10-Q: zSpace Reports Q2 Loss Amid Revenue Dip, Secures New Debt

zSpace, Inc. reported a net loss of $6.1 million for the second quarter of 2025, with total revenue decreasing by 1% year-over-year, while securing new convertible debt financing.

Summary

• Net loss for Q2 2025 was $6.1 million, compared to $4.7 million in Q2 2024.
• Total revenue for Q2 2025 decreased by 1% to $7.5 million, from $7.5 million in Q2 2024.
• Hardware revenue increased by 2% to $4.3 million in Q2 2025, while software revenue decreased by 10% to $2.4 million.
• Operating expenses surged by 45% to $9.5 million in Q2 2025, primarily due to a $1.8 million increase in stock-based compensation.
• For the six months ended June 30, 2025, net loss was $11.9 million, an improvement from $17.0 million in the prior year period.
• Total revenue for the six months ended June 30, 2025, decreased by 7% to $14.2 million, with hardware revenue down 13% and software revenue down 6%.
• Cash, cash equivalents, and restricted cash decreased to $1.4 million as of June 30, 2025, from $4.9 million at December 31, 2024.
• The company incurred negative cash flows from operations of $11.6 million for the six months ended June 30, 2025.
• Total liabilities increased significantly to $34.4 million as of June 30, 2025, from $28.2 million at December 31, 2024.
• Gross profit increased by 5% in Q2 2025 and 11% in H1 2025, driven by higher margins of Inspire units and reduced software costs.
• Annualized Contract Value (ACV) for software licenses improved to $10.9 million as of June 30, 2025, from $9.9 million a year prior.
• Net Dollar Retention Rate (NDRR) for customers with at least $50,000 ACV was 131% for the trailing twelve months ended June 30, 2025, up from 104%.

Sentiment

Score: 3

Explanation: While there are some positive operational metrics like improved gross margin and NDRR, the significant decline in cash, increased net loss in Q2, substantial decrease in bookings, and explicit 'going concern' warning, coupled with identified material weaknesses in internal controls, indicate a highly challenging financial position and significant operational risks. The capital raises are critical for survival rather than growth, reflecting underlying distress.

Positives

• Gross profit increased by 5% in Q2 2025 and 11% in H1 2025, reaching $3.2 million and $6.4 million respectively, driven by higher margins of Inspire units and reduced software costs.
• Hardware gross margin improved to 32% in Q2 2025 (from 24% in Q2 2024) and 34% in H1 2025 (from 25% in H1 2024).
• Software gross margin remained strong at 68% in Q2 2025 and improved to 67% in H1 2025 (from 60% in H1 2024), partly due to success in acquiring software applications previously subject to revenue share.
• Services revenue increased by 16% in Q2 2025 to $0.8 million and by 30% in H1 2025 to $1.7 million, driven by increased sales of extended warranty and technology support services.
• Annualized Contract Value (ACV) for active software licenses improved by 11% to $10.9 million as of June 30, 2025, from $9.9 million a year prior.
• Net Dollar Retention Rate (NDRR) for customers with at least $50,000 ACV significantly improved to 131% for the trailing twelve months ended June 30, 2025, compared to 104% in the prior year period.
• Interest expense decreased by 67% in Q2 2025 and 51% in H1 2025, primarily due to convertible loans converting to common stock in the December 2024 IPO and a lower interest rate on new convertible debt.
• The company secured a Senior Secured Convertible Note financing of $13.0 million in gross proceeds in April 2025, with an option for an additional $7.0 million.
• The company entered into a Common Stock Purchase Agreement with Tumim Stone Capital LLC, providing the right to sell up to $30.0 million worth of newly issued shares.

Negatives

• Net loss increased to $6.1 million in Q2 2025 from $4.7 million in Q2 2024.
• Total revenue decreased by 1% in Q2 2025 and 7% in H1 2025, primarily due to lower software and hardware revenues.
• Software revenue decreased by 10% in Q2 2025 and 6% in H1 2025, attributed to customer funding disruptions in K-12 markets.
• Hardware revenue decreased by 13% in H1 2025, impacted by tariff and trade policy uncertainty and federal funding uncertainty for education.
• Operating expenses increased significantly by 45% in Q2 2025 to $9.5 million, largely due to a $1.8 million increase in stock-based compensation.
• Cash, cash equivalents, and restricted cash declined substantially to $1.4 million as of June 30, 2025, from $4.9 million at December 31, 2024.
• Net cash used in operating activities increased to $11.6 million for H1 2025, compared to $5.7 million for H1 2024, indicating higher cash burn.
• Total liabilities increased to $34.4 million as of June 30, 2025, from $28.2 million at December 31, 2024, driven by new convertible debt.
• Accumulated deficit increased to $302.3 million as of June 30, 2025, from $290.4 million at December 31, 2024.
• Bookings decreased significantly by 54% in Q2 2025 to $7.2 million and by 34% in H1 2025 to $15.5 million.
• International sales from China dropped significantly to $20,000 in H1 2025 from $0.6 million in H1 2024.
• An increase of $0.2 million in excess and obsolete inventory expense was recorded in Q2 and H1 2025 due to the write-off of third-party software licenses.

