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 resulting from the economic consequences of the Covid-19 pandemic; (ii) the potential effect on our revenue and operating results of the Covid-19 crisis on our customers and suppliers, the markets 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 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 timing of and improvement in gross margins resulting from future cost reduction programs; (ix) market acceptance of our SQ3000 Multi-Function systems and products for semiconductor wafer and advanced packaging inspection and metrology; (x) our assessment of trends in the surface mount technology ("SMT") and semiconductor capital equipment markets; (xi) the impact of lower margin MX3000™ memory module inspection systems on our consolidated gross margin in any future period; (xii) risks related to cancellation or renegotiation of orders we have received; and (xiii) changes in the level of tariffs and other trade policies of the United States, and trade relations with other countries. 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, 2020.
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.
We believe that conditions in the SMT and semiconductor capital equipment markets are currently robust, and we believe this market strength will continue into the foreseeable future. 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 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 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 systems for Automated Optical Inspection (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. We are developing an enhanced version of the SQ3000 Multi-Function system that will allow for inspection and metrology of features sizes down to 50-microns at in-line production 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 in the first quarter of 2020. Since late 2020, we have received new purchase orders for the MX3000 valued at $8.1 million. We recognized $2.4 million of the MX3000 orders as revenue in the second quarter of 2021, and expect to recognize a further $4.9 million of the MX3000 orders as revenue in the third quarter of 2021.
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Our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS™ sensor, which is capable of measuring feature sizes down to 25 microns accurately and at high speeds, and is suitable for many semiconductor wafer and advanced packaging inspection and metrology applications. We have adapted the software used in our SQ3000 Multi-Function systems to work with wafer handling equipment to facilitate sales of our 3D NanoResolution MRS sensor to OEM's and system integrators.
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Our new WX3000™ metrology and inspection system for wafer and advanced packing applications, which incorporates our next generation ultra-high resolution 3D NanoResolution MRS sensor. The WX3000 performs 100% 3D and 2D inspection and metrology simultaneously at high speeds 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 and advanced packaging inspection and metrology applications for feature sizes down to 25-microns. We anticipate that sales of sensors and systems based on our 3D MRS technology for semiconductor wafer 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 $6.4 million or 43% to $21.3 million in the six months ended June 30, 2021, from $14.9 million in the six months ended June 30, 2020. 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 mini LED, memory modules and semiconductor wafer 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 a record $45.3 million at June 30, 2021, up from $32.4 million at March 31, 2021, and up from $24.8 million at June 30, 2020. Our backlog at June 30, 2021 includes approximately $10.0 million of longer-term orders from OEM customers that are scheduled for shipment in periods after 2021. We are forecasting sales of $25.0 million to $28.0 million for the third quarter of 2021 ending September 30, compared to $20.8 million in the third quarter of 2020. Our forecast for the third quarter of 2021 includes $4.9 million of sales from our order backlog of MX memory module inspection systems. It is anticipated that there will be no revenue from MX memory module systems in the fourth quarter of 2021 due to normal quarterly variability in the sales of these products. For this reason, aggregate sales in the fourth quarter of 2021 are expected to be lower than the third quarter of 2021 on a sequential quarterly basis. However, strong year-over-year sales growth is anticipated for the fourth quarter of 2021 when compared to the fourth quarter of 2020, which we believe will be driven by the Company's record backlog and the robust capital spending environment. We believe that demand in the SMT and semiconductor capital equipment markets will remain strong into the foreseeable future. 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 products based on 3D MRS technology and WaferSense sensors should increase revenues and net income. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling $32.0 million at June 30, 2021.
Impact from Covid-19
Effect of Covid-19 Outbreak on Business Operations
Covid-19 was first identified in December 2019, 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 to varying degrees, and the ultimate impacts of Covid-19, including the potential impact of known and future variants, 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 32% to $42.9 million in the first six months of 2021, from $32.4 million in the first six months of 2020. We are forecasting sales of $25.0 million to $28.0 million for the third quarter of 2021 ending September 30, compared to $20.8 million in the third quarter of 2020. Our forecast for the third quarter of 2021 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. Since the start of the pandemic, many of our non-factory employees have spent the majority of their time 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 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 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 six months ended June 30, 2021 due to the Covid-19 pandemic. Travel, trade show expenses 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 Covid-19 related supply chain disruptions will have a significant impact on our revenue in the third quarter of 2021.
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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, 2021, our available balances of cash and marketable securities totaled $32.0 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.
