The following discussion should be read in conjunction with our financial statements and notes thereto. Our fiscal year ends December 31. This Report contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Please see "Statement Regarding Forward-Looking Information" and Part II, Item 1A, "Risk Factors" of this Report. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include changes in external factors or in our internal budgeting process which might impact trends in our results of operations, unanticipated working capital or other cash requirements, changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate, and various competitive market factors that may prevent us from competing successfully in the marketplace. Forward-looking statements do not represent our views as of any date other than the date of this Report.
We design, develop, manufacture and market organic light emitting diode, or OLED, miniature displays, which we refer to as OLED-on-silicon microdisplays, virtual imaging products that utilize OLED microdisplays, and related products. We also perform research in the OLED field. Our virtual imaging products integrate OLED technology with silicon chips to produce high-resolution microdisplays which, when viewed through a magnifying headset, create virtual images that appear comparable in size to that of a computer monitor or a largescreen television. Our products enable our original equipment manufacturer, or OEM, customers in the military and commercial markets to develop and market improved or new electronic products.
We believe that our OLED microdisplays offer a number of significant advantages over comparable liquid crystal microdisplays, including higher contrast, greater power efficiency, less weight, more compact size, and negligible image smearing. Using our active matrix OLED technology, many computer and electronic system functions can be built directly into the OLED microdisplays silicon backplane, resulting in compact, high resolution and power efficient systems. Already proven in military and commercial systems, our product portfolio of OLED microdisplays deliver highresolution, virtual images that perform effectively even in extreme temperatures and highvibration conditions.
During the second quarter of 2022 our total revenue was $7.2 million marked by continuing strength in military demand and increased revenue contributions from medical customers. In addition to higher yields, we saw a 40% increase in display production from the second quarter of last year. Our second quarter 2022 display revenues of $7.0 million was up 22% year over year while our quarterly display revenue gross margin improved to 21% from the prior year's second quarter of 5%. As of the end of the second quarter, our sales backlog remained strong at $12.8 million, reflecting demand for our displays for use in thermal weapon sights, military night vision goggles, and medical applications.
Operating expenses for the second quarter of 2022, including R&D expenses were $3.4 million, compared with $3.5 million in the prior-year period. Operating expenses as a percentage of sales were 47% in the second quarter of 2022, with 55% in the prior-year period.
We have implemented employee health and safety measures as required by the Centers for Disease Control and Prevention, or CDC, guidelines, and monitor, Federal, State, and local governmental regulations to respond to the latest health and safety guidelines. As a result of the COVID-19 pandemic, we experienced disruptions in supply, had several employees test positive for the COVID-19 virus and had to close our facilities for cleaning purposes. There is no assurance that our operations will not be disrupted in the future by additional impacts of the COVID-19 pandemic, its variants, or other resurgences of the virus, on either our internal operations or those of our suppliers or customers, including the possible impact of disruptions in the supply of silicon wafers or other raw materials that could harm our ability to meet demand for our products in a timely manner, or within budget.
We received a validation of our products and technology during fiscal 2020 from the U.S. government. In 2020, we received two U.S. Department of Defense, or DoD, awards totaling $39.1 million. We believe we are the only commercial U.S. manufacturer of OLED microdisplays and our displays are used in many U.S. Military programs. The Company has committed the funds and ordered all equipment to be purchased under these programs. As of the end of the second quarter of 2022, the Company has qualified and added four pieces of equipment to its production line and received three additional pieces of equipment that are currently in qualification stages. We expended $19.3 million of grant money towards progress payments to equipment vendors and have five more major pieces of equipment on order, including an advanced, production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology for the benefit of AR/VR customers. Overall, the Company remains on track and on budget with the requirements of these important government grants and is beginning to realize the anticipated yield, reliability, and throughput improvements.
As of June 30, 2022, all equipment awarded by these grants had been ordered, including a production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology. We have taken delivery of seven pieces of production equipment and received $19.8 million of the total $39.1 million in government granted awards for initial deposits required by capital equipment vendors.
We are continually making improvements in production processes and beginning to add the government funded equipment to our production line however, most of our equipment is older. Malfunctions in single point of failure equipment have the potential to delay our production until repairs can be made. We experienced equipment issues leading to late order shipments during 2020 and 2021, and had delays in getting vendor support personnel due to COVID-19 travel restrictions, resulting in occasional production disruptions. Additional equipment to be purchased and added to our line during fiscal 2022 and 2023 under our government awards programs are expected to reduce our single point of failure risk and continue to improve manufacturing yields and throughput. As part of our ongoing efforts to improve our throughput, yield, and quality practices, we are working with an industrial engineering firm to develop an operations excellence strategy and to obtain the AS9100 quality certification by the fourth quarter of 2022. Our backlog on June 30, 2022, was $12.8 million compared to backlog of $9.5 million at June 30, 2021. Backlog is comprised of orders believed to be firm with scheduled delivery dates over the next twelve months and does not include contract revenues.
