10-K: zSpace Faces Financial Headwinds, Reports Revenue Decline Amid Funding Uncertainty

zSpace, Inc. reported a 27% revenue decrease in 2025, ongoing net losses, and significant doubt about its ability to continue as a going concern, despite recent capital raises.

Summary

• Total revenue decreased by 27% to $27.9 million for the year ended December 31, 2025, down from $38.1 million in 2024.
• The company incurred a net loss of $25.4 million for the year ended December 31, 2025, compared to $20.8 million in 2024.
• An accumulated deficit of $315.8 million and a total stockholders deficit of $22.5 million were reported as of December 31, 2025.
• Negative cash flows from operations totaled $18.0 million in 2025, up from $8.9 million in 2024.
• Hardware revenue decreased by 35% to $14.2 million in 2025, primarily due to tariff and trade policy uncertainty and federal funding disruptions in the K-12 education market.
• Software revenue decreased by 18% to $10.6 million in 2025, attributed to decreased third-party annual software sales.
• Services revenue decreased by 5% to $3.1 million in 2025.
• Bookings decreased to $26.1 million in 2025 from $39.3 million in 2024, with significant cancellations of $1.7 million in 2024 due to customer financial constraints.
• Net Dollar Retention Rate (NDRR) for customers with at least $50,000 of ACV declined to 71% in 2025 from 92% in 2024.
• The company raised $22.6 million in 2025 through debt and financing arrangements, including $5.6 million from an equity line and $13.0 million from a Senior Secured Convertible Note.
• Material weaknesses in internal control over financial reporting persist, specifically in segregation of duties, account reconciliations and cutoff, and formal risk assessment policy for entity-level controls.
• Received delisting notices from Nasdaq in November and December 2025 for failing to maintain minimum market value of listed securities ($35 million) and minimum bid price ($1.00).
• Stockholders approved a reverse stock split in a ratio of no less than 1-for-15 and no more than 1-for-25 on March 13, 2026.

Sentiment

Score: 2

Explanation: StockSavvy.ai views this as a highly negative report, primarily due to the significant revenue decline, increasing net losses, negative cash flow, and the explicit 'going concern' warning from auditors, compounded by Nasdaq delisting threats.

Positives

• Secured $3.0 million in financing through Series P Preferred Stock and warrants on January 27, 2026, with potential for an additional $7.0 million.
• Issued an additional Senior Secured Convertible Note for $4.3 million on March 16, 2026, with net proceeds intended for debt repayment and working capital.
• Successfully remediated two material weaknesses in internal control over financial reporting related to IT general controls and analysis of significant/unusual transactions.
• Maintains a strong brand recognition as a market leader in AR/VR and eduverse for schools.
• Proprietary hardware and software platform offers a unique, interactive 3D learning experience without VR goggles, enhancing engagement and learning outcomes.
• Strategic PC OEM partnerships allow leveraging extensive global supply chain networks and component purchasing power.
• Software gross margin improved to 71% in 2025 from 61% in 2024, partly due to success in acquiring software applications on which the company formerly incurred revenue share.

Negatives

• Total revenue decreased by 27% to $27.9 million in 2025, primarily due to lower hardware sales and uncertainty in K-12 funding.
• Reported a net loss of $25.4 million in 2025, an increase from $20.8 million in 2024.
• Accumulated deficit reached $315.8 million as of December 31, 2025, with a total stockholders deficit of $22.5 million.
• Negative cash flows from operations increased to $18.0 million in 2025 from $8.9 million in 2024.
• Bookings decreased significantly to $26.1 million in 2025 from $39.3 million in 2024, including $1.7 million in cancellations in 2024 due to customer financial constraints.
• Net Dollar Retention Rate (NDRR) for key customers declined to 71% in 2025 from 92% in 2024, indicating reduced spending from existing customers.
• Received delisting notices from Nasdaq for failing to meet the minimum market value of listed securities ($35 million) and minimum bid price ($1.00) requirements.
• Three material weaknesses in internal control over financial reporting remain outstanding: lack of segregation of duties, account reconciliations and cutoff, and lack of a formal risk assessment policy for entity-level controls.
• Existing indebtedness of approximately $17.7 million as of December 31, 2025, with maturity dates ranging from 2026 through 2027, could adversely affect financial health and future financing ability.
• The company's independent registered public accounting firm included an explanatory paragraph regarding substantial doubt about its ability to continue as a going concern.

