Nextech AR Solutions Corp. (OTCQB:NEXCF) Q2 2022 Results Conference Call August 18, 2022 5:00 PM ET
Company Participants
Julia Viola – IR
Evan Gappelberg – CEO
Andrew Chan – CFO
Conference Call Participants
Lisa Thompson – Zacks
Scott Buck – H.C. Wainwright
Operator
Good evening, ladies and gentlemen, and welcome to Nextech AR Solutions Corporation 2022 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I’d like to remind everyone that this call is being recorded, today Thursday, August 18, 2022.
And I would now like to turn the call over to Ms. Julia Viola, Investor Relations at Nextech AR Solutions Corporation.
Julia Viola
Hello and welcome to the Nextech Q2 2022 earnings call. With me on the call are Evan Gappelberg, Chief Executive Officer; and Andrew Chan, Chief Financial Officer.
Today, after market’s close, Nextech AR Solutions Corp. released its financial results for the second quarter ended June 30, 2022. A copy of the earnings disclosure is available on our website and on SEDAR. Some of the information discussed on this call is based on information as of today, August 18, 2022 and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings.
During this call, we will discuss IFRS results and key performance indicators. A detailed description of our key performance indicators is available in our MD&A, which can be found on SEDAR. Neither this call nor the webcast archived may be recorded or otherwise reproduced or distributed without prior written permission from Nextech.
To begin our call, Evan Gappelberg, CEO, will discuss 2022 Q2 highlights as well as recent business development followed by Andrew Chan, CFO, who will review our financial results and outlook. Finally, Evan will provide closing remarks before opening up the lines for a question-and-answer period.
I’ll now turn the call over to CEO and Founder of Nextech AR Solutions, Evan Gappelberg.
Evan Gappelberg
Thank you, Julia. Good afternoon and good evening, everyone. Thank you for joining us from around the globe today.
In 2022, we have emphasized over and over again the rapidly growing demand for our 3D modeling and AR solutions really for the transformation to Web 3.0, especially in e-commerce. This demand that we’ve been talking about is evident through our regular announcements, disclosing a multitude of new deals closed in Q1 and Q2 of 2022, all related to 3D modeling. The new deal flow is continuing into Q3 and serves to reinforce the narrative we’ve been public about, which is, there is a rapid acceleration, there is a massive new urgency and new demand that we are seeing for 3D models in e-commerce across various industries and product categories, which include, but aren’t limited to furniture, sports equipment, clothing, accessories, artwork, appliances, lighting, auto parts, and much more.
Now, looking back gives me some sense of what to expect as I look forward. It’s been 4.5 years since the founding of Nextech in 2018 with $3 million and a dream of becoming the first pure play 3D AR public company. During that time, we’ve navigated in and out of a number of businesses that in hindsight acted as bridges and test beds, proving our resilience and ability to pivot.
During this time, however, we were always planning for this momentous moment in history, making calculated decisions about our in-house development of our 3D technology, as well as picking and choosing the best strategic acquisitions that would position us for the 3D tidal wave that we believed was coming sometime in the future, many years ago. We have been steadily working towards this moment, making acquisitions. We’ve made 10 acquisitions to date, testing our technology in the real world and developing our technology to prepare for the digital transformation, and Web 3.0.
Well, ladies and gentlemen, I am pleased to announce that the time is here now. How can I be so sure? How can I make such a bold statement? It’s because we have been closing 3D modeling contracts at the fastest pace in our company’s history. It’s because Google is now indexing 3D models higher in organic search. It’s because the largest prime marketplace, Amazon has gone 3D. It’s because Shopify has gone 3D. It’s because Walmart, Target, Kohl’s, NAPA, all companies that we either currently have contracts with or are talking to have all gone 3D. The world has now pivoted to 3D. So, make no mistake about it. 3D is here and it’s here to stay. And it will be a big part of a multi-trillion dollar multi-decade mega trend that is now being called the metaverse.
