UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number: 000–27127

iBasis, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or
organization)

04-3332534

(I.R.S. Employer Identification No.)

20 Second Avenue, Burlington, MA 01803

(Address of executive offices, including zip code)

(781) 505–7500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No ý

As of July 29, 2005, there were 83,530,107 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

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Part I – Financial Information

Item 1.  Financial Statements

iBasis, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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iBasis, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

iBasis, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

iBasis, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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iBasis, Inc.
Condensed Notes to Consolidated Financial Statements

(1)  Business and Presentation

We are a leading provider of international communications services and a provider of retail prepaid calling services.  Our continuing operations consist of our Voice-Over-Internet-Protocol, or VoIP, trading business (“Trading”), in which we connect buyers and sellers of international telecommunications services, and our retail services business (“Retail”).  In the Trading business we receive voice traffic from buyers-originating carriers who are interconnected to our network via VoIP or traditional TDM connections, and we route the traffic over the Internet to sellers-local carriers in the destination countries with whom we have established termination agreements.  We use proprietary, patent-pending technology to automate the selection of routes and termination partners based on a variety of performance, quality, and business metrics.  We offer this trading service on a wholesale basis to carriers, telephony resellers and other service providers worldwide and have termination agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Our Retail  business was launched during the third quarter of 2003, with the introduction of our retail prepaid calling cards which are marketed through distributors primarily to ethnic communities within major metropolitan markets in the U.S.  Our retail prepaid calling card business leverages our existing international VoIP network and termination agreements and has the potential to deliver higher margins than those typically achieved in the VoIP trading business.  In addition, the retail prepaid calling card business typically has a faster cash collection cycle than the VoIP trading business.  In the second quarter of 2004, we created the Retail business segment, which consists of retail prepaid calling card services and other enhanced services, in addition to our Trading business.  Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of our total net revenue.

In September 2004, we launched a prepaid calling service, Pingo, offered directly to consumers through an eCommerce web interface, which we have included in our Retail business segment.  Revenue from our Pingo services was not material in 2004 or the first six months of 2005.

The unaudited condensed consolidated financial statements presented herein have been prepared by us and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year.

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2004.

Certain reclassifications have been made to previously reported financial data to conform to the 2005 presentation.  Beginning in the three months ended June 30, 2005, we have begun to separately report foreign exchange gain and losses, on a comparative basis, as they have become more material.   Previously, foreign exchange gains and losses were included in general and administrative expenses.

Basic and diluted net loss per common share are determined by dividing net loss by the weighted average common shares outstanding during the period.  Basic net loss per share and diluted net loss per share are the same for all period presented, as outstanding common stock options, common shares to be issued upon conversion of the Company’s convertible notes and warrants to purchase common shares are anti-dilutive.

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The following table summarizes common shares that have been excluded from the computation of diluted weighted average common shares for the periods presented:

We account for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” using the intrinsic-value method.  In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R).  This Statement is a revision of SFAS 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25.  SFAS No. 123R requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards.  SFAS No. 123R is effective for us beginning in the first quarter of 2006.  We expect to adopt SFAS No. 123R using the Statement’s modified prospective application method.  Adoption of SFAS No. 123R is expected to increase our stock compensation expense significantly.  We are currently in the process of evaluating the impact and implementation of SFAS No. 123R.

At June 30, 2005, we had one stock-based employee compensation plan.  The following table illustrates the effect on net income or net loss, and net income or net loss per share, if we had applied the fair value recognition provisions of SFAS No. 123.

We estimate the fair value of our stock-based awards to employees using the Black-Scholes option pricing model.  The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, the Black-Scholes model required the input of highly subjective assumptions including the expected stock price volatility.  Because stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based awards to employees.  The fair value of stock-based awards to employees was estimated assuming no expected dividends and the following weighted average assumptions.

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(4) Business Segment Information

Beginning in the second quarter of 2004, our recently created operating segment, retail prepaid calling card services and other enhanced services (“Retail”) became a reportable business segment, in addition to our international wholesale VoIP services (“Trading”).  Since the second quarter of 2004, revenue from our Retail business has exceeded 10% of total net revenue.

Our Trading business consists of international long distance services we provide using VoIP.  We offer these services on a wholesale basis through our worldwide network to carriers, telephony resellers and others around the world by operating through various service agreements with local service providers in North America, Europe, Asia, the Middle East, Latin America, Africa and Australia.

