, and then engage in the financing of that subsidiary. The short-term intended result of that series of transactions would be to decouple it from us so that it would operate on a stand-alone basis. The Biotech segment is being presented as a discontinued operation for the years ended December 27, 2025 and December 28, 2024 (see Note 4 of our Condensed Consolidated Financial Statements). Corporate and Other In August 2025, the Company closed a $1.5 billion registered direct offering and concurrent private placement – led by World Liberty Financial, Inc. – to support our WLFI Treasury Strategy. As a result, the Company acquired a significant position in WLFI, the native governance token of the World Liberty Financial ecosystem. WLFI is a digital asset that is designed to provide governance functions within the World Liberty Financial ecosystem. With a fixed maximum supply of 100 billion tokens, WLFI powers decentralized lending, borrowing, staking, and governance within a rapidly growing DeFi platform. A core driver of WLFI’s value is its economic linkage to USD1, the ecosystem’s flagship U.S. dollar-pegged stablecoin. USD1 is issued on a basis intended to be fully reserved, audited, and redeemable. USD1 aims to establish itself as a primary medium of exchange for institutions and consumers alike. Increased adoption of USD1 directly accrues value to WLFI holders through protocol fees, governance rights, and ecosystem growth. We currently intend to integrate WLFI into our existing payment and trading infrastructure, which serves clients in North America, Europe, and Asia. Our vision includes collaborating with WLFI to help enable everyday commerce – such as retailers accepting WLFI or USD1, with instant fiat conversion, cross-border B2B settlements, and tokenized assets settled using WLFI and/or USD1 as the medium of exchange. Our policy remains a committed long-term approach, with future acquisitions funded through operating cash flows, structured debt, and selective capital raises. Sales are restricted to liquidity requirements or material portfolio rebalancing events. Our Corporate and Other segment consists of WLFI assets, including any additions, redemptions, or mark-to-market changes in value, which are recorded within the Company’s Corporate and Other segment. Our Corporate and Other segment also consists of certain corporate general and administrative costs. Reporting Period. We report on a 52- or 53-week fiscal year. Our 2025 fiscal year ended on December 27, 2025 (“fiscal 2025”). Our 2024 fiscal year ended on December 28, 2024 (“fiscal 2024”). Application of Critical Accounting Policies Our discussion of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. Critical accounting policies include intangible impairment under ASC 350, and revenue recognition under ASC 606. 27 Table of Contents Adjusted EBITDA We evaluate the performance of our operations based on financial measures such as “Adjusted EBITDA”, which is a non-U.S. GAAP financial measure. We define Adjusted EBITDA as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization, stock-based compensation, and other non-cash or nonrecurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of the business, including the business’s ability to fund acquisitions and other capital expenditures, and to service its debt. Additionally, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate a company’s financial performance, subject to certain adjustments. Adjusted EBITDA does not represent cash flows from operations, as defined by U.S. GAAP, and should not be construed as an alternative to net income or loss and is indicative neither of our results of operations, nor of cash flows available to fund all our cash needs. It is, however, a measurement that we believe is useful to investors in analyzing our operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities, and other measures of financial performance prepared in accordance with U.S. GAAP. As companies often define non-U.S. GAAP financial measures differently, Adjusted EBITDA, as calculated by the Company, should not be compared to any similarly titled measures reported by other companies. Adjusted EBITDA (Non-GAAP) Fintech Biotech (Discontinued Operations) Total Reportable Segments Corporate and Other Total Income (loss) before income taxes $ (8,310 ) $ (3,898 ) $ (12,208 ) $ (419,918 ) $ (432,126 ) Interest expense, net 2,754 — 2,754 1,114 3,868 Depreciation and amortization 3,339 1,929 5,268 — 5,268 Stock based compensation — — — 5,901 5,901 Unrealized loss on cryptocurrency assets — — — 402,054 402,054 Other adjustments (394 ) — (394 ) — (394 ) Adjusted EBITDA $ (2,611 ) $ (1,969 ) $ (4,580 ) $ (10,849 ) $ (15,429 ) Results of Operations The following table sets forth certain statement of operations items from continuing and discontinued operations and as a percentage of revenue, for the periods indicated (in $000’s): Fiscal Year Ended December 27, 2025 Fiscal Year Ended December 28, 2024 Statement of Operations Data: Revenue $ 24,840 $ 11,887 Cost of revenue 14,652 6,238 Gross profit 10,188 5,649 Selling, general and administrative expenses 33,039 12,572 Impairment charges — — Operating loss (22,851 ) (6,923 ) Interest expense, net (3,869 ) (1,159 ) Realized (loss) gain on exchange transactions 374 1,019 Unrealized loss on marketable securities — (1,238 ) Unrealized loss on cryptocurrency assets (402,054 ) — Unrealized gain on