UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20569
Form 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2006
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
Ibis Technology Corporation
(Exact name of registrant as specified in its charter)
Massachusetts |
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| 04-2987600 |
(State or other jurisdiction of |
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| (I.R.S. Employer |
incorporation or organization) |
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| Identification No.) |
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32 Cherry Hill Drive, Danvers, MA |
| 01923 | ||
(Address of principal executive offices) |
| (Zip Code) |
(978) 777-4247
(Registrant’s telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined by Rule b-2 of the Exchange Act).
Large Accelerated Filer o |
| Accelerated Filer o |
| Non-Accelerated Filer x |
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
10,873,139 shares of Common Stock, par value $.008, were outstanding on November 13, 2006.
IBIS TECHNOLOGY CORPORATION
INDEX
2
IBIS TECHNOLOGY CORPORATION
(Unaudited)
| December 31, |
| September 30, |
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| 2005 |
| 2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 6,856,874 |
| $ | 5,772,099 |
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Accounts receivable, trade, net |
| 90,878 |
| 381,395 |
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Inventories, net (note 4) |
| 6,276,650 |
| 3,388,252 |
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Prepaid expenses and other current assets |
| 615,702 |
| 384,153 |
| ||
Total current assets |
| 13,840,104 |
| 9,925,899 |
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Property and equipment |
| 26,448,906 |
| 24,721,976 |
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Less: Accumulated depreciation and amortization |
| (21,352,154 | ) | (20,462,811 | ) | ||
Net property and equipment |
| 5,096,752 |
| 4,259,165 |
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Patents and other assets, net |
| 1,055,532 |
| 860,049 |
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Total assets |
| $ | 19,992,388 |
| $ | 15,045,113 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
| $ | 230,871 |
| $ | 797,292 |
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Accrued liabilities (notes 5 and 6) |
| 1,201,695 |
| 1,149,478 |
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Deferred revenue |
| 7,263,000 |
| — |
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Total current liabilities |
| 8,695,566 |
| 1,946,770 |
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Stockholders’ equity: |
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| �� | ||
Undesignated preferred stock, $.01 par value |
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Authorized 2,000,000 shares; none issued |
| — |
| — |
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Common stock, $.008 par value |
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Authorized 50,000,000 shares; issued and outstanding 10,816,029 shares and 10,873,139 shares at December 31, 2005 and September 30, 2006, respectively |
| 86,528 |
| 86,985 |
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Additional paid-in capital |
| 93,245,754 |
| 93,610,761 |
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Accumulated deficit |
| (82,035,460 | ) | (80,599,403 | ) | ||
Total stockholders’ equity |
| 11,296,822 |
| 13,098,343 |
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Total liabilities and stockholders’ equity |
| $ | 19,992,388 |
| $ | 15,045,113 |
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See accompanying notes to unaudited interim financial statements.
3
IBIS TECHNOLOGY CORPORATION
(Unaudited)
| Three months ended |
| Nine months ended |
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| September 30, |
| September 30, |
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| 2005 |
| 2006 |
| 2005 |
| 2006 |
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Net Sales and revenue: |
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License and other revenue |
| $ | 120,723 |
| $ | 183,006 |
| $ | 284,818 |
| $ | 466,226 |
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Equipment revenue |
| 42,070 |
| 7,040,857 |
| 243,550 |
| 13,060,870 |
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Total net sales and revenue (notes 2 and 8) |
| 162,793 |
| 7,223,863 |
| 528,368 |
| 13,527,096 |
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Cost of sales and revenue: |
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Cost of license and other revenue |
| — |
| — |
| — |
| — |
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Cost of equipment revenue (includes share-based compensation expense of $5,530 and $12,027 for the three and nine months ended September 30, 2006, respectively) |
| 139,573 |
| 2,957,249 |
| 661,803 |
| 5,683,525 |
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Total cost of sales and revenue |
| 139,573 |
| 2,957,249 |
| 661,803 |
| 5,683,525 |
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Gross profit (loss) |
| 23,220 |
| 4,266,614 |
| (133,435 | ) | 7,843,571 |
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Operating expenses: |
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General and administrative (includes share-based compensation expense of $37,138 and $159,509 for the three and nine months ended September 30, 2006, respectively) |
| 525,893 |
| 560,240 |
| 1,737,767 |
| 1,874,727 |
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Marketing and selling (includes share-based compensation expense of $4,425 and $33,349 for the three and nine months ended September 30, 2006, respectively) |
| 272,138 |
| 219,470 |
| 1,064,051 |
| 835,986 |
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Research and development (includes share-based compensation expense of $18,206 and $82,900 for the three and nine months ended September 30, 2006, respectively) |
| 1,371,033 |
| 1,342,981 |
| 4,621,725 |
| 4,028,874 |
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Total operating expenses |
| 2,169,064 |
| 2,122,691 |
| 7,423,543 |
| 6,739,587 |
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Income (loss) from operations |
| (2,145,844 | ) | 2,143,923 |
| (7,556,978 | ) | 1,103,984 |
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Other income (expense): |
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Interest income |
| 59,671 |
| 86,644 |
| 146,740 |
| 240,291 |
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Interest expense |
| — |
| — |
| (536 | ) | — |
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Other |
| 944 |
| 6,666 |
| 9,671 |
| 93,038 |
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Total other income |
| 60,615 |
| 93,310 |
| 155,875 |
| 333,329 |
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Income (loss) from continuing operations before income taxes |
| (2,085,229 | ) | 2,237,233 |
| (7,401,103 | ) | 1,437,313 |
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Income tax expense |
| — |
| — |
| 1,256 |
| 1,256 |
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Income (loss) from continuing operations |
| (2,085,229 | ) | 2,237,233 |
| (7,402,359 | ) | 1,436,057 |
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Discontinued operations: |
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Gain on disposal |
| 164,591 |
| — |
| 149,876 |
| — |
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Income from discontinued operations |
| 164,591 |
| — |
| 149,876 |
| — |
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Net income (loss) (note 2 and 9) |
| $ | (1,920,638 | ) | $ | 2,237,233 |
| $ | (7,252,483 | ) | $ | 1,436,057 |
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Earnings (loss) per share: |
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Basic |
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Continuing operations |
| $ | (0.19 | ) | $ | 0.21 |
| $ | (0.69 | ) | $ | 0.13 |
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Discontinued operations |
| $ | 0.01 |
| $ | — |
| $ | 0.01 |
| $ | — |
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Net income (loss) |
| $ | (0.18 | ) | $ | 0.21 |
| $ | (0.68 | ) | $ | 0.13 |
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Diluted |
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Continuing operations |
| $ | (0.19 | ) | $ | 0.20 |
| $ | (0.69 | ) | $ | 0.13 |
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Discontinued operations |
| $ | 0.01 |
| $ | — |
| $ | 0.01 |
| $ | — |
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Net income (loss) |
| $ | (0.18 | ) | $ | 0.20 |
| $ | (0.68 | ) | $ | 0.13 |
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Weighted average common shares outstanding |
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Basic |
| 10,739,291 |
| 10,872,928 |
| 10,728,469 |
| 10,841,656 |
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Diluted (note 7) |
| 10,739,291 |
| 10,991,264 |
| 10,728,469 |
| 10,971,358 |
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See accompanying notes to unaudited interim financial statements.
