**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20569**

 

**Form 10-Q**

 

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

 

**For theQuarterly Period Ended March 31, 2005**

 

**Or**

 

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

 

**For thetransition period from                               to                                       **

 

**Commission file number       0-23150**

 

**Ibis Technology Corporation**

(Exact name of registrant as specified in its charter)

 
| **Massachusetts**                                         | ** ** | ** ** | ** ** | **04-2987600**      |
|-----------------------------------------------------------|------------|------------|------------|---------------------|
| (State or other jurisdiction of                           |       |       |       | (I.R.S. Employer    |
| incorporation or organization)                            |       |       |       | Identification No.) |
|                                                      |       |       |       |                |
| **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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 
| Yes   ý | No   o |
|------------------------|------------------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 
| Yes   o | No   ý |
|-------------------|-----------------------|

 

10,719,595shares of Common Stock, par value $.008, were outstanding on May 06, 2005.

 

 

----

 

**IBIS TECHNOLOGY CORPORATION**

 

**INDEX**

 
| PART 1 -  FINANCIAL INFORMATION                                                                      |       |
|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** |
| Item 1 – Financial Statements:                                                                       |       |
|                                                                                                      |       |
| Balance Sheets  December 31, 2004 and March 31, 2005 (unaudited)                                |       |
|                                                                                                      |       |
| Statements of Operations  Three Months Ended March 31, 2004 and 2005 (unaudited)                     |       |
|                                                                                                      |       |
| Statements of Cash Flows  Three Months Ended March 31, 2004 and 2005 (unaudited)                     |       |
|                                                                                                      |       |
| Notes  to Unaudited Interim Financial Statements                                                          |       |
|                                                                                                      |       |
| Item 2 – Management’s Discussion  and Analysis of Financial Condition and Results of Operations |       |
|                                                                                                      |       |
| Item 3 – Quantitative and  Qualitative Disclosure About Market Risk                                  |       |
|                                                                                                      |       |
| Item 4 – Controls and Procedures                                                                     |       |
|                                                                                                      |       |
| PART II – OTHER INFORMATION                                                                     |       |
|                                                                                                      |       |
| Item 1 – Legal Proceedings                                                                           |       |
|                                                                                                      |       |
| Item 2 – Changes in  Securities                                                                      |       |
|                                                                                                      |       |
| Item 3 –  Defaults upon Senior Securities                                                            |       |
|                                                                                                      |       |
| Item  4 – Submission of Matters to a Vote of Security Holders                                        |       |
|                                                                                                      |       |
| Item 5 – Other Information                                                                           |       |
|                                                                                                      |       |
| Item 6 –  Exhibits and Reports on Form 8-K                                                      |       |
|                                                                                                      |       |
| Signatures                                                                                                |       |

 

2

----

 

**IBIS TECHNOLOGY CORPORATION**

 

**BALANCESHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2004**              | ** ** | **2005**           | ** ** |
|                                                                                                                                                           |       |                  |       |               |       |
| **Assets**                                                                                                                                                     |       |                  |       |               |       |
| **Current assets:**                                                                                                                                            |       |                  |       |               |       |
| Cash and cash equivalents                                                                                                                                      |       | $                     | 7,726,072  |               | $          | 5,587,772 |   |
| Accounts receivable, trade, net                                                                                                                                |       | 34,458                |       | 130,500            |       |
| Inventories (note 4)                                                                                                                                           |       | 5,625,167             |       | 5,672,137          |       |
| Prepaid expenses and other current assets                                                                                                                      |       | 760,721               |       | 687,767            |       |
| Assets held for sale (note 7)                                                                                                                                  |       | 131,416               |       | 131,416            |       |
| Total current assets                                                                                                                                           |       | 14,277,834            |       | 12,209,592         |       |
| Property and equipment                                                                                                                                         |       | 33,660,086            |       | 32,977,394         |       |
| Less: Accumulated depreciation and amortization                                                                                                                |       | (27,335,477           | )          | (27,007,180        | )          |
| Net property and equipment                                                                                                                                     |       | 6,324,609             |       | 5,970,214          |       |
| Patents and other assets, net                                                                                                                                  |       | 1,680,197             |       | 1,570,825          |       |
| Total assets                                                                                                                                                   |       | $                     | 22,282,640 |               | $          | 19,750,631 |   |
|                                                                                                                                                           |       |                  |       |               |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                  | ** ** | ** **            | ** ** | ** **         | ** ** |
| **Current liabilities:**                                                                                                                                       |       |                  |       |               |       |
| Accounts payable                                                                                                                                               |       | $                     | 392,875    |               | $          | 449,161 |   |
| Accrued liabilities                                                                                                                                            |       | 1,417,904             |       | 1,516,551          |       |
| Deferred revenue                                                                                                                                               |       | 52,000                |       | 52,000             |       |
| Total current liabilities                                                                                                                                      |       | 1,862,779             |       | 2,017,712          |       |
| Total liabilities                                                                                                                                              |       | 1,862,779             |       | 2,017,712          |       |
| ** **                                                                                                                                                     | ** ** | ** **            | ** ** | ** **         | ** ** |
| **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 and outstanding  10,719,595 shares and 10,719,595 shares at December 31, 2004 and March 31,  2005, respectively |       | 85,757                |       | 85,757             |       |
| Additional paid-in capital                                                                                                                                     |       | 93,124,259            |       | 93,124,259         |       |
| Accumulated deficit                                                                                                                                            |       | (72,790,155           | )          | (75,477,097        | )          |
| Total stockholders’ equity                                                                                                                                |       | 20,419,861            |       | 17,732,919         |       |
| Total liabilities and stockholders’ equity                                                                                                                |       | $                     | 22,282,640 |               | $          | 19,750,631 |   |

 

See accompanying notes to unaudited interim financial statements.

 