exchange transactions 768 — Other expense, net (596 ) (160 ) Net loss before provision for income taxes (428,228 ) (8,461 ) Income tax expense (benefit) (86,742 ) (160 ) Net loss income from continuing operations (341,486 ) (8,301 ) Loss from discontinued operations (3,898 ) (2,148 ) Income tax benefit from discontinued operations (877 ) (2,881 ) Net (loss) income from discontinued operations (3,021 ) 733 Net loss $ (344,507 ) $ (7,568 ) 28 Table of Contents The following tables set forth revenues for key product and service categories, percentages of total revenue and gross profits earned by key product and service categories and gross profit percent as compared to revenues for each key product category indicated (in $000’s): Fiscal Year Ended December 27, 2025 Fiscal Year Ended December 28, 2024 Net Revenue Percent of Total Net Revenue Percent of Total Revenue Fintech $ 24,840 100 % $ 11,887 100 % Biotech — — % — — % Corporate and other — — % — — % Total revenue $ 24,840 100 % $ 11,887 100 % Fiscal Year Ended December 27, 2025 Fiscal Year Ended December 28, 2024 Gross Profit Gross Profit % Gross Profit Gross Profit % Gross Profit Fintech $ 10,188 41 % $ 5,649 48 % Biotech — — % — — % Corporate and other — — % — — % Total gross profit $ 10,188 41 % $ 5,649 48 % Revenue Revenue increased by approximately $13.0 million for the fiscal year ended December 27, 2025, as compared to the year ended December 28, 2024. The increase is due to the acquisition of ALT5 Subsidiary during May 2024, as well as the acquisition of Mswipe during May 2025. Gross Profit Gross profit increased by approximately $4.6 million for the fiscal year ended December 27, 2025, as compared to the year ended December 28, 2024. The increase is due to the acquisition of ALT5 Subsidiary during May 2024, as well as the acquisition of Mswipe during May 2025. Selling, General and Administrative Expense Selling, general and administrative expenses from continuing operations increased by approximately $20.5 million for the fiscal year ended December 27, 2025, as compared to the year ended December 28, 2024, primarily due to the acquisitions of ALT5 Subsidiary in May 2024 and Mswipe in May 2025, as well as higher bad debt and legal expenses and increased stock-based compensation from RSU grants. Interest Expense, net Interest expense, net, was approximately $3.9 million for the fiscal year ended December 27, 2025, as compared to approximately $1.2 million for the year ended December 28, 2024. The change was primarily driven by the acquisition of ALT5 Subsidiary in May 2024, as well as higher average debt balances during the period. 29 Table of Contents Unrealized Loss on Marketable Securities Unrealized loss on marketable securities for the fiscal year ended December 28, 2024 was approximately $1.2 million. Unrealized gains or losses on marketable securities reflect the mark-to-fair-value adjustment for securities received in connection with the sale of GeoTraq. No such transactions occurred during the fiscal year ended December 27, 2025. Unrealized Loss on Cryptocurrency Assets Unrealized loss on cryptocurrency assets for the fiscal year ended December 27, 2025 was approximately $402.0 million. An unrealized loss was recorded to mark our WLFI tokens to fair value. No such unrealized gain or loss was recorded during the fiscal year ended December 28, 2024. Segment Performance We report our business in the following segments: Fintech, Biotechnology and Corporate and Other. During fiscal 2025, the Company announced its intent formally to separate its Biotechnology segment, also known as Alyea. As a result, the Biotechnology segment is presented as discontinued operations for the fiscal years ended December 27, 2025 and December 28, 2024. Results of Operations by Segment The following table sets forth the results of operations by segment (in $000’s): Fiscal Year Ended December 27, 2025 Fiscal Year Ended December 28, 2024 Fintech Biotech (Discontinued Operations) Corporate and other Total Fintech Biotech (Discontinued Operations) Corporate and other Total Revenue $ 24,840 $ — $ — $ 24,840 $ 11,887 $ — $ — $ 11,887 Cost of revenue 14,652 — — 14,652 6,238 — — 6,238 Gross profit 10,188 — — 10,188 5,649 — — 5,649 Selling, general and administrative expense 16,370 3,898 16,669 36,937 5,456 2,148 7,116 14,720 Impairment charges — — — — — — — — Gain on sale of ARCA — — — — — — — — Operating (loss) income (6,182 ) (3,898 ) (16,669 ) (26,749 ) 193 (2,148 ) (7,116 ) (9,071 ) Fintech Segment Our Fintech segment consists of ALT5 Subsidiary, which was acquired during May 2024, as well as Mswipe, which was acquired during May 2025. Revenue for the fiscal year ended December 27, 2025 was approximately $24.8 million, and gross margin percentage was 41.0%. Operating loss for the fiscal year ended December 27, 2025 was approximately $6.2 million. Corporate and Other Segment Our Corporate and Other segment generated no revenue for the fiscal year ended December 27, 2025. Selling, general and administrative expenses increased by approximately $9.6 million primarily due to increased costs for stock-based compensation and legal expenses, as well as other professional services. Biotech Segment (Discontinued Operations) During fiscal 2025, the Company announced its intent formally to separate its Biotechnology segment, also known as Alyea. As a result, the Biotechnology segment is presented as discontinued operations for the fiscal year ended December 27, 2025. Selling, general and administrative expenses increased over the prior year period primarily due to increases in professional fees and research and development costs. 