Risks

• Changes to U.S. Department of Education and federal funding have created significant budgetary uncertainty for customers, leading to extended sales cycles, lost sales, and reduced purchase sizes.
• Requires additional capital to fund operations and growth, which may not be available on favorable terms or at all, potentially leading to significant dilution for stockholders.
• Inability to grow revenue or manage growth effectively could adversely affect business, operating results, and financial condition.
• Failure to develop new products, manage frequent product introductions, and adapt to rapid technological change could impair competitiveness.
• Intense competition from more established and better-capitalized companies, as well as potential new technologies, poses an ongoing threat.
• Substantial time and effort are typically required to make a sale, exacerbated by budgetary uncertainty and complex purchasing processes of public school districts.
• Failure to effectively manage inventory and supply chain, including reliance on limited source suppliers, could disrupt manufacturing and increase costs.
• Inability to effectively expand sales and marketing capabilities could harm customer base growth and market acceptance.
• Errors, bugs, or vulnerabilities in technology, or failures to address technical limitations, could damage reputation, lead to customer loss, and regulatory inquiries.
• Existing and future indebtedness could adversely affect financial health, ability to obtain future financing, and ability to fulfill obligations.
• Uncertainty regarding the ability to continue as a going concern, with recurring losses and negative cash flows.
• Material weaknesses in internal control over financial reporting could adversely affect financial reporting accuracy and timing, and stock price.
• Adverse effects from changes in U.S. and international trade policies, including tariffs and trade restrictions, particularly on imports from China and Mexico.
• Involvement in legal disputes, including a lawsuit related to a failed merger and breach of contract claims, which are expensive and time-consuming.
• Obligations associated with operating as a public company require significant resources and management attention, increasing expenses.
• Failure to protect proprietary technology and intellectual property rights could substantially harm the business.
• Inability to maintain licenses from third parties for incorporated technology could severely harm the business.
• Failure of IT systems or a security breach involving customer, student, or employee personal data could materially impact reputation and business.
• Risk of delisting from Nasdaq Capital Market due to failure to maintain minimum market value of listed securities and minimum bid price.
• Potential limitations on the use of United States federal and state net operating losses (NOLs) to offset future taxable income due to ownership changes (Section 382).

Future Outlook

The company is focused on scaling execution across targeted growth vectors, including pursuing additional software applications for accretive earnings and increased software revenue. It plans to continue driving growth in the United States education market by expanding use cases and introducing new applications, particularly for K-12 and CTE users with Inspire products, and expanding its content library and platform. The company expects future results to remain sensitive to the cyclical nature of state and federal education budgets.

Management Comments

• Management has concluded that substantial doubt exists about the company's ability to continue as a going concern for one year after the date its consolidated financial statements are issued.
• Management is developing a remediation plan that includes refinancing existing debt facilities and raising new sources of capital to address the shortage of working capital.
• The operational disruptions and funding freezes initiated at the U.S. DoE in early 2025 created a volatile contracting environment for the education technology sector, leading to extended sales cycles and decreased capital expenditures by schools.

Industry Context

StockSavvy.ai notes that zSpace operates in the global education technology market, valued at $163.5 billion in 2024 and projected to grow at a 13.3% CAGR to 2030. The global AR, VR, and mixed reality market is expected to grow at a 37% CAGR to $647 billion by 2031. Spending on AR and VR in education is predicted to reach $14.2 billion by 2028 (30% CAGR from 2023). Despite these growth trends, zSpace's performance has been negatively impacted by specific U.S. Department of Education funding changes, suggesting a vulnerability to policy shifts that may not affect all EdTech companies equally. The competitive landscape includes broad EdTech providers, CTE specialists, major virtual technology companies (Apple, Google, Meta), free educational resources, and other AR/VR focused companies, indicating a crowded and evolving market where differentiation and funding access are critical.

Comparison to Industry Standards

• The global education technology market was valued at $163.5 billion in 2024 and is expected to grow at a compound annual growth rate (CAGR) of 13.3% from 2025 to 2030. zSpace's total revenue decreased by 27% in 2025, significantly underperforming the broader market growth.
• The global AR, VR, and mixed reality market is expected to grow at a 37% CAGR to $647 billion by 2031. zSpace's revenue decline indicates it is not currently capitalizing on this projected industry expansion.
• Spending on AR and VR in the education market globally is predicted to grow to $14.2 billion by 2028 (CAGR of 30% from 2023). zSpace's performance is contrary to this positive market trend, highlighting company-specific challenges rather than industry-wide contraction.
• The filing mentions competitors like Chegg, Coursera, Docebo, Duolingo, Instructure, Kahoot, Powerschool, Udemy in EdTech; Degreed, LinkedIn Learning, Pluralsight in CTE; and Apple, Google, Meta Platforms, Matterport Inc, Unity Software, Avantis Education, Prisms VR, Interplay Learning, Umety Solutions Ltd, Transfr VR, and Victory XR in virtual technology. zSpace's revenue decline suggests it is losing market share or struggling to compete effectively against these diverse players, particularly given its reliance on government funding which has been disrupted.