3

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
| ** **                                  | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2004**                               | ** ** | **2005** | ** ** |
|                                        |       |                                   |       |   |   |
| **Net Sales and revenue:**                  |       |                                   |       |   |   |
| Contract and other revenue                  |       | $                                      | 90,251     |   | $ | 68,234 |   |
| Equipment revenue                           |       | 117,657                                |       | 98,421 |   |
| Total net sales and revenue (notes 2 and 6) |       | 207,908                                |       | 166,655 |   |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Cost of sales and revenue:**              |       |                                   |       |   |   |
| Cost of contract and other revenue          |       | 6,942                                  |       | — |   |
| Cost of equipment revenue                   |       | 326,655                                |       | 300,083 |   |
| Total cost of sales and revenue             |       | 333,597                                |       | 300,083 |   |
| Gross profit                                |       | (125,689                               | )          | (133,428 | ) |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Operating expenses:**                     |       |                                   |       |   |   |
| General and administrative                  |       | 631,491                                |       | 561,613 |   |
| Marketing and selling                       |       | 340,655                                |       | 390,256 |   |
| Research and development                    |       | 985,268                                |       | 1,682,663 |   |
| Total operating expenses                    |       | 1,957,414                              |       | 2,634,532 |   |
|                                        |       |                                   |       |   |   |
| Loss from operations                        |       | (2,083,103                             | )          | (2,767,960 | ) |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Other income (expense):**                 | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Interest income                             |       | 23,444                                 |       | 40,524 |   |
| Interest expense                            |       | (12,857                                | )          | (536 | ) |
| Total other income                          |       | 10,587                                 |       | 39,988 |   |
|                                        |       |                                   |       |   |   |
| Loss before income taxes                    |       | (2,072,516                             | )          | (2,727,972 | ) |
|                                        |       |                                   |       |   |   |
| Income tax expense                          |       | 1,256                                  |       | 1,256 |   |
| Loss from continuing operations             |       | (2,073,772                             | )          | (2,729,228 | ) |
|                                        |       |                                   |       |   |   |
| Discontinued operations: (note 7)           |       |                                   |       |   |   |
| Loss from discontinued operations           |       | (1,407,383                             | )          | — |   |
| Gain on disposal                            |       | —                                 |       | 42,286 |   |
| Income (loss) from discontinued operations  |       | (1,407,383                             | )          | 42,286 |   |
|                                        |       |                                   |       |   |   |
| Net loss (note 2)                           |       | $                                      | (3,481,155 | ) | $ | (2,686,942 | ) |
|                                        |       |                                   |       |   |   |
| Earnings (loss) per share:                  |       |                                   |       |   |   |
| Basic                                       |       |                                   |       |   |   |
| Continuing operations                       |       | $                                      | (0.20      | ) | $ | (0.25 | ) |
| Discontinued operations                     |       | $                                      | (0.13      | ) | $ | — |   |
| Net loss                                    |       | $                                      | (0.33      | ) | $ | (0.25 | ) |
|                                        |       |                                   |       |   |   |
| Diluted                                     |       |                                   |       |   |   |
| Continuing operations                       |       | $                                      | (0.20      | ) | $ | (0.25 | ) |
| Discontinued operations                     |       | $                                      | (0.13      | ) | $ | — |   |
| Net loss                                    |       | $                                      | (0.33      | ) | $ | (0.25 | ) |
|                                        |       |                                   |       |   |   |
| Weighted average common shares outstanding  |       |                                   |       |   |   |
| Basic                                       |       | 10,651,316                             |       | 10,719,595 |   |
| Diluted (note 5)                            |       | 10,651,316                             |       | 10,719,595 |   |

 

See accompanying notes to unaudited interim financial statements.

 

4

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                               | ** ** | **2005** | ** ** |
|                                                                                         |       |                                   |       |   |   |
| **Cash flows from operating activities:**                                                    | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net loss                                                                                     |       | $                                      | (3,481,155 | ) | $ | (2,686,942 | ) |
| Gain (loss) from discontinued operations                                                     |       | (1,407,383                             | )          | 42,286 |   |
| Loss from continuing operations                                                              |       | (2,073,772                             | )          | (2,729,228 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in)  continuing operations: |       |                                   |       |   |   |
| Depreciation and amortization                                                                |       | 268,002                                |       | 487,838 |   |
| Changes in operating assets and liabilities:                                                 |       |                                   |       |   |   |
| Accounts receivable, trade                                                                   |       | 33,777                                 |       | (99,754 | ) |
| Unbilled revenue                                                                             |       | 528,581                                |       | — |   |
| Inventories                                                                                  |       | (256,487                               | )          | (46,970 | ) |
| Prepaid expenses and other current assets                                                    |       | (156,106                               | )          | 72,954 |   |
| Accounts payable                                                                             |       | 254,198                                |       | 56,286 |   |
| Accrued liabilities and deferred revenue                                                     |       | 2,320,134                              |       | 109,920 |   |
|                                                                                         |       |                                   |       |   |   |
| Net cash provided by (used in) operating activities of  continuing operations                |       | 918,327                                |       | (2,148,954 | ) |
| ** **                                                                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Cash flows from investing activities of  continuing operations:**                          |       |                                   |       |   |   |
| Additions to property and equipment, net                                                     |       | (6,195                                 | )          | (46,291 | ) |
| Other assets                                                                                 |       | (16,379                                | )          | 22,220 |   |
|                                                                                         |       |                                   |       |   |   |
| Net cash used in investing activities of continuing  operations                              |       | (22,574                                | )          | (24,071 | ) |
| ** **                                                                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Cash flows from financing activities of  continuing operations:**                          |       |                                   |       |   |   |
| Exercise of stock options and warrants                                                       |       | 2,823                                  |       | — |   |
|                                                                                         |       |                                   |       |   |   |
| Net cash used by financing activities of continuing  operations                              |       | 2,823                                  |       | — |   |
|                                                                                         |       |                                   |       |   |   |
| Net cash provided (used) for discontinued operations                                         |       | (422,258                               | )          | 34,725 |   |
|                                                                                         |       |                                   |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                         |       | 476,318                                |       | (2,138,300 | ) |
|                                                                                         |       |                                   |       |   |   |
| Cash and cash equivalents, beginning of period                                               |       | 14,174,716                             |       | 7,726,072 |   |
|                                                                                         |       |                                   |       |   |   |
| Cash and cash equivalents, end of period                                                     |       | $                                      | 14,651,034 |   | $ | 5,587,772 |   |
| ** **                                                                                   |       |                                   |       |   |   |
| **Supplemental disclosure of cash flow  information:**                                       |       |                                   |       |   |   |
| Cash paid during the period for interest                                                     |       | $                                      | 12,857     |   | $ | 536 |   |
| ** **                                                                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Supplemental disclosure of non-cash investing  activities:**                               |       |                                   |       |   |   |
| Transfer of internally constructed equipment from  property and equipment to inventory       |       | $                                      | 3,931,390  |   | $ | — |   |

 

See accompanying notes to unaudited interim financial statements.

 

5

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

** **

**(1) InterimFinancial Statements**

 

The accompanying financial statements are unauditedand have been prepared by the Ibis Technology Corporation (the “Company” or “Ibis”)in accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.

 

In theopinion of management, the interim financial statements include alladjustments, which consist only of normal and recurring adjustments, necessaryfor a fair presentation of the Company’s financial position and results ofoperations. Results of operations for the interim periods are not necessarilyindicative of the results to be expected for the full year. These financialstatements should be read in conjunction with the financial statements of theCompany as of and for the year ended December 31, 2004, which are includedin the Company’s Annual Report on Form 10-K as filed on March 31, 2005.

