10-Q: zSpace Reports Q3 Loss Amid Revenue Decline, Nasdaq Transfer

zSpace, Inc. reported a significant net loss and revenue decline for Q3 2025, alongside a transfer to the Nasdaq Capital Market due to minimum market value non-compliance.

Summary

• Net loss for the three months ended September 30, 2025, was $6.169 million, a substantial increase from $0.204 million in the prior year period.
• Total revenue decreased by 38% to $8.793 million for the three months ended September 30, 2025, compared to $14.219 million in the same period of 2024.
• Hardware revenue declined by 51% to $3.768 million, and software revenue decreased by 23% to $4.319 million for the three months ended September 30, 2025.
• For the nine months ended September 30, 2025, net loss was $18.103 million, up from $17.197 million in the prior year.
• Total revenue for the nine months decreased by 22% to $23.011 million, down from $29.563 million in the prior year period.
• The company reported negative cash flows from operations of $14.025 million for the nine months ended September 30, 2025, significantly higher than $3.850 million in the prior year.
• Cash, cash equivalents and restricted cash stood at $4.271 million as of September 30, 2025, down from $4.864 million at December 31, 2024.
• The company's accumulated deficit grew to $308.503 million as of September 30, 2025.
• Adjusted EBITDA for the three months ended September 30, 2025, was a loss of $1.956 million, compared to a profit of $0.445 million in the prior year.
• Bookings decreased by 37% to $7.436 million for the three months and by 35% to $22.746 million for the nine months ended September 30, 2025.
• Net Dollar Retention Rate (NDRR) for customers with at least $50,000 ACV dropped to 77% for the trailing twelve months ended September 30, 2025, from 102% in the prior year.
• The company received a Nasdaq notice for not meeting the minimum market value of publicly held shares ($15 million) and subsequently transferred its listing to the Nasdaq Capital Market, which has a $1 million MVPHS requirement.
• An amendment to the Senior Secured Convertible Note on October 15, 2025, reduced the conversion floor price from $1.98 to $0.60 and eased Equity Conditions for stock payments.

Sentiment

Score: 2

Explanation: The company faces severe financial challenges, including widening losses, declining revenue, negative cash flow, and a going concern warning. While it has secured new financing and is addressing internal control weaknesses and Nasdaq listing issues, the overall financial performance and outlook are highly concerning.

Positives

• Gross margin improved to 51% for the three months ended September 30, 2025, from 45% in the prior year, and to 47% for the nine months, from 41%.
• Cost of hardware sold decreased by 52% for the three months and 36% for the nine months, partly due to fewer units sold and lower bill of materials costs for the new Inspire 2 laptop.
• Cost of software sold decreased by 35% for the three months and 28% for the nine months, partly due to success in acquiring software applications on which the company formerly incurred revenue share.
• Services revenue increased by 9% for the nine months ended September 30, 2025, driven by increased sales of extended warranty and technology support services.
• Interest expense decreased by 49% for the three months and 50% for the nine months, due to convertible loans converting into common stock and a lower interest rate on new convertible debt.
• Successfully transferred listing to the Nasdaq Capital Market, resolving the minimum market value deficiency notice.
• Stockholders approved an amendment to the Certificate of Incorporation to allow for stockholder action by written consent.

Negatives

• Significant increase in net loss for both the three-month ($6.169 million vs $0.204 million) and nine-month ($18.103 million vs $17.197 million) periods ended September 30, 2025.
• Total revenue decreased substantially by 38% for the three months and 22% for the nine months ended September 30, 2025.
• Hardware and software revenues were negatively impacted by uncertainty in K-12 end-user markets, funding disruptions, and elongated sales cycles due to potential tariff volatility surcharges.
• Bookings declined significantly by 37% for the three months and 35% for the nine months ended September 30, 2025.
• Net Dollar Retention Rate (NDRR) for key customers dropped from 102% to 77%, indicating a decline in customer retention and expansion.
• Annualized Contract Value (ACV) decreased to $10.172 million from $11.304 million.
• Operating expenses increased by 47% for the three months ended September 30, 2025, primarily due to a $2.3 million increase in stock-based compensation expense.
• Negative cash flows from operations increased considerably to $14.025 million for the nine months ended September 30, 2025, from $3.850 million in the prior year.
• The company has an accumulated deficit of $308.503 million and recurring losses, raising substantial doubt about its ability to continue as a going concern.
• Identified material weaknesses in internal control over financial reporting as of December 31, 2024, including lack of segregation of duties, ineffective IT General Controls, and issues with account reconciliation and risk assessment.
• Experienced $1.8 million in customer cancellations ("debooks") for the nine months ended September 30, 2024, due to customer financial constraints.