To enter the metaverse, however, you need a 3D model. And that is what Nextech makes, 3D models, which we are now scaling the production of. For the first time, we’re hearing from our customers that they are either told to buy 3D models from leadership or planning on buying 3D models in the near future. In fact, I had a call yesterday from a major customer of ours that was talking about a three-year plan to purchase over 100,000 3D models. This has never happened before in the history of Nextech, and it signals to me that the market is here, the demand has shown up. The demand for 3D models in my view will only accelerate throughout the second half of 2022. And I believe that in 2023, we will see demand shift into high gear, similar to what happened with our virtual events business during the pandemic in 2020, which had a significant impact on our valuation. I believe it can and will happen again.
If you look at our major customers, we’re signing major customers but we’re also signing small and midsized e-commerce customers for 3D models as well. In Q2 and even into Q3, we’re experiencing a rapid expansion of major 3D modeling customers with some of the biggest retailers. These include new contracts with brand new customers as well as bigger add-on contracts for more 3D models with existing customers, including NAPA Auto Parts, Kohl’s, CB2 Kmart Australia, just to name a few of our major customers. But the biggest fish in the e-commerce ocean by far is the prime marketplace. It is Amazon by far. It’s not even close. Amazon is the biggest fish in the e-commerce marketplace, and represents at least for the business that we used to own and operate, our e-commerce business, about 70% of sales. And I’ve seen that number over and over again, about 70% of a company that’s in the e-commerce space, about 70% of their sales happens on Amazon. We announced on July 12th that we began supplying the world’s largest prime marketplace with 3D models. Now, that’s in Q3, not Q2. This represented a significant — significant new development. And it does represent potentially massive growth for Nextech for many years to come.
Signing a deal with Amazon, however, does demonstrate Nextech’s technical proficiency and leadership in the 3D modeling for e-commerce space. Believe me, Amazon only works with best in breed. If you look at Amazon, there’s over 1.5 million registered active Amazon sellers with hundreds or thousands of models for each one of those sellers. There is an average of 1,800 new sellers that are signing up on Amazon every single day. They have about 0.25 billion product SKUs, just a massive, massive opportunity for Next Tech. And it’s just getting started in Q3.
So no revenue in Q2, the numbers just released, did not include any revenue from this. In Q3, we anticipate a few hundred thousand dollars in revenue as we start to scale with Amazon, and we expect we will quickly grow $1 million in revenue through Q4 of 2022. As we enter 2023, we are gearing up our production for the possibility of doing $1 million a month in Amazon revenue alone. Amazon however is clearly not the only customer we have. Although they are significant in the potential revenue over the coming years, we have other customers that are also quite significant.
We’re currently in talks with some of the world’s largest brands to supply hundreds of thousands of 3D models, Kohl’s, Walmart, Jacuzzi, Fortune Brands, just to name a few. The more contracts we sign with major players, the more Nextech cements itself as the world’s leading supplier for 3D models and the more companies will ultimately see us as such and come knocking on our door.
The business opportunity and demand for Nextech to produce 3D models and AR experiences for retail and e-commerce has never been greater, and we are extremely excited for what the future holds. We will take full advantage of this opportunity. E-commerce is over a $5 trillion global industry, expected to grow by another $1 trillion in the next year or two. And 3D models are fundamentally transforming online shopping. Why? It’s come down to one thing, ROI. There is a 40% reduction in returns, 93% higher click-through rate and up to a 250% increase in conversions. Nothing else comes close to this ROI in e-commerce, not video, not direct messaging, not next day delivery. With our 3D modeling technology, we are perfectly positioned to ride this mega trend for the foreseeable future. We are the on-ramp for Web 3.0 and we have achieved a perfect product market fit with 3D models in e-commerce.
Consumers which really drive the bus, they prefer retailers who have 3D and AR experiences. 3D models are also enabling virtual product photography, which is a huge new business opportunity for us. We are launching this very soon. It will replace product photography for web and e-commerce sites, saving companies millions of dollars and generating significant revenue for Nextech. We offer all these solutions in one integrated platform, one end-to-end solution, which we believe is very, very valuable and becoming more valuable every quarter.
