Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

OR

For the transition period from          to

Commission file number 000-31019

1101 Chess Drive
Foster City, CA 94404
(Address of principal executive offices, including zip code)

(650) 655-4200
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ]   No [X]

There were 20,193,201 shares of the registrant’s common stock outstanding on July 31, 2003.

Table of Contents

Argonaut Technologies, Inc.
Form 10-Q
Quarterly Period Ended June 30, 2003

TABLE OF CONTENTS

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

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

Page 3

Table of Contents

ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

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

Page 4

Table of Contents

ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

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

Page 5

Table of Contents

ARGONAUT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals and adjustments, which Argonaut Technologies, Inc. (“Argonaut” or “the Company”) considers necessary to present fairly the financial information included herein. The condensed consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K, for the year ended December 31, 2002 as filed with the Securities and Exchange Commission. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2003, or any other future period.

NOTE 2 — STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation “ (“SFAS 123”), as amended by Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” whereby stock-based employee compensation arrangements are accounted for under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, when the exercise price of the Company’s stock options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. Pro forma information regarding net loss per share is required by SFAS 123 as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value of these options granted prior to the Company’s initial public offering in July 2000 was estimated at the date of grant using the minimum value method. The fair value of stock options granted subsequent to the initial public offering were valued using the Black-Scholes valuation model based on the actual stock closing price on the date of grant. The fair value of these options was estimated at the date of grant using the following weighted-average assumptions:

The pro forma disclosures required by SFAS 123 are as follows (in thousands, except per share amounts):

Page 6

Table of Contents

Equity instruments granted to non-employees are accounted for using the Black-Scholes valuation model prescribed by SFAS 123 and, in accordance with Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services.” The equity instruments are subject to periodic revaluations over their vesting terms. The expense is recognized as the instruments vest.

NOTE 3 — INVENTORIES

Inventories consist of the following (in thousands):

NOTE 4 — NET LOSS PER SHARE

Net loss per share has been computed according to Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” which requires disclosure of basic and diluted earnings per share. Basic and diluted net loss per share was computed using the weighted-average number of common shares outstanding during the period. Due to the net loss position of the Company, diluted earnings per share is calculated using the weighted average number of common shares outstanding and excludes the effects of potential common shares that are antidilutive. Options to purchase 4,061,596 and 3,332,769 shares of common stock were outstanding at June 30, 2003 and June 30, 2002, respectively, and warrants to purchase 80,665 shares of common stock were outstanding at June 30, 2003 and June 30, 2002, but were not included in the computation of diluted net loss per share, since the effect would be antidilutive.

NOTE 5 — COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and other items of comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’s short-term investments and foreign currency translation adjustments.

For the three- and six-month periods ended June 30, 2003 and 2002, comprehensive loss is as follows (in thousands):

NOTE 6 — BUSINESS COMBINATION

On February 20, 2002, Argonaut completed its acquisition of Jones Chromatography Limited, a company organized under

Page 7

Table of Contents

the laws of England and Wales (“JCL”), and its wholly owned subsidiaries International Sorbent Technology (“IST”) and Jones Chromatography U.S.A., Inc. (“JCI”) (together with JCL, “Jones Group”), pursuant to a Share Purchase Agreement (the “Purchase Agreement”), dated February 11, 2002, among Argonaut and the stockholders of JCL.

The strategic acquisition of Jones Group creates a combined company serving as a global provider of solutions for chemistry development. The addition of Jones Group to Argonaut strengthens and expands the Company’s position in chemistry consumables sales, and increases the Company’s European business. The Jones Group is a leading manufacturer and distributor of high quality chromatography and purification accessories, consumables and instrumentation. Consumable items include leading brand sorbents, solid phase extraction (“SPE”) columns and 96-well plates, flash chromatography and High Performance Liquid Chromatography (“HPLC”) columns. It manufactures purification and other chemistry development instruments for the drug discovery market.

In the transaction, the stockholders of JCL exchanged all of their respective shares of JCL’s stock for (i) cash in an aggregate amount of £3,825,000 ($5,431,500), (ii) 572,152 shares of unregistered Argonaut Common Stock, and (iii) notes payable in the aggregate principal amount of £7,650,000 ($10,863,000). The aggregate purchase price, including transaction costs of $875,000, was approximately $19.0 million. Barclays Bank PLC guarantees the notes payable, which are redeemable for cash over a two-year period following the closing date. In addition, certain employees of the Jones Group that remained as employees after the transaction have received stock options to purchase an aggregate 349,800 shares of Argonaut’s Common Stock.

