S-1/A: zSpace Inc. Files for IPO, Aiming to Raise $15 Million for AR/VR Education Platform

zSpace, Inc., a provider of AR/VR educational technology, is pursuing an initial public offering of 3,000,000 shares of common stock with an expected price range of $4.50 to $5.50 per share.

Summary

• zSpace, Inc., a Delaware corporation, has filed an amendment to its Form S-1 registration statement for an initial public offering.
• The company plans to offer 3,000,000 shares of common stock to the public.
• The anticipated initial public offering price is expected to be between $4.50 and $5.50 per share.
• Additionally, certain securityholders are registering for resale up to 2,219,970 shares of common stock.
• The company intends to use the net proceeds from the offering for growth initiatives, including funding product commitments, software development, sales and marketing, and working capital.
• Roth Capital Partners and Craig-Hallum Capital Group are serving as joint book-running managers for the offering.
• 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.
• After the offering, dSpace Investments Limited, bSpace Investments Limited and Fiza Investments Limited are expected to control a majority of the voting power.
• The company estimates its revenue for the three months ended June 30, 2024 to be approximately $7.5 million, a decrease of approximately 29.7% compared to the three months ended June 30, 2023.
• The company expects an increase in its gross profit margin to approximately 40.4% for the three months ended June 30, 2024 from 38.7% for the three months ended June 30, 2023.
• The company expects the Net Dollar Retention Rate (NDRR) for customers with at least $50,000 in ACV, as of June 30, 2023 and June 30, 2024 to be 104%.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company operates in a growing market and has some positive metrics, it also faces significant challenges, including a history of losses, material weaknesses in internal controls, and a going concern warning from its auditor. The IPO is intended to address some of these issues, but its success is not guaranteed.

Positives

• The company's K-12 platform is currently deployed in over 80% of the largest 100 K-12 public school districts in the United States, as measured by student enrollment.
• The company's CTE solutions have been deployed in approximately 73% of those public school districts it serves.
• The company has partnered with over 25 resellers and has expanded its customer network into over 50 countries.
• The company expects an increase in its gross profit margin to approximately 40.4% for the three months ended June 30, 2024 from 38.7% for the three months ended June 30, 2023.
• The company expects the Net Dollar Retention Rate (NDRR) for customers with at least $50,000 in ACV, as of June 30, 2023 and June 30, 2024 to be 104%.

Negatives

• The company has a history of net losses and expects to continue to experience net losses in the future.
• The company estimates its revenue for the three months ended June 30, 2024 to be approximately $7.5 million, a decrease of approximately 29.7% compared to the three months ended June 30, 2023.
• The company has identified material weaknesses in its internal control over financial reporting.
• The company's independent auditor has raised substantial doubt about its ability to continue as a going concern.

Risks

• The company has a limited operating history at the scale of its business, which makes it difficult to evaluate its current business and future prospects.
• The company may not be able to scale its business for future growth.
• The company has a history of net losses and expects to continue to experience net losses in the future.
• The company may not achieve profitability.
• 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.
• The company's platform may become less competitive.
• The company may fail to manage its inventory and supply chain effectively.
• The company was involved in a SPAC transaction that was terminated.
• The outcome of the termination remains uncertain and may result in negative impact to the company.
• The company expects to incur research and development costs in developing 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 product and software offerings and technical infrastructure, and any significant disruption in the availability of its platform could damage its reputation, result in a potential loss of customers and engagement, and adversely affect its business, operating results and financial condition.
• 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.
• Any interruptions in the company's operations due to cyberattacks or to its failure to maintain adequate security and supporting infrastructure as it scales, could damage its reputation, business, operating results, and financial condition.
• The failure of the company's information technology (IT) systems or a security breach involving customer or employee personal data, and the remediation of any such failure or breach, could materially impact its reputation and adversely affect its business, results of operations or financial condition.
• If the company needs additional capital in the future, it may not be available on favorable terms, if at all.
• The company's existing and future levels of indebtedness could adversely affect its financial health, ability to obtain financing in the future, ability to react to changes in its business and ability to fulfill its obligations under such indebtedness.
• The company depends on a limited number of third-party partners to produce, resell and distribute its products.
• Certain of the company's market opportunity estimates, growth forecasts and key metrics could prove to be inaccurate, and any real or perceived inaccuracies may harm its reputation and negatively affect its business.
• 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 its 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 obligations associated with operating as a public company following the offering will require significant resources and management attention and will cause it 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 its business, operating results, and financial condition.
• The company has identified material weaknesses in its internal control over financial reporting.
• Economic uncertainty or downturns, including as a result of supply chain disruptions, geopolitical conflicts, rising fuel prices, inflation, increasing interest rates and instability in the global banking system could adversely affect its business, financial condition and operating results.
• Failure to register, protect or enforce its proprietary technology and intellectual property rights could substantially harm its business, operating results and financial condition.
• The company will incur significant transaction and transition costs in connection with the offering, and it will incur additional costs and obligations as a result of being a public operating company following the offering.
• The company 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.
• The company is 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 its 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. The company believes that the net proceeds of this offering, together with its existing cash and cash equivalents, will be sufficient to fund its operations and its planned development through at least December 31, 2025.

Industry Context

The global education technology market was valued at $142.4 billion in 2023 and 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 compared to $28 billion in 2021. Spending on AR and VR in the education market globally will grow to $14.2 billion by 2028 (CAGR of 30% from 2023).

Comparison to Industry Standards

• The document mentions several competitors in the education technology ecosystem, including Chegg, Coursera, Docebo, Duolingo, Instructure, Kahoot, Powerschool, and Udemy.
• It also lists CTE companies such as A Cloud Guru Ltd., Degreed, Inc., LinkedIn Corporation through its LinkedIn Learning services, Pluralsight, Inc. and Udacity, Inc.
• Competitors in the virtual technology market include Apple, Google, Meta Platforms, Matterport Inc and Unity Software.
• AR/VR focused companies such as ClassVR, Inception XR, Interplay Learning, Umety Solutions Ltd, Transfr VR Victory XR are also listed as competitors.
• The document does not provide a detailed comparison of zSpace's financial performance or market position relative to these specific companies.

Legal Proceedings

• On July 12, 2024 EdtechX filed a complaint in the Superior Court of the State of Delaware in connection with the termination of the EdtechX Merger Agreement, alleging breaches of contract and the implied covenant of good faith and fair dealing.

Related Party Transactions

• dSpace Investments Limited controls zSpace, Inc. through its ownership of 3,874,946 shares of our Series A preferred stock, which is 100% of the outstanding shares of Series A preferred stock.
• Pankaj Gupta, one of our directors and the Co-CEO of 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.

Stakeholder Impact

• Shareholders will experience immediate dilution upon the closing of the offering.
• The company's future success depends on the continuing ability to attract, train, integrate and retain highly skilled personnel, including software engineers and sales personnel with experience in the education market.

Next Steps

• 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.

Key Dates

Keywords

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