##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2007
 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: 000-50373
 Horne International, Inc.
  Delaware
    
    90-0182158(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2677 Prosperity Avenue, Suite 300,Fairfax, Virginia
    
    22031(Address of principal executive offices)
    
    (Zip Code)
 703-641-1100
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the three and six month periods ended June30, 2007 and June 30, 2006
    
    
    3Consolidated Statement of Stockholders Equity for the period endedJune 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six month periods endedJune 30, 2007 and June 30, 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A Risk Factors
    
    
    18Item 6. Exhibits
    
    
    19




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##### 



June
    
    
    December30, 2007
    
    
    31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,596
    
    
    $
    4,465Receivables, net
    
    
    2,447
    
    
    
    5,170Inventories
    
    
    237
    
    
    
    156Prepaid expenses & Other current assets
    
    
    366
    
    
    
    333Total current assets
    
    
    6,646
    
    
    
    10,124Property and equipment, net
    
    
    5,497
    
    
    
    5,737Goodwill
    
    
    3,529
    
    
    
    3,529Other intangibles, net
    
    
    8,646
    
    
    
    9,007Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    1,111
    
    
    
    1,356TOTAL ASSETS
    
    $
    25,740
    
    
    $
    30,064LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    319
    
    
    $
    717Accrued expenses
    
    
    1,658
    
    
    
    2,517Deferred revenues
    
    
    230
    
    
    
    319Current portion of long-term debt
    
    
    69
    
    
    
    68Total current liabilities
    
    
    2,276
    
    
    
    3,621Long-term liabilities:Long term debt, less current portion
    
    
    1,891
    
    
    
    1,926TOTAL LIABILITIES
    
    
    4,167
    
    
    
    5,547Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value; 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 80,000,000 shares authorized,
41,774,082 and 44,072,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    78,581
    
    
    
    78,371Accumulated deficit
    
    
    (57,012
    )
    
    
    (53,858
    )Total stockholders equity
    
    
    21,573
    
    
    
    24,517TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    25,740
    
    
    $
    30,064
  2




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##### 



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesServices
    
    $
    9,327
    
    
    $
    5,008
    
    
    $
    11,813
    
    
    $
    16,218Products
    
    
    421
    
    
    
    1,225
    
    
    
    933
    
    
    
    2,761Total
    
    
    9,748
    
    
    
    6,233
    
    
    
    12,746
    
    
    
    18,979Cost of revenuesServices
    
    
    8,413
    
    
    
    3,990
    
    
    
    10,544
    
    
    
    13,842Products
    
    
    615
    
    
    
    1,333
    
    
    
    1,305
    
    
    
    2,724Total
    
    
    9,028
    
    
    
    5,323
    
    
    
    11,849
    
    
    
    16,566Gross profitServices
    
    
    914
    
    
    
    1,018
    
    
    
    1,269
    
    
    
    2,376Products
    
    
    (194
    )
    
    
    (108
    )
    
    
    (372
    )
    
    
    37Total
    
    
    720
    
    
    
    910
    
    
    
    897
    
    
    
    2,413Operating expenses
    
    
    2,027
    
    
    
    3,079
    
    
    
    4,321
    
    
    
    4,838Loss from operations
    
    
    (1,307
    )
    
    
    (2,169
    )
    
    
    (3,424
    )
    
    
    (2,425
    )Total non-operating income, net
    
    
    121
    
    
    
    20
    
    
    
    272
    
    
    
    36Loss before provision for income taxes
    
    
    (1,186
    )
    
    
    (2,149
    )
    
    
    (3,152
    )
    
    
    (2,389
    )Income tax benefit (expense)
    
    
    0
    
    
    
    0
    
    
    
    (2
    )
    
    
    2Loss before discontinued operations
    
    
    (1,186
    )
    
    
    (2,149
    )
    
    
    (3,154
    )
    
    
    (2,387
    )Loss from discontinued operations
    
    
    0
    
    
    
    (2,413
    )
    
    
    0
    
    
    
    (2,682
    )Net Loss
    
    $
    (1,186
    )
    
    $
    (4,562
    )
    
    $
    (3,154
    )
    
    $
    (5,069
    )Weighted average common shares outstanding:Basic and diluted
    
    
    41,774,082
    
    
    
    44,072,200
    
    
    
    41,553,254
    
    
    
    44,072,200Basic and diluted earnings per shareLoss from continuing operations
    
    
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.08
    )
    
    
    (0.05
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.05
    )
    
    
    0.00
    
    
    
    (0.06
    )Net loss
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    
    (0.08
    )
    
    $
    (0.12
    )
  3




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##### 



Common Stock
    
    
    
    
    
    AccumulatedShares
    
    Amount
    
    APIC
    
    Deficit
    
    TotalBalance as of January 1, 2007
    
    
    41,272,200
    
    
    $
    4
    
    
    $
    78,371
    
    
    $
    (53,858
    )
    