4
IBIS TECHNOLOGY CORPORATION
(Unaudited)
| Nine months ended |
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| September 30, |
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| 2005 |
| 2006 |
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Cash flows from operating activities: |
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Net income (loss) |
| $ | (7,252,483 | ) | $ | 1,436,057 |
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Less: income from discontinued operations |
| 149,876 |
| — |
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Income (loss) from continuing operations |
| (7,402,359 | ) | 1,436,057 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Share-based compensation expense |
| — |
| 287,785 |
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Depreciation and amortization |
| 1,360,899 |
| 1,158,384 |
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Changes in operating assets and liabilities: |
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Accounts receivable, trade |
| (36,358 | ) | (290,517 | ) | ||
Inventories |
| (332,184 | ) | 2,892,221 |
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Prepaid expenses and other current assets |
| (77,585 | ) | 231,549 |
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Accounts payable |
| 5,977 |
| 566,421 |
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Accrued liabilities and deferred revenue |
| 4,917,305 |
| (7,315,217 | ) | ||
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Net cash used in operating activities of continuing operations |
| (1,564,305 | ) | (1,033,317 | ) | ||
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Cash flows from investing activities of continuing operations: |
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Additions to property and equipment, net |
| (106,023 | ) | (34,956 | ) | ||
Other assets |
| 122,875 |
| (90,358 | ) | ||
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Net cash provided by (used in) investing activities of continuing operations |
| 16,852 |
| (125,314 | ) | ||
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Cash flows from financing activities of continuing operations: |
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Exercise of stock options and employee stock purchase plan |
| 29,643 |
| 73,856 |
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Net cash provided by financing activities of continuing operations |
| 29,643 |
| 73,856 |
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Cash flows of discontinued operations: |
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Operating cash flows |
| 350,045 |
| — |
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Investing cash flows |
| (294,223 | ) | — |
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Net cash provided by discontinued operations |
| 55,822 |
| — |
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Net decrease in cash and cash equivalents |
| (1,461,988 | ) | (1,084,775 | ) | ||
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Cash and cash equivalents, beginning of period |
| 7,726,072 |
| 6,856,874 |
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Cash and cash equivalents, end of period |
| $ | 6,264,084 |
| $ | 5,772,099 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
| $ | 536 |
| $ | — |
|
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 Ibis Technology Corporation (the “Company” or “Ibis”) in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
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, 2005, which are included in the Company’s Annual Report on Form 10-K as filed on March 29, 2006.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenue from 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 product (or service) has been delivered to the customer and, when applicable, the product (or service) has been installed (and completed) and accepted by the customer; (3) the sales price to the customer has been fixed or is determinable; and (4) collectibility of the sales price is reasonably assured. The Company recognizes revenue from implanter sales upon acceptance at the customer’s site. 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 judgment based upon these factors could impact the timing and amount of revenue and cost recognized.
(b) Share-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”(“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, employee stock purchases related to the 2000 Employee Stock Purchase Plan (“the ESPP”), restricted stock and other special equity awards based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in 2006. In March 2005, the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company’s financial statements as of and for the three and nine months ended September 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the three and nine months ended September 30, 2006 was $0.1 million and $0.3 million respectively or $0.01 and $0.03 per share, which consisted of share-based compensation expense related to employee stock options and the employee stock purchase plan. Of this year-to-date expense, fifty eight percent came from options issued prior to December 31, 2005 and are valued using the accrual method, which is consistent with prior periods, while eighteen percent came from options issued in 2006 and are valued using the straight-line prorated method, which was adopted in 2006 under the new guidance, and twenty four percent came from the valuation of shares issued under the employee stock purchase plan. There was no stock-based compensation expense related to employee stock options or employee stock purchases recognized during the three and nine months ended September 30, 2005 because the Company elected not to adopt the recognition provisions, and instead
6
provided footnote disclosure permissible under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Statement of Operations. Prior to the adoption of SFAS 123(R) the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as allowed under SFAS 123. Under the intrinsic value method, stock-based compensation expense had not been recognized in the Company’s statement of operations, when the exercise price of the Company’s stock options granted to employees and directors equaled or exceeded the fair market value of the underlying stock at the date of grant.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Statement of Operations for the three and nine months ended September 30, 2006, included compensation expenses for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the Statement of Operations for the three and nine months ended September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Upon adoption of SFAS 123(R), the Company elected to retain its method of valuation for share-based awards granted beginning in 2006 using the Black-Scholes option—pricing model (“Black—Scholes model”) which was also previously used for the Company’s pro forma information required under SFAS 123. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.
(c) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact this interpretation will have on our results from operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. We do not expect the adoption of SAB 108 to have a material impact on our financial statements.
7
In August 2001, the FASB issued Statement No. 143, “Accounting for Conditional Asset Retirement Obligations” which states “An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.” FASB Interpretation No. 47 is an interpretation of FASB Statement No. 143 which clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement No.143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Fin 47 is effective for fiscal years beginning after December 15, 2005. The Company has determined that there is no additional impact from the adoption of this Statement.
(3) Liquidity
Historically, the Company has financed its operations and met its capital requirements through funds generated from operations, the issuance of common stock, equipment lines of credit, a working capital line of credit, a term loan, sales-leaseback arrangements and collaborative arrangements. In July 2004, the Company discontinued its wafer manufacturing business and focus exclusively on the equipment manufacturing business. The Company will maintain a research and development effort focused on continuous improvement of the equipment capabilities and for supporting the Company’s equipment customers’ needs.
As of September 30, 2006, the Company had cash and cash equivalents of $5.8 million, including the final payment of $1.1 million received during the third quarter of 2006 for the final customer acceptance of the i2000 implanter shipped to SUMCO in April 2006. During the nine months ended September 30, 2006, Ibis used $1.0 million of cash from operating activities of continuing operations as compared to $1.6 million in the nine months ended September 30, 2005. The principal uses of cash during the nine months ended September 30, 2006 were to fund operations and additions to property and equipment which totaled approximately $35 thousand. At September 30, 2006, Ibis had commitments to purchase approximately $0.4 million in material. Our headcount for the quarter ended September 30, 2006 was 45 employees.
The Company’s management believes that it will have sufficient cash resources to support current operations through the second quarter of 2007. We expect to receive approximately $800,000 in the fourth quarter from a customer in respect of the expiration of an option to place an order for an additional implanter prior to the end of 2006. With the addition of the next implanter order from SUMCO, which the Company believes will occur during the first half of 2007, and its subsequent payment, the Company believes it could support operations at current levels through at least the next twelve months. This expectation however, is based on the Company’s current operating plan and general sales outlook, each of which may change rapidly. The Company intends to continue to invest in research, development and manufacturing capabilities. Changes in technology or sales growth beyond currently established capabilities may require further investment. Further adoption of the technology and the timing of future equipment orders are dependent on the continuing qualification of implanters and improvement programs at the device manufacturers, among other factors. At present time the Company has only one of the four major wafer manufacturers as its current customer. We currently do not have an order backlog for implanters. The timing of future orders is important and difficult to predict because customers can delay orders and/or request early shipment, either of which could cause the need for additional cash requirements. Forecasting future revenue, on a quarter-by-quarter basis, remains exceedingly difficult and significant variations quarter to quarter, are likely.