United States Covid-19 Relief Legislation
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. Additional relief packages were passed in December 2020 and March 2021. We have analyzed these pieces of legislation and presently do not believe they will have a material impact on our financial condition, results of operations or liquidity. However, we will continue to monitor the impact that these pieces of legislation could have on our business in the future.
Singapore Jobs Support Program
The Singapore Government implemented a jobs support program in 2020 that was 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 co-funded a portion of the gross monthly wages paid to local employees, which reduced our operating expenses in the three and six months ended June 30, 2020 by $276,000 and $295,000, respectively. We did not receive any material benefit from the Singapore jobs support program in the three or six months ended June 30, 2021, nor do we expect to receive any material benefits in future periods.
Revenues
Our revenues increased by 58% to $25.2 million in the three months ended June 30, 2021, from $16.0 million in the three months ended June 30, 2020. Our revenues increased by 32% to $42.9 million in the six months ended June 30, 2021, from $32.4 million in the six months ended June 30, 2020. The following table sets forth revenues by product line for the three and six months ended June 30, 2021 and 2020:
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Three Months Ended June 30,
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Six Months Ended June 30,
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(In thousands)
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2021
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2020
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% Change
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2021
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2020
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% Change
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High Precision 3D and 2D Sensors
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$
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7,131
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$
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4,745
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50
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%
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$
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13,488
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$
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8,867
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52
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%
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Inspection and Metrology Systems
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12,581
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7,661
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64
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%
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18,920
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16,022
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18
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%
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Semiconductor Sensors
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5,492
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3,590
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53
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%
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10,528
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7,536
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40
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%
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Total
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$
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25,204
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$
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15,996
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58
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%
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$
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42,936
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$
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32,425
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32
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%
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Revenues from sales of high precision 3D and 2D sensors increased by $2.4 million or 50% to $7.1 million in the three months ended June 30, 2021, from $4.7 million in the three months ended June 30, 2020. Revenues from sales of high precision 3D and 2D sensors increased by $4.6 million or 52% to $13.5 million in the six months ended June 30, 2021, from $8.9 million in the six months ended June 30, 2020. The increases were due to higher sales of both 3D MRS sensors and legacy 2D sensors resulting from improving conditions in the global semiconductor and SMT capital equipment markets. Sales of high precision 3D MRS sensors increased by $1.4 million or 46% to $4.3 million in the three months ended June 30, 2021, from $3.0 million in the three months ended June 30, 2020. Sales of high precision 3D MRS sensors increased by $2.5 million or 42% to $8.6 million in the six months ended June 30, 2021 from $6.0 million in the six months ended June 30, 2020.
Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers and system integrators selling products that incorporate our sensors. We believe sales of our 3D MRS 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 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 forecasted to post strong year-over-year growth in the third quarter of 2021.
Revenues from sales of inspection and metrology systems increased by $4.9 million or 64% to $12.6 million in the three months ended June 30, 2021, from $7.7 million in the three months ended June 30, 2020. Revenues from sales of inspection and metrology systems increased by $2.9 million or 18% to $18.9 million in the six months ended June 30, 2021, from $16.0 million in the six months ended June 30, 2020. The increases were due to higher sales of SQ3000™ Multi-Function systems and MX3000™ memory module inspection systems resulting from improving market conditions, and increasing sales from more complex applications such as inspection and metrology for mini-LED and memory modules. Sales of SQ3000™ Multi-Function systems increased by $1.6 million or 35% to $6.3 million in the three months ended June 30, 2021, from $4.7 million in the three months ended June 30, 2020. Sales of SQ3000™ Multi-Function systems increased by $2.4 million or 30% to $10.3 million in the six months ended June 30, 2021, from $8.0 million in the six months ended June 30, 2020. Sales of 2D and 3D MX memory module inspection systems totaled $2.4 million in the three and six months ended June 30, 2021. There were no sales of MX systems in the three months ended June 30, 2020. Sales of 2D and 3D MX systems totaled $1.4 million in the six months ended June 30, 2020. Revenues from sales of inspection and metrology systems are forecasted to grow solidly in the third quarter of 2021 on a year-over-year basis.
We believe the increase in sales of SQ3000™ Multi-Function systems in the six months ended June 30, 2021 was due to the competitive advantages offered by our SQ3000™ Multi-Function system products, particularly for more complex applications, 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. 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.