 

**(2) Summaryof Significant Accounting Policies**

 

***(a) Revenue Recognition***

 

The Company recognizes revenue from equipment salesand the sales of spare parts when all of the following criteria have beenmet:  (1) evidence exists that thecustomer is bound to the transaction; (2) the product (or service) hasbeen delivered to the customer and, when applicable, the product (or service)has been installed (and completed) and accepted by the customer; (3) thesales price to the customer has been fixed or is determinable; and (4) collectibilityof the sales price is reasonably assured. The Company recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Provisions forestimated sales returns and allowances are made at the time the products aresold. Revenue derived from contracts and services is recognized uponperformance. Significant management judgments and estimates must be made andused in connection with revenue recognized in any period. Management analyzesvarious factors including a review of specific transactions, historicalexperience, credit worthiness of customers and current market and economicconditions. Changes in judgments based upon these factors could impact thetiming and amount of revenue and cost recognized.

 

***(b) Stock-Based Compensation***

 

The Company accounts for its stock option plans underthe recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees, and Related Interpretations” and complies withthe disclosure provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”)and SFAS 148, “Accounting for Stock-Based Compensation Transition andDisclosure”. No stock-based compensation cost is reflected in net income (loss)for these plans, as all options granted under these plans had an exercise priceequal 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 SFAS No. 123  to stock-based compensation:

 
| ** **                                                                                                                           | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
|                                                                                                                                 |       |                                           |       |   |   |
| Net loss, as reported                                                                                                                |       | $                                              | (3,481,155 | ) | $ | (2,686,942 | ) |
| Add: Stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | (263,336                                       | )          | (135,331 | ) |
| Pro-forma net loss                                                                                                                   |       | $                                              | (3,744,491 | ) | $ | (2,822,273 | ) |
| Net loss per share:                                                                                                                  |       |                                           |       |   |   |
| Basic and diluted – as reported                                                                                                 |       | $                                              | (0.33      | ) | $ | (0.25 | ) |
| Basic and diluted – pro-forma                                                                                                   |       | $                                              | (0.35      | ) | $ | (0.26 | ) |

 

6

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The fair value of each stock option is estimated onthe date of grant using the Black-Scholes option valuation model.

 

**(c)  *New Accounting Pronouncements***

 

In December 2004, theFASB issued FASB Statement No. 123 (revised 2004), *“Shared-Based Payment.”* Statement 123(R)addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Statement 123(R) requires an entity torecognize the grant-date fair-value of stock options and other equity-basedcompensation issued to employees in the income statement. The revised Statementgenerally requires that an entity account for those transactions using thefair-value-based method, and eliminates the intrinsic value method ofaccounting in APB Opinion No. 25, *“Accountingfor Stock Issued to Employees”,* which was permitted under Statement123, as originally issued.

 

The revised Statementrequires entities to disclose information about the nature of the share-basedpayment transactions and the effects of those transactions on the financialstatements.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first interim or annual reporting period that begins afterDecember 15, 2005 (i.e., first quarter 2006 for the Company). All publiccompanies must use either the modified prospective or the modifiedretrospective transition method. Early adoption of this Statement for interimor annual periods for which financial statements or interim reports have notbeen issued is encouraged. The Company has not yet evaluated the impact ofadoption of this pronouncement which must be adopted in the first quarter ofour fiscal year 2006.

 

In November 2004, theFASB issued Statement No. 151, *“InventoryCosts”*, to amend the guidance in Chapter 4, *“Inventory Pricing”*, of FASB AccountingResearch Bulletin No. 43, *“Restatementand Revision of Accounting Research Bulletins.”*Statement No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The Statement requiresthat those items be recognized as current-period charges. Additionally,Statement 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. Statement No. 151 is effective for fiscal years beginningafter June 15, 2005. The Company is currently evaluating the impact of theadoption of this Statement.

 

**(3) Liquidity**

 

Historically, the Companyhas financed its operations and met its capital requirements through fundsgenerated from operations, the issuance of common stock, equipment lines ofcredit, a working capital line of credit, a term loan, sales-leasebackarrangements and collaborative arrangements. In July 2004, the Companydiscontinued its wafer manufacturing business, which was characterized byvolatile production volumes and costs associated with periodic changes andcontinuing improvements in the process. Because of this unpredictability, andbecause it was also likely that additional capital investments would have to bemade to keep the wafer manufacturing process up to date, the Company decided todiscontinue the wafer manufacturing portion of the business in 2004 and tofocus exclusively on the equipment manufacturing business.  The Companywill maintain a research and development effort focused on continuousimprovement of the equipment capabilities and for supporting the Company’sequipment customers’ needs at what is expected to be a significantly reducedcost to the business going forward.

 

Based on the Company’s final disposal plans relativeto the closure of the wafer operation, the Company was required to take cashrelated charges of approximately $0.1 million during the third quarter of 2004.The Company will maintain a wafer research and development effort focused oncontinuous improvement of the equipment capabilities and for supporting theCompany’s equipment customers’ needs at what is expected to be at asignificantly reduced cost to the business going forward. As a result, theCompany expects to reduce its monthly cash burn rate and believes it willgenerate sufficient cash from operations, based on current forecasts, throughthe foreseeable future or at least the next 12 months.

 

7

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During the three months ended March 31, 2005,Ibis used $2.1 million of cash for operating activities of continuingoperations as compared to cash provided of $0.9 million for the same period in2004. To date, Ibis’ working capital requirements have been funded primarilythrough debt (capital leases) and equity financings. The principal uses of cashfor the three months ended March 31, 2005 were to fund operations andadditions to property and equipment which totaled $46 thousand. At March 31,2005, Ibis had commitments to purchase $0.3 million in material to be used forthe i2000 implanter currently under construction and operating expenses.

 

As part of our cash management plan we initiatedadditional cost savings measures during 2003 and 2004. This included the layoffof twenty-nine employees. In the third quarter of 2004 the Company announcedthat it was discontinuing the wafer-manufacturing portion of the business. Thisresulted in the layoff of an additional seventeen employees. Our headcount forthe three months ended March 31, 2005 was 57 employees.

 

In September 2001, Ibis entered into a $4.5million equipment lease line with Heller Financial’s Commercial EquipmentFinance Group. The lease line was used to finance the purchase of processequipment for wafer production, primarily 300 mm wafers. This line was fullydrawn down in two sale-leaseback transactions, bearing interest at approximately8% with a term of three years, and a monthly net payment of approximately $0.1million. Ibis had a fair market value purchase option at the end of the leaseterm. The lease-line ended in the third quarter of 2004 and the Companyexercised the fair market value purchase option at the negotiated buyout priceof $0.9 million. The Company intends to use the majority of the equipment tosupport its ongoing process development efforts and anticipates that it will beable to sell a portion of the equipment purchased for approximately $0.5million.

