zSpace, Inc.: Form 10-Q for the period ended Sep 30, 2025

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in “Risk Factors” or in other sections of this report.

In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

Overview

We are a leading provider of augmented and virtual reality educational technology solutions. 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.

Graphics and speed of computing have increased exponentially over time, but the physical computing experience has remained largely static since the introduction of the mouse and touchscreen in the 1980s. 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 were founded with the goal of eliminating that barrier between students and content and reinventing the student experience. 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 sell our platform directly to United States school districts, both as a primary educational tool in K-12 classrooms and as a career training solution for higher grade levels, as well as to community college customers through both a direct sales and support team as well as regional resellers. Internationally, we rely exclusively on resellers to bring our products to those markets. Today, our platform is implemented in more than 3,500 of the approximately 13,000 United States public school districts. Our K-12 platform is currently deployed in over 80% of the largest 100 K-12 public school districts in the United States, as measured by student enrollment, and our CTE solutions have been deployed in approximately 73% of those public school districts we serve. Our CTE solutions have also been deployed in approximately 2% of United States community and technical colleges. In addition, we have partnered with over 25 resellers and have expanded our customer network into over 50 countries.

Since 2014, we have been developing and delivering hardware and software technology focused on improving education in K-12 and CTE classrooms. 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.

We estimate using data from national government sources specifying the number of schools within their regions that our total addressable market (TAM) for the K-12 market is approximately $21.4 billion in the United States, $29.0 billion in Europe, Middle East and Africa region (EMEA) and $5.6 billion in the Asia Pacific region (APAC) and that our TAM for the CTE market is approximately $6.2 billion in the United States, $5.4 billion in EMEA and $0.8 billion in APAC, with an overall global TAM of greater than $68 billion. Our TAM for the K-12 market is an estimate of the revenue that we would receive over a five year period assuming that each public school in the applicable region purchases one “lab” (consisting of 25 laptops and one cart) at our current prices. Such estimates include recurring annual revenue per laptop based on the average software subscription revenue we receive per unit per year from K-12 customers and assumes an 80% renewal rate. Our TAM for the CTE market is an estimate of the revenue that we would receive over a five year period assuming that each school that offers vocational/CTE programs (including community colleges) in the applicable region purchases one “lab” (consisting of 27 laptops and one cart) at our current prices. Such estimates include recurring annual revenue based on the average software subscription revenue we receive per unit per year from CTE customers in such region and assumes an 80% renewal rate. We have estimated the number of schools in the K-12 market and the CTE market in the US/Canada region, EMEA region and APAC region based on data sourced from third parties, including the Institute of Education Science, the British Educational Suppliers Association, Statista, various governmental instrumentalities, articles and published papers.

Our Business Model

We generate revenue by selling hardware, software and services to customers, who are primarily K-12 schools, as well as community colleges, technical colleges and trade colleges. Our hardware product includes our flagship product, the Inspire laptop which works together with our patented stylus product to create an interactive AR/VR experience. Our software consists of a series of educational applications that run on our hardware to provide interactive experiences. Our services consist of support services from our professional development team. We are focused on driving substantial annual growth in software applications revenue and product revenue while maintaining modest growth in services revenue.

Hardware Product Revenue

Our platform is designed to work with a wide range of learning applications, for both K-12 education and CTE, that come to life by having 3D models projected out of the screen. Our flagship product is the Inspire line of products, our latest laptop product built in partnership with a major PC OEM. It is our first product offering 3D stereo visualization without the need to utilize glasses/eyewear. Our initial original edition product offerings (OE) used a proprietary passive circular polarized display to create comfortable 3D stereo using lightweight eyewear. We are no longer producing our OE products, although we continue to sell existing inventory outside of the US. Product revenue accounted for 52% and 58% of our total revenue for the nine months ended September 30, 2025 and 2024, respectively.

Software Applications Revenue

Our platform allows for immersive experiential learning experiences across science, math technology, engineering and career training applications. We derive software applications revenue from the sale of licenses and subscription plans to the software applications available on our platform.

Our software applications are priced based on the number of devices or users and length of the contract. We offer discount programs based on increases in volume of devices or users and the length of the contract. We believe the wide variety and flexibility of our software applications help us retain existing customers and acquire additional customers. Software applications revenue accounted for 38% and 35% of our total revenue for the nine months ended September 30, 2025 and 2024, respectively. 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.

We typically invoice our customers annually in advance of providing software and services. Software sales consist of licenses of our functional intellectual property that are materially satisfied at a point in time when key codes are provided to allow customers to access the software. In transactions where a third-party is involved in providing software licenses to a customer, we recognize the revenue from the third-party ratably on a straight-line basis.

Services Revenue

Our services are a “turn-key” solution that aids customers with configuring purchased products with software and license keys specific to the customer’s use. This service allows the applicable school to quickly get started with an out-of-the-box ready system. We derive services revenue from installation and/or training services for products, both of which are separate performance obligations and typically are satisfied within a short period of time, often less than one month delivered remotely or on-site at the customer’s location. Additionally, we offer one- and two-year extended warranty contracts that customers can purchase at their option, which are also separate performance obligations. Services revenue accounted for 11% and 8% of our total revenue for the nine months ended September 30, 2025 and 2024, respectively.

Key Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. The calculation of the key metrics discussed below may differ significantly from other similarly titled metrics used by other companies, analysts, investors and other industry participants.

Bookings Growth

We track the bookings growth in our business very closely and we believe this is a key indicator of our business. Bookings represent customer orders that have hardware, software and service components. Bookings indicate future revenue, which lags based on product shipping date, monthly recognition of certain subscription revenue and service delivery completion. Our bookings growth is represented below for each of the periods presented:

(in thousands)

United States CTE & K-12 Bookings

We believe our ability to retain and grow our product and software revenue will be dependent on our ability to grow in both our United States CTE and K-12 market segments. We track our performance in this area by measuring our bookings from customers in each of these markets. We calculate this metric on a quarterly basis by comparing the aggregate number of bookings in each market for the most recent quarter divided by the number of bookings attributable to the same market for the same quarter in the previous fiscal year. CTE bookings accounted for approximately 49% and 41% for the three months ended September 30, 2025 and 2024, respectively, while K-12 bookings accounted for approximately 51% and 59%, for the three months ended September 30, 2025 and 2024, respectively. CTE bookings accounted for approximately 38% and 34% for the nine months ended September 30, 2025 and 2024, respectively, while K-12 bookings accounted for approximately 62% and 66%, for the nine months ended September 30, 2025 and 2024, respectively.

Subsequent to September 30, 2024, we experienced significant cancellations ("debooks") of previously reported customer commitments that affect full year bookings performance. These debooks totaled $1.8 million for the nine months ended September 30, 2024. The primary factors contributing to these debooks were customer financial constraints.

