zSpace, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2026

Description of Business

zSpace, Inc. (“zSpace” or the “Company”) was incorporated in the state of Delaware in 2006 and is headquartered in San Jose, California with wholly owned subsidiaries in China and Japan. The Company is the developer of full-service augmented reality/virtual reality (“AR/VR”) solutions built for K-12 education and career technical education. zSpace’s primary product is a mixed reality hardware device that provides an immersive, collaborative, and interactive learning experience. zSpace generates revenues via hardware sales in addition to recurring software revenue for access to zSpace interactive learning applications. The Company’s customer base includes federal, state, and local governments who are making large investments in education technology.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and include the assets, liabilities, results of operations and cash flows of the Company.

The Company has prepared its unaudited condensed consolidated financial statements in accordance with GAAP in the United States of America (“GAAP”) and the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information or note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and notes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 filed with the SEC on March 30, 2026.

All intercompany accounts and transactions have been eliminated in consolidation.

Liquidity Risk and Going Concern

For the six months ended June 30, 2026, the Company incurred a net loss of approximately $6.3 million. For the six months ended June 30, 2025, the Company incurred a net loss of $11.9 million. For the six months ended June 30, 2026 and 2025, the Company incurred negative cash flows from operations of $5.0 million and $11.6 million, respectively. The Company had combined cash, cash equivalents and restricted cash balance of $0.9 million and $1.0 million as of June 30, 2026 and December 31, 2025, respectively. The Company has incurred operating losses and negative cash flows from operations since inception. The Company’s prospects are subject to risks, expenses, and uncertainties frequently encountered by companies in the technology industry. These risks include, but are not limited to, the uncertainty of successfully developing its products, availability of additional financing, gaining customer acceptance, and uncertainty of achieving future profitability. The Company’s success depends on obtaining additional financing, increasing sales, expanding its partnerships with resellers, controlling costs, and continued research and development activities to improve product offerings to end-users. The Company has historically funded its operations through the issuance of common and preferred stock to private investors (Note 6 – Stockholders’ Deficit), the proceeds of its Initial Public Offering (the “IPO”) in December 2024 and debt financing (Note 5 – Debt and Related Party Debt). The Company evaluated its financial condition as of the date of issuance and determined it is probable that, without consideration of a remediation plan to refinance existing debt facilities and raise new sources of capital, the Company would be unable to meet repayment obligations and the ongoing working capital shortfall in the next twelve months, and there is uncertainty about the Company’s ability to continue as a going concern. The conditions identified above raise substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the issuance date of the condensed consolidated financial statements.

The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business and does not include any adjustments to reflect the outcome of this uncertainty.

Foreign Operations

Operations outside the United States include subsidiaries in China and Japan. Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of Accumulated Other Comprehensive Income. Income and expense accounts are translated at average exchange rates during the periods presented.

The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements are disclosed in the notes to the consolidated financial statements for the fiscal year ended December 31, 2025 and have not changed significantly since those consolidated financial statements were issued.

Cash, Cash Equivalents, and Restricted Cash

The Company considers cash on hand, deposits in banks, and investments with original maturities of three months or less, such as the Company’s money market funds, to be cash and cash equivalents.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the condensed consolidated balance sheet as of June 30, 2026 and December 31, 2025, to the amounts reported on the condensed consolidated statement of cash flows (in thousands):

The restricted cash is legally restricted to secure credit card charges incurred by the Company.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are customer obligations due under normal trade terms. Expected credit losses include losses expected based on known credit issues with specific customers as well as a general expected credit loss allowance based on relevant information, including historical loss rates, current conditions, and reasonable economic forecasts that affect collectability. The Company updates its allowance for credit losses on a quarterly basis with changes in the allowance recognized in loss from operations. The Company reserves for any accounts receivable balances that are determined to be uncollectible in the allowance for credit losses.

After all attempts to collect accounts receivable balances have failed, the balance is written off against the allowance for credit losses. As of June 30, 2026 and December 31, 2025, the Company reported an allowance for credit losses balance of $0.1 million.

Series P and P 2 Preferred Stock Liability

In accordance with ASC 480-10-25-14, the Company determined that the Series P and P 2 Preferred Stock should be classified as a liability and recorded at fair value as a non-current liability as of June 30, 2026 on the condensed consolidated balance sheet. This classification reflects the embedded obligation to issue a variable number of common shares upon automatic conversion, based predominantly on a measure other than the fair value of the Company’s equity shares (the lower of the Conversion Price or 80% of the 90-Day VWAP of the Company’s common stock).

The Series P and P 2 Preferred Stock is measured at fair value at each reporting date, with changes in fair value recognized in earnings. The fair value measurement incorporates the present value of all contractual cash flows, including accrued PIK dividends at the 18% stated rate through the Required Conversion date. No separate dividend accrual is recognized.

Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, and restricted cash, accounts receivable, accrued liabilities, and accounts payable approximate fair value due to their relatively short-term maturities and are classified as short-term assets and liabilities in the accompanying balance sheets. The following table represents the fair value hierarchy for the financial assets and liabilities held by the Company measured at fair value on a recurring basis (in thousands):

The following table presents the roll-forward of the Series P and Series P 2 Preferred Stock liability balance for the six months ended June 30, 2026 (in thousands):

The Company measures its convertible debt at fair value on a quarterly basis. The fair value of the Company’s debt approximates book value as of June 30, 2026 utilizing a Monte Carlo simulation using observable market conditions for items such as interest free rates, discount rates and volatility assumptions. The fair value of the convertible debt has been categorized as a Level 2 item as of June 30, 2026.

