**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C.  20569**

 

**Form10-Q**

 

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

 

**For the Quarterly Period EndedSeptember 30, 2004**

 

**Or**

 

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

 

**For the transition period from                                   to                                   **

 

**Commissionfile number     0-23150**

 
| **Ibis Technology Corporation**                                  |
|------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)          |
|                                                             |
| **Massachusetts**                                                | ** ** | **04-2987600** |
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

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

 

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

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

 

----

* The Company previouslyreported on its Form 10-K for the fiscal year ended December 31, 2003 and theForm 10-Q for the fiscal quarter ended March 31, 2004 that it was anaccelerated filer, however, please note that the Company is not and was not anaccelerated filer prior to the date of this filing.

 

10,668,073 shares of CommonStock, par value $.008, were outstanding on November 11, 2004.

 

 

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**IBIS TECHNOLOGY CORPORATION**

 

**INDEX**

 
|                                                                                                                                      | **Page  Number** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------------|
| PART 1 - FINANCIAL  INFORMATION                                                                                                           |             |
|                                                                                                                                      |             |
| Item 1 – Financial  Statements:                                                                                                      |             |
|                                                                                                                                      |             |
| Balance Sheets  December 31, 2003 and September 30, 2004 (unaudited)                                                                      | 3                |
|                                                                                                                                      |             |
| Statements  of Operations  Three Months Ended September 30, 2003 and 2004 and  Nine Months Ended September 30, 2003 and 2004 (unaudited)) | 4                |
|                                                                                                                                      |             |
| Statements  of Cash Flows  Nine Months Ended September 30, 2003 and 2004 (unaudited)                                                      | 5                |
|                                                                                                                                      |             |
| Notes  to Unaudited Interim Financial Statements                                                                                          | 6                |
|                                                                                                                                      |             |
| Item 2 –  Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                | 11               |
|                                                                                                                                      |             |
| Item 3 – Quantitative and Qualitative  Disclosure About Market Risk                                                                  | 20               |
|                                                                                                                                      |             |
| Item 4 – Controls and Procedures                                                                                                     | 21               |
|                                                                                                                                      |             |
| PART II – OTHER INFORMATION                                                                                                          |             |
|                                                                                                                                      |             |
| Item 1 - Legal Proceedings                                                                                                                | 22               |
|                                                                                                                                      |             |
| Item 2 – Changes in  Securities                                                                                                      | 22               |
|                                                                                                                                      |             |
| Item 3 -  Defaults upon Senior Securities                                                                                                 | 22               |
|                                                                                                                                      |             |
| Item  4 - Submission of Matters to a Vote of Security Holders                                                                             | 22               |
|                                                                                                                                      |             |
| Item 5 - Other Information                                                                                                                | 22               |
|                                                                                                                                      |             |
| Item 6 -  Exhibits and Reports on Form 8-K                                                                                                | 22               |
|                                                                                                                                      |             |
| Signatures                                                                                                                                | 24               |

 

2

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**IBIS TECHNOLOGY CORPORATION**

 

**BALANCESHEETS****(Unaudited)**

 
| ** **                                                                                                                    | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                                                                          |       |                   |       |                    |       |
| **Assets**                                                                                                                    |       |                   |       |                    |       |
| **Current assets:**                                                                                                           |       |                   |       |                    |       |
| Cash and cash equivalents                                                                                                     |       | $                      | 14,174,716 |                    | $          | 8,333,158 |   |
| Accounts receivable, trade, net (note 5)                                                                                      |       | 123,548                |       | 2,392,757               |       |
| Unbilled revenue (note 5)                                                                                                     |       | 528,581                |       | 75,000                  |       |
| Inventories (note 3)                                                                                                          |       | 1,758,449              |       | 4,680,123               |       |
| Prepaid expenses and other current assets                                                                                     |       | 247,602                |       | 1,094,682               |       |
| Total current assets                                                                                                          |       | 16,832,896             |       | 16,575,720              |       |
| Property and equipment                                                                                                        |       | 40,584,764             |       | 33,669,008              |       |
| Less: Accumulated depreciation and  amortization                                                                              |       | (23,743,179            | )          | (26,848,897             | )          |
| Net property and equipment                                                                                                    |       | 16,841,585             |       | 6,820,111               |       |
| Assets held for sale (note 7)                                                                                                 |       | —                 |       | 277,265                 |       |
| Patents and other assets, net                                                                                                 |       | 1,668,558              |       | 1,480,116               |       |
| Total assets                                                                                                                  |       | $                      | 35,343,039 |                    | $          | 25,153,212 |   |
|                                                                                                                          |       |                   |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                 |       |                   |       |                    |       |
| **Current liabilities:**                                                                                                      |       |                   |       |                    |       |
| Capital lease obligation, current                                                                                             |       | $                      | 1,184,399  |                    | $          | — |   |
| Accounts payable                                                                                                              |       | 404,512                |       | 989,165                 |       |
| Accrued liabilities                                                                                                           |       | 2,384,915              |       | 1,402,519               |       |
| Deferred revenue                                                                                                              |       | 252,000                |       | 52,000                  |       |
| Total current liabilities                                                                                                     |       | 4,225,826              |       | 2,443,684               |       |
| Total liabilities                                                                                                             |       | 4,225,826              |       | 2,443,684               |       |
|                                                                                                                          |       |                   |       |                    |       |
| **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 10,651,170 shares and 10,668,023 shares in 2003 and 2004,  respectively |       | 85,209                 |       | 85,344                  |       |
| Additional paid-in capital                                                                                                    |       | 92,903,618             |       | 93,013,198              |       |
| Accumulated deficit                                                                                                           |       | (61,871,614            | )          | (70,389,014             | )          |
| Total stockholders’ equity                                                                                               |       | 31,117,213             |       | 22,709,528              |       |
| Total liabilities and stockholders’ equity                                                                               |       | $                      | 35,343,039 |                    | $          | 25,153,212 |   |

 

Seeaccompanying notes to unaudited interim financial statements.

 

3

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF OPERATIONS****(Unaudited)**

