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Operator
Good afternoon, everyone, and welcome to Coffin 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 Clint Callinan, investor relations for Coffin. Please go ahead.
spk03
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 10th, 2023, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. 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-K and other documents filed with the Securities and Exchange Commission. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven inaccurate, and there can be no assurances that the results will be realized. The company undertakes no obligation to update the forward-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 Copen's progress within the company's strategy. Following Michael, Copen's CFO, Richard Snyder, will review the company's first quarter results. I would now like to turn the conference over to Michael Murray.
Michael Murray
Thank you, Quinn. Good afternoon to everyone, and welcome to our second quarter earnings call. I'm proud to announce we turned in $10.5 million in revenue for the quarter, which is also our third consecutive positive book-to-bill quarter. And with our recent announcement of an approximate $12.8 million order, our third 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. I'd also like to briefly discuss two areas in the P&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 first quarter of 2024 and remain confident in our position. The second item was a $3.3 million non-cash charge related to our equity investments, whose valuations we review quarterly. These two items on the P&L had significant negative impact on earnings per share. Without these items, our loss would have been approximately $2.9 million, or $0.03 a share. For reference, this compares favorably to our second quarter of 2022 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 Copen, I'll briefly remind everyone who Copen is, what we do, and who we sell to. 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 Copen, we design and manufacture several different types of micro displays, including our proprietary AMLCD technology, our broad portfolio of OLED displays, our FL cost displays, and our recently announced micro-LED technology. Now, what makes Copen 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 optics continue to broaden as new industries are discovering ways to use these technologies to improve their and customers' user experience. COPEN is at the forefront of optical advancements, creating innovative technologies that have enhanced how people interact in their environment, both real and virtual. Today, COPEN applies this expertise as a vital supplier for many of the world's largest defense contractors. 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 coping by improving margins, higher customer satisfaction, and repeat in future business. We continue to see dividends from the focus in the second quarter of this year as our product costs stayed low, our incoming inspection improved, and our supply chain continued to normalize. 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 100 cleanroom. The cleanliness of the air within our manufacturing facility greatly impacts our ability to 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. Consistency in this area is greatly important and contributes to our customers' happiness, and ultimately, the amount of their business Copen receives. Higher on-time and full rates also allow Copen to operate more efficiently, requiring fewer touch points 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 first six months of 2023, and I'm greatly encouraged by the positive comments received from our top customers that they're experiencing a much improved, reliable, and customer-focused coping. Cost discipline remains a priority as well, beyond quality improvements. We continue to scrutinize internal R&D projects and the profitability of any funded R&D we take on. We began to see returns on this new approach to funded R&D as a profitability in this area dramatically improved relative to 2022. Internal R&D expenses remain low relative to past periods as we formalize the R&D investment criterion investing only in projects with a high probability of success, sustainability, and that offer more than just a great display, which we still make. Reducing R&D spend doesn't imply that Copen 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 and Artificial Intelligence 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. This activity will augment current research and developments in these areas of displays, optics, software, and algorithms. By joining MIT's CSAIL program, COPEN 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 COPEN 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. As per our previous calls, COPEN 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 deposition which utilize U.S. DOD approved vendors. I highlight this announcement as this event has been misunderstood by some in the investment community. So to clarify, by adding these new vendors, Copen 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. 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 USDOD 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, Copen introduced our first micro LED display. This micro LED 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 million nits of brightness is, and it's truly a wonder of engineering achievement. By comparison, many of the new AR VR headsets that use OLED displays, as an example, only offer 5,000 to 10,000 nits of brightness, and 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 micro LEDs will enable these key requirements and bespoke optical solutions, and they are the future of wearable display technology. Copen is undoubtedly the vanguard of micro LED development as we continue to develop our color micro LED display portfolio. Earlier this week, We announced a follow-on order for one of our IP sub-assemblies to a Department of Defense prime contractor that integrates our IPs into a