 

The Company ended the first quarter of 2005 withapproximately $5.6 million in cash and believes it will have sufficient cash onhand, including cash expected to be received from the SUMCO order announced in January 2005to support operations at current levels through the first quarter of 2006. Uponfactory acceptance of this order, which was received on April 22, 2005, weinvoiced SUMCO for 80% of the purchase price of the system, or $4,800,000.Shipment of this order is expected by the end of the second quarter of 2005,with revenue recognition and receipt of the final 20% of the purchase pricebased on final customer acceptance at the customer’s facility in Japan expectedby year end.  The timing of finalacceptance, receipt of the final 20% of the purchase price and revenuerecognition may vary depending on a number of factors, which include amongother things tool performance at the customer site.

 

The Company’s expectations regarding liquidity andcapital resources are based on current operating plans and the company’sgeneral sales outlook, each of which may change rapidly. The company intends tocontinue to invest in research, development and manufacturing capabilities.Changes in technology or sales growth beyond currently established capabilitiesmight require further investment. Moreover, although Ibis is encouraged by the receipt of an additionalorder from SUMCO for an i2000 implanter and the opportunity to work withleading wafer manufacturers like SUMCO to develop further both the i2000implanter and to improve the SIMOX process, SOI technology is still in an earlystage. Further adoption of the technology and timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. The timing of futureorders is important and difficult to predict because customers can delay ordersand/or request early shipment, either of which could cause the need foradditional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. We expect to continue to exploreequity offerings and other forms of financing and anticipate that we may berequired to raise additional capital in the future in order to finance futuregrowth and our research and development programs. There can be no assurance,however, that our actual needs will not exceed expectations or that we will beable to fund our operations on a long-term basis in the absence of othersources. There also can be no assurance that any additional required longerterm financing will be available through additional bank borrowings, debt orequity offerings or otherwise, or that if such financing is available, that itwill be available on terms acceptable to us.

 

8

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**(4) Inventories**

 

Inventoriesconsist of the following:

 
| ** **                | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                | ** ** | **2004**              | ** ** | **2005**           | ** ** |
| Raw materials             |       | $                     | 3,622,501  |               | $          | 3,555,210 |   |
| Work in process           |       | 57,330                |       | 92,502             |       |
| Finished goods            |       | 1,945,336             |       | 2,024,425          |       |
| Total equipment inventory |       | $                     | 5,625,167  |               | $          | 5,672,137 |   |

 

**(5) NetIncome (Loss) Per Share**

 

Net income (loss) per share of common stock iscomputed based upon the weighted average number of shares outstanding duringeach period and including the dilutive effect, if any, of stock options andwarrants. SFAS 128 requires the presentation of basic and diluted earnings(loss) per share for all periods presented. As the Company was in a net lossposition for the three months ended March 31, 2004 and March 31,2005, common stock equivalents of 290,823 and 0, respectively, were excludedfrom the diluted loss per share calculation, as they would be antidilutive. Asa result, diluted loss per share is the same as basic loss per share for allperiods presented.

 

**(6) IndustrySegments**

 

TheCompany’s current reportable segments are SIMOX Equipment and Other Products orServices. The company discontinued its wafer manufacturing operations during2004. For purposes of segment reporting, equipment, equipment spares and fieldservice revenue are combined and reported as SIMOX Equipment. Governmentcontracts, other services and license revenue are combined and reported as OtherProducts or Services.

 

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Thetable below provides unaudited information for the three months ended March 31,2004 and 2005 pertaining to the Company’s two industry segments.

 
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Net Revenues**                                             |       |                 |       |                            |       |       |       |
| Three Months Ended March 31, 2004                       |       | $                    | 117,657    |                            | $          | 90,251     |       | $ | 207,908 |   |
| Three Months Ended March 31, 2005                       |       | $                    | 98,421     |                            | $          | 68,234     |       | $ | 166,655 |   |
|                                                         |       |                 |       |                            |       |       |       |
| **Operating Income (Loss)**                                  |       |                 |       |                            |       |       |       |
| Three Months Ended March 31, 2004                       |       | (1,534,921           | )          | 83,309                          |       | (1,451,612 | )          |
| Three Months Ended March 31, 2005                       |       | (2,274,580           | )          | 68,234                          |       | (2,206,346 | )          |
|                                                         |       |                 |       |                            |       |       |       |
| **Assets**                                                   |       |                 |       |                            |       |       |       |
| March 31, 2005                                          |       | 13,867,784           |       | 114,527                         |       | 13,982,311 |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Capital Expenditures**                                     |       |                 |       |                            |       |       |       |
| Three Months Ended March 31, 2004                       |       | 3,745                |       | —                          |       | 3,745      |       |
| Three Months Ended March 31, 2005                       |       | 46,291               |       | —                          |       | 46,291     |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Depreciation and Amortization of Property and  Equipment** | ** ** | ** **           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months Ended March 31, 2004                       |       | 246,678              |       | —                          |       | 246,678    |       |
| Three Months Ended March 31, 2005                       |       | 473,551              |       | —                          |       | 473,551    |       |

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| **Segment Reconciliation**                                   | ** ** | **2004**                               | ** ** | **2005** | ** ** |
|                                                         |       |                                   |       |   |   |
| Loss Before Income Taxes:                                    |       |                                   |       |   |   |
| Total operating loss for reportable Segments                 |       | $                                      | (1,451,612 | ) | $ | (2,206,346 | ) |
| Corporate general & administrative expenses         |       | (631,491                               | )          | (561,614 | ) |
| Net other income                                             |       | 10,587                                 |       | 39,988 |   |
| Income tax expense                                           |       | 1,256                                  |       | 1,256 |   |
| Gain (loss) from discontinued operations                     |       | (1,407,383                             | )          | 42,286 |   |
| Net loss                                                     |       | $                                      | (3,481,155 | ) | $ | (2,686,942 | ) |
|                                                         |       |                                   |       |   |   |
| Capital Expenditures:                                        |       |                                   |       |   |   |
| Total capital expenditures for reportable segments           |       | $                                      | 3,745      |   | $ | 46,291 |   |
| Corporate capital expenditures                               |       | 2,450                                  |       | — |   |
| Total capital expenditures                                   |       | $                                      | 6,195      |   | $ | 46,291 |   |
|                                                         |       |                                   |       |   |   |
| Depreciation and Amortization:                               |       |                                   |       |   |   |
| Total depreciation and amortization for reportable  segments |       | $                                      | 246,678    |   | $ | 473,551 |   |
| Corporate depreciation and amortization                      |       | 21,324                                 |       | 14,287 |   |
| Total depreciation and amortization                          |       | $                                      | 268,002    |   | $ | 487,838 |   |
|                                                         |       |                                   |       |   |   |
| ** **                                                   | ** ** | ** **                             | ** ** | **Balance as  of** | ** ** |
| ** **                                                   | ** ** | ** **                             | ** ** | **3/31/2005** | ** ** |
| Assets:                                                      | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Total assets for reportable segments                         |       |                                   |       | $ | 13,982,311 |   |
| Cash & cash equivalents not allocated to  Segments  |       |                                   |       | 5,587,772 |   |
| Other unallocated assets                                     |       |                                   |       | 180,548 |   |
| Total assets                                                 |       |                                   |       | $ | 19,750,631 |   |