The acquisition was accounted for under the purchase method of accounting. The 572,152 shares of unregistered Argonaut Common Stock issued in the transaction were valued at $3.196 per share based on the average closing price of Argonaut’s Common Stock on the Nasdaq National Market System on the two trading days prior and two trading days subsequent to the announcement date of the acquisition (February 11, 2002).

The Consolidated Statements of Operations include the results of Jones Group for the period from February 21, 2002 to June 30, 2002.

The Company allocated the purchase price based on the estimated fair value of the net tangible and intangible assets acquired. Based on the information obtained from an independent valuation, the Company allocated the purchase price as follows (in thousands):

The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of Jones Group had occurred at the beginning of 2002 and does not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future.

Page 8

Table of Contents

NOTE 7 — GOODWILL AND OTHER PURCHASED INTANGIBLES

Goodwill and other purchased intangible assets have resulted from the acquisition of Camile Products, LLC now Argonaut Technologies Systems, Inc. (“ATSI”) and the Jones Group. Goodwill and other intangible assets with indefinite lives are not amortized subsequent to the Company’s adoption of SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).

The amortization expense relating to the purchased intangible assets for the three- and six-month periods ended June 30, 2003 was $225,000 and $451,000 respectively. The following represents the gross carrying amounts and accumulated amortization of amortized intangible assets at June 30, 2003:

NOTE 8 — RESTRUCTURING CHARGES

On August 8, 2002, the Company announced its intention to execute a restructuring program focused on improving productivity, reducing operational expenses in remote offices, and implementing a workforce reduction of approximately 20% of its existing worldwide employees. As a result, the Company recognized a charge of $1.8 million in the third quarter ended September 30, 2002. The charge includes termination benefits and related expenses of approximately $630,000 related to the reduction of the workforce by 44 employees, expenses of approximately $683,000 related to the abandonment of excess equipment, expenses of approximately $356,000 for the abandonment of excess leased facilities, and expenses of approximately $133,000 for various other related charges. At June 30, 2003, 26 of the 44 employees had been terminated.

Remaining cash expenditures relating to workforce reduction will be paid during 2003. Amounts related to the abandonment of excess leased facilities will be paid as the lease payments are due through the remainder of the lease terms through 2004. A summary of the restructuring activity is as follows (in thousands):

NOTE 9 — SUBSEQUENT EVENTS

On July 30, 2003, the Company announced the sale of its HPLC business to the Grace Vydac business unit of W.R. Grace & Co. The sale included the Genesis® and Apex^TM brands of HPLC columns and HPLC-related capital assets and trademarks. The divestiture enables the Company to focus R&D and sales and marketing efforts on core product areas providing consumable and instrument products to the critical areas of drug development.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report contains forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995, and it is the Company’s intention that such statements be protected by the safe harbor created thereby. Examples of

Page 9

Table of Contents

such forward-looking statements include statements regarding future revenues, expenses, losses and cash flows, our ability to be cash flow positive in the fourth quarter of 2003, research and development activities and sales and marketing initiatives such as our plan to concentrate our efforts in those areas such as building our core consumables business, possible future acquisitions, the anticipated effects of the acquisition of Jones Group to our net sales performance and pre-tax operating results, our plans to discontinue non-performing consumable products and certain legacy instrument products, the anticipated effects of our recent restructuring program and related accruals, values of our assets and liabilities over their remaining useful lives and our testing for impairment of goodwill, and our expectations as to the duration of our negative cash flows from operations and the sufficiency of existing cash reserves for the next 12 months. Actual results may differ materially from those projected in such forward-looking statements due to various known and unknown risks and uncertainties, including the risk that a decline in the economy generally or the market for our products will adversely affect our business, the risk that the market for our products and services does not develop as anticipated, the risk that we are unable to successfully integrate the product and service offerings of the company we recently acquired and successfully capitalize on anticipated synergies and growth opportunities, and the risk that our restructuring programs do not proceed as planned and that we incur unexpected expenses in connection with the implementation thereof. For a further discussion of these and other risks and uncertainties related to our business see the discussion set forth herein under “Factors That May Affect Our Future Results”.