The Company measures its Series P and Series P 2 Preferred Stock liability at fair value on a quarterly basis. The fair value of the Company’s liability is calculated using a Probability Weighted Expected Return Method (“PWERM”) Model which included a Monte Carlo simulation of the share price and volume weighted average price at exit. The scenario probabilities for change in control, maturity expiration and dissolution assumptions are provided by management. The fair value of the Series P and Series P 2 convertible stock has been categorized as a Level 3 item as of June 30, 2026.

The following table provides the inputs used to measure the Series P and Series P 2 Preferred Stock at the issuance date and June 30, 2026:

During the three and six months ended June 30, 2026, there were no transfers of financial assets and liabilities between Levels 1, 2 or 3.

The Company accounts for revenue in accordance with ASC Topic 606,Revenue from Contracts with Customers. The revenue recognition guidance provides a single model to determine when and how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognizes revenue using a five-step model resulting in revenue being recognized as performance obligations within a contract have been satisfied. The steps within that model include: (i) identifying the existence of a contract with a customer; (ii) identifying the performance obligations within the contract; (iii) determining the contract’s transaction price; (iv) allocating the transaction price to the contract’s performance obligations; and (v)recognizing revenue as the contract’s performance obligations are satisfied. Judgment is required to apply the principles-based, five-step model for revenue recognition. Management is required to make certain estimates and assumptions about the Company’s contracts with its customers, including, among others, the nature and extent of its performance obligations, its transaction price amounts and any allocations thereof, the events which constitute satisfaction of its performance obligations, and when control of any promised goods or services is transferred to its customers. The standard also requires certain incremental costs incurred to obtain or fulfill a contract to be deferred and amortized on a systematic basis consistent with the transfer of goods or services to the customer.

The Company assesses the goods and/or services promised in each customer contract and separately identifies a performance obligation for each promise to transfer to the customer a distinct good or service. The Company then allocates the transaction price to each performance obligation in the contract using relative Standalone Selling Price (“SSP”). The Company determines standalone selling prices based on the price at which a good or service is sold separately. If the standalone selling price is not observable through historic data, the Company estimates the standalone selling price by considering the cost-plus margin approach, along with all reasonably available information, including peer-company selling information while taking into consideration market conditions and other factors, such as customer size, volume purchased, market and industry conditions, product specific factors and historical sales of the deliverables.

The Company sells proprietary augmented reality and virtual reality hardware, software, and related installation and training services to education customers. The Company has contractual agreements with customers that set forth the general terms and conditions of the relationship, including pricing of goods and services, payment terms and contract duration. Revenue is recognized when the obligation under the terms of the Company’s contract with its customer is satisfied and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

The Company offers standard warranty coverage on substantially all products which provides the customer with assurance that the product will function as intended during the first year. This standard warranty coverage is accounted for as an assurance warranty and is not considered to be a separate performance obligation. Returns and repairs under the Company’s general assurance warranty of products have not been material.

Payment is generally due within 30 days of invoice issuance. The Company uses the practical expedient and does not recognize a significant financing component for payment considerations of less than one year.

Hardware: Hardware sales represent separate performance obligations, all of which are satisfied at a point in time when the hardware is delivered to the customer, which is typically FOB shipping point.

Software: Software sales consist of licenses of functional intellectual property that are satisfied at a point in time when key codes are provided to allow customers to access the software, which is the contract start date.

In transactions where the Company provides user-based based software licenses to a customer, zSpace recognizes software revenue ratably on a straight-line basis. These fees charged to its customers are recognized on a gross basis as zSpace has determined that it is the principal in the transaction. As a principal to the transaction, the Company obtains control of the third-party software licenses before control is transferred to the customer. The fees paid to third parties for software licenses are recognized as transaction expenses and recorded in cost of goods sold in the condensed consolidated statements of operations and comprehensive income (loss).

Services: The Company offers installation and/or training services for its products, both of which are separate performance obligations and typically are satisfied within a short period of time, often less than one month. Additionally, the Company offersone-andtwo-year extended warranty contracts that customers can purchase at their option, which are also separate performance obligations. All warranty-related performance obligations are generally fulfilled evenly throughout the contract term. Services also includes post-contract support (“PCS”) which is akin to a stand-ready performance obligation that is provided throughout the contract term. For all services related performance obligations, the Company believes that the passage of time corresponds directly to the satisfaction of the performance obligations; therefore, an output method of measuring progress based on time elapsed during the contract period is used to recognize revenue ratably on a straight-line basis.

Contract Liabilities: The Company typically bills in advance of providing goods and services, including for installation and training services, PCS, and extended warranties, resulting in contract liabilities (i.e., deferred revenue). Contract liabilities are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.

Contract Costs: The Company incurs incremental contract commission costs to obtain contracts with customers which are expected to be recoverable through the term of those contracts. The Company allocates contract costs among the underlying performance obligations to which they relate and amortizes those costs on a systematic basis consistent with the pattern of the transfer of the goods and services. Contract cost assets are typically completely amortized soon after initial recognition as the majority of the Company’s revenue on the underlying performance obligations is recognized upon delivery of the goods or services.