Nextech is creating tremendous value for the e-com ecosystem, and it’s just getting started with this transition to 3D models. It’s only a matter of time. I think it’s going to happen in Q4 of 2022 when the breakout for everything 3D happens, where there’s a FOMO, where companies are going to feel pressure to adopt 3D models. If they don’t, they will feel like they are going to be left behind by their competitors.
Everything today is perfectly aligned for Nextech to experience dramatic growth over the coming year, Google has even come out and they’re supporting us. As mentioned before, they’re now ranking 3D models higher than 2D images imagine if you’re a product that you sell gets ranked higher by Google, that’s the wind at your back. That’s the position that Nextech is in. If an e-commerce site has 3D models on their site, those 3D models will organically show up higher in search results over an e-commerce site that just has 2D images, giving them a huge competitive advantage. And again, creating this FOMO, this massive amount of new demand for 3D models and we are here to supply that demand.
As we improve our AI and 3D model production capabilities, we expect to be able to grow our 3D modeling capabilities by as much as 1,000% in 2023. Now, if you look at what we’ve done to date, we’ve set ourselves up with a SaaS platform strategically integrating with all the third-party platforms, which we’ve talked about previously. This SaaS integration with all of our product lines really has quite significant implications for our scalability and our revenue growth, which is why we made them a priority earlier this year.
We are setting ourselves up for higher annual recurring revenue year-over-year, driven by our monthly recurring revenue streams, month over month. And as reported in our Q2 results, today, we’re up to almost $1 million already in Q2 of 2022. This growth is a huge validation of our efforts to disrupt the emerging multibillion dollar 3D model market. As we’ve previously indicated, 3D models for e-commerce and annual recurring revenue are going to be the area of business that we believe can scale quite quickly. Annual recurring revenue is what investors to pay close attention to in order to measure the health and the growth really, of our company.
Shopify, another big player in the e-commerce ecosystem, believes as we do, the future of e-commerce is 3D. We’ve integrated with Shopify, we continue to pick up customers off of Shopify, we’ve integrated with WooCommerce, BigCommerce, and we basically put our 3D model making solution called ARitize 3D in front of the millions of merchants that are out there globally, which again, positions us in this — in front of this massive 3D model for e-commerce opportunity, which is estimated to be worth $200 billion. Started to emerge really at the end of 2021 and now it’s continuing through the first half and now into the second half of 2022. And we continue to believe that we’re going to win more and more business and as time goes on, capture more and more market share. And we believe that our competitors will not be able to compete for long. Just because we have such a vast array of solutions.
If you look at our solutions, we keep adding more. We are going to soon be adding our CAD to POLY studio, which again is going to be a 3D — essentially production studio for the creation of 3D models from CAD files. You could change the colors in the studio, you could change the mesh, you could change the textures. It’s a full on creation studio, and it’ll have the virtual photography built in as well.
Now apart from ARitize 3D and 3D modeling, Nextech also owns a portfolio of quite valuable companies that contain breakthrough technology and industry disrupting products. We are working towards unlocking the value of these assets and businesses. And that really brings us to our spatial computing platform ARway, which is getting stronger and stronger every single day.
ARway is being spun out, as previously announced. ARway really is a next generation computing platform for the real world metaverse. And it drives new revenue with out of the box augmented reality mapping solutions. It’s a no code platform. Anybody can use it. And we’ve already launched the mobile app. I suggest you if you’re interested, you could download it. It’s just ARway in the App Store. It’s on Google and iOS. And we have an SDK that also was recently launched. We also have a studio. So, you can go into a web based studio and edit maps and create exciting AR experiences.
ARway really opens Nextech 3D AR technology solutions to new substantial markets for use by creators, brands and companies and really extends our reach much, much further beyond just e-commerce. Even though that’s huge, we actually think that there’s even more potential with ARway.