Overview

Argonaut develops innovative products designed to help pharmaceutical and other chemists engaged in the discovery and development of new chemical entities increase their productivity and reduce their operating costs without compromising the scientific integrity of their research. Our products are designed to enable chemists to increase their productivity, reduce their operating costs through automation and process simplification, and cost effectively explore the increasing number of drug targets available for drug development. We derive revenues primarily from the sale of our chemistry consumable products, instrumentation products and services. We commenced commercial shipment of our first generation instrument in 1996, the Quest product line in 1997, the Trident product line in 1998,the Surveyor and the Endeavor product lines in 2000, and the Advantage Series™ product line in 2003. Revenue from sales of our instrument products and integration services are recognized when delivery and installation of the product is complete. We also derive revenues from the sale of reagents, and other instrument related consumables and consumables products of Jones Chromatography Limited (“Jones Group”), which we acquired on February 20, 2002. Our expenses have consisted primarily of costs incurred in research and development, manufacturing and general and administrative costs associated with our operations, and our sales and marketing organization. Since our inception, we have incurred significant losses and, as of June 30, 2003, we had an accumulated deficit of $73.5 million.

Recent Developments

Restructuring charges

On August 8, 2002, the Company announced its intention to execute a restructuring program focused on improving productivity, reducing operational expenses in remote offices, and implementing a workforce reduction of approximately 20% of the existing worldwide employees. As a result, the Company recognized a charge of $1.8 million in the third quarter ending September 30, 2002. The charge includes termination benefits and related expenses of approximately $630,000 related to the reduction of our workforce by 44 employees, expenses of approximately $683,000 related to the abandonment of excess equipment, expenses of approximately $356,000 for the abandonment of excess leased facilities, and expenses of approximately $133,000 for various related charges. The restructuring program is estimated to result in annualized savings of approximately $3.0 million beginning in fiscal 2003, realized primarily in reduced operating costs as a result of reduced employee-related costs. As of June 30, 2003, 26 of the 44 employees had been terminated and the accrued restructuring liability was $534,000. For the three- and six-month periods ended June 30, 2003, cash payments related to the restructuring program were $145,000 and $343,000 respectively. Remaining cash expenditures relating to workforce reduction and other related charges will be paid during 2003. Amounts related to the abandonment of excess leased facilities will be paid as the

Page 10

Table of Contents

lease payments are due over the remainder of the lease terms through 2004.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies that are included/described in our Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.

RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2003

Operating results for the three-and six-month periods ended June 30, 2002 include the Jones Group since February 21, 2002.

Net sales

Net sales in the three-month period ended June 30, 2003 were $6.9 million compared to $6.7 million for the same period in 2002, an increase of 2%. For the second quarter of 2003, instrument sales comprised approximately 41% of net sales, chemistry consumables sales comprised approximately 43% of net sales, and service, integration services and contract research and development (“R&D”) together comprised approximately 16% of net sales. Instrument sales were $3.0 million in the second quarter of 2003 versus $2.9 million for the same period in 2002, an increase of 3%. The transition away from discontinued legacy instrument products was largely completed during the quarter with year over year growth achieved primarily through the impact of new products. Chemistry consumables sales were $3.0 million in the second quarter of 2003 versus $3.0 million in the same period of 2002. For the six-month period ending June 30, 2003, net sales totaled $13.1 million compared to $11.5 million for the same quarter in 2002, an increase of 14%. For the six-month period ending June 30, 2003, instrument sales were $4.7 million, or 36% of total net sales, versus $5.4 million, or 47% of total net sales, as compared to the same period in 2002, due primarily to the effects of product transitions and discontinuance of legacy instrument products. Chemistry consumable sales for the six-month period ending June 30, 2003 were $6.3 million versus $4.6 million in the same period in 2002, an increase of 35%. The substantial growth in chemistry consumables products is primarily attributable to the acquisition of the Jones Group.

Cost of sales

Cost of sales, comprised of cost of products and cost of services was $3.9 million in the three-month period ended June 30, 2003 versus $3.5 million for the same period in 2002, an increase of 10%. The increase in cost of sales is primarily due to the higher cost of services as compared to the same period in the prior year. Gross margin as a percent of sales was 43.8% for the second quarter of 2003 compared to 47.5% for the second quarter of 2002. Lower margin performance was primarily due to lower margin performance for services caused by product mix concentrations of contract research and development (approximately 16% of sales as noted above), which carry nominal margins. Product gross margin as a percent of sales increased to 48.6% for the quarter ended June 30, 2003 as compared to 48.3% for the same period in 2002. The gross margin as a percent of sales for the quarterly period ended June 30, 2003 includes the favorable impact of approximately $146,000 related to the sale of discontinued products previously charged to cost of sales as excess inventory in the third quarter of 2002. For the six-month period ended June 30, 2003, cost of sales was $7.4 million versus $6.1 million for the same period in 2002. The increase in cost of sales was primarily due to higher sales volume relative to the same period in the prior year. Gross margin as a percent of sales for products was 47.4% for the first half of 2003, as compared to 47.0% for the same period in 2002. The gross margin as a percent of sales for the six-month period ended June 30, 2003 includes the favorable impact of approximately $393,000 related to the sale of discontinued products previously charged to cost of sales as excess inventory in the third quarter of 2002.

