ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS:
The following management’s discussion and analysis of the financial condition and results of operations of CyberOptics Corporation and its wholly-owned subsidiaries ("we", "us" and "our") contains a number of estimates and predictions that are forward looking statements rather than statements based on historical fact. Among other matters, we discuss (i) a world-wide recession or depression resulting from the economic consequences of the Covid-19 pandemic; (ii) the negative effect on our revenue and operating results of the economic crisis resulting from the Covid-19 pandemic on our customers and suppliers, the market for our products and the global supply chain; (iii) the availability of parts to meet customer orders; (iv) the level of anticipated revenues, gross margins, and expenses; (v) the timing of orders and shipments of our existing products, particularly our 3D Multi-Reflection Suppression™ (MRS™)-enabled SQ3000™ Multi-Function system for automated optical inspection ("AOI") and MX systems for memory module inspection; (vi) the level of orders from our original equipment manufacturer ("OEM") customers; (vii) the timing of initial revenue and projected improvements in gross margins from sales of new products that have been recently introduced, that we have under development or that we anticipate introducing in the future; (viii) the market acceptance of our SQ3000 Multi-Function inspection and measurement system and products for semiconductor advanced packaging inspection and metrology (ix) our assessment of trends in the surface mount technology ("SMT") and semiconductor capital equipment markets; and (x) changes in the level of tariffs and other trade policies of the United States. Although we have made these statements based on our experience and expectations regarding future events, there may be events or factors that we have not anticipated. Therefore, the accuracy of our forward-looking statements and estimates are subject to a number of risks, including those risks identified in our Annual Report on Form 10-K for the year ended December 31, 2019.
RESULTS OF OPERATIONS
General
We are a leading global developer and manufacturer of high precision 3D sensors and system products for inspection and metrology. We also develop and manufacture our WaferSense® products, which is a family of wireless, wafer-shaped sensors that provide measurements of critical factors in the semiconductor fabrication process. We intend to leverage our sensor technologies in the SMT and semiconductor industries to deliver profitable growth. A key element of our strategy is the continued development and sale of high precision 3D sensors and system products based on our proprietary Multi-Reflection Suppression ("MRS") technology. We believe that our MRS technology is a breakthrough 3D optical technology for high-end inspection and metrology with the potential to significantly expand our markets. Another key element in our strategy is the continued development and introduction of new sensor applications for our WaferSense® family of products.
Our operating results in 2019 were affected by the cyclical, industry-wide slowdown in demand for SMT and semiconductor capital equipment as well as uncertainty relating to the global trade environment. We believe that the three months ended September 30, 2019 marked the trough of the downturn in the SMT and semiconductor capital equipment markets, and that industry conditions have started to strengthen. Over the longer-term (i.e., the next several years), we expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology. We believe that our 3D MRS-enabled sensor and system products and our WaferSense® family products have the potential to expand our presence in the markets for SMT and semiconductor capital equipment.
Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. We believe 3D inspection and metrology represent high-growth segments in both the SMT and semiconductor capital equipment markets. We believe our 3D MRS technology platform is well suited for many applications in these markets, particularly with respect to complex circuit boards and semiconductor wafer level and advanced packaging inspection and metrology applications. We are taking advantage of current market trends by deploying our 3D MRS sensor technology in the following products:
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Our SQ3000™ Multi-Function inspection and measurement machines (the SQ3000 and SQ3000™ 3D CMM) for AOI, Solder Paste Inspection ("SPI") and coordinate measurement ("CMM") applications, which are designed to expand our presence in markets requiring high precision inspection and metrology. In these markets, identifying defects has become highly challenging and critical due to smaller semiconductor and electronics packaging and increasing component density on circuit boards. In our view, the 3D MRS sensor technology used in our products is uniquely suited for many of these applications because of its ability to offer microscopic image quality and superior measurement performance at production line speeds.
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Our next generation MX3000™ AOI system for 3D inspection of memory modules following the singulation step of the manufacturing process. We recognized our first revenue from the sale of the MX3000 product in the first quarter of 2020.
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Our new MRS-enabled WX3000™ metrology and inspection system for wafer-level and advanced packing applications, which incorporates our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS sensor. The WX3000 performs 100% 3D and 2D inspection and metrology simultaneously at high speed and delivers through-put of more than 25 wafers per hour. We believe the WX3000 performs two to three times faster than alternate technologies at data processing speeds in excess of 75 million 3D data points per second. The WX3000 is suitable for many semiconductor wafer level and advanced packaging inspection and metrology applications for features down to 25-micron. We anticipate that sales of 3D MRS-enabled sensors and systems for semiconductor wafer level and advanced packaging inspection and metrology applications will represent compelling long-term growth opportunities.