    $
    24,517Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,154
    )
    
    $
    (3,154
    )Stock Issuances
    
    
    501,882
    
    
    $
    
    
    
    $
    200
    
    
    
    
    
    
    $
    200Option Issuances
    
    
    
    
    
    
    
    
    
    $
    10
    
    
    
    
    
    
    $
    10Balance as of June 30, 2007
    
    
    41,774,082
    
    
    $
    4
    
    
    $
    78,581
    
    
    $
    (57,012
    )
    
    $
    21,573
  4




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##### 



For the Six month period ended
 June 30,2007
    
    
    2006Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (3,154
    )
    
    $
    (2,387
    )Adjustments to reconcile net loss to netCash used in operating activitiesStock options issued to employees
    
    
    10
    
    
    
    123Depreciation/Amortization
    
    
    702
    
    
    
    1,153Loss on disposal of equipment
    
    
    (7
    )
    
    
    Receivables
    
    
    2,723
    
    
    
    3,906Accounts Payable
    
    
    (398
    )
    
    
    (5,597
    )Other balance sheet changes
    
    
    (619
    )
    
    
    (309
    )Net cash used in
continuing operations
    
    
    (743
    )
    
    
    (3,111
    )Cash flows from investing activitiesCash received from sale of subsidiary
    
    
    
    
    
    
    6,202Purchase of property and equipment
    
    
    (133
    )
    
    
    (99
    )Proceeds from the sale of equipment
    
    
    40
    
    
    
    3Net cash (used in)provided by investing activities
    
    
    (93
    )
    
    
    6,106Cash flows from financing activitiesRepayment of debt, net
    
    
    (33
    )
    
    
    (35
    )Legal settlement costs not included in net income
    
    
    
    
    
    
    (175
    )Net cash used in financing activities
    
    
    (33
    )
    
    
    (210
    )Cash flows used in discontinued operationsOperating
    
    
    
    
    
    
    (269
    )Net (decrease)increase in cash and cash equivalents
    
    
    (869
    )
    
    
    2,516Cash and cash equivalents at beginning of period
    
    
    4,465
    
    
    
    1,813Cash and cash equivalents at end of period
    
    $
    3,596
    
    
    $
    4,329
    5




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##### 



1. BASIS OF PRESENTATION
   2. RECEIVABLES (000s)
  June
    
    
    DecemberAccounts Receivable
    
    30, 2007
    
    
    31, 2006Billed AR
    
    $
    1,370
    
    
    $
    3,779Unbilled AR
    
    
    909
    
    
    
    1,197Holdbacks
    
    
    168
    
    
    
    194Total AR
    
    $
    2,447
    
    
    $
    5,170
  3. INVENTORIES (000s)
  June
    
    
    DecemberInventories
    
    30, 2007
    
    
    31, 2006Raw materials, net of reserve
    
    $
    221
    
    
    $
    100Work in Process
    
    
    16
    
    
    
    56Total Inventories
    
    $
    237
    
    
    $
    156
 6




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##### 



4. PROPERTY AND EQUIPMENT (000s)
 June
    
    
    DecemberProperty & Equipment
    
    30, 2007
    
    
    31, 2006Land
    
    $
    575
    
    
    $
    575Buildings & Improvements
    
    
    4,277
    
    
    
    4,270Furniture & Fixtures
    
    
    288
    
    
    
    256Manufacturing Equipment
    
    
    1,308
    
    
    
    1,283Tools & Equipment
    
    
    358
    
    
    
    354Office Equipment
    
    
    647
    
    
    
    644Vehicles
    
    
    254
    
    
    
    303Investment Property
    
    
    221
    
    
    
    221Total
    
    $
    7,928
    
    
    $
    7,906Accumulated Depreciation
    
    
    (2,431
    )
    
    
    (2,169
    )Property & Equipment, net
    
    $
    5,497
    
    
    $
    5,737
 5. BORROWINGS AND LINES OF CREDIT
   6. STOCK TRANSACTIONS
  7. STOCK-BASED COMPENSATION
   Number of shares
    
    
    Option Price
    
    
    Weighted Average PriceOptions Outstanding 12/31/2006
    
    
    3,104,476Granted
    
    
    230,000
    
    
    
    0.52 - 0.53
    
    
    
    0.53Exercised
    
    
    Cancelled
    
    
    (1,114,521
    )
    
    
    1.40 - 1.95
    
    
    
    1.56Options Outstanding 6/30/2007
    
    
    2,219,955
 7




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##### 



Options Exercisable & OutstandingExercise
    
    Shares
    
    Shares
    
    Weighted AveragePrice
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs)0.50
    
    
    60,000
    
    
    
    20,000
    
    
    
    9.00.52
    
    
    50,000
    
    
    