Research and development expenses

Research and development expenses decreased to $1.1 million for the three-month period ended June 30, 2003 compared to $1.5 million for the same period in 2002, a decrease of 27%. These expenses include salaries and related costs of research and development personnel, fees paid to consultants and outside service providers, the costs of facilities and related expenses, non-recurring engineering charges and prototype costs related to the design, development testing, pre-manufacturing and significant improvement of our products. The decrease was primarily attributable to lower personnel costs resulting from the effects of the restructuring program initiated in the third quarter of 2002 and reduced stock-based compensation expenses. Stock-based compensation expenses related to research and development decreased by $35,000 for the second quarter of 2003 as compared to the same period in 2002. For the six-month period ended June 30, 2003, research and development expenses decreased to $2.4 million as compared to $2.8 million for the same period in 2002, a decrease of 17%, due primarily to lower personnel costs resulting from the third quarter 2002 restructuring program. Had the Jones Group been included for the full six-month period for 2002, the additional spending decrease would have been approximately $50,000, or

Page 11

Table of Contents

a total decrease of 19%. Stock-based compensation expenses related to research and development decreased by $104,000 for the first half of 2003 as compared to the same period in 2002.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased to $3.7 million in the three-month period ended June 30, 2003 from $4.8 million for the same period in 2002, a decrease of 22%. These expenses consist primarily of salaries and related costs for executive, sales and marketing, finance and other administrative personnel, the cost of facilities and related spending, and the costs associated with promotional and other marketing expenses. The decrease was primarily attributable to the effects of the restructuring efforts initiated in the third quarter of 2002 and reduced stock-based compensation charges. Stock-based compensation expenses related to selling, general and administration decreased by $55,000 for the second quarter of 2003, as compared to the second quarter of 2002. Selling, general and administrative expenses decreased to $7.5 million for the six-month period ended June 30, 2003 from $8.7 million for the same period in 2002, a decrease of 14%. The decrease was primarily due to lower personnel costs resulting from the third quarter 2002 restructuring program. Had the Jones Group been included for the full six-month period for 2002, the additional spending decrease would be approximately $481,000, or a total decrease of 18%.

Amortization of purchased intangible assets

For the quarter ended June 30, 2003, the Company recorded amortization of purchased intangibles of $214,000 related to the March 1, 2001 acquisition of ATSI, the February 20, 2002 acquisition of Jones Group, and other purchased intangibles compared to $196,000 in the same period of 2002. For the six-month period ended June 30, 2003, the Company recorded amortization of purchased intangibles of $425,000 as compared to $315,000 for the same period in 2002, due to the increased intangibles resulting from the acquisition of the Jones Group.

Interest and other income (expense), net

Interest and other income decreased to $289,000 for the three-month period ended June 30, 2003 as compared to $379,000 for the same period in 2002, primarily because of lower average balances of invested cash, cash equivalents, and short-term investments and reduced interest rates consistent with the overall interest rate decline of high quality short-term investments. Interest and other expense was $148,000 for the second quarter of 2003 compared to $110,000 in the same period in 2002. For the six-month period ended June 30, 2003, interest and other income decreased to $532,000 as compared to $683,000 for the same period in 2002, due to the same factors driving the second quarter results. Interest and other expense was $326,000 for the first half of 2003 as compared to $249,000 for the first half of 2002 primarily due to the full year of interest associated with the notes payable for the Jones Group acquisition.

Provision for income taxes

The Company recorded a provision for income taxes of approximately $53,000 to record the UK corporate tax liability of Jones Group for the three-month period ended June 30, 2003 as compared to approximately $163,000 for the same period in 2002. For the first half of 2003 and 2002, the Company recorded tax provisions of approximately $111,000 and $200,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2003, the Company had cash, cash equivalents, short-term investments and restricted cash of $32.0 million compared to $39.2 million at December 31, 2002. The decrease was primarily due to the use of $5.6 million in general operating activities, approximately $562,000 used for capital expenditures, approximately $343,000 in cash payments related to restructuring activities initiated in the third quarter of 2002, and approximately $1.2 million in cash used for principal payments on notes payable and capital lease obligations.