30 Table of Contents Adjusted EBITDA (Non-GAAP) Reconciliation The following table presents a reconciliation of net income to Adjusted EBITDA for the fiscal years ended December 27, 2025 and December 28, 2024 (in $000’s): For the Year Ended December 27, 2025 December 28, 2024 Net income (loss) $ (344,507 ) $ (7,568 ) Depreciation and amortization 5,268 3,401 Stock-based compensation 5,901 2,283 Interest expense (income), net 3,868 1,159 Income tax expense (benefit) (87,619 ) (3,041 ) Unrealized loss on marketable securities — 1,238 Unrealized gain on exchange transactions (768 ) 1,019 Realized loss (gain) on exchange transactions 374 — Unrealized loss on cryptocurrency assets 402,054 — Adjusted EBITDA $ (15,429 ) $ (1,509 ) Adjusted EBITDA decreased by approximately $13.9 million for the fiscal year ended December 27, 2025, as compared to the prior year period. The decrease was primarily due to the results of operations, as discussed above. Liquidity and Capital Resources Overview As of December 27, 2025, our cash on hand was approximately $6.2 million. Approximately $3.5 million of cash has been fully reserved in connection with the legal matter, further described in Note 20 to the consolidated financial statements. We intend to raise funds to support future development of JAN123 either through capital raises or structured arrangements, which would include effectuating our previously announced intention to capitalize a subsidiary with certain of our biotechnology assets, acquire an additional biotechnology asset, and then engage in a financing of that subsidiary. The short-term intended result of that series of transactions would be for us to own a controlling interest in that subsidiary, but to decouple it from us so that it would operate on a stand-alone basis, although its financial statements would continue to be consolidated with ours for as long as we have a controlling interest. Cash Flows During the fiscal year ended December 27, 2025, cash used in operations was approximately $7.2 million, compared to cash provided by operations of approximately $1.8 million during the fiscal year ended December 28, 2024. The decrease in cash was primarily due to results of operations as discussed above. There was no cash used in operating activities for discontinued operations during the fiscal years ended December 27, 2025 or December 28, 2024. Cash used in investing activities was approximately $706.6 million for the fiscal year ended December 27, 2025, compared to cash provided by investing activities of approximately $5.9 million for the fiscal year ended December 28, 2024. Cash used in investing activities for the fiscal year ended December 27, 2025 was primarily the purchase of WLFI tokens, partially offset by tokens redeemed during the period, while cash provided by investing activities for the fiscal year ended December 28, 2024 was related to cash acquired in the acquisition of ALT5 Subsidiary. There was no cash used in investing activities for discontinued operations during the fiscal years ended December 27, 2025 or December 28, 2024 31 Table of Contents Cash provided by financing activities was approximately $716.8 million for the fiscal year ended December 27, 2025, and primarily relates to proceeds received from equity financing and the issuance of notes payable, partially offset by cash paid for fees related to the equity financing, cash paid for notes payable and related party notes payable. Cash provided by financing activities was approximately $6.1 million for the fiscal year ended December 28, 2024, and relates to proceeds from notes payable, proceeds from equity financing and warrants exercised, and proceeds from related party notes payable, partially offset by payments on notes payable, as well as payments on related party notes payable. There was no cash used in financing activities for discontinued operations during the fiscal years ended December 27, 2025 or December 28, 2024 Sources of Liquidity We acknowledge that we continue to face a challenging competitive environment as we continue to focus on our overall profitability, including managing expenses. We reported a net loss from continuing operations of approximately $341.5 million for the fiscal year ended December 27, 2025, and net loss from continuing operations of approximately $8.3 million for the fiscal year ended December 28, 2024, for the reasons discussed above. Additionally, the Company has total current assets of approximately $29.5 million and total current liabilities approximately of $51.4 million, resulting in a net negative working capital of approximately $21.9 million. Cash used in operations was approximately $7.2 million. Future Sources of Cash; New Acquisitions, Products and Services We may require additional debt financing and/or capital to finance new acquisitions, conduct our Phase IIb clinical trials for our Biotechnology segment, or consummate other strategic investments in our business. No assurance can be given any financing obtained may not further dilute or otherwise impair the ownership interest of our existing stockholders. Off Balance Sheet Arrangements At December 27, 2025, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.