UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20569

 

Form 10-Q

 

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2003

 

Or

 

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                                    to                                   

 

Commission file number      0-23150

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

10,565,524 shares of Common Stock, par value $.008, were outstanding on October 31, 2003.

 

 

IBIS TECHNOLOGY CORPORATION

 

INDEX

 

	Page Number
PART 1 - FINANCIAL INFORMATION
Item 1 – Financial Statements:
Balance Sheets December 31, 2002 and September 30, 2003 (unaudited)	3
Statements of Operations Three Months Ended September 30, 2002 and 2003 and Nine Months Ended September 30, 2002 and September 30, 2003 (unaudited)	4
Statements of Cash Flows Nine Months Ended September 30, 2002 and 2003 (unaudited)	5
Notes to Unaudited Interim Financial Statements	6
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3 – Quantitative and Qualitative Disclosure About Market Risk	19
PART II – OTHER INFORMATION	19
Item 1 – Legal Proceedings	19
Item 2 – Changes in Securities	19
Item 3 – Defaults upon Senior Securities	19
Item 4 – Submission of Matters to a Vote of Security Holders	19
Item 5 – Other Information	19
Item 6 – Exhibits and Reports on Form 8-K	19
Signatures	20

 

2

 

IBIS TECHNOLOGY CORPORATION

 

BALANCE SHEETS

(Unaudited)

 

			December 31, 2002			September 30, 2003
Assets
Current assets:
Cash and cash equivalents			$	11,745,918		$	4,867,904
Accounts receivable, trade, net (note 6)			1,598,560			203,348
Unbilled revenue (note 6)			—			528,581
Inventories (note 3)			1,231,559			2,736,239
Deferred costs			2,621,580			—
Prepaid expenses and other current assets			112,729			294,532
Total current assets			17,310,346			8,630,604
Property and equipment			51,728,659			51,700,792
Less:	Accumulated depreciation and amortization		(19,233,900		)	(22,127,000		)
	Net property and equipment		32,494,759			29,573,792
Patents and other assets, net			1,893,854			1,737,059
Total assets			$	51,698,959		$	39,941,455
Liabilities and Stockholders’ Equity
Current liabilities:
Capital lease obligation, current			$	1,501,415		$	1,495,808
Accounts payable			897,212			2,429,020
Accrued liabilities			2,394,601			2,824,769
Deferred revenue			6,966,325			—
Total current liabilities			11,759,553			6,749,597
Capital lease obligation, noncurrent			1,184,400			74,651
Total liabilities			12,943,953			6,824,248
Stockholders’ equity:
Undesignated preferred stock, $.01 par value. Authorized 2,000,000 shares; none issued			—			—
Common stock, $.008 par value. Authorized 50,000,000 shares; issued 9,474,940 shares and 9,561,774 shares in 2002 and 2003, respectively			75,799			76,494
Additional paid-in capital			79,101,032			79,685,702
Accumulated deficit			(40,421,825		)	(46,644,989		)
Total stockholders’ equity			38,755,006			33,117,207
Total liabilities and stockholders’ equity			$	51,698,959		$	39,941,455

 

See accompanying notes to unaudited interim financial statements.

 

3

 

IBIS TECHNOLOGY CORPORATION

 

STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2002			2003			2002			2003
Net Sales and revenue:
Wafer product sales		$	2,011,670		$	3,743,875		$	4,992,987		$	7,951,775
Contract and other revenue		60,701			66,834			232,761			592,899
Equipment revenue		5,657,605			226,114			5,987,565			8,622,289
Total net sales and revenue (notes 2 and 6)		7,729,976			4,036,823			11,213,313			17,166,963
Cost of sales and revenue:
Cost of wafer product sales		3,995,509			5,010,417			10,278,147			12,516,260
Cost of contract and other revenue		9,819			6,330			97,076			34,332
Cost of equipment revenue		3,573,559			208,888			3,732,403			4,014,590
Total cost of sales and revenue		7,578,887			5,225,635			14,107,626			16,565,182
Gross profit (loss)		151,089			(1,188,812		)	(2,894,313		)	601,781
Operating expenses:
General and administrative		502,183			477,253			1,643,802			1,663,800
Marketing and selling		382,303			297,519			1,155,703			957,988
Research and development		1,604,539			1,175,064			4,614,678			4,208,360
Total operating expenses		2,489,025			1,949,836			7,414,183			6,830,148
Loss from operations		(2,337,936		)	(3,138,648		)	(10,308,496		)	(6,228,367		)
Other income (expense):
Interest income		68,017			9,564			231,816			49,462
Interest expense		(2,672		)	(33,753		)	(9,057		)	(46,728		)
Other		—			—			—			3,725
Total other income		65,345			(24,189		)	222,759			6,459
Loss before income taxes		(2,272,591		)	(3,162,837		)	(10,085,737		)	(6,221,908		)
Income tax expense		—			—			1,256			1,256
Net loss (note2)		$	(2,272,591	)	$	(3,162,837	)	$	(10,086,993	)	$	(6,223,164	)
Net loss per common share:
Basic		$	(0.24	)	$	(0.33	)	$	(1.11	)	$	(0.66	)
Diluted		$	(0.24	)	$	(0.33	)	$	(1.11	)	$	(0.66	)
Weighted average number of common shares outstanding:
Basic		9,436,170			9,504,210			9,126,317			9,486,532
Diluted (note5)		9,436,170			9,504,210			9,126,317			9,486,532

 

See accompanying notes to unaudited interim financial statements.

