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 possible world-wide recession or depression due to the economic consequences of the pandemic resulting from the worldwide spread of a novel form of coronavirus (Covid-19); (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 systems 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 improvement in gross margins resulting from future cost reduction programs; (ix) market acceptance of our SQ3000 Multi-Function inspection and measurement system and products for semiconductor wafer level and advanced packaging inspection and metrology (x) our assessment of trends in the surface mount technology ("SMT") and semiconductor capital equipment markets; and (xi) 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 and in Section 1A of this report.
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, 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 of 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. We believe 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 provide us with 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 $8.9 million or 60% to $23.8 million in the nine months ended September 30, 2020, from $14.9 million in the nine months ended September 30, 2019. Over the long term, we anticipate continued increases in 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, memory modules and semiconductor wafer level and advanced packaging applications represent significant long-term growth opportunities. We anticipate increasing sales of MRS-based products by selling them to 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 increase our revenue growth, including the In-Line Particle Sensor™ (IPS™). This sensor 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 long-term, strong future sales growth is anticipated for our WaferSense® family of products.
Our order backlog was $17.7 million at September 30, 2020, down from $24.8 million at June 30, 2020, and up from $14.4 million at September 30, 2019. We are forecasting sales of $15.5 to $17.0 million for the fourth quarter of 2020. Our forecast for the fourth quarter of 2020 includes $1.4 million of sales from our order backlog for SQ3000™ Multi-Function systems used in micro LED inspection and metrology and $1.6 million of sales from our order backlog for MX600 memory module inspection systems. Our forecast for the fourth quarter of 2020 does not include any significant new orders for SQ3000™ Multi-Function systems for micro LED inspection and metrology or MX systems for memory module inspection. We believe that demand in the SMT and semiconductor capital equipment markets will remain solid through 2021. 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, we believe anticipated sales growth of our 3D MRS-enabled products and WaferSense sensors should increase revenues and net income.
Impact from Covid-19
Effect of Covid-19 Outbreak on Business Operations
In December 2019, 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 26% to $53.2 million in the first nine months of 2020, from $42.4 million in the first nine months of 2019. We are forecasting revenues of $15.5 to $17.0 million for the fourth quarter of 2020, compared to $16.9 million in the fourth quarter of 2019. Our forecast for the fourth quarter of 2020 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, but these measures have 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. Most 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. However, global travel restrictions and quarantine measures have hindered our ability to obtain customer acceptances of certain of our products at various times in the nine months ended September 30, 2020. Continuing or new global travel restrictions and quarantine measures could hinder our ability to obtain customer acceptances in a timely manner in the future, and therefore impact the timing of revenue recognition.
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Total operating expenses were reduced in the three and nine months ended September 30, 2020 due to the Covid-19 pandemic. Wage costs were reduced in the three and nine months ended September 30, 2020 by $76,000 and $371,000, respectively, from a jobs support program implemented by the government of Singapore. In addition, travel, trade show and other costs were reduced due to changes in employee travel patterns and trade show cancellations.
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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 fourth 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 September 30, 2020, our available balances of cash and marketable securities totaled $27.9 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. There have been recent spikes in Covid-19 cases, and some health experts have predicted that the Covid-19 pandemic will worsen during the winter 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. We anticipate that the Singapore jobs support program will reduce operating expenses in the fourth quarter of 2020 by approximately $35,000.
Revenues
Our revenues increased by 68% to $20.8 million in the three months ended September 30, 2020, from $12.4 million in the three months ended September 30, 2019. Our revenues increased by 26% to $53.2 million in the nine months ended September 30, 2020, from $42.4 million in the nine months ended September 30, 2019. The following table sets forth revenues by product line for the three and nine months ended September 30, 2020 and 2019:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(In thousands)
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2020
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2019
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% Change
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2020
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2019
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% Change
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High Precision 3D and 2D Sensors
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$
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3,645
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$
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3,170
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15
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%
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$
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12,512
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$
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8,923
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40
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%
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Inspection and Metrology Systems
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13,339
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5,545
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141
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%
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29,361
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22,554
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30
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%
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Semiconductor Sensors
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3,836
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3,676
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4
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%
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11,372
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10,934
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4
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%
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Total
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$
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20,820
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$
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12,391
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68
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%
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$
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53,245
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$
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42,411
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26
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%
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Revenues from sales of high precision 3D and 2D sensors increased by $475,000 or 15% to $3.6 million in the three months ended September 30, 2020, from $3.2 million in the three months ended September 30, 2019. Revenues from sales of high precision 3D and 2D sensors increased by $3.6 million or 40% to $12.5 million in the nine months ended September 30, 2020, from $8.9 million in the nine months ended September 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 $746,000 or 59% to $2.0 million in the three months ended September 30, 2020 from $1.3 million in the three months ended September 30, 2019. Sales of high precision 3D MRS-enabled sensors increased by $3.9 million or 96% to $8.1 million in the nine months ended September 30, 2020 from $4.1 million in the nine months ended September 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 on a year-over-year basis in the fourth quarter of 2020.