8
Further, because some of the materials and components the Company uses to build its implanter have long lead times, the Company may purchase some or all of these long lead time items prior to receipt of an order by its customers. When this is the case, those parts and materials bear the risk of being subject to excess and obsolescence. The Company expects to continue to explore equity offerings and other forms of financing and anticipates that we may be required to raise additional capital in the near future in order to finance future growth and our research and development programs. There can be no assurance, however, that our actual needs will not exceed expectations or that we will be able to fund our operations on a long-term basis in the absence of other sources. There also can be no assurance that any additional required longer term financing will be available through additional bank borrowings, debt or equity offerings or otherwise, or that if such financing is available, that it will be available on terms acceptable to us.
9
(4) Inventories
Inventories consist of the following:
| December 31, |
| September 30, |
| |||
|
| 2005 |
| 2006 |
| ||
Raw materials |
| $ | 1,790,923 |
| $ | 2,315,755 |
|
Work in process |
| 1,980,513 |
| 1,072,497 |
| ||
Finished goods |
| 2,505,214 |
| — |
| ||
Total equipment inventory |
| $ | 6,276,650 |
| $ | 3,388,252 |
|
(5) Accrued Liabilities
Current accrued liabilities were as follows at December 31, 2005 and September 30, 2006.
| December 31, |
| September 30, |
| |||
|
| 2005 |
| 2006 |
| ||
Accrued Vacation |
| $ | 125,468 |
| $ | 149,932 |
|
Accrued Warranty |
| 653,133 |
| 511,246 |
| ||
Accrued Payroll |
| 76,195 |
| 151,051 |
| ||
Accrued Expenses |
| 346,899 |
| 337,249 |
| ||
Total accrued liabilities |
| $ | 1,201,695 |
| $ | 1,149,478 |
|
(6) Accrued Warranty
At the time that revenue is recognized for the sale of an implanter a liability for warranty is also established. An estimate of the warranty cost is made based on the number of years involved and the Company’s prior experience. As material and labor is used during the warranty period the liability is reduced based on these charges. At the end of the warranty term the balance in the liability is eliminated and adjusted through cost of sales, the account charged at inception. A reconciliation of warranty liability for the period ended December 31, 2005 and September 30, 2006 is as follows:
Warranty balance December 31, 2004 |
| $ | 708,830 |
|
Expense incurred – 2005 |
| (31,061 | ) | |
Initiated – 2005 |
| — |
| |
Expired – 2005 |
| (24,636 | ) | |
Warranty balance December 31, 2005 |
| 653,133 |
| |
Expense incurred –2006 |
| (85,673 | ) | |
Initiated – 2006 |
| 608,220 |
| |
Expired – 2006 |
| (664,434 | ) | |
Warranty balance September 30, 2006 |
| $ | 511,246 |
|
10
(7) Net Income (Loss) Per Share
Net income for the quarter ended September 30, 2006 of $2.2 million included stock-based compensation expense under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” (SFAS 123R) of $0.1 million related to employee stock options, and employee stock purchases. Net income for the nine month period ended September 30, 2006 of $1.4 million included stock-based compensation expense under (SFAS 123R) of $0.3 million related to employee stock options and employee stock purchases. Net loss for the quarter ending September 30, 2005 was $1.9 million or $0.18 loss per share, excluding the effects of stock-based compensation expense (SFAS 123R) as disclosed in the footnotes to the financial statements of $0.2 million, or $0.02 per share. Net loss for the nine months ending September 30, 2005 was a loss of $7.3 million or $0.68 loss per share, excluding the effects of stock-based compensation expense (SFAS 123R) as disclosed in the footnotes to the financial statements of $0.5 million or $0.04 per share. There was no stock-based compensation expense related to employee stock options, or employee stock purchases under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123”) in the quarter and nine months ended September 30, 2005 because the Company elected not to adopt the recognition provisions of SFAS 123 at that time.
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. For the three and nine months ended September 30, 2006 the company did report both basic and diluted earnings per share because it reported net income in those quarters. As the Company was in a net loss position for the three and nine months ended September 30, 2005, common stock equivalents of 80,557 and 94,793, 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 these periods presented.
(8) Industry Segments
The Company’s current reportable segments are 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. Other services and license revenue are combined and reported as Other Products or Services.
11
The table below provides unaudited information for the three and nine months ended September 30, 2005 and 2006 pertaining to the Company’s two industry segments.
|
| SIMOX |
| Other Products |
| Total |
| |||
Net Revenue |
|
|
|
|
|
|
| |||
Three Months Ended September 30, 2005 |
| $ | 42,070 |
| $ | 120,723 |
| $ | 162,793 |
|
Three Months Ended September 30, 2006 |
| $ | 7,040,857 |
| $ | 183,006 |
| $ | 7,223,863 |
|
Nine Months Ended September 30, 2005 |
| $ | 243,550 |
| $ | 284,818 |
| $ | 528,368 |
|
Nine Months Ended September 30, 2006 |
| $ | 13,060,870 |
| $ | 466,226 |
| $ | 13,527,096 |
|
|
|
|
|
|
|
|
| |||
Operating Income (Loss) |
|
|
|
|
|
|
| |||
Three Months Ended September 30, 2005 |
| (1,740,674 | ) | 120,723 |
| (1,619,951 | ) | |||
Three Months Ended September 30, 2006 |
| 2,521,157 |
| 183,006 |
| 2,704,163 |
| |||
Nine Months Ended September 30, 2005 |
| (6,104,029 | ) | 284,818 |
| (5,819,211 | ) | |||
Nine Months Ended September 30, 2006 |
| 2,512,485 |
| 466,226 |
| 2,978,711 |
| |||
|
|
|
|
|
|
|
| |||
Assets |
|
|
|
|
|
|
| |||
September 30, 2006 |
| 8,769,953 |
| 340,014 |
| 9,109,967 |
| |||
|
|
|
|
|
|
|
| |||
Capital Expenditures |
|
|
|
|
|
|
| |||
Three Months Ended September 30, 2005 |
| 18,460 |
| — |
| 18,460 |
| |||
Three Months Ended September 30, 2006 |
| 7,119 |
| — |
| 7,119 |
| |||
Nine Months Ended September 30, 2005 |
| 106,023 |
| — |
| 106,023 |
| |||
Nine Months Ended September 30, 2006 |
| 34,956 |
| — |
| 34,956 |
| |||
|
|
|
|
|
|
|
| |||
Depreciation and Amortization of Property and Equipment |
|
|
|
|
|
|
| |||
Three Months Ended September 30, 2005 |
| 376,390 |
| — |
| 376,390 |
| |||
Three Months Ended September 30, 2006 |
| 367,620 |
| — |
| 367,620 |
| |||
Nine Months Ended September 30, 2005 |
| 1,294,072 |
| — |
| 1,294,072 |
| |||
Nine Months Ended September 30, 2006 |
| 1,112,605 |
| — |
| 1,112,605 |
|
12