We’ve always been focused since day one on increasing shareholder value, which is why we announced the spin-out of ARway in June. The spin-out will result in our ARway being a standalone public company. And we believe it’ll be the first publicly traded pure-play spatial computing platform, which is quite exciting for shareholders. And I am pleased to update that we are working diligently to bring this transaction to market. It’s quickly moving forward and is anticipated to start trading in October, the Canadian Securities Exchange and shortly after that, on a U.S. exchange.
When the spin out is completed Nextech will receive about 20 million shares that’ll be issued, 4 million of those will be distributed to Nextech shareholders on a pro rata basis. So, if you own shares in Nextech today and you own shares in Nextech, when we spin out ARway, you will get a share for free in the new public company, called ARway. This will give Nextech shareholders ownership in yet another exciting public company with the spatial computing platform, which I believe is perfectly positioned for growth in again the rapidly emerging Web 3.0 world. There will also be zero dilution to the holdings of Nextech shareholders.
As a result of the spin-out, I believe the true value of ARway’s business and technology will get the recognition it deserves and see a positive revaluation, which will benefit Nextech shareholders, which will continue either through their indirect ownership through Nextech, Nextech will remain the largest single shareholder of ARway, or through the shares they get through their dividend.
I’m quite confident that the spatial computing is the technology of the future. It’s the next big thing, possibly even bigger than 3D modeling. And I think it could be the most important technology breakthrough in the 21st century. Because spatial computing essentially merges many disruptive technologies, including 3D models, augmented reality, VR, AI and all the Web 3.0 technologies. It expands the concept of traditional computing by adding a 3D object’s location in space in relation to other objects or locations. And so, when we look at that, we look at our 3D models. And so, we’ve integrated our solutions where you can now be in a spatial map and populate that spatial map with the 3D models that we make for our e-commerce customers, setting the stage for additional business from our e-com customers that also have brick-and-mortar stores.
So, again, we continue to combine tech, integrate tech and create new tech through those integrations, and ultimately creating our moat with this end-to-end solution for creators and brands that’s really unseen anywhere else.
If you look at our future, ARway is only one of many assets that Nextech has incubated with the potential for the development into commercial stage businesses. And so, as ARway — after ARway gets spun out, there is a plan to repeat the business model with some of our other assets, continuing to increase shareholder value. That is the key.
Map Dynamics is another one of our portfolio companies that we are steadily growing. The self-serve event management software solution creates floor plans, you can have ticketing happen if you have an event, a live event, you could buy tickets on Map Dynamics. You could buy a booth on Map Dynamics. And we are seeing a rapid growth in that business. And obviously, one mapping technology merged with the other mapping technology creates synergies, synergies that create value. So, we have integrated AR Wayfinding into Map D so that we now have over 800 customers that we can sell Wayfinding finding to, or live events.
We’ve already done this for Restaurants Canada, for the Restaurants Canada RC Show back in May of 2022. So, we already have a contract with Restaurants Canada. We’ve already mapped out quite a large event, the largest restaurant gathering event in Canada. And we were able to do that by combining our technology. So, quite an exciting time for Map Dynamics.
Moving right along, we are transforming and moving to become a pure play technology company. We’ve announced earlier this summer, back in June that we are positioning the company to the next level of growth, all the stuff that I’ve been talking about, transforming our operations with renewed laser focus on Web 3.0 and our SaaS business. And with that, we have been winding down our legacy vacuum cleaner market e-commerce business. This transformation is the next logical step. It does also represent, when you look at our quarterly numbers, you do see the numbers going down. But that is strictly because we are getting out of the e-com business and knocked — we’ve taken our foot off the gas, and we’re exiting that. And so, if you think about that, you’re going to see a reduction in our product sales business, but you will see a growth, extremely rapid growth in our 3D modeling business. So, it’s important that everybody understand that they’re not related.
And so, as we continue to gain traction, signing new deals, winding down our legacy ecommerce business, we’re now solely focused on our fast-growing, scalable business, which is our 3D modeling technology.
In closing, the first half of 2022 has been challenging. As a shareholder, we all watched small cap stocks get crushed. We watched the market get crushed in the first half of the year, which included Nextech, but the strong companies always bounce back. And I think we have only seen just the beginning of our bounce back.