The Company includes within cost of goods sold those costs related to the manufacture and distribution of its AR/VR products, as well as the cost to purchase third-party software. Specifically, the Company includes in cost of goods sold

each of the following: material costs, labor and employee benefit costs related to the manufacture of our products, and freight and shipping costs. Costs are expensed as incurred, or as control of products is transferred, except for costs incurred to fulfill a contract, which are capitalized and amortized on a straight-line basis over the expected period of performance. The Company does not incur significant incremental costs to acquire contracts.

New Accounting Pronouncements

As of June 30, 2026 there are no new accounting pronouncements affecting the Company other than those discussed in the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 filed with the SEC on March 30, 2026.

Disaggregation of Revenue

The Company earns revenue through the sale of products and services. Product and service revenue are the disaggregation of revenue primarily used by management, as this disaggregation allows for the evaluation of market trends and certain product lines and services vary in renewing versus non-renewing nature.

The following table disaggregates revenue by recognition method for the three and six months ended June 30, 2026 and 2025 (in thousands):

The following table disaggregates revenue by type of products and services for the three and six months ended June 30, 2026 and 2025 (in thousands):

The following table disaggregates revenue by geographic area for the three and six months ended June 30, 2026 and 2025 (in thousands):

The amount of deferred revenue as of June 30, 2026 and December 31, 2025 reflects the revenue expected to be recognized in future periods related to remaining performance obligations as the Company collects payment in advance of satisfaction of performance obligations.

As of June 30, 2026 and December 31, 2025, the Company has $3.1 million and $2.2 million in deferred revenue. As of June 30, 2026 approximately $2.9 million of the balance is expected to be earned within the next 12 months and $0.2 million to be earned within the next 13 to 33 months. We recognized approximately $0.8 million of revenue during the six months ended June 30, 2026 that was included in the $2.2 million deferred revenue balance as of December 31, 2025.

As of December 31, 2025 approximately $1.9 million of the balance was expected to be earned within the next 12 months and $0.3 million to be earned within the next 13 to 58 months.

As of June 30, 2026 and December 31, 2025, the Company hadno contract assets.

Inventory

As of June 30, 2026 and December 31, 2025, inventory, net of reserve, consisted of the following (in thousands):

Prepaid and other current assets

Prepaid expenses and other current assets consisted of the following at June 30, 2026 and December 31, 2025 (in thousands):

Accrued expenses and other liabilities

Accrued expenses and other current liabilities consisted of the following at June 30, 2026 and December 31, 2025 (in thousands):

During the three and six months ended June 30, 2026, the Company settledtwo outstanding vendor claims. The related liabilities, which were carried at December 31, 2025 as $0.6 million in accounts payable and $0.6 million in accrued expenses and other current liabilities, were extinguished with the settlements, resulting in a gain of $1.2 million presented as “Gain from settlement of vendor claims” in the condensed consolidated statements of operations and comprehensive income (loss).

As of June 30, 2026 and December 31, 2025, debt and related party debt is comprised of the following (in thousands):

All issuance costs related to the convertible debt issued during the three and six months ended June 30, 2026 were expensed as incurred.

As of June 30, 2026, future principal payments for long-term debt, including the current portion, are summarized as follows (in thousands):

During the three and six months ended June 30, 2026 and 2025, the Company capitalized $31,000 and $30,500, respectively, of debt discount and issuance costs on term loans incurred.

3i and Fiza Debt Restructuring

On May 28, 2026, the Company entered into a series of related agreements and corporate actions to restructure approximately$12.0 million of outstanding indebtedness owed to two noteholders: 3i, LP, a Delaware limited partnership (“3i”), and Fiza Investments Limited, a Cayman Islands entity (“Fiza” and, together with 3i, the “Holders”). The transactions consist of (i) the conversion of a portion of the amounts owed to 3i and all amounts owed to Fiza into shares of the Company’s common stock, par value$0.00001 per share (“Common Stock”), and a newly created series of preferred stock designated as Series P-2 Convertible Preferred Stock (“Series P-2 Preferred”), (ii) the amendment of 3i’s remaining senior convertible note, (iii) the amendment of the Certificate of Designations of the Company’s Series P Convertible Preferred Stock, and (iv) the creation of the new Series P-2 Preferred, each as described in more detail below.

3i Debt Restructuring Agreement

On May 28, 2026 (the “Closing Date”), the Company converted an aggregate of $2,000,000 of outstanding principal and other owed amounts under its senior secured convertible notes into shares of Common Stock. Specifically, the converted amount consisted of (i) $789,110 (the “First Note Converted Amount”) of outstanding principal and other owed amounts under a senior secured convertible note originally issued on April 11, 2025 in the original principal amount of $13,978,495 (the “First Note”), and (ii) an amount of interest and Make-Whole Amounts (as defined in the Second Note) equal to $2,000,000 minus the First Note Converted Amount, drawn from a senior secured convertible note issued on March 16, 2026 in the original principal amount of $4,301,075 (the “Second Note”). Conversion of the First Note

Converted Amount fully satisfies and discharges all obligations under the First Note. In connection with the 3i debt restructuring, the Company recorded a gain on debt extinguishment of $1.2 million during the three and six months ended June 30, 2026.

The conversion price for the shares of Common Stock issuable to 3i pursuant to the 3i Agreement is $0.2385 per share, a fixed price equal to 150% of the closing price of the Common Stock on the OTC Markets on the trading day immediately preceding the Closing Date. The number of shares of Common Stock issuable to 3i pursuant to the 3i Agreement is equal to $2,000,000 divided by such conversion price, rounded up to the nearest whole share.