 

**(7) DiscontinuedOperations**

 

On July 21,2004 the Company announced its intention to discontinue its wafer manufacturingbusiness. This wafer business had been highly concentrated on providing wafersfor the Company’s largest customer, and was characterized by very volatileproduction volumes and costs associated with periodic changes and continuingimprovements to the manufacturing process. The wafer demand from our largestcustomer had been subject to repeated starts and stops. The result was a waferbusiness that was neither not predictable or profitable. Principally for thesereasons, and because it also was likely that additional capital investmentwould have had to have been made to keep our wafer manufacturing process up todate, the Company decided to exit the wafer manufacturing business and focusexclusively on the equipment business. The Company will maintain a research anddevelopment effort relating to wafers for our equipment improvement programs.In the first quarter of 2005, the Company recognized a gain on disposal of assetsfrom the discontinued operations of approximately $42 thousand. The balancesheet at March 31, 2005 includes $0.1 million as assets held for sale as aresult of the discontinuance of the wafer manufacturing business.

 

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**(8) LegalProceedings**

 

Fiveclass action securities lawsuits have been filed in the United States DistrictCourt 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 TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July, 2004,a consolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. That motion now has been fully briefed. While we believe thatthe allegations are without merit, and we intend to vigorously defend againstthe suits, there can be no guarantee as to how they ultimately will beresolved.

 

Inaddition, Ibis has been named as a nominal defendant in a shareholderderivative action filed in February 2004 against certain of its directorsand 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 conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

 

Litigationmay be time-consuming, expensive and disruptive to normal business operations,and the outcome of litigation is difficult to predict. An unfavorableresolution of these litigation matters could have a material adverse effect onour business, results of operations and financial condition.

 

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**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 1987and commenced operations in January 1988. Ibis’ initial activitiesconsisted of producing and selling SIMOX-SOI wafers and conducting research anddevelopment activities. This effort led to the development of proprietaryoxygen implanters, the Ibis 1000, which we began selling in 1996, the nextgeneration implanter, the i2000ä, which we began selling in 2002, andalso to other proprietary process technology.

 

Initially, much of our revenue was derived fromresearch and development contracts and sales of wafers for militaryapplications. Over the years, the Company decided to focus its businessoperations and sales strategy on the manufacture and sale of our implanterequipment products and de-emphasized the sale of wafers given that, among otherthings, we believed that the wafer manufacturing companies were in the bestposition to manufacture SIMOX-SOI wafers using our implanter equipment in lightof their expertise and operating efficiencies. As we announced on July 21,2004, we have exited the wafer manufacturing business. The Company’s finaldisposal plans relative to the closure of the wafer manufacturing operationresulted in a loss from disposal of inventory and certain production assetsfrom discontinued operations of approximately $2.1 million. This loss combinedwith the negative margin incurred by the wafer manufacturing business in 2004of approximately $3.2 million resulted in the total loss from discontinuedoperations of approximately $5.3 million. Our wafer business had been highlyconcentrated on providing wafers for the Company’s largest customer, and wascharacterized by volatile production volumes and costs associated with periodicchanges and continuing improvements to the process. Our major wafer customerhad tended to order fluctuating quantities of wafers on an irregular basis. Thiscustomer also could revise or cancel orders at any time prior to delivery. Thismeant that this customer, who had accounted for a significant portion of ournet revenue in the past, could have reduced or decided not to place any ordersin the succeeding quarter or quarters. Furthermore, most of our other wafercustomers were sampling SIMOX wafers or are in the process of developingprototype products and have also tended to order small quantities of wafers onan irregular basis. These customers could also revise or cancel orders at anytime prior to delivery. As previously announced, because of thisunpredictability, and because it was also likely that additional capitalinvestments would have to be made to keep our wafer manufacturing process up todate (among other factors), we decided to discontinue the wafer manufacturingportion of the business in July 2004 and to focus exclusively on ourequipment business. We will maintain a research and development effort relatingto wafers for our equipment improvement programs. Ibis has experiencedquarterly and annual fluctuations in revenue and results of operations due tovarious factors, including (i) the timing of receipt of equipment orders,and (ii) dependence on a limited number of customers.

 

We believe that a migration of SOI wafer manufacturinginto the major silicon wafer suppliers is taking place. We reach thisconclusion for a number of reasons. First, we believe that tremendous pricepressure exists on commodity type products, such as silicon wafers, and thispressure is already eroding price expectations of SOI wafers. Because thestarting wafer represents a significant component of the SOI wafer cost, webelieve that silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin, and therefore should be able tomanage such price pressure better than stand-alone SOI producers that do notalso produce the silicon wafer itself. Second, we expect that the pricepressure will encourage silicon wafer manufacturers to seek out higher marginproducts, like SOI wafers, to increase their margins. Third, we believe thatsilicon wafer manufacturers have traditionally developed proprietaryintellectual property in silicon materials science, which can be applied todesigning optimal starting wafers for SOI production. We believe that thisshould give them an advantage in both minimizing wafer cost and maximizing SOIwafer quality and yield. Fourth, our experience suggests that silicon wafermanufacturers already have a well-developed infrastructure for manufacturing,sale and marketing of large volumes of substrates. Lastly, we believe thatthere is greater efficiency in producing the SOI wafer as part of the wafermanufacturers existing product flow, specifically avoiding the need torepackage, re-clean, re-inspect and reship substrates twice, once as startingsilicon wafers, and a second time as SOI wafers. Therefore, as a result ofthese trends, we expect our ultimate customers will be drawn from these siliconwafer manufacturers and we plan to focus a majority of our technical andmarketing

 

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resources on the sale of implanters to the leadingsilicon wafer manufacturers and our key customers in the semiconductor industrywho we believe are the leaders in the adoption of SOI technology. We expectthat implanter sales to chipmakers should be minimal, and that these sales willbe focused on SOI processes that the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

 

Our fundamental SIMOX-SOI technology has beendeveloped, refined, and tested over the last dozen years. In 2002, weintroduced the current generation of SIMOX-SOI technology, that included oursecond-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range of manufacturingprocesses, including Advantox® MLD and Advantox MLD-UT wafers. Wealso believe the ability of the i2000 implanter to produce eight andtwelve-inch (or 200 and 300 mm) SIMOX-SOI wafers coupled with the MLD processpositions us to capitalize on the growing SOI market. In 1999, we commenced aprogram to design and develop the i2000, introduced it in March 2002 andbegan shipping 300 mm wafers implanted from this machine shortly thereafter.Customers who purchase the i2000 can utilize more than one SIMOX wafermanufacturing processes on the implanter including the IBM MLD process, whenlicensed, as well as other SIMOX-SOI wafer manufacturing processes that do notrequire the IBM license.