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Revenue from our MRS based products, including 3D AOI systems and high precision 3D MRS sensors, increased by $4.6 million or 45% to $14.9 million in the six months ended June 30, 2020, from $10.3 million in the six months ended June 30, 2019. We anticipate we will continue to increase sales of products based on our MRS technology in the SMT and semiconductor capital equipment markets. In particular, we believe inspection and metrology for micro LED, semiconductor wafer level and advanced packaging applications represent significant long-term growth opportunities. We anticipate increasing sales of MRS-based products by reaching new OEM customers and system integrators, and by expanding direct sales of inspection and metrology system products to end-user customers.
We have continued to invest in our WaferSense® family of products, because fabricators of semiconductors and other customers view these products as valuable tools for improving yields and productivity. We have recently introduced several new WaferSense® products to further enhance our revenue growth prospects, including the In-Line Particle Sensor™ (IPS™), which detects particles in gas and vacuum lines in semiconductor process equipment, and is particularly relevant for EUV lithography tools. Additional WaferSense® applications are currently under development. Over the longer-term, strong future sales growth is anticipated for our WaferSense® family of products.
Prior to the end of the second quarter of 2020, we received a $2.5 million order for SQ3000 Multi-Function systems for Micro LED applications. This order is scheduled to be recognized as revenue in the third quarter of 2020. Additional micro LED-related orders are anticipated during the second half of 2020. Our order backlog was $24.8 million at June 30, 2020, unchanged from March 31, 2020, and up significantly from $13.0 million at June 30, 2019. We are forecasting sales of $19.5 to $21.5 million for the third quarter of 2020. Our forecast for the third quarter of 2020 includes $4.0 million of sales from our existing backlog of MX600 memory module inspection systems. We believe that demand in the SMT and semiconductor capital equipment markets will remain solid in 2020. However, an increase in the severity of the current Covid-19 outbreak, or a resulting prolonged economic recession or depression, could cause a slow-down in demand for SMT and semiconductor capital equipment. Over the long-term, anticipated sales growth of our 3D MRS-enabled products and WaferSense sensors should increase our revenues and net income in the future.
Impact from Covid-19
In December 2019, a novel strain of coronavirus ("Covid-19") was first identified, and in March 2020, the World Health Organization categorized Covid-19 as a pandemic. The Covid-19 pandemic is affecting our customers, suppliers, service providers and employees, and the ultimate impacts of Covid-19 on our business, results of operations, liquidity and prospects are not fully known at this time. However, the Covid-19 outbreak has had a relatively minimal impact on our business to date. Our revenues increased by 8% to $32.4 million in the first six months of 2020, from $30.0 million in the first six months of 2019. We are forecasting revenues of $19.5 to $21.5 million for the third quarter of 2020, a significant increase from $12.4 million in the third quarter of 2019. However, our forecast could change if the Covid-19 pandemic worsens, or if unforeseen events related to the pandemic occur. The most significant impacts on our business from the Covid-19 pandemic include the following:
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Our key factories are located in Minnesota and Singapore. Both of these locations have been subject to government mandated shelter-in-place orders. Because our operations have been deemed essential, we were able to keep our factories up and running while the shelter-in-place mandates were in effect. If the pandemic worsens, it is possible that our operations may not be deemed essential under future government mandated shelter-in-place orders, and we may be required to shut-down factory operations. We have periodically implemented split-shifts for our factory operations to minimize the number of employees in our facilities at any given time, however, this has not affected our production capacity. Most of the time, our non-factory employees are working remotely. To date, the shelter-in-place mandates and remote work arrangements have had a minimal impact on operations, but that could change if the pandemic worsens and is more than temporary.
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Sales of some products, mainly our SQ3000 Multi-Function inspection and measurement systems and MX memory module inspection products, require customer acceptance due to performance or other criteria that is considered more than a formality. Many of our customer’s factories have remained open during the Covid-19 pandemic because they are deemed to be essential under government shelter-in-place mandates. Approximately $1.5 million of customer acceptances for SQ3000 Multi-Function inspection systems were pushed out to the third quarter of 2020 because of travel restrictions and the inability to gain access to customers' factories due to quarantine measures. None of the affected orders were cancelled, and all are expected to be recorded as revenue in the third quarter of 2020. Continuing or new global travel restrictions and quarantine measures could hinder our ability to obtain customer acceptances for some of our products in a timely manner, and therefore impact the timing of revenue recognition.