The table below provides the reconciliation of reportable segment operating loss and assets to Ibis’ totals.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
Segment Reconciliation |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (-Loss): |
|
|
|
|
|
|
|
|
| ||||
Total operating income (loss) for reportable Segments |
| $ | (1,619,951 | ) | $ | 2,704,163 |
| $ | (5,819,211 | ) | $ | 2,978,711 |
|
Corporate general & administrative expenses |
| (525,893 | ) | (560,240 | ) | (1,737,767 | ) | (1,874,727 | ) | ||||
Net other income |
| 60,615 |
| 93,310 |
| 155,875 |
| 333,329 |
| ||||
Income tax expense |
| — |
| — |
| (1,256 | ) | (1,256 | ) | ||||
Gain from discontinued operations |
| 164,591 |
| — |
| 149,876 |
| — |
| ||||
Net income (loss) |
| $ | (1,920,638 | ) | $ | 2,237,233 |
| $ | (7,252,483 | ) | $ | 1,436,057 |
|
|
|
|
|
|
|
|
|
|
| ||||
Capital Expenditures: |
|
|
|
|
|
|
|
|
| ||||
Total capital expenditures for reportable segments |
| $ | 18,460 |
| $ | 7,119 |
| $ | 106,023 |
| $ | 34,956 |
|
Corporate capital expenditures |
| — |
| — |
| — |
| — |
| ||||
Total capital expenditures |
| $ | 18,460 |
| $ | 7,119 |
| $ | 106,023 |
| $ | 34,956 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
| ||||
Total depreciation and amortization for reportable segments |
| $ | 376,390 |
| $ | 367,620 |
| $ | 1,294,072 |
| $ | 1,112,605 |
|
Corporate depreciation and amortization |
| 40,156 |
| 14,987 |
| 66,827 |
| 45,779 |
| ||||
Total depreciation and amortization |
| $ | 416,546 |
| $ | 382,607 |
| $ | 1,360,899 |
| $ | 1,158,384 |
|
|
|
|
|
| Balance as of |
| ||
|
|
|
|
|
| 9/30/06 |
| |
Assets: |
|
|
|
|
|
|
| |
Total assets for reportable segments |
|
|
|
|
| $ | 9,109,967 |
|
Cash & cash equivalents not allocated to segments |
|
|
|
|
| 5,772,099 |
| |
Other unallocated assets |
|
|
|
|
| 163,047 |
| |
Total assets |
|
|
|
|
| $ | 15,045,113 |
|
(9) Employee Stock Benefit Plans
Net income for the quarter ended September 30, 2006 included stock-based compensation expense under SFAS 123 ( R ) of $ 0.1 million. Of this expense, twenty percent came from options issued prior to December 31, 2005 and are valued using the accrual method, which is consistent with prior periods, while thirty eight percent came from options issued in 2006 and are valued using the straight-line prorated method, which was adopted in 2006 under the new guidance, and forty two percent came from the employee stock purchase plan valuation. Net income for the nine months ended September 30, 2006 included stock-based compensation expense under SFAS 123 (R) of $0.3 million. Of this expense, fifty eight percent came from options issued prior to December 31, 2005 and are valued using the accrual method, which is consistent with prior periods, while eighteen percent came from options issued in 2006 and are valued using the straight-line prorated method which was adopted in 2006 under the new guidance, and twenty four percent came from the employee stock purchase plan valuation. Net income for the quarter and nine months ended September 30, 2005 did not include any stock-based compensation expense because the Company did not adopt the recognition provisions of SFAS 123.
13
Employee Stock Purchase Plans
The Company maintains an employee stock purchase plan where eligible employees may purchase common stock through payroll deduction of up to 15% of compensation with a limit of $21,250. The price per share is the lower of 85% of the market price at the beginning or end of each offering period (generally 6 months). The plan provides for purchases by employees of up to an aggregate of 600,000 shares through May 31, 2010. During the nine months ended September 30, 2005 and September 30, 2006 the Company issued 19,696 and 56,085 shares respectively under the Purchase Plan. At September, 2006, 212,006 shares were available for purchase under the Purchase Plan.
Employee Stock Option Plan
The Company has stock-based compensation plans under which employees and directors may be granted options to purchase common stock. Options are generally granted with exercise prices at not less than the fair market value on the grant date, generally vest over 4 years and expire in 10 years after the grant date. As of September 30, 2006, a total of 3.2 million shares are authorized for grant under the Company’s stock-based compensation plans. The number of common shares reserved for granting of future awards to employees and directors under these plans was 0.5 million at September 30, 2006. The remaining unrecognized compensation expense on stock options at September 30, 2006 was $0.5 million. The weighted average period over which the cost is expected to be recognized is approximately 2 years.
As of September 30, 2006 the Company had three equity compensation plans under which our equity securities have been authorized for issuance to our employees and/or directors: the 2000 Employee Stock Purchase Plan, as amended (described above), the 1993 Employee, Director and Consultant Stock Option Plan, as amended, (the 1993 Plan);and the 1997 Employee, Directors and Consultant Stock Option Plan, as amended. The 1993 Plan has expired and there are no options available for issuance; however, the 1993 Plan continues to govern all options, awards and other grants granted and outstanding under the 1993 Plan.
Distribution and Dilutive Effect of Options
The following table illustrates the grant dilution and exercise dilution:
| Three Months Ended |
| Nine Months Ended |
| |||||
|
| September 30, |
| September 30 |
| ||||
|
| 2005 |
| 2006 |
| 2005 |
| 2006 |
|
Shares of common stock outstanding |
| 10,739,291 |
| 10,873,139 |
| 10,739,291 |
| 10,873,139 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 90,000 |
| — |
| 304,500 |
| 140,500 |
|
Canceled/forfeited |
| (132,119 | ) | (13,642 | ) | (272,261 | ) | (165,156 | ) |
Expired |
| — |
| — |
| — |
| — |
|
Net options granted |
| (42,119 | ) | (13,642 | ) | 32,239 |
| (24,656 | ) |
|
|
|
|
|
|
|
|
|
|
Grant dilution (1) |
| (0.4 | )% | 0.0 | % | 0.3 | % | 0.0 | % |
|
|
|
|
|
|
|
|
|
|
Exercised |
| — |
| 625 |
| — |
| 1,025 |
|
Exercised dilution (2) |
| — |
| 0.0 | % | — |
| 0.0 | % |
(1) The percentage for grant dilution is computed based on net options granted as a percentage of shares of common stock outstanding.
(2) The percentage for exercise dilution is computed based on options exercised as a percentage of shares of common stock outstanding.
Basic and diluted shares outstanding for the three and nine months ended September 30, 2006 were 10,872,928 10,991,264, 10,841,656 and 10,971,358 shares respectively. During the three and nine months ending September 30,
14
2006, the dilutive effect of in-the-money employee stock options was 118,385 and 129,702 shares or 1.1% and 1.2% of the basic shares outstanding based on the Company’s average share price of $1.48.