Revenues from sales of inspection and metrology systems increased by $7.8 million or 141% to $13.3 million in the three months ended September 30, 2020, from $5.5 million in the three months ended September 30, 2019. Revenues from sales of inspection and metrology systems increased by $6.8 million or 30% to $29.4 million in the nine months ended September 30, 2020, from $22.6 million in the nine months ended September 30, 2019. The revenue increases were mainly due to higher sales of SQ3000™ Multi-Function systems and MX memory module inspection systems. Sales of SQ3000™ Multi-Function systems increased by $3.6 million or 109% to $6.9 million in the three months ended September 30, 2020, from $3.3 million in the three months ended September 30, 2019. Sales of 2D and 3D MX memory module inspection systems totaled $3.3 million in the three months ended September 30, 2020, compared to $561,000 in the three months ended September 30, 2019. Sales of SQ3000™ Multi-Function systems increased by $4.5 million or 43% to $14.8 million in the nine months ended September 30, 2020, from $10.4 million in the nine months ended September 30, 2019. Sales of 2D and 3D MX memory module inspection systems totaled $4.7 million in the nine months ended September 30, 2020, compared to $3.3 million in the nine months ended September 30, 2019. Revenues from sales of inspection and metrology systems are forecasted to decline on a year-over-year basis in the fourth quarter of 2020 due to normal quarter-to-quarter fluctuations in demand for these products.
We believe the increase in sales of SQ3000™ Multi-Function systems in the nine months ended September 30, 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 systems 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 performance advantages of the SQ3000™ Multi-Function system has allowed us to attain a leadership position in the high growth micro LED inspection and metrology market. Sales of SQ3000™ Multi-Function systems for micro LED inspection and metrology applications totaled $2.2 million in the three months ended September 30, 2020, compared to $120,000 in the three months ended September 30, 2019. Sales of these systems for micro LED inspection and metrology applications totaled $4.0 million in the nine months ended September 30, 2020, compared to $1.2 million in the nine months ended September 30, 2019. Given these market dynamics and because of the competitive advantages of 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 semiconductor sensors, principally our WaferSense® line of products, increased by $160,000 or 4% to $3.8 million in the three months ended September 30, 2020, from $3.7 million in the three months ended September 30, 2019. Revenues from sales of semiconductor sensors increased by $438,000 or 4% to $11.4 million in the nine months ended September 30, 2020, from $10.9 million in the nine months ended September 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 long 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 fourth quarter of 2020 are forecasted to grow by more than 10% on a year-over-year basis.
Export revenues totaled $17.5 million or 84% of our total revenues in the three months ended September 30, 2020, compared to $9.6 million or 77% of total revenues in the three months ended September 30, 2019. Export revenues totaled $42.7 million or 80% of our total revenues in the nine months ended September 30, 2020, compared to $31.1 million or 73% of total revenues in the nine months ended September 30, 2019. Export revenues as a percentage of total revenues increased in the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, because most of our customers for micro LED and memory module inspection and metrology are located in Asia. In addition, the Covid-19 pandemic has had a more negative impact on U.S. sales, when compared to the effect on sales in Asia and Europe.
Cost of Revenues and Gross Margin
Cost of revenues increased by $5.2 million or 76% to $12.1 million in the three months ended September 30, 2020, from $6.9 million in the three months ended September 30, 2019. Cost of revenues increased by $6.7 million or 29% to $30.0 million in the nine months ended September 30, 2020, from $23.3 million in the nine months ended September 30, 2019. The increase in cost of revenues in both periods was mainly due to revenue increases. Revenues increased by 68% in the three months ended September 30, 2020, when compared to the three months ended September 30, 2019, and revenues increased by 26% in the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019.
Total gross margin as a percentage of revenues was 42% in the three months ended September 30, 2020, compared to 44% in the three months ended September 30, 2019. Total gross margin as a percentage of revenues was 44% in the nine months ended September 30, 2020, compared to 45% in the nine months ended September 30, 2019. The decrease in gross margin percentage in both the three and nine months ended September 30, 2020 was primarily due to a less favorable product mix. Product mix reflected lower sales of higher margin WaferSense products as a percentage of our total revenues in both the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019. In the three months ended September 30, 2020, higher margin MRS-based products were also a lower percentage of our total revenues. In addition, sales of inspection system products in the lower margin general purpose SMT market increased during the three months ended September 30, 2020, when compared to the three months ended September 30, 2019.
Our total gross margin as a percentage of revenues in the fourth quarter of 2020 is expected to be above the level in this year's third quarter, and should be closer to our total gross margin as percentage of revenue in the first nine months of 2020 and calendar year 2019.
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 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 general purpose 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 costs for material handling and automation required for this product. We are working on cost reduction strategies for our SQ3000™ Multi-Function system which should benefit gross margins for this product starting in the second quarter of 2021.