Management Changes

Corporate Governance

Legal Proceedings

• EdtechX Holdings Acquisition Corp. II filed a complaint on July 12, 2024, in the Superior Court of the State of Delaware, claiming breaches of contract and the implied covenant of good faith and fair dealing related to a terminated merger agreement. Trial is set for January 20, 2027.
• Jiangxi Kmax Industrial Co., Ltd. (KMax) filed a complaint on February 9, 2026, in the United States District Court for the Northern District of California, alleging breach of contract related to unpaid revenue share invoices totaling $557,940 plus interest. The company intends to assert counterclaims.
• Kmax filed a second complaint on March 11, 2026, in the U.S. District Court for the Southern District of New York, alleging violations of federal securities laws and state common law claims related to Kmax's $15 million investment in pre-IPO private placement financings between 2017 and 2019.

Related Party Transactions

• bSpace Investments Limited (an affiliate of Gulf Islamic Investments, LLC (GII)) owns 16.5% of common stock as of January 31, 2026. Previously, bSpace loans totaling $37.5 million were converted into preferred stock and later NCNV Preferred Stock 3, relieving the company of further obligations.
• dSpace Investments Limited (an affiliate of GII) owns 34.8% of common stock as of January 31, 2026. Pankaj Gupta, a former director and Co-CEO of GII, holds 100% equity in dSpace.
• Kuwait Investment Authority (KIA), a principal shareholder, previously had a $5.0 million promissory note, which was converted into NCNV preferred stock, relieving the company of further obligations.
• The company expensed and accrued $0.2 million as of December 31, 2025, with GII for recruitment fees paid on the company's behalf.

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from future equity raises, potential loss of investment due to going concern doubt, and possible delisting from Nasdaq. The approved reverse stock split aims to address bid price compliance but does not guarantee long-term value. Voting power is concentrated with certain large shareholders.
• **Employees**: Retention of talented employees, including senior management, is critical for future success, but volatility in stock price and financial uncertainty could make retention challenging. The company offers competitive compensation and benefits, including a 401(k) plan.
• **Customers (K-12 & CTE Schools)**: Experience budgetary uncertainty due to changes in U.S. Department of Education funding, leading to extended sales cycles and delayed purchases. The company's products are designed to enhance learning, but funding constraints impact adoption.
• **Suppliers**: The company relies on third-party contract manufacturers and OEMs for hardware production, particularly in China, exposing it to supply chain risks and trade policy changes. Legal disputes with suppliers (e.g., KMax) could disrupt relationships.
• **Creditors**: Existing debt holders face risks related to the company's ability to meet repayment obligations, especially given the 'going concern' doubt. Recent debt refinancings and amendments (e.g., Itria, Fiza) indicate ongoing efforts to manage debt, but also highlight financial strain.

Next Steps

• Implement a remediation plan to refinance existing debt facilities and raise new sources of capital to address working capital shortfalls.
• Actively monitor market value of listed securities (MVLS) and bid price to regain compliance with Nasdaq listing requirements by May 26, 2026 (MVLS) and June 9, 2026 (bid price).
• Effect a reverse stock split in a ratio of 1-for-15 to 1-for-25, as approved by stockholders on March 13, 2026, to potentially increase share price and regain Nasdaq compliance.
• Continue efforts to remediate remaining material weaknesses in internal control over financial reporting.
• Pursue additional software applications for acquisition to increase software offerings and revenue growth.
• Expand use cases and introduce new applications within the United States K-12 and CTE markets.
• Expand content library and platform to address current and future customer needs.
• Defend against legal complaints filed by EdtechX Holdings Acquisition Corp. II (trial set for January 20, 2027) and Jiangxi Kmax Industrial Co., Ltd. (response due April 20, 2026).

Key Dates

Recommendation

The company faces severe financial distress, evidenced by a 27% revenue decline, increasing net losses, negative cash flow, and an accumulated deficit of over $315 million. The independent auditor's 'going concern' opinion highlights fundamental viability issues. Furthermore, the company has received delisting notices from Nasdaq, indicating a high probability of its stock moving to a less liquid over-the-counter market. While recent capital raises provide some short-term liquidity, they are insufficient to resolve the underlying financial instability. The ongoing legal disputes and persistent material weaknesses in internal controls add further layers of risk. A reverse stock split is a cosmetic measure that does not address the core business challenges. Given these compounding factors, the stock presents an extremely high risk profile with a strong likelihood of further value erosion.

Keywords

EdTech, Augmented Reality, Virtual Reality, K-12 Education, Career & Technical Education, Convertible Note, Going Concern, Nasdaq Delisting, Financial Losses, Software Subscriptions, Hardware Sales, SEC Filing, Financial Reporting, Risk Factors, Capital Raise, Reverse Stock Split