 
| ** **                                                                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                         | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| **Net Sales and revenue:**                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Contract and other revenue                                                                         |       | $                                     | 66,834     |                                 | $          | 124,566 |   | $ | 592,899 |   | $ | 297,481 |   |
| Equipment revenue                                                                                  |       | 226,114                               |       | 7,116,204                            |       | 8,622,289 |   | 7,354,450 |   |
| Total net sales and revenue (notes 2 and 6)                                                        |       | 292,948                               |       | 7,240,770                            |       | 9,215,188 |   | 7,651,931 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| **Cost of sales and revenue:**                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Cost of contract and other revenue                                                                 |       | 6,330                                 |       | 3,219                                |       | 34,332 |   | 15,370 |   |
| Cost of equipment revenue                                                                          |       | 208,888                               |       | 3,663,606                            |       | 4,014,590 |   | 4,362,687 |   |
| Total cost of sales and revenue                                                                    |       | 215,218                               |       | 3,666,825                            |       | 4,048,922 |   | 4,378,057 |   |
| Gross profit                                                                                       |       | 77,730                                |       | 3,573,945                            |       | 5,166,266 |   | 3,273,874 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| **Operating expenses:**                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| General and administrative                                                                         |       | 477,253                               |       | 549,975                              |       | 1,663,800 |   | 1,753,500 |   |
| Marketing and selling                                                                              |       | 297,519                               |       | 375,846                              |       | 957,988 |   | 1,141,813 |   |
| Research and development                                                                           |       | 1,175,064                             |       | 1,726,926                            |       | 4,208,360 |   | 3,599,099 |   |
| Total operating expenses                                                                           |       | 1,949,836                             |       | 2,652,747                            |       | 6,830,148 |   | 6,494,412 |   |
| Profit (loss) from operations                                                                      |       | (1,872,106                            | )          | 921,198                              |       | (1,663,882 | ) | (3,220,538 | ) |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| **Other income (expense):**                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Interest income                                                                                    |       | 9,564                                 |       | 12,533                               |       | 49,462 |   | 50,319 |   |
| Interest expense                                                                                   |       | (33,753                               | )          | (2,116                               | )          | (46,728 | ) | (33,568 | ) |
| Other                                                                                              |       | —                                |       | 165,169                              |       | 3,725 |   | 166,418 |   |
| Total other income                                                                                 |       | (24,189                               | )          | 175,586                              |       | 6,459 |   | 183,169 |   |
| Profit (loss) before income taxes                                                                  |       | (1,896,295                            | )          | 1,096,784                            |       | (1,657,423 | ) | (3,037,369 | ) |
| Income tax expense                                                                                 |       | —                                |       | —                               |       | 1,256 |   | 1,256 |   |
| Income (loss) from continuing operations                                                           |       | (1,896,295                            | )          | 1,096,784                            |       | (1,658,679 | ) | (3,038,625 | ) |
| Loss from discontinued operations (note 7)                                                         |       | (1,266,542                            | )          | (2,774,745                           | )          | (4,564,485 | ) | (5,478,775 | ) |
| Net (loss) (note 2)                                                                                |       | $                                     | (3,162,837 | )                                    | $          | (1,677,961 | ) | $ | (6,223,164 | ) | $ | (8,517,400 | ) |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) from continuing operations per  common share:                                        |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                              |       | $                                     | (0.20      | )                                    | $          | 0.10 |   | $ | (0.17 | ) | $ | (0.28 | ) |
| Diluted                                                                                            |       | $                                     | (0.20      | )                                    | $          | 0.10 |   | $ | (0.17 | ) | $ | (0.28 | ) |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of common shares  outstanding for income (loss)from continuing operations: |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                              |       | 9,504,210                             |       | 10,668,023                           |       | 9,486,532 |   | 10,659,072 |   |
| Diluted (note 4)                                                                                   |       | 9,504,210                             |       | 10,708,513                           |       | 9,486,532 |   | 10,659,072 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Net (loss) per common share:                                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                              |       | $                                     | (0.33      | )                                    | $          | (0.16 | ) | $ | (0.66 | ) | $ | (0.80 | ) |
| Diluted                                                                                            |       | $                                     | (0.33      | )                                    | $          | (0.16 | ) | $ | (0.66 | ) | $ | (0.80 | ) |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of common shares  outstanding for net income:                              |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                              |       | 9,504,210                             |       | 10,668,023                           |       | 9,486,532 |   | 10,659,072 |   |
| Diluted (note 4)                                                                                   |       | 9,504,210                             |       | 10,668,023                           |       | 9,486,532 |   | 10,659,072 |   |

 

Seeaccompanying notes to unaudited interim financial statements.

 

4

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**STATEMENTSOF CASH FLOWS****(Unaudited)**

 
| ** **                                                                                  | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                  | ** ** | **2003**                             | ** ** | **2004** | ** ** |
|                                                                                        |       |                                 |       |   |   |
| **Cash flows from operating activities:**                                                   |       |                                 |       |   |   |
| Net loss                                                                                    |       | $                                    | (6,223,164 | ) | $ | (8,517,400 | ) |
| Loss from discontinued operations                                                           |       | (4,564,485                           | )          | (5,478,775 | ) |
| Loss from continuing operations                                                             |       | (1,658,679                           | )          | (3,038,625 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) continuing operations: |       |                                 |       |   |   |
| Depreciation and amortization                                                               |       | 5,014,576                            |       | 2,905,246 |   |
| Changes in operating assets and  liabilities:                                               |       |                                 |       |   |   |
| Accounts receivable, trade                                                                  |       | 2,791,087                            |       | (2,536,333 | ) |
| Unbilled revenue                                                                            |       | (528,581                             | )          | 453,581 |   |
| Deferred Costs                                                                              |       | 2,621,580                            |       | — |   |
| Prepaid expenses and other current assets                                                   |       | (181,803                             | )          | (98,328 | ) |
| Accounts payable                                                                            |       | 135,933                              |       | 584,653 |   |
| Accrued liabilities and deferred revenue                                                    |       | (6,536,157                           | )          | (461,097 | ) |
|                                                                                        |       |                                 |       |   |   |
| Net cash provided by (used in) operating  activities of continuing operations               |       | 1,657,956                            |       | (2,190,903 | ) |
|                                                                                        |       |                                 |       |   |   |
| **Cash flows from investing activities of  continuing operations:**                         |       |                                 |       |   |   |
| Additions to property and equipment, net                                                    |       | (335,481                             | )          | (891,244 | ) |
| Other assets                                                                                |       | (94,416                              | )          | (66,036 | ) |
|                                                                                        |       |                                 |       |   |   |
| Net cash used in investing activities of continuing  operations                             |       | (429,897                             | )          | (957,280 | ) |
|                                                                                        |       |                                 |       |   |   |
| **Cash flows from financing activities of  continuing operations:**                         |       |                                 |       |   |   |
| Exercise of stock options and warrants                                                      |       | 585,365                              |       | 109,715 |   |
|                                                                                        |       |                                 |       |   |   |
| Net cash used by financing activities of continuing  operations                             |       | 585,365                              |       | 109,715 |   |
|                                                                                        |       |                                 |       |   |   |
| Net cash used for discontinued operations                                                   |       | (8,691,438                           | )          | (2,803,090 | ) |
|                                                                                        |       |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                                   |       | (6,878,014                           | )          | (5,841,558 | ) |
|                                                                                        |       |                                 |       |   |   |
| Cash and cash equivalents, beginning of  period                                             |       | 11,745,918                           |       | 14,174,716 |   |
|                                                                                        |       |                                 |       |   |   |
| Cash and cash equivalents, end of period                                                    |       | $                                    | 4,867,904  |   | $ | 8,333,158 |   |
|                                                                                        |       |                                 |       |   |   |
| **Supplemental disclosure of cash flow  information:**                                      |       |                                 |       |   |   |
| Cash paid during the period for interest                                                    |       | $                                    | 46,728     |   | $ | 33,568 |   |
|                                                                                        |       |                                 |       |   |   |
| **Supplemental disclosure of non-cash  investing activities:**                              |       |                                 |       |   |   |
| Transfer of internally constructed  equipment from property and equipment to inventory      |       | $                                    | —     |   | $ | 5,620,239 |   |

 

See accompanying notes to unaudited interim financial statements.

 

5

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TOUNAUDITED INTERIM FINANCIAL STATEMENTS**

 

**(1) InterimFinancial Statements**

 

The accompanying financialstatements are unaudited and have been prepared by the Company in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and in accordance with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting Principles GenerallyAccepted in the United States of America for complete financial statements.