 

4

 

IBIS TECHNOLOGY CORPORATION

 

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended September 30,
		2002			2003
Cash flows from operating activities:
Net loss		$	(10,086,993	)	$	(6,223,164	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,657,960			5,014,576
Changes in operating assets and liabilities:
Accounts receivable, trade		4,213,188			1,395,212
Unbilled revenue		—			(528,581		)
Inventories		(657,473		)	(1,504,680		)
Deferred Costs		—			2,621,580
Prepaid expenses and other current assets		350,951			(181,803		)
Accounts payable		2,578,960			1,531,808
Accrued liabilities and deferred revenue		(6,002,178		)	(6,536,157		)
Net cash used in operating activities		(4,945,585		)	(4,411,209		)
Cash flows from investing activities:
Additions to property and equipment, net		(6,321,822		)	(1,842,398		)
Other assets		(81,434		)	(94,416		)
Net cash used in investing activities		(6,403,256		)	(1,936,814		)
Cash flows from financing activities:
Payments of capital lease obligations		(1,134,792		)	(1,115,356		)
Exercise of stock options and warrants		183,081			585,365
Proceeds from sale of common stock net of issuance costs		12,113,469			—
Net cash provided (used) by financing activities		11,161,758			(529,991		)
Net decrease in cash and cash equivalents		(187,083		)	(6,878,014		)
Cash and cash equivalents, beginning of period		13,087,799			11,745,918
Cash and cash equivalents, end of period		$	12,900,716		$	4,867,904
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	9,057		$	46,728

 

See accompanying notes to unaudited interim financial statements.

 

5

 

IBIS TECHNOLOGY CORPORATION

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

 

 

(1) Interim Financial Statements

 

The accompanying financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America.

 

In the opinion of management, the interim financial statements include all adjustments, which consist only of normal and recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.  Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the financial statements of the Company as of and for the year ended December 31, 2002 which are included in the Company’s Annual Report on Form 10-K.

 

(2) Summary of Significant Accounting Policies

 

(a)  Revenue Recognition

 

The Company recognizes revenue from product sales, equipment sales and the sales of spare parts when all of the following criteria have been met:  (1) evidence exists that the customer is bound to the transaction; (2) the sales price to the customer has been fixed or is determinable; (3) the product has been delivered to the customer and, when applicable, the product has been installed and accepted by the customer; and (4) collectibility of the sales price is reasonably assured.  Provisions for estimated sales returns and allowances are made at the time the products are sold.  Revenue derived from contracts and services is recognized upon performance.  Significant management judgments and estimates must be made and used in connection with revenue recognized in any period.  Management analyzes various factors including a review of specific transactions, historical experience, credit worthiness of customers and current market and economic conditions.  Changes in judgments based upon these factors could impact the timing and amount of revenue and cost recognized.

 

(b)  Stock-Based Compensation

 

The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.”  No stock-based compensation cost is reflected in net income (loss) for these plans, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income (loss) and income (loss) per share if we had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock Based Compensation”, to stock based compensation:

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2002			2003			2002			2003
Net loss, as reported		$	(2,272,591	)	$	(3,162,837	)	$	(10,086,993	)	$	(6,223,164	)
Add:  Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(19,192		)	18,185			(2,710,532		)	(1,494,332		)
Pro-forma net loss		$	(2,291,783	)	$	(3,144,652	)	$	(12,797,525	)	$	(7,717,496	)
Net loss per share:
Basic and diluted – as reported		$	(0.24	)	$	(0.33	)	$	(1.11	)	$	(0.66	)
Basic and diluted – pro-forma		$	(0.24	)	$	(0.33	)	$	(1.40	)	$	(0.81	)

 

6

 

The fair value of each stock option is estimated on the date of grant using Black-Scholes option pricing model with the following weighted-average assumptions:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2003			2002			2003
Risk-free interest rate		2.62		%	2.20		%	3.38		%	2.01		%
Expected dividend yield		0.00		%	0.00		%	0.00		%	0.00		%
Expected volatility		115.4		%	64.9		%	103.0		%	73.1		%
Expected life (years)		3			3			3			3
Weighted average fair value of options granted during the quarter		$	5.19		$	9.52		$	7.25		$	7.37

 

Pro-forma net loss reflects only options granted in 1995 through 2003.  Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected because compensation costs for options granted prior to January 1, 1995, are not considered.

 

(3) Inventories

 

Inventories consist of the following:

 

		December 31, 2002			September 30, 2003
Raw materials		$	810,740		$	1,700,107
Work in process		94,090			222,268
Finished goods		326,729			813,864
Total wafer inventory		$	1,231,559		$	2,736,239

 

(4) Capitalization and Subsequent Event

 

In March 2002, Ibis completed a public offering of 900,000 shares of common stock at $13 per share, and on April 1, 2002, 100,000 shares were exercised as an over allotment option by the underwriter. Net proceeds to the Company were approximately $12,100,000.

