Datavault AI Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of our financial condition and results of operation should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this Report. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the date of this Report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results. Overview Datavault is a pioneering technology licensing company that owns a portfolio of patented, secure platforms designed to redefine how data is managed, valued, and monetized in the modern era. Leveraging our proprietary HPC capabilities and advanced software, our technology offerings are designed to ensure data ownership immutability, experiential data observability, precise data asset valuation, and secure monetization—which we believe will unlock significant opportunities for businesses in an increasingly data-driven world. Datavault has two synergistic platforms—Data Sciences and Acoustic Sciences—that our executive leadership is focusing on as key drivers of future revenue growth. 54 Table of Contents Critical Accounting Policies The following discussion and analysis of 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 of America. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, our observance of trends in the industry and information available from other outside sources, as appropriate. Please see Note 1 of the Notes to the Consolidated Financial Statements for a more complete description of our significant accounting policies. Comparison of the Years Ended December 31, 2025 and 2024 Revenue Revenue for the year ended December 31, 2025 was $39.1 million, an increase of $36.4 million or 1,362%, compared to the revenue of $2.7 million for the year ended December 31, 2024. The increase is primarily related to an increase in patent license revenue from two customers and the CSI acquisition. Gross Profit (Deficit) and Operating Expenses Gross Profit (Deficit) Gross profit for the year ended December 31, 2025 was $30.4 million, an increase of $30 million compared to a gross profit of $0.4 million for the year ended December 31, 2024. Gross margin as a percent of sales was 78% for the year ended December 31, 2025, compared to 14% for the year ended December 31, 2024. The increase in gross profit and gross margin as a percent of sales is mainly attributable to the year ended December 31, 2025 having higher margin patent license revenue. Research and Development Research and development expenses for the year ended December 31, 2025 were $16.5 million, an increase of $8.7 million compared to expenses of $7.8 million for the year ended December 31, 2024. The increase in research and development expenses for the year ended December 31, 2025 is primarily driven by IBM watsonx.ai subscription license fees of $4.7 million, an increase in research and development expenses of $1.4 million related to the acquisition of NYIAX assets, NFL Alumni license and Brookhaven National Laboratory research, higher headcount resulting in increased salaries, wages, benefits, and stock-based compensation of $1.4 million, and legal expenses related to intellectual property of $1.2 million. Sales and Marketing Sales and marketing expenses for the year ended December 31, 2025 were $11.2 million, an increase of $7.2 million compared to expenses of $4.0 million for the year ended December 31, 2024. The increase in sales and marketing expenses is primarily related to an increase in headcount resulting in increased salaries and wages, benefits and stock-based compensation of $6.4 million, and increased consulting expenses of $0.8 million. General and Administrative General and administrative expenses for the year ended December 31, 2025 were $35.1 million, an increase of $25.4 million compared to expenses of $9.7 million for the year ended December 31, 2024. The increase in general and administrative expenses is primarily driven by higher amortization of intangibles assets of $10.2 million related to the DV Asset Acquisition (as defined below) that closed on December 31, 2024 and intellectual property acquisitions from Turner Global Media LLC and Web Access LLC closed in July 2025, an increase in headcount resulting in increased salaries and wages, commissions, benefits and stock-based compensation of $4.4 million, increased consulting expenses of $3.3 million, increased legal settlement accrual expense of $0.9 million, increased legal and accounting fees of $2.4 million and $0.4 million, respectively, and an increase in investor relations expenses of $2.7 million. 55 Table of Contents Interest Expense, net Interest expense, net for the year ended December 31, 2025 was $20 million compared to $1.3 million for the year ended December 31, 2024. Interest expense for the year ended December 31, 2025 was primarily due to the issuance of the Additional Warrants with the 2025 Notes fair value at issuance of $16.7 million and increased borrowings. Interest expense for the year ended December 31, 2024 was primarily due to the amortization of debt discounts associated with the January 2024 Promissory Note in the principal amount of $1 million that the Company incurred in January 2024 and repaid in full in the three months ended March 31, 2024. Change in Fair Value of Convertible Notes Change in fair value of convertible notes measured at fair value increased to $20.6 million for the year ended December 31, 2025 compared to none for the year ended December 31, 2024 due to the issuance of the senior secured convertible notes issued in 2025 and recording the issuance fair value of $20.6 million, including the original issue discount of $3.0 million and fees of $2.3 million. Change in Fair Value of Convertible Notes – Related Party Change in fair value of convertible note to a related party measured at fair value increased to a gain of $0.1 million for the year ended December 31, 2025 compared to none for the year ended December 31, 2024. Change in Fair Value of Warrant Liability Change in fair value of warrant liability for the year ended December 31, 2025 was a gain of $19,000 compared to a loss of $29.1 million for the year ended December 31, 2024. The change in fair value of the warrant liability for the year ended December 31, 2024 was due to the issuance of additional warrants to purchase 5,602,693 shares of our common stock and the subsequent valuing of such warrants. The additional warrants were issued as a result of a provision in certain of the warrant agreements that was triggered following the Company’s reverse stock split that occurred in April 