 

In the opinion ofmanagement, the interim financial statements include all adjustments, whichconsist only of normal and recurring adjustments, necessary for a fair presentationof the Company’s financial position and results of operations. Results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for the full year. These financial statements should beread in conjunction with the financial statements of the Company as of and forthe year ended December 31, 2003, which are included in the Company’s AnnualReport on Form 10-K as filed on March 2, 2004.

 

**(2) Summaryof Significant Accounting Policies**

 

***(a) Revenue Recognition***

The Company recognizesrevenue from wafer product sales, equipment sales and the sales of spare partswhen all of the following criteria have been met:  (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonably assured.The Company has typically recognized revenue from wafer sales upon shipment(and will continue to do so until it has completely discontinued its wafermanufacturing business as previously announced) and recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Provisions forestimated sales returns and allowances for wafers and parts are made at thetime the products are sold. Revenue derived from contracts and services isrecognized upon performance. Significant management judgments and estimatesmust be made and used in connection with revenue recognized in any period.Management analyzes various factors including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions. Changes in judgments based upon these factorscould impact the timing and amount of revenue and cost recognized.

 

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

The Company accounts for itsstock option plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees, and RelatedInterpretations” and complies with the disclosure provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”) and SFAS 148, “Accounting for Stock-BasedCompensation Transition and Disclosure”. No stock-based compensation cost isreflected in net income (loss) for these plans, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net income (loss) and income (loss) per share if we had applied the fairvalue recognition provisions of SFAS No. 123 to stock-based compensation:

 
| ** **                                                                                                                          | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2003**                                      | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                                                |       |                                          |       |                                         |       |   |   |   |   |
| Net income (loss), as reported                                                                                                      |       | $                                             | (3,162,837 | )                                            | $          | (1,677,961 | ) | $ | (6,223,164 | ) | $ | (8,517,400 | ) |
| Add: Stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax effects |       | (549,341                                      | )          | (327,603                                     | )          | (1,343,320 | ) | (930,343 | ) |
| Pro-forma net income (loss)                                                                                                         |       | $                                             | (3,712,178 | )                                            | $          | (2,005,564 | ) | $ | (7,566,484 | ) | $ | (9,447,743 | ) |
| Net income (loss) per share:                                                                                                        |       |                                          |       |                                         |       |   |   |   |   |
| Basic and diluted – as reported                                                                                                |       | $                                             | (0.33      | )                                            | $          | (0.16 | ) | $ | (0.66 | ) | $ | (0.80 | ) |
| Basic and diluted – pro-forma                                                                                                  |       | $                                             | (0.39      | )                                            | $          | (0.19 | ) | $ | (0.80 | ) | $ | (0.89 | ) |
|                                                                                                                                     |            |                                               |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

6

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The fair value of each stockoption is estimated on the date of grant using the Black-Scholes optionvaluation model.

 

Pro-forma net loss reflectsonly options granted in 1995 through September 30, 2004. Therefore, the fullimpact of calculating compensation costs for stock options under SFAS No. 123is not reflected because compensation costs for options granted prior toJanuary 1, 1995, are not considered.

 

**(3)Inventories**

 

Inventories consist of thefollowing:

 
| ** **               | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
|--------------------------|------------|------------------------|------------|-------------------------|------------|
| Raw materials            |       | $                      | 1,464,434  |                    | $          | — |   |
| Work in process          |       | 177,715                |       | —                  |       |
| Finished goods           |       | 116,300                |       | —                  |       |
| Subtotal wafer inventory |       | 1,758,449              |       | —                  |       |
| Equipment inventory      |       | —                 |       | 4,680,123               |       |
| Total Inventories        |       | $                      | 1,758,449  |                    | $          | 4,680,123 |   |

 

Equipment inventory atSeptember 30, 2004 consists of i2000 parts and/or implanters under constructionor otherwise available for resale. At December 31, 2003 these costs wereincluded in construction in progress under property and equipment and amountedto $3,674,903. With the discontinuance of the wafer operation in the thirdquarter of 2004, (see note 7), all wafer inventory was written off to the lossfrom discontinued operations with the exception of the 300 mm raw wafers,valued at $750,000, that were reclassified as prepaid expenses to be used forfuture R&D and implanter qualifications.

 

**(4) NetIncome (Loss) Per Share**

 

Net income (loss) per shareof common stock is computed based upon the weighted average number of sharesoutstanding during each period and including the dilutive effect, if any, ofstock options and warrants. SFAS 128 requires the presentation of basic anddiluted earnings (loss) per share for all periods presented. As the Company wasin a net loss position for the three and nine months ended September 30, 2003and September 30, 2004, common stock equivalents of 167,530, 47,509, 40,490 and188,575, respectively, were excluded from the diluted loss per sharecalculation, as they would be antidilutive. As a result, diluted loss per shareis the same as basic loss per share for all periods presented.

 

**(5)Significant Customers and Concentration of Business Risk**

 

The Company sells itsproducts and services to a limited number of semiconductor and silicon wafermanufacturers primarily in the United States and the Pacific Rim.

 

Sales of products andservices for significant customers are shown in dollar amounts and as apercentage of total revenue as follows:

 
| ** **                            | ** ** | **Significant  Customers** | ** ** | **Amount** | ** ** | **%**  | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------|------------|--------|------------|
|                                  |       |                       |       |       |       |   |       |
| Three Months Ended September 30, 2003 |       | —                     |       | $          | —     |   | —     |   |
| Three Months Ended September 30, 2004 |       | 1                          |       | $          | 7,000,000  |   | 97         | % |
| Nine Months Ended September 30, 2003  |       | 1                          |       | $          | 7,992,906  |   | 87         | % |
| Nine Months Ended September 30, 2004  |       | 1                          |       | $          | 7,000,000  |   | 91         | % |

 

Accounts receivable andunbilled revenue from significant customers at September 30, 2004 and December31, 2003 amounted to $2,310,000 and $631,000, respectively.

 

7

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**(6)Industry Segments**

 

The Company’s currentreportable segments are SIMOX Equipment and Other Products or Services, withthe discontinuance of the wafer operation. For purposes of segment reporting,equipment, equipment spares and field service revenue are combined and reportedas SIMOX Equipment. Government contracts, other services and license revenueare combined and reported as Other Products or Services.

 

The tablebelow provides unaudited information for the three and nine months endedSeptember 30, 2003 and 2004 pertaining to the Company’s two industry segments.