Management believes the disclosure of these material debooks provides investors with important context for evaluating business performance. While we do not routinely adjust previously reported bookings figures for normal course cancellations, the magnitude of these debooks was deemed material enough to warrant specific disclosure in this Quarterly Report on Form 10-Q.

International Bookings

We track our performance in international sales by measuring bookings from our international reseller partners relative to total bookings. We calculate this metric on a quarterly basis by comparing the aggregate amount of bookings attributable to international partners for the most recent quarter compared to the number of bookings attributable to international partners for the same quarter in the previous fiscal year and the prior quarter. International bookings accounted for approximately 17% and 27% for the three months ended September 30, 2025 and 2024, respectively. International bookings accounted for approximately 14% and 16% for the nine months ended September 30, 2025 and 2024, respectively.

Software Subscription Renewable Revenue Growth

We believe that our ability to renew and increase the software revenues on our platform from existing customers is an indicator of market penetration, adoption, the growth of our business and future revenue trends. Software sales of our solutions are purchased on an annual or multi-year basis, as well as one-time licenses to allow (i) an unlimited number of users on a particular device or (ii) a particular number of users to access our applications. We include subscriptions for both device and user-based applications and services in our measure of renewing revenue. Our customers typically enter into annual licenses or subscriptions with us, although some enter into multi-year agreements. Customers have no contractual obligation to renew their licenses or subscriptions with us after the completion of their initial term.

We believe the level of renewing revenue is an important indicator of future business success, as it is an indicator of sales growth of customer expansion accounts, utilization of our platform and future margin improvement. Our renewing revenue includes:

(i) renewal of prior customer agreements in whole or in part, plus

(ii) additional software titles added to existing customer agreements, and

(iii) software revenues related to sales of new systems as part of an expansion of the customer footprint.

The above aspects of software revenue are captured in the annualized contract value (ACV) and net dollar revenue retention rate (NDRR) metrics described below under “Retention and Expansion of Customers.” We believe that these annualized measures provide important context to understanding the strength and growth of our software license revenue. We expect to accelerate the transition of our revenue mix to software from hardware through continued improvement in renewing revenue from the retention and expansion of our customers.

Retention and Expansion of Customers

Our ability to increase revenue depends in part on retaining our existing customers and expanding their use of our platform. We offer an integrated, comprehensive set of solutions that cover K-12/STEM and CTE. We have a variety of software bundles targeted at different areas of learning and grade levels. Retaining and expanding our existing customer base is critical to our success.

To monitor our ability to retain and grow our customer base for our software we monitor the annualized contract value of active software licenses, with particular attention to customers with at least $50,000 in annualized contract value (“ACV”). Our ACV for the nine months ended September 30, 2025 and 2024 was approximately $10.2 million and $11.3 million, respectively. We calculate our Dollar-Based Retention Rate as of a given period end by starting with the ACV from all customers as of 12 months prior to such period end (“Prior Period ACV”) and calculating the ACV from these same customers as of the current period end (“Current Period ACV”). Current Period ACV includes any upsells and is net of contraction or attrition over the trailing 12 months but excludes revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at our Dollar- Based Retention Rate. For the trailing twelve-month period ended September 30, 2025 and 2024, our NDRR on customers with at least $50,000 of ACV was 77% and 102%, respectively.

Average Term Length

We measure the ACV dollar-weighted term length of our renewable software license agreements. We believe, an increase in term length is a signal that customers are adopting our products for long-term use, which decreases the risk that a customer will choose not to renew their software licenses. CTE agreements are typically longer-term than K-12 agreements, and as a result, the dollar-weighted term length measure can reflect a mix shift of license agreements between these product lines.

Non-GAAP Financial Measures

We use non-GAAP financial measures in addition to our results of operations reported in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income (loss). We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.

Adjusted EBITDA

We calculate Adjusted EBITDA as GAAP net loss adjusted for interest expense, depreciation and amortization expense, stock-based compensation, change in fair value of convertible debt, loss on debt extinguishment and income tax expense. We believe this measure provides our management and investors with consistency and comparability with our past financial performance and is an important indicator of the performance and profitability of our business.

The following table presents our Adjusted EBITDA from operations for each of the periods presented:

Factors Affecting Our Performance

We believe that our growth and financial performance are dependent upon many factors, including the key factors described below which are in turn subject to significant risks and challenges, including those discussed below and in the section of this report entitled “Risk Factors.”

Retention of Key Employees

In 2020, in response to concerns relating to the COVID-19 pandemic, we made significant changes to our business, including changes to our structure and employee base. We moved to a remote working environment at the onset of the pandemic and have transitioned to a hybrid working environment. In many respects, we believe these changes have better positioned our workforce and our company for profitability. However, we believe we have many employees that are key to our operations, and in the event some of these key employees were to leave our company, it would have a detrimental effect on our business and operations.

Strategic PC OEM Partnerships

Prior to our most recent laptop product, Inspire, we worked exclusively with tier-one Original Development Manufacturers (“ODMs”) to manufacture our products. In 2021, we made the strategic decision to partner with a major PC OEM, working together to build Inspire, a proprietary laptop product, which allowed us to leverage the OEM’s supply chain network and volumes. As of September 30, 2025, approximately 21,600 Inspires have been shipped under our agreement with this PC OEM. Our master agreement with our PC OEM partner is subject to an initial one-year term, with automatic renewal for subsequent one-year terms. Either party is permitted to terminate the agreement upon written notice delivered to the other party not later than three months prior to the expiration of the applicable term. During 2023, we entered into an agreement with another PC OEM for the manufacture of an additional laptop product. If either PC OEM decided to discontinue their relationship with us, our business could be materially and adversely impacted. We also rely upon one third-party partner located in China to manufacture our stylus. If our manufacturing partners that we rely upon decide to discontinue their relationship with us and we are unable to replace such parties on similar terms or at all, our business could be materially and adversely impacted.

Scaling in the United States

Our fundamental go-to-market model is built upon a solution-oriented selling approach. We believe it is critical that we continue to grow and scale our business in the United States in order to be successful. School districts can at times be prone to long sales cycles as a result of the bureaucratic purchasing process. In addition, education funding is subject to change based on political, policy or economic variables at the federal, state or local level, which can impact a school district’s funding, both positively and negatively, and impact our business in the United States.

Software Acquisitions for Growth

An important component to our future growth plan going forward is the acquisition of key software companies and/or intellectual property in specific areas within the education market. We believe that the completion and successful integration of such companies and assets will be important to our success.

Beginning in the first quarter of 2025, new tariffs were announced on imports to the U.S. ("U.S. Tariffs"), including tariffs on imports from China, where the Company manufactures its products, and multiple nations have announced tariffs and other actions in response. Trade negotiations are ongoing, but overall the global trade environment remains fluid and highly uncertain. Modifications and delays to the U.S. Tariffs have been announced and further changes are expected to be made in the future. Tariffs and other measures that are applied to the Company’s products or their components can have a material adverse impact on the Company’s business, results of operations and financial condition, including impacting the Company’s supply chain, pricing and gross margin. The ultimate impact remains uncertain and will depend on several factors, including whether additional or incremental U.S. Tariffs or other measures are announced or imposed, to what extent other countries implement tariffs or other retaliatory measures in response, and the overall magnitude and duration of these measures. Trade and other international disputes can have an adverse impact on the overall macroeconomic environment and result in shifts and reductions in spending for the Company’s products and services, all of which can further adversely affect the Company’s business and results of operations.