The restricted cash amount is denominated in British Pounds Sterling and represents the cash used to secure the notes payable of £7,650,000 (approximately $10.9 million) as purchase consideration in the acquisition of the Jones Group. The notes are payable over two years carrying an initial interest rate of 3.9% per annum for the twelve month period commencing on the date of note issuance, payable quarterly. Following the initial twelve-month period, the interest rate on the notes is set to the Barclays Bank base rate on the business day immediately preceding each quarterly interest period. At June 30, 2003, approximately £822,000 of the note principal had been paid, with the remainder payable at April 30, 2004.

Net cash used to support operating activities has historically fluctuated based on the timing of payments of accounts payable balances, receipts of customer deposits, receipt of payments of accounts receivable balances, changes in inventory balances resulting from varying levels of manufacturing activities, the timing of research and development projects, the timing and

Page 12

Table of Contents

scope of our sales and marketing initiatives and fluctuations in the Company’s net loss.

On August 8, 2002, the Company announced the approval by its Board of Directors of a stock repurchase program pursuant to which shares of its outstanding common stock having an aggregate value of up to $500,000 may be repurchased through open market transactions at prices deemed appropriate by the Company. The duration of the stock repurchase program is open-ended. The timing and amount of repurchase transactions under this program will depend on market conditions, corporate and regulatory considerations, and will be funded from available working capital. Through June 30, 2003, the Company had repurchased 50,000 shares of outstanding common stock at an average purchase price of per share of $0.93.

The Company expects to have negative cash flows from operations through the third quarter of 2003. We may also use cash resources and raise additional funds to fund additional collaborative or strategic relationships, acquisitions or investments in other businesses, technologies or product lines. Our future capital requirements depend on a number of factors, including market acceptance of our products, the resources we devote to developing and supporting our products, continued progress of our research and development of potential products, the need to acquire licenses to new technology and the availability of other financing on acceptable terms. We believe that our current cash balances will be sufficient to fund our operations through at least the next 12 months. To the extent that our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital or incur indebtedness to fund our operations. There can be no assurance that additional debt or equity financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate, our operations. We may be required to obtain funds through arrangements with collaborative or strategic partners or others that may require us to relinquish rights to certain technologies or products that we might otherwise seek to retain.

The following summarizes the Company’s contractual cash obligations at June 30, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

We have a history of operating losses and we may never achieve or sustain profitability and may be required to raise additional funds if losses continue.

We have incurred operating losses and negative cash flows from operations since our inception. As of June 30, 2003, we had an accumulated deficit of $73.5 million and we recorded net losses of $4.4 million for the six-month period ended June 30, 2003. Although we expect to become cash flow positive in the fourth quarter of 2003, we expect to continue to incur operating and net losses during 2003 and we may never generate positive cash flows.

To the extent our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds to continue the development and commercialization of our products. Funds may not be available on favorable terms, if at all. To the extent that we raise additional capital through the sale of equity, the issuance of those securities will result in dilution to our stockholders.

If our products do not become widely used in the pharmaceutical, biotechnology, life sciences and chemical industries, it is unlikely that we will ever become profitable.

Pharmaceutical, biotechnology, life sciences and chemical organizations have historically performed chemistry development using traditional laboratory methods. To date, our products have not been widely adopted by these industries. The

Page 13

Table of Contents

commercial success of our products will depend upon the adoption of these products as a method to develop chemical compounds for these industries. In order to be successful, our products must meet the performance and pricing requirements for chemistry development within the pharmaceutical, biotechnology, life sciences and chemical industries. Market acceptance will depend on many factors, including our ability to:

•		Convince prospective customers that our products are a cost-effective alternative to traditional methods and other technologies that may be introduced for chemistry development.
•		Convince prospective customers that our products provide the same or enhanced quality and accuracy as compared with traditional methods and other new technologies that may be developed.
•		Manufacture products in sufficient quantities with acceptable quality and at an acceptable cost.
•		Install and service sufficient numbers of our instruments, particularly new instruments such as the Advantage Series™ 3400 process chemistry workstation.

If we cannot achieve these objectives, our products will not gain market acceptance.

We face risks associated with past and future acquisitions.

Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To meet these challenges, we have acquired complementary businesses and may choose to acquire others in the future. We completed our acquisition of ATSI in March 2001 and Jones Group in February 2002. During 2002 and the first half of 2003, we made significant progress integrating the Jones Group business; however, we continue to have remaining integration activities and projects. Our failure to completely and successfully integrate this business may materially affect our business going forward.