A summary of stock option transactions follows:
| Options Outstanding |
| ||||||
|
| Options Available |
|
|
| Weighted average |
| |
|
| for |
|
|
| exercise price of |
| |
|
| Grant |
| Shares |
| shares under plan |
| |
Balance outstanding at December 31, 2004 |
| 158,218 |
| 1,348,235 |
| $ | 14.06 |
|
Granted |
| (304,500 | ) | 304,500 |
| 1.46 |
| |
Exercised |
| — |
| — |
| — |
| |
Cancelled/forfeited |
| 331,473 |
| (331,473 | ) | 12.95 |
| |
Expired |
| — |
| — |
| — |
| |
Balance outstanding at December 31, 2005 |
| 185,191 |
| 1,321,262 |
| $ | 11.43 |
|
Granted |
| (140,500 | ) | 140,500 |
| 3.42 |
| |
Exercised |
| — |
| (1,025 | ) | 1.36 |
| |
Cancelled/forfeited |
| 165,156 |
| (165,156 | ) | 16.56 |
| |
Expired |
| (7,700 | ) | — |
| — |
| |
Additional shares reserved |
| 300,000 |
| — |
| — |
| |
Balance outstanding at September 30, 2006 |
| 502,147 |
| 1,295,581 |
| $ | 9.92 |
|
The following table summarizes information concerning outstanding and exercisable options as of September 30, 2006:
Options Outstanding |
| Options Exercisable |
| |||||||||||||||
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Average |
| Weighted |
|
|
|
|
| Weighted |
| |||||
|
|
|
| remaining |
| average |
|
|
|
|
| average |
| |||||
Range of |
| Number |
| contractual |
| exercise price |
| Aggregate |
| Options |
| exercise price |
| |||||
exercise prices |
| outstanding |
| life (years) |
| per share |
| Intrinsic Value |
| Exercisable |
| per share |
| |||||
$ .01 | - | 6.00 |
| 665,000 |
| 8.1 |
| $ | 3.12 |
| $ | 160,820 |
| 263,311 |
| $ | 3.95 |
|
$ 6.01 | - | 9.00 |
| 152,971 |
| 5.7 |
| $ | 7.89 |
|
|
| 127,721 |
| $ | 7.90 |
| |
$ 9.01 | - | 13.50 |
| 306,035 |
| 3.3 |
| $ | 10.19 |
|
|
| 298,660 |
| $ | 10.16 |
| |
$ 13.51 | - | 20.26 |
| 42,575 |
| 4.0 |
| $ | 18.29 |
|
|
| 42,575 |
| $ | 18.29 |
| |
$ 20.27 | - | 30.37 |
| 10,250 |
| 3.0 |
| $ | 24.10 |
|
|
| 10,250 |
| $ | 24.10 |
| |
$ 30.38 | - | 45.55 |
| 13,250 |
| 3.5 |
| $ | 37.27 |
|
|
| 13,250 |
| $ | 37.27 |
| |
$ 45.56 | - | 68.32 |
| 104,500 |
| 3.3 |
| $ | 46.33 |
|
|
| 104,500 |
| $ | 46.33 |
| |
$ 68.33 | - | 98.71 |
| 1,000 |
| 3.5 |
| $ | 89.94 |
|
|
| 1,000 |
| $ | 89.94 |
| |
|
|
| 1,295,581 |
| 6.1 |
| $ | 9.92 |
| $ | 160,820 |
| 861,267 |
| $ | 13.39 |
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $3.57 as of September 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The fair value of stock options vested at September 30, 2006 and September 30, 2005 was $4.9 million and $5.4 million, respectively. The total number of in-the-money options exercisable as of September 30, 2006 was 101,200. As of December 31, 2005, 863,221 outstanding options were exercisable, and the weighted average exercise price was $15.85.
15
Valuation and Expense Information under SFAS 123(R)
The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases under SFAS123 (R) for the three and nine months ended September 30, 2006 which was allocated as follows:
| Three Months Ended |
| Nine Months Ended |
| |||
|
| September 30, 2006 |
| September 30, 2006 |
| ||
|
| (in thousands) |
| (in thousands) |
| ||
Cost of sales |
| $ | 6 |
| $ | 12 |
|
Research and development |
| 18 |
| 83 |
| ||
Marketing and selling |
| 4 |
| 33 |
| ||
General and administration |
| 38 |
| 160 |
| ||
Stock-based compensation expense included in operating expenses |
| $ | 66 |
| $ | 288 |
|
As of September 30, 2006 the Company capitalized $ 4 thousand of stock-based compensation in inventory. The Company did not recognize any tax benefits on the stock-based compensation recorded in the periods based on the current tax status of the Company.
The table below reflects net income per share, basic and diluted for the three and nine months ended September 30, 2006 compared with the pro forma information for the three and nine months ended September 30, 2005.
| Three Months Ended September 30, |
| Nine months Ended September30, |
| |||||||||
|
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| ||||
Net loss as reported for prior periods (1) |
| $ | (1,920,638 | ) | N/A |
| $ | (7,252,483 | ) | N/A |
| ||
Stock-based compensations expense related to employee stock options and employee stock purchases (2) |
| (192,978 | ) | (65,300 | ) | (524,474 | ) | (287,785 | ) | ||||
Net income (loss) including the effect of stock-based compensation expense (3) |
| $ | (2,113,616 | ) | $ | 2,237,233 |
| $ | (7,776,957 | ) | $ | 1,436,057 |
|
Per share information, basic and diluted: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss as reported for the prior period (1) |
| $ | (0.18 | ) | N/A |
| $ | (0.68 | ) | N/A |
| ||
Net income (loss) including the effect of stock-based compensation expense (3) |
| $ | (0.20 | ) | $ | .21 |
| $ | (0.72 | ) | $ | 0.13 |
|
(1) Net income (loss) and net income (loss) per share prior to 2006 did not include stock-based compensation expense related to employee stock options and employee stock purchases under SFAS123 because we did not adopt the recognition provisions of SFAS123.
(2) Stock-based compensation expense prior to 2006 is calculated on the pro forma application of SFAS123 as previously disclosed in the notes to the Financial Statements.
(3) Net income (loss) and net income (loss) per share prior to 2006 represents pro forma information based on SFAS123 as previously disclosed in the notes to the Financial Statements.
16
The weighted-average estimated fair value of employee stock options granted during the nine months ended September 30, 2006 was $2.39 per share using the Black Scholes option-pricing model with the following weighted-average assumptions:
| Nine Months Ended |
| |
|
| September 30, 2006 |
|
Expected volatility |
| 103.64 | % |
Risk free interest rate |
| 4.91 | % |
Dividend yield |
| 0.00 |
|
Expected option life (10 year contractual life options) |
| 6.25 |
|
The expected life of employee stock options is the anticipated average time that an option will be outstanding. The Company chose to use the simplified method provided under SAB107 to estimate the expected term for “plain vanilla” stock options. The expected term as calculated under the simplified method is 6.25 years.
The Company determined the expected volatility of the stock price by using a period equal to the expected life of the stock options, 6.25 years. Volatility was measured as the standard deviation of the difference in the natural logarithms of the stock over the expected life of the options using the daily closing stock price. This resulted in the volatility of 103.64 percent.
The risk-free interest rate assumption is based upon observed treasury bill interest rates (risk free) appropriate for the expected term of the Company’s employee stock options.
As stock-based compensation expense recognized in the Statement of Operations for the nine months ended September 30, 2006 is actually based on awards ultimately expected to vest, it has been reduced for annualized estimated forfeitures of 16.36%. SFAS 123 (R ) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2006
The weighted average estimated fair value of employee stock options granted during the nine months ended September 30, 2005 was $1.05 using the Black Scholes option-pricing model with the following weighted average assumptions:
| Nine Months Ended |
| |
|
| September 30, 2005 |
|
Expected volatility |
| 97.62 | % |
Risk free interest rate |
| 2.91 | % |
Dividend yield |
| 0.00 |
|
Expected option life (10 year contractual life options) |
| 4.00 |
|
For purposes of pro forma disclosures under SFAS 123, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting period.