2022 is proving to be a substantial year of growth for our key growth driver, which is 3D models and augmented reality. Nextech is fully focused on obtaining greater industry leadership and penetration and becoming the world’s leading 3D modeling company, if we’re not that already. To do this, we’ve made crucial business decisions, as mentioned, winding down our legacy VCM business, which will result, again, in short term reduction of our revenue. But again, don’t be alarmed as this was all planned and anticipated. We are now going to be replacing the legacy revenue with pure 3D AR revenue, which we expect will eclipse, eclipse our vacuum cleaner revenue in 2023. We continue to integrate ARitize 3D with third-party ecommerce platforms and roll out our SaaS self-serve products to increase scalability. I believe all these decisions will pay dramatic dividends as the market is finally aligning and soon will recognize the value of Nextech’s groundbreaking Web 3.0 technology and solutions.
The Company and I are also doing everything we can to bring shareholder value — to increase shareholder value. And this is why, again, we’ve decided to spin out ARway. Web 3.0 and the metaverse is a multi-decade, multi-trillion dollar megatrends. And our technology which includes 3D models, augmented reality, and spatial mapping, are the gateway. Nextech’s capture of the market share within this burgeoning industry is just getting started, and I’ve never been more excited and confident about the position our company is in and the opportunity we have before us.
Before turning the call over, I’d like to thank our experienced executive leadership team for their hard work and dedication, and thank every Nextech AR employee working day in and day out striving for success to achieve our Company’s goals. I would also like to personally thank Paul Duffy for his massive contributions to Nextech as President and Chairman of the Board. He and I have been working together for the past four years, and we are expecting to continue working together on ARway. So that Paul can focus, I’ve asked him to step down as Chairman of the Board, while I fill the role and he will become the Chief Metaverse Officer of ARway, which is hugely positive for the spin-out and for Nextech shareholders. I have full confidence in our Company’s direction and I am looking forward to our continued growth in 2022 and beyond.
With that, I’m going to turn the call over to our Chief Financial Officer, Andrew Chan to provide further commentary on the quarterly financials. Take it away, Andrew.
Andrew Chan
Thank you, Evan, and good afternoon. As a reminder, unless otherwise noted, all figures reported on today’s call are in Canadian dollars under IFRS. All the preceding financial information is now available on our website and have been filed on SEDAR at the close of market today for your reference.
Total revenue in the first quarter was $3.2 million, down from $6.1 million for the same quarter last year. These revenues continued to reflect our shift in business from e-commerce and virtual events to 3D AR, the metaverse and Web3.0. Our product sales revenue for the quarter was $2.6 million, down from $4.4 million for the same quarter last year, and down from $3 million in the immediate preceding quarter, reflecting the decision of winding down our e-commerce business and solely focusing purely on technology.
Renewable software license revenues were up 15% to $518,000 this quarter compared to the same quarter last year. And we saw a 40% increase in 3D recognized subscriptions revenue and a 1% increase in revenues related to our hybrid events platform Map D compared to Q1 2022. This is a result of the revenue recognized from our 30% growth of ARR to $991,000 this quarter.
Gross profit also came in lower at $1.6 million compared to $2.3 million for the same period last year but on higher revenues, while we maintained a 52% gross profit margin compared to 38% gross margin compared to the last quarter.
Product sales gross margin saw an improvement from the immediate preceding quarter of Q1 2022, an increase of 55% from 42% as we focused on more profitable items during this wind-down face. Technology services gross profit margins increased up to 37% from 27% in Q1 2021 as the focus now has shifted to the more profitable 3D and AR products. We anticipate gross profit margins to increase even more as we continue to scale the business through these products.
Operating expenses for Q2 was $7.2 million down $1.6 million from the same period last year and down $300,000 from Q1 2022. There are approximately $1 million of significant one-time expenses related to acquisition bonus payments and settlement of employment contract agreement obligations that were expensed this quarter, otherwise there would have been a greater reduction in expenses presented. The decrease in operating expenses in this quarter continues to be from sales and marketing, and research and development expenses, similar to the immediate preceding quarter.