 
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Net Sales and Revenue**                                    |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2003                        |       | $                    | 226,114    |                            | $          | 66,834     |       | $ | 292,948 |   |
| Three Months Ended September 30, 2004                        |       | $                    | 7,116,204  |                            | $          | 124,566    |       | $ | 7,240,770 |   |
| Nine Months Ended September, 2003                            |       | $                    | 8,622,289  |                            | $          | 592,899    |       | $ | 9,215,188 |   |
| Nine Months Ended September 30, 2004                         |       | $                    | 7,354,450  |                            | $          | 297,481    |       | $ | 7,651,931 |   |
|                                                         |       |                 |       |                            |       |       |       |
| **Operating Income (Loss)**                                  |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2003                        |       | (1,455,357           | )          | 60,504                          |       | (1,394,853 | )          |
| Three Months Ended September 30, 2004                        |       | 1,349,826            |       | 121,347                         |       | 1,471,173  |       |
| Nine Months Ended September 30, 2003                         |       | (558,649             | )          | 558,567                         |       | (82        | )          |
| Nine Months Ended September 30, 2004                         |       | (1,749,149           | )          | 282,111                         |       | (1,467,038 | )          |
|                                                         |       |                 |       |                            |       |       |       |
| **Assets**                                                   |       |                 |       |                            |       |       |       |
| September 30, 2004                                           |       | 15,986,317           |       | 120,993                         |       | 16,107,310 |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Capital Expenditures**                                     |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2003                        |       | 8,891                |       | —                          |       | 8,891      |       |
| Three Months Ended September 30, 2004                        |       | 868,564              |       | —                          |       | 868,564    |       |
| Nine Months Ended September30, 2003                          |       | 314,238              |       | —                          |       | 314,238    |       |
| Nine Months Ended September 30, 2004                         |       | 883,591              |       | —                          |       | 883,591    |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Depreciation and Amortization of Property  and Equipment** |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2003                        |       | 1,665,834            |       | —                          |       | 1,665,834  |       |
| Three Months Ended September 30, 2004                        |       | 870,408              |       | —                          |       | 870,408    |       |
| Nine Months Ended September30, 2003                          |       | 4,924,910            |       | —                          |       | 4,924,910  |       |
| Nine Months Ended September 30, 2004                         |       | 2,843,070            |       | —                          |       | 2,843,070  |       |

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **Segment Reconciliation**                                   | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Income (Loss) Before Income Taxes:                           |       |                                  |       |                                 |       |   |   |   |   |
| Total operating income (loss)for reportable  Segments        |       | $                                     | (1,394,853 | )                                    | $          | 1,471,173 |   | $ | (82 | ) | $ | (1,467,038 | ) |
| Corporate general & administrative  expenses             |       | (477,253                              | )          | (549,975                             | )          | (1,663,800 | ) | (1,753,500 | ) |
| Net other income                                             |       | (24,189                               | )          | 175,586                              |       | 6,459 |   | 183,169 |   |
| Income (loss) before income taxes                            |       | $                                     | (1,896,295 | )                                    | $          | 1,096,784 |   | $ | (1,657,423 | ) | $ | (3,037,369 | ) |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Capital Expenditures:                                        |       |                                  |       |                                 |       |   |   |   |   |
| Total capital expenditures for reportable  segments          |       | $                                     | 8,891      |                                 | $          | 868,564 |   | $ | 314,238 |   | $ | 883,591 |   |
| Corporate capital expenditures                               |       | —                                |       | —                               |       | 21,243 |   | 7,653 |   |
| Total capital expenditures                                   |       | $                                     | 8,891      |                                 | $          | 868,564 |   | $ | 335,481 |   | $ | 891,244 |   |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Depreciation and Amortization:                               |       |                                  |       |                                 |       |   |   |   |   |
| Total depreciation and amortization for reportable  segments |       | $                                     | 1,665,834  |                                 | $          | 870,408 |   | $ | 4,924,910 |   | $ | 2,843,070 |   |
| Corporate depreciation and amortization                      |       | 22,790                                |       | 15,076                               |       | 89,666 |   | 62,176 |   |
| Total depreciation and amortization                          |       | $                                     | 1,688,624  |                                 | $          | 885,484 |   | $ | 5,014,576 |   | $ | 2,905,246 |   |

 
| ** **                                             | ** ** | **Balance as of  9/30/04** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| Assets:                                                |       |                       |       |
| Total assets for reportable segments                   |       | $                          | 16,107,310 |   |
| Cash & cash equivalents not allocated  to Segments |       | 8,333,158                  |       |
| Other unallocated assets                               |       | 742,744                    |       |
| Total assets                                           |       | $                          | 25,183,212 |   |

 

**(7) LossFrom Discontinued Operations**

 

On July 21, 2004 the Companyannounced its intention to discontinue its wafer manufacturing business. Thiswafer business has been highly concentrated on providing wafers for the Company’slargest customer, and was characterized by very volatile production volumes andcosts associated with periodic changes and continuing improvements to theprocess. The wafer demand from our largest customer had been, and continues tobe, subject to repeated starts and stops. The result is a wafer business thatis not predictable or profitable. Principally for these reasons, and because italso is likely that additional capital investment would have to be made to keepour wafer manufacturing process up to date, the Company decided to exit thewafer manufacturing business and focus exclusively on the equipment business.The Company will maintain a research and development effort relating to wafersfor our equipment improvement programs. In the third quarter of 2004, theCompany recognized a loss from discontinued operations for approximately $2.8million. The balance sheet at the end of the third quarter of 2004 includes$277,265 as assets held for sale as a result of this loss from discontinuedoperations.

 

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**(8) LegalProceedings**

 

Five class action securitieslawsuits have been filed in the United States District Court in the District ofMassachusetts against Ibis and its President and CEO: Martin Smolowitz v. IbisTechnology Corporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Denv. Ibis Technology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.);Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D.Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No.04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation.,et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Court enteredan order consolidating these actions under the caption In re Ibis TechnologySecurities Litigation, C.A. 04-10446 RCL. On July, 2004, a consolidated amendedclass action complaint was filed which alleges, among other things, that theCompany violated federal securities laws by allegedly making misstatements tothe investing public relating to demand for certain Ibis products andintellectual property issues relating to the sale of the i2000 oxygenimplanter. The plaintiffs are seeking unspecified damages. On August 5, 2004,we filed a motion to dismiss the consolidated amended complaint on the grounds,among others, that it failed to state a claim on which the relief could begranted. That motion now has been fully briefed. While we believe that theallegations are without merit, and we intend to vigorously defend against thesuits, there can be no guarantee as to how they ultimately will be resolved.

 

In addition, Ibis has beennamed as a nominal defendant in a shareholder derivative action filed inFebruary 2004 against certain of its directors and officers: Louis F. Matheson,Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL). The complaintalleges, among other things, that the alleged conduct challenged in thesecurities cases pending against Ibis in Massachusetts (described above)constitutes a breach of the defendants’ fiduciary duties to Ibis. The complaintseeks unspecified money damages and other relief ostensibly on behalf of Ibis.On June 4, 2004, the Court entered an order staying this matter pending theentry of a final order on any motion filed by the Company to dismiss theconsolidated class action complaint referenced above.

 

Litigation may betime-consuming, expensive and disruptive to normal business operations, and theoutcome of litigation is difficult to predict. An unfavorable resolution ofthese litigation matters could have a material adverse effect on our business,results of operations and financial condition.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I - ITEM 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Ibis Technology Corporation(“Ibis”) was formed in October 1987 and commenced operations in January 1988.Ibis’ initial activities consisted of producing and selling SIMOX-SOI wafersand conducting research and development activities. This effort led to thedevelopment of proprietary oxygen implanters, the Ibis 1000, which we beganselling in 1996, the next generation implanter, the i2000TM, which we began selling in 2002, and also toother proprietary process technology.