We believe that our U.S.-based design and manufacturing, combined with in-house advanced backplane design, and our dPd technology give us a competitive advantage. Our direct patterning equipment is operational. We have fabricated full color displays using the newly upgraded and installed dPd tool during 2021 including our 4kX4k and WUXGA displays. In July 2021, using our dPd technology we created full color WUXGA displays with a brightness of over 10,000 cd/m2 and displayed these to industry analysts. We continue our development work for a tier one consumer customer and are targeting similar levels of brightness on proof-of-concept displays using our full color dPd process.
Consumer, commercial (in which we include the medical and industrial sectors), and military customers continue to look to us because of our technological leadership in display brightness and resolution. This leadership in brightness is further demonstrated by our proprietary dPd capability. Unlike traditional OLEDs that produce colors by using a white source with filters that eliminate about 80% of the emitted light, with dPd we make full color displays by directly depositing each of the primary color materials on respective sub-pixels, without the use of filters. This advanced technology gives us an increase in brightness of over 10X versus the competition. In July 2021, we achieved full color brightness levels of over 10,000 cd/m2 and expect to achieve a brightness level of over 28,000 cd/m2 ready for mass production of full color displays by 2023. We achieved the highest monochrome brightness levels in the market years ago and are continuing our leadership with color displays. Display brightness is critical for AR/VR devices because of optics inefficiency and the need to eliminate motion artifacts. This is especially important for heads up displays used in bright, daylight environments. Our high resolution and low pixel pitch are also important to eliminate the "screen door" effect that comes with expanding lower resolution displays over wide fields of view.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. which require that management make numerous estimates and assumptions.
Please refer to the information provided under the heading "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 10, 2022, or 2021 Form 10-K for a discussion of our critical accounting policies. There were no material changes to such policies in the six months ended June 30, 2022.
Comparative results of operations for the three and six months ended June 30, 2022 and 2021 (in thousands):
Total revenue for the three and six months ended June 30, 2022 were $7.2 million and $14.5 million, respectively, as compared to revenues of $6.3 million and $13.1 million, for the three and six months ended June 30, 2021.
Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three and six months ended June 30, 2022 product revenue increased by $1.3 million and $2.2 million, respectively, primarily due to increased shipments to customers in NATO countries, increased medical revenues and shipments of displays used for the ENVG-B program.
Contract revenue primarily reflected development associated with a proof of concept display for a tier one consumer company. For the three and six months ended June 30, 2022 contract revenue decreased by $0.4 million and $0.7 million, respectively, as compared to the prior period, reflecting the timing of phases and milestones of this contract. We are continuing to work on our proof of concept for this customer and expect ongoing contract revenue under this program.
Total cost of revenues is comprised of costs of product and contract revenues. Cost of product revenue includes materials, labor and manufacturing overhead, warranty costs and depreciation related to our products. Cost of contract revenue includes direct and allocated indirect costs associated with performance on the contracts, primarily engineering resources and materials. Total cost of revenues for the three and six months ended June 30, 2022 decreased by $0.1 million and $0.3 million, respectively from the comparable prior year period due to improvements in yield.
Product cost of revenues for the three and six months ended June 30, 2022, increased from the prior year period, primarily due to the increases in revenue.
Contract cost of revenues for the three and six months ended June 30, 2022 decreased $0.2 million and $0.5 million, respectively, compared to the prior year period, reflecting decreased contract revenue.
Product revenues gross profit $ 1,504 $ 276 $ 3,744 $ 1,674 Product revenues gross margin
Contract revenues gross profit $ 65 $ 295 $ 314 $ 605 Contract revenues gross margin
Total gross profit is a function of revenues less cost of revenues. Gross profit for the three months ended June 30, 2022 of $1.6 million increased $1.0 million, from the comparable prior year period reflecting increased product revenues and the impact of higher average selling prices in the current year's periods due to price increases and a favorable sales mix. Total gross margin was 22% and 28% for the three and six months ended June 30, 2022, respectively, compared to 9% and 17% for the comparable 2021 periods.