2024. There was no such activity for the year ended December 31, 2025. Loss on Debt Extinguishment Debt extinguishment expense for the year ended December 31, 2025 was $5.8 million due to the extinguishment of senior secured convertible notes issued on April 3, 2025 in an aggregate principal amount of $5.5 million and May 20, 2025, in an aggregate principal amount of $11.1 million (collectively, the “Q2 2025 Notes”). The Company recognized the pre-modification fair value and the post modification incremental fair value change in the Q2 2025 Notes due to the decrease in the alternative conversion feature and recorded $2.1 million in expense and the exchange of 30,738,449 outstanding warrants held by the holders of the Q2 2025 Notes for common stock for which the Company recognized the incremental fair value of $3.7 million. During the year ended December 31, 2024, the Company recorded a loss on debt extinguishment of $0. Deemed Dividend on Exchange of Convertible Preferred Stock for Common Stock During the year ended December 31, 2025, the Company had no deemed dividend activity. During the year ended December 31, 2024, the Company recorded a deemed dividend of $5.8 million which was primarily related to the accretion upon the repurchase of 62,657 Series B Preferred Stock shares and extinguishment of 81,315 Series B Preferred Stock warrants Deemed Dividend on Issuance of Common Stock and Warrants Issued in Connection with Amendments to Warrants to Purchase Common Stock During the year ended December 31, 2024, the Company recorded a deemed dividend of $10.5 million primarily related to excess fair value of equity instruments transferred to warrant holders in connection with modifications and exchanges to equity classified common stock warrants. The Company had no deemed dividend activity for the year ended December 31, 2025. 56 Table of Contents Liquidity and Capital Resources Cash and cash equivalents as of December 31, 2025 were $2.0 million, compared to $3.3 million as of December 31, 2024. We used net cash in operating activities of $23.6 million for the year ended December 31, 2025. For the year ended December 31, 2024, we used net cash in operating activities of $17.5 million. Excluding the net loss and non-cash adjustments, the increase in the use of net cash from operating activities during the year ended December 31, 2025, was primarily related to the increase in accounts receivable, unbilled contract costs, and other assets. We have historically financed our operations primarily through the sale and issuance of equity securities, proceeds from the exercise of common stock purchase warrants, and the sale and issuance of convertible debt securities. In November 2025, we completed the closing of an equity investment from Scilex Holding Company for $150 million of BTC, which we consider to be highly liquid. In April 2025, May 2025, August 2025 and September 2025, we received $4.5 million, $9.2 million, $5.5 million and $6.0 million, respectively, in proceeds from the issuance of the senior secured convertible notes. In February 2025, we received aggregate gross proceeds of approximately $5.4 million in a registered direct offering. In January 2024, we received gross proceeds of $600,000 from the sale and issuance of promissory notes and common stock purchase warrants to certain accredited investors. In February 2024, we received gross proceeds of approximately $10.0 million from a public offering of 1,025,600 units, with each unit consisting of one share of common stock (or a pre-funded warrant in lieu thereof) and one warrant to purchase one share of common stock. In March 2024, we received gross proceeds of approximately $2.3 million from the issuance of shares of common stock, pre-funded warrants, and warrants to purchase common stock. While we have historically relied on capital raising activities to finance operations, based on current liquidity levels and projected operating results, we do not currently anticipate the need to raise additional capital to fund operations within the next twelve months. The Company may, however, seek additional equity or debt financing in the future to support strategic initiatives, product development, acquisitions, or other growth opportunities. There can be no assurance that additional financing, if sought, will be available on favorable terms or at all. Going Concern Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. The Company has incurred NOLs in prior periods and may continue to incur operating losses in the foreseeable future as it invests in research and development activities, expands its product portfolio, and grows its market presence. As of December 31, 2025, the Company had approximately $129.1 million of liquid assets, consisting of $2 million in cash, $92.2 million of unrestricted crypto assets, and $32.6 million of accounts receivable (including related party receivables) expected to be collected in the normal course of business. The Company has no debt maturities within the next twelve months and no covenant compliance requirements or contractual commitments expected to materially impact liquidity during the evaluation period. Management prepared internal operating forecasts covering the twelve-month period from the issuance date of these financial statements and considered potential adverse scenarios, including reductions in projected revenues and declines in digital asset values. Based on current liquidity levels and projected operating results, management believes the Company has sufficient liquidity to meet its obligations as they become due for at least twelve months from the issuance date of these consolidated financial statements. Accordingly, management has concluded that substantial doubt about the Company’s ability to continue as a going concern has been alleviated. However, the Company’s future capital requirements will depend on many factors, including the rate of revenue growth, gross margin performance, digital asset market conditions, and the timing and extent of expenditures for product development and market expansion. While the Company may seek additional capital in the future to support strategic initiatives, there can be no assurance that the Company’s projections of capital requirements or future revenues will prove to be accurate. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. 57 Table of Contents Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We are not required to provide the information required by this Item as we are a smaller reporting company.