Operating Expenses
R&D expenses were $2.4 million or 12% of revenues in the three months ended September 30, 2020, compared to $2.4 million or 19% of revenues in the three months ended September 30, 2019. R&D expenses were $7.0 million or 13% of revenues in the nine months ended September 30, 2020, compared to $7.0 million or 16% of revenues in the nine months ended September 30, 2019. R&D expenses in the three and nine months ended September 30, 2020 were reduced by $61,000 and $307,000, respectively, due to the favorable impact of the Singapore Government's jobs support program on wage costs discussed above. Expenditures for R&D proto-types were also lower in the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019. These reductions were 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 systems.
Selling, general and administrative ("S,G&A") expenses were $4.1 million or 20% of revenues in the three months ended September 30, 2020, compared to $3.9 million or 31% of revenues in the three months ended September 30, 2019. S,G&A expenses were $11.9 million or 22% of revenues in the nine months ended September 30, 2020, compared to $11.8 million or 28% of revenues in the nine months ended September 30, 2019. The decrease in S,G&A expenses as a percentage of revenues in both the three and nine months ended September 30, 2020 resulted from a higher level of revenues. The increase in S,G&A expenses in both the three and nine months ended September 30, 2020 was due to higher commissions and bonus accruals due to our improved financial performance and an increase in provision for doubtful accounts due to higher sales. These increases were offset in part by lower costs for travel and 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.
We anticipate that operating expenses in the fourth quarter of 2020 will be slightly lower on a sequential basis when compared to the third quarter of 2020, primarily due to a reduction in commissions and bonus accruals due to our forecast for lower revenue levels.
Interest Income (Expense) and Other
Interest income (expense) 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, China and Taiwan. We recognized losses from foreign currency transactions of $77,000 in the three months ended September 30, 2020, compared to gains from foreign currency transactions of $71,000 in the three months ended September 30, 2019. We recognized gains from foreign currency transactions of $65,000 in the nine months ended September 30, 2020, compared to gains from foreign currency transactions of $45,000 in the nine months ended September 30, 2019.
Income Taxes
We recorded income tax expense of $409,000 in the three months ended September 30, 2020, compared to an income tax benefit of $234,000 in the three months ended September 30, 2019. We recorded income tax expense of $462,000 in the nine months ended September 30, 2020, compared to income tax expense of $92,000 in the nine months ended September 30, 2019. Income tax expense in the nine months ended September 30, 2020 was reduced by $367,000 for excess tax benefits from employee stock option exercises. Our income tax expense in the nine months ended September 30, 2020 reflected an effective tax rate of approximately 10%, compared to an effective tax rate of approximately 13% in the nine months ended September 30, 2019. The reduction in effective tax rate in the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019, was due to the significant excess tax benefits from employee stock option exercises recognized in the nine months ended September 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 decreased by $171,000 in the nine months ended September 30, 2020. Cash provided by operating activities of $2.5 million and proceeds of $9.0 million from maturities of marketable securities were more than offset by purchases of marketable securities totaling $10.6 million and purchases of fixed assets and capitalized patent costs totaling $1.2 million. Proceeds from stock option exercises and share purchases under our Employee Stock Purchase Plan totaling $546,000, were mostly offset by $420,000 of cash used to make employee withholding tax payments for shares withheld related to stock option exercises. 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 $1.6 million to $27.9 million as of September 30, 2020, from $26.3 million as of December 31, 2019.
Operating activities provided $2.5 million of cash in the nine months ended September 30, 2020. The amount of cash provided by operations was favorably impacted by net income of $4.3 million. Net income was affected by non-cash expenses totaling $3.3 million for depreciation and amortization, non-cash operating lease expense, provision 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 an increase in accounts payable of $3.1 million and an increase in accrued expenses of $1.1 million. Changes in operating assets and liabilities using cash included an increase in accounts and trade notes receivable of $1.7 million, an increase in inventories of $6.4 million, an increase in prepaid expenses and other current assets of $785,000 and various changes in other operating assets and liabilities totaling $408,000. Increases in accounts payable and inventories at September 30, 2020 were due to planned purchases of raw materials to meet anticipated customer demand for SQ3000™ Multi-Function systems. The increase in accrued expenses was mainly due to bonus accruals resulting from our improved financial performance. Accounts and trade notes receivable increased due to the significant increase in sales in the third quarter of 2020 when compared to the fourth quarter of 2019. The increase in prepaid expenses and other current assets was due to higher balances of refundable goods and services taxes resulting from the additional purchases of raw materials and amounts receivable under the Singapore jobs support program. The decrease in other operating assets and liabilities was mainly due to payments for operating lease liabilities.
Investing activities used $2.8 million of cash in the nine months ended September 30, 2020. Changes in the level of investment in marketable securities, resulting from purchases and maturities of those securities, used $1.6 million of cash in the nine months ended September 30, 2020. We used $1.2 million of cash in the nine months ended September 30, 2020 for the purchase of fixed assets and capitalized patent costs.
Financing activities provided $126,000 of cash in the nine months ended September 30, 2020. Proceeds from the exercise of stock options and share purchases under our employee stock purchase plan provided $546,000 of cash in the nine months ended September 30, 2020. Tax payments for shares withheld related to stock option exercises used $420,000 of cash in the nine months ended September 30, 2020.
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 September 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.