Risks

• The company's recurring net losses and negative cash flows from operations since inception, coupled with a working capital deficiency, raise substantial doubt about its ability to continue as a going concern for at least twelve months from the issuance date without additional financing.
• Uncertainty exists regarding the successful development of products, gaining customer acceptance, and achieving future profitability in the technology industry.
• The company's success is dependent on obtaining additional financing, increasing sales, expanding reseller partnerships, controlling costs, and continued research and development activities.
• Operations in China and Japan expose the company to risks inherent in operating under different legal systems and various political and economic environments.
• The departure of key employees could have a detrimental effect on the business and operations.
• Reliance on a major PC OEM for the Inspire laptop and another PC OEM for an additional laptop product, as well as a single third-party partner in China for stylus manufacturing, poses risks if these relationships are discontinued.
• School districts, a primary customer base, are prone to long sales cycles due to bureaucratic purchasing processes.
• Education funding is subject to change based on political, policy, or economic variables at federal, state, or local levels, which can impact the company's business.
• The future growth plan relies on the acquisition and successful integration of key software companies and/or intellectual property, which carries inherent risks.
• New tariffs on imports to the U.S. (from China, where products are manufactured) and potential retaliatory measures can materially adversely impact the company's supply chain, pricing, and gross margin, and contribute to elongated sales cycles.
• As of September 30, 2025, one customer accounted for approximately 14% of the company's accounts receivable, indicating customer concentration risk.
• The company is a party to a lawsuit filed by EdtechX Holdings Acquisition Corp II for alleged breaches of contract, with a trial date set for January 20, 2027, which could result in significant costs and diversion of management resources.
• Identified material weaknesses in internal control over financial reporting as of December 31, 2024, including lack of segregation of duties and ineffective IT General Controls, could lead to material misstatements in financial statements not being prevented or detected timely.

Future Outlook

The company expects working capital needs to increase and its ability to raise additional funds depends on financial success, strategic initiatives, and market conditions. Management projects that cash on hand may not be sufficient to continue operations, raising substantial doubt about its ability to continue as a going concern within 12 months without additional funding. The company plans to use net proceeds from the Senior Secured Convertible Note Financing for debt repayment, working capital, and general corporate purposes. It also expects R&D expenses to increase with business growth and continued investments in its platform and products.

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 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.
• 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 believes the disclosure of these material debooks provides investors with important context for evaluating business performance.
• 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.
• Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level.

Industry Context

zSpace operates in the augmented reality/virtual reality (AR/VR) educational technology market, targeting K-12 and Career and Technical Education (CTE). The company highlights its proprietary hardware (Inspire laptop) and software applications for immersive learning. The market is characterized by significant investment in education technology by governments. The company's growth strategy includes scaling in the U.S., international expansion, R&D, and software acquisitions, indicating a competitive landscape where innovation and market penetration are key. The mention of tariffs and funding disruptions in K-12 markets suggests broader economic and policy impacts on the education technology sector. The company's reliance on PC OEMs and a single stylus manufacturer reflects common supply chain dynamics in hardware-centric tech industries.

Comparison to Industry Standards

• The Net Dollar Retention Rate (NDRR) of 77% for customers with at least $50,000 ACV is below 100%, indicating a decline in revenue from existing customers (churn or contraction) that is not offset by upsells. This is generally considered a negative trend compared to successful SaaS/subscription businesses that often report NDRR well over 100-120%.
• The company's gross margins (51% for Q3 2025) are reasonable for a hardware/software blend, but the significant net losses and negative cash flow from operations suggest a struggle to achieve profitability, which is a concern compared to established, profitable technology companies.
• The substantial accumulated deficit of $308.503 million and the explicit 'going concern' warning indicate a financial position far from industry standards for stable, growing companies in the technology sector.