 

Initially, much of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, the Company decided to focus itsbusiness operations and sales strategy on the manufacture and sale of ourimplanter equipment products and de-emphasized the sale of wafers given that,among other things, we believed that the wafer manufacturing companies were inthe best position to manufacture SIMOX-SOI wafers using our implanter equipmentin light of their expertise and operating efficiencies. As we announced on July21, 2004, we have exited the wafer manufacturing business. Our wafer businesshad been highly concentrated on providing wafers for the Company’s largestcustomer, and was characterized by very volatile production volumes and costsassociated with periodic changes and continuing improvements to the process.Our major wafer customer had tended to order fluctuating quantities of waferson an irregular basis. This customer also could revise or cancel orders at anytime prior to delivery. This meant that this customer, who had accounted for asignificant portion of our net revenue in the past, could have reduced or decidednot to place any orders in the succeeding quarter or quarters. Furthermore,most of our other wafer customers were sampling SIMOX wafers or are in theprocess of developing prototype products and have also tended to order smallquantities of wafers on an irregular basis. These customers could also revise or cancel orders at any time prior todelivery. As previously announced, because of this unpredictability, andbecause it was also likely that additional capital investments would have to bemade to keep our wafer manufacturing process up to date (among other factors),we decided to discontinue the wafer manufacturing portion of the business in2004 and to focus exclusively on our equipment business. We will maintain aresearch and development effort relating to wafers for our equipmentimprovement programs.  Ibis hasexperienced quarterly and annual fluctuations in revenue and results ofoperations due to various factors, including (i) the fluctuating quantities ofwafer orders that we have experienced in the past as described above, (ii) thetiming of receipt of equipment orders, and (iii) dependence on a limited numberof customers.

 

We believe that a migrationof SOI wafer manufacturing into the major silicon wafer suppliers is takingplace. We reach this conclusion for a number of reasons. First, we believe thattremendous price pressure exists on commodity type products, such as siliconwafers, and this pressure is already eroding the price of SOI wafers. Becausethe starting 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,sales and marketing large volumes of substrates. Lastly, we believe that thereis greater efficiency in producing the SOI wafer as part of the wafermanufacturers existing product flow, specifically avoiding the need torepackage, reclean, reinspect 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 ofimplanters to the leading silicon wafer manufacturers and our major keycustomers in the semiconductor industry who we believe are the leaders in theadoption of SOI technology. We expect that implanter sales to chipmakers shouldbe minimal, and that these sales will be focused on SOI processes that thechipmaker wishes to keep proprietary, such as selective (or patterned) SIMOX,or other specialty substrates.

 

Our fundamental SIMOX-SOItechnology has been developed, refined, and tested over the last dozen years.In 2002, we introduced the current generation of SIMOX-SOI technology, thatincluded our second-generation oxygen implanter (i2000TM), and the MLD waferprocess which was licensed to us by IBM. We believe that the i2000’sflexibility, automation and operator-friendly controls allow this tool toproduce a wide range of SIMOX-SOI wafer products, including Advantox®MLD and Advantox MLD-UT wafers. We also believe the ability of the i2000implanter to produce eight and twelve-inch (or 200 and 300 mm) SIMOX-SOI waferscoupled with the MLD process positions us to capitalize on the growing SOImarket. In 1999, we commenced a program to design and develop the i2000,introduced it in March 2002 and began shipping 300 mm wafers implanted fromthis machine shortly thereafter. Customers who purchase the i2000 can utilizeSIMOX wafer manufacturing processes on the implanter other than the IBM MLDprocess.

 

Because we have sold only alimited number of implanters to date on an irregular basis, the recognition ofrevenue from the sale of even one implanter is likely to result in asignificant increase in the revenue for that quarter. We recognize implanterrevenue in accordance with SAB 104, which includes, among other criteria, theshipment and factory acceptance of the implanter at the customer’s location. Asa result, deferral of revenue will be recorded on our balance sheet until theCompany is able to meet these criteria.

 

During February 2004, weannounced the booking of an order for one Ibis i2000 SIMOX implanter, with anoption to purchase a second i2000, from a leading international silicon wafermanufacturer. We subsequently achieved customer acceptance of this implanter atour facility and this system was later shipped to the customer’s facility inthe second quarter of 2004. Revenue for this implanter order was recognized inthe third quarter of 2004, based on the final acceptance by the customer.

 

 During the fourth quarter ended December 31,2003, a number of unexpected events occurred that impacted our 200 mm andsmaller wafer size production line including the line’s projected cash flowgeneration and our projected utilization of the assets within our revisedplans. Based on these events and their impact on current and future projectedcash flows, and our subsequent impairment analysis under the provisions of SFASNo. 144, Accounting for Impairment or Disposal of Long-Lived Assets resulted inan impairment charge of $11,051,324 for our 200 mm and smaller SIMOX waferproduction line, which is principally comprised of Ibis 1000 implanters andassociated machinery and equipment not expected to be utilized or sold. Theremaining carrying amount of assets for this line was charged to the loss fromdiscontinued operations in the third quarter of 2004.

 

The Company’s final disposalplans relative to the closure of the wafer operation resulted in cash relatedcharges of approximately $0.1 million and non-cash charges for inventory andcertain production assets associated with the wafer manufacturing business ofapproximately of $2.7 million, for a total of $2.8 million in the loss fromdiscontinued operations in the quarter.

 

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**CriticalAccounting Policies**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat have a significant impact on the results we report in our financialstatements. Some of our accounting policies require us to make difficult andsubjective judgments, often as a result of the need to make estimates onmatters that are inherently uncertain. Our most critical accounting policiesinclude: revenue recognition, inventory valuation and reserves, accountsreceivable reserves and the assessment of long-lived asset impairment. Actualresults may differ from these estimates under different assumptions orconditions. Below, we discuss these policies further, as well as the estimatesand judgments involved.

 

***Revenue Recognition. ***We recognize revenue from wafer productsales, equipment sales and the sales of spare parts when all of the followingcriteria have been met: (1) evidence exists that the customer is bound to thetransaction; (2) the product has been delivered to the customer and, whenapplicable, the product has been installed and accepted by the customer; (3)the sales price to the customer has been fixed or is determinable; and (4)collectibility of the sale price is reasonably assured. We recognize revenuefrom implanter 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.

 

***Inventory Valuation and Reserves. ***Our policyfor the valuation of inventory, including the determination of obsolete orexcess inventory, requires us to estimate the future demand for our productswithin specific time horizons, generally twelve months or less. If ourestimated demand for specific products is greater than actual demand and wefail to reduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on our grossmargin. We have reserved for obsolescence when engineering changes or othertechnological advances 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 Receivable Reserves. ***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-Lived Assets. ***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-Lived Assets.  Management is required to assess therecoverability of its long-lived assets whenever events and circumstancesindicate that the carrying value may not be recoverable. Based on current conditions,factors we consider important and that could trigger an impairment reviewinclude the following:

 

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•                  Significant underperformance relative toexpected historical or projected future operating results;

•                  Significantchanges in the manner of our use of the acquired assets or the strategy of ouroverall business;

•                  Significantnegative industry or economic trends;

•                  Significantdecline in our stock price for a sustained period; and

•                  Ourmarket capitalization relative to book value.

 

In accordance with SFAS No.144, when we determine that the carrying value of applicable long-lived assetsmay not be recoverable based upon the existence of one or more of the aboveindicators of impairment, we evaluate whether the carrying amount of the assetexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of that asset. If such a circumstance exists, we wouldmeasure an impairment loss to the extent the carrying amount of the particularlong-lived asset or group exceeds its fair value. We would determine the fairvalue based on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in our currentbusiness model. We adopted SFAS No. 144 during the first quarter of 2002 andduring the fourth quarter of 2003 we recognized an impairment charge of$11,051,324 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 the third quarter of2004 that resulted in a charge of $2,774,775.