We do not know if we will be able to complete any future acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, and may disrupt our ongoing business and distract our management. If we are unable to effectively integrate any acquired entities, products or technologies, our business may suffer. In addition, any amortization of goodwill or other assets or charges resulting from the costs of acquisitions could negatively impact our operating results. Our available cash and securities may be used to buy or invest in companies or products, possibly resulting in significant acquisition-related charges to earnings and dilution to our stockholders. Due to volatile market conditions, the value of long live assets maybe negatively impacted, which may result in future, additional impairment charges. Moreover, if we buy a company, we may have to incur or assume that company’s liabilities, including liabilities that are unknown at the time of acquisition.

Our product development efforts may not produce commercially viable products.

We continue to devote significant personnel and financial resources to research and development activities to develop new products. We may not be successful in developing new products, and we may never realize any benefits from such research and development activities, including both our current research collaboration with Pfizer and GSK, which may not produce commercially viable products. Our ability to increase our revenues and achieve and sustain profitability is dependent upon our ability to successfully develop new and commercially viable products. During the first half of 2003, we launched a new product from the Pfizer and ICI consortium, the Advantage Series™ 3400 workstation, and this product is important to our ability to increase revenues in 2003 and beyond. Our failure to achieve our anticipated levels of revenues for this product will harm our ability to achieve our financial goals during 2003.

Our instrument products have lengthy sales cycles, which could cause our operating results to fluctuate significantly from quarter to quarter.

Our ability to obtain customers for our instrument products depends in significant part upon the perception that our products can help accelerate efforts in chemical development. The sale of many of our instrument products typically involves a significant technical evaluation and commitment of capital by customers. Accordingly, the sales cycles of many of our instrument products are lengthy and subject to a number of risks that are beyond our control, including customers’ budgetary constraints and internal acceptance reviews. Our revenues could fluctuate significantly from quarter to quarter, due to this lengthy and unpredictable sales cycle. A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Accordingly, if our revenues decline or do not grow as we anticipate, we might not be able to correspondingly reduce our operating expenses. Our failure to achieve our anticipated levels of revenues could significantly

Page 14

Table of Contents

harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our operating results, we believe that quarter-to-quarter comparisons of our operating results are not always a good indication of our future performance.

The capital spending policies of pharmaceutical, biotechnology, life sciences and other chemical research organizations have a significant effect on the demand for our instruments.

We market our products to and receive our revenues principally from pharmaceutical, biotechnology, life sciences and other chemical research organizations, and the capital spending policies of these entities can have a significant effect on the demand for our instruments. These policies are based on a wide variety of factors, including the resources available for purchasing research equipment, the spending priorities among various types of research equipment and the policies regarding capital expenditures. In particular, the volatility of the public stock market for biotechnology and related companies has at certain times significantly impacted their ability to raise capital, which has directly affected their capital spending budgets. In addition, continued consolidation within these industries will likely delay and may potentially reduce capital spending by pharmaceutical companies involved in such consolidations. Any decrease or delay in capital spending by life sciences companies could cause our revenues to decline and harm our profitability.

In order to be successful, we must recruit, retain and motivate key employees, and failure to do so could seriously harm us.

In order to be successful, we must recruit, retain and motivate executives and other key employees, including those in managerial, technical, marketing and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified technical personnel. Attracting and retaining qualified sales representatives is also critical to our future. Experienced management and technical, marketing and support personnel in the chemistry instrumentation and consumables industry are in high demand and competition for their talents is intense, although current economic conditions have moderated this demand and competition for talent. The loss of key employees could have a significant impact on our operations. We also must continue to motivate employees and keep them focused on Argonaut’s strategies and goals, which may be particularly difficult due to morale challenges posed by workforce reductions and general uncertainty. Changes in management may be disruptive to our business and may result in the departure of existing employees, customers and/or research collaborators. It may take significant time to locate, retain and integrate qualified management personnel.

Our direct worldwide sales force and network of distributors may not be sufficient to successfully address the market for our products.

We sell a major portion of our products through our own sales force. We may not be able to build an efficient and effective sales and marketing force and continue to expand our network of distributors. Our failure to build an efficient and effective sales and marketing force could negatively impact sales of our products, thus reducing our revenues and profitability.

Because we outsource our instrument component, chemical intermediates and product manufacturing, our ability to produce and supply our products could be impaired.

We outsource most of the production of components of our instruments to vendors. We also outsource significant quantities of our high volume chemical intermediates for our consumables products. Our reliance on our outside vendors exposes us to risks including:

•		the possibility that one or more of our vendors could terminate their services at any time without notice;
•		reduced control over pricing, quality and timely delivery, due to the difficulties in switching to alternative vendors; and
•		the potential delays and expenses of seeking alternative sources of manufacturing services.