 

Because we have sold only a limited number ofimplanters to date on an irregular basis, the recognition of revenue from thesale of even one implanter is likely to result in a significant increase in therevenue during that quarter. We recognize implanter revenue in accordance withSAB 104, which includes, among other criteria, the shipment and factoryacceptance of the implanter at the customer’s location. As a result, deferralof revenue will be recorded on our balance sheet until the Company is able tomeet these criteria.

 

In January 2005,we announced the booking (i.e. receipt) of an order for one Ibis i2000 SIMOXimplanter from SUMCO, a leading international silicon wafer manufacturer.Although no assurances can be given, we expect to ship this system in thesecond quarter of 2005 as the customer accepted in April 2005 the tool atour facility. Revenue recognition for this implanter will be based on finalcustomer acceptance at their facility, the timing of which may vary dependingon a number of factors, including performance of the tool.

 

In July 2004,the Company announced its intention to discontinue its wafer manufacturingbusiness. Wafer product sales, as well as wafer revenue reported in previousquarters, are reported net of associated costs, as loss from discontinuedoperations on our income statement. The Company believes that its decision todiscontinue the wafer business permit broader strategic collaboration effortsbetween Ibis and the wafer manufacturers. The Company also believes eliminationof wafer manufacturing and associated sales at Ibis, potentially allows ourprimary customers the opportunity to supply additional wafer volume with betterquality and at lower cost to their end customers. We believe this has thepotential to lead to the placement of additional SIMOX SOI equipment orders,and to accelerate customer acceptance of our technology.

 

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**CriticalAccounting Policies**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that have a significant impact on the results wereport in our financial statements. Some of our accounting policies require usto make difficult and subjective judgments, often as a result of the need tomake estimates on matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, accounts receivable reserves and the assessment of long-lived assetimpairment. Actual results may differ from these estimates under differentassumptions or conditions. Below, we discuss these policies further, as well asthe estimates and judgments involved.

 

***Revenue Recognition. ***We recognize revenue from equipment sales and thesales of spare parts when all of the following criteria have been met: (1) evidenceexists that the customer is bound to the transaction; (2) the product hasbeen delivered to the customer and, when applicable, the product has beeninstalled and accepted by the customer; (3) the sales price to thecustomer has been fixed or is determinable; and (4) collectibility of thesale price is reasonably assured. We recognize revenue from implanter salesupon acceptance at the customer’s site. Provisions for estimated sales returnsand allowances are made at the time the products are sold. Revenue derived fromcontracts and services is recognized upon performance. Significant managementjudgments and estimates must be made and used in connection with revenuerecognized in any period. Management analyzes various factors, including areview of specific transactions, historical experience, credit worthiness ofcustomers and current market and economic conditions. Changes in judgmentsbased upon these factors could impact the timing and amount of revenue and costrecognized.

 

***Inventory Valuation andReserves. ***Our policy for the valuation ofinventory, including the determination of obsolete or excess inventory,requires us to forecast the future demand for our products within specific timehorizons, generally twelve months or less. If our forecasted demand forspecific products is greater than actual demand and we fail to reducemanufacturing output accordingly, we could be required to record additionalinventory reserves, which would have a negative impact on our gross margin. Wehave reserved for obsolescence when engineering changes or other technologicaladvances indicate that obsolescence has occurred.  With the discontinuance of the wafermanufacturing business and the write-off of all inventory, the focus is now onthe reserves required for equipment part inventory.

 

***Accounts ReceivableReserves. ***Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future. Theestimated allowance for uncollectible amounts is based primarily on a specificanalysis of accounts in the receivable portfolio and a general reserve based onthe aging of receivables and historical write-off experience. While managementbelieves the allowance to be adequate, if the financial condition of ourcustomers were to deteriorate, resulting in impairment of their ability to makepayments, additional allowances may be required and could materially impact ourfinancial position and results of operations.

 

***Valuation of Long-LivedAssets. ***Ibis reviews the valuation of long-livedassets, including property and equipment and licenses, under the provisions ofSFAS No. 144, Accounting for Impairment or Disposal of Long-LivedAssets.  Management is required to assessthe recoverability of its long-lived assets whenever events and circumstancesindicate that the carrying value may not be recoverable. Based on currentconditions, factors we consider important and that could trigger an impairmentreview include the following:

 

•                  Significant underperformance relative to expectedhistorical or projected future operating results;

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

•                  Significant negative industry or economic trends;

•                  Significant decline in our stock price for a sustainedperiod; and

•                  Our market capitalization relative to book value.

 

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In accordance with SFAS No. 144, when wedetermine that the carrying value of applicable long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, we evaluate whether the carrying amount of the asset exceeds thesum of the undiscounted cash flows expected to result from the use and eventualdisposition of that asset. If such a circumstance exists, we would measure animpairment loss to the extent the carrying amount of the particular long-livedasset or group exceeds its fair value. We would determine the fair value basedon a projected discounted cash flow method using a discount rate determined byour management to be commensurate with the risk inherent in our currentbusiness model. We adopted SFAS No. 144 during the first quarter of 2002and during the fourth quarter of 2003 we recognized an impairment charge of$11.1 million for our 200 mm and smaller SIMOX wafer production line. Theremaining value of this line along with other assets of wafer manufacturingwere charged to the loss from discontinued operations in 2004 that resulted ina charge of $5.3 million.

 

**Resultsof Operations**

 

***Firstquarter Ended March 31, 2005 Compared to First quarter Ended March 31,2004***

 

***Contract and Other Revenue***. Contract and other revenue includesrevenue derived from license agreements, characterization and other services.Contract and other revenue decreased for the first quarter ended March 31,2005 to $68 thousand from $90 thousand for the first quarter ended March 31,2004, a decrease of $22 thousand or 24%. This is attributable to reducedlicense revenue recognized from royalty fees related to equipment technology.

 

***Equipment Revenue. ***Equipment revenue represents revenue recognized fromsales of implanters, spare parts and field service. Equipment revenue decreasedto $98 thousand for the first quarter ended March 31, 2005 from $117thousand for the first quarter ended March 31, 2004, a decrease of $19thousand or 16%. Field service revenue accounted for $58 thousand for the firstquarter ended March 31, 2005 as compared to $76 thousand for the sameperiod last year. Sales of spare parts accounted for $41 thousand of equipmentrevenue for the quarter ended March 31, 2005 as compared to $41 thousandof equipment revenue for the first quarter ended March 31, 2004. Sales ofspare parts fluctuate depending on customer demand and customer warrantyexpiration dates.

 

***Total Net Sales and Revenue***.  Total net sales and revenue for the firstquarter ended March 31, 2005 was $167 thousand, a decrease of $41thousand, or 20%, from total net revenue of $208 thousand for the first quarterended March 31, 2004. This decrease is due to a reduction in licenserevenue and field service revenue.