Components of Results of Operations

Revenue

Our revenue consists of hardware revenue, software applications revenue and services revenue. We recognize revenue at the amount to which we expect to be entitled when control of the products, software or services is transferred to its customers as described below. We have elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.

Hardware Revenue — Hardware revenue is generated from the sale of our learning stations bundled with pre-loaded perpetual license software, accessories necessary for full use of our products, including stylus, eyewear (if needed) and power adapters, and a standard assurance type warranty. Hardware accessories are also sold on a stand-alone basis. Customers place orders for the hardware and we fulfill the order and ship the hardware directly to the customer or authorized resellers. Generally, we receive payment from customers or authorized resellers at the time of hardware delivery; however, in certain circumstances our United States customers may remit payment at a later date pursuant to the terms of their agreement with us. We recognize hardware revenue associated with a sale in full at the time of shipment. Customers purchasing hardware from us also typically purchase our enabled software applications for use on their devices.

Software Applications Revenue — Software applications revenue is generated from the sale of internally developed and third-party applications enabled for use on our products licensed over specified contractual terms. Most software applications reside on our products and require license keys to activate, although certain applications are web-based and require user log-ins. Customers who license our software use it on our products under different subscription terms based on the number of devices or users and length of the contract. We do not require customers to license software applications when purchasing our products.

We typically invoice our customers annually in advance based on their subscription. Software sales that consist of licenses of functional intellectual property are satisfied at a point in time when key codes are provided to allow customers to access the software. In transactions where we provide user-based software licenses to a customer, we recognize software revenue ratably on a straight-line basis. For the sale of third-party applications where we obtain control of the application before transferring it to the customer, we recognize revenue based on the gross amount billed to customers.

Services Revenue — We derive services revenue from implementation, professional development and technical services delivered remotely or on-site at the customer’s location and extended service type warranties. Services are either delivered by our personnel or our qualified third-party representatives. Under the third-party arrangements, we will pay the third-party for their delivery services and bill the customer directly. We will also repair our products for a fee if the nature of the repair is outside the scope of the applicable warranty, but this is not a significant source of revenue. Each service type does not significantly impact the functionality of the others, or the hardware/software being provided. Services are typically invoiced in advance and revenue is recognized based on the passage of time during the contract period. We believe that the passage of time corresponds directly to the satisfaction of the performance obligations.

Cost of Goods Sold

Cost of goods sold consists of cost of hardware sold, cost of software sold and cost of services sold. Overall cost of revenue is largely dependent on a combination of revenue types, hardware component supply and pricing and cost of third-party software applications.

Cost of Hardware Sold — Cost of hardware sold consists primarily of costs associated with the manufacture of our products and personnel-related expenses associated with manufacturing employees, including salaries, benefits, bonuses, overhead and stock-based compensation.

All of our products are manufactured by manufacturers located primarily in China. We have entered into agreements for the supply of many components; however, there can be no guarantee that we will be able to extend or renew these agreements on similar terms, or at all. Although most components in the products essential to our business are generally available from multiple sources, certain custom and new technology components are currently obtained from single or limited sources. We compete for various components with other participants in the markets for personal computers, tablets and accessories. Therefore, many components, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.

Cost of hardware sold also includes costs of acquiring third-party devices and components, and costs associated with shipping devices to customers. We have outsourced much of our transportation and logistics management for the distribution of products. While these arrangements can lower operating costs, they also reduce our direct control over distribution. During the COVID-19 pandemic, certain of our logistical service providers experienced disruptions. Refer to “Supply Chain Challenges” for more information.

Cost of goods sold related to delivered hardware and bundled software, including estimated standard warranty costs, are recognized at the time of sale.

Cost of Software Sold — Cost of software sold consists primarily of fees paid to third parties for software licenses, costs associated with the technical support of software applications and the cost of our customer success operations. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.

Cost of Services Sold — Cost of services sold consists primarily of personnel costs associated with the development and delivery of the services. Some of these costs are internal resources while others are associated with third parties engaged to develop or deliver the services. Other costs include travel and technology used in the development or delivery of the services. Cost of services revenue, including those for extended service type warranty and repair expenses relating to our products, are recognized as cost of sales as incurred or upon completion of the service obligation.

Operating Expenses

Our operating expenses consist primarily of selling, general and administrative expenses and product engineering and R&D expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and sales commissions. Operating expenses also include overhead costs, including rent, utilities, insurance, legal and office supplies.

Selling and marketing — Selling and marketing expenses consist of labor and other costs directly related to the promotion of our products, including compensation for our marketing team and travel expense incurred in connection with promotional efforts.

General and administrative expenses — General, and administrative expenses consist primarily of personnel-related expenses associated with our finance, legal, information technology, human resources, facilities and administrative employees, including salaries, benefits, bonuses, sales commissions and stock-based compensation. Commissions paid on the sale of hardware and short-term software licenses are recognized upon delivery. Commissions paid on the sale in which at least a portion of the goods and services will be satisfied over a period of time (services primarily consisting of extended warranties) are not material and are expensed when incurred. General and administrative expenses also include external legal, accounting and other professional services fees, operational software and subscription services and other corporate expenses.

Research and development expenses — Research and development expenses consist primarily of product engineering and personnel-related expenses associated with our hardware and software engineering employees, including salaries, benefits, bonuses and stock-based compensation. R&D expenses also include third-party contractor or professional services fees, and software and subscription services dedicated for use by our engineering organization. We expect that our R&D expenses will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform and products. In addition, R&D expenses that qualify as internal-use software development costs are capitalized, the amount of which may fluctuate significantly from period-to-period.

Interest Expense

Interest expense consists primarily of changes in accrued interest expense, interest payments and amortization of debt issuance costs for our debt facilities. See “Liquidity and Capital Resources — Debt and Financing Arrangements.”

Income Tax Expense (Benefit)

Income tax expense (benefit) consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.

Results of Operations

The following table sets forth our results of operations for the three and nine months ended September 30, 2025 and 2024:

(in thousands)

(1) Includes stock-based compensation expense as follows:

(in thousands)

(unaudited)

Comparison of financial results for the three months ended September 30, 2025 and 2024

Revenue

(in thousands)

Total revenue decreased by $5.4 million, or 38%, for the three months ended September 30, 2025 to $8.8 million as compared to the three months ended September 30, 2024. This decrease in revenue is primarily attributable to lower hardware and software revenues attributable to uncertainty in our K-12 end-user markets where funding sources have been disrupted, causing longer than usual sales cycles, and in some cases prompting customers to delay receipt of confirmed order bookings. Potential tariff volatility surcharges have also contributed to potentially elongated sales cycles as we communicate these pricing impacts to customers in revised quotes.

