ZSpace's Recent Senior Secured Convertible Note Amendment: Strategic Implications for Liquidity, Investor Confidence, and Dilution Risks

ZSpace, Inc. (NASDAQ: ZSPC) has taken a controversial step to stabilize its financial position by amending the terms of its $13.98 million Senior Secured Convertible Note, originally issued on April 11, 2025. The amendment, disclosed in an SEC filing, reduces the conversion "Floor Price" from $1.98 to $0.60 per share-a 70% cut-and adjusts the "Equity Conditions" to lower the required volume-weighted average price (VWAP) from $1.98 to $0.75 and average daily trading volume from $300,000 to $200,000, according to a Panabee report. These changes, while providing short-term liquidity relief, raise critical questions about the company's strategic direction, investor trust, and long-term equity dilution risks.

Liquidity Relief at a Cost

The amendment allows ZSpace to meet its obligations with non-cash payments in common stock, easing immediate cash flow pressures. The company has already committed to paying $509,493.69 by October 16, 2025, and an additional $108,936.56 by November 14, 2025, as disclosed in that filing. This flexibility is crucial for a company that reported a net loss of $5.8 million in Q1 2025 despite an 11% year-over-year growth in higher-margin software and services revenue, according to its Q1 2025 10‑Q. However, the reliance on equity-based payments signals a weakened balance sheet. As noted in a convertible notes guide, such amendments often reflect a company's inability to service debt through traditional means, which could deter future lenders.

The broader convertible note market in 2025 has seen rising interest rates (6–8%) and extended maturity terms (up to 36 months), reflecting both macroeconomic pressures and sector-specific challenges, according to that guide. For ZSpace, the revised terms align with industry trends but at a steeper cost: the lowered Floor Price and Equity Conditions effectively guarantee that the note holder will convert the debt into shares if the stock remains below $0.75-a threshold it has not cleared in months.

Investor Confidence: A Fragile Facade

While the amendment was approved by shareholders at the October 15, 2025, annual meeting, as disclosed in that filing, investor sentiment remains divided. On one hand, analysts have maintained cautiously optimistic ratings, with five "Buy" and one "Strong Buy" recommendation, averaging a $10.00 price target, per the MarketBeat forecast. On the other, the stock's year-to-date decline of 89.68% and Nasdaq compliance risks-its market value of publicly held shares fell below $15 million-underscore deepening skepticism, as outlined in the filing.

The disconnect between analyst optimism and market reality highlights a key risk: the amendment may be perceived as a desperate measure rather than a strategic pivot. As noted in a Numerix white paper, "shareholder approvals for dilutive financing often mask underlying fragility, particularly when coupled with declining revenue and governance concerns." ZSpace's recent pivot to industrial robotics training applications, while innovative, has yet to translate into meaningful revenue growth, leaving investors with few near-term catalysts to justify the dilution.

Dilution Risks: A Double-Edged Sword

The most immediate consequence of the amendment is the potential for severe equity dilution. At the revised Floor Price of $0.60 per share, the $13.98 million note could convert into 23.3 million shares-a 58% increase over the 14.8 million shares that would have been issued at the original $1.98 Floor Price. This assumes the stock remains above $0.60, which is far from certain given its recent performance (trading at $1.10 on October 17 but fluctuating within a $1.07–$1.13 range), as shown in the 10‑Q.

Dilution risks are further amplified by the lowered Equity Conditions. With the required 20-day VWAP now at $0.75 and average daily trading volume at $200,000, the path to share-settled payments is significantly easier for the note holder. For context, ZSpace's October 2025 average daily volume was 265,000 shares, which the 10‑Q shows meets the revised threshold but is far below the original $300,000 requirement. This suggests the note holder could trigger conversions even if the stock stagnates or declines further, compounding pressure on existing shareholders.

Strategic Implications and the Road Ahead

ZSpace's amendment reflects a classic trade-off: short-term liquidity for long-term equity value. While the company has taken steps to strengthen its capital structure-such as securing a $20 million convertible debt facility in Q1 2025, as disclosed in the 10‑Q-the recent amendments risk eroding stakeholder trust. The Nasdaq compliance deadline (March 30, 2026) adds urgency, but regaining compliance may require not just financial restructuring but also a credible growth narrative.

For investors, the key question is whether ZSpace's pivot to industrial robotics training and higher-margin software services can generate the revenue growth needed to offset dilution. The company's Q1 2025 gross margin improvement to 47.4%, noted in the 10‑Q, is encouraging, but scaling this profitability will require execution against ambitious targets. In the absence of clear milestones, the amended note may serve as a warning sign rather than a solution.

In conclusion, ZSpace's strategic maneuvering highlights the precarious position of tech companies reliant on convertible debt in a high-interest-rate environment. While the amendment buys time, it also raises the stakes for a company already facing significant headwinds. Investors must weigh the immediate liquidity benefits against the long-term dilution risks-and ask whether the company's leadership has a viable plan to navigate both.