Simultaneously, the Second Note (as reduced by the converted amounts described above) was amended effective as of the Closing Date (as so amended, the “Amended Note”). Under the Amended Note, 3i will be subject to a nine (9)-month conversion moratorium during which it may not exercise any conversion right. Commencing on the date that is nine (9) months after the Closing Date, the Company will be obligated to repay the Amended Note in nine (9) equal consecutive monthly installments of combined principal, interest and Make-Whole Amounts (as defined in the Amended Note), with the final installment due eighteen (18) months after the Closing Date.

The 3i Agreement also includes customary representations and warranties of the parties, a limitation on the beneficial ownership of 3i in the Company’s Common Stock of 4.99% of the total outstanding Common Stock immediately after giving effect to such issuance (increasing to 9.99% on or after June 20, 2026), and a 60-day standstill on 3i’s ability to declare an Event of Default (as defined in the Amended Note) as a result of the Company’s Common Stock being suspended from trading on Nasdaq.

Under Section 6(a) of the 3i Agreement, in the event that any issuance of Conversion Shares to 3i would otherwise cause 3i to exceed a beneficial ownership limitation equal to 4.99% (or 9.99% on or after June 20, 2026) of the number of shares of Common Stock outstanding immediately after giving effect to such issuance (the "Beneficial Ownership Limitation"), the Company shall only issue such number of Conversion Shares as would not cause 3i to exceed the maximum number of Conversion Shares permitted under Section 6(a), as directed by 3i, with the balance to be held in abeyance until notice from 3i that the balance, or a portion thereof, may be issued in compliance with such limitations. The abeyance is evidenced through the 3i Agreement. 3i may, upon notice to the Company, increase or decrease the Beneficial Ownership Limitation, provided that it shall in no event exceed 9.99% of the outstanding shares of Common Stock, and any increase is not effective until the sixty-first day after such notice is delivered to the Company.

As of June 30, 2026,6,321,912 Conversion Shares were held in abeyance under Section 6(a). The Company is obligated to issue those Conversion Shares upon notice from 3i, and 3i is not entitled to cash or any other consideration in lieu of those shares. Because the obligation is to issue a fixed number of Conversion Shares in respect of consideration settled at the Closing, and neither the 3i Agreement nor the Amended Note permits or requires settlement in cash or other assets, the obligation is classified within permanent stockholders' equity and is not subsequently remeasured. The Conversion Shares held in abeyance are excluded from shares issued and outstanding as of June 30, 2026 and are included in the weighted-average number of shares used to compute basic net income (loss) per share from the Closing Date.

Fiza Debt Conversion

On May 28, 2026, the Company converted an aggregate amount of $10,003,916, consisting of $7,201,695 in principal (the “Principal”) and $2,802,221 in accrued interest (the “Interest”) as follows (i) the Principal into shares of Common Stock at a fixed conversion price equal to $0.2385 per share,150% of the closing price of the Common Stock on the OTC Markets on the trading day immediately preceding the Closing Date; and (ii) the Interest into shares of the newly created Series P-2 Preferred at a fixed conversion price of $1.00 per share, resulting in the issuance of 2,802,221 shares of Series P-2 Preferred to Fiza.

Series P Preferred Stock

On January 27, 2026, the Company filed a Certificate of Designations of Series P Convertible Preferred Stock (the “Series P COD”) with the Secretary of State of the State of Delaware. The Series P COD established a new series of preferred stock designated as “Series P Convertible Preferred Stock” (the “Series P Preferred Stock”). On May 28, 2026,

the Company filed an Amendment to the Certificate of Designations of Series P Convertible Preferred Stock of zSpace, Inc. As of June 30, 2026,1,500,000 shares of Series P Preferred Stock were issued and outstanding. The principle terms of the Series P Preferred are as follows:

Designation and Amount. Up to 2,000,000 shares of Series P Preferred are authorized, par value $0.00001 per share, with a stated value of $1.00 per share. Series P Preferred ranks pari passu with the Series P-2 Convertible Preferred Stock and senior to Common Stock and all other junior shares as to payment of dividends, distribution of assets upon liquidation, and redemption rights.

Dividends. Each share of Series P Preferred is entitled to cumulative dividends at a rate of 18% per annum, payable annually, compounding annually from the original issue date. Dividends are payable only in shares of Series P Preferred. No dividends may be paid on shares junior to the Series P Preferred unless dividends on Series P Preferred have first been paid in full.

Voting Rights. Series P Preferred votes on an as-converted basis together with the Common Stock. So long as any shares of Series P Preferred remain outstanding, the Company may not, without the affirmative vote of a majority of the outstanding shares of Series P Preferred, (a) alter or change the powers, preferences or rights of the Series P Preferred, (b) authorize or create any class of stock ranking senior to or pari passu with the Series P Preferred, (c) amend the Certificate of Incorporation in any manner adversely affecting Series P Preferred holders, (d) increase the authorized shares of preferred stock, or (e) enter into any agreement with respect to the foregoing.

Liquidation. Upon any liquidation, dissolution, winding-up, or Change of Control Transaction (as defined in the Series P COD), holders of Series P Preferred are entitled to receive, for each share, before any distribution to holders of junior shares, an amount equal to the greater of (a) the stated value plus accrued and unpaid dividends and other amounts due, or (b) the amount such holder would receive if the share had been converted into Common Stock at the then-applicable conversion price immediately prior to such event.

