Kopin Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Copper Corporation Second Quarter 2023 Earnings Call. Please note that this event is being recorded. At this time, I'd like to turn the conference over to Quinn Cullinan, Investor Relations for Cowen. Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone. Before we get started, I'd like to remind everyone that during today's call Taking place on Thursday, August 10, 2023, we will be making forward looking statements as defined in the Private Securities Litigation Reform Act of 19 95. These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties that could cause Actual results to differ materially from those forward looking statements. Potential risks include, but are not limited to, Demand for our products, operating results of our subsidiaries, market conditions and other factors discussed in our most recent annual report on Form 10 ks and other documents filed with the Securities and Exchange Commission.

Speaker 1

Although the company believes that the assumptions underlying these statements are reasonable, looking statements made during today's call. In addition, references may be made to certain non generally accepted accounting principles or non GAAP measures for which you should refer to the appropriate disclaimers and reconciliation in the company's SEC filings and press releases. Copen Corporation's Chief Executive Officer, Michael Murray, will begin today's call with an overview Of Kopin's progress within the company's strategy, following Michael, Kopin's CFO, Richard Snyder, will review the company's Q1 results. I would now like to turn the conference over to Michael Murray.

Speaker 2

Thank you, Quinn. Good afternoon to everyone and welcome to our 2nd quarter earnings call. I'm proud to announce we turned in $10,500,000 in revenue for the quarter, which was also our 3rd consecutive positive book to bill quarter. And with our recent announcement of an approximate $12,800,000 order, our 3rd quarter book to bill is off to a very good start. I do want to highlight that beyond revenue, we were successful in our disciplined operations and managing the factors that were within our control and within our transformation plan.

Speaker 2

I'd also like to briefly discuss 2 areas in the P and L, the first of which is elevated legal costs, a portion of which is associated with our new patents and trademark development, but mostly due to a litigation which began in 2016. Details of the litigation are discussed in our recent 10 ks and 10 Qs. But in summary, we are scheduled for trial in the Q1 of 2024 We remain confident in our position. The second item was a $3,300,000 non cash charge related to our equity investments whose valuations we review quarterly. These two items on the P and L had significant negative impact on earnings per share.

Speaker 2

Without these items, Our loss would have been approximately $2,900,000 or 0 point 0 $3 a share. For reference, this compares favorably to our Q2 of 22 earnings per share loss of $0.06 This quarter is another data point that we are continuously improving the core operations significantly. Again, outside of these items, our operations showed significant improvement and we remain hyper focused on controlling what we can control with regards to our strategic initiatives, operational discipline and growth objectives. Since we spoke last, we have gained several new investors recently. And for those who are unfamiliar with Kopin, I'll briefly remind everyone who Kopin is, What we do and who we sell to.

Speaker 2

After that brief overview, I'll touch on some strategic initiatives and discuss this last quarter and some opportunities on the horizon before turning the call over to Rich. Now for those new to Kopin, we design and manufacture several different types of microdisplays, Including our proprietary AMLCD technology, our broad portfolio of OLED displays, our FL cost displays and our recently announced MicroLED technology. Now what makes Kopin unique and valued by our customers is our ability to couple these types of display technologies with advanced optics, drive electronics and housings to solve our customers' needs in defense, commercial and consumer applications. We believe we were the only company with the core capabilities and competencies in each of these display technologies enabling us to objectively provide the right solutions for our customers. Our products are the overlay of critical digital information on the analog world and we continue to see the adoption and application of objects continue to broaden as new industries are Today, Kopin applies this expertise as a vital supplier for many of the world's largest defense contractors.

Speaker 2

Now still, We also look to capitalize on consumer, automotive, medical and industrial opportunities as they adopt these technologies as well. Touching on some of our strategic priorities, we saw tremendous improvement in our quality measurements last quarter, which we refer to as on time in full or OTIF for short. OTIF measures how often we deliver products to a customer on time in total and without any quality issues as judged by the customer. This focus on quality ultimately leads to a more profitable Koppen by improving margins, Higher customer satisfaction and repeat in future business. We continue to see dividends from the focus in the Q2 of this year as our product costs stayed low, Our incoming inspection improved and our supply chain continued to normalize.

