Ionatron Vice Chairman Selling on Weakness

Aug.29.06 | About: Ionatron Inc. (IOTN)

Insider Score LogoFrom InsiderScore: Vice Chairman Selling on Weakness: Two days after stepping down from the chief executive officer post, the co-founder of controversial "directed-energy" weapons maker Ionatron Inc. (IOTN) sold stock, eventually disposing of more than $4M in shares over a three-day period. Thomas Dearmin sold 665K shares at an average price of $6.43 from August 23rd to August 25th, decreasing his holdings to 8.384M shares, or an 11.45% stake. Previously, Dearmin sold 175K shares at an average price of $9.54 in December 2005.

Co-founder and former Chairman Robert Howard is IOTN's largest shareholder with a 28.8% stake, while EVP of Business Operations Joseph Hayden and EVP of Technology Stephen McCahon each own 8.3% stakes. On the institutional side, Artis Capital Management owns a 10.19% stake, and SAC Capital controls a 9.12% stake.

Dearmin stepped down from the CEO position on August 21st, taking the vice chairman slot and giving way to Dana Marshall, the founder and former CEO of Cutting Edge Optronics, a manufacturer of high-power, solid-state, and semiconductor lasers that was sold to TRW, Inc., now a unit of Northrop Grumman Corp. (NYSE:NOC). Dearmin had served as the president, CEO, and a director of IOTN since its inception in 2002, and he was also the chief financial officer until March 2006. Last year, Dearmin took home a salary of $200K and no other compensation. According to IOTN's latest proxy filing, Dearmin holds no stock options or restricted stock.

Tucson, Arizona-based IOTN develops and markets Laser Guided Energy ("LGE") and Laser-Induced Plasma Channel ("LIPC") weapons. In simpler terms, the company, which is currently only testing its technology, makes weapons that harness electrical energy and incapacitate targets instead of killing them. Critics have derisively called the company a "ray-gun" maker and compared its technology to something out of Buck Rogers, Star Trek, and Star Wars. The technology, however, is being looked at by the military and various law enforcement agencies.

One major critic of IOTN has been Christopher Byron, a business columnist for The New York Post. Byron keyed in on IOTN due to the funding the company received a few years ago from In-Q-Tel, a venture capital firm set up by the Central Intelligence Agency. Byron, in articles published last year, reported that co-founder Howard, who resigned from the chairman position in March, paid $2.9M to the SEC in 1997 to settle charges that he made false and misleading statements about Presstek, Inc., a company he founded and controlled.

Later articles by Byron explored charges leveled by a company named HVS Technologies, which claims that a former employee of defense contracting giant Raytheon Corp. (NYSE:RTN) scammed the company out of patented technology by passing information onto IOTN. HVS claims that Joseph Hayden, one of the aforementioned IOTN executives with an 8.3% stake, violated confidentiality agreements and then left RTN, lured by millions of dollars in stock options. The other 8.3% stakeholder, Stephen McCahon, was also a RTN employee.

Despite all the bad press (including articles suggesting that the Pentagon and In-Q-Tel put millions into IOTN before pulling the plug on certain relationships), shares of IOTN rose to an all-time high of $14.82 in June (the stock got its listing via a reverse-merger two years ago). Shorts, no doubt, watched in horror (about 40% of the 30.45M-share float is sold short), but then had a field day as the stock tumbled to a 52-week low of $4.90 just six weeks later.

On August 8th, IOTN reported Q2 results, posting a net loss of -$5.2M, or -7 cents per share, on just $2M in revenue. IOTN did sign "strategic" agreements with DRS Technologies (DRS) and a unit of General Dynamics (NYSE:GD) during the quarter, but financial terms were not disclosed. A day after earnings, IOTN announced a $100K contract with the Army Research Office.

Investors reacted positively to earnings, but then sold off the stock the following day when the company diluted shareholders by about 7% through the sale 4.6M shares plus rights to buy an additional 923.26K shares to a group of institutional investors.