 

In October 2003, Ibis completed a public offering of 1,000,000 shares of common stock at $13.25 per share, including an over allotment option exercised by the underwriter. Net proceeds to the Company were approximately $12,700,000.

 

(5) Net Income (Loss) Per Share

 

Net income (loss) per share of common stock is computed based upon the weighted average number of shares outstanding during each period and including the dilutive effect, if any, of stock options and warrants.  SFAS 128 requires the presentation of basic and diluted earnings (loss) per share for all periods presented.  As the Company was in a net loss position for the three and nine months ended September 30, 2002 and September 30, 2003, common stock equivalents of 0, 70,611, 167,530 and 47,509, respectively, were excluded from the diluted loss per share calculation, as they would be antidilutive.  As a result, diluted loss per share is the same as basic loss per share for all periods presented.

 

7

 

(6) Significant Customers and Concentration of Business Risk

 

The Company sells its products to a limited number of semiconductor and optical components manufacturers primarily in the United States and the Pacific Rim.

 

Sales for significant customers are shown in dollar amounts and as a percentage of total revenue as follows:

 

		Significant Customers		Amount			%
Three Months Ended September 30, 2002		3		$	7,352,240		95	%
Three Months Ended September 30, 2003		1		$	3,754,458		93	%
Nine Months Ended September 30, 2002		3		$	9,498,549		85	%
Nine Months Ended September 30, 2003		1		$	15,894,242		93	%

 

Accounts receivable and unbilled revenue from significant customers at September 30, 2003 and December 31, 2002 amounted to $664,000 and $769,000, respectively.

 

(7) Industry Segments

 

The Company’s reportable segments are SIMOX Wafer Products, SIMOX Equipment and Other Products or Services.  For purposes of segment reporting, equipment, equipment spares and field service revenue are combined and reported as SIMOX Equipment.  Government contracts, other services and license revenue are combined and reported as Other Products or Services.

 

The table below provides unaudited information for the three and nine months ended September 30, 2002 and 2003 pertaining to the Company’s three industry segments.

 

		SIMOX Wafer Products			SIMOX Equipment			Other Products or Services			Total
Net Sales and Revenue
Three Months Ended September 30, 2002		$	2,011,670		$	5,657,605		$	60,701		$	7,729,976
Three Months Ended September 30, 2003		3,743,875			226,114			66,834			4,036,823
Nine Months Ended September 30, 2002		4,992,987			5,987,565			232,761			11,213,313
Nine Months Ended September 30, 2003		7,951,775			8,622,289			592,899			17,166,963
Operating Income (Loss)
Three Months Ended September 30, 2002		(2,051,941		)	165,306			50,882			(1,835,753		)
Three Months Ended September 30, 2003		(1,688,610		)	(1,033,289		)	60,504			(2,661,395		)
Nine Months Ended September 30, 2002		(6,692,245		)	(2,108,133		)	135,684			(8,664,694		)
Nine Months Ended September 30, 2003		(5,893,762		)	770,628			558,567			(4,564,567		)
Assets
September 30, 2003		31,665,209			2,583,989			120,154			34,369,352
Capital Expenditures
Three Months Ended September 30, 2002		2,976,958			20,561			—			2,997,519
Three Months Ended September 30, 2003		421,204			8,890			—			430,094
Nine Months Ended September 30, 2002		6,052,233			124,339			—			6,176,572
Nine Months Ended September 30, 2003		1,812,265			8,890			—			1,821,155
Depreciation and Amortization of Property and Equipment
Three Months Ended September 30, 2002		1,168,493			359,575			—			1,528,068
Three Months Ended September 30, 2003		1,323,844			341,990			—			1,665,834
Nine Months Ended September 30, 2002		3,472,047			1,117,652			—			4,589,699
Nine Months Ended September 30, 2003		3,872,097			1,052,813			—			4,924,910

 

8

 

The table below provides the reconciliation of reportable segment operating loss and assets to Ibis’ totals.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2003			2002			2003
Segment Reconciliation
Loss Before Income Taxes:
Total operating loss for reportable segments		$	(1,835,753	)	$	(2,661,395	)	$	(8,664,694	)	$	(4,564,567	)
Corporate general & administrative expenses		(502,183		)	(477,253		)	(1,643,802		)	(1,663,800		)
Net other income (expense)		65,345			(24,189		)	222,759			6,459
Loss before income taxes		(2,272,591		)	(3,162,837		)	(10,085,737		)	(6,221,908		)
Capital Expenditures:
Total capital expenditures for reportable segments		2,997,519			430,094			6,176,572			1,821,155
Corporate capital expenditures		88,621			—			145,250			21,243
Total capital expenditures		$	3,086,140		$	430,094		$	6,321,822		1,842,398
Depreciation and Amortization:
Total depreciation and amortization for reportable segments		1,528,068			1,665,834			4,589,699			4,924,910
Corporate depreciation and amortization		22,837			22,790			68,261			89,666
Total depreciation and amortization		$	1,550,905		1,688,624			4,657,960			5,014,576

 

 

						Balance as of 9/30/03
Assets:
Total assets for reportable segments						$	34,369,352
Cash & cash equivalents not allocated to segments						4,867,904
Other unallocated assets						704,199
Total assets						$	39,941,455

 

(8) New Accounting Pronouncements

 

Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,”  is effective for fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement Amends FASB Statement No. 4 and FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS 145 during the first quarter of 2003 without a material impact on its financial condition or results of operations.