Hardware revenue decreased by $3.9 million or 51%, to $3.8 million for the three months ended September 30, 2025, from $7.7 million for the three months ended September 30, 2024. The decrease in hardware revenue was primarily attributable to a decrease in units shipped. For the three months ended September 30, 2025 and 2024, hardware revenue as a percentage of total revenue was 43% and 54%, respectively.

Software revenue decreased by $1.3 million or 23%, to $4.3 million for the three months ended September 30, 2025, from $5.6 million for the three months ended September 30, 2024. Software content purchased on new unit deployments and retention of existing software licenses revenue were disproportionately affected by customer funding disruptions in the three months ended September 30, 2025. For the three months ended September 30, 2025 and 2024, software revenue as a percentage of total revenue is 49% and 39%, respectively.

Our key software retention metrics are as follows: (1) ACV as of September 30, 2025 decreased to $10.2 million as compared to September 30, 2024 of $11.3 million and (2) NDRR for the trailing twelve-month period ended September 30, 2025 was 77%, as compared to 102% for the trailing twelve-month period ended September 30, 2024.

Service revenue decreased by $0.2 million or 21%, to $0.7 million for the three months ended September 30, 2025, from $0.9 million for the three months ended September 30, 2024. The decrease in revenue was primarily attributable to decreased sales of extended warranty and technology support services. For the three months ended September 30, 2025 and 2024, services revenue as a percentage of total revenue was 8% and 6%, respectively.

(in thousands)

39

For the three months ended September 30, 2025, total cost of goods sold decreased by $3.6 million, or 45%, to $4.3 million compared to $7.9 million for the three months ended September 30, 2024. This decrease was primarily attributable to reduced hardware costs of $2.9 million due to fewer units sold partially and the lower cost of Inspire units. For the three months ended September 30, 2025 and 2024, gross margin was 51% and 45%, respectively.

Cost of hardware sold decreased by $2.9 million, or 52%, to $2.7 million for the three months ended September 30, 2025, from $5.5 million for the three months ended September 30, 2024. The decrease in cost of hardware sold was primarily attributable to a decrease in the volumes shipped of Inspire laptops and reductions in the bill of materials costs of the new Inspire 2 laptop, relative to the Inspire 1 model which was sold during the three months ended September 30, 2024.

The Company’s hardware costs include shipping and handling fees paid to the primary logistics agent for tariffs, custom duties and related logistics expenses. For the three months ended September 30, 2025, these costs were approximately $0.1 million, as compared to $0 for the three months ended September 30, 2024.

For the three months ended September 30, 2025 and 2024, hardware gross margin was 36% and 28%, respectively.

Cost of software sold decreased by $0.6 million or 35%, to $1.1 million for the three months ended September 30, 2025, from $1.7 million for the three months ended September 30, 2024. The decrease in cost of software sold corresponded to decreased sales of third party point-in-time software and overall software application sales. The decrease in third-party point-in-time software costs was also related to success in acquiring software applications on which the company formerly incurred revenue share. For the three months ended September 30, 2025 and 2024, software gross margin was 68% and 70%, respectively.

Cost of services sold increased by $0.2 million or 52%, to $0.5 million for the three months ended September 30, 2025, from $0.3 million for the three months ended September 30, 2024. For the three months ended September 30, 2025 and 2024, services gross margin was 25% and 63%, respectively.

Excess and obsolete expense decreased by $0.3 million or 85%, to $47,000 for the three months ended September 30, 2025, from $0.3 million in the three months ended September 30, 2024. The decrease was attributable to the write-off of inventory in the three months ending September 30, 2024.

Excluding the $0.1 million of shipping costs paid to the primary logistics agent and the write-off of excess and obsolete charges in the three months ended September 30, 2025, gross margin for the three months ended September 30, 2025 would have been 52% compared to the actual gross margin of 51%.

Operating Expenses

(in thousands)

(unaudited)

For the three months ended September 30, 2025, operating expenses increased by $3.0 million, or 47%, to $9.3 million from $6.3 million for the three months ended September 30, 2024. The increase in expenses was primarily attributable to an increase of $2.3 million of stock-based compensation expense due to annual grants of 1.3 million RSUs to members of the Board of Directors, named executive officers and employees in February and March 2025 at a grant date fair value of $17.5 million. After removing the stock-based compensation and RSU expense from the totals, for the three months ended September 30, 2025, the adjusted operating expenses totaled $6.6 million and resulted in an increase of $0.3 million or

4%, from the $6.3 million total operating expenses for the three months ended September 30, 2024. This net increase was primarily due to increased costs in personnel and professional expenses through the three months ended September 30, 2025 and additional selling and marketing activities.

Research and development expenses increased by $0.5 million or 51%, to $1.6 million for the three months ended September 30, 2025, from $1.0 million for the three months ended September 30, 2024. The increase in expenses was primarily attributable to an increase in compensation costs resulting from higher headcount, as well as expanded R&D project activities including new product development and outside services.

Selling and marketing expenses increased by $1.1 million or 33%, to $4.3 million for the three months ended September 30, 2025, from $3.3 million for the three months ended September 30, 2024. The increase in expenses was mainly due to higher compensation and commission expenses associated with the expanded sales team, reflecting increased pay levels and performance-based incentives.

General and administrative expenses increased by $1.4 million or 67%, to $3.4 million for the three months ended September 30, 2025, from $2.0 million for the three months ended September 30, 2024. The increase in expenses was primarily attributable to the increase in stock-based compensation expense of $1.4 million.

Interest Expense

(in thousands)

For the three months ended September 30, 2025, interest expense decreased by $0.3 million, or 49%, to $0.3 million, from $0.6 million for the three months ended September 30, 2024. The decrease in interest expense was primarily attributable to the convertible loans converting into Common Stock as part of the IPO in December 2024 and a lower interest rate on the convertible debt entered into in April 2025 compared to the debt paid off with a portion of the proceeds from the convertible debt.

Income Tax Expense

Income tax expense for each of the three months ended September 30, 2025 and 2024 was immaterial. We estimate an annual effective tax rate for the year ending December 31, 2025 of (0.09)% as we incurred losses for the three months ended September 30, 2025 and expect to continue to incur losses through the remainder of our fiscal year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2025. The United States federal statutory rate is 21% while our effective tax rate for the years ended December 31, 2024 and 2023 was 0.1% and zero, respectively. No federal or state income taxes are expected outside of immaterial state tax payments.