17
(10) Legal Proceedings
On October 2, 2006, the Company announced that it had reached an agreement in principle to settle the five class action securities lawsuits filed in the United States District Court in the District of Massachusetts against Ibis and its President and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). The settlement in principle announced on October 2, 2006 is subject to and contingent on, the negotiation and execution of a formal settlement agreement and final Court approval. The proposed settlement, which provides for a payment to the plaintiffs of $1.9 million and is to be funded entirely by the Company’s insurance carrier, will not have a material adverse effect on our business, results of operations and financial condition.
Ibis remains a nominal defendant in a shareholder derivative action filed in February 2004 against certain of its directors and officers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL). The complaint alleges, among other things, that the alleged conduct challenged in the securities cases pending against Ibis in Massachusetts (described above) constitutes a breach of the defendants’ fiduciary duties to Ibis. The complaint seeks unspecified money damages and other relief ostensibly on behalf of Ibis. On June 4, 2004, the Court entered an order staying this matter pending the entry of a final order on any motion filed by the Company to dismiss the consolidated class action complaint referenced above. This continuing litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict.
18
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 effort led to the development of proprietary oxygen implanters, the Ibis 1000, which we began selling in 1996, the next generation implanter, the i2000ä, which we began selling in 2002, 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, the Company decided to focus its business operations and sales strategy on the manufacture and sale of our implanter equipment products and de-emphasized the sale of wafers given that, among other things, we believed that the wafer manufacturing companies were in the best position to manufacture SIMOX-SOI wafers using our implanter equipment in light of their expertise and operating efficiencies. As we announced on July 21, 2004, we exited the wafer manufacturing business. The Company believes that its decision to discontinue the wafer business permits broader strategic collaboration efforts between Ibis and the wafer manufacturers. We will maintain a research and development effort relating to wafers for our equipment improvement programs.
We believe that a migration of SOI wafer manufacturing into the major silicon wafer suppliers is taking place. We reach this conclusion for a number of reasons. First, we believe that tremendous price pressure exists on commodity type products, such as silicon wafers, and this pressure is already eroding future price expectations of SOI wafers. Because the starting wafer represents a significant component of the SOI wafer cost, we believe that silicon wafer manufacturers should have a natural cost structure advantage leading to a higher gross margin in large volume production, and therefore should be able to manage such price pressure better than stand-alone SOI producers that do not also produce the silicon wafer itself. Second, we expect that the price pressure will encourage silicon wafer manufacturers to seek out higher margin products, like SOI wafers, to increase their margins. Third, we believe that silicon wafer manufacturers have traditionally developed proprietary intellectual property in silicon materials science, which can be applied to designing optimal starting wafers for SOI production. We believe that this should give them an advantage in both minimizing wafer cost and maximizing SOI wafer quality and yield. Fourth, our experience suggests that silicon wafer manufacturers already have a well-developed infrastructure for manufacturing, sale and marketing of large volumes of substrates. Lastly, we believe that there is greater efficiency in producing the SOI wafer as part of the wafer manufacturers existing product flow, specifically avoiding the need to repackage, re-clean, re-inspect and re-ship substrates twice, once as starting silicon wafers, and a second time as SOI wafers. Therefore, as a result of these trends, we expect our ultimate customers will be drawn from these silicon wafer manufacturers and we plan to focus a majority of our technical and marketing resources on the sale of implanters to the leading silicon wafer manufacturers and our key customers in the semiconductor industry who we believe are the leaders in the adoption of SOI technology. We expect that implanter sales to chipmakers should be minimal, and that these sales will be focused on SOI processes that the chipmaker wishes to keep proprietary, such as selective (or patterned) SIMOX, or other specialty substrates.
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Our fundamental SIMOX-SOI technology has been developed, refined, and tested over the last dozen years. In 2002, we introduced the current generation of SIMOX-SOI technology, that included our second-generation oxygen implanter (i2000ä), and the MLD wafer process which was licensed to us by IBM. We believe that the i2000’s flexibility, automation and operator-friendly controls allow this tool to produce a wide range of SIMOX-SOI wafer products using a range of manufacturing processes, including Advantox® MLD and Advantox MLD-UT wafers. We also believe the ability of the i2000 implanter to produce twelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process positions us to capitalize on the growing SOI market. In 1999, we commenced a program to design and develop the i2000, introduced it in March 2002 and began shipping 300 mm wafers implanted from this machine shortly thereafter. Customers who purchase the i2000 can utilize more than one SIMOX wafer manufacturing processes on the implanter including the IBM MLD process, when licensed, as well as other SIMOX-SOI wafer manufacturing processes that do not require the IBM license.
Because we have sold only a small number of implanters to date on an irregular basis, the recognition of revenue from the sale of even one implanter is likely to result in a significant increase in the revenue during that quarter. We recognize implanter revenue in accordance with SAB 104, which includes, among other criteria, the shipment and final customer acceptance of the implanter at the customer’s location. As a result, deferral of implanter revenue will be recorded on our balance sheet until the Company is able to meet these criteria.
In January 2005, we announced the booking (i.e. receipt) of an order for one Ibis i2000 SIMOX implanter from SUMCO, a leading international silicon wafer manufacturer. This system was factory accepted and shipped in the second quarter of 2005 and we received final customer acceptance of the tool at the customer’s site in March 2006. In October of 2005, we received a second order for an i2000 SIMOX implanter from SUMCO and negotiated a master purchase agreement that will govern the general commercial terms of future orders from SUMCO. This implanter was factory accepted by SUMCO at Ibis’ facility in the first quarter of 2006. The implanter was shipped in April 2006 and final customer acceptance at the customer’s facility occurred in August, 2006, with the revenue recognized in the quarter ended September 30, 2006.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 on 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.
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Revenue Recognition. We recognize revenue from 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 product has been delivered to the customer and, when applicable, the product has been installed and accepted by the customer; (3) the sales price to the customer has been fixed or is determinable; and (4) collectibility of the sales price is reasonably assured. We recognize revenue from implanter sales upon final customer acceptance at the customer’s site. 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 judgment based upon these factors could impact the timing and amount of revenue and cost recognized.
Inventory Valuation and Reserves. Our policy for the valuation of inventory, including the determination of obsolete or excess inventory, requires us to forecast the future demand for our products within specific time horizons, generally twelve months or less. If our forecasted 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 have reserved for obsolescence when engineering changes or other technological advances indicate that obsolescence has occurred.
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 or asset groups whenever events and circumstances indicate that the carrying value may not be recoverable. Based on current conditions, factors we consider important and 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 or asset group. 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, 2006 Compared to Third Quarter Ended September 30, 2005
License and Other Revenue. License and other revenue includes revenue derived from license agreements, characterization and other services. License and other revenue increased for the third quarter ended September 30, 2006 to $0.2 million from $0.1 million for the third quarter ended September 30, 2005, an increase of $62 thousand or 52%. This increase is attributable to increased license revenue from royalty fees related to equipment technology.