 

**Results ofOperations**

 

***Third Quarter Ended September 30, 2004 Compared to Third Quarter EndedSeptember 30, 2003***

 

***Contract and Other Revenue***. Contract and other revenue includes revenue derived from licenseagreements, characterization and other services. Contract and other revenueincreased for the third quarter ended September 30, 2004 to $124,566 from$66,834 for the third quarter ended September 30, 2003, an increase of $57,732or 86%. This is attributable to license revenue recognized from royalty feesrelated to equipment technology.

 

***Equipment Revenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service. Equipmentrevenue increased to $7,116,204 for the third quarter ended September 30, 2004from $226,114 for the third quarter ended September 30, 2003, an increase of$6,890,090 or 3047%. During the third quarter of 2004, we recognized therevenue of an i2000 implanter of $7,000,000. Field service revenue accounted for $75,747 for the third quarter endedSeptember 30, 2004 as compared to $69,300 for the same period last year. Sales ofspare parts accounted for $40,457 of equipment revenue for the quarter endedSeptember 30, 2004 as compared to $156,814 of equipment revenue for the thirdquarter ended September 30, 2003. Sales of spare parts fluctuate depending oncustomer demand and customer warranty expiration dates.

 

***Total Net Sales and Revenue***. Total net sales and revenue for the third quarter ended September 30,2004 was $7,240,770, an increase of $6,947,822, or 2372%, from total netrevenue of $292,948 for the third quarter ended September 30, 2003. Thisincrease is due to the recognition of an i2000 implanter in the third quarterof 2004.

 

***Total Cost of Sales and Revenue***.  Costof contract and other revenue consists of labor and materials expended duringthe quarter. Cost of contract and other revenue for the third quarter endedSeptember 30, 2004 was $3,219, as compared to $6,330 for the third quarterended September 30, 2003, a decrease of $3,111, or 49%. This is attributable toa decrease in miscellaneous sales.

 

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Cost of equipment revenuerepresents the cost of equipment and spare parts, along with labor incurred forfield service. Cost of equipment revenue for the third quarter ended September30, 2004 was $3,663,606, as compared to $208,888 for the third quarter endedSeptember 30, 2003. This increase of $3,454,718 or 1654% was primarily due tothe costs associated with the recognition of revenue for the i2000 implanter inthe third quarter of 2004.

 

Total cost of sales and revenuefor the third quarter ended September 30, 2004 was $3,666,825 as compared to$215,218 for the third quarter ended September 30, 2003, an increase of$3,451,607 or 1604%. The gross margin for all sales was a positive 49% for thethird quarter ended September 30, 2004 as compared to a positive gross marginof 27% for the third quarter ended September 30, 2003. This increase in thegross margin for all sales is attributable to the approximate gross margin of50% achieved on the i2000 implanter sale in the quarter ended September 30,2004.

 

***General and Administrative Expenses***. General and administrative expenses for the third quarter endedSeptember 30, 2004 were $549,975 (or 8% of total revenue) as compared to$477,253 (or 163% of total revenue) for the third quarter ended September 30,2003, an increase of $72,722, or 15%. This is due to increased legal fees of$39,066, accounting fees of $30,021 and security compliance fees of $25,620,which were partially offset by a reduction in other various expenses.

 

***Marketing and Selling Expenses***. Marketing and selling expenses for the third quarter ended September 30,2004 were $375,846 (or 5% of total revenue) as compared to $297,519 (or 102% oftotal revenue) for the third quarter ended September 30, 2003, an increase of$78,327, or 26%. This is a result of increased subcontractor costs, whichincreased by $72,504, associated with our service group based in Japan andpayroll and payroll related expenses, which increased by $33,803. This waspartially offset by a reduction in promotional expenses of $19,890 and othermiscellaneous expenses.

 

***Research and Development Expenses.*** Internally funded research and development expenses increased by$551,862 or 47%, to $1,726,926 (or 24% of total revenue) for the third quarterended September 30, 2004, as compared to $1,175,064 (or 401% of total revenue)for the third quarter ended September 30, 2003. This is due to wafer researchand development costs of $896,968 that were previously a part of wafer cost ofsales but are now supporting equipment development. This was partially offsetby reduced depreciation of $132,388, reduced wafer material of $70,532, reducedpayroll and payroll related expenses of $66,254, reduced joint developmentproject spending of $31,924 and other miscellaneous research and developmentspending.

 

***Other Income (Expense)*****.**  Total other income for the third quarterended September 30, 2004 was $175,586 as compared to an expense of $24,189 forthe third quarter ended September 30, 2003, an increase of $199,775, or 925%.The increase in total other income is attributable to the expiration of a wafervolume option of $200,000 that was associated with an asset obtained by thewafer manufacturing group from a wafer customer. This volume option was to beused on orders received over a one-year period. Since the time expired and noorders were received, the Company reduced its liability and recognized theamount in income, as no further obligation exists. The increase in other incomewas offset by an increase in miscellaneous expenses. Interest income increasedby $2,969 due to increased interest rates on investments and increased cashbalances. Interest expense decreased by $31,637 due to the decrease in wafersales that involved a financing arrangement entered into with the customerduring the second quarter of 2002.

 

***Loss From Discontinued Operations.***Discontinued operations incurred a loss of$2,774,745 in the third quarter ended September 30, 2004. The Company announcedin the beginning of the quarter that it was discontinuing the wafermanufacturing portion of its business in order to focus on the equipmentbusiness. Fixed asset write-offs related to the discontinued operation were$1,565,167. Inventory costs from the discontinued operation were $1,545,548 andseverance costs of $77,981. This was offset by the sale of some of the assetsand scrap recovery of $413,951.

 

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***Nine Months Ended September 30, 2004 Compared to Nine Months EndedSeptember30, 2003***

 

***Contract and Other Revenue***.  Contract and other revenueincludes revenue derived from license agreements, characterization and otherservices.  Contract and other revenuedecreased for the nine months ended September 30, 2004 to $297,481 from$592,899 for the nine months ended September 30, 2003, a decrease of $295,418or 50%. This decrease is attributable to revenue recognized from the transferof wafer technology to a customer, pursuant to a license transfer agreement inthe nine months ended September 30, 2003. This was offset by an increase inroyalty fees related to equipment technology in the nine months ended September30, 2004.

 

***Equipment Revenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue decreased to $7,354,450 for the nine months ended September30, 2004 from $8,622,289 for the nine months ended September 30, 2003, adecrease of $1,267,839 or 15%.  Duringthe nine months ended September 30, 2003, the i2000 implanter we shipped to ourlargest customer late in 2002 was accepted. As a result, we recognized revenueof approximately $8 million in the nine months ended September 30, 2003. Theimplanter revenue recognized in the nine months ended September 30, 2004 wasfor $7 million. Field service revenue accounted for $231,532 of equipmentrevenue for the nine months ended September 30, 2004 as compared to $209,150 ofequipment revenue for the same period last year.  Sales of spare parts accounted for $122,918of equipment revenue for the nine months ended September 30, 2004 as comparedto $420,233 of equipment revenue for the nine months ended September 30, 2003.Sales of spare parts fluctuate depending on customer demand and when warrantiesexpire.

 

***Total Net Sales and Revenue***. Total net revenue for the nine months ended September 30, 2004 was$7,651,931, a decrease of $1,563,257, or 17%, from total net revenue of$9,215,188 for the nine months ended September 30, 2003.