Comparison of financial results for the nine months ended September 30, 2025 and 2024

Revenue

(in thousands)

41

Total revenue decreased by $6.6 million, or 22%, for the nine months ended September 30, 2025 to $23.0 million as compared to $29.6 million for the nine months ended September 30, 2024. This decrease in revenue was primarily attributable to lower hardware revenues and attributable to uncertainty in the Company’s K-12 end-user markets where funding sources have been disruptive, causing longer than usual sales cycles, and in some cases prompting customers to delay receipt of confirmed order bookings. Potential tariff volatility surcharges have also contributed to potentially elongated sales cycles as we communicate these pricing impacts to customers in revised quotes.

Hardware revenue decreased by $5.2 million or 30%, to $11.9 million for the nine months ended September 30, 2025, from $17.1 million for the nine months ended September 30, 2024. The decrease in hardware revenue was primarily attributable to tariff and trade policy uncertainty, as well as uncertainty in federal funding sources for education available to our K-12 segment customers, and the resulting impact on laptop shipments, during nine months ended September 30, 2025. For the nine months ended September 30, 2025 and 2024, hardware revenue as a percentage of total revenue was 52% and 58%, respectively.

Software revenue decreased by $1.6 million or 15%, to $8.7 million for the nine months ended September 30, 2025 from $10.2 million for the nine months ended September 30, 2024. Notwithstanding adverse factors affecting hardware shipments, and software content purchased on new unit deployments, retention of existing software licenses revenue, and increases in the sales price of software, generated an improvement in software revenue relative to the decline in hardware revenue. For the nine months ended September 30, 2025 and 2024, software revenue as a percentage of total revenue was 38% and 35%, respectively.

Our key software retention metrics are as follows: (1) ACV as of September 30, 2025 decreased to $10.2 million as compared to September 30, 2024 of $11.3 million and (2) NDRR for the trailing twelve-month period ended September 30, 2025 was 77%, as compared to 102% for the trailing twelve-month period ended September 30, 2024.

Service revenue increased by $0.2 million or 9%, to $2.4 million for the nine months ended September 30, 2025, from $2.2 million for the nine months ended September 30, 2024. The increase in service revenue was primarily attributable to increased sales of extended warranty and technology support services. For the nine months ended September 30, 2025 and 2024, services revenue as a percentage of total revenue was 11% and 8%, respectively.

(in thousands)

For the nine months ended September 30, 2025, total cost of goods sold decreased by $5.3 million, or 31%, to $12.1 million compared to $17.5 million for the nine months ended September 30, 2024. This decrease was primarily attributable to reduced hardware costs of $4.6 million due to fewer shipments of Inspire units, a decrease in software costs of $1.0 million and a decrease in excess and obsolete of $0.1 million, partially offset by an increase in service cost of $0.3 million. For the nine months ended September 30, 2025 and 2024, gross margin was 47% and 41%, respectively.

Cost of hardware sold decreased by $4.6 million, or 36%, to $8.0 million for the nine months ended September 30, 2025, from $12.6 million for the nine months ended September 30, 2024. The decrease in cost of hardware sold was primarily attributable to the 30% decrease in hardware revenue driven primarily by a decrease in the volumes shipped of Inspire laptops, as well as reductions in the bill of materials costs of the new Inspire 2 laptop relative to the Inspire 1 model which was sold during the nine months ended September 30, 2024.

The Company’s hardware costs include shipping and handling fees paid to the primary logistics agent for tariffs, custom duties and related logistics expenses. For the nine months ended September 30, 2025, these costs were approximately $0.1 million, as compared to $0 for the nine months ended September 30, 2024.

For the nine months ended September 30, 2025 and 2024, hardware gross margin was 35% and 27%, respectively.

Cost of software sold decreased by $1.0 million or 28%, to $2.5 million for the nine months ended September 30, 2025, from $3.5 million for the nine months ended September 30, 2024. The decrease in cost of software sold corresponded to decreased sales of third party point-in-time software and overall software application sales. The decrease in third-party point-in-time software costs was also related to success in acquiring software applications on which the company formerly incurred revenue share. For the nine months ended September 30, 2025 and 2024, software gross margin was 68% and 66%, respectively.

Cost of services sold increased by $0.3 million or 28%, to $1.4 million for the nine months ended September 30, 2025, from $1.1 million for the nine months ended September 30, 2024. The increase in cost of services sold was primarily attributable to increased sales of technology support services. For the nine months ended September 30, 2025 and 2024, services gross margin was 42% and 52%, respectively.

Excess and obsolete expense decreased $0.1 million or 30%, to $0.2 million for the nine months ended September 30, 2025, from $0.3 million in the nine months ended September 30, 2024. The decrease was attributable to the write-off of inventory costs in the nine months ending September 30, 2024.

Excluding the $0.1 million of shipping costs paid to the primary logistics agent and the write-off of $0.2 million of excess and obsolete costs in the nine months ended September 30, 2025, gross margin for the nine months ended September 30, 2025 would have been 49% compared to the actual gross margin of 47%.

Operating Expenses

(in thousands)

(unaudited)

For the nine months ended September 30, 2025, operating expenses increased by $0.4 million, or 1%, to $27.4 million from $27.0 million for the nine months ended September 30, 2024. The increase in expenses was primarily attributable to increased costs in personnel.

Research and development expenses decreased by $0.2 million or 4%, to $3.9 million for the nine months ended September 30, 2025, from $4.1 million for the nine months ended September 30, 2024. The decrease in expenses was primarily attributable to a decrease in stock-based compensation expense of $0.4 million due to grants to employees in March 2024.

Selling and marketing expenses increased by $0.2 million or 1%, to $12.3 million for the nine months ended September 30, 2025, from $12.1 million for the nine months ended September 30, 2024. The increase in expenses was primarily attributable to increased headcount and compensation expense partially offset by a decrease in stock-based compensation expense of $1.0 million due to grants to employees in March 2024.

General and administrative expenses increased by $0.4 million or 4%, to $11.2 million for the nine months ended September 30, 2025, from $10.8 million for the nine months ended September 30, 2024. The increase in expenses was primarily attributable to increased costs in personnel and professional expenses in 2025 related to being a public Company partially offset by a $0.7 million decrease in stock compensation expenses due to grants to employees in March 2024.

Interest Expense

(in thousands)

For the nine months ended September 30, 2025, interest expense decreased by $1.1 million, or 50%, to $1.1 million, from $2.2 million for the nine months ended September 30, 2024. The decrease in interest expense was attributable to the convertible loans converted into Common Stock as part of the IPO in December 2024 and a lower interest rate on the convertible debt entered into in April 2025 compared to the debt paid off with a portion of the proceeds from the convertible debt.

Income Tax Expense

Income tax expense for each of the nine months ended September 30, 2025 and 2024 was immaterial. We estimate an annual effective tax rate for the year ending December 31, 2025 of (0.09)% as we incurred losses for the nine months ended September 30, 2025 and expect to continue to incur losses through the reminder of our fiscal year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2025. The United States federal statutory rate is 21% while our effective tax rate for the years ended December 31, 2024 and 2023 was 0.1% and zero, respectively. No federal or state income taxes are expected outside of immaterial state tax payments.