Speaker 2

We expect further improvements ahead as we increase volumes, Automate manual processes and improve absorption rates and we continue to focus on total cost management. Much of our manufacturing takes place within our Class 1 100 clean room. The cleanliness of the air within our manufacturing facility greatly impacts our ability Keep product quality high. During the quarter, we saw improvements in air quality as we installed several new pieces of equipment and implemented some further operational changes. I'm happy to report that our on time and full rates are now in the 90% range on a consistent basis.

Speaker 2

Consistency in this area is greatly important and contributes to our by our employees and less yield and quality losses. Now indeed, we have more to improve upon and accomplish. However, I am proud of our team, our progress over the 1st 6 months of 2023, and I'm greatly encouraged by the positive comments received from our top customers that they are experiencing a much improved, reliable and customer focused Koppen. Cost discipline remains a priority as well beyond quality improvements. We continue to scrutinize internal R and D projects and the profitability of any funded R and D we take on.

Speaker 2

We began to see returns on this new approach to funded R and D as a profitability in this area dramatically improved relative to 2022. Internal R and D expenses remained low relative to past periods as we formalize Reducing R and D spend doesn't imply that Kopin will not Stay on the forefront of display and optical technology, but rather that our efforts are directed to those projects with the best chances of success, Value creation and capture. An excellent example of our new approach is the partnership with the MIT Computer Science Artificial Intelligent Laboratory or CSAIL for short. We announced this in the second quarter. The goal of this program is to integrate AI capabilities into our products to solve the problems which have been limiting the success of AR and VR products.

Speaker 2

This activity will augment current research and developments in these areas of displays, optics, software and algorithms. By joining MIT's CSAIL program, Kopin becomes part of an elite group of members in non competitive markets that share information and capabilities for functional integration and deployment of application specific AI capabilities that bring additional value to the products we design and manufacture. We look forward to actively participating in this group and we will help improve our solutions and solve several of the human centric computing issues of today. Joining this organization also brings Cope in full circle having been spun out of MIT almost 40 years ago. Now I'll provide some updates on key programs since the last time we spoke and some opportunities we see on the horizon.

Speaker 2

As per our previous calls, Kopin is unique in that our OLED backplane technology does not require a custom deposition process. This allows us to utilize multiple deposition fabrication strategies globally. Within the quarter, we announced new agreements for OLED which utilize U. S. DoD approved vendors.

Speaker 2

I highlight this announcement as this event has been misunderstood by some in the investment community. So to clarify, by adding these new vendors, Kopin can support U. S. DoD customers with our current and broad portfolio and future OLED devices. At the same time, for our non DoD OLED customers, We will continue to work with our existing OLED deposition partner in Asia.

Speaker 2

This dual strategy enables us to provide the lowest possible cost to our Customers in automotive, consumer, industrial and medical markets, while also supporting our U. S. DoD sovereign supply chain requirements. With recent shifts in competitive landscapes, we are seeing a dramatic uplift in both consumer and defense opportunities alike due to this strategy. In early June, Kopin introduced our first microLED display.

Speaker 2

This microLED is an ultra high definition monochrome version that provides millions of nits of brightness. It's difficult to describe just how bright a display with several 1,000,000 nits of brightness is and it's truly a wonder of engineering achievement. By comparison, many of the new ARVR headsets that use OLED displays, as an example, only offer 5000 to 10000 nits of brightness These manufacturers of the devices recognize that to offer better brightness, contrast, thinner and lighter weight designs, A much stronger light engine and bespoke optics are required. We believe microLEDs will enable these key requirements and bespoke optical solutions And they are the future of wearable display technology. Kopin is undoubtedly the vanguard of microLED development as we continue to develop our Color MicroLED display portfolio.

Speaker 2

Earlier this week, We announced a follow on order for 1 of our IP sub assemblies to a Department of Defense prime contractor that integrates our IPs into a sophisticated video AR module. This $12,800,000 follow on order represents a significant increase in year over year volume and revenue from the strategic customer and we expect further additional follow on orders for the same product as well. This order is the result of improved customer engagement, program management focus and on time and full processes and a great customer who's been patient in supportive of Kopin and our transformation plan. Recently Kopin has been informed of our success and being down selected for several new dismounted soldier projects. We are now in the final stages of submitting formal proposals We expect to receive feedback on those strategic pursuits in the next few quarters.

