S-1/A: zSpace Eyes Nasdaq Listing with $15 Million IPO

zSpace, a provider of AR/VR educational technology, is planning an initial public offering to raise $15 million.

Summary

• zSpace, Inc., a Delaware corporation, has filed an amendment to its Form S-1 registration statement with the SEC for a proposed IPO.
• The company plans to offer 3,000,000 shares of common stock to the public.
• The anticipated initial public offering price is between $4.50 and $5.50 per share.
• zSpace has applied to list its common stock on The Nasdaq Global Market under the symbol ZSPC.
• The company is an emerging growth company and a smaller reporting company, which allows it to comply with certain reduced public company reporting requirements.
• Certain stockholders are also registering for resale up to 2,219,970 shares of common stock.
• The company will not receive any proceeds from the resale of shares by the selling stockholders.
• Roth Capital Partners and Craig-Hallum Capital Group are acting as joint book-running managers for the offering.
• The company expects revenue for the three months ended June 30, 2024 to be approximately $7.0 to $7.5 million, a decrease of approximately 30 to 34% compared to the same period in 2023.
• Worldwide bookings for the three months ended June 30, 2024 are expected to be approximately $15.7 million, an increase of approximately 27% compared to the same period in 2023.
• The company's backlog as of June 30, 2024 is expected to be between $13.5 to $14.0 million, an increase of approximately 22% compared to the same period in 2023.
• As of June 30, 2024, the Annualized Contract Value (ACV) of renewable software is expected to be approximately $9.9 million, an increase of 8% compared to the same period in 2023.
• The Net Dollar Retention Rate (NDRR) for customers with at least $50,000 in ACV is expected to be 104% as of June 30, 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While there are positive aspects such as growth in bookings and recurring revenue, there are also concerns about declining revenue, material weaknesses in internal control, and the company's ability to continue as a going concern. The overall sentiment is neutral.

Positives

• The company's K-12 platform is deployed in over 80% of the largest 100 K-12 public school districts in the United States.
• The company's CTE solutions have been deployed in approximately 73% of those public school districts it serves.
• The company estimates its total addressable market (TAM) for the K-12 market is approximately $21.4 billion in the United States.
• The company estimates its TAM for the CTE market is approximately $6.2 billion in the United States.
• The global education technology market is expected to grow at a CAGR of 13.6% from 2023 to 2030.
• The global AR, VR and mixed reality market is expected to grow at a 37% CAGR to $252 billion by 2028.
• Worldwide bookings for the three months ended June 30, 2024 are expected to be approximately $15.7 million, an increase of approximately 27% compared to the same period in 2023.
• The company's backlog as of June 30, 2024 is expected to be between $13.5 to $14.0 million, an increase of approximately 22% compared to the same period in 2023.
• As of June 30, 2024, the Annualized Contract Value (ACV) of renewable software is expected to be approximately $9.9 million, an increase of 8% compared to the same period in 2023.
• The Net Dollar Retention Rate (NDRR) for customers with at least $50,000 in ACV is expected to be 104% as of June 30, 2024.

Negatives

• The company expects revenue for the three months ended June 30, 2024 to be approximately $7.0 to $7.5 million, a decrease of approximately 30 to 34% compared to the same period in 2023.
• The company has identified material weaknesses in its internal control over financial reporting.
• The company has a history of net losses and expects to continue to experience net losses in the future.
• The company's auditor has included an explanatory paragraph in its report on the consolidated financial statements as of and for the year ended December 31, 2023, which stated that substantial doubt exists about the company's ability to continue as a going concern.