Cash Flows

The following table summarizes our cash flows for the periods presented:

(in thousands)

Operating Activities

For the nine months ended September 30, 2025, our operating activities used cash of $14.0 million, primarily due to our net loss of $18.1 million and the changes in our operating assets and liabilities of $2.4 million, partially offset by adjustments for non-cash charges, including stock-based compensation expense of $5.2 million, the change in fair value of convertible debt of $0.6 million, issuance of restricted stock units of $0.4 million, provision for excess and obsolete inventory of $0.2 million, and non-cash amortization of other debt discount of $0.1 million. The change in our operating assets and liabilities was primarily the result of an increase in accounts receivable of $0.5 million and prepaid and other assets of $1.0 million and a decrease in accounts payable of $1.7 million and deferred revenue of $0.6 million, partially offset by a decrease in inventory of $0.7 million and an increase in accrued expenses of $0.1 million and accrued interest of $0.7 million.

For the nine months ended September 30, 2024, our operating activities used cash of $3.9 million, primarily due to our net loss of $17.2 million partially offset by changes in our operating assets and liabilities of $5.8 million, an adjustment for non-cash charge of stock-based compensation expense of $7.4 million, and loss on extinguishment of debt of $0.1 million. The change in our operating assets and liabilities was primarily the result of a decrease in accounts receivable of $0.6 million and inventory of $1.0 million, and an increase in accounts payable of $1.9 million, accrued expenses of $0.2 million, deferred revenue of $1.1 million, and accrued interest of $1.3 million partially offset by an increase in prepaid expenses and other assets of $0.3 million.

Investing Activities

For the nine months ended September 30, 2025 and 2024, net cash used in investing activities was immaterial due to our low capital equipment requirements.

Financing Activities

For the nine months ended September 30, 2025, net cash provided by financing activities was $13.7 million primarily due to proceeds from convertible debt of $13.0 million, other debt issuances of $4.0 million, proceeds from issuance of common stock from equity line-of-credit of $3.6 million, and proceeds from exercise of stock options of $0.2 million partially offset by repayment of other debt issuances of $6.8 million, and fees paid for debt issuance of $0.1 million.

For the nine months ended September 30, 2024, net cash provided by financing activities was $4.0 million primarily due to proceeds from convertible notes of $5.0 million and proceeds from other term loan issuances of $3.5 million partially offset by repayment of other debt issuances of $3.9 million and fees paid for deferred offering costs of $0.5 million.

Liquidity and Capital Resources

As of September 30, 2025 and December 31, 2024, we had an accumulated deficit of $308.5 million and $290.4 million, respectively. Our net losses were $18.1 million and $17.2 million for the nine months ended September 30, 2025 and 2024, respectively. A portion of our net losses in the nine months ended September 30, 2024 related to $7.4 million in stock compensation expense from options issued during the period.

As of September 30, 2025 and December 31, 2024, we had cash and cash equivalents of $4.3 million and $4.9 million, respectively. In April 2025, we raised $14.0 million in a Senior Secured Convertible Note Financing. See Note 5 to our condensed consolidated financial statements for the nine months ended September 30, 2025 elsewhere in this report for additional information. In the nine months ended September 30, 2025 and the years ended December 31, 2024 and 2023, we raised $20.6 million, $18.5 million and $11.4 million, respectively, for an aggregate of $50.5 million through debt and financing arrangements, including the $13.0 million of convertible debt, $7.5 million of net proceeds from the IPO, $9.3 million under loan and security agreements with Fiza, $5.0 million in convertible notes and $5.6 million in other debt issuances. In May 2024 and June 2024, we entered into multiple loan agreements from an existing lender to borrow a total of $3.5 million secured by certain of our assets. Our accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. Our accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. Our financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. The recurring losses and negative cash flows from operations, working capital deficiency, the need for additional financing, uncertainties frequently encountered by companies in the technology industry and the dependency on closing this offering are factors that raise substantial doubt about our ability to continue as a going concern for the twelve-month period from the date the financial statements included herein were issued. See Note 1 to our condensed consolidated financial statements for the three and nine months ended September 30, 2025 included elsewhere in this report for additional information on our assessment.

During the nine months ended September 30, 2025, we incurred a net loss of $18.1 million and had Adjusted EBITDA of ($10.7) million and negative cash flows from operations of $14.0 million. For the years ended December 31, 2024 and 2023, we incurred net losses of $20.8 million and $13.0 million, respectively, and incurred negative cash flows from operations of $8.9 million and $6.4 million, respectively. We had combined cash and cash equivalents of $4.3 million and $4.9 million as of September 30, 2025 and December 31, 2024, respectively. We have incurred operating losses and negative cash flows from operations since inception. Our 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 our products, availability of additional financing, gaining customer acceptance and uncertainty of achieving future profitability among other factors discussed under “Cautionary Note Regarding Forward - Looking Statements”. Our success depends on the outcome of our research and development activities, scale-up and successful partnering and commercialization of our products and product candidates. In February 2025, we entered into two Loan and Security agreements that provided us with $2.0 million in financing. In April 2025, we entered into a convertible debt agreement that may provide us with up to $20.0 million in financing. In July 2025, we entered into an equity line-of-credit agreement that may provide us with up to $30.0 million in equity. In August 2025, we entered into new debt loans that provided us with $2.0 million in financing.

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. We expect our working capital needs to increase in the future as we continue to expand and enhance our operations. Our ability to raise additional funds for working capital through equity or debt financings or other sources may depend on the financial success of our business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. Further financings may have a dilutive effect on stockholders and any debt financing, if available, may require restrictions to be placed on our future financing and operating activities. If we require additional capital and are unsuccessful in raising that capital at a reasonable cost and at the required times, or at all, we may not be able to continue our business operations or we may be unable to advance our growth initiatives, either of which could adversely impact our business, financial condition and results of operations.

Sources of Liquidity

We have historically funded our operations through the issuance of common stock and preferred stock to private investors, our IPO in December 2024, and debt financing. Our accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. The recurring losses and negative cash flows from operations, working capital deficiency, the need for additional financing, uncertainties frequently encountered by companies in the technology industry and the dependency on closing this offering are factors that raise substantial doubt about our ability to continue as a going concern for the twelve-month period from the date the financial statements included herein were issued. The conditions identified above raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Issuance of Common Stock

On December 6, 2024, we completed an IPO of 2.2 million shares of Common Stock at a price of $5.00 per share, which included 0.3 million shares sold to the underwriters pursuant to their option to purchase additional shares. After underwriting discounts and commissions of $0.8 million and offering expenses of $2.5 million, we received net proceeds from the IPO of $7.5 million. In connection with the IPO, 4.0 million outstanding shares of preferred stock were converted into 18.7 million shares of Common Stock. See Notes 6 (Temporary Redeemable Preferred Stock and Stockholders’ Equity) for more information.

Debt and Financing Arrangements

Fiza Term Debt.