Speaker 2

Turning to our General Dynamics Armoured Vehicle Upgrade program. To remind folks, this program is in the final quality review process, which is called Production Part Approval Process or PPAP for short. And we expect this program to be significant revenue for Kopin. The program continues to progress well and is a perfect example of the parenting advantage Coking can bring to our customers. In this specific case, We were selected for the program because we were able to offer the right system technology for the application.

Speaker 2

In this specific use case, the best display was an FL Cos display developed by our team at 4th Dimension Display in Scotland. The DRIVE electronics and optics were developed at Kopin in Westborough, Massachusetts and the complete system prototypes were developed and designed by our talented team of Envest in Virginia. The final system will be built at Copen and Westboro and this assembly sells for tens of 1,000 of dollars each and There are several assemblies per vehicle multiplied by several 1,000 vehicles, which we expect to be upgraded equates Well over $100,000,000 in potential revenue for this program over the period of performance once in production. Now turning from land systems to air systems. Our low rate initial production or LRIP rotary wing and fighter aircraft helmet OLED programs remain on track and we expect several milestones in the coming quarters.

Speaker 2

Furthermore, we are continuing to see strong demand in military training and simulation markets With both new and repeat orders for a variety of products serving this market, now training proceeds deployment and the broader issues in Europe among other regions are driving increased demand for these products. Turning to the 3 d AOI market. We continue to experience weaker demand in the Chinese Commodities, Semiconductor and Industrial sectors. We expect this part of the market to remain weak through the remainder of the year. There are modest demand signals from our high performance customers though, however, in Europe and the Americas.

Speaker 2

Lastly, we continue to experience increased customer design and proposal demands in both defense and consumer markets. With recent consumer announcements in ARVR headsets and continued human centric issues slowing higher adoption rates in both markets, customers are turning to Kopin to help them solve some of the most significant application specific human centric issues their end users are experiencing. Kopin has decades of experience solving these specific issues relating to optically induced nausea, comfort and performance of Head and Helmet Worn Systems. We expect these efforts will result in new business with current and new customers as we introduce exciting new technologies in these So now I'll turn the call over to our CFO, Rich Snyder to review our results in further detail. Rich over to you.

Speaker 3

Thank you, Michael. Turning to our financial results, total revenues from Q2 2023 were 10 point $5,000,000 versus $11,900,000 for the prior year, a 12% decrease year over year. Product revenues for the Q1 ended July 1, 2023 were $6,000,000 compared with $9,000,000 for the Q2 ended June 25, 2022, a 33% decrease year over year. Decrease in product revenue was driven by a $2,000,000 or 28% decrease in defense revenues $749,000 or 43% decrease in industrial revenues over the prior year. As we previously announced, we have an additional $12,800,000 order For defense, and we're reviewing lead times on materials to understand the potential positive impact on Q4 2023 revenue.

Speaker 3

Regarding industrial products revenues, we believe that lower they will be lower due to less demand from China. Funded research and development revenues were $3,900,000 for the Q2 of 2023 compared to $2,800,000 for Q2, a 39% increase. The increase in funded R and D was largely due to an increase in Funding for display systems initially used in U. S. Defense programs.

Speaker 3

Cost of goods sold for the Q2 of 2023 was 5.7 1,000,000 or 95 percent of product revenues compared with $7,900,000 or 88% of the 2nd quarter last year. The increase in cost of product revenues as a percent of product revenues was the result of lower efficiencies from reduced product sales volumes as well as year over year increase in non cash stock compensation of 415,000 Excluding the increase in stock compensation costs, cost of product revenues would have been 88% of net product revenue. R and D expenses in the Q2 of 2023 were $3,100,000 compared with $5,100,000 during the Q2 of 2022, a 39% decrease year over year. Funded R and D expenses for Q2, 2023 was $2,200,000 as compared to $3,200,000 for Q2 2022. The decrease in expense was a result Certain U.