Since late 2020, we have received new purchase orders for the MX3000 valued at $8.1 million. We recognized $2.4 million of the MX3000 orders as revenue in the second quarter of 2021, and expect to recognize a further $4.9 million of the MX3000 orders as revenue in the third quarter of 2021. We believe memory manufacturers have determined that post singulation automated optical inspection of memory modules is an important step in their manufacturing process to improve yields and product quality. Two of the world's three largest memory manufacturers now use either our 2D MX600™ or 3D MX3000 memory module inspection systems. As a result, we believe the potential market opportunity for our 2D and 3D memory module inspection systems is significant and anticipate that sales of these systems will continue in the future.
Revenues from sales of semiconductor sensors, principally our WaferSense line of products, increased by $1.9 million or 53% to $5.5 million in the three months ended June 30, 2021, from $3.6 million in the three months ended June 30, 2020. Revenues from sales of semiconductor sensors increased by $3.0 million or 40% to $10.5 million in the six months ended June 30, 2021, from $7.5 million in the six months ended June 30, 2020. The revenue increases were due to construction of new semiconductor fabs, favorable market conditions for semiconductor capital equipment spending, and the growing acceptance of our WaferSense products as important productivity enhancement tools by 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 are forecasted to post strong year-over-year growth in the third quarter of 2021.
Export revenues totaled $21.2 million or 84% of our revenues in the three months ended June 30, 2021, compared to $13.4 million or 84% of our revenues in the three months ended June 30, 2020. Export revenues totaled $35.7 million or 83% of our revenues in the six months ended June 30, 2021, compared to $25.2 million or 78% of our revenues in the six months ended June 30, 2020. Export revenues as a percentage of total revenues increased in the three and six months ended June 30, 2021 due to higher sales of 3D and 2D high precision sensors, semiconductor sensors and MX3000™ memory module inspection systems. A higher proportion of these products are generally sold outside the United States as compared to our other products.
Cost of Revenues and Gross Margin
Cost of revenues increased by $5.4 million or 62% to $14.1 million in the three months ended June 30, 2021, from $8.7 million in the three months ended June 30, 2020. Cost of revenues increased by $5.6 million or 32% to $23.4 million in the six months ended June 30, 2021, from $17.8 million in the six months ended June 30, 2020. Total gross margin as a percentage of revenues was 44% in the three months ended June 30, 2021, compared to 46% in the three months ended June 30, 2020. Total gross margin as a percentage of revenues was 45% in both the six months ended June 30, 2021 and the six months ended June 30, 2020. The increase in cost of revenues in both periods was mainly due to higher revenues. Revenues increased on a year-over-year basis in the three and six months ended June 30, 2021 by 58% and 32%, respectively. Cost of revenues in the three months ended June 30, 2021 were negatively impacted by a less favorable sales mix of lower gross margin products. Sales of lower gross margin inspection and metrology system products, including $2.4 million of MX3000™ memory module inspection systems, represented a larger percentage of our total revenues in the three months ended June 30, 2021, when compared to the three months ended June 30, 2020.
Our total gross margin as a percentage of revenues in the third quarter of 2021 is expected to decline by roughly 1-2 percentage points from the level in the second quarter of 2021, reflecting an increased proportion of lower gross margin inspection and metrology systems in our revenue mix, including $4.9 million of MX3000 memory module inspection systems. We anticipate sequential quarterly improvement in our total gross margin percentage for the fourth quarter of 2021, given that we are not expecting any sales of lower gross margin MX3000™ systems in the 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 SQ3000 Multi-Function systems, WX3000 system for semiconductor wafer and advanced packaging inspection and metrology, 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 sensor and system 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 3D MX3000 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.
Operating Expenses
R&D expenses were $2.8 million or 11% of revenues in the three months ended June 30, 2021, compared to $2.2 million or 14% of revenues in the three months ended June 30, 2020. R&D expenses were $5.5 million or 13% of revenues in the six months ended June 30, 2021, compared to $4.6 million or 14% of revenues in the six months ended June 30, 2020. The increase in R&D expenses in the three and six months ended June 30, 2021 was mainly due to higher compensation costs for new and existing R&D employees, including incentive compensation accruals, and higher costs for engineering prototypes. R&D expenses in the three and six months ended June 30, 2020 were reduced by $225,000 and $245,000, respectively, due to the favorable impact of the Singapore Government's jobs support program on wage costs discussed above. Current R&D expenditures are primarily focused on the continued development of our portfolio of next generation 3D MRS sensor and system products and continued R&D work on WaferSense products. We also continue to enhance and develop new generations of our SQ3000 Multi-Function systems and 3D MX3000 memory module inspection systems.