Conversion. Each share of Series P Preferred is convertible into Common Stock at the option of the holder beginning on the third anniversary of the original issue date. The conversion price is equal to the stated value ($1.00) plus accrued dividends, divided by the then-applicable conversion price (initially $1.00 per share of Common Stock, subject to customary anti-dilution adjustments). Conversion is subject to a 4.99% (or 9.99% at the holder’s election) beneficial ownership limitation.

Amendment to Series P Convertible Preferred Stock

In connection with the foregoing transactions, on May 28, 2026, the Board of Directors of the Company (the “Board”), with the prior written consent of the holder of all of the outstanding shares of Series P Convertible Preferred Stock, approved, and directed the Company to file with the Secretary of State of the State of Delaware, a Certificate of Amendment to the Certificate of Designations of Series P Convertible Preferred Stock of zSpace, Inc. (the “Series P Amendment”). The Series P Amendment: (i) reduces the authorized number of shares of Series P Convertible Preferred Stock from 5,000,000 to 2,000,000 shares; and (ii) reduces the current Conversion Price of the Series P Convertible Preferred Stock to $1.00 per share. All other terms of the Certificate of Designations of Series P Convertible Preferred Stock were not affected by the Series P Amendment.

Series P-2 Convertible Preferred Stock

On May 29, 2026, the Company filed a Certificate of Designations of Series P-2 Convertible Preferred Stock of zSpace, Inc. (the “Series P-2 COD”), creating a new series of preferred stock designated as “Series P-2 Convertible Preferred Stock” upon filing with the Secretary of State of the State of Delaware. The principal terms of the Series P-2 Preferred are as follows:

Designation and Amount. Up to 3,000,000 shares of Series P-2 Preferred are authorized, par value $0.00001 per share, with a stated value of $1.00 per share. Series P-2 Preferred ranks pari passu with the Series P Convertible Preferred

Stock and senior to Common Stock and all other junior shares as to payment of dividends, distribution of assets upon liquidation, and redemption rights.

Dividends. Each share of Series P-2 Preferred is entitled to cumulative dividends at a rate of 18% per annum, payable annually, compounding annually from the original issue date. Dividends are payable only in shares of Series P-2 Preferred. No dividends may be paid on shares junior to the Series P-2 Preferred unless dividends on Series P-2 Preferred have first been paid in full.

Voting Rights. Series P-2 Preferred votes on an as-converted basis together with the Common Stock. So long as any shares of Series P-2 Preferred remain outstanding, the Company may not, without the affirmative vote of a majority of the outstanding shares of Series P-2 Preferred, (a) alter or change the powers, preferences or rights of the Series P-2 Preferred, (b) authorize or create any class of stock ranking senior to or pari passu with the Series P-2 Preferred (other than Series P), (c) amend the Certificate of Incorporation in any manner adversely affecting Series P-2 Preferred holders, (d) increase the authorized shares of preferred stock, or (e) enter into any agreement with respect to the foregoing.

Liquidation. Upon any liquidation, dissolution, winding-up, or Change of Control Transaction (as defined in the Series P-2 COD), holders of Series P-2 Preferred are entitled to receive, for each share, before any distribution to holders of junior shares, an amount equal to the greater of (a) the stated value plus accrued and unpaid dividends and other amounts due, or (b) the amount such holder would receive if the share had been converted into Common Stock at the then-applicable conversion price immediately prior to such event.

Conversion. Each share of Series P-2 Preferred is convertible into Common Stock at the option of the holder beginning on the third anniversary of the original issue date. The conversion price is equal to the stated value ($1.00) plus accrued dividends, divided by the then-applicable conversion price (initially $1.00 per share of Common Stock, subject to customary anti-dilution adjustments). Conversion is subject to a 4.99% (or 9.99% at the holder’s election) beneficial ownership limitation.

Classification and Measurement of Series P and P 2 Preferred Stock Liability

In accordance with ASC 480-10-25-14, the Company determined that the Series P and Series P 2 Preferred Stocks should be classified as a liability and recorded at fair value as a non-current liability as of June 30, 2026 on the condensed consolidated balance sheet. This classification reflects the embedded obligation to issue a variable number of common shares upon automatic conversion, based predominantly on a measure other than the fair value of the Company’s equity shares (the lower of the Conversion Price or 80% of the 90-Day VWAP of the Company’s common stock).

The Series P and Series P 2 Preferred Stocks are measured at fair value at each reporting date, with changes in fair value recognized in earnings. The fair value measurement incorporates the present value of all contractual cash flows, including accrued PIK dividends at the 18% stated rate through the Required Conversion date. No separate dividend accrual is recognized.

In accordance with ASC 480-10-25-14, the Company determined that the changes in fair value of the Series P and Series P 2 Preferred Stocks liability during the periods presented were primarily attributable to changes in the price of the Company’s common stock and the discount rate used in the valuation model, rather than changes in the Company's own credit risk. Accordingly, the change in fair value was recognized in consolidated net loss rather than other comprehensive income (loss). The net impact for the three months ended June 30, 2026 and 2025, was a loss of approximately $34,000 and $0, respectively. The net impact for the six months ended June 30, 2026 and 2025, was a gain of approximately $0.2 million and $0, respectively.

As of June 30, 2026, there are 1,500,000 and 2,802,221 shares outstanding of the Series P and Series P 2 Preferred stock, respectively.