Speaker 3

S. Defense programs moving to production and a reduction of some of the funded OLED development costs due to the spin out in the Q1 of 2023 of certain OLED activities to lightning silicon. Internal R and D expense for Q2, 2023 was $939,000 as compared to $2,000,000 in the Q1 of 2022. The decrease in expense was a result of decrease in OLED development activities and more stringent criteria for IR and D programs that Michael spoke up earlier. SG and A expenses were $6,500,000 in the Q2 of 2023 compared to $4,300,000 in the Q2 of 2022.

Speaker 3

The SG and A increases for the 3 months ended July 1, 2023 as compared to 3 months ended June 25, 2022 was primarily due to legal expenses of approximately $2,400,000 for the Q2 of 2023 as compared to approximately $200,000 for the Q2 of 2022 and bad debt expense of approximately 300,000 For the Q2 of 2023 as compared to bad debt recoveries of approximately $200,000 for the Q2 of 2022. These increases were partially offset by lower information technology spending of approximately $100,000 for the Q2 of 2023 as compared to $200,000 for the Q2 of 2022 and post retirement benefits, which were 0 in the Q2 of 2020 as compared to $200,000 in the Q2 of 2022. Other expense was approximately $3,300,000 for the Q2 of 2020 compared with $141,000 for the Q2 of 2022. In the Q2 of 2023, we recorded Foreign currency losses of $236,000 and a non cash impairment loss on equity investments of $3,300,000 Turning to the bottom line, the net loss attributable to Kopin during the Q2 was approximately $8,200,000 or $0.07 per share compared with $5,600,000 or 0.06 dollars per share in the Q2 of 2022. Net cash used in operating activities for the 3 months ended July 1, as compared to $12,600,000 at December 31, 2022.

Speaker 3

We have no long term debt. The amounts we've got above are based on our current estimates and listeners should review our final Form 10 Q for the quarter ended July 1, 2023 for any possible changes and of course for additional disclosures. And with that, I'll turn it back over to Michael for closing remarks and then we'll take questions.

Speaker 2

Thanks, Rich. Our focus continues to be on strengthening the order book, Achieving higher on time and full rates, cost controls and making the strategic investments in products and people, which in the aggregate will improve cash flow and provide long term sustainable profitability and growth. Lastly, yet most importantly, we are fortunate to have world leading and market making customers who are supporting Kopin during this transformational period. Due to our quality improvements over the past Several quarters, additional executive management focus on strategic customer relationships and the addition of experienced business development program managers, Kopin is now being invited into larger design opportunities that will allow us to move up the value chain within our customers' applications, solving more of their technical challenges and increasing Kopin's content in their designs. I'd like to thank everyone for your time today and for showing interest in Kopin.

Speaker 2

I'd like to thank our employees and our stakeholders for their hard work and dedication. With the continued work of our team here at Kopin, I think we can achieve great things And with that, operator, we will now offer some time to take some questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question comes from Matt Sheerin of Stifel.

Speaker 4

Yes. Thank you and good afternoon. A couple of questions. Michael, just on the revenue side, You talked about a lot of the opportunities. It sounds like those are opportunities 2 or 3 quarters out, That new $12,800,000 program you talked about, but how should we think about the next quarter Or to in terms of top line, are you expecting sort of a similar revenue profile or would there be some recovery in The back half of the year.

Speaker 2

Hi, Matt. So the question was, how would we think about Q3 and Q4 with the 12 $8,000,000 order as well as the market dynamics. So in our best estimates, Q3 looks about the same revenue profile. We're currently working the order that we just received to see what we can pull in because they do invite early deliveries. So we're working We do see potential uplift in our Q4 revenues from that order as well as some other pull ins that we're hearing from the Training and Simulation market.

Speaker 4

Okay, great. And You talked about the revenue breakdown, R and D versus product and R and D has been growing and product has gone The other way, at what time do you at what point, do you expect that to shift as some of the those R and D pilot programs go So full volume. And is there any impact on gross margin or operating margin when it goes to sort of Full volume contract basis?