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Total operating expenses in the second quarter of 2020 benefitted by approximately $276,000 from a jobs support program implemented by the government of Singapore. In addition, travel, trade show and other costs were reduced in the second quarter of 2020 due to the Covid-19 pandemic. We anticipate that operating expenses in the third quarter of 2020 will increase, and be comparable to the level in the first quarter of 2020. The anticipated increase is due to the phase-out of the Singapore jobs support program, and our expectation that travel, trade shows and other costs will return to more normal levels in the third quarter of 2020.
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We have experienced some supply disruptions due to the Covid-19 pandemic, mainly from suppliers not deemed essential by shelter-in-place mandates in certain countries. Key supply chain disruptions have been resolved to date. However, supply chain disruptions could increase significantly if the pandemic worsens and continues for an extended period of time. To date, our on-hand inventories have been sufficient to enable us to mitigate any supply disruptions with minimal impact on our sales or ability to service customers. We presently do not expect that supply chain disruptions will have a significant impact on our revenue in the third quarter of 2020.
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We currently do not anticipate any significant credit losses or asset impairments resulting from the Covid-19 pandemic. As of June 30, 2020, our available balances of cash and marketable securities totaled $29.1 million. We believe that we have the resources required to attain our growth objectives and to meet any unforeseen difficulties resulting from the Covid-19 pandemic. However, we will continue to closely monitor the Covid-19 pandemic and its impact on our business in the coming months.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in the United States. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods and alternative tax credit refunds. The CARES Act also appropriated funds for the Small Business Administration Paycheck Protection Program loans that are forgivable in certain circumstances to promote continued employment. We have analyzed the provisions of the CARES Act and presently do not believe it will have a material benefit to our financial condition, results of operations or liquidity. However, we will continue to monitor the impact the CARES Act could have on our business.
Singapore Jobs Support Program
As stated above, the Singapore Government implemented a jobs support program in 2020 that is intended to support businesses and encourage retention of employees during the period of economic uncertainty caused by the Covid-19 pandemic. Under the jobs support program, the Singapore Government will co-fund a portion of the gross monthly wages paid to local employees. The program is presently scheduled to end in August 2020. We anticipate that the Singapore jobs support program will reduce operating expenses in the third quarter of 2020 by approximately $50,000.
Revenues
Our revenues increased by 6% to $16.0 million in the three months ended June 30, 2020, from $15.0 million in the three months ended June 30, 2019. Our revenues increased by 8% to $32.4 million in the six months ended June 30, 2020, from $30.0 million in the six months ended June 30, 2019. The following table sets forth revenues by product line for the three and six months ended June 30, 2020 and 2019:
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Three Months Ended June 30,
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Six Months Ended June 30,
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(In thousands)
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2020
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2019
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% Change
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2020
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2019
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% Change
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High Precision 3D and 2D Sensors
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$
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4,745
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$
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2,004
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137
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%
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$
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8,867
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$
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5,753
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54
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%
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Inspection and Metrology Systems
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7,661
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9,918
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(23
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%
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16,022
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17,009
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(6
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%
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Semiconductor Sensors
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3,590
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3,122
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15
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%
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7,536
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7,258
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4
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%
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Total
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$
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15,996
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$
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15,044
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6
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%
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$
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32,425
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$
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30,020
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8
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%
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Revenues from sales of high precision 3D and 2D sensors increased by $2.7 million or 137% to $4.7 million in the three months ended June 30, 2020, from $2.0 million in the three months ended June 30, 2019. Revenues from sales of high precision 3D and 2D sensors increased by $3.1 million or 54% to $8.9 million in the six months ended June 30, 2020, from $5.8 million in the six months ended June 30, 2019. The increases in both periods were primarily due to higher sales of 3D MRS-enabled sensors. Sales of high precision 3D MRS-enabled sensors increased by $1.9 million or 170% to $3.0 million in the three months ended June 30, 2020 from $1.1 million in the three months ended June 30, 2019. Sales of high precision 3D MRS-enabled sensors increased by $3.2 million or 113% to $6.0 million in the six months ended June 30, 2020 from $2.8 million in the six months ended June 30, 2019. The increase was due to improving conditions in the global semiconductor capital equipment market. Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers selling products that incorporate our sensors. We believe sales of our new 3D MRS enabled sensors, including our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS sensor, will represent an increasing percentage of our total high precision 3D and 2D sensor sales in the future. Sales of high precision 3D and 2D sensors, including 3D-MRS enabled sensors, are prone to significant quarterly fluctuations due to variations in market demand and customer inventory levels. Revenues from sales of high precision 3D and 2D sensors are expected to decline modestly on a sequential basis in the third quarter of 2020.
