IBIS Technology Corporation - Essay Example

?IBIS Technology Corporation Auditor’s Report: Doubt in Ibis’s Ability to Continue Operating as a Going Concern Professor DeSalvo 1.0 Introduction Ibis Technology Corporation is in the business of developing, manufacturing and marketing Separation by Implantation of Oxygen – a form of silicon-on-insulator (SIMOX-SOI) technology for the global semiconductor industry. This technology has been tested over a number of years (Ibis 2). The company has an active research and development program in both equipment and wafer process technology. In 2004 the company began focusing primarily on developing implanter technology and advanced process capability to produce 300mm SIMOX wafers. This required the development of a new generation of oxygen implanter – the i2000. The i2000 was developed to support the SIMOX-SOI 300 mm wafers in order to satisfy the global semiconductor industry (Ibis 7). Ibis believes that it offers significant advantages over silicon wafers that are constructed on conventional silicon wafers which make them ideal for a number of commercial applications. This applications include: servers and workstations; desktop and portable computers; various entertainment devices such as game consoles and televisions; wireless communications and battery powered hand held devices which have a lot of features such as cell phones; and electronics that can be used in harsh environments (Ibis 2-3). Ibis was incorporated in Massachusetts in October 1987 and started operating in January 1988. In the initial stages most of the company’s revenue came from research and development contracts and the sale of wafers for military applications (Ibis 3). At times there are shifts to the sale of equipment. However, in 2004 Ibis stopped manufacturing wafers and concentrated on supplying equipment and process technology to their customers who purchase equipment. Their customers are major producers of silicon. Most of the company’s sales are made to overseas companies with over 80% going to Japan. In 2007 Ibis had six customers and so the company is reliant on only a few customers for its business. In 2008 there was only one prospective customer from a regular total of about four (Ibis ). 2.0 Qualified Audit Report According to BPP Learning Media (2009) audit reports are qualified for various reasons. A qualified opinion may be expressed for one or more of the following reasons: The auditor has concluded that there are material but not pervasive misstatements with respect to the appropriateness and application of accounting policies as well as the adequacy of disclosures in the financial statements The auditor cannot obtain sufficient and appropriate audit evidence on which to base an opinion but concludes that the possible effects could be material but not pervasive, including limitations imposed by management; and circumstances beyond the company’s control. There are uncertainties in relation to whether the company would be able to continue to operate as a going concern During the course of an audit it is a requirement that the auditors take into consideration the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements. The going concern assumption is a fundamental assumption in the preparation of financial statements. Going concern assumes that the business will continue in operation for the foreseeable future with no intention to liquidate. This type of qualified opinion suggests that the possibility exist that the organization may not be operational in the foreseeable future (BPP 2009). It indicates that there are a number of factors that could give rise to this including declining sales and profits or increasing losses. This is also an indication that an organization may not be able to honor its obligations as they fall due if it cannot generate the level of revenues necessary to do cover its costs and leave some in reserves. Additionally, if an organization continues to make losses thereby eroding reserves it may not be able to carry out any major investments or any projects in the form of research and development. In a case where an organization is no longer a going concern, the organization’s noncurrent (fixed) assets are valued at the price they are likely to fetch in a forced sale and their current assets such as stock and debtors will also be discounted to the price they are likely to fetch in a liquidation. This value will be substantially less than the values in the books which assume that the organization is a going concern. The process of liquidating a business is a costly procedure which should not be prolonged and so investors are not willing to pay anything substantial for such assets. Ibis Audit Report Ibis was issued a qualified audit report for the financial year ended December 31, 2007. In the audited report dated May 22, 2008, the company’s auditor - KPMG expressed doubt as to whether Ibis can be considered a going concern. Ibis’s audit report was qualified for a number of reasons. Based on the situation facing the company it appears highly unlikely that Ibis will be able to generate the kind of revenue expected to carry on its business in the next year. Even though the financial statements were prepared under the assumption that Ibis would continue as a going concern there is some doubt because of the recurring losses and the level of accumulated deficit. This issue has been raised because the company has deficiencies in its capital base and was unable to secure any orders for its implanter equipment in 2007 (Ibis 9). The sale of implanters is generally weak