 

9

 

Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,”is effective for exit or disposal activities that are initiated after December 31, 2002.  This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The Company adopted SFAS 146 during the first quarter of 2003 without a material impact on its financial condition or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees.  The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002.  The application of the requirements of FIN 45 did not have a material impact on the Company’s financial position or results of operations.

 

Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123,” is effective for fiscal years ending after December 15, 2002. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS 148 during the first quarter of 2003 without a material impact on its financial condition or results of operations.

 

In April 2003, FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS 149 is effective prospectively for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003.  The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates.  In addition, paragraphs 7 (a) and 23 (a), which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003.  The adoption of this Statement did not have a material impact on the Company’s financial condition or results of operations.

 

In May 2003, FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable preferred financial instruments of nonpublic companies.  It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption.  Restatement is not permitted.  The adoption of this Statement did not have a material impact on the Company’s financial condition or results of operations.

 

10

 

IBIS TECHNOLOGY CORPORATION

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Ibis Technology Corporation (“Ibis”) was formed in October 1987 and commenced operations in January 1988. Ibis’ initial activities consisted of producing and selling SIMOX-SOI wafers and conducting research and development activities. This research led to the development of proprietary next generation oxygen implanters, the Ibis 1000, which we began selling in 1996, and the i2000, and also to other proprietary process technology.

 

Initially, much of our revenue was derived from research and development contracts and sales of wafers for military applications. Over the years, there was a shift in revenue to sales of SIMOX-SOI wafers for commercial applications and the nature of our business has evolved through stages where sometimes our revenues resulted primarily from selling wafers for evaluation purposes, and sometimes our revenue was generated primarily from equipment sales. This is a normal path to follow while developing and promoting a fundamental new technology, especially when it relates to the semiconductor industry embracing any change that affects fabrication operations.  This trend is expected to continue in the near-term as our customers continue to sample SOI and the early adopters work to achieve stable production processes and enter pilot production. We believe that we are in the technology rollout stage of our corporate life cycle with respect to our i2000 SIMOX-SOI implanters.

 

Our fundamental SIMOX-SOI technology has been developed, refined, and proven over the last dozen years.  In 2002, we introduced the next generation of SIMOX-SOI technology, which included our second-generation oxygen implanter (i2000) and the modified low dose (“MLD”) SIMOX wafer process, licensed to Ibis by IBM. We believe the ability of the i2000 implanter to produce eight and twelve-inch (or 200 and 300 mm) SIMOX-SOI wafers coupled with the MLD process positions us to capitalize on the growing SOI market. In September 2002, we received an order valued at approximately $8 million for an i2000 oxygen implanter from a major semiconductor manufacturer. During the second quarter ended June 30, 2003, our largest customer accepted the i2000 implanter that we shipped to them late last year. As a result of this acceptance, we recognized revenue of approximately $8 million in the second quarter ended June 30, 2003.

 

Commercial shipments of our wafers have been used principally for evaluation purposes or pilot production in products, including microprocessors, gate arrays, ASICs (application specific integrated circuits), memories (DRAMs, SRAMs, etc.), and cellular and mobile radio components. From our customers’ perspective, the pathway to SOI adoption is complex and time consuming.  Typically, a customer will go through three major stages:

 

•                                            Sampling, where preliminary performance characteristics are explored and verified;

•                                            R&D, where specific customer specifications are tested and developed; and

•                                            Production, where yield and cost benefits are optimized.

 

Each of these stages has many steps, and customers must evaluate each new wafer technology that essentially lays a new foundation for substantially all other processes they have spent billions of dollars and decades of time developing.  Accordingly, it takes anywhere from 12 to 36 months for a customer to proceed from initial sampling through R&D to initial production, which is not unlike the standard process for qualifying any new wafer material.  These steps apply each time there is a change in the customer’s fabrication process, such as a feature-size change or new material.  To date, most of our customers have purchased wafers for the purpose of characterizing and evaluating the wafers, developing prototype products or for pilot production, consequently historical sales are not necessarily an indication of future operations.

 

11

 

At September 30, 2003, Ibis had eight Ibis 1000 implanters, two of which are owned by a customer, available to produce up to 200 mm SIMOX wafers and two i2000’s available to produce 300 mm SIMOX wafers.  Our second balance-of-process line (annealing, cleaning, metrology) has been fully qualified and is now available for completing the manufacture of 300-millimeter SIMOX-SOI wafers. One more Ibis 1000 implanter is available for sale and an additional one is dedicated as a research and development tool.  We also have one additional i2000 implanter under construction that will be available for sale or utilized internally for wafer production. Although our 200 mm and smaller wafer size production line is currently underutilized, considering our future plans, current potential business prospects and alternatives, Management believes that we do not have an impairment issue at this time. However, if our future plans and potential business prospects do not materialize, if semiconductor manufacturers fail to adopt SIMOX technology during the current process cycle (which typically last two to three years) or our customers transition to the 300 mm wafer size sooner than we anticipate, our 200 mm and smaller wafer size production line may become obsolete and we would be required to reduce our income by an impairment loss which could be material.