Speaker 2

Indeed. So we have a number we have several Projects going from funded research and development into LRIP in the latter half of this year and the beginning of 2024. We do believe that Those programs as they transition through not only will they have revenue impact in terms of increase, but we do expect some operational expenses At the beginning of the Q1 to support those. However, the margins of those programs should consume that operational expense just fine. So there will be a transition from funded research and development in Q4 and Q1 into production as those LRIP products actually hit production.

Speaker 2

Does that answer your question?

Speaker 4

Yes, that's helpful. And then below the line, just some questions on the expense line. That legal of those legal fees are $2,400,000 How should we think about over the next of quarters, it sounds like you said it's going to go to trial early next year. So I would expect expenses maybe even go higher. And if you go to trial and when, Can you recover those legal costs?

Speaker 2

I think the legal costs that we're seeing right now for This quarter were larger than what we had expected. I won't go into why, but I think they will normalize back to The previous type of expense you've been seeing from us after Q1. But I think Q3 and Q4, I don't think the cost will go higher than what you saw in Q2. We also had some trademarking and patenting In the period and we'll have a little bit of that in Q3 as well, which did add to the expense. But We think we are in a good place with that lawsuit and we're expecting to be victorious in that position In Q1, whether or not we can recoup our legal fees, I don't know, hard to say at this point.

Speaker 4

Okay. So just to confirm then, then the OpEx should be we should be thinking about a $6,000,000 or above the next couple of quarters and then going down after that. Is that fair?

Speaker 2

I think that's fair. I think it will come down in Q3 anyway, Is what our sense is currently, but it won't be by much. So I think it's a fair statement.

Speaker 4

Great. And offsetting that was your gross margin Was up significantly quarter on quarter and year over year. Is that also sustainable as we get through the next couple

Speaker 2

We have worked with Several of our customers to increase our prices. So I believe our gross margins will remain stable Increase over time. The reason why is we've gone back to some of our customers where there's been scope creep. There's been No inflation increases or there has been acceptance criteria that we needed to charge for. And for the most part, we've been successful where it made sense.

Speaker 2

So I believe our margins will continue to increase to a reasonable level And therefore, so will our profitability.

Speaker 4

Okay, great. All right. Thanks very much.

Speaker 2

Thank you, Matt.

Operator

The next question comes from Glenn Mattson of Zayden Group Thalmann.

Speaker 5

Hi. Thanks for taking the questions. So congrats on the $12,800,000 order. That was nice to See, but I don't want to talk about that a little bit further. But before we get to that, just a little more detail on Product revenue and kind of although the total top line came in line, it Felt like the product revenue is a little lighter than I would have expected.

Speaker 5

And I'm trying to think about the number of programs, some of which have moved into LRIP and some of which are full production and just kind of get a sense of have any of those and I realize these they could be lumpy from time to time, but it sounds like There's a quarter or 2 here where it's a little softer. So I'm just curious if it's if there's just some cadence of order flow in that front or some more color there would be great.

Speaker 2

Sure. So there's no change in demand. Let me be clear on that. Our customers are not communicating any changes in demand. There are from time to time material issues and or push ins, push outs because of our customers' customer requirements either through Testing, qualification, quality issues down the line outside of Kopin.

Speaker 2

So we did see some of that in Q2, where some of our customers were asking us to Hold on while their end customer had either quality or timeliness issues because we're a small system and a subsystem of a larger system if So I think the main thing Glenn moving forward in Q3 and Q4, there's no changes in demand. In fact demand is moving In our favor into Q4 with this larger order, I think it's important to note that early deliveries are request And supported. So I think we can do better in the second half of the year. And I think there was also in Q2 a mix change where we were doing a little bit more of international business and focusing in on that versus that of more of the U. S.

Speaker 2

DoD type of Product line. So that's why you saw a bit of change in the profitability as well as the overall

Speaker 5

revenue. Rich, anything

Speaker 2

you want to add to that?

Speaker 3

No, I think that but the point is that it is somewhat Counterintuitive that we saw defense revenues decline when in fact our order book for defense is Probably the best it's been in several years. So as Michael indicated, we're not always the Captain of our own fate. We do get comments from our customers asking us to hold shipments or whatever have you For whole varieties outside our control.