This is a continuation of our effort to shift our growth related to spending to our 3D business. During the past few quarters, we have now restructured our sales force and marketing spend to a more cost effective model for new pursuits in AR sales, which resulted in a 55% decrease in sales and marketing expense compared to the same quarter last year, and a 30% decrease from Q1 2022.
The decrease in research and development cost continues from Q1 to be the result of our shifting and our product development focus to AR products, resulting in overall lower headcount in this area by 34% from the comparative quarter and a 14% decrease from Q1.
As previously mentioned, the $1 million one-time expenses contributed to the $4.5 million of G&A costs. Excluding those costs would result in a $3.5 million expense, which would be flat against the same quarter last year and the immediate preceding quarter. After announcing cost reductions through the latter part of last year, we have made significant progress in achieving net cash used in operating activities of $3 million during the quarter and continue to actively monitor and reduce our expenses where necessary to better align ourselves with anticipated revenues and future growth.
We had a net loss in Q2 of $8.9 million compared to $5.9 million in Q2 last year and a loss of $7.7 million in Q1, driven mainly by the $2.7 million impairment related to the wind down of the e-commerce business. Excluding the impairment, the charge of net loss would be $6.2 million, which is one of the lowest in recent quarters.
As of June 30, 2022, we had cash of $7.1 million, inventory of $2.4 million, and a positive working capital of $7 million. Subsequent to the quarter, our employees signed up for a shares for services compensation plan that will save the Company approximately $1.5 million per quarter, extending our cash runway. And based on our current projections of sales and cost reductions, we feel this is sufficient capital to finance our business over the next 12 months.
This quarter reflects months of hard work from Nextech employees related to cost management and the refocus of our business. I’m very proud of each and every one of the Nextech employees and would like to thank them personally for contributing to and sticking with us through this exciting journey.
With that, I turn the call back over to Evan.
Evan Gappelberg
Thank you, Andrew. On behalf of Next Tech, I’d like to thank everyone for taking the time today to join us on this call, also like to thank all of our employees, all of our shareholders, all of our partners for their continued support as we remain focused on providing long-term value.
Operator, we are now ready for the Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question will come from Lisa Thompson with Zacks. Please go ahead.
Lisa Thompson
Hello, everyone. I apologize in advance for not guessing vacuum cleaner sales correctly for the quarter, which is probably the biggest issue in the miss, which is something I don’t know anything about. You have so much going on, I think I’m just going to narrow it down to a few things. And Andrew, thank you for so much detail on the financials. You answered a lot of questions already. Evan, could you just talk about what needs to be done to get to these higher revenues? And all these orders you have coming in? Like, what physically do you need to do?
Evan Gappelberg
Physically? Hi, Lisa.
Lisa Thompson
Yes.
Evan Gappelberg
So, this isn’t a physically challenging job, it’s more of mentally challenging, but I hear you.
Lisa Thompson
Where you got to write emails and hire people and stuff like that, right?
Evan Gappelberg
Yes. So, we’re pretty locked in as far as headcount, we do not need to add additional expenses. From where we are today, we are in the process of scaling our production capabilities of the models for — today, the customer that’s demanding the most is Amazon. And it really is insatiable. And so — but they’re not the only ones. So, from our standpoint, the hardest part is going to be mapping it out, which we have already started to do on a calendar to be able to meet the demand that is now apparent. And just continuing to meet that demand will be a challenge.
My CTO is working overtime to enhance our AI and machine learning technology. I meet with him now multiple times a week, and he’s creating some take your breath away AI technology that creates 3D models. I don’t want to say, out of thin air, but it’s a whole another level than what we’ve been able to do previously. So, it’s really just improving our technology to be able to meet the coming tsunami of demand.
Lisa Thompson
Okay. And then one question about the virtual product photography. Can you talk about that — is that going to be like an entirely different product line or revenue model or anything like that?