Term Debt

Fiza Amendment

As discussed above, on May 28, 2026, the outstanding principal balance of the Fiza loans of $7.2 million were restructured and converted into common stock. The outstanding accrued interest balance of $2.8 million was converted into Series P 2 Preferred Stock. In connection with the conversion of principal and accrued interest under the Fiza loans, the Company recorded a gain on debt extinguishment of $3.1 million during the three and six months ended June 30, 2026. As of June 30, 2026, there remains no outstanding amounts under the Fiza loans.

Itria Refinancing

On March 19, 2026, the Company, entered into a new Loan and Security Agreement the (“New Loan Agreement”) with Itria Ventures LLC (the “Lender”) in connection with the refinancing of all of its outstanding debt with the Lender. Pursuant to the New Loan Agreement, the Lender agreed to provide the Company with a term loan in the principal amount of $1,344,500 (the “New Loan”) at an interest rate of 18.99% per year. The New Loan is payable on a monthly basis in 24 equal installments, maturing on the 24-month anniversary of the funding date.

The proceeds of the New Loan were used to refinance and pay off in full thetwo existing Loan and Security Agreements with the Lender dated August 20, 2025, which hadoriginal principal amounts of $1,000,000 each. In connection with this refinancing, the Company, the Lender, and the Company’s existing Senior Lender, entered into an amended intercreditor agreement (the “Intercreditor Agreement”) to maintain the subordinated status of the New Loan, pursuant to which, among other things, Itria subordinated its security interest in the assets of the Company to the security interest of the Senior Lender and agreed to certain covenants limiting its ability to declare an event of default under the New Loan Agreement.

The Company may prepay the New Loan in full at any time after the first month of the term, subject to a prepayment fee equal to 1.5% of the unpaid principal balance if the New Loan is prepaid within the first 12 months of the term. The New Loan is secured by a second priority lien on substantially all of the Company’s assets and is guaranteed by the Company’s two wholly owned subsidiaries -- zSpace Technologies (Shanghai) Ltd. and zSpace K.K. The New Loan Agreement contains standard representations, warranties and affirmative covenants, including relating to use of proceeds and information rights.

In addition, the New Loan Agreement contains certain customary negative covenants, including that the Company may not incur additional indebtedness other than certain permitted indebtedness. The New Loan Agreement also contains customary events of default, including, but not limited to, upon non-payment, the occurrence of material adverse changes to the Company’s business, or bankruptcy. Upon the occurrence of an event of default, the applicable interest rate would increase by five percentage points and the Lender may declare the outstanding principal and accrued interest immediately due and payable.

Conversion of Principal and Interest amounts into Common Stock

During the six months ended June 30, 2026, the Company reduced its obligations under the Initial Senior Secured Convertible Note by $1.8 million through the conversion of principal and interest into 278,374 shares of common stock at conversion prices ranging between $3.00 per share to $15.00 per share.

In accordance with ASC 825-10-45-5, the Company determined that the changes in fair value of the Note during the periods presented were primarily attributable to changes in market interest rates and the discount rate used in the valuation model, rather than changes in the Company's own credit risk. Accordingly, the change in fair value was recognized in net income rather than other comprehensive income. The net impact for the three months ended June 30, 2026 and 2025, was a loss of approximately $1.0 million and a gain of approximately $0.5 million, respectively. The net impact for the six months ended June 30, 2026 and 2025, was a loss of approximately $3.6 million and a gain of approximately $0.5 million, respectively.

The Company has shares reserved and available for future issuance of common stock as follows as of the periods indicated:

Conversion Shares Held in Abeyance

As of June 30, 2026,6,321,912 Conversion Shares issuable to 3i under the 3i Agreement were held in abeyance under Section 6(a) as a result of the Beneficial Ownership Limitation described in Note 5. The Company's obligation is to issue a fixed number of Conversion Shares in respect of consideration settled at Closing, and neither the 3i Agreement nor the Amended Note permits or requires settlement of that obligation in cash or other assets. Accordingly, the obligation is classified within stockholders' equity. The Conversion Shares held in abeyance are presented as a separate component of stockholders' equity of $0.9 million and are excluded from shares issued and outstanding as of June 30, 2026, as they had not been issued as of that date.

Reverse Stock Split

On April 16, 2026, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of its issued common stock, par value$0.00001 per share (“common stock”), in the ratio of 1-for-25 (the “Reverse Stock Split”), to be effective at 11:59 p.m., eastern time, on April 20, 2026. As of the effective time of the Reverse Stock Split, every 25 issued and outstanding shares of the Company’s common stock was automatically reclassified intoone issued and outstanding share of the Company’s common stock, with any fractional shares being rounded up to the next whole share. Proportionate adjustments were made to the number of shares of common stock underlying the Company’s outstanding equity awards, warrants, the number of shares issuable under its equity incentive plans and other existing agreements, as well as the exercise or conversion price, as applicable.

All references to common stock, restricted stock units, warrants, preferred stock, and options to purchase common stock share data, per share data and related information contained in the unaudited condensed consolidated financial statements and the accompanying notes have been retroactively adjusted to reflect the effect of the Reverse Stock Split.

Equity incentive plans

As of June 30, 2026, the Company had adopted three equity incentive plans in 2007 (the “2007 Plan”), 2017 (the “2017 Plan”) and 2024 (the “2024 Plan, and together with the 2007 Plan and the 2017 Plan, the “Stock Plans”) to provide for the grant of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and other stock or cash-based awards to our directors, employees, non-employee directors and service providers. Equity awards are granted with an exercise price per share equal to at least the estimated fair value of the underlying common stock on the date of grant. The vesting period is determined through individual award agreements. Awards generally expire 10 years from the date of grant.

