Yeah, it must contain a DAC, or there wouldn't be much in it. I don't know anything about DAC design, but it still seems to me to be too much work to be done part time by a small team (remember, Lejonklou has also released a number of other products and updates in the last four years). I would guess an off-the-shelf DAC chip and some clever custom power regulation.
As for what it will play.. well it sounds like it will play whatever your "Apple device" will agree to play and "cast" (I dunno what verb Apple uses here) to an external device.
This means that the scope of what Lejonklou is doing is smaller than what Linn does with their DS concept - Källa will only need to deal with one audio codec (wikipedia suggests it is ALAC, 44.1kHz, 2 channel, encrypted) and everything will be transcoded to this by the "Apple device" before sent to the renderer (Källa). The approach makes a whole lotta sense for a small team, and is certainly much more feasible than in the mid-00s when Linn came up with the DS approach. No-one back then would have dared go WiFi only. :)
(AirPlay apparently assumes WiFi. It's unclear to me if Källa requires it. I guess we will soon know - but speculating is fun! :) )