Consequently, in the event that components from our suppliers or work performed by our vendors are delayed or interrupted for any reason, our ability to produce and deliver our products in sufficient quantities and at acceptable costs would decline. Additionally, certain components are provided by a single source. The effect of a disruption of delivery of those single source components could impact our ability to deliver product to our customers.

We are exposed to fluctuations in the exchange rates of foreign currency.

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. Approximately 52% of our net sales are exposed to foreign

Page 15

Table of Contents

currency risk. Approximately 27% of our operating expenses are exposed to foreign currency risk. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results. We will monitor our exposure and may hedge against this and any other emerging market currencies as necessary.

We are exposed to the credit risk of some of our customers.

Due to the current slowdown in the economy, the credit risks relating to our customers have increased. Although we have programs in place to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks. We have experienced losses due to customers failing to meet their obligations. Although these losses have not been significant, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial conditions.

Our business is subject to risks from international operations.

We conduct business globally. Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, foreign currency exchange rates; regulatory, political, or economic conditions in a specific country or region; trade protection measures and other regulatory requirements; and natural disasters. Any or all of these factors could have a material adverse impact on our future international business.

Our business is subject to the effects of general global economic conditions, and particularly economic conditions in the United States and the United Kingdom. Specifically, our business is subject to the effects of market conditions in the pharmaceutical, biotechnology, life sciences and chemical industries. In recent quarters, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced capital spending in the United States, Europe, and Asia. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may continue to experience material adverse impacts on our business, operating results, and financial condition.

The life sciences industry is highly competitive and subject to rapid technological change, and we may not have the resources necessary to successfully compete.

We compete with companies worldwide that are engaged in the development and production of similar products. We face competition primarily from the following three sectors:

•		pharmaceutical companies developing their own instruments;
•		companies marketing products based upon parallel synthesis and other non-traditional technologies, such as Mettler-Toledo AG and several smaller instrument and reagent companies; and
•		companies marketing conventional products based on traditional chemistry methodologies, such as Biotage (a subsidiary of Dyax Corp.) and Isco, Inc.

Many of our competitors have access to greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. We face, and will continue to face, intense competition from organizations serving the life sciences industry that are developing or marketing competing products and technologies. These organizations may develop products or technologies that are superior to our products or technologies in terms of performance, cost or both. These organizations may offer price discounts or other concessions as a competitive tactic that we may not be in a position to match.

We will need to develop new applications for our products to remain competitive. Our present or future products could be rendered obsolete or uneconomical by technological advances of one or more of our current or future competitors. In addition, the introduction or announcement of new products by us or by others could result in a delay of or decrease in sales of existing products, as customers evaluate these new products. Our future success will depend on our ability to compete effectively against current technology as well as to respond effectively to technological advances.

If we infringe on or misappropriate the proprietary rights of others or we are unable to protect our own intellectual property rights our revenues could be harmed.

We may be sued for infringing on the intellectual property rights of others. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation could affect our profitability. In addition, litigation is time consuming and could divert management attention and resources away from our business. If we do not prevail in any litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. We may not be able

Page 16

Table of Contents

to obtain required licenses on acceptable terms, or at all. In addition, some licenses may be nonexclusive, and therefore, our competitors may have access to the technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which could harm our ability to compete and result in a decline in our revenues.

Our success may depend on our ability to obtain and enforce patents on our technology and to protect our trade secrets. Any patents we own may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or rendered unenforceable. In addition, our current and future patent applications may not result in the issuance of patents to us in the United States or foreign countries. Moreover, competitors may develop products similar to ours that are not covered by our patents.

We try to protect our non-patented trade secrets by requiring our employees, consultants and advisors to execute confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection against improper use or disclosure of our trade secrets. Further, others may independently develop substantially equivalent proprietary information and techniques. If we are unable to protect our proprietary information and techniques, our ability to exclude certain competitors from the market will be limited.

There may not be an active, liquid trading market for our common stock.

There is no guarantee that an active trading market for our Common Stock will be maintained on the NASDAQ National Market. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active. If we fail to comply with the continued listing requirements of the NASDAQ National Market, we may be de-listed from trading on such market, and thereafter trading in our common stock, if any, would likely be conducted through the NASDAQ SmallCap Market, the over-the-counter market or on the Electronic Bulletin Board of the National Association of Securities Dealers, Inc.

Our stock price has been highly volatile, and your investment could suffer a further decline in value.