 

***Total Cost of Sales and Revenue***. Cost of equipment revenue represents the cost of equipment and spareparts, along with labor incurred for field service. Cost of equipment revenuefor the first quarter ended March 31, 2005 was $300 thousand, as comparedto $ 326 thousand for the first quarter ended March 31, 2004. Thisdecrease of $26 thousand or 8% was primarily due to the reduction of underabsorption of overhead in equipment manufacturing.

 

Total cost of sales and revenue for the first quarterended March 31, 2005 was $300 thousand as compared to $336 thousand forthe first quarter ended March 31, 2004, an decrease of $33 thousand or10%. The gross margin for all sales was a negative 80% for the first quarterended March 31, 2005 as compared to a negative gross margin of 60% for thefirst quarter ended March 31, 2004. This decrease in the gross margin forall sales is attributable to the reduced gross margin on license revenue.

 

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***General and Administrative Expenses***.  General and administrative expenses for thefirst quarter ended March 31, 2005 were $0.6 million as compared to $0.6million for the first quarter ended March 31, 2004, a decrease of $70thousand, or 11%. This is due to decreased securities compliance of $49thousand, D&O insurance of $42 thousand and service charges of $28thousand, along with the reduction of other various expenses which werepartially offset by an increase of professional services of $45 thousand andpayroll and payroll related expenses of $34 thousand.

 

***Marketing and Selling Expenses***.  Marketing and selling expenses for the firstquarter ended March 31, 2005 were $0.4 million as compared to $0.3 millionfor the first quarter ended March 31, 2004, an increase of $50 thousand,or 15%. This is a result of increased subcontractor costs, which increased by$41 thousand, associated with our service group based in Japan and payroll andpayroll related expenses, which increased by $34 thousand. This was partiallyoffset by a reduction in promotional expenses of $10 thousand and othermiscellaneous expenses.

 

***Research and Development Expenses.***  Internally funded research and developmentexpenses increased by $0.7 million or 71%, to $1.7 million for the firstquarter ended March 31, 2005, as compared to $1.0 million for the firstquarter ended March 31, 2004. This is due to wafer research and developmentcosts of $0.8 million that were previously a part of wafer cost of sales butare now supporting equipment development and increased payroll and payrollrelated expenses of $78 thousand and repairs of $76 thousand. This waspartially offset by reduced wafer material of $0.1 million, reduceddepreciation of $71 thousand and other miscellaneous research and developmentspending.

 

***Other Income (Expense)*.**  Total other income for the first quarterended March 31, 2005 was $40 thousand as compared $11 thousand for thefirst quarter ended March 31, 2004, an increase of $29 thousand. Theincrease in total other income is attributable to the interest income increaseof $19 thousand due to increased interest rates on investments and a decreasein interest expense by $12 thousand due to the termination of a financingarrangement.

 

***Gain (loss) From Discontinued Operations.***Discontinuedoperations generated a gain of $42 thousand in the first quarter ended March 31,2005 as compared to a loss for the first quarter ended March 31, 2004 of$1.4 million. The gain of $42 thousand is from scrap recovery as compared tothe operating loss incurred by the discontinued wafer manufacturing portion ofthe business in the quarter ended March 31, 2004.

 

#### **Liquidity andCapital Resources**

#### ** **

As of March 31, 2005, Ibis had cash and cashequivalents of $5.6 million. Based on the Company’s final disposal plansrelative to the closure of the wafer operation, the Company was required totake cash related charges of approximately $0.1 million. The Company willmaintain a wafer research and development effort focused on continuousimprovement of the equipment capabilities and for supporting the Company’sequipment customers’ needs at what is expected to be at a significantly reducedcost to the business going forward. As a result, the Company expects to reduceits monthly cash burn rate and believes it has sufficient cash for operations,based on current forecasts, through the foreseeable future or at least the nexttwelve months.

 

During the three months ended March 31, 2005,Ibis used $2.1 million of cash for operating activities of continuingoperations as compared to cash provided of $0.9 million for the same period in2004. To date, Ibis’ working capital requirements have been funded primarilythrough debt (capital leases) and equity financings. The principal uses of cashfor the three months ended March 31, 2005 were to fund operations andadditions to property and equipment which totaled $46 thousand. At March 31,2005, Ibis had commitments to purchase $0.3 million in material to be used forthe i2000 implanter currently under construction and operating expenses.

 

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As part of our cash management plan we initiatedadditional cost savings measures during 2003 and 2004. This included the layoffof twenty-nine employees. In the third quarter of 2004 the Company announcedthat it was discontinuing the wafer manufacturing portion of the business. Thisresulted in the layoff of an additional seventeen employees. Our headcount forthe three months ended March 31, 2005 was 57 employees.

 

In September 2001, Ibis entered into a $4.5million equipment lease line with Heller Financial’s Commercial EquipmentFinance Group. The lease line was used to finance the purchase of processequipment for wafer production, primarily 300 mm wafers. This line was fullydrawn down in two sale-leaseback transactions, bearing interest atapproximately 8% with a term of three years, and a monthly net payment ofapproximately $0.1 million. Ibis had a fair market value purchase option at theend of the lease term. The lease-line ended in the third quarter of 2004 andthe Company exercised the fair market value purchase option at the negotiatedbuyout price of $0.9 million. The Company intends to use the majority of theequipment to support its ongoing process development efforts and anticipatesthat it will be able to sell a portion of the equipment purchased forapproximately $0.5 million.

 

The Company ended the first quarter of 2005 withapproximately $5.6 million in cash and believes it will have sufficient cash onhand, including cash expected to be received from the SUMCO order announced in January 2005,to support operations at current levels through the first quarter of 2006. Uponfactory acceptance of this order which we received on April 22, 2005, weinvoiced SUMCO for 80% of the purchase price of the system, or $4,800,000.Shipment of this order is expected by the end of the second quarter of 2005,with revenue recognition and receipt of the final 20% of the purchase pricebased on final customer acceptance at the customer’s facility in Japan by yearend. The timing of final acceptance, receipt of the final 20% of the purchaseprice and revenue recognition may vary depending on a number of factors, whichinclude among other things tool performance at the customer site.

 

The Company’s expectations regarding liquidity andcapital resources are based on current operating plans and the company’sgeneral sales outlook, each of which may change rapidly. The company intends tocontinue to invest in research, development and manufacturing capabilities.Changes in technology or sales growth beyond currently established capabilitiesmay require further investment. Moreover, although Ibis is encouraged by the receipt of an additionalorder from SUMCO for an i2000 implanter and the opportunity to work withleading wafer manufacturers like SUMCO to develop further both the i2000implanter and to improve the SIMOX process, SOI technology is still in an earlystage. Further adoption of the technology and timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. The timing of futureorders is important and difficult to predict because customers can delay ordersand/or request early shipment, either of which could cause the need foradditional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. We expect to continue to exploreequity offerings and other forms of financing and anticipate that we may berequired to raise additional capital in the future in order to finance futuregrowth and our research and development programs. There can be no assurance,however, that our actual needs will not exceed expectations or that we will beable to fund our operations on a long-term basis in the absence of othersources. There also can be no assurance that any additional required longerterm financing will be available through additional bank borrowings, debt orequity offerings or otherwise, or that if such financing is available, that itwill be available on terms acceptable to us.

