10-K: ZSpace, Inc. Reports Fiscal Year 2024 Results Amidst Going Concern Uncertainty

Sentiment:

Annual Report 27 March 2025 10:21 PM

ZSpace, Inc.'s 10-K filing reveals a decrease in revenue for fiscal year 2024 and ongoing concerns about the company's ability to continue as a going concern.

Capital raiseTo address its shortage of working capital necessary to fund its operations, management is developing a remediation plan that includes refinancing existing debt facilities and raising new sources of capital.The company may require additional capital from equity or debt financing in the future to support its growth, fund its operations or to respond to competitive pressures or strategic opportunities.

Worse than expectedThe company's revenue decreased by 13% compared to the previous year.The company's net loss increased compared to the previous year.The company has identified material weaknesses in its internal control over financial reporting.

Summary

ZSpace, Inc., a provider of AR/VR educational technology, filed its 10-K report for the fiscal year ended December 31, 2024.
The company experienced a 13% decrease in consolidated revenue, totaling $38.1 million in 2024 compared to $43.9 million in 2023.
The net loss for 2024 was $(20.8) million, compared to a net loss of $(13.0) million in 2023.
The company has an accumulated deficit of $(290.4) million as of December 31, 2024.
There is substantial doubt about ZSpace's ability to continue as a going concern due to recurring losses, negative cash flows, and a working capital deficiency.
The company is working on a remediation plan that includes refinancing existing debt and raising new capital.
Material weaknesses in internal control over financial reporting were identified, and remediation efforts are underway.
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 and approximately 2% of United States community and technical colleges.
The company estimates its total addressable market (TAM) for K-12 and CTE markets is greater than $68 billion globally.

Sentiment

Score: 3

Explanation: The document presents a concerning financial picture with declining revenue, increasing losses, and going concern uncertainty, offset by a strong market position and remediation efforts.

Positives

ZSpace's K-12 platform has a strong presence, deployed in over 80% of the largest 100 K-12 public school districts in the United States.
The company's CTE solutions have a significant footprint, deployed in approximately 73% of those public school districts it serves.
The company estimates a large total addressable market (TAM) for K-12 and CTE markets, exceeding $68 billion globally.
The company is actively working to remediate material weaknesses in internal control over financial reporting.
The company completed an IPO in December 2024, generating $7.5 million in net proceeds.

Negatives

The company experienced a 13% decrease in revenue for fiscal year 2024.
The company's net loss increased to $(20.8) million in 2024.
There is substantial doubt about the company's ability to continue as a going concern.
Material weaknesses in internal control over financial reporting were identified.

Risks

The company's ability to continue as a going concern is uncertain.
Failure to remediate material weaknesses in internal control over financial reporting could harm the business.
The company may not be able to secure additional financing on favorable terms or at all.
Adverse economic conditions and changes in government funding may reduce demand for the company's products.
The company faces intense competition in the education technology market.
The company depends on a limited number of third-party partners to produce, resell and distribute its products.

Future Outlook

The company expects that going forward its software applications revenue will grow faster in absolute dollars and as a percentage of its total revenue than its product or service revenues. The company expects its working capital needs to increase in the future as it continues to expand and enhance its operations.

Management Comments

Management is developing a remediation plan that includes refinancing existing debt facilities and raising new sources of capital.
Management believes the disclosure of these material debooks provides investors with important context for evaluating business performance.

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. Markets and Markets Research predicts that 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 competitors in the education technology ecosystem include companies such as Chegg, Coursera, Docebo, Duolingo, Instructure, Kahoot, Powerschool, and Udemy.
CTE companies such as A Cloud Guru Ltd., Degreed, Inc., LinkedIn Corporation through its LinkedIn Learning services, Pluralsight, Inc. and Udacity, Inc. are also listed as competitors.
Companies that operate in the virtual technology market, such as Apple, Google, Meta Platforms, Matterport Inc and Unity Software are also listed as competitors.
AR/VR focused companies such as ClassVR, Inception XR, Interplay Learning, Umety Solutions Ltd, Transfr VR Victory XR are also listed as competitors.

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Internal Control	The company is implementing measures to improve its internal control over financial reporting to remediate material weaknesses.	December 31, 2024	Aims to improve the accuracy and timeliness of financial reporting.
Clawback Policy	The Board of Directors has adopted a Clawback Policy to provide for the recovery of erroneously awarded Incentive-based Compensation from Executive Officers.	June 18, 2024	Aims to promote integrity and accountability.
Code of Business Conduct and Ethics	The Board of Directors has adopted a code of business conduct and ethics.	June 18, 2024	Aims to promote honest and ethical conduct.
Insider Trading Policy	The Board of Directors has adopted an Insider Trading Policy.	June 18, 2024	Aims to promote compliance with insider trading laws, rules and regulations.

Legal Proceedings

EdtechX filed a complaint in the Superior Court of the State of Delaware in connection with the termination of the EdtechX Merger Agreement, claiming breaches of contract and the implied covenant of good faith and fair dealing.
On September 20, 2024, the Company filed a motion to dismiss the complaint in Delaware Superior Court.