Corporate Governance

Legal Proceedings

• EdtechX Holdings Acquisition Corp II filed a complaint in the Superior Court of the State of Delaware on July 12, 2024, claiming breaches of contract and the implied covenant of good faith and fair dealing related to the termination of a 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 September 30, 2025, 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.
• Fiza Investments Limited (Fiza) has three outstanding loans totaling $7.2 million as of September 30, 2025. Amendments to Fiza loans and an intercreditor agreement were made on April 11, 2025, subordinating Fiza's security interest to the Note Investor.
• Kuwait Investment Authority (KIA) previously forgave loan amounts in exchange for NCNV preferred stock in August 2022, and remaining amounts were redeemed for NCNV Preferred Stock 2 in January 2024, terminating obligations under the KIA loan.

Stakeholder Impact

• Shareholders face potential for significant dilution from the Equity Line of Credit and convertible debt conversions. The going concern warning poses a substantial risk to investment value. The transfer to Nasdaq Capital Market might affect liquidity and perception. The ability to act by written consent could empower shareholders.
• Employees: Retention of key employees is a factor affecting performance. Stock-based compensation is a significant component of operating expenses.
• Customers: Funding disruptions in K-12 markets and tariff volatility are causing elongated sales cycles and affecting hardware/software sales. Declining NDRR suggests challenges in retaining and expanding existing customer relationships.
• Suppliers: The company has $11.2 million in purchase obligations outstanding as of September 30, 2025, due by December 31, 2025, indicating significant short-term commitments. Reliance on single/limited source manufacturers for key components poses supply chain risks.
• Creditors: The company has substantial debt, including the Senior Secured Convertible Note and Fiza loans. The going concern warning indicates a high risk for creditors. The subordination of Fiza's security interest to the Note Investor impacts Fiza's recovery priority.

Next Steps

• Continue efforts to remediate material weaknesses in internal control over financial reporting, including hiring additional financial personnel, implementing user access policies, improving account reconciliation, reviewing significant transactions, and establishing a formal risk assessment policy.
• Evaluate the financial impact of the One Big Beautiful Act (OBBBA) signed into law on July 4, 2025.
• Repay remaining principal and interest under Fiza 1 Agreement over twelve equal monthly installments, beginning on the later of December 31, 2027, or the Convertible Note Repayment Date.
• Amortize and repay remaining principal and interest under Fiza 2 and 3 Agreement over 12 months, beginning on the Convertible Note Repayment Date.
• Continue to make monthly payments of interest only on Fiza 2 and 3 Agreement until the Convertible Note Repayment Date.
• Continue to make monthly repayments of $665,643 towards the principal balance of the Senior Secured Convertible Note and any accrued and unpaid interest, in cash or common stock.
• Potentially issue an additional senior secured convertible note for $7.0 million in gross proceeds, subject to conditions.
• Continue to sell shares under the Equity Line of Credit (ELOC) Agreement with Tumim Stone Capital LLC, up to $30.0 million.
• Vigorously defend against the lawsuit filed by EdtechX Holdings Acquisition Corp II, with a trial date set for January 20, 2027.
• Focus on scaling execution across growth vectors: scaling in the United States, expanding internationally, investing in research and development (R&D), and acquiring software.

Key Dates

Recommendation

The company exhibits severe financial distress with widening net losses, significant revenue declines, and substantially increased negative cash flow from operations. The explicit "going concern" warning, coupled with a deteriorating Net Dollar Retention Rate (NDRR) and declining bookings, indicates fundamental business challenges. While new financing has been secured and Nasdaq listing issues addressed, these are temporary measures against a backdrop of persistent unprofitability and material weaknesses in internal controls. The amendment to the convertible note's floor price and equity conditions further suggests a need to facilitate conversions at lower stock prices, implying significant dilution risk for existing shareholders. The overall picture points to a high probability of continued value erosion.

Keywords

Augmented Reality, Virtual Reality, AR/VR, Educational Technology, K-12 Education, Career Technical Education, EdTech, Hardware Sales, Software Subscriptions, SEC Filing, 10-Q, Financial Performance, Net Loss, Revenue Decline, Going Concern, Nasdaq Capital Market, Convertible Debt, Equity Line of Credit, Internal Controls, Tariffs, Customer Retention