Revenues from sales of inspection and metrology systems decreased by $2.3 million or 23% to $7.7 million in the three months ended June 30, 2020, from $9.9 million in the three months ended June 30, 2019. Revenues from sales of inspection and metrology systems decreased by $1.0 million or 6% to $16.0 million in the six months ended June 30, 2020, from $17.0 million in the six months ended June 30, 2019. The revenue decreases were mainly due to lower sales of legacy products and 2D MX600 memory module inspection systems. Sales of SQ3000™ Multi-Function systems increased modestly to $4.7 million in the three months ended June 30, 2020, from $4.6 million in the three months ended June 30, 2019. Sales of SQ3000™ Multi-Function systems increased by $873,000 or 12% to $8.0 million in the six months ended June 30, 2020, from $7.1 million in the six months ended June 30, 2019. Sales of SQ3000™ Multi-Function systems in the three months ended June 30, 2020 were negatively impacted by delays in obtaining $1.5 million of customers acceptances due to travel restrictions and the inability to gain access to customer's factories because of the Covid-19 pandemic.
We believe the increase in sales of SQ3000™ Multi-Function systems in the first half of 2020 was due to the competitive advantages offered by our SQ3000™ Multi-Function system products, and resulted from many companies transitioning from 2D AOI to 3D AOI to meet the increasingly demanding product inspection and metrology requirements in the SMT and semiconductor markets. The market transition away from 2D AOI systems is expected to result in an industry-wide 20% compound annual rate of growth in global sales of 3D AOI systems through 2025. In addition, we believe the demonstrated advantages of the SQ3000™ Multi-Function system has allowed us to attain first-mover status in the high growth micro-LED inspection and metrology market. Given these market dynamics and because of the competitive advantages inherent in our 3D MRS sensor technology, we anticipate sales of SQ3000™ Multi-Function systems will represent an increasing percentage of our total inspection and metrology system sales in the future. Revenues from sales of inspection and metrology systems are expected to increase significantly in the third quarter of 2020, both sequentially and on a year-over-year basis.
Revenues from sales of semiconductor sensors, principally our WaferSense® line of products, increased by $468,000 or 15% to $3.6 million in the three months ended June 30, 2020, from $3.1 million in the three months ended June 30, 2019. Revenues from sales of semiconductor sensors increased by $278,000 or 4% to $7.5 million in the six months ended June 30, 2020, from $7.3 million in the six months ended June 30, 2019. The revenue increases were due to growing acceptance of our WaferSense® products as important productivity enhancement tools by semiconductor manufacturers, and improved account penetration at major semiconductor manufacturers and capital equipment suppliers. Over the longer term, we anticipate that the benefits from growing market awareness of our WaferSense® products, improved account penetration at major semiconductor manufacturers and capital equipment suppliers and new product introductions will lead to additional WaferSense® product sales. Revenues from sales of semiconductor sensors in the third quarter of 2020 are forecasted to grow modestly on both a quarterly sequential and year-over-year basis.
Export revenues totaled $13.4 million or 84% of our total revenues in the three months ended June 30, 2020, compared to $10.9 million or 73% of total revenues in the three months ended June 30, 2019. Export revenues totaled $25.2 million or 78% of our total revenues in the six months ended June 30, 2020, compared to $21.5 million or 72% of total revenues in the six months ended June 30, 2019. The increase in export revenues as a percentage of total revenues in the three and six months ended June 30, 2020, when compared to the three and six months ended June 30, 2019, was due to lower domestic sales resulting from travel restrictions and quarantine measures related to Covid-19.
Cost of Revenues and Gross Margin
Cost of revenues increased by $227,000 or 3% to $8.7 million in the three months ended June 30, 2020, from $8.5 million in the three months ended June 30, 2019. Cost of revenues increased by $1.4 or 9% to $17.8 million in the six months ended June 30, 2020, from $16.4 million in the six months ended June 30, 2019. The increase in cost of revenues in both periods were mainly due to revenue increases and a change in product mix. Revenues increased by 6% in the three months ended June 30, 2020, when compared to the three months ended June 30, 2019, and revenues increased by 8% in the six months ended June 30, 2020, when compared to the six months ended June 30, 2019.