The trading price of our common stock has been highly volatile and ranged in 2003 from a per-share high of $1.61 to a low of $0.81 and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including;

•		actual or anticipated variations in quarterly operating results;
•		failure to achieve, or changes in, financial estimates by securities analysts;
•		announcements of new products or services or technological innovations by us or our competitors;
•		conditions or trends in the pharmaceutical, biotechnology, life sciences and chemical industries;
•		announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
•		additions or departures of key personnel, including any directors;
•		developments in the application or interpretation of new or existing accounting pronouncements and reporting obligations
•		purchases or sales of our common stock, including any repurchases of our common stock under the existing or future stock repurchase program; and
•		developments regarding our patents or other intellectual property or that of our competitors.

In addition, the stock market in general, and the NASDAQ Stock Market’s National Market and SmallCap Market and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of life science companies. These broad market and industry factors may negatively impact the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

Our principal stockholders, directors and executive officers beneficially own approximately 51% of our common stock, which may prevent new investors from influencing corporate decisions.

Our principal stockholders, those who currently own 5% or greater of our common stock, together with our directors and executive officers beneficially own approximately 51% of our outstanding common stock. They will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and the approval of

Page 17

Table of Contents

significant corporate transactions. This concentration of ownership may also delay or prevent a change in control of us even if beneficial to our other stockholders.

Sales of large numbers of shares of our common stock could cause our stock price to decline.

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. All of the shares sold in our initial public offering are now freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our affiliates, as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are restricted securities as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act, to the extent permitted by Rule 144 or other exemptions under the Securities Act.

On March 1, 2001, we issued 666,667 shares of unregistered common stock in connection with the acquisition of ATSI.

On February 5, 2002, we registered 2,628,618 shares of common stock that are reserved for issuance upon exercise of options granted under our stock option and employee stock purchase plans. These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.

On February 20, 2002, we issued 572,152 shares of unregistered common stock in connection with the acquisition of Jones Group.

Anti-takeover provisions in our charter and bylaws and under Delaware law could make a third-party acquisition of us difficult.

Pursuant to our charter, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote of action by our stockholders. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Our certificate of incorporation and bylaws contain other provisions that could make it more difficult for a third party to acquire us, even if doing so might be deemed beneficial by our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us.

Recently Enacted and Proposed Changes in Securities Laws and Regulations are Likely to Increase Our Costs

The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of our corporate governance and securities disclosure or compliance practices. That Act also requires the SEC to promulgate new rules on a variety of subjects, in addition to rule proposals already made, and Nasdaq has proposed revisions to its requirements for companies that are Nasdaq-listed. We expect these developments to increase our legal compliance costs, and to make some activities more time-consuming. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk disclosures have not changed significantly from those set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

         Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our

Page 18

Table of Contents

Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

         Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Page 19

Table of Contents

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company is not currently involved in any material legal proceedings.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 8, 2002, the Company announced the approval by its Board of Directors of a stock repurchase program pursuant to which shares of its outstanding common stock having an aggregate value of up to $500,000 may be repurchased through open market transactions at prices deemed appropriate by the Company. The duration of the stock repurchase program is open-ended. The timing and amount of repurchase transactions under this program will depend on market conditions, corporate and regulatory considerations, and will be funded from available working capital. At June 30, 2003, the Company had repurchased 50,000 shares of outstanding common stock at an average purchase price per share of $0.93.

We amended our Bylaws to allow 10 percent stockholders to call a special meeting of the stockholders at any time.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting of Stockholders held on June 5, 2003 the following proposals were adopted by the margins indicated:

1)

To elect the following Class III directors to hold office for a term of three years until the annual meeting of stockholders in the year 2006.

			Ms. Lissa A. Goldenstein and Mr. Hingge Hsu, M.D. continue to serve as Class I directors until the annual meeting of stockholders in the year 2004. Mr. Brook H. Byers and Mr. Peter M. Macintyre continue to serve as Class II directors until the annual meeting of stockholders in the year 2005.
	2)		Ratification of appointment of Ernst & Young LLP as independent auditors of Argonaut Technologies, Inc. for the fiscal year ending December 31, 2003.

ITEM 5: OTHER INFORMATION

None.

Page 20

Table of Contents

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits.
		The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report on Form 10-Q.
(b)		Reports on Form 8-K.
		On April 24, 2003, the Company filed a report on Form 8-K providing the contents of a press release issued by the Company announcing its financial results for the quarter ended March 31, 2003.
		The Company filed no other reports on Form 8-K during the period ended June 30, 2003.

Page 21

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Page 22 

Table of Contents

ARGONAUT TECHNOLOGIES, INC.
Form 10-Q
Quarterly Period Ended June 30, 2003

EXHIBIT INDEX