Speaker 5

Great. Thanks for that color. Moving on to the large order you announced yesterday, the A little more detail and maybe you can't because it's maybe a program that you're not allowed to discuss that much, but it reads that the headline is the thermal weapons So, but then you talked about kind of a video AR pancake optics. Can you is this something you have seen revenue from before? Or is this a new program or just An offshoot of existing, can you just give us a little color there?

Speaker 2

Sure. Existing program, existing customer And they're seeing what I believe is increased demand on their side. And so therefore, we're seeing it as well. That's about all I can say.

Speaker 5

Okay. Great. That's it for me. Thanks guys.

Operator

Thank you. The next question comes from Kevin Dede of H. C. Wainwright.

Speaker 6

Afternoon, gentlemen. Thanks for having me. Michael, back to Glenn's question on the this most recent thermal weapon site order, $12,800,000 I think you noted as being the largest of 3. I was just wondering Or actually, no, the most recent of 3, but I'm wondering if it's the largest. And I guess how long you'd expect It would take Kopin to work through it from a sales perspective.

Speaker 2

Sure. Our view is that this is a significant year over year volume increase for us, roughly speaking about 40% year over year increased volume. Therefore, that equates to the same revenue, roughly speaking. And we believe that that period of performance for this order will start this Pardon me, Q4 of this year into 2024 and be concluded in 2024 is what the customer is And the customers requested as many units as they can get as soon as they can get them. So that's great news for Koping.

Speaker 2

So we will be looking at how we can increase volumes and production in the facility here to support our customers' mission in that case.

Speaker 6

Helpful. Thank you, Michael. Looking at the Abrams PPAP,

Speaker 5

can you For a little

Speaker 6

more insight on the timeline there, when do you think that goes to I imagine the next step is LRIP and then From there full production and how we might address timing to that $100,000,000 Total addressable contract market you referenced?

Speaker 2

Sure. So we've hit our milestones thus far. We expect to hit the milestones in front of us throughout this year. We'll gain more clarity into our end customers' plans. Now the PPAP is essentially what we would consider LRIP.

Speaker 2

It's the last stage of their quality review And it's more of an automotive standard, which is good for us because that sets us up for other automotive business or other armored vehicle business, which is great. But we'll have more visibility, I'd say, in the next couple of quarters as to what their program management team is going to be requiring for implementation of the upgrades. So, it's a little bit murky right now. I don't have a clear answer for you other than to say, we're still hitting our marks and our milestones On that process, it's going great.

Speaker 6

And in that, you're the exclusive supplier? Indeed, we are. Okay. More of a 20,000 foot perspective, but you alluded Many times in your prepared remarks to this transitional period that Kopen that you're working with Kopen and your senior managers through, I was wondering, I know you don't have a crystal ball, but I think yours is certain clearer than mine. Mine looks more like a bowling ball.

Speaker 6

I was just wondering if you could offer what you might Or how you might recommend we consider this transitional period to last?

Speaker 2

My view and Rich and I have talked about this along with the executive team and Board at Kopin, 2023 is a positional year and a transformational year and There's a great deal of effort going on internally around our culture, our people and talent agenda, our organization, and our focus. And we've taken this year to really be inward focused to make sure that we're ready for 2024 2025 Because as we've talked about Kevin, 2024 is going to be a significant revenue year for Kopin and 2025 is going to be an even more significant Your next question comes from the line of John Koppen. Hi, good morning, everyone. I'm going to Q3 book to bill, which would be 4 quarters in a row of positive book to bill. So the order backlog is all there to have great revenue growth over the course of 2024 and 2025, the focus has been and continues to be building on time in full And delivering that revenue at great gross profit and margins for our shareholders.

Speaker 2

That's what 2023 is about. And I'm happy to report and I've said this before, we're on track slightly ahead of some of our strategic initiatives around the path to profitability on time and full, Some of the strategic initiatives and pursuits that we have and also our development around our technology. So You're going to hear more about that in Q3 and Q4. There are some announcements that we're excited to put out in the market when they're ready. And I think we'll hit 2024 in full stride.

Speaker 2

That's the plan.

Speaker 6

Okay. Thank you for the additional perspective, Michael. Appreciate it. And just sort of a follow on in that thinking, Rich alluded to with the reversal of comp accrual, the product margin would be in the 12% range, which I think is down a little sequentially from March. Do you think I'm just looking Maybe too short a period to evaluate your transition from I think all last year product margin was negative.