Equipment Revenue. Equipment revenue represents revenue recognized from sales of implanters, spare parts and field service revenue. Equipment revenue increased to $7.0 million for the third quarter ended September 30, 2006 from $0.1 million for the third quarter ended September 30, 2005, an increase of $6.9 million as a result of final customer acceptance of the implanter the Company shipped to SUMCO in April of this year. Sales of spare parts accounted for $41 thousand of equipment revenue for the third quarter ended September 30, 2006 as compared to $42 thousand of equipment revenue for the third quarter ended September 30, 2005. Sales of spare parts fluctuate depending on customer demand and when warranties expire on individual pieces of equipment. Warranty expense is calculated on our anticipated replacement costs for equipment accepted by our customers over a one or two year contract period.
Total Net Sales and Revenue. Total sales and revenue for the third quarter ended September 30, 2006 was $7.2 million, an increase of $7.0 million, from total net revenue of $0.2 million for the third quarter ended September 30, 2005. This increase is due to revenue recognition associated with final customer acceptance of the implanter the Company shipped to SUMCO in April of this year of $7.0 million.
Total Cost of Sales and Revenue. Cost of equipment revenue represents the cost of equipment, the cost for spare parts, and the costs of labor incurred for field service. Cost of equipment revenue for the third quarter ended September 30, 2006 was $2.9 million, as compared to $0.1 million for the third quarter ended September 30, 2005. This increase of $2.8 million was primarily due to the costs associated with the recognition of revenue for the i2000 implanter in the third quarter ended September 30, 2006.
Total cost of sales and revenue including contract and other revenue as well as equipment revenue mentioned above for the third quarter ended September 30, 2006 was $2.9 million as compared to $0.1 million for the third quarter ended September 30, 2005, an increase of $2.8 million. The gross margin for all sales was a positive 59% for the third quarter ended September 30, 2006 as compared to a positive gross margin of 14% for the third quarter ended September 30, 2005. The increase in the gross margin for all sales is attributable to the approximate gross margin of 55% for the i2000 implanter sale recognized in the third quarter ended September 30, 2006 as compared to no implanter gross margin for the quarter ended September 30, 2005 as well as the $0.3 million in reduction in cost from the expiration of customer warranty coverage associated with the i2000 implanter revenue recognized in the third quarter ended September 30, 2004.
General and Administrative Expenses. General and administrative expenses for the third quarter ended September 30, 2006 were $0.6 million as compared to $0.5 million for the third quarter ended September 30, 2005. This includes $0.1 million of stock-based compensation expense, which impacted the financial statements in compliance with the new accounting rule, in the quarter ended September 30, 2006.
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Marketing and Selling Expenses. Marketing and selling expenses for the third quarter ended September 30, 2006 were $0.2 million as compared to $0.3 million for the third quarter ended September 30, 2005. This was due to decreased payroll expenses of $0.1 million due to labor being charged to cost of sales and warranties in the quarter ended September 30, 2006 as compared to operating expenses in the quarter ended September 30, 2005.
Research and Development Expenses. Internally funded research and development expenses decreased by $0.1 million or 2% to $1.3 million for the third quarter ended September 30, 2006, as compared to $1.4 million for the third quarter ended September 30, 2005. This was due to a reduction in payroll and payroll related expenses of $0.1 million from headcount reductions.
Other Income (Expense). Total other income for the third quarter ended September 30, 2006 was $0.1 million as compared to $0.2 million for the third quarter ended September 30, 2005. Other Income during the quarter is principally composed of interest income.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
License and Other Revenue. License and other revenue includes revenue derived from license agreements, characterization and other services. License and other revenue was $0.5 million for the nine months ended September 30, 2006 as compared to $0.3 million for the nine months ended September 30, 2005. The increase is attributable to a new sublicense agreement related to equipment technology valued at $0.2 million.
Equipment Revenue. Equipment revenue represents revenue recognized from the sale of implanters, spare parts and field service revenue. Equipment revenue was $13.1 million for the nine months ended September 30, 2006 as compared to $0.2 million for the nine months ended September 30, 2005, an increase of $12.8 million. During the nine months ended September 30, 2006 revenue was recognized for two i2000 implanters for $13.0 million as compared to no implanter revenue recognition in the first nine months of 2005. Field service revenue accounted for $0 dollars of equipment revenue for the nine months ended September 30, 2006 as compared to $0.1 million of equipment revenue for the same period last year. Sales of spare parts accounted for $0.1million of equipment revenue for the nine months ended September 30, 2006 as compared to $0.1 million of equipment revenue for the nine months ended September 30, 2005. Sales of spare parts fluctuate depending on customer demand and when warranties expire on individual pieces of equipment. Warranty expense is calculated on our anticipated replacement costs for equipment accepted by our customers over a one or two year contract period.
Total Net Sales and Revenue. Total sales and revenue for the nine months ended September 30, 2006 was $13.5 million, an increase of $13.0 million, from total net revenue of $0.5 million for the nine months ended September 30, 2005. The increase is due to revenue recognition for two i2000 implanters of $13.0 million during the nine months ended September 30, 2006 along with increased license revenue of $0.2 million which was offset by a decrease in service revenue of $0.1 million and spare parts revenue of $0.1 million.
Total Cost of Sales and 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 nine months ended September 30, 2006 was $5.7 million, compared to $0.7 million for the nine months ended September 30, 2005. The increase of $5.0 million was primarily due to the costs associated with the recognition of revenue for the two i2000 implanters in the nine months ended September 30, 2006.
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Total cost of sales and revenue for the nine months ended September 30, 2006 was $5.7 million compared to $0.7 million for the nine months ended September 30, 2005, an increase of $5.0 million. The gross margin for all sales was positive 58% for the nine months ended September 30, 2006 as compared to a negative gross margin of 25% for the nine months ended September 30, 2005. This increase in the gross margin for all sales is attributable to the approximate gross margin of 55% for the two i2000 implanter sales recognized in the nine months ended September 30, 2006 and $0.6 million reduction in cost from the expiration of warranties on two i2000 implanters.
General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2006 were $1.9 million compared to $1.7 million for the nine months ended September 30, 2005. This was primarily due to $0.2 million of stock-based compensation expense which impacted the financial statements in compliance with the new accounting rule in the nine months ended September 30, 2006.
Marketing and Selling Expenses. Marketing and selling expenses were $0.8 million for the nine months ended September 30, 2006 as compared to $1.1 million for the nine months ended September 30, 2005. This decrease was due to decreased payroll and payroll related expenses of $0.3 million from headcount reductions.
Research and Development Expenses. Internally funded research and development expenses decreased by $0.6 million or 13%, to $4.0 million for the nine months ended September 30, 2006, as compared to $4.6 million for the nine months ended September 30, 2005. This was due to a reduction in wafer research and development costs of $0.2 million that are now supporting equipment development. In addition, reduced payroll and payroll related expenses of $0.3 million and the reduction of repair and maintenance costs of $0.1 million contributed to these results.
Other Income (Expense). Total other income for the nine months ended September 30, 2006 was $0.3 million as compared to $0.3 million for the nine months ended September 30, 2005. Other income is principally composed of interest income.
Liquidity and Capital Resources
As of September 30, 2006, the Company had cash and cash equivalents of $5.8 million, including the final payment of $1.1 million received during the third quarter for final customer acceptance of the i2000 SIMOX implanter shipped to SUMCO. During the nine months ended September 30, 2006, Ibis used $1.0 million of cash from operating activities of continuing operations as compared to $1.6 million in the nine months ended September 30, 2005. The principal uses of cash during the nine months ended September 30, 2006 were to fund operations, and additions to property and equipment which totaled approximately $35 thousand. At September 30, 2006, Ibis had commitments to purchase approximately $0.4 million in material. Our headcount for the quarter ended September 30, 2006 was 45 employees.