Evan Gappelberg
Yes. So, that’s a very interesting new piece of technology. We are creating a studio, which I think will be launched in September-October timeframe. And within that studio, you will be able to import 3D models, whether we make them from you — for you or you have them already. And within that studio, you will be able to change the color of that 3D model. There’ll be some textures that you can — and it’s literally point and click. It’s kind of a design studio for 3D modeling. And within that, you will have the product photography, so you could stage and create virtual showrooms and use that for catalogs, use it for your website. And it’ll be a SaaS business, where you’ll pay to play, you pay for usage. And so that’s launching. And all of this, Lisa, puts us in a position to be that one integrated platform end-to-end solution, which has always been our dream, but it’s now turning to reality, because we have the dream team.
Lisa Thompson
That sounds good. So, Andrew, my only question on accounting is what’s deferred assets?
Evan Gappelberg
Yes. So, sometimes when we — because our contracts with the models are over ARR, sort of like 12-month period, some of the costs that we incur are kind of upfront. So, it’s really just trying to match better the costs with the revenue that’s coming in over a 12-month period, if not longer, depending on how long customers sign their contracts for.
Lisa Thompson
Okay. So, you’ve created the model, but you’re not going to get paid except over the 12-month period?
Evan Gappelberg
Exactly. Yes.
Lisa Thompson
Okay. All right. Just checking. That was new. Thank you. That’s all my questions for now. I’m glad to see the continued expense reduction. Really doing a great job there.
Evan Gappelberg
Thank you, Lisa. That was a heavy lift. But, it’s done.
Lisa Thompson
Well, I’m sure you get more with the spin-off and then also as the product sales going down.
Evan Gappelberg
Yes, exactly.
Andrew Chan
Spin-off and product sales contributed heavily to that. Again, a lot of thought goes into — the strategy to meet the goals. It’s more mental work. It’s just a complex equation. But, thanks for recognizing that, Lisa.
Operator
[Operator Instructions] Our next question will come from Scott Buck with H.C. Wainwright. Please go ahead.
Scott Buck
Evan, you did a really nice job laying out the revenue cadence for the remainder of the year in terms of the modeling business. But could you give us a sense of what the business mix shift does to gross margin as we exit ’22 and into ’23?
Evan Gappelberg
Yes. It’s an interesting question. I had the same conversation with Andrew this week. So, as time goes on, our gross margin is going to dramatically increase. We do have some upfront costs, as Andrew just mentioned, initially. We are creating the models, and then we’re charging over time for those models. And then we’re adding additional services, like the virtual product photography. And so, as we get deeper into the relationship, as time goes on, the margin goes up as we start to recoup our cost and as we start to sell more software services to the customers. The goal is to be north of 70% in gross margins, but I don’t have a timeframe as to when we’ll achieve that.
Scott Buck
And then, sort of as a follow up to Lisa’s question on OpEx. How much in annual OpEx is tied up in what will be ARway the separate entity? Curious what the cost savings there are just removing that off of your P&L?
Evan Gappelberg
It’s about $100,000 per month, call it $1.2 million.
Scott Buck
Okay, great. That’s helpful. And then last one for me, just on a timeline for the spin. It sounds like October, but can you remind us what steps need to take place between now and then, are there new approvals you’re waiting for, are there shareholder meeting? I mean, what do we need to just keep in the back of our mind?
Evan Gappelberg
Yes, Andrew, can you lay that out for Scott, please?
Andrew Chan
Yes, exactly. So, there’s obviously working with the CSC and so have to get through that process. This will be kind of brought forward, as like you said, shareholder approval at the AGM, which is scheduled kind of, I believe in early October. And so, those are kind of the barriers, the two main barriers that we have to achieve — or have to go through.
Evan Gappelberg
Yes. I would just say, Scott, there are less barriers than checking the boxes in terms of timing. We are pretty confident. We are working with counsel and in constant contact with them. And so, this is something we have actually done before, and we are doing it again. So, we do have a playbook. So we’re pretty confident with the timing going into October.