Total gross margin as a percentage of revenues was 46% in the three months ended June 30, 2020, compared to 44% in the three months ended June 30, 2019. Total gross margin as a percentage of revenues was 45% in both the six months ended June 30, 2020 and the six months ended June 30, 2019. The increase in gross margin percentage in the three months ended June 30, 2020 was primarily due to a more favorable product mix. Product mix reflected decreased sales of lower margin legacy products as a percentage of our total revenues in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.
Our total gross margin as a percentage of revenues in the third quarter of 2020 is expected to be at or slightly below the level in this year's second quarter.
Our markets are highly price competitive, particularly in the electronics assembly and SMT markets. As a result, we have experienced continual pressure on our gross margins. We compensate for the pressure to reduce the price of our products by introducing new products with more features and improved performance and through manufacturing cost reduction programs. Sales of many products that we have recently introduced or are about to introduce, including our current and future MRS-enabled SQ3000™ Multi-Function inspection and measurement systems, next generation 3D MRS sensors and semiconductor sensors (consisting primarily of our WaferSense® line of products) have, or are expected to have, more favorable gross margins than many of our existing products. Our next generation 3D MRS-enabled sensor and system products, including wafer level and advanced packaging inspection and metrology products, are being designed for more complex and demanding inspection and metrology applications in the SMT and semiconductor markets. Sales prices and gross profit margins for these applications tend to be higher than margins for products sold in the broader SMT market. However, the gross margin percentage for our next generation 3D MRS-enabled MX3000 AOI system for inspection of memory modules will be lower than our current total gross margin percentage due to the significant material handling and automation required for this product.
Operating Expenses
R&D expenses were $2.2 million or 14% of revenues in the three months ended June 30, 2020, compared to $2.2 million or 15% of revenues in the three months ended June 30, 2019. R&D expenses were $4.6 million or 14% of revenues in the six months ended June 30, 2020, compared to $4.5 million or 15% of revenues in the six months ended June 30, 2019. R&D expenses in both the three and six months ended June 30, 2020 were reduced by approximately $225,000 due to the favorable impact of the Singapore Government's jobs support program on wage costs discussed above. This benefit was offset by higher compensation costs for new and existing R&D employees, including higher bonus accruals due to our improved financial performance. Current R&D expenditures are primarily focused on the continued development of our portfolio of next generation 3D MRS-enabled sensor and system products, and continued R&D work on new WaferSense® products. We also continue to enhance our SQ3000™ Multi-Function inspection and measurement machines.
Selling, general and administrative ("S,G&A") expenses were $3.7 million or 23% of revenues in the three months ended June 30, 2020, compared to $3.8 million or 25% of revenues in the three months ended June 30, 2019. S,G&A expenses were $7.8 million or 24% of revenues in the six months ended June 30, 2020, compared to $7.9 million or 26% of revenues in the six months ended June 30, 2019. The decrease in S,G&A expenses as a percentage of revenues in both the three and six months ended June 30, 2020 resulted from a decrease in costs and higher revenues. S,G&A expenses in both the three and six months ended June 30, 2020 benefited from lower costs for travel and the cancellation of trade shows due to the Covid-19 pandemic, and the favorable impact of the Singapore Government's jobs support program on wage costs. Commissions paid to third party sales representatives were also lower due to the decrease in U.S. sales. These decreases were mostly offset by higher bonus accruals due to our improved financial performance.
We anticipate that operating expenses in the third quarter of 2020 will increase, and be comparable to the level of these expenses in the first quarter of 2020. The anticipated increase is due to phase-out of the Singapore Government's jobs support program, and our expectation that travel, trade shows and other costs will increase in the third quarter of 2020.
Interest Income and Other
Interest income and other includes interest earned on investments and gains and losses associated with foreign currency transactions, primarily intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore and China. We recognized losses from foreign currency transactions of $24,000 in the three months ended June 30, 2020, compared to losses from foreign currency transactions of $7,000 in the three months ended June 30, 2019. We recognized gains from foreign currency transactions of $146,000 in the six months ended June 30, 2020, compared to gains from foreign currency transactions of $25,000 in the six months ended June 30, 2019.