 

***Total Cost of Sales and Revenue***. Contract and other revenue costs consist of labor and materials expendedduring the nine month period. Cost of contract and other revenue for the ninemonths ended September 30, 2004 was $15,370, as compared to $34,332 for thenine months ended September 30, 2003, a decrease of $18,962, or 55%. Thisdecrease is attributable to a reduction in labor costs associated with licenserevenue compared to the prior year period.

 

Cost of equipment revenuerepresents the cost of equipment, the cost for spare parts, along with labor incurredfor field service. Cost of equipment revenue for the nine months endedSeptember 30, 2004 was $4,362,687, as compared to $4,014,590 for the ninemonths ended September 30, 2003, an increase of $348,097 or 9%. This increaseis due to an under absorption of manufacturing cost of $465,181 and theincrease in inventory reserves for equipment parts of $160,000. This was offsetby decreased costs due to the reduction in sales volume of equipment parts.

 

The total cost of sales andrevenue for the nine months ended September 30, 2004 was $4,378,057 as comparedto $4,048,922 for the nine months ended September 30, 2003, a decrease of$329,135 or 8%. The gross margin for all sales was a positive 43% for the ninemonths ended September 30, 2004 as compared to a positive gross margin of 56%for the nine months ended September 30, 2003. This decrease in the gross marginfor all sales is attributable to an approximate gross margin of 55% achieved onthe i2000 implanter sale, recognized in the nine months ended September 30,2003 as compared to the approximate gross margin of 50% for the i2000 implanterrecognized in the nine months ended September 30, 2004 as well as theunabsorbed manufacturing costs and the increase in inventory reserves.

 

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***General and Administrative Expenses***. General and administrative expenses for thenine months ended September 30, 2004 were $1,753,500 (or 23% of total revenue)as compared to $1,663,800 (or 18% of total revenue) for the nine months endedSeptember 30, 2003, an increase of $89,700, or 5%. This is due to increasedsecurity compliance costs of $77,040, increased professional services of$60,021, increased service charges for the letter of credit related to the saleof the i2000 implanter in September 2004 of $32,633 and computer expenses of$30,374 along with other miscellaneous expenses that increased. These costswere partially offset by decreased payroll and payroll related expenses whichtotaled $133,299 as a result of cost savings initiated by Ibis.

 

***Marketing and Selling Expenses***. Marketing and selling expenses for the ninemonths ended September 30, 2004 were $1,141,813 (or 15% of total revenue) ascompared to $957,988 (or 10% of total revenue) for the nine months ended September30, 2003, an increase of $183,825, or 19%. The increase in marketing andselling expenses is a result of increased subcontractor costs associated withour service group in Japan of $161,809 and salaries of $48,067, which werepartially offset by a reduction in promotion expenses.

 

***Research andDevelopment Expenses.***Internally funded researchand development expenses decreased by $609,261 or 15%, to $3,599,099 (or 47% oftotal revenue) for the nine months ended September 30, 2004, as compared to$4,208,360 (or 46% of total revenue) for the nine months ended September 30,2003. This decrease is due to reduced payroll and payroll related expenses of$457,403, reduced joint development project costs of $382,600, reduceddepreciation expense of $363,755, reduced consulting and subcontractor costs of$124,055, reduced project material of $114,829 and reductions in othermiscellaneous expenses. This was more than offset by the wafer research anddevelopment costs of $896,968 that were previously part of the cost of salesbut are now supporting equipment development.

 

***Other Income (Expense)*****.**Total other income for the nine months endedSeptember 30, 2004 was $183,169 as compared to $6,459 for the nine months endedSeptember 30, 2003, an increase of $176,710, or 2736%. The increase in totalother income is attributable to the expiration of a wafer volume option of$200,000 that was associated with an asset obtained by the wafer productiongroup from a wafer customer. This volume option was to be used on orders receivedover a one-year period. Since the time expired and no orders were received, theCompany reduced its liability and recognized the amount in income, as nofurther obligation exists. The increase in other income was reduced by anincrease in miscellaneous expenses. Interest income also increased by $857 forthis period due to increased interest rates and increased cash balances.Interest expense decreased by $13,160 for this period due to the decrease inwafer sales that involved a financing arrangement entered into with thecustomer during the second quarter of 2002.

 

***Loss From Discontinued Operations*****.**Discontinued operations incurred a loss of$5,478,775 for the nine months ended September 30, 2004 due to thediscontinuance of the wafer manufacturing operation. For comparative purposes,wafer sales and associated costs from the previous quarters are shown asdiscontinued operations loss, as are the prior year periods. The negativemargin of $2,704,030 incurred by the wafer manufacturing operation in the previousquarters in addition to the loss this quarter of $2,774,745, equals the amountshown of $5,478,775. Fixed asset dispositions and provisions related to thediscontinued operation were $1,565,167. Costs associated with inventoryprovision from the discontinued operation were $1,545,548 and employeeseverance pay of $77,981. This was offset by the sales of a portion of theexcess equipment previously used in the wafer business of $413,951.

 

**Liquidity and Capital Resources.**

 

Asof September 30, 2004, Ibis had cash and cash equivalents of $8,333,158,including a portion of the receipt of net proceeds of the $12.6 millionreceived from a public offering of 1,000,000 shares of common stock at $13.25per share in October 2003 and the down payment of $4.7 million for the i2000SIMOX implanter which was recognized as revenue in the third quarter of 2004based on the final acceptance by the customer. The shares were included in ashelf registration statement filed with the Securities and Exchange

 

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Commissionon September 2, 2003 and declared effective on October 3, 2003. Net proceedsfrom the offering have been used primarily to fund research and development,capital expenditures and working capital.

 

Based on theCompany’s final disposal plans relative to the closure of the wafer operation,the Company was required to take cash related charges of approximately $0.1million. The Company will maintain a wafer research and development effortfocused on continuous improvement of the equipment capabilities and forsupporting the Company’s equipment customers’ needs at what is expected to beat a significantly reduced cost to the business going forward. As a result, theCompany expects to reduce its monthly cash burn rate and anticipates it willhave sufficient cash for operations through the foreseeable future or about thenext nine to twelve months.

 

During thenine months ended September 30, 2004, Ibis used $2,190,903 in cash foroperating activities of continuing operations compared to cash used of$1,657,956 for the same period in 2003. Depreciation and amortization expensefor the nine months ended September 30, 2004 and 2003 was $2,905,246 and$5,014,576, respectively. This accounted for 38% and 54% of total revenue,respectively. Management expects that depreciation and amortization willcontinue to be a significant portion of its expenses in the near term and for2004 will approximate $3.5 million. To date, Ibis’ working capital requirementshave been funded primarily through debt, (capital leases), and equityfinancings. Ibis also used $891,244 during the nine months ended September 30,2004 to fund additions to property and equipment as compared to $429,897 duringthe nine months ended September, 2003. At September 30, 2004, Ibis hadcommitments to purchase approximately $1,326,708 for i2000 implanter parts and$437,655 for operating expenses.

 

Aspart of our cash management plan, we initiated additional cost saving measuresduring 2003 and 2004. This included the lay-off of twenty-nine employees. Inthe third quarter of 2004 the Company announced that it was discontinuing thewafer manufacturing portion of the business. This resulted in the layoff of anadditional seventeen employees. Our headcount at the end of the third quarter2004 is now 61 employees.

 

InJune 2003, Ibis entered into an agreement with a financing agent to obtainpayment for products from its largest customer on an expedited basis. Thediscount rate associated with this agreement is based on the prime rate and mayfluctuate.