Risks

• The company has a limited operating history at the scale of its business.
• The company may not be able to scale its business for future growth.
• The company operates in a highly competitive market.
• The company may not be able to compete successfully against current and future competitors.
• The company may fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customers needs or requirements.
• Certain of the company's market opportunity estimates, growth forecasts, and key metrics could prove to be inaccurate.
• The company expects to incur research and development costs to develop new products, which could significantly reduce its profitability and may never result in revenue.
• The company's business is dependent on its ability to maintain and scale its hardware and software offerings and technical infrastructure.
• The company has in the past been, and may in the future be, dependent on a limited number of significant customers.
• The company's future revenues and operating results will be harmed if it is unable to acquire new customers, if its customers do not renew their contracts with it, or if it is unable to expand sales to its existing customers or develop new products that achieve market acceptance.
• The company was involved in a SPAC transaction that was terminated.
• Adverse general and industry-specific economic and market conditions may reduce demand for the company's products and platform.
• The company is susceptible to illegal or improper uses of its educational platform.
• The legal system of the PRC is not fully developed and there are inherent uncertainties that may affect the protection afforded to the company's business.
• The company is subject to laws and regulations, including governmental export and import controls, sanctions and anti-corruption laws, that could subject it to liability if it is not in full compliance with applicable laws.
• The obligations associated with operating as a public company following the offering will require significant resources and management attention and will cause the company to incur additional expenses, which will adversely affect its profitability.
• Failure to maintain effective systems of internal control and disclosure controls could have a material adverse effect on the company's business, operating results, and financial condition.
• There is uncertainty regarding the company's ability to continue as a going concern.
• The company's business is subject to seasonal sales and customer growth fluctuations which could result in volatility in its operating results.
• If currency exchange rates fluctuate substantially in the future, the company's operating results, which are reported in United States dollars, could be adversely affected.
• The company's ability to use its United States federal and state net operating losses to offset future taxable income may be subject to certain limitations which could subject its business to higher tax liability.
• State or local legislation has been and may continue to be adopted that limits or bans instruction in public schools that includes or promotes social or emotional learning, which could limit the company's ability to operate in those states and/or localities and have an adverse impact on its business, operating results and financial condition.
• The company's failure to comply with laws and regulations that are or may become applicable to it as a technology provider for Higher Education and K-12 could adversely affect its business and results of operations, increase costs and impose constraints on the way it conducts its business.
• The company's business is subject to complex and evolving United States and foreign laws, regulations and industry standards, many of which are subject to change and uncertain interpretation, which uncertainty could harm its business, operating results and financial condition.
• The price of the company's common stock may be volatile.
• Investors in this offering will experience immediate dilution upon the closing of the offering.
• Prior to this offering, there has been no public market for the company's common stock, and the company cannot assure you that a market for its common stock will develop or that the market price of shares of its common stock will not decline following the offering.
• We will be classified as a controlled company for purposes of the Nasdaq Listing Rules and therefore qualify for certain exceptions from certain corporate governance requirements.
• We are an emerging growth company and a smaller reporting company, and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.

Future Outlook

The company intends to use the net proceeds from this offering for growth initiatives, including funding product commitments, software development through acquisitions of applications and third-party software developers, sales and marketing, and for working capital and general corporate purposes.

Industry Context

The company operates in the education technology market, which is experiencing growth driven by the increasing adoption of technology in education and the growing demand for AR/VR solutions. The company's focus on K-12 and CTE markets aligns with the increasing emphasis on STEM education and career readiness.

Comparison to Industry Standards

• The document mentions several competitors in the education technology ecosystem, including Chegg, Coursera, Docebo, Duolingo, Instructure, Kahoot, Powerschool, and Udemy.
• These companies represent a mix of online learning platforms, educational resource providers, and learning management systems.
• The document also identifies competitors in the virtual technology market, such as Apple, Google, Meta Platforms, Matterport Inc and Unity Software.
• These companies are major players in the broader AR/VR space, but may not be directly focused on the education market.
• The document further mentions AR/VR focused companies such as ClassVR, Inception XR, Interplay Learning, Umety Solutions Ltd, Transfr VR Victory XR.
• These companies are more direct competitors to zSpace, offering similar AR/VR solutions for education and training.
• The document does not provide specific financial comparisons to these companies, but it does note that some competitors have significantly greater resources than zSpace.

Legal Proceedings

• EdtechX filed a complaint in the Superior Court of the State of Delaware alleging breaches of contract and the implied covenant of good faith and fair dealing in connection with this dispute.

Related Party Transactions

• Pankaj Gupta, one of our directors and the Co-CEO of Gulf Islamic Investments, LLC (GII), holds 100% of the equity interest in dSpace in his personal capacity.
• Mohammed Al Hassan, the Co-CEO of GII, holds 100% of the equity interest in bSpace in his personal capacity.
• Husain Zariwala, the Chief Financial Officer of GII and Imran Ladhani, the Head of Operations & Investor Relations of GII, each own 50% of the equity interests and voting control of Fiza in their personal capacities.
• The company has entered into various transactions with these related parties, including debt financing and preferred stock issuances.

Stakeholder Impact

• Shareholders will be affected by the potential dilution from the IPO and the volatility of the stock price.
• Employees may be affected by the company's ability to execute its growth strategies and maintain a stable financial condition.
• Customers may be affected by the company's ability to continue providing and improving its products and services.
• Suppliers may be affected by the company's ability to meet its purchase obligations.

Next Steps

• The company needs to obtain approval for listing on Nasdaq.
• The company needs to execute its growth strategies, including scaling in the United States, expanding internationally, investing in R&D, and acquiring software.
• The company needs to remediate the material weaknesses in its internal control over financial reporting.

Key Dates

Keywords

AR/VR, education technology, IPO, K-12, CTE, augmented reality, virtual reality, initial public offering, stock offering, educational solutions