The Company has three outstanding loans as of September 30, 2025 with Fiza Investments Limited, (“Fiza”) with a total outstanding principal balance of $7.2 million. On April 10, 2025, in connection with the Senior Secured Convertible Note Financing described in Note 5 to the to the condensed consolidated financial statements, the maturity date of the Fiza loans were amended to be the latter to occur of December 31, 2027 or the date in which there is no debt outstanding under the Senior Secured Convertible Note (as defined in Note 5 to the to the condensed consolidated financial statements). As of September 30, 2025 and December 31, 2024, gross principal amounts due on the Fiza term debt is $7.2 million and have been classified as non-current other term loans on the balance sheet.

On April 11, 2025, in connection with the Senior Secured Convertible Note Financing (as defined below), the Company entered into an amendment (the “Fiza 1 Amendment”) to that certain Loan and Security Agreement with Fiza dated November 3, 2022 (the “Fiza 1 Agreement”). Pursuant to the Fiza 1 Amendment, the maturity date of the Fiza 1 Agreement is extended to December 31, 2027. The Fiza 1 Amendment also amends the repayment schedule such that, beginning on the latter to occur of December 31, 2027 or the date in which there is no debt outstanding under the Senior Secured Convertible Note (the “Convertible Note Repayment Date”), the Company will repay all remaining principal and interest under the Fiza 1 Agreement over twelve equal monthly installments.

On April 11, 2025, also in connection with the Senior Secured Convertible Note Financing, the Company entered into an amendment (the “Fiza 2 and 3 Amendment”) to a Loan and Security Agreement dated July 11, 2024 with Fiza (the “Fiza 2 and 3 Agreement”). Pursuant to the Fiza 2 and 3 Amendment, the interest rate under the Fiza 2 and 3 Agreement was lowered from 25% to 20%. In addition, until the Convertible Note Repayment Date, the Company shall make monthly payments of interest only. The remaining principal and interest shall be amortized and repaid over 12 months beginning on the Convertible Note Repayment Date, the Company will repay all remaining principal and interest under the Fiza 1 Agreement over twelve monthly installments.

On April 11, 2025, the Company and Fiza entered into an intercreditor agreement (the “Intercreditor Agreement), with the institutional investor in the Senior Secured Convertible Note Financing (the “Note Investor”), pursuant to which, among other things, Fiza subordinated its security interest in the assets of the Company to the security interest of the Note Investor under the Security Agreement in the same assets and agreed to certain covenants limiting its ability to receive cash payments from the Company, including pursuant to the Fiza 1 Agreement and Fiza 2 and 3 Agreement.

Itria Other Term Loans.

On February 26, 2025, the Company entered into two Loan and Security Agreements (“Term Loans 8 and 9”) in the principal amounts of $1,100,000 and $900,000 (“Term Loans 8 and 9”) with Itria Ventures LLC (“Itria”). The Term Loans 8 and 9 bear interest at a rate of 18.00% per year (subject to increases upon an event of default) and are payable on a monthly basis in 12 equal installments, maturing on February 26, 2026. The Company may prepay the Term Loans 8 and 9 in full at any time during the term, subject to a prepayment fee equal to 1.5% of the unpaid principal balance. In connection with the Senior Secured Convertible Note financing on April 10, 2025, Term Loans 8 and 9 were prepaid. See Note 5 – Debt and Related Party Debt for more information.

On August 20, 2025, the Company entered into two Loan and Security Agreements in the principal amounts of $1,000,000 each (“Term Loans 10 and 11”) for an aggregate total of $2,000,000. One of the Term Loans 10 and 11 bears interest at a rate of 18.00% per year and is payable on a monthly basis in 15 equal installments, maturing on the 15-month anniversary of the funding date. The second Term Loans 10 and 11bears interest at a rate of 18.99% per year and is payable on a monthly basis in 18 equal installments, maturing on the 18-month anniversary of the funding date. The Company may prepay either of Term Loans 10 and 11Loans 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 Term Loans 10 and 11are prepaid within the first 12 months of the term. See Note 5 – Debt and Related Party Debt for more information.

The outstanding balance of all Itria loans as of September 30, 2025 and December 31, 2024 is $1.9 million and $4.8 million, respectively.

Senior Secured Convertible Note Financing.

On April 10, 2025, the Company entered into a securities purchase agreement (the “Note SPA”) with the Note Investor, pursuant to which the Company sold, and the Note Investor purchased, a senior secured convertible note issued by the Company (the “Senior Secured Convertible Note,” and such financing, the “Senior Secured Convertible Note Financing”) in the original principal amount of $13,978,495, which is convertible into shares of the Company’s Common Stock. The Senior Secured Convertible Note Financing closed on April 11, 2025.

The gross proceeds to the Company from the Senior Secured Convertible Note Financing, prior to the payment of legal fees and transaction expenses, was $13,000,000. Subject to the satisfaction of certain conditions contained in the

Note SPA, the Company may issue an additional senior secured convertible note to the Note Investor in the principal amount of $7,526,882 (for additional gross proceeds of $7,000,000). The Company intends to use the net proceeds from the Senior Secured Convertible Note Financing to repay existing debt and for working capital and general corporate purposes.

Description of the Note

The Senior Secured Convertible Note was issued with an original issue discount of 7.0% and accrues interest at a rate of 6.0% per annum. The Senior Secured Convertible Note matures on April 11, 2027, unless extended pursuant to the terms thereof. Interest on the Senior Secured Convertible Note is guaranteed through April 11, 2027 regardless of whether the Senior Secured Convertible Note is earlier converted or redeemed. The Senior Secured Convertible Note is secured by a first priority security interest in substantially all the assets of the Company, including its intellectual property.

The Senior Secured Convertible Note is convertible (in whole or in part) at any time prior to April 11, 2027 into the number of shares of Common Stock equal to (x) the sum of (i) the portion of the principal amount to be converted or redeemed, (ii) all accrued and unpaid interest with respect to such principal amount, and (iii) all accrued and unpaid late charges with respect to such principal and interest amounts, if any, divided by (y) a conversion price of $12.39 per share (“Initial Conversion Price” and such shares issuable upon conversion of the Note, the “Conversion Shares”). In addition, upon the effectiveness of the registration statement covering the resale of the Conversion Shares and before the 90th day after the closing under the Note SPA, the Note Investor has the right to convert up to $750,000 (or a higher amount mutually agreed upon by the parties) principal per month, priced at 97% of the lowest volume-weighted average price of the Common Stock (“VWAP”) in the 10 trading days prior to the conversion. Pursuant to the Note SPA, in certain cases, the Note Investor must limit the selling of Common Stock to the higher of (i) 15% of the daily trading volume or (ii) $100,000 per trading day. At no time may the Note Investor hold or be required to take more than 4.99% (or up to 9.99% at the election of the Investor pursuant to the Senior Secured Convertible Note) of the outstanding Common Stock.