Speaker 3

Well, Kevin, let me just take that for a second. If you look at it right, so we have an overhead as a semiconductor overhead is a very significant piece of our overall cost and overhead has 2 places to go. It's either going to end up in inventory or cost of sales via sales. If you look at our Q2 results, vis a vis Q2 of last year and Q1 of this year, If you combine the inventory and sales, you'll see that as those are the 2 places to absorb overhead, Q2 is down significantly compared to those, But yet we maintained margin, which means that we're greatly increasing efficiencies. Or to put it another way, Had this been had you been working with the efficiencies of 2022, we probably would have had significant negative margins.

Speaker 6

Okay. That's exactly where I was going, Rich. Thank you. All right. Last question for me.

Speaker 6

I'm sure you're relieved. Just maybe a

Speaker 5

little more color on how Quickly, you think you may be

Speaker 6

able to adopt MIT's assist on the AI side in addressing the nausea A problem that you alluded to, Michael. And whether or not you think it transcends consumer and helps you in

Speaker 2

Great question, Kevin. Whether you're a war fighter, a gamer, a doctor, Everyone using a see through optic or ARVR glass has the same issue And that is the human brain interprets video information or site issue information differently. We all focus on building the greatest display type technology and we think that will solve the day. In reality, What we're going to do is different than that. We still are going to make fantastic displays 4 ks, 8 ks, 16 ks, 30 whatever it is.

Speaker 2

But what we're going to do is match the Technology to the human, not the human to the technology. And that I think is what you're going to hear from us in Q3, Q4 and 2024 We're going to take our technology to the human as opposed to the other way around. So that's why we signed up with MIT and CSAIL program, we are sitting on the shoulders of giants in that program. If you look at some of the contributors to that program, they're the best of the best in the industry and we'll be working with them to solve these human centric computer issues, so that folks can use our technology more easily, More readily and with much more comfort than they ever have before because that's what's gating the adoption rates of ARVR glasses in consumer As well as military and medical. So those are the problems that we're going to attempt to solve.

Speaker 2

The great news is we have all the technology that we need. The piece that we're missing is the AI algorithm development side of things and no greater place than in my TC Sail to work on that technology and we continue to invest in it. It's a program that I started the day that I started at Kopin And we're very excited about it and we'll be sharing more with you in the coming quarters.

Speaker 6

When you look at your modules, Michael, Are they extensible in handling the computations? Or will it require, I guess additional integration with a partner?

Speaker 2

I think the latter. I think It will require certainly more sophisticated computers that Our computational algorithms that we currently cannot do in our backplane technology, but we do have a plan for that. I think the technology is available. We know how to use it. I think what's Missing for us is really the algorithm development and the ability to trial and test our theories In an environment with others that's useful and non competitive, and everyone in that program is working in the same So I don't think it's a technology problem so much that we can't Traverse, I think it's more of an awareness problem and a use case and commissioning issue that we need to solve.

Speaker 2

And over the next couple of quarters, you're See and hear how we're going to solve it as Koppen. And I'm very impressed with the level of interest that we've gotten already on This new technology platform, which we'll introduce, like I said, in the next couple of quarters, we're working with a few select handful customers To bring this forward, one of them is classified, the other one is a consumer company and we hope to have something signed with those folks very shortly.

Speaker 6

Well, I apologize for misleading you and thinking I

Speaker 5

was going to let you off the hook early, but

Speaker 6

I do appreciate the effort, Michael and Rich. Thank you very much.

Speaker 2

Thanks, Kevin. Good talking with you.

Operator

Thank you. Gentlemen, that was the final question. I will now hand over to Michael Murray for closing remarks.

Speaker 2

Thank you, operator. Well, Q2 was a very interesting quarter for Kopin. We've made significant progress as a team, a company. Our customers are enjoying a higher on time and full rate And we believe this trend will continue through Q3 and Q4 and we look forward to updating you on our progress on the next call.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for attending and you may now disconnect your

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Earnings Conference Call
Kopin Q2 2023
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