The Company’s management believes that it will have sufficient cash resources to support operations through the second quarter of 2007. We expect to receive approximately $800,000 in the fourth quarter from a customer in respect of the expiration of an option to place an order for an additional implanter prior to the end of 2006. With the addition of the next implanter order from SUMCO, which the Company believes will occur during the first half of 2007, and its subsequent payment, the Company believes it could support operations at current levels through at least the next twelve months. This expectation however, is based on the Company’s current operating plan and general sales outlook, each of which may change rapidly. The Company intends to continue to invest in research and development and its manufacturing capabilities. Changes in technology or sales growth beyond currently established capabilities may require further investment. Further adoption of the technology and timing of future equipment orders are dependent on the continuing qualification of implanters and improvement programs at the device manufacturers, among other factors.
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At present time the Company has only one of the four major wafer manufacturers as its current customer. We currently do not have an order backlog for implanters. The timing of future orders is important and difficult to predict because customers can delay orders and/or request early shipment, either of which could cause the need for additional cash requirements. Forecasting future revenue, on a quarter-by-quarter basis remains exceedingly difficult and significant variations quarter to quarter, are likely. Further, because some of the materials and components the Company uses to build its implanter have long lead times, the Company may purchase some or all of these long lead time items prior to receipt of an order by its customers. When this is the case, those parts and materials bear the risk of being subject to excess and obsolescence. The Company expects to continue to explore equity offerings and other forms of financing and anticipates that we may be required to raise additional capital in the near future in order to finance future growth and our research and development programs. There can be no assurance however, that our actual needs will not exceed expectations or that we will be able to fund our operations on a long-term basis in the absence of other sources. There also can be no assurance that any additional required longer term financing will be available through additional bank borrowings, debt or equity offerings or otherwise, or that if such financing is available, that it will be available on terms acceptable to us.
Business Risk Factors
This Form 10-Q contains express or implied forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or “continue” or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms. In addition, these forward-looking statements include, but are not limited to, statements regarding, among other things: (i) the Company’s expectations regarding future orders for i2000 implanters, (ii) attaining implanter improvements to the degree and in the timeframe necessary to meet SUMCO’s expectations, (iii) the timing of SUMCO’s ramping to production quantities on the i2000 implanter and the sustained production worthiness of the i2000 implanter, (iv) the reliance on a single or small number of large customers, interest in and demand for, and market acceptance of, the Company’s SIMOX-SOI technology including the Company’s implanters, (v) the involvement generally of the silicon wafer manufacturing industry in the SOI wafer market and the ability of the wafer manufacturer’s to produce sufficiently low cost SIMOX-SOI wafers utilizing both our SIMOX equipment and technology, as well as other equipment manufacturer’s tools, (vi) the Company’s ability to conduct its operations in a manner consistent with its current plan and existing capital resources or otherwise to obtain additional implanter orders or to secure financing to continue as a going concern, (vii) the continued employment of key management and technical personnel, (viii) the timing and likelihood of revenue recognition on orders for the Company’s implanters, (ix) the Company’s belief that wafer manufacturers will become the primary suppliers of SIMOX-SOI wafers to the chipmaking industry, (x) the throughput and production capacity of the i2000 implanter for manufacturing 300-mm SIMOX-SOI wafers, attaining implanter improvements to the degree and in the timeframe necessary to meet customer expectations, and the ability of the i2000 implanter to achieve acceptable production yields, (xi) the Company’s plan to focus on supplying implanters to wafer manufacturers, and (xii) the Company’s expectation of having sufficient cash for operations. Such statements are neither promises nor guarantees but rather are subject to risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such risks and uncertainties include, but are not limited to: future continued migration to SOI technology and market acceptance of SIMOX; the level of demand for the Company’s products; the Company’s ability to pursue and maintain further strategic relationships, partnerships and alliances with third parties; the Company’s ability to protect its proprietary technology; the potential trends in the semiconductor industry generally; the ease with which the i2000 can be installed and qualified in fabrication facilities; the likelihood that implanters, if ordered, will be qualified and accepted by customers without substantial delay, modification, or cancellation, in whole or in part; the likelihood and timing of revenue recognition on such transactions; the impact of competitive products, technologies and pricing; the impact of rapidly changing technology; the possibility of further asset impairment and resulting charges; equipment capacity and supply constraints or difficulties; the Company’s limited history in selling implanters; general economic conditions; and
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
other risks and uncertainties described elsewhere in this Form 10-Q and in the Company’s Securities and Exchange Commission filings from time to time, including but not limited to those set forth in the Company’s annual report on Form 10-K for the year ended December 31, 2005. 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.
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IBIS TECHNOLOGY CORPORATION
PART I – ITEM 4
(a) Evaluation of Disclosure Controls and Procedures. As of September 30, 2006, the Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2006, the Company’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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IBIS TECHNOLOGY CORPORATION
PART II
On October 2, 2006, the company announced that it had reached an agreement in principle to settle the five class action securities lawsuits filed in the United States District Court in the District of Massachusetts against Ibis and its President and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). The settlement in principle announced on October 2, 2006 is subject to, and contingent upon the negotiation and execution of a formal settlement agreement and final court approval after notice to the class. The proposed settlement, which provides for a payment to the plaintiffs of $1.9 million and is to be funded entirely by the company’s insurance carrier, will not have a material adverse effect on our business, results of operations and financial condition.
Ibis remains a nominal defendant in a shareholder derivative action filed in February 2004 against certain of its directors and officers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL). The complaint alleges, among other things, that the alleged conduct challenged in the securities cases pending against Ibis in Massachusetts (described above) constitutes a breach of the defendants’ fiduciary duties to Ibis. The complaint seeks unspecified money damages and other relief ostensibly on behalf of Ibis. On June 4, 2004, the Court entered an order staying this matter pending the entry of a final order on any motion filed by the Company to dismiss the consolidated class action complaint referenced above. This continuing litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict.
Given the settlement described in Item No. 1 above, the “Risk Factor” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.under the heading “Securities Litigation Could Result in Substantial Cost and Divert the Attention of Key Personnel, Which Could Seriously Harm Our Business” should be understood to include only: (i) the risks described therein if the parties are unable to negotiate a mutually acceptable settlement and/or such settlement is not approved by the court or otherwise effected in a timely manner, and (ii) those risks attendant to the ongoing derivative litigation.
Except as described in this Item 1A, for information regarding risk factors, please refer to Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults upon Senior Securities
None
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Item 4 - Submission of Matters to a Vote of Security Holders
None
None
(a) Exhibits furnished as Exhibits hereto:
Exhibit No. |
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31.1 |
| Certification of Martin J. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
| Certification of William J. Schmidt pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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 |
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Date: November 13, 2006 |
| By: | /s/William J. Schmidt |
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| William J. Schmidt | ||
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| Chief Financial Officer, Treasurer and Clerk | ||
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Date: November 13, 2006 |
| By: | /s/Martin J. Reid |
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| Martin J. Reid | ||
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| President and Chief Executive Officer |
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