The conversion price of the Senior Secured Convertible Note was subject to a floor price of $1.98. On October 15, 2025, the Company entered into an amendment to the Senior Secured Convertible Note pursuant to which the floor price was amended to $0.60 (for more information regarding the amendment, see Note 15 – Subsequent Events).

In addition, if an Event of Default (as defined in the Senior Secured Convertible Note) has occurred under the Note, the Note Investor may elect to convert all or a portion of the Senior Secured Convertible Note into shares of Common Stock at a price equal to the lesser of (i) 80% of the VWAP of the shares of Common Stock as of the trading day immediately preceding the delivery or deemed delivery of an applicable Event of Default notice and (ii) 80% of the average VWAP of Common Stock for the five trading days with the lowest VWAP of the shares of Common Stock during the ten consecutive trading day period ending and including the trading day immediately preceding the delivery or deemed delivery of an applicable Event of Default notice.

Upon the occurrence of an Event of Default, the Company is required to deliver written notice to the Note Investor within one business day. At any time after the earlier of (a) the Note Investor’s receipt of an Event of Default notice, and (b) the Note Investor becoming aware of an Event of Default, the Note Investor may require the Company to redeem all or any portion of the Senior Secured Convertible Note a 10% premium. Upon an Event of Default, the Senior Secured Convertible Note shall bear interest at a rate of 11.0% per annum.

Beginning 90 days after April 11, 2025, and every month thereafter, the Company must repay the Note Investor $665,643 towards the principal balance of Senior Secured Convertible Note and any accrued and unpaid interest in cash or, provided certain conditions are satisfied, shares of Common Stock, at the Company’s option (collectively, the “Installment Amount”). The Note Investor also has the right to accelerate monthly repayment obligations by receiving shares of Common Stock. For any Installment Amount paid in the form of shares of Common Stock, the applicable conversion price will be equal to the lesser of (a) the Initial Conversion Price, and (b) 95% of the lowest VWAP in the ten trading days immediately prior to such conversion.

In connection with a “Change of Control” (as defined in the Senior Secured Convertible Note), the Note Investor will have the right to require the Company to redeem all or any portion of the Note in cash at a price equal to 110% times the sum of (i) the portion of the principal amount to be converted or redeemed, (ii) all accrued and unpaid interest with respect to such principal amount, (iii) a “make-whole” amount to ensure that, if paid, the Note Investor will have received the guaranteed interest pursuant to the Note and (iv) all accrued and unpaid late charges with respect to the amounts described in (i), (ii) and (iii), if any.

Contractual Obligations

Our principal commitments consist of obligations for office space under a non-cancelable operating lease that expires in January 2026, as well as repayment of borrowings under other financing arrangements as described above under “— Liquidity and Capital Resources — Debt and Financing Arrangements.” In addition, we have agreements with certain hardware suppliers to purchase inventory; as of September 30, 2025, we had approximately $11.2 million in purchase obligations outstanding under such agreements, all of which are scheduled to come due on or before December 31, 2025.

Critical Accounting Estimates

As discussed in our Form 10-K for the fiscal year ended December 31, 2024, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition, including Standalone Selling Price (“SSP”) and the allocation of the transaction price; leases; impairment of intangible assets; impairment of long-lived assets; valuation of accounts receivable; valuation of inventory; valuation of debt and embedded features; stock compensation; and income taxes (including uncertain tax positions). There have been no significant changes to the Company’s accounting policies subsequent to December 31, 2024.

Revenue Recognition

We recognize revenue from signed contracts with customers, change orders (approved and unapproved) and claims on those contracts that we conclude to be enforceable under the terms of the signed contracts. Some of our contracts have one clearly identifiable performance obligation. However, many contracts provide the customer several promises that include hardware, software and professional services. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.

For contracts with multiple performance obligations, the transaction price is allocated based on standalone selling prices (SSP), with list prices typically used for most items. For post-contract support services (“PCS”) significant judgement is involved based on factors such as specific services offered, business models and operational efficiency. The Company regularly reassesses this estimate as changes could materially impact revenue recognition timing and amounts.

Discounts in certain contracts with customers are deemed variable consideration but are known at the time of revenue recognition.

Inventory

Our inventory, which includes raw materials and finished goods is valued using the weighted average cost method for hardware inventory while software inventory is recorded at actual cost. We periodically review the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.

Convertible Debt

We have issued convertible promissory notes and evaluate embedded features for potential bifurcation as derivatives.

For the recent convertible note described in Note 5, we elected the fair value option under ASC 825, measuring the entire instrument at fair value with changes recognized in earnings. This election is irrevocable and applied to the whole instrument, consistent with ASC 825-10 guidance. Key estimates include the valuation of original issue discount, accrued interest, and make-whole provisions, which require assumptions about discount rates, credit risk, and market conditions. The fair value option under ASC 825 simplifies the accounting by eliminating the need to bifurcate embedded derivatives under ASC 815 and aligns with the principles outlined in ASC 470 for debt instruments. This approach requires ongoing reassessment of fair value inputs and assumptions, which can significantly affect reported earnings and liabilities. All fees related to the convertible note were expensed as incurred and not recorded as debt issuance costs.

Income Taxes

We use the asset and liability method under FASB ASC Topic 740, Income Taxes, when accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we will make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

JOBS Act

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We are also a smaller reporting company meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. To the extent we continue to qualify as a smaller reporting company after we cease to qualify as an emerging growth company, we will continue to be permitted to make certain reduced disclosures in our periodic reports and other documents that we file with the SEC. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Internal Control Over Financial Reporting

Evaluation of disclosure controls and procedures

As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2025, our disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed in our Exchange Act filings is recorded, processed, summarized, and reported within the time periods required time periods.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

The Company has identified material weaknesses in our internal control over financial reporting as of December 31, 2024, relating to: (i) the lack of segregation of duties; (ii) ineffective IT General Controls; (iii) account reconciliation and cutoff; (iv) analysis of significant and unusual transactions, and (v) the lack of a formal risk assessment policy for entity level controls. As such, management determined that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of December 31, 2024.

To respond to these material weaknesses, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our disclosure controls and procedures. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance our system of evaluating and implementing the complex accounting standards that apply to our financial statements. Our plans at this time include: (i) hiring additional financial personnel with accounting and financial reporting expertise; (ii) implementing user access policies, reviews and procedures; (iii) improving our ongoing account reconciliation and variance analyses; (iv) reviewing significant and unusual financing transactions; and (v) establishing a formal and documented risk assessment policy.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligation. Even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our financial statements may not be prevented or detected on a timely basis. In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our financial statements for the three and nine months ended September 30, 2025 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the quarter ended September 30, 2025 are fairly stated, in all material respects, in accordance with GAAP.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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. However, the effectiveness of any internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, which could materially affect our business, financial condition, or future operating results and cash flows. We do not believe that there have been any material changes to the risk factors disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. The risks described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results and/or cash flows.