Our Retail business consists of our retail prepaid calling card services, Pingo, a prepaid calling service sold to consumers through an eCommerce interface, and other enhanced services.  To date, we have marketed our retail prepaid calling card services primarily to ethnic communities within major domestic markets through distributors.  Revenue from our retail prepaid calling card services were 94% of our total Retail revenue in both the three and six months ended June 30, 2005.  Launched in the third quarter of 2004, Pingo revenues were not material in the three and six months ended June 30, 2005.  Our other enhanced services primarily consist of revenue derived from the outsourcing of our retail prepaid calling card platform.

Our executive management team uses net revenue and gross margin, which is net revenue less data communications and telecommunications costs, as the basis for measuring profit or loss and making decisions on our Trading and Retail businesses.  We do not allocate our research and development expenses, selling and marketing expenses, general and administrative expenses and depreciation and amortization between Trading and Retail.

Operating results, excluding interest income and expense and other income and expense, for our two business segments are as follows:

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During 2001 and 2002, the Company announced restructuring plans to better align the organization with its corporate strategy and recorded a charge to its Statements of Operations in those periods in accordance with the criteria set forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring included the write-off of property and equipment, the termination of certain contractual obligations, exiting certain leased facilities and the reduction in the Company’s workforce resulting in employee benefit costs.

As of June 30, 2005, the accrued restructuring costs consisted of costs accrued for certain leased facilities obligations.  A summary of the accrued restructuring costs for the six months ended June 30, 2005 is as follows:

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Long-term debt consists of the following:

In June 2005, we negotiated the early conversion of $9,100,000 of our 8% Secured Convertible Notes due June 2007 into 4.9 million shares of common stock at the stated conversion price of $1.85 per common share and $2,000,000 of our 6 ¾% Convertible Subordinated Notes due June 2009 into 1.1 million shares of common stock at the stated conversion price of $1.85 per common share.   We paid a total of $661,000 in premiums to the noteholders to encourage the early conversion of these notes, of which $546,000 was paid in cash and the remaining amount was paid in the form of 43,736 shares of the Company’s common stock that had a fair value of $115,000.   In addition, $1,150,000 of our 6 ¾% Convertible Subordinated Notes due June 2009 voluntarily converted into 0.6 million shares of common stock at the conversion price of $1.85 per share.  In total, $12,250,000 of notes were converted into 6.6 million shares of common stock.

Subsequent to the date of these financial statements, in July 2005, we negotiated the early conversion of the remaining $19,900,000 of our 8% Secured Convertible Notes due June 2007 into 10.8 million shares of common stock at the stated conversion price of $1.85 per share.  We paid a total premium of $1,194,000 in cash to the noteholders to encourage the early conversion of these notes.  The $19,900,000 we converted into common stock in July is classified separately as long-term debt on our balance sheet as of June 30, 2005.

In the first quarter of 2005, holders of $0.2 million of 6¾% Convertible Subordinated Notes due June 2009 voluntarily converted their notes into 105,405 shares of common stock at the conversion price of $1.85 per share.  In January 2005, holders of certain warrants which we issued in 2003 in connection with an exchange of debt, exercised their warrants for 1,400,000 shares of common stock at an exercise price of $0.65 per share, resulting in total proceeds to us of $0.9 million.

At June 30, 2005 and December 31, 2004, we had $2.6 million and $3.0 million, respectively, in letters of credit outstanding under our bank line of credit.  We had no other borrowings outstanding under our bank line of credit at June 30, 2005 or December 31, 2004.

In the three months ended June 30, 2005, we entered into a capital lease agreement, with a three year term, to finance $1.2 million in equipment purchases for The iBasis Network.

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In addition to litigation that we have initiated or responded to in the ordinary course of business, we are currently party to the following potentially material legal proceedings:

Beginning July 11, 2001, we were served with several class action complaints that were filed in the United States District Court for the Southern District of New York against us and several of our officers, directors, and former officers and directors, as well as against the investment banking firms that underwrote our November 10, 1999 initial public offering of the common stock and our March 9, 2000 secondary offering of the common stock. The complaints were filed on behalf of persons who purchased the common stock during different time periods, all beginning on or after November 10, 1999 and ending on or before December 6, 2000.