 

We will continue to review our assumptions about our long-lived assets on a periodic basis for potential impairment in future quarters.  We cannot be sure that our implanters or other long-lived assets will not become impaired in the future. In addition, the impairment factors evaluated by Management may change in subsequent periods, given the current trends of the business environment.

 

Ibis has experienced quarterly and annual fluctuations in revenue and results of operations due to the timing of receipt of equipment orders and dependence on a limited number of customers.  We expect to continue to experience fluctuations in revenue due to equipment sales and shifts in customer demands during various stages of the SIMOX-SOI sales cycle.  We recognize implanter revenue in accordance with SEC Staff Accounting Bulletin No. 101, which includes among other criteria, the shipment, factory installation and acceptance of the implanter at the customer’s location.  As a result, deferral of revenue may extend longer due to meeting these criteria.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting policies include: revenue recognition, inventory valuation and reserves, accounts receivable reserves and the assessment of long-lived asset impairment. Actual results may differ from these estimates under different assumptions or conditions.  Below, we discuss these policies further, as well as the estimates and judgments involved.

 

Revenue Recognition.  We recognize revenue from product sales, equipment sales and the sales of spare parts when all of the following criteria have been met:  (1) evidence exists that the customer is bound to the transaction; (2) the sales price to the customer has been fixed or is determinable; (3) the product has been delivered to the customer and, when applicable, the product has been installed and accepted by the customer; and (4) collectibility of the sale price is reasonably assured.  Provisions for estimated sales returns and allowances are made at the time the products are sold.  Revenue derived from contracts and services is recognized upon performance.   Significant management judgments and estimates must be made and used in connection with revenue recognized in any period.  Management analyzes various factors, including a review of specific transactions, historical experience, credit worthiness of customers and current market and economic conditions.  Changes in judgments based upon these factors could impact the timing and amount of revenue and cost recognized.

 

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Inventory Valuation and Reserves.  Our policy for the valuation of inventory, including the determination of obsolete or excess inventory, requires us to estimate the future demand for our products within specific time horizons, generally twelve months or less. If our estimated demand for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory reserves, which would have a negative impact on our gross margin. We reserve for a possible over supply of wafers utilizing inventory aging records and for obsolescence when engineering changes or other technological advances indicate that obsolescence has occurred.  We also adjust the valuation of inventory when estimated actual cost is significantly different than standard cost and value inventory at the lower of cost or market. Once established, any write-downs of inventory are considered permanent adjustments to the cost basis of the inventory.

 

Accounts Receivable Reserves.  Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.  The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and a general reserve based on the aging of receivables and historical write-off experience.  While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required and could materially impact our financial position and results of operations.

 

Valuation of Long-Lived Assets.  Ibis reviews the valuation of long-lived assets, including property and equipment and licenses, under the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.  Management is required to assess the recoverability of its long-lived assets whenever events and circumstances indicate that the carrying value may not be recoverable.  Factors we consider important that could trigger an impairment review include the following:

 

•                  Significant underperformance relative to expected historical or projected future operating results;

•                  Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

•                  Significant negative industry or economic trends;

•                  Significant decline in our stock price for a sustained period; and

•                  Our market capitalization relative to book value.

 

In accordance with SFAS No. 144, when we determine that the carrying value of applicable long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate whether the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset.  If such a circumstance exists, we would measure an impairment loss to the extent the carrying amount of the particular long-lived asset or group exceeds its fair value.  We would determine the fair value based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

 

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Results of Operations

 

Third Quarter Ended September 30, 2003 Compared to Third Quarter Ended September 30, 2002

 

Wafer Product Sales.  Wafer product sales increased $1,732,205 or 86%, to $3,743,875 for the third quarter ended September 30, 2003 from $2,011,670 for the third quarter ended September 30, 2002.  Wafer product sales this quarter were higher due to increased 300 mm SIMOX wafer demand from one customer. We qualified a second 300 mm SIMOX wafer production line at Ibis in the first quarter of this year which increased our ability to ship 300 mm wafers.  Sales of 300 mm wafers this quarter accounted for 98% of wafer sales compared to 32% the same quarter last year.

 

Contract and Other Revenue.  Contract and other revenue includes revenue derived from government contracts, license agreements, characterization and other services.  Contract and other revenue increased for the third quarter ended September 30, 2003 to $66,834 from $60,701 for the third quarter ended September 30, 2002, an increase of $6,133 or 10%.  This is attributable to an increase in license revenue.

