10-Q: zSpace Q1 2026: Revenue Plunges Amid Going Concern Doubts

zSpace, Inc. reported a 22% revenue decrease and a higher net loss in Q1 2026, alongside a going concern warning and material weaknesses in internal controls.

Summary

• Net loss increased to $6.6 million for the three months ended March 31, 2026, from $5.8 million in the prior year period.
• Total revenue decreased by 22% to $5.3 million in Q1 2026 from $6.8 million in Q1 2025, primarily due to lower hardware and services sales.
• Hardware revenue fell 27% to $2.8 million, and services revenue dropped 49% to $0.5 million. Software revenue remained flat at $2.0 million.
• Bookings decreased to $6.1 million in Q1 2026 from $6.7 million in Q1 2025.
• Annualized Contract Value (ACV) declined to $10.1 million from $11.6 million, and Net Dollar Retention Rate (NDRR) significantly dropped to 65% from 97%.
• Operating expenses decreased by 22% to $6.7 million, driven by lower personnel, travel, and consulting costs.
• The company reported negative cash flows from operations of $3.0 million for Q1 2026.
• Management has raised substantial doubt about the company's ability to continue as a going concern for the next twelve months.
• Material weaknesses in internal control over financial reporting were identified, including lack of segregation of duties, account reconciliation and cutoff issues, and absence of a formal risk assessment policy.

Sentiment

Score: 2

Explanation: StockSavvy.ai views this filing with significant concern due to the substantial doubt about the company's going concern ability, declining revenue and customer retention metrics, and identified material weaknesses in internal controls, despite some cost reduction efforts.

Positives

• Gross margin improved to 53% in Q1 2026 from 47% in Q1 2025.
• Operating expenses decreased by 22% ($1.9 million) year-over-year, reflecting cost control efforts.
• Loss from operations improved by 27% ($1.5 million) compared to the prior year.
• Adjusted EBITDA improved to a loss of $2.1 million in Q1 2026 from a loss of $4.4 million in Q1 2025.
• Net cash used in operating activities improved to $3.0 million in Q1 2026 from $4.6 million in Q1 2025.
• A second legal complaint by Kmax alleging federal securities law violations was voluntarily dismissed in May 2026.

Negatives

• Total revenue decreased by 22% ($1.5 million) to $5.3 million in Q1 2026 compared to Q1 2025.
• Net loss increased by 12% ($0.7 million) to $6.6 million in Q1 2026.
• Bookings decreased to $6.1 million in Q1 2026 from $6.7 million in Q1 2025.
• Annualized Contract Value (ACV) decreased by 13% to $10.1 million in Q1 2026.
• Net Dollar Retention Rate (NDRR) significantly declined to 65% for the trailing twelve months ended March 31, 2026, from 97% in the prior year period.
• Accumulated deficit worsened to $322.3 million as of March 31, 2026.
• Total stockholders' deficit increased to $25.4 million as of March 31, 2026.
• Total liabilities increased to $35.9 million as of March 31, 2026, from $30.1 million as of December 31, 2025.
• The company identified material weaknesses in internal control over financial reporting, rendering disclosure controls ineffective.

Risks

• Substantial doubt about the company's ability to continue as a going concern for at least the next twelve months.
• Dependence on obtaining additional financing to meet repayment obligations and ongoing working capital shortfalls.
• Uncertainty of successfully developing products and gaining customer acceptance.
• Uncertainty of achieving future profitability.
• Risks inherent in foreign operations, including different legal systems and political/economic environments.
• Potential tariff volatility surcharges contributing to elongated sales cycles.
• Customer financial constraints leading to significant order cancellations ('debooks').
• Material weaknesses in internal control over financial reporting, which could lead to misstatements.
• Litigation risks, including a breach of contract lawsuit with EdtechX and a separate breach of contract claim from KMax.
• Reliance on single or limited sources for certain custom and new technology components.
• Industry-wide shortages and significant commodity pricing fluctuations for components.
• Outsourced transportation and logistics management reducing direct control over distribution.
• Potential dilutive effect on stockholders from future equity financings.
• Debt financing may impose restrictions on future financing and operating activities.

Future Outlook

Management expects R&D expenses to increase in absolute dollars due to continued investments in the platform and products. The company aims to accelerate the transition of its revenue mix from hardware to software through improved renewing revenue from customer retention and expansion. The company anticipates incurring losses for the remainder of the fiscal year ending December 31, 2026.