and irregular. In February 2008 an investment bank – Blue Lake Partners LLC was hired to determine whether there were any strategic alternatives which included a possible sale of the company or its assets (Ibis 36). This step was taken as a result of weak implanter sales with the most recent order being in October 2005 and the fact that no implanter sales were recognized for 2006. No implanter revenue was recorded for the year ended December 2007 and as of April 10, 2008 no orders were received for implanters (Ibis 4). The company was not able to consummate a strategic transaction which would result in the sale of the business or any other strategic alternative (Ibis 11-12). Furthermore, this situation is worsened by the fact that only one of the company’s four major wafer manufacturers was a prospective customer for 2008. There were also uncertainties in relation to whether the company would receive orders for implanters in the foreseeable future (Ibis 31). The company faces a serious problem because its current customers may not want to do business with a company that may be going out of business very soon. Ibis has competitors in the area of SIMOX-SOI implanters and therefore customers would be more willing to do business with the company’s competitors because they may have problems in getting spare parts and benefiting from their warranties in future if Ibis went out of business. This will be a major factor for consideration by Ibis’s customers. The fact that the company has not being able to find a buyer is an indication that the SIMOX-SOI technology is not considered as being a viable business given the fact that there are direct SIMOX-SOI competitors, competing SOI technologies as well as competing non-SOI technologies (Ibis 8). The success of Ibis’s operations is also dependent on its proprietary technology and core intellectual property. While the company has been awarded a number of patents there are others that are still pending. Ibis is extremely reliant on the protection of the company’s trade secrets as well as confidentiality and proprietary information agreement in order to safeguard its proprietary technology. However, despite the company’s efforts to protect its core intellectual property only limited protection is provided by way of contractual, statutory and common law protections (Ibis 9). There are also doubts about whether Ibis will be able to retain its management staff and/or obtain loans in order to continue in business. According to information obtained in relation to Ibis, notwithstanding the belief that there is sufficient cash to support the company’s operations for the 2008 financial year. Ibis’s inability to obtain any orders in the foreseeable future and to obtain any other sources of revenue to offset this loss of business would definitely have a materially adverse impact on the company’s business and therefore hinder its ability to continue as a going concern. If Ibis is unable to generate revenue from sales then it will not be able to invest in research and development or improve its manufacturing capabilities. This would therefore negatively affect the company’s ability to pursue and maintain its current relationships, partnerships and alliances with third parties. This would also lead to a loss in key personnel at Ibis as a result of a general reduction in the workforce or by way of a voluntary termination of employment. This would also place a limit on the company’s ability to access financing at terms that could be considered acceptable based on the company’s current situation (Ibis 9). This would also negatively affect the trading of the company’s common stock. Financial Results The company’s financial results indicate clearly that there is little or no hope for the survival of Ibis’s business. There are no signs of any significant improvement in sales. The company’s cash resources however are projected to last at least until June 2009. Revenue for the year ended December 31, 2007 was $1mn, down from $14mn in the previous year. Approximately 97% of this revenue relates to equipment sales. Equipment sales fell from $13mn in 2006 to $0.5 million in 2007, representing a decline of over 96% while Ibis’s gross margin declined by 133% in 2008 when compared to the previous year (Ibis 31). The information presented is an indication of the uncertainties facing the company. The survival of the business appears uncertain and so the inventory on hand at December 31, 2007 may have to be written down significantly or possibly in its entirety. The fact that there are outstanding warranties in relation to sales means that previous customers will definitely not be prepared to invest in any additional equipment that was manufactured by Ibis once they are aware of the company’s current status. Without the possibility of the company being acquired by a competitor or one of Ibis’s customers in the process of or considering vertical integration the company will not survive. The company’s stock was trading below $1 on the NASDAQ exchange in 2007 and was therefore faced with the possibility of being delisted (Ibis 35). Ibis was advised of this after this occurred for 30 consecutive days. These are some of the things that do not augur well for the continuation of the business. Works Cited BPP Learning Media. ACCA Paper F8 Audit and Assurance (International). London: BPP Publishing. 2009. Print Ibis Technology Corporation (2008). “United States Securities and Exchange Commission Form 10-K: IBIS Technology Corporation.” Securities and Exchange Commission. 22 May 2008. Web. 9 March 2012 Read More