sophisticated video AR module. This $12.8 million follow-on order represents a significant increase in year-over-year volume and revenue from this 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 has been patient and supportive of COPEN and our transformation plan. Recently, COPEN has been informed of our success in being down selected for several new dismounted soldier projects. We are now in the final stages of submitting formal proposals and we expect to receive feedback on those strategic pursuits in the next few quarters. Turning to our General Dynamics Armored 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 Copen. The program continues to progress well and is a perfect example of the parenting advantage Copen 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. In this specific use case, the best display was an FL COS display developed by our team at Fourth Dimension Display in Scotland. The drive electronics and optics were developed at Copen in Westboro, 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 in Westboro, and this assembly sells for tens of thousands of dollars each, and there are several assemblies per vehicle. Multiplied by several thousand vehicles, which we expect to be upgraded, equates to well over $100 million 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 successful milestones in the coming quarters. 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 precedes deployment, and the broader issues in Europe, among other regions, are driving increased demand for these products. Turning to the 3D 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. Lastly, we continue to experience increased customer design and proposal demands in both defense and consumer markets. With recent consumer announcements in AR and VR headsets and continued human-centric issues slowing higher adoption rates in both markets, customers are turning to Copen to help them solve some of the most significant application-specific human-centric issues their end users are experiencing. Copen 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 areas in the very near future. So now I'll turn the call over to our CFO, Rich Snyder, to review our results in further detail. Rich, over to you.
Quinn
Thank you, Michael. Turning to our financial results, total revenues from Q2 2023 were $10.5 million versus $11.9 million for the prior year, a 12% decrease year-over-year. Product revenues for the first quarter into July 1, 2023 were $6 million, compared with $9 million for the second quarter into June 25, 2022, a 33% decrease year-over-year. The decrease in product revenue was driven by a $2 million or 28% decrease in defense revenues and $749,000 or 43% decrease in industrial revenues over the prior year. As we previously announced, we have an additional $12.8 million order for defense and we're reviewing lead times on materials to understand the potential positive impact on Q4 2023 revenue. Regarding industrial products revenues, we believe that they will be lower due to left demand from China. Funded research and development revenues were $3.9 million for the second quarter of 2023 compared to $2.8 million for the second quarter of 2022, a 39% increase. The increase in funded R&D was largely due to an increase in funding for display systems initially used in U.S. defense programs. Cost of goods sold for the second quarter of 2023 was 5.7 million or 95 percent of product revenues compared with 7.9 million or 88 percent of second 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 percent of net product revenue. R&D expenses in the second quarter of 2023 were $3.1 million, compared with $5.1 million during the second quarter of 2022, a 39 percent decrease year-over-year. Funded R&D expenses for Q2 2023 was $2.2 million as compared to $3.2 million for Q2 2022. The decrease in expense was a result of certain U.S. defense programs moving to production and a reduction of some of the funded OLED development costs due to the spin-out in the first quarter of 2023 of certain OLED activities to lightning silicon. Internal R&D expense for Q2 2023 was $939,000 as compared to $2 million in the first quarter of 2022. The decrease in expense was a result of decrease in OLED development activities and more stringent criteria for IR&D programs that Michael spoke of earlier. SG&A expenses were $6.5 million in the second quarter of 2023 compared to $4.3 million in the second quarter of 2022. The SG&A increases for the three months into July 1st, 2023, as compared to three months into June 25th, 2022, was primarily due to legal expenses of approximately $2.4 million for the second quarter of 2023, as compared to approximately $200,000 for the second quarter of 2022, and bad debt expense of approximately $300,000 for the second quarter of 2023, as compared to bad debt recoveries of approximately $200,000 for the second quarter of 2022. These increases were partially offset by lower information technology spending of approximately $100,000 for the second quarter of 2023 as compared to $200,000 for the second quarter of 2022, and post-retirement benefits, which were zero in the second quarter of 2023 as compared to $200,000 in the second quarter of 2022. Other expense was approximately $3.3 million for the second quarter of 2023, compared with $141,000 for the second quarter of 2022. In the second quarter of 2023, we recorded foreign currency losses of $236,000 and a non-cash impairment loss on equity investments of $3.3 million. Turning to the bottom line, the net loss attributed to Copen during the second quarter was approximately $8.2 million, or 7 cents per share, compared with 5.6 million, or six pence per share, in the second quarter of 2022. Net cash used in operating activities for the three-month end of July 1st, 2023, was approximately 3.8 million. Copeland's cash and marketable securities were approximately 25.7 million at July 1st, 2023, as compared to 12.6 million at December 31st, 2022. We have no long-term debt. The amounts discussed 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.