Management Comments

• "The decrease in revenue is primarily attributable to lower hardware and software revenues attributable to uncertainty in our K-12 end-user markets where funding sources have been disrupted, causing longer than usual sales cycles, and in some cases prompting customers to delay receipt of confirmed order bookings."
• "Potential tariff volatility surcharges have also contributed to potentially elongated sales cycles as we communicate these pricing impacts to customers in revised quotes."
• "We expect that going forward our software applications revenue will grow faster in absolute dollars and as a percentage of our total revenue than our product or service revenues."
• "Management has projected cash on hand may not be sufficient to allow us to continue operations and there is substantial doubt about our ability to continue as a going concern within 12 months from the date of issuance of the financial statements if we are unable to raise additional funding for operations."

Industry Context

StockSavvy.ai notes that the education technology sector, particularly K-12, is susceptible to funding disruptions and elongated sales cycles, as evidenced by zSpace's performance. The company's focus on AR/VR solutions for education positions it in a growing but competitive market, where the ability to secure long-term contracts and manage supply chain costs is crucial. The decline in Net Dollar Retention Rate suggests challenges in maintaining and expanding existing customer relationships, a key indicator of health in subscription-based models.

Comparison to Industry Standards

• N/A The filing does not provide specific comparable companies, projects, or results to global benchmarks.

Corporate Governance

Legal Proceedings

• EdtechX Holdings Acquisition Corp II filed a complaint on July 12, 2024, alleging breaches of contract and implied covenant of good faith and fair dealing related to a terminated merger agreement. A trial date is set for January 20, 2027. The company believes the lawsuit is without merit.
• Jiangxi Kmax Industrial Co., Ltd. (KMax) filed a complaint on February 9, 2026, alleging breach of contract related to unpaid revenue share invoices totaling $557,940 plus interest. The company has denied allegations and asserted counterclaims. An account payable of $0.6 million has been recorded.
• Kmax filed a second complaint on March 11, 2026, alleging violations of federal securities laws and state common law claims related to a $15 million pre-IPO investment. This matter was voluntarily dismissed by Kmax in May 2026.

Related Party Transactions

• Expensed and accrued $0.2 million as of March 31, 2026, with Gulf Islamic Investments Holding, LLC (GII) for recruitment fees paid on the company's behalf for the Chief Financial Officer, Erick DeOliveira, hired in 2023.

Stakeholder Impact

• Shareholders: Face significant dilution risk from potential future equity raises and conversions of convertible debt/preferred stock. The reverse stock split may temporarily boost share price but does not address underlying financial issues. The going concern warning indicates a high risk of investment loss.
• Creditors: The company's financial distress and going concern warning increase credit risk. Debt refinancing and new convertible notes indicate ongoing efforts to manage debt, but also highlight the company's reliance on debt.
• Employees: Headcount reductions contributed to lower operating expenses, indicating potential job insecurity. Stock-based compensation is a significant component of compensation, but the low stock price and going concern risk diminish its value.
• Customers: Delays in order fulfillment and elongated sales cycles due to funding disruptions and tariff volatility could impact customer satisfaction and future sales. The decline in NDRR suggests existing customers are reducing their engagement or not renewing.
• Suppliers: The company has $16.2 million in purchase obligations due by December 31, 2026, and a recorded account payable of $0.6 million related to a vendor dispute, indicating potential payment risks for suppliers.

Next Steps

• Vigorously defend against the EdtechX lawsuit, with a trial date set for January 20, 2027.
• Respond to KMax's breach of contract allegations and pursue counterclaims, with KMax's answer due June 10, 2026.
• Continue efforts to raise additional funding for operations to address liquidity risk and working capital needs.
• Address identified material weaknesses in internal control over financial reporting.
• Manage the Fiza loan interest moratorium until December 31, 2026, after which monthly interest-only payments resume.
• Repay the New Loan from Itria Ventures LLC in 24 equal monthly installments.
• Manage monthly repayment obligations for the Senior Secured Convertible Notes, which can be in cash or common stock.
• Accelerate the transition of revenue mix to software from hardware through continued improvement in renewing revenue.

Key Dates

Recommendation

StockSavvy.ai recommends a strong sell for zSpace, Inc. given the severe financial distress indicated by the going concern warning, persistent net losses, and declining revenue. The significant drop in Net Dollar Retention Rate (NDRR) and Annualized Contract Value (ACV) points to fundamental challenges in customer acquisition and retention. While operating expenses were reduced, the overall financial health remains precarious, exacerbated by material weaknesses in internal controls. Despite recent capital raises and debt restructuring, the company's long-term viability is highly questionable without a substantial and sustained turnaround in its core business operations and profitability.

Keywords

zSpace, AR/VR, augmented reality, virtual reality, education technology, K-12, CTE, SEC filing, 10-Q, financial results, net loss, revenue decline, convertible debt, going concern, reverse stock split, liquidity risk, internal controls, corporate governance, debt refinancing, financial performance, stockholders deficit, customer retention, software licenses, hardware sales