 

Equipment Revenue.  Equipment revenue represents revenue recognized from sales of implanters, spare parts and field service.  Equipment revenue decreased to $226,114 for the third quarter ended September 30, 2003 from $5,657,605 for the third quarter ended September 30, 2002, a decrease of $5,431,491 or 96%. Equipment revenue in this quarter consisted solely of parts and service revenue, whereas, the third quarter of last year included approximately $5 million from the sale of an Ibis 1000 implanter to a Chinese customer. Field service revenue accounted for $69,300 for the third quarter ended September 30, 2003 as compared to $78,520 for the same period last year.  Sales of spare parts accounted for $156,814 of equipment revenue for the third quarter ended September 30, 2003 as compared to $579,085 of equipment revenue for the third quarter ended September 30, 2002.

 

Total Net Sales and Revenue.  Total net sales and revenue for the third quarter ended September 30, 2003 was $4,036,823, a decrease of $3,693,153, or 48%, from total net revenue of $7,729,976 for the third quarter ended September 30, 2002.  This decrease is a result of no implanter sales in the quarter which was partially offset by an increase in 300 mm SIMOX wafer sales.

 

Total Cost of Sales and Revenue.  Cost of wafer product sales for the third quarter ended September30, 2003 was $5,010,417, compared to $3,995,509 for the third quarter ended September 30, 2002, an increase of $1,014,908, or 25%.  This is attributable to increased 300 mm wafer sales along with increased fixed costs, mainly depreciation and amortization of 300 mm equipment, and an increase in the wafer inventory obsolescence reserve.  We increased our inventory obsolescence reserve for 200 mm wafers that were manufactured under an older process and for an oversupply of wafers calculated using our inventory aging reports.  Cost of contract and other revenue consists of labor and materials expended during the quarter.  Cost of contract and other revenue for the third quarter ended September 30, 2003 was $6,330, as compared to $9,819 for the third quarter ended September 30, 2002, a decrease of $3,489, or 36%.  This is attributable to a decrease in material costs associated with other revenue.  Cost of equipment revenue represents the cost of equipment and spare parts, along with labor incurred for field service.  Cost of equipment revenue for the third quarter ended September 30, 2003 was $208,888, as compared to $3,573,559 for the third quarter ended September 30, 2002. Costs this quarter are for equipment parts and service, whereas the costs for the quarter ended September 30, 2002 included the cost of the Ibis 1000 implanter which was recognized as revenue that quarter in accordance with SAB 101.

 

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Total cost of sales and revenue for the third quarter ended September 30, 2003 was $5,225,635 as compared to $7,578,887 for the third quarter ended September 30, 2002, a decrease of $2,353,252 or 31%.  The gross margin for all sales was a negative 29% for the third quarter ended September 30, 2003 as compared to a gross margin of 2% for the third quarter ended September 30, 2002.  This decrease in the gross margin for all sales is attributable to the gross margin achieved on the Ibis 1000 implanter sale to China last year, which was offset by improved margins on wafer sales due to increased volumes in this quarter. Our wafer production line for smaller wafer sizes is currently underutilized and we believe that as sales volumes of all wafer sizes increase, the wafer product gross margins should improve.

 

General and Administrative Expenses.  General and administrative expenses for the third quarter ended September 30, 2003 were $477,253 (or 12% of total revenue) as compared to $502,183 (or 6% of total revenue) for the third quarter ended September 30, 2002, a decrease of $24,930, or 5%.  This is due to decreased payroll, payroll related expenses and professional services as a result of cost savings initiated by Ibis. These savings were offset by an increase in Director’s & Officer’s liability insurance.

 

Marketing and Selling Expenses.  Marketing and selling expenses for the third quarter ended September 30, 2003 were $297,519 (or 7% of total revenue) as compared to $382,303 (or 5% of total revenue) for the third quarter ended September 30, 2002, a decrease of $ 84,784, or 22%.  This is a result of a decrease in promotional expenses and payroll and payroll related expenses resulting from cost savings initiatives.

 

Research and Development Expenses.  Internally funded research and development expenses decreased by $429,475 or 27%, to $1,175,064 (or 29% of total revenue) for the third quarter ended September 30, 2003, as compared to $1,604,539 (or 21% of total revenue) for the third quarter ended September 30, 2002.  This is due to reduced payroll, payroll related expenses and consulting services relating to the i2000 implanters, which were initiated through cost savings programs implemented this year.

 

Other Income (Expense).  Total other expense for the third quarter ended September 30, 2003 was $24,189 as compared to income of $65,345 for the third quarter ended September 30, 2002, a decrease of $89,534, or 137%.  The decrease in total other income is attributable to decreased interest income earned as a result of lower average cash balances and a reduction in the interest rates, along with increased interest expense due to a financing arrangement entered into during the second quarter of 2003.

 

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

 

Wafer Product Sales.  Wafer product sales increased $2,958,788 or 59%, to $7,951,775 for the nine months ended September 30, 2003 from $4,992,987 for the nine months ended September 30, 2002.  This is attributable to increased demand of 300 mm SIMOX wafers. Sales of 300 mm wafers accounted for 92% and 19% of total product sales for the nine months ended September 30, 2003 and 2002, respectively.