Michael Murray
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 Copen 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, Copen 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 Copen's content in their designs. I'd like to thank everyone for your time today and for showing interest in Copen. 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 Copen, I think we can achieve great things and grow the business to new heights. And with that, operator, we'll now offer some time to take some questions.
Operator
Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press Start in 1 on your telephone keypad. A confirmation term will indicate that Ilan is in the question queue. You may press Start 2 to leave the question queue. For participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Nat Sheeran of Starfall.
Matt
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 two or three quarters out, particularly that new $12.8 million program you talked about. But how should we think about the next quarter or two 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?
Michael Murray
Hi, Matt. So the question was, How do we think about Q3 and Q4 with the $12.8 million 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 our supply chain on that. 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.
Matt
Okay, great. And you talked about the revenue breakdown, R&D versus product, and R&D has been growing and product has gone the other way. At what point do you expect that to shift as some of those R&D pilot programs go to full volume? And is there any impact on gross margin or operating margin when it goes to sort of a full volume contract basis?
Michael Murray
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, in the beginning of 2024. We do believe that those programs, as they transition through, not only will they have a revenue impact in terms of projects, but we do expect some operational expenses at the beginning of the first quarter 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. Does that answer your question?
Matt
Yeah, that's helpful. And then below the line, just some questions on the expense line. Those legal fees, $2.4 million, how should we think about over the next couple 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 win, can you recover those legal costs?
Michael Murray
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 costs 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 were 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.
Matt
Okay, so just to confirm, then the OPEX should be, we should be thinking about a $6 million or above for the next couple of quarters and then going down after that. Is that fair?
Michael Murray
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.
Matt
Great, and offsetting that was, your gross margin was up significantly earlier quarter on quarter and year over year. Is that also sustainable as we get through the next couple of quarters or with some of those programs ramping, could there be some margin pressure there?
Michael Murray
We have worked with several of our customers to increase our prices. So I believe our gross margins will remain stable and 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's been acceptance criteria that we needed to charge for. And for the most part, we've been successful where it made sense. So I believe our margins will continue to increase to a reasonable level and therefore so will our profitability.
Matt
Okay, great. All right. Thanks very much.
Michael Murray
Thank you, Matt.
Operator
The next question comes from Glenn Mattson observing with Tolman.
Glenn Mattson
Hi. Thanks for taking the questions. So congrats on the $12.8 million order. That was nice to see. But, you know, I want to talk about that a little bit further. But before we get to that, just a little more detail on the product revenue and kind of the you know, although the total top line came in, in line, it felt like the product revenue was a little lighter than I would have expected. And, you know, 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, and just kind of get a sense of have any of those. And I realized that they could be lumpy from time to time, but it sounds like there's a quarter or two here where it's a little softer. So I'm just curious if it's a, If there's just some cadence of order flow in that front or some more color, that would be great.
Michael Murray
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 COPINH. 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 that makes sense. So I think the main thing, Glenn, moving forward in Q3 and Q4, there's no changes in demand. In fact, demand's moving in our favor into Q4 with this larger order. I think it's important to note that early, you know, early, deliveries are requested 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 mixed 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. DOD type of product line. So that's why you saw a bit of change in the profitability as well as the overall revenue. Rich, anything you want to add to that? Go ahead.
Quinn
No, I think that 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 a whole variety outside our control.
Glenn Mattson
Great. Thanks for that, Cutler. Moving on to the large order you announced yesterday, it's a little more detailed, and maybe you can't because it's maybe a program that you're not allowed to discuss that much, but it reads as the headline is the thermal weapons scope, but then you talked about it's kind of a video AR pancake optics. Is this something you... have seen revenue from before? Is this a new program or just an offshoot of existing? Can you just give us a little color there?