The product gross profit of $1.5 million and $3.7 million for the three and six months ended June 30, 2022, increased from $0.3 million and $1.7 million in the comparable prior year periods due to increased shipments of displays in the three and six months ended June 30, 2022 combined with the favorable impact of price increases, improvements in yields and increases in period costs capitalized into inventory due to increased production volumes.
Contract gross margin is dependent upon the mix of internal labor costs versus external third-party costs and materials, with the external third-party costs and materials causing a lower gross margin and reducing the contract gross profit. For the three and six months ended June 30, 2022, contract revenue gross profit was $0.1 million and $0.3 million compared to $0.3 million and $0.6 million, respectively, for the prior year period. The decrease in contract gross margin for the three months ended June 30, 2022 versus the prior year period is primarily due to the mix of higher margin consumer contracts versus military revenues.
R&D expenses are Company funded and are primarily compromised of salaries and related benefits, development materials and other costs specifically allocated to the development of new technologies, microdisplay products, OLED technologies and production processes. R&D related costs associated with fulfilling contracts are categorized as contract cost of revenues. R&D expense was $1.5 million and $2.9 million for the three and six months ended June 30, 2022, compared to $ 1.8 million and $3.6 million, respectively, in the prior year period. The decrease in R&D costs in the second quarter and first six months of 2022 primarily reflect lower allocations of production costs to R&D due to the completion of development work on the XLE process in the last quarter of 2021.
Selling, General and Administrative Expense
SG&A expenses consist primarily of personnel expenses, professional services fees, as well as other marketing, general corporate and administrative expenses. The increase in SG&A expenses for the three and six months ended June 30, 2022 of $0.2 million and $0.6 million, respectively, primarily reflects changes in non-cash stock compensation, and increase in legal fees.
Other income (expense), net consists of changes in the fair value of warrant liability as well as interest income earned on cash balances. Other income related to the change in fair value of warrant liability was $0.2 million for the three months ended June 30, 2022, compared to other expense of $2.6 million for the three months ended June 30, 2021. This non-cash income or expense is associated with changes in the liability related to registered warrants issued in May 2017 and January 2018. We are required to revalue warrants classified on our Condensed Consolidated Balance Sheets as a liability at the end of each reporting period and reflect a gain or loss from the change in fair value in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model. Other income for the three and six months ended June 30, 2022, also includes a $0.1 million in reimbursement of labor overhead charges under government grant programs. During the three and six months ended June 30, 2022 we started to depreciate assets purchased with government awards and pursuant to our accounting policy, we began to record systematic reductions in the deferred income - government awards liability to recognize income associated with these grants over their useful, or depreciable lives. For each quarterly period going forward we will reduce the government awards liability and record a credit to other income equal to the related quarterly depreciation on any assets purchased with government funds. During the three and six months ended June 30, 2022 we recognized other income of $0.2 million related to these assets.
Gain on forgiveness of debt
Gain on forgiveness of debt of $1.9 million reflects indebtedness payable to the Small Business Administration that was forgiven on March 31, 2021, pursuant to the terms of the Paycheck Protection Program and the CARES Act.
As of June 30, 2022, we had $4.3 million in cash and cash equivalents, working capital of $12.3 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.1 million and $0.7 million, respectively. We had $5.7 million in cash, working capital of $11.8 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.0 million and $2.3 million, respectively, at December 31, 2021.
On July 28, 2020, we announced that we had been awarded a $33.6 million contract over the following 33 months from the DoD to sustain and enhance U.S. domestic capability for high resolution, high brightness OLED microdisplays that will be based on our proprietary direct dPd technology. This investment is in addition to the $5.5 million award announced on June 11, 2020, under the IBAS Program for OLED Supply Chain Assurance. We have used and expect to continue to use the investment to increase capacity and sustain
operations at our Hopewell Junction, New York headquarters. In August 2020, these funds began to be released to us and will continue to be released over the life of the programs in accordance with the down payment and progress payment schedules of the various capital equipment vendors.
As of June 30, 2022, we have ordered all equipment awarded by these grants, including a production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology. We have taken delivery of seven pieces of production equipment and expended $19.3 million of the total $39.1 million in government granted awards for progress payments required by capital equipment vendors.
For the six months ended June 30, 2022 cash used in operating activities were $1.8 million which was attributable to a net loss of $1.6 million and cash used by operating assets and liabilities of $1.0 million and non-cash income and expenses of $0.7 million. Cash used in operating activities for the six months ended June 30, 2021 was $2.1 million.