 

Contract and Other Revenue.  Contract and other revenue increased for the nine months ended September 30, 2003 to $592,899 from $232,761 for the nine months ended September 30, 2002, an increase of $360,138 or 155%.  This increase is attributable to revenue recognized from the transfer of wafer technology to a customer pursuant to a license transfer agreement.  Royalty fees also increased, but these were offset by a decrease in government contract work.

 

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Equipment Revenue.  Equipment revenue increased to $8,622,289 for the nine months ended September 30, 2003 from $5,987,565 for the nine months ended September 30, 2002, an increase of $2,634,724, or 44%.  Revenue during the nine months ended September 30, 2003, included approximately $8 million from the sale of an i2000 implanter compared to the nine months ended September 30, 2002 which included approximately $5 million from the sale of an Ibis 1000 implanter and parts to a Chinese customer.  Field service revenue accounted for $209,150 of equipment revenue for the nine months ended September 30, 2003 as compared to $219,370 of equipment revenue for the same period last year.  Sales of spare parts accounted for $420,233 of equipment revenue for the nine months ended September 30, 2003 as compared to $768,195 of equipment revenue for the nine months ended September 30, 2002.

 

Total Net Sales and Revenue.  Total net sales and revenue for the nine months ended September 30, 2003 was $17,166,963, an increase of $ 5,953,650, or 53%, from total net revenue of $11,213,313 for the nine months ended September 30, 2002.

 

Total Cost of Sales and Revenue.  Cost of wafer product sales for the nine months ended September 30, 2003 was $12,516,260, compared to $10,278,147 for the nine months ended September 30, 2002, an increase of $2,238,113, or 22%.  This is attributable to increased sales of 300 mm wafers along with increased fixed costs, mainly depreciation and amortization of 300 mm equipment.  Cost of contract and other revenue for the nine months ended September 30, 2003 was $34,332, as compared to $97,076 for the nine months ended September 30, 2002, a decrease of $62,744, or 65%.  This decrease is primarily attributable to a decrease in work performed on contracts.  Cost of equipment revenue for the nine months ended September 30, 2003 was $4,014,590, as compared to $3,732,403 for the nine months ended September 30, 2002, an increase of $282,187 or 8%.  This increase is due to the costs recognized for the i2000 implanter sold during this period as compared to the costs recognized for the Ibis 1000 sold last year, which was offset by the decrease in costs for parts sold.  As a result of the foregoing, the total cost of sales and revenue for the nine months ended September 30, 2003 was $16,565,182 as compared to $14,107,626 for the nine months ended September 30, 2002, an increase of $2,457,556 or 17%.  The gross margin for all sales was 4% for the nine months ended September 30, 2003 as compared to a negative gross margin of 26% for the nine months ended September 30, 2002.  This improvement in the gross margin for all sales is attributable to a 55% gross margin achieved on the i2000 implanter sale, as well as improved margins on wafer sales due to increased volumes.

 

General and Administrative Expenses.  General and administrative expenses for the nine months ended September 30, 2003 were $1,663,800 (or 10% of total revenue) as compared to $ 1,643,802 (or 15% of total revenue) for the nine months ended September 30, 2002, an increase of $19,998, or 1%.  This is primarily a result of an increase in D&O insurance which was offset by decreases in payroll and payroll related expenses and professional services.

 

Marketing and Selling Expenses.  Marketing and selling expenses for the nine months ended September 30, 2003 were $957,988 (or 6% of total revenue) as compared to $1,155,703 (or 10% of total revenue) for the nine months ended September 30, 2002, a decrease of $197,715, or 17%.  The decrease in marketing and selling expenses is primarily a result of decreases in payroll and payroll related expenses, travel and promotional expenses due to cost savings initiatives.

 

Research and Development Expenses.  Internally funded research and development expenses decreased by $406,318 or 9%, to $4,208,360 (or 25% of total revenue) for the nine months ended September 30, 2003, as compared to $4,614,678 (or 41% of total revenue) for the nine months ended September 30, 2002.  This decrease is mainly due to decreased R&D activity on the i2000 implanter program, which was partially offset by increased activity on joint SIMOX-SOI wafer development programs.

 

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Other Income (Expense).  Total other income for the nine months ended September 30, 2003 was $6,459 as compared to $222,759 for the nine months ended September 30, 2002, a decrease of $216,300, or 97%.  The decrease in total other income is primarily attributable to decreased interest income earned as a result of lower average cash balances and a reduction in interest rates, along with increased interest expense due to expense due to a financing arrangement entered into during the second quarter of 2003.

 

Liquidity and Capital Resources

 

As of September 30, 2003, Ibis had cash and cash equivalents of $4,867,904, reflecting the receipt of a majority of the proceeds from the sale of an i2000 implanter in December 2002, which was due upon shipment.  In addition, in March 2002, Ibis completed a public offering of 900,000 shares of common stock at $13 per share, and on April 1, 2002, 100,000 shares were exercised as an over allotment by the underwriter.  The shares were included in a shelf registration statement filed with the Securities and Exchange Commission on July 8, 1999 and declared effective on July 26, 1999.  Net proceeds from the offering were approximately $12.1 million and were used primarily to fund research and development, capital expenditures and working capital.

