Pretty sneaky, sis.

So yesterday, at about the same time as my Foolish Forecast on its Q2 2006 earnings was being uploaded for publication, high-tech raygun play Ionatron (NASDAQ:IOTN) up and released its earnings a day ahead of schedule. (Kind of defeats the purpose, "forecasting" something that's in the process of happening, don't you know.)

Regardless, the results are out, and the stock climbed 6% yesterday to close north of $8 for the first time since May. What sparked the rally, though? I haven't a clue. You read these numbers and maybe you can tell me where the good news is:

  • Sales declined 50% year over year to $2 million, far lower than the $5.1 million predicted by the lone analyst who follows the stock.
  • As sales collapsed, inventories and accounts receivable continued to climb: up 117% and 7%, respectively.
  • Net losses tripled to $5.2 million, or $0.07 per diluted share ($0.02 worse than estimated).
  • Three contract signings were announced (including deals with brand-name firms DRS Technologies (NYSE:DRS) and General Dynamics (NYSE:GD)) -- none of which included a dollar-value. A subsequent news release, possibly related to the third contract with the U.S. Army, appears to value that contract at under $100,000.
  • Free cash flow for the first half of the year ran negative to the tune of $5.7 million, meaning the company's rate of cash-burn more than doubled in comparison to last year. (Word to the Foolish: Ionatron failed to include its cash flow statement in its earnings release, but you can find it in the simultaneously-submitted 10-Q SEC filing.)

And then what?
And then (rather ungraciously, considering Mr. Market's forgiving mood of yesterday) the company up and shot itself -- or rather, its current shareholders -- in the foot today. Management announced that it will dilute outside shareholders by about 7%, issuing 4.6 million shares of stock, along with warrants to purchase another 0.9 million shares at a strike price of $9.15 per share.

Considering that Ionatron has never generated a penny in free cash flow, the move was both logical and inevitable -- companies need money to survive, and if they can't get it from selling goods for a profit, they've got to get it from selling their stock. Still, the announcement somehow managed to take investors by surprise, and sparked a massive sell-off that has already dropped the stock 25% today.

What's that you say? Shades of Xybernaut (formerly Nasdaq: XYBR, now Pink Sheets: XYBRQ.PK)? Yeah, I'm starting to think that way, too.

Aside from whichever contractor it was that supplied the Empire's storm troopers 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)

Taser is a Motley Fool Rule Breakers recommendation. Keep tabs on big events in tiny technology with a free 30-day trial subscription.

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