Andrew Chan
Yes. Sorry, I didn’t mean to use the word barrier. Everything is going kind of to plan at this point. It’s just procedures that we have to go through at this point.
Scott Buck
I appreciate that. And Evan, I guess, one more question. When we think about the modeling business in 2023, what do you suspect Amazon will be in terms of total revenue in that business? Just trying to get a sense of customer concentration.
Evan Gappelberg
That’s a good question. I don’t have a clear answer as we stand here today. But my guesstimate is that, it will be north of 50% of our revenue. It could be a lot more. There’s multiple streams of opportunity with Amazon, one being the 3D modeling and there is a couple of others that are equally as large that we are exploring with them. It truly is a partnership. And so, we are working together to try and solve some of their problems, which is meeting demand essentially. And so, it’s hard to gauge, but it’s going to be significant.
Scott Buck
Okay. I appreciate the color there. And congrats on the progress, guys.
Evan Gappelberg
Thank you, Scott.
Operator
Our next question will come from Dan Stevens. [Ph] Please go ahead.
Unidentified Analyst
Good afternoon. I wondered if you could share a little bit more information about the shares for service plan. Specifically, do you have any idea how many shares you are going to be issuing per year for this plan?
Evan Gappelberg
So, we actually filed the shares for services plan. So, it’s all public information. You could find the filing. And we don’t have an exact number because it varies, based on the share price. So, if the share price goes up dramatically, there will be a lot less shares. If the share price goes down dramatically, there could be — well, not more, but it’ll swing. There is a limit, cap of about 7 million shares. So, that would be the cap at this stage.
Unidentified Analyst
So, that would be 7 million for a year, or just altogether?
Evan Gappelberg
No, no, not necessarily. That would be — as we are talking today, the program that we have in place allows for approximately 7 million shares to be issued over the next 12 months. Yes.
Operator
[Operator Instructions] Our next question will come from Michael Farra. [Ph]
Unidentified Analyst
Hey. Good afternoon, everybody. And,, Andrew and, Evan, good afternoon to you as well. Hope you guys are doing good. Thank you so much for the presentation. It was very good, very informative. And I really liked Lisa’s question. Evan, you got to do more physical stuff in that business, buddy.
Evan Gappelberg
Yes. I’m going to get my shovel…
Unidentified Analyst
Just a quick, just one question. Can you give us an update on the patent situation? Have there been any correspondence from the USPTO in terms of office action letters? And I guess, a B part to that would be, are there any new patents that may be filed in the coming months?
Evan Gappelberg
So, there’s nothing new. We did file four, possibly five patent applications. So, we’ve filed those, and they’re still — we’re still waiting. It does take time. We are working on some new patents as well. And so, ARway has the potential to have a number of patents filed after that is spun out.
Unidentified Analyst
Okay. Do you know if your counsel is taking any kind of fast track with the five patents that you did file?
Evan Gappelberg
We always take the fast track.
Unidentified Analyst
Right. Okay. Yes. And I understand having been in that business that it definitely — it rolls at the speed, they roll out. So, last question, just really quick. On the spin out, how many shares do you anticipate? And again, of course, it’s a pro rata situation. But how many shares would you anticipate? So, if somebody owned 100,000 shares, how many shares of the new entity as a dividend would they get?
Evan Gappelberg
It’s approximately 4%.
Unidentified Analyst
4% of what you currently own?
Evan Gappelberg
Correct.
Unidentified Analyst
Got you. All right. Well, thank you so much. Please tell your team, as I always say, to thank them for all of their dedication and things are looking good. Let’s get the ball rolling.
Evan Gappelberg
Thank you.
Operator
And with no further questions, I’d like to turn the call back over to Evan Gappelberg for closing remarks.
Evan Gappelberg
Well, just thank you all for joining us today. We appreciate your questions. We appreciate your investing in Nextech. And we look forward to doing this again in Q3. Everybody, have a great night. Bye, bye.
Operator
And this will conclude today’s conference. Thank you for your participation. And you may now disconnect.
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