Related Party Transactions

The company has engaged in multiple transactions with Gulf Islamic Investments LLC (GII) and its related parties, including bSpace Investments Limited and Fiza Investments Limited.
These transactions include loans, convertible notes, and preferred stock issuances.
The company has also engaged in transactions with Kuwait Investment Authority (KIA), including a promissory note and subsequent amendments and conversions.

Stakeholder Impact

Shareholders face the risk of dilution from potential future equity issuances.
Employees may be affected by cost-cutting measures or restructuring efforts.
Customers may experience changes in product offerings or service levels.
Suppliers may be impacted by changes in the company's purchasing patterns.
Creditors face increased risk due to the company's going concern uncertainty.

Next Steps

The company is working on a remediation plan that includes refinancing existing debt and raising new capital.
The company is targeting completion of the remediation measures for material weaknesses in internal control over financial reporting within twelve months of the date of this Annual Report on Form 10-K.

Key Dates

Date	Description
2006	ZSpace, Inc. was incorporated in the state of Delaware.
January 1, 2008	The PRC Labor Contract Law became effective.
July 1, 2011	The PRC Social Insurance Law became effective.
December 28, 2012	The PRC Labor Contract Law was amended.
2014	ZSpace began offering its education products and solutions.
December 29, 2018	The PRC Social Insurance Law was amended.
April 3, 1999	The Administrative Regulations on the Housing Funds became effective.
March 24, 2002	The Administrative Regulations on the Housing Funds was amended.
March 24, 2019	The Administrative Regulations on the Housing Funds was amended.
February 2019	ZSpace entered into a promissory note with the Kuwait Investment Authority (KIA).
May 2019	ZSpace entered into a loan and security agreement with bSpace Investments Limited.
November 2020	ZSpace and bSpace amended the LSA to extend the maturity date to December 15, 2020.
December 2020	ZSpace and bSpace amended the LSA for all tranches to extend the maturity date to December 31, 2022.
April and June 2021	ZSpace drew the $3.0 million Tranche 4 loans under the same terms and conditions as existed during the December 2020 LSA modifications.
September 2021	ZSpace and bSpace amended the LSA in connection with the Revolving Line-of-Credit.
August 2021	ZSpace entered into an agreement to work with a major PC OEM to build Inspire.
Early 2022	Inspire, ZSpace's second-generation laptop product, was launched.
May 16, 2022	ZSpace entered into a merger agreement with EdtechX Holdings Acquisition Corp II.
August 12, 2022	$8.1 million of the amounts outstanding under the KIA Note was converted into 8,062 shares of New NCNV Preferred Stock.
January 2023	ZSpace signed term loan agreements to borrow $4.0 million (Term Loan 1) and $2.5 million (Term Loan 2).
April 2023	ZSpace signed an additional agreement to borrow $0.7 million (Term Loan 3).
June 21, 2023	The Original Merger Agreement with Edtech was terminated.
September 8, 2023	The Revolving Line of Credit was made available through September 8, 2023.
December 29, 2023	ZSpace effected a 1-for-75 reverse stock split.
December 30, 2023	ZSpace entered into a loan termination agreement with bSpace.
January 2024	The balance of approximately $5.2 million under the KIA Note was converted into 5,190 shares of New NCNV Preferred Stock.
March 2024	ZSpace granted employees and members of the board of directors stock options to purchase a total of 5,028,756 shares of common stock.
May 2024	ZSpace entered into multiple loan agreements from an existing lender to borrow a total of $3.5 million secured by certain assets.
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.
July 2024	ZSpace entered into SAFE agreements with three suppliers in the total amount of $3.25 million.
September 20, 2024	The Company filed a motion to dismiss the complaint in Delaware Superior Court.
Late 2024	Inspire 2, ZSpace's third-generation laptop product, was launched.
December 4, 2024	ZSpace's Registration Statement on Form S-1 was declared effective in connection with its IPO.
December 5, 2024	ZSpace's common stock began trading on the Nasdaq Global Market.
December 6, 2024	ZSpace closed its IPO.
Early 2025	Imagine, ZSpace's fourth-generation laptop product, was launched.
February 26, 2025	ZSpace entered into two Loan and Security agreements that will provide it with $2.0 million in financing.
February 28, 2025	The number of outstanding shares of the Registrants common stock as of February 28, 2025 was 22,849,378.
March 1, 2025	The board of directors increased Mr. Kellenbergers annual base salary to $500,000 effective March 1, 2025.
March 1, 2025	The board of directors increased Mr. Harpers annual base salary to $400,000 effective March 1, 2025.
March 1, 2025	The board of directors increased Mr. Rheinheimers annual base salary to $300,000 effective March 1, 2025.
March 1, 2025	The board of directors increased Mr. DeOliveiras annual base salary to $400,000 effective March 1, 2025.
March 27, 2025	Date of the audit report.

Keywords

financial results, going concern, internal control, revenue, education technology, AR/VR, ZSpace, 10-K

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