As of June 30, 2026, a total of 347,695 shares were authorized for issuance under the Stock Plans. As of June 30, 2026,328,785 shares have been granted or issued under the Stock Plans, leaving 18,910 shares available for future awards. As of December 31, 2025, there were 239,208 shares granted under the 2007 Plan and the 2017 Plan. The shares available for issuance under the 2024 Plan may consist, in whole or in part, of authorized and unissued shares or reacquired shares. Shares from the 2024 Plan which are forfeited due to employee termination or expiration are returned to the share pool. Similarly, shares from the 2024 Plan which are withheld upon exercise to provide for the exercise price and/or taxes due and shares repurchased by the Company are also returned to the pool.

Since December 6, 2024, we have not granted and do not intend to grant any further awards under the 2007 Plan or the 2017 Plan.

Time-Based Restricted Stock

Time-based restricted stock units (RSUs) granted to employees under the 2024 Plan typically vest overone tothree years and are subject to forfeiture if employment terminates prior to the vesting or lapse of restrictions, as applicable. RSUs are not considered outstanding Common Stock until they vest. The value of RSUs is determined by the stock price on the grant date.

The following table summarizes the activity related to RSUs subject to time-based vesting requirements for the six months ended June 30, 2026:

As of June 30, 2026, total unrecognized stock-based compensation cost for RSUs was approximately $7.3 million which is expected to be recognized on a straight-line basis over a weighted average period of 1.4 years. The intrinsic value of RSUs as of June 30, 2026 was approximately$14,000.

Determination of fair value of stock options

As of June 30, 2026 and December 31, 2025, the Company had approximately 0.2 million options outstanding under the 2007 Plan and the 2017 Plan. As of June 30, 2026 and December 31, 2025, all options outstanding were granted solely with time-based vesting requirements.

A summary of the Company’s stock option plan and the changes during the period ended June 30, 2026 is presented below:

(1) The Company’s closing stock price as of June 30, 2026 is $0.21 per share. As all outstanding options have an exercise price greater than the closing price, there does not exist any intrinsic value as of June 30, 2026.

As of June 30, 2026, there was no significant unrecognized stock-based compensation cost for stock options granted.

Stock-based compensation included in the condensed consolidated statements of operations was as follows:

The Company estimates an annual effective tax rate of (0.08)% for the year ending December 31, 2026 as the Company incurred losses for the three and six months ended June 30, 2026 and expects to continue to incur losses through the remainder of the fiscal year ending December 31, 2026, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2026. Therefore, no federal or state income taxes are expected outside of state minimum tax payments. The effective rate during this period includes income tax benefits and exclusions associated with convertible debt interest and changes in valuation allowances related to future deductible temporary differences.

Due to the Company’s history of losses since inception, there is not enough evidence at this time to support that the Company will generate future income of a sufficient amount and nature to utilize the benefits of its net deferred tax assets. Accordingly, the deferred tax assets have been reduced by a full valuation allowance, since the Company does not currently believe that realization of its deferred tax assets is more likely than not. As of June 30, 2026, the Company hasno uncertain tax positions that require the establishment of a reserve.

Net income (loss) per common share (“EPS”) is presented for both Basic EPS and Diluted EPS. Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common shares equivalents outstanding during the period. Diluted shares outstanding includes the dilutive effect of in-the-money options and convertible securities. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that has not yet been recognized are collectively assumed to be used to repurchase shares. Diluted EPS for convertible securities is calculated using the ‘if-converted’ method, assuming all convertible securities outstanding during the period were converted into common stock at the beginning of the reporting period, resulting in an adjustment to both the numerator net income (loss) and denominator (weighted average shares outstanding) to reflect the potential dilution from such conversions.

When an entity has a loss from operations, including potential shares in the denominator of diluted per share computations will generally be anti-dilutive, even if the entity has net income after adjusting for discontinued operations. That is, including potential shares in the denominator of the earnings per share calculation for a loss-making entity will generally decrease the loss per share and, therefore, those shares should be excluded from calculations of diluted earnings per share.

In computing the net loss available to common shareholders, adjustments to the carrying value of preferred shares as a result of a modification accounted for as an extinguishment during a period should be subtracted or added to the net loss in arriving at the net loss available to common shareholders.

The 6,321,912 Conversion Shares held in abeyance described in Note 5 are issuable for no further consideration and aretherefore included in the weighted-average number of shares used to compute basic net income (loss) per share from May 28, 2026, the Closing Date. As a result, the weighted-average number of shares used to compute basic net income (loss) per share exceeds the number of shares of Common Stock issued and outstanding as of June 30, 2026.

The following data show the amounts used in computing EPS and the effect on income (loss) and the weighted average number of shares for the three months ended June 30, 2026 and 2025:

The following data show the amounts used in computing EPS and the effect on income and the weighted average number of shares for the six months ended June 30, 2026 and 2025:

For the six months ended June 30, 2026 and 2025, the following items have been excluded from the computation of diluted net loss per share because the effect of including these would have been anti-dilutive:

Gulf Islamic Investments Holding, LLC (“GII”)

In connection with the hiring in 2023 of the Company’s Chief Financial Officer, Erick DeOliveira, the Company has expensed and accrued $0.2 million as of June 30, 2026 with a related party, GII, for recruitment fees paid on the Company’s behalf by GII.