The complaints are similar to each other and to hundreds of other complaints filed against other issuers and their underwriters, and allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 primarily based on the assertion that there was undisclosed compensation received by our underwriters in connection with our public offerings and that there were understandings with customers to make purchases in the aftermarket. The plaintiffs have sought an undetermined amount of monetary damages in relation to these claims. On September 4, 2001, the cases against us were consolidated. On October 9, 2002, the individual defendants were dismissed from the litigation by stipulation and without prejudice.

On June 11, 2004, we and the individual defendants, as well as many other issuers named as defendants in the class action proceeding, entered into an agreement-in-principle to settle this matter, and on June 14, 2004, this settlement was presented to the court. The court has preliminarily approved the settlement.  Once the notice has been mailed, there will be an objection period, followed by a hearing for final approval of the settlement.  Although we believe that we and the individual defendants have meritorious defenses to the claims made in the complaints, in deciding to pursue settlement, we considered, among other factors, the substantial costs and the diversion of our management’s attention and resources that would be required by litigation.

Pursuant to the terms of the proposed settlement, in exchange for a termination and release of all claims against us and the individual defendants and certain protections against third-party claims, we will assign to the plaintiffs certain claims we may have as an issuer against the underwriters, and our insurance carriers, along with the insurance carriers of the other issuers, will ensure a floor of $1 billion for any underwriter-plaintiff settlement. Although the financial effect of the settlement on us will not be material, our insurance carriers’ exposure in this connection will range from zero to a few hundred thousand dollars, and will be reduced proportionately by any amounts recovered by plaintiffs directly from the underwriters.

We cannot assure you that the settlement which has been finalized will be accepted by the court, or that we will be fully covered by collateral or related claims from underwriters, and that we would be successful in resulting litigation. In addition, even though we have insurance and contractual protections that could cover some or all of the potential damages in these cases, or amounts that we might have to pay in settlement of these cases, an adverse resolution of one or more of these lawsuits could have a material adverse affect on our financial position and results of operations in the period in which the lawsuits are resolved. We are not presently able to estimate potential losses, if any, related to the lawsuits.

We are also party to suits for collection, related commercial disputes, claims from carriers and foreign service partners over reconciliation of payments for circuits, Internet bandwidth and/or access to the public switched telephone network, and claims from estates of bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. Our employees have also been named in proceedings arising out of business activities in foreign countries.  We intend to prosecute vigorously claims that we have brought and employ all available defenses in contesting claims against us, or our employees. Nevertheless, in deciding whether to pursue settlement, we will consider, among other factors, the substantial costs and the diversion of management’s attention and resources that would be required in litigation. In light of such costs, we have settled various and in some cases similar matters on what we believe have been favorable terms which did not have a material impact our financial position, results of operations, or cash flows. The results or failure of any suit may have a material adverse affect on our business.

In June 2004, we completed a refinancing of our outstanding debt obligations. As part of the refinancing, we prepaid all $25.2 million of our 11½% Senior Secured Notes due January 2005 plus accrued but unpaid interest and issued warrants exercisable for an aggregate of 5,176,065 shares of our common stock at $1.85 per share. In conjunction with the refinancing we issued $29.0 million of new 8% Secured Convertible Notes due in June 2007, proceeds of  $25.2 million were used to prepay the 11½% Senior Secured Notes due January 2005. The 8% Secured Convertible Notes due June 2007 are convertible into shares of common stock at $1.85 per share.  The 8% Secured Convertible Notes due June 2007 are fully and unconditionally guaranteed, jointly and severally, by our wholly-owned subsidiaries, iBasis Global, Inc., iBasis Holdings, Inc. and iBasis Securities Corporation.  As described in Note 6, during June and July 2005, all of our outstanding $29.0 million of 8% Secured Convertible Notes due June 2007 were converted into common stock.

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The following tables contain condensed consolidating financial information for iBasis, Inc (“Parent Company”) and iBasis Global, Inc., iBasis Holdings, Inc., and iBasis Securities Corporation (collectively, “Subsidiary Guarantors”), on a combined basis, for the periods presented.  Separate financial statements of the Subsidiary Guarantors are not presented as we believe they would not be  material to investors.

Condensed Consolidating Balance Sheet (Unaudited)
As of June 30, 2005

(In thousands, except per share data)