It's not often you find a stock as heavily shorted as that of raygun maker Ionatron (NASDAQ:IOTN). This level of negativity (40% of the float) is even more rare in companies with such substantial market capitalization ($600 million, give or take). With the company's Q2 2006 report due out tomorrow afternoon, now might be a good time to explore what's gone wrong at Ionatron.

What analysts say:

  • Buy, sell, or waffle? Exactly one analyst follows Ionatron and rates it a buy.
  • Revenues. He thinks the company grew its revenues 29% year over year in Q2, and will report sales of $5.1 million tomorrow.
  • Earnings. Our lone analyst also predicts a $0.05-per-share loss -- more than twice as bad as last year's $0.02 loss.

What management says:
Last month, Ionatron got itself a new chief of operations. Kenneth Wallace moved from the CFO's chair to the COO's seat. He had a fair amount of experience wearing the CFO hat, having counted beans at privately held tech companies Crosswalk and LAB-Interlink, as well as a company named Moxtek (which our data provider was unable to find any information about). His COO experience consists of a several-month-long stint at an unidentified Arizonan "building products manufacturer." Experienced or not, the company has given him ample incentive to get Ionatron on a path toward profitability; in June, he was issued 200,000 stock options with a $7.20 strike price.

What management does:
Wallace has his work cut out for him. To date, Ionatron has directed most of its energy (pardon the pun) toward losing money. Although atypical for a high-tech company, the single-digit gross margins that Ionatron has been posting aren't unheard of in the building products industry. So perhaps Wallace is uniquely qualified to deal with this situation after all.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Ionatron's primary issue appears to be a desperate need to control its costs as it produces its "Directed Energy Weapon" line of sight guns and other products. Sales have been rising nicely in the last six months -- up 27%. The problem is that its costs of doing business have risen even faster. Cost of goods sold, for example, was up 33%; operating costs more than doubled.

Things look similarly bad on the balance sheet, where accounts receivable growth (74%) and inventories (133%) are both rapidly outpacing sales growth. That suggests to this Fool that customers aren't paying their bills on time -- and Ionatron lacks the ability to make them do so -- and they're not even that interested in buying what Ionatron is making. Finally, and unsurprisingly, things also look bleak on the cash flow statement, where Ionatron's free cash flow (or rather, negative free cash flow) has doubled to $5.6 million in the last six-month period.

Long story short, this is a company facing some serious troubles. Wish Wallace luck, because unless tomorrow's news shows a dramatic turnaround, he's going to need it.

Aside from whichever contractor it was that supplied the Empire's Stormtroopers with their blaster rifles in Star Wars, I imagine Ionatron has few publicly traded competitors in its chosen marketplace. Those companies most likely to compete with Ionatron in selling to buyers of "gee-whiz" weaponry would include:

  • Taser (NASDAQ:TASR)
  • Mace Security (NASDAQ:MACE)
  • Law Enforcement Associates (AMEX:AID)

Oh, c'mon. Don't tell me you've forgotten about Mace already. Refresh your memory with this blast from the past, Seth Jayson's "Portfolio Terror Alert."

And what should you do in the event of a portfolio terror alert? Review our instructional video, disturbingly titled "Sex, Lies, and Tickertape."

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Fool contributor Rich Smith does not own shares of any company named above.