For the six months ended June 30, 2022 cash used in investing activities was $8.5 million related to equipment purchases primarily to improve manufacturing yields and production capacity and to advance our dPd technology including grant proceeds for capital expenditures of $7.4 million.
As of June 30, 2022, we had outstanding commitments to purchase approximately $0.9 million in capital expenditures, and expect to make additional capital expenditures during 2022 to improve our manufacturing and R&D capabilities. These commitments exclude $16.4 million expected to be purchased and funded by the DoD, as described above. Cash used in investing activities during the six months ended June 30, 2021 was $5.7 million for equipment purchases.
For the six months ended June 30, 2022, cash provided by financing activities of $8.7 million, includes proceeds from government grants of $6.6 million, and public offering (ATM) proceeds of $2.1 million offset by net borrowings of $0.1 million under our ABL Facility. Net cash provided by financing activities during the six months ended June 30, 2021 was $9.4 million.
The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes that we will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. For the six months ended June 30, 2022, a net loss of $1.6 million was incurred and cash used in operating activities of $1.8 million. As of June 30, 2022, we had $4.3 million of cash, $2.1 million of outstanding indebtedness and borrowing availability of $0.7 million under our ABL Facility.
Our ABL Facility expires on December 31, 2022, and renews automatically for another year unless terminated pursuant to its terms. The ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default. Although our relationship with the lender is positive, there is no assurance the lender will renew or extend this facility or continue to make funds available during 2022 and beyond at present availability levels, or at all.
Due to continuing losses, our financial position, and uncertainty regarding our ability to borrow under our ABL Facility, or continue to raise funds under our ATM facility, we may not be able to meet our financial obligations as they become due without additional financing or sources of capital. In addition, the COVID-19 pandemic and disruptions caused by the war in Ukraine have significantly increased economic and demand uncertainty across the globe and contributed to supply chain shortages and disruptions. Although demand for our products has remained steady, inflationary factors and our ability to obtain components and other materials or services on a timely basis has resulted in manufacturing delays, and increased costs. If these trends worsen as a result of COVID-19, the Ukraine war, or other semiconductor supply chain issues or result in lost orders it could materially and adversely affect our business, financial condition, and results of operations. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that we will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.
We have taken actions to increase revenues and to reduce expenses and are considering financing alternatives. Our plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continue a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) continue to utilize government grants for purchase of capital equipment and funding manufacturing personnel, 4) reduce discretionary and other expenses, 5) seek to enter new markets, 6) sell shares under our At the Market, or ATM, equity facility entered into in November 2021, and 7) consider additional financing and/or strategic alternatives.
We are reassessing our business plans and forecasts over the next two years. Based on our known cash needs as of July 2022, our latest forecast of revenues and expenses, and the anticipated availability of our ABL facility, we have developed plans to extend our
liquidity to support working capital requirements through the third quarter of 2023 and beyond.
However, there can be no assurance our plans will be achieved and we will be able to meet our financial obligations as they become due without obtaining additional financing or sources of capital. Therefore, in accordance with applicable accounting guidance, and based on our current financial condition and availability of funds, there is substantial doubt about our ability to continue as a going concern through twelve months from the date these financial statements were issued.
On November 18, 2021, we entered into an ATM offering agreement with H.C. Wainwright & Co., LLC, or Wainwright, relating to sales of shares of our common stock under an ATM facility. On November 18, 2021, we also filed a prospectus supplement to allow the sale of shares of our common stock having an aggregate offering price of up to $10.0 million under the ATM facility. For the six months ended June 30, 2022, we raised $2.1 million through the sale of shares under the ATM facility. During 2021, we raised $0.2 million, net of offering expenses. We used and intend to use the net proceeds from sales made under the ATM facility for working capital and other general corporate purposes. We had approximately $7.5 million of potential sales remaining under the ATM facility, gross of offering expenses as of June 30, 2022.
On December 21, 2016, we entered into an asset based revolving credit facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent of 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2,000. We are obligated to pay the lender a monthly administrative fee of $1,000 and an annual facility fee equal to 1% of the maximum amount borrowable under the facility. The ABL Facility automatically renewed on December 31, 2021 for a one-year term.
Our ABL Facility expires on December 31, 2022 and renews automatically for another year unless terminated pursuant to its terms. Our ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default.
The ABL Facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default, including a provision that we maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million. As of June 30, 2022, we had $2.1 million in borrowings, had unused borrowing availability of $0.7 million and were in compliance with all financial debt covenants.
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