Income Taxes
We recorded an income tax benefit of $96,000 in the three months ended June 30, 2020, compared to income tax expense of $192,000 in the three months ended June 30, 2019. We recorded income tax expense of $53,000 in the six months ended June 30, 2020, compared to income tax expense of $326,000 in the six months ended June 30, 2019. The income tax benefit in the three months ended June 30, 2020 includes $340,000 in excess tax benefits from employee stock option exercises. Our income tax expense in the six months ended June 30, 2020 reflected an effective tax rate of approximately 2%, compared to an effective tax rate of approximately 25% in the six months ended June 30, 2019. The reduction in effective tax rate in the six months ended June 30, 2020, when compared to the six months ended June 30, 2019, was due to the significant excess tax benefits from employee stock option exercises recognized in the six months ended June 30, 2020, deductions for Foreign Derived Intangible Income ("FDII") and Global Intangible Low-Taxed Income ("GILTI") and foreign tax credits. We were unable to take advantage of the FDII and GILTI deductions and foreign credits in 2019 because we had un-used federal net operating loss carry-forwards. We expect to use our remaining federal net operating loss carry forwards in 2020.
We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, R&D tax credit carry forwards and federal and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry-forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore based deferred tax assets were not required.
The Inland Revenue Authority of Singapore has initiated a routine compliance review of our 2018 income tax return. We presently anticipate that the outcome of this audit will not have a significant impact on our financial position or results of operations.
Liquidity and Capital Resources
Our cash and cash equivalents increased by $773,000 in the six months ended June 30, 2020. Cash provided by operating activities of $3.2 million and proceeds of $6.2 million from maturities of marketable securities were partially offset by purchases of marketable securities totaling $8.0 million and purchases of fixed assets and capitalized patent costs totaling $518,000. In addition, we used $420,000 of cash as tax payments for shares withheld related to stock option exercises which were mostly offset by the proceeds from the stock option exercises totaling $256,000. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities and investment of cash balances in marketable securities, and from other sources of cash. Accordingly, we believe the combined balances of cash and marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash and marketable securities increased by $2.8 million to $29.1 million as of June 30, 2020, from $26.3 million as of December 31, 2019.
Operating activities provided $3.2 million of cash in the six months ended June 30, 2020. The amount of cash provided by operations was favorably impacted by net income of $2.5 million. Net income was affected by non-cash expenses totaling $1.8 million for depreciation and amortization, non-cash operating lease expense, recovery for doubtful accounts, deferred taxes, non-cash gains from foreign currency transactions, share-based compensation costs and an unrealized loss on our available-for-sale equity security. Changes in operating assets and liabilities providing cash included a decrease in accounts receivable of $1.4 million, an increase in accounts payable of $2.7 million and an increase in accrued expenses of $780,000. Changes in operating assets and liabilities using cash included an increase in inventories of $5.0 million, an increase in prepaid expenses and other current assets of $782,000 and minimal changes in other operating assets and liabilities totaling $76,000. Accounts receivable decreased due to faster collections and a decrease in sales in the second quarter of 2020 when compared to the fourth quarter of 2019. We ended the second quarter of 2020 with a large backlog of orders. Inventories and accounts payable at June 30, 2020 increased due to planned purchases of raw materials to meet customer demand. The increase in accrued expenses was mainly due to bonus accruals resulting from our improved financial performance. The increase in prepaid expenses and other current assets was due to advance payments to a key materials supplier for the MX600 systems.
Investing activities used $2.3 million of cash in the six months ended June 30, 2020. Changes in the level of investment in marketable securities, resulting from purchases and maturities of those securities, used $1.8 million of cash in the six months ended June 30, 2020. We used $518,000 of cash in the six months ended June 30, 2020 for the purchase of fixed assets and capitalized patent costs.
Financing activities used $164,000 of cash in the six months ended June 30, 2020. Tax payments for shares withheld related to stock option exercises were mostly offset by the proceeds from the exercise of stock options.
In July 2019, our Board of Directors authorized a $3.0 million share repurchase program which expired on June 30, 2020. No shares were repurchased under this program in the six months ended June 30, 2020.
In February 2020, we finalized an extension to our lease for our existing 19,805 square foot mixed office and warehouse facility in Singapore, which serves as a sales, development and final assembly and integration facility for our inspection and metrology system products. The new lease runs from the expiration date of our old lease in July 2020 through July 24, 2023. Rent and facility operating costs under the new lease are expected to remain unchanged from the old lease that expired in July 2020.
At June 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities are established by some companies for the purpose of establishing off-balance sheet arrangements or for other contractually narrow or limited purposes.
We believe that on-hand cash, cash equivalents and marketable securities, coupled with anticipated future cash flow from operations, will be adequate to fund our cash flow needs for the foreseeable future.