 

During the nine months ended September 30, 2003, Ibis used $4,411,209 in cash for operating activities compared to $4,945,585 for the same period in 2002. Depreciation and amortization expense for the nine months ended September 30, 2003 and 2002 was $5,014,576 and $4,657,960, respectively.  This accounted for 29% and 42% of total revenue, respectively. Due to the capital intensive nature of Ibis’ business and the recent expansion of our 300 mm SIMOX-SOI wafer production line, Management expects that depreciation and amortization will continue to be a significant portion of its expenses.  To date, Ibis’ working capital requirements have been funded primarily through debt and equity financings.  Ibis also used $1,842,398 during the nine months ended September 30, 2003 to fund additions to property and equipment as compared to $6,321,822 during the nine months ended September 30, 2002.  At September 30, 2003, Ibis had commitments to purchase approximately $403,361 of material to be used for manufacturing wafers and i2000 implanter parts and $40,025 in capital equipment purchases.

 

As part of our cash management plan, we initiated additional cost saving measures during 2003.  This included the lay-off of twenty-nine employees, so our headcount is now approximately 80 employees. We also increased the number of days off that all employees must use and established a salary reduction program throughout the Company.  We expect these measures to save us in excess of $2.5 million on an annual basis.

 

In June 2003, Ibis entered into an agreement with a financing agent to obtain payment for products from its largest customer on an expedited basis. The discount rate associated with this agreement is based on the prime rate and may fluctuate.

 

In September 2001, Ibis entered into a $4.5 million equipment lease line with Heller Financial’s Commercial Equipment Finance Group. The lease line was used to finance the purchase of process equipment for wafer production, primarily for 300 mm wafers.  This line was fully drawn down in two sale-leaseback transactions, bearing interest at approximately 8% with a term of three years, and a monthly net payment of $131,212. Ibis has a fair market value purchase option at the end of the lease term.  The lease line is secured by the underlying assets and all other property and equipment of Ibis.

 

17

 

In October 2003, Ibis completed a public offering of 1,000,000 shares of common stock at $13.25 per share, which included an over allotment option exercised by the underwriter.  Net proceeds from the offering were approximately $12.7 million and will be used primarily to fund research and development, capital expenditures, working capital and general corporate purposes.

 

We estimate that we have adequate cash available for at least twelve months. Although we anticipate a fourth quarter slow down for 300 mm wafer business at our largest customer, forecasts from this customer and others for 2004 continue to look positive. Forecasting future wafer sales, on a quarter-by-quarter basis, remains exceedingly difficult, and significant variations, quarter to quarter, are likely. We continue to anticipate booking orders for one-to-three implanters during the fourth quarter of 2003.

 

This Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 including statements regarding the impact that the MLD process and i2000 oxygen implanter is expected to have on future financial results, belief that in future years our business is more likely to include a growing component of equipment sales, the adoption by our customers of SIMOX-SOI technology in their mainstream manufacturing processes, the expectation that gross margins on wafer product sales will increase as volumes and production yields improve, the continuation of fluctuations in revenue and results of operations, the expectation that depreciation and amortization will continue to be a significant portion of expenses, the sufficiency of our capital resources, and the anticipation of booking orders for one-to-three implanters this fiscal year.  Such statements are based on our current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.  Such factors and uncertainties are referenced in the Company’s SEC filings from time to time, including, but not limited to those described above and in our Form 10-K for the year ended December 31, 2002. All information set forth in this Form 10-Q is as of the date of this Form 10-Q, and Ibis undertakes no duty to update this information, unless required by law.

 

Effects Of Inflation

 

Ibis believes that over the past three years inflation has not had a significant impact on Ibis’ sales or operating results.

 

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IBIS TECHNOLOGY CORPORATION

 

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The exposure of market risk associated with risk-sensitive instruments is not material to the Company, as the Company does not transact its sales denominated in other than United States dollars, invests primarily in money market funds and short-term commercial paper, holds its investments until maturity and has not entered into hedging transactions.

 

PART II

 

OTHER INFORMATION

 

 

Item 1 - Legal Proceedings

None

Item 2 - Changes in Securities

None

Item 3 - Defaults upon Senior Securities

None

Item 4 - Submission of Matters to a Vote of Security Holders

None

 

Item 5 - Other Information

None

 

Item 6 - Exhibits and Reports on Form 8-K

 

(a)	Exhibits furnished as Exhibits hereto:
	Exhibit No.		Description
	31.1		Certification of Martin J. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification of Debra L. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Reports on Form 8-K:
	The Company filed with the Securities and Exchange Commission on July 23, 2003 a Current Report on Form 8-K for the July 23, 2003 event announcing its financial results for the Second Quarter ended June 30, 2003.

 

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IBIS TECHNOLOGY CORPORATION

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	Ibis Technology Corporation
Date: November 3, 2003	By:	/s/Debra L. Nelson
		Debra L. Nelson
		Chief Financial Officer, Treasurer and Clerk (principal financial and accounting officer)
Date:  November 3, 2003	By:	/s/Martin J. Reid
		Martin J. Reid
		President and Chief Executive Officer

 

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