Michael Murray
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.
Glenn Mattson
Okay. Great. That's it for me. Thanks, guys.
Operator
Thank you. The next question comes from Kevin Diddy of HC Wainwright.
Kevin Diddy
Afternoon, gentlemen. Thanks for having me. Michael, back to Glenn's question on this most recent thermal weapon site order. $12.8 million, I think you noted as being the largest of three. I was just wondering... Or actually, no, the most recent of three, but I'm wondering if it's the largest. And I guess how long you'd expect it would take Copen to work through it from a sales perspective.
Michael Murray
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 requesting of us. And the customer has requested as many units as they can get as soon as they can get them. So that's great news for Copen. So we will be looking at how we can increase volumes and production in the facility here to support our customer's mission in that case.
Kevin Diddy
Helpful. Thank you, Michael. Looking at the Abrams PPAP, can you offer a little 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? in how we might address timing to that $100 million total addressable contract market you referenced?
Michael Murray
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. 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, and it's going great.
Kevin Diddy
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 you're working with Copen 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. I was just wondering if you could offer what you might or how you might recommend we consider this transitional period to last.
Michael Murray
My view, and Rich and I have talked about this along with the executive team and board at Copen, 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 and 2025. Because as we've talked about, Kevin, 2024 is going to be a significant revenue year for Copen. And 2025 is going to be an even more significant revenue year for Copen based on our current backlogs. We now have three quarters of positive book to bill. And with this recent order, we're going to have a fantastic Q3 book to bill, which would be four 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 25. The focus has been and continues to be building on time in full and and delivering that revenue at great gross profit and margins for our shareholders. That's what 2023 is about. And I'm happy to report, and I said this before, we're on track slightly ahead of some of our strategic initiatives around the path to profitability on time in 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's 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.
Kevin Diddy
That's the plan. Okay. Thank you for the additional perspective, Michael. Appreciate it. And just sort of a follow-on in that thinking, Rich alluded to with a 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 at too short a period to evaluate your transition from, you know, I think all last year your product margin was negative?
Quinn
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 two 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 two places that absorb overhead, Q2 is down significantly compared to those, but yet we maintained margin, which means that we're greatly increasing efficiency. Or to put it another way, had we been working with the efficiencies of 2022, we probably would have had significant negative margins.
Kevin Diddy
Oh, okay. That's exactly where I was going, Rich. Thank you. All right, last question for me. I'm sure you're relieved. Just maybe a little more color on how quickly you think you may be able to adopt MIT's assist on the AI side in addressing the nausea problem that you alluded to, Michael, and whether or not you think it transcends consumer and helps you in defense.
Michael Murray
Great question, Kevin. Whether you're a warfighter, a gamer, a doctor, everyone using a quote-unquote see-through optic or AR, VR glass has the same issue, and that is the human brain interprets video information or sight 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, 4K, 8K, 16K, 30K, whatever it is. 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 in 2024, is 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 the 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 AR, VR glasses in consumer as well as military and medical. So those are the problems that we're going to attempt to solve. 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 MIT CSAIL 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 Copen. And we're very excited about it. And we'll be sharing more with you in the coming quarters.
Kevin Diddy
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?
Michael Murray
I think the latter. I think it will require certainly more sophisticated computers that or computational algorithms that we currently cannot do in our backplane technology, but we do have a plan for that. I think the technology's 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 direction to solve some of these human-centric issues. 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. And over the next couple of quarters, you're going to see and hear how we're going to solve it as COPEN. 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.
Kevin Diddy
Well, I apologize for misleading you and thinking I was going to let you off the hook early, but I do appreciate the effort, Michael and Rich. Thank you very much. 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.
Michael Murray
Thank you, Operator. Well, Q2 was a very interesting quarter for Copen. 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 in the next call. Thank you very much for joining. We appreciate it. Take care and have a great day.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for attending. Anyone now disconnect your line.
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