Risks

• **Liquidity and Going Concern**: The company has incurred net losses and negative cash flows from operations since inception, with a cash balance of $1.4 million as of June 30, 2025, raising substantial doubt about its ability to continue as a going concern for at least the next twelve months without additional financing.
• **Dependence on Additional Financing**: The company's success depends on obtaining additional financing, increasing sales, expanding reseller partnerships, controlling costs, and continued R&D. Failure to raise capital at a reasonable cost and required times could adversely impact business operations and growth initiatives.
• **Customer Financial Constraints and Sales Cycles**: Uncertainty in K-12 end-user markets due to funding disruptions has caused longer than usual sales cycles and delayed customer orders, impacting revenue.
• **Tariff and Trade Policy Uncertainty**: New U.S. tariffs on imports from China, where products are manufactured, and retaliatory measures from other nations, can materially adversely impact the company's supply chain, pricing, and gross margin. Potential tariff volatility surcharges contribute to elongated sales cycles.
• **Reliance on Key Employees**: The loss of key employees could have a detrimental effect on the business and operations.
• **Reliance on Strategic PC OEM Partnerships**: The company relies on a major PC OEM for its Inspire laptop and another for an additional laptop product, as well as a third-party partner in China for its stylus. Termination of these relationships without suitable replacements could materially and adversely impact the business.
• **Education Funding Volatility**: Education funding is subject to change based on political, policy, or economic variables at federal, state, or local levels, which can impact school district funding and the company's business.
• **Integration Risk of Software Acquisitions**: Future growth plans include acquiring software companies and/or intellectual property, which carries risks related to successful integration and achieving accretive earnings.
• **Litigation Risk**: The company is a party to a lawsuit filed by EdtechX Holdings Acquisition Corp II claiming breaches of contract related to a terminated merger agreement, with a trial date set for January 20, 2027.
• **Purchase Obligations**: The company has $23.7 million in purchase obligations outstanding as of June 30, 2025, due on or before December 31, 2025, which could strain liquidity.
• **Customer Concentration**: One customer accounted for approximately 10% of total revenue for Q2 2025 and 14% of accounts receivable as of June 30, 2025, posing a concentration risk.
• **Ineffective Internal Controls**: Material weaknesses in internal control over financial reporting were identified as of December 31, 2024, including lack of segregation of duties, ineffective IT General Controls, issues with account reconciliation and cutoff, insufficient analysis of significant/unusual transactions, and absence of a formal risk assessment policy. These could lead to misstatements not being prevented or detected timely.

Future Outlook

The company expects to continue incurring losses through the remainder of fiscal year 2025, resulting in an estimated net loss for both financial statement and tax purposes. Management projects that current cash on hand may not be sufficient for continued operations, necessitating additional funding. Future growth plans include scaling in the United States, international expansion, investing in research and development, and acquiring software companies or intellectual property to increase software offerings and revenue, with such acquisitions intended to be accretive to earnings.

Management Comments

• "We believe that we are a recognized brand in the education market with a current focus on both United States K-12 schools and the Career and Technical Education (CTE) markets."
• "We believe limiting the user experience to the confines of a screen creates inherent limitations such as slowing technological breakthroughs, discouraging engagement and hampering creativity, particularly when utilizing technology as a learning tool."
• "We hope to accomplish this through a range of proprietary innovations in hardware and software that comprise the foundation of our educational platform."
• "We believe that these innovations help to eliminate a barrier between digital content and students so that students can be immersed in content: manipulate it, experience it, and interact with it as if it were real."
• "We believe that our platform leads to (i) deeper understanding of content, (ii) increased motivation of students to learn (iii) additional engagement of students with content and (iv) improved preparedness for the workforce."
• "We believe that we have significant growth potential and that we have demonstrated a repeatable value proposition and the ability to scale our sales growth model."
• "With a mature and tested go-to-market playbook and team in place, we are focused on scaling execution across a carefully selected set of growth vectors, including scaling in the United States, expanding internationally, investing in research and development (R&D), and acquiring software, both specific software applications and third party software developers, in order to increase the growth of our software offerings."
• "Such acquisitions, if completed, are intended to be accretive to earnings and materially increase our software revenues."
• "Management believes the disclosure of these material debooks provides investors with important context for evaluating business performance."
• "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."
• "Management believes that despite our material weaknesses, our financial statements for the quarter ended June 30, 2025 are fairly stated, in all material respects, in accordance with GAAP."
• "The Company believes this lawsuit is without merit and intends to vigorously defend itself against these allegations."