 

InSeptember 2001, Ibis entered into a $4.5 million equipment lease line of creditwith Heller Financial’s Commercial Equipment Finance Group. The lease line wasused to finance the purchase of process equipment for wafer production,primarily for 300 mm wafers. This line was fully drawn down in twosale-leaseback transactions, bearing interest at approximately 8% with a termof three years, and a monthly net payment of $131,212. Ibis has a fair marketvalue purchase option at the end of the lease term. The lease line ended in thethird quarter of 2004 and the Company exercised the fair market value purchaseoption at the negotiated buyout price of $900,000.

 

Our existingcash resources are believed to be sufficient to support our current operatingplan for the next nine to twelve months. 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.

 

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**Business Risk Factors**

 

This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as“may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “project,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology, although not allforward-looking statements contain such terms. In addition, theseforward-looking statements include, but are not limited to, statementsregarding, among other things: (i) customer interest in and demand for, andmarket acceptance of, the Company’s SIMOX-SOI technology including theCompany’s implanters, and the involvement generally of the silicon wafermanufacturing industry in the SOI wafer market, (ii) the Company’s belief thatwafer manufacturers will become the primary suppliers of SIMOX-SOI wafers tothe chipmaking industry, (iii) the throughput and production capacity of thei2000 implanter for manufacturing 200-mm and 300-mm SIMOX-SOI wafers, and theability of the i2000 implanter to achieve acceptable production yields, (iv)the Company’s plan to focus on supplying implanters to wafer manufacturers, (v)the Company’s expectations regarding future orders for i2000 implanters, andthe likelihood and timing of revenue recognition on such sales, (vi) theCompany’s expectation regarding future willingness of wafer manufacturers topurchase equipment from the Company, (vii) the technological advancements andthe adoption rate of SOI technology, and (viii) the Company’s expectation ofhaving sufficient cash for operations. Such statements are neither promises norguarantees but rather are subject to risks and uncertainties, whichcould cause actual results to differ materially from those described in theforward-looking statements. Such risks and uncertainties include, but are notlimited to: future continued migration to SOI technology and market acceptanceof SIMOX; the level of demand for the Company’s products; the Company’s abilityto pursue and maintain further strategic relationships, partnerships andalliances with third parties; the Company’s ability to protect its proprietarytechnology; the potential trends in the semiconductor industry generally; theease with which the i2000 can be installed and qualified in fabricationfacilities; the likelihood that implanters, if ordered, will be qualified andaccepted by customers; the likelihood and timing of revenue recognition on suchtransactions; the impact of competitive products, technologies and pricing; theimpact of rapidly changing technology; the possibility of further assetimpairment and resulting charges; equipment capacity and supply constraints ordifficulties; the Company’s limited history in selling implanters; generaleconomic conditions; and other risks and uncertainties described elsewhere inthis Form 10-Q and in the Company’s Securities and Exchange Commission filingsfrom time to time, including but not limited to those set forth in theCompany’s annual report on Form 10-K for the year ended December 31,2003. All information set forth in this Form 10-Q is as of the date of thisForm 10-Q, and Ibis undertakes no duty to update this information, unlessrequired by law.

 

**Effects of Inflation**

 

Ibis believes that over thepast three years inflation has not had a significant impact on Ibis’ sales oroperating results.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I –ITEM 3**

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

The exposureof market risk associated with risk-sensitive instruments is not material tothe Company, as the Company does not transact its sales denominated in otherthan United States dollars, invests primarily in money market funds andshort-term commercial paper, holds its investments until maturity and has notentered into hedging transactions.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I –ITEM 4**

 

**CONTROLS AND PROCEDURES**

 

(a)          Evaluationof Disclosure Controls and Procedures. Our principal executive officer andprincipal financial officer, after evaluating the effectiveness of ourdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e) as of the end of the period covered by this Quarterly Report onForm 10-Q, have concluded that, based on such evaluation, our disclosurecontrols and procedures were adequate and effective to ensure that materialinformation relating to the Company was made known to them by others within theCompany, particularly during the period in which this Quarterly Report on Form10-Q was prepared.

 

(b)         Changesin Internal Controls. There were no changes in our internal control overfinancial reporting, identified in connection with the evaluation of suchinternal control that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART II**

 

**OTHER INFORMATION**

 

Item 1 - 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., etal., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v. Ibis TechnologyCorporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v.Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). OnJune 4, 2004, the Court entered an order consolidating these actions under thecaption In re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. OnJuly, 2004, a consolidated amended class action complaint was filed whichalleges, among other things, that the Company violated federal securities lawsby allegedly making misstatements to the investing public relating to demandfor certain Ibis products and intellectual property issues relating to the saleof the i2000 oxygen implanter. The plaintiffs are seeking unspecified damages.On August 5, 2004, we filed a motion to dismiss the consolidated amendedcomplaint on the grounds, among others, that it failed to state a claim onwhich the relief could be granted. That motion now has been fully briefed.While we believe that the allegations are without merit, and we intend tovigorously defend against the suits, there can be no guarantee as to how theyultimately will be resolved.

 

Inaddition, Ibis has been named as a nominal defendant in a shareholderderivative action filed in February 2004 against certain of its directors andofficers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No.04-10341 (RCL). The complaint alleges, among other things, that the allegedconduct challenged in the securities cases pending against Ibis inMassachusetts (described above) constitutes a breach of the defendants’fiduciary duties to Ibis. The complaint seeks unspecified money damages andother relief ostensibly on behalf of Ibis. On June 4, 2004, the Court enteredan order staying this matter pending the entry of a final order on any motionfiled by the Company to dismiss the consolidated class action complaintreferenced 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 - OtherInformation 

None

 

Item 6 - Exhibits andReports on Form 8-K 

 

(a)                                  Exhibits furnished as Exhibits hereto:

 
| **Exhibit No.** | ** ** | **Description**                                              |
|-----------------|------------|--------------------------------------------------------------|
|            |       |                                                         |
| 3.1             |       | Amended and Restated By-Laws of Ibis  Technology Corporation |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                 |
|-----------------|------------|-------------------------------------------------------------------------------------------------|
|            |       |                                                                                            |
| 31.1            |       | Certification  of Martin J. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      |
|            |       |                                                                                            |
| 31.2            |       | Certification  of 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)                                 Reports on Form 8-K:

 

OnJuly 22, 2004 we furnished to the SEC a report on Form 8-K containing the July21, 2004 press release announcing the discontinuance of the wafer manufacturingportion of our business along with the financial results for the Second Quarterended June 30, 2004.

 

OnSeptember 14, 2004 we furnished to the SEC a report on Form 8-K containing theSeptember 14, 2004 press release announcing the final acceptance of the Ibisi2000 oxygen implanter by a major customer.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**SIGNATURES**

 

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

 

 
|                     | Ibis  Technology Corporation |
|--------------------------|------------------------------|
|                     |                         |
|                     |                         |
| Date:  November 11, 2004 | By:                          | /s/ William J. Schmidt |   |
|                     |                         | William  J. Schmidt |
|                     |                         | Chief  Financial Officer, Treasurer and Clerk |
|                     |                         | (principal  financial and accounting officer) |
|                     |                         |
|                     |                         |
| Date:  November 11, 2004 | By:                          | /s/ Martin J. Reid |   |
|                     |                         | Martin  J. Reid |
|                     |                         | President  and Chief Executive Officer |
|                          |                              |  |  |  |

 

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