Selling, general and administrative ("S,G&A") expenses were $4.7 million or 19% of revenues in the three months ended June 30, 2021, compared to $3.7 million or 23% of revenues in the three months ended June 30, 2020. Selling, general and administrative expenses were $8.6 million or 20% of revenues in the six months ended June 30, 2021, compared to $7.8 million or 24% of revenues in the six months ended June 30, 2020. The increase in S,G&A expenses in both the three and six months ended June 30, 2021 was due to higher third party channel commissions resulting from the significant revenue increases in both periods, higher accruals for incentive compensation given our improved financial performance, and an increase in our accounts receivable allowance and related expense.
Total operating expenses in the third quarter of 2021 are forecasted to be at or near the level in this year's second quarter.
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, China and Taiwan. We recognized losses from foreign currency transactions of $1,000 in the three months ended June 30, 2021, compared to losses from foreign currency transactions of $24,000 in the three months ended June 30, 2020. We recognized losses from foreign currency transactions of $53,000 in the six months ended June 30, 2021, compared to gains from foreign currency transactions of $146,000 in the six months ended June 30, 2020.
Income Taxes
We recorded income tax expense of $590,000 in the three months ended June 30, 2021, compared to an income tax benefit of $96,000 in the three months ended June 30, 2020. We recorded income tax expense of $901,000 in the six months ended June 30, 2021, compared to income tax expense of $53,000 in the six months ended June 30, 2020. Our income tax expense in the six months ended June 30, 2021 reflected an effective tax rate of approximately 17%, compared to an effective tax rate of approximately 2% in the six months ended June 30, 2020. The increase in effective income tax rate in both the three and six months ended June 30, 2021, when compared to the three and six months ended June 30, 2020, was mainly due to a significant reduction in excess tax benefits from employee stock option exercises. Excess tax benefits in the three and six months ended June 30, 2021 were negligible, compared to excess tax benefits in the three and six months ended June 30, 2020 of $340,000 and $356,000, respectively. On a recurring basis, our effective income tax rate is favorably impacted by the U.S. federal R&D tax credit, foreign tax credit and the impact from Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).
We have significant deferred tax assets as a result of temporary differences between the taxable income on our tax returns and U.S. GAAP income, R&D tax credit carry forwards 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 credit and 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 was not required at June 30, 2021 or December 31, 2020.
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 $1.2 million in the six months ended June 30, 2021. Cash provided by operating activities of $2.7 million and proceeds of $6.3 million from maturities and sales of marketable securities were partially offset by purchases of marketable securities totaling $6.8 million and purchases of fixed assets and capitalized patent costs totaling $1.1 million. Proceeds from stock option exercises totaled $67,000. 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 $1.5 million to $32.0 million as of June 30, 2021, from $30.6 million as of December 31, 2020.
Operating activities provided $2.7 million of cash in the six months ended June 30, 2021. The amount of cash provided by operations was favorably impacted by net income of $4.6 million. Net income was affected by non-cash expenses totaling $2.8 million for depreciation and amortization, non-cash operating lease expense, provision for doubtful accounts, deferred taxes, non-cash losses from foreign currency transactions, share-based compensation costs and an unrealized gain on our available-for-sale equity security. Changes in operating assets and liabilities providing cash included an increase in accounts payable of $6.0 million and an increase in accrued expenses of $456,000. Changes in operating assets and liabilities using cash included an increase in accounts and trade notes receivable of $7.3 million, an increase in inventories of $3.5 million and a decrease in operating lease liabilities of $409,000. Increases in accounts payable and inventories at June 30, 2021 were due to planned purchases of raw materials to meet anticipated customer demand. The increase in accrued expenses was mainly due to higher accruals for income taxes payable and wages, including incentive compensation, offset in part by payment of 2020 bonus accruals in the first quarter of 2021. Accounts and trade notes receivable increased due to higher sales in the second quarter of 2021 when compared to the fourth quarter of 2020. The decrease in operating lease liabilities was due to monthly rental payments for facility leases.
Investing activities used $1.6 million of cash in the six months ended June 30, 2021. Changes in the level of investment in marketable securities, resulting from purchases and maturities of those securities, used $467,000 of cash in the six months ended June 30, 2021. We used $1.1 million of cash in the six months ended June 30, 2021 for the purchase of fixed assets and capitalized patent costs.
Financing activities provided $67,000 of cash in the six months ended June 30, 2021 from the exercise of employee stock options.
At June 30, 2021, 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.