Industry Context

zSpace operates in the rapidly evolving augmented and virtual reality (AR/VR) educational technology market, targeting K-12 and Career and Technical Education (CTE) segments. The company's focus on immersive learning experiences aligns with broader trends towards interactive and experiential education. However, the industry is susceptible to long sales cycles in public education, which are further exacerbated by political, policy, and economic variables affecting education funding. The company's reliance on PC OEM partnerships and manufacturing in China exposes it to global supply chain risks and tariff volatility, a common challenge for hardware-centric tech companies. The strategic shift towards increasing software revenue aligns with industry trends favoring recurring revenue models and higher-margin software offerings over hardware sales.

Comparison to Industry Standards

• The company's Net Dollar Retention Rate (NDRR) of 131% for customers with over $50,000 ACV is a strong indicator of customer satisfaction and expansion, comparing favorably to many SaaS companies that often target NDRR above 120%.
• The reported gross margins of 43% (Q2 2025) and 45% (H1 2025) are reasonable for a company with a significant hardware component (57% of H1 2025 revenue), but lower than pure software companies which typically achieve 70-90% gross margins. The software gross margin of 67-68% is more in line with software industry standards.
• The company's accumulated deficit of $302.3 million and recurring net losses, coupled with negative cash flow from operations, are common for early-stage or high-growth technology companies investing heavily in R&D and market penetration, but also indicate significant financial challenges and a high burn rate compared to established, profitable industry players.
• The identified material weaknesses in internal controls are a concern, as robust internal controls are a standard expectation for publicly traded companies, especially post-IPO. This suggests a need for significant operational maturity improvements compared to well-governed peers.
• The total addressable market (TAM) estimates of over $68 billion globally suggest substantial growth potential, but the company's current revenue of $14.2 million (H1 2025) indicates a very small market share, typical for an emerging player in a large market.

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 in connection with the termination of the EdtechX Merger Agreement. A trial date has been set for January 20, 2027. The company believes this lawsuit is without merit and intends to vigorously defend itself.

Related Party Transactions

• Accrued $0.2 million as of June 30, 2025, with Gulf Islamic Investments Holding, LLC (GII) for recruitment fees paid on the company's behalf for the Chief Financial Officer.
• Kuwait Investment Authority (KIA) loan amounts were forgiven in exchange for NCNV preferred stock in 2022 and January 2024, relieving the company of further obligations.

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from potential future equity raises (e.g., ELOC Agreement) and conversions of convertible debt at potentially lower prices. The "going concern" warning indicates substantial risk to investment value.
• **Creditors**: The Senior Secured Convertible Note provides a first priority security interest in substantially all company assets, potentially improving recovery prospects for this specific investor compared to unsecured creditors. Existing Fiza loans were subordinated.
• **Employees**: Stock-based compensation remains a significant component of operating expenses, but the overall financial instability and need for cost control could impact job security or future compensation.
• **Customers**: Funding disruptions in K-12 markets and potential tariff surcharges could affect product pricing, availability, and sales cycles, potentially impacting customer acquisition and retention.
• **Suppliers**: The $23.7 million in purchase obligations due by December 31, 2025, indicates significant commitments, and the company's liquidity challenges could pose risks to timely payments.

Next Steps

• Remediate identified material weaknesses in internal control over financial reporting, including hiring additional financial personnel, implementing user access policies, improving account reconciliation, reviewing financing transactions, and establishing a formal risk assessment policy.
• File a registration statement on Form S-1 with the SEC to register for resale the shares of common stock that may be issued to Tumim Stone Capital LLC under the ELOC Agreement.
• Continue efforts to raise additional funding for operations to address the going concern risk.
• Focus on scaling business in the United States and expanding internationally.
• Invest in research and development (R&D) to improve product offerings.
• Pursue acquisitions of key software companies and/or intellectual property to increase software offerings and revenue.
• Vigorously defend against the lawsuit filed by EdtechX Holdings Acquisition Corp II, with a trial date set for January 20, 2027.
• Evaluate the financial impact of the One Big Beautiful Act (OBBBA) on tax law.

Key Dates

Recommendation

The company faces severe liquidity challenges, explicitly stating 'substantial doubt about our ability to continue as a going concern' without additional financing. While new debt and equity facilities have been secured, they are primarily for survival and come with significant dilution potential. Financial performance shows declining revenue, increased net loss in Q2, and a substantial increase in cash burn from operations. The identified material weaknesses in internal controls further highlight operational risks. Despite some positive operational metrics like improved gross margin and NDRR, the fundamental financial health is precarious, making the stock a high-risk investment with significant downside potential.

Keywords

AR/VR, Augmented Reality, Virtual Reality, Education Technology, K-12 Education, Career Technical Education, EdTech, Hardware, Software, SEC Filing, 10-Q, Financial Results, Going Concern, Convertible Debt, Liquidity, Stock-based Compensation, Tariffs, Customer Concentration, Internal Controls