Fiza

During the three and six months ended June 30, 2026 and 2025, there were no related party transactions with Fiza other than the financing transactions and conversions described in Note 5.

Litigation

From time to time, the Company may be involved in lawsuits, claims, investigations, and proceedings consisting of intellectual property, commercial, employment, and other matters, which arise in the ordinary course of business. In accordance with ASC Topic 450,Contingencies, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

On May 16, 2022, we entered into a merger agreement (the “EdtechX Merger Agreement”) with EdtechX Holdings Acquisition Corp II (“EdtechX”), a Special Purpose Acquisition Company (“SPAC”). The Original Merger Agreement with EdtechX was terminated on June 21, 2023. 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, claiming breaches of contract and the implied covenant of good faith and fair dealing. A trial date has been set for January 20, 2027. The Company believes this lawsuit is without merit and intends to vigorously defend itself against these allegations. The Company has not accrued any amount related to this matter based on the belief that the amount of liability is not currently probable or estimable.

On February 9, 2026, Jiangxi Kmax Industrial Co., Ltd. (“KMax”) filed a complaint against zSpace in the United States District Court for the Northern District of California arising from a Software Resale License Agreement, dated July 24, 2019, alleging breach of contract related to unpaid revenue share invoices totaling $557,940 plus interest. The Company denied the allegations and asserted counterclaims for breach of contract and trade secret theft. On June 9, 2026, the parties filed a joint stipulation of dismissal with prejudice, and the court dismissed all claims and counterclaims with prejudice on June 10, 2026. No consideration was exchanged by either party, and each party bore its own fees and costs. The Company’s account payable of $0.6 million as of March 31, 2026 and December 31, 2025 was extinguished in connection with the dismissal, and is included in gain from settlement of vendor claims in the accompanying condensed consolidated statement of operations and comprehensive income (loss). Accordingly, this matter is concluded and no further disclosure is expected in future periodic reports.

Purchase Obligations

The Company has agreements with hardware suppliers to purchase inventory. As of June 30, 2026, the Company had $16.5 million in purchase obligations outstanding.

**12.**MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

For the three months ended June 30, 2026, there weretwo individual customers which represented 23% of the Company’s total revenue, withone customer representing 13%, and the second customer representing 10%. For the three months ended June 30, 2025, there wereno individual customers which represented 10% or more of the Company’s total revenue. For the six months ended June 30, 2026 and 2025, there wereno individual customers which represented 10% or more of the Company’s total revenue.

As of June 30, 2026, two customers accounted for approximately 36% of the Company’s accounts receivable, withone customer representing 23%, and the second customer representing 13%. As of December 31, 2025, one customer accounted for approximately 11% of the Company’s accounts receivable.

The Company maintains a qualified 401(k) plan (the “401(k) Plan”) which allows participants to defer from 0% to 100% of cash compensation. The 401(k) Plan allows employees to contribute on a pretax and after-tax basis to a Traditional and Roth 401(k). The 401(k) Plan allows employees who meet the age requirements and reach the 401(k) Plan contribution limits to make catch-up contributions (which are eligible for matching contributions). Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches pretax and Roth employee contributions up to $2,000 per participant annually and all matching contributions vest immediately. The matching contributions to the 401(k) Plan totaled approximately $0.1 million for both of the three months ended June 30, 2026 and 2025. The matching contributions to the 401(k) Plan totaled approximately $0.1 million for both of the six months ended June 30, 2026 and 2025.

The Company’s chief operating decision maker is its chief executive officer who reviews financial information presented on a consolidated basis for the purposes of making operating decisions, assessing financial performance, and allocating resources. The Company’s chief operating decision maker reviews segment performance and allocates resources based upon revenues and expenses. As the Company has onlyone reportable segment, revenues and expenses are reported only on a consolidated basis. The measure of segment assets is reported in the balance sheet as total consolidated assets.

The following table presents selected financial information about revenues, expenses and net loss for the three and six months ended June 30, 2026 and 2025 for the Company’sone reportable segment:

Management has evaluated subsequent events and has determined that there were no subsequent events that required recognition or disclosure in the financial statements as of and for the period ended June 30, 2026, except as follows.

Nasdaq Delisting Proceedings

As previously disclosed, on April 21, 2026 the Company received a determination from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) to delist the Company’s common stock pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(iii), following the closing bid price of the common stock being $0.10 or less for ten consecutive trading days as of April 17, 2026. Trading in the Company’s common stock was suspended at the opening of business on April 28, 2026, and the common stock has since been quoted on the OTC Markets under the symbol “ZSPC.” The Company requested a hearing before a Nasdaq Hearings Panel (the “Panel”), which stayed the filing of a Form 25 and the removal of the common stock from listing, but did not stay the suspension of trading.

On August 6, 2026, the Panel issued a decision determining to delist the Company’s common stock. The Company may request review of the Panel’s decision by the Nasdaq Listing and Hearing Review Council within 15 days of the decision; such a request would not stay the Panel’s decision or restore trading. The Company does not intend to request review. The Company expects that Nasdaq will thereafter file a Form 25 with the SEC. Delisting will become effective ten days after the Form 25 is filed, and the registration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended, will terminate 90 days after that filing. The Company will remain subject to the reporting requirements of the Exchange Act through and after that date.