 

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**BusinessRisk Factors**

 

This Form 10-Q contains express or impliedforward-looking statements within the meaning of the “safe harbor” provisionsof the Private Securities Litigation Reform Act of 1995 that relate to futureevents or our future financial performance. In some cases, you can identifyforward-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 comparableterminology, although not all forward-looking statements contain such terms. Inaddition, these forward-looking statements include, but are not limited to,statements regarding, among other things: (i) the expected shipment andon-site acceptance of the i2000 implanter ordered by SUMCO, (ii) attainingimplanter improvements to the degree and in the timeframe necessary to meetSUMCO’s expectations, (iii)  the timingand likelihood of revenue recognition on that implanter, and (iv) the timing ofSUMCO’s ramping to production quantities on the i2000 implanter (v:) customerinterest in and demand for, and market acceptance of, the Company’s SIMOX-SOItechnology including the Company’s implanters, and the involvement generally ofthe silicon wafer manufacturing industry in the SOI wafer market, (vi) thecompany’s ability to conduct its operations in a manner consistent with itscurrent plan and existing capital resources or otherwise to obtain additionalimplanter orders or to secure financing to continue as a going concern, (vii)the timing and likelihood of revenue recognition on orders for the company’simplanters, (viii) the timing and impact of the company’s decision to discontinueits wafer manufacturing and sales operation, (ix) the Company’s belief thatwafer manufacturers will become the primary suppliers of SIMOX-SOI wafers tothe chipmaking industry, (x) the throughput and production capacity of thei2000 implanter for manufacturing 200-mm and 300-mm SIMOX-SOI wafers, attainingimplanter improvements to the degree and in the timeframe necessary to meetcustomer expectations, and the ability of the i2000 implanter to achieveacceptable production yields, (xi) the Company’s plan to focus on supplyingimplanters to wafer manufacturers, (xii) the Company’s expectations regardingfuture orders for i2000 implanters, and the likelihood and timing of revenuerecognition on such sales, (xiii) the Company’s expectation regarding futurewillingness of wafer manufacturers to purchase equipment from the Company,(xiv) the technological advancements and the adoption rate of SOI technology,and (xv) the Company’s expectation of having sufficient cash for operations.Such statements are neither promises nor guarantees but rather are subject torisks and uncertainties, which could cause actual results to differ materiallyfrom those described in the forward-looking statements. Such risks anduncertainties include, but are not limited to: future continued migration toSOI technology and market acceptance of SIMOX; the level of demand for theCompany’s products; the Company’s ability to pursue and maintain furtherstrategic relationships, partnerships and alliances with third parties; the Company’sability to protect its proprietary technology; the potential trends in thesemiconductor industry generally; the ease with which the i2000 can beinstalled and qualified in fabrication facilities; the likelihood thatimplanters, if ordered, will be qualified and accepted by customers withoutsubstantial delay, modification, or cancellation, in whole or in part; thelikelihood and timing of revenue recognition on such transactions; the impactof competitive products, technologies and pricing; the impact of rapidlychanging technology; the possibility of further asset impairment and resultingcharges; equipment capacity and supply constraints or difficulties; the Company’slimited history in selling implanters; general economic conditions; and other risksand uncertainties described elsewhere in this Form 10-Q and in the Company’sSecurities and Exchange Commission filings from time to time, including but notlimited to those set forth in the Company’s annual report on Form 10-K forthe year ended December 31, 2004. All information set forth in this Form 10-Qis as of the date of this Form 10-Q, and Ibis undertakes no duty to updatethis information, unless required by law.

 

**Effectsof Inflation**

 

Ibisbelieves that over the past three years inflation has not had a significantimpact on Ibis’ sales or operating results.

 

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**PART I– ITEM 3**

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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

 

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**PART I– ITEM 4**

 

**CONTROLS AND PROCEDURES**

 

(a)          Evaluation of DisclosureControls and Procedures. Our principal executive officer and principalfinancial officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this Quarterly Report on Form 10-Q,have concluded that, based on such evaluation, our disclosure controls andprocedures were adequate and effective to ensure that material informationrelating to the Company was made known to them by others within the Company,particularly during the period in which this Quarterly Report on Form 10-Qwas prepared.

 

(b)         Changes in InternalControls. There were no changes in our internal control over financialreporting, identified in connection with the evaluation of such internalcontrol that occurred during our last fiscal quarter that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

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**PART II**

 

**OTHER INFORMATION**

 

Item 1 - Legal Proceedings

 

Fiveclass action securities lawsuits have been filed in the United States DistrictCourt 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 TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July, 2004,a consolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. That motion now has been fully briefed. While we believe thatthe allegations are without merit, and we intend to vigorously defend againstthe suits, there can be no guarantee as to how they ultimately will beresolved.

 

Inaddition, Ibis has been named as a nominal defendant in a shareholderderivative action filed in February 2004 against certain of its directorsand 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 conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

 

Litigationmay be time-consuming, expensive and disruptive to normal business operations,and the outcome of litigation is difficult to predict. An unfavorableresolution of these litigation matters could have a material adverse effect onour business, results of operations and financial condition.

 

Item 2 - Changes inSecurities

None

 

Item 3 - Defaults uponSenior Securities

None

 

Item 4 - Submission ofMatters to a Vote of Security Holders

None

 

Item 5 - Other Information

None

 

Item 6 - Exhibits andReports 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 |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                |
| 31.2                 |       | Certification of William J. Schmidt 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)                                 Reportson Form 8-K:

 

On January 6,2005 we furnished to the SEC a report on Form 8-K containing the January 6,2005 press release announcing the receipt of an order for one Ibis i2000 SIMOXimplanter.

 

On February 23,2005 we furnished to the SEC a report on Form 8-K containing the February 23,2005 press release reporting Ibis’ fourth quarter and fiscal year ended December 31,2004 financial results.

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                    | Ibis Technology  Corporation |
|-------------------------|------------------------------|
|                    |                         |
|                    |                         |   |
| Date: May 4,  2005 | By:                          |         /s/William  J. Schmidt |   |
|                    |                         | William J.  Schmidt |
|                    |                         | Chief Financial  Officer, Treasurer and Clerk |
|                    |                         | (principal financial  and accounting officer) |
|                    |                         |   |
|                    |                         |   |
| Date: May 4,  2005 | By:                          |         /s/Martin  J. Reid |   |
|                    |                         | Martin J. Reid |
|                    |                         | President and  Chief Executive Officer |
|                         |                              |  |  |  |

 

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