    
    
    
    
    4.20.53
    
    
    180,000
    
    
    
    
    
    
    
    4.20.80
    
    
    150,000
    
    
    
    
    
    
    
    2.01.28
    
    
    3,000
    
    
    
    3,000
    
    
    
    1.21.40
    
    
    323,300
    
    
    
    323,300
    
    
    
    0.41.55
    
    
    853,655
    
    
    
    853,655
    
    
    
    0.91.65
    
    
    600,000
    
    
    
    600,000
    
    
    
    0.62,219,955
    
    
    
    1,799,955
 8. EARNINGS(LOSS) PER SHARE
  9. SEGMENT INFORMATION (000s)
  8




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##### 



Three months ended June 30
    
    Six months ended June 302007
    
    2006
    
    2007
    
    2006Security SolutionsTotal revenue
    
    $
    480
    
    
    $
    1,176
    
    
    $
    1,066
    
    
    $
    2,227Gross Profit
    
    
    (190
    )
    
    
    (200
    )
    
    
    (377
    )
    
    
    (378
    )Operating loss
    
    $
    (367
    )
    
    $
    (454
    )
    
    $
    (743
    )
    
    $
    (761
    )Repair and OverhaulTotal revenue
    
    $
    501
    
    
    $
    725
    
    
    $
    948
    
    
    $
    1,522Gross Profit
    
    
    189
    
    
    
    208
    
    
    
    316
    
    
    
    527Operating gain
    
    $
    33
    
    
    $
    87
    
    
    $
    25
    
    
    $
    254ServicesTotal revenue
    
    $
    8,767
    
    
    $
    4,332
    
    
    $
    10,732
    
    
    $
    15,230Gross Profit
    
    
    721
    
    
    
    902
    
    
    
    958
    
    
    
    2,264Operating gain
    
    $
    473
    
    
    $
    363
    
    
    $
    368
    
    
    $
    1,217HeadquartersTotal revenue
    
    
    
    
    
    
    
    
    
    
    Gross Profit
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    $
    (1,446
    )
    
    $
    (2,165
    )
    
    $
    (3,074
    )
    
    $
    (3,135
    )TotalTotal revenue
    
    $
    9,748
    
    
    $
    6,233
    
    
    $
    12,746
    
    
    $
    18,979Gross Profit
    
    
    720
    
    
    
    910
    
    
    
    897
    
    
    
    2,413Operating loss
    
    
    (1,307
    )
    
    
    (2,169
    )
    
    
    (3,424
    )
    
    
    (2,425
    )Non-Operating income
    
    
    121
    
    
    
    20
    
    
    
    272
    
    
    
    36Net Loss before tax
    
    $
    (1,186
    )
    
    $
    (2,149
    )
    
    $
    (3,152
    )
    
    $
    (2,389
    )
 10. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  Plum Island Claim
  9




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
   DESCRIPTION OF THE COMPANY
     10




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##### 



CRITICAL ACCOUNTING POLICIES
   Off Balance Sheet Risk
  COMPARISON OF THREE MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006
  FISCAL QUARTER ENDED JUNE 30, 2007 COMPARED WITH FISCAL QUARTER ENDED JUNE 30, 2006
 Consolidated Overview (000s)
 Three months ended June 30,2007
    
    2006Total revenue
    
    $
    9,748
    
    
    
    100.0
    %
    
    $
    6,233
    
    
    
    100.0
    %Gross profit
    
    
    720
    
    
    
    7.4
    %
    
    
    910
    
    
    
    14.6
    %Operating loss
    
    
    (1,307
    )
    
    
    -13.4
    %
    
    
    (2,169
    )
    
    
    -34.8
    %
   11




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##### 



Security Solutions (000s)
 Three months ended June 30,2007
    
    2006Total revenue
    
    $
    480
    
    
    
    100.0
    %
    
    $
    1,176
    
    
    
    100.0
    %Gross loss
    
    
    (190
    )
    
    
    -39.6
    %
    
    
    (200
    )
    
    
    -17.0
    %Operating loss
    
    $
    (367
    )
    
    
    -76.5
    %
    
    $
    (454
    )
    
    
    -38.6
    %
     Repair and Overhaul Segment (000s)
 Three months ended June 30,2007
    
    2006Total revenue
    
    $
    501
    
    
    
    100.0
    %
    
    $
    725
    
    
    
    100.0
    %Gross Profit
    
    
    189
    
    
    
    37.7
    %
    
    
    208
    
    
    
    28.7
    %Operating gain
    
    $
    33
    
    
    
    6.6
    %
    
    $
    87
    
    
    
    12.0
    %
  12




---



##### 



Services Segment (000s)
 Three months ended June 30,2007
    
    2006Total revenue
    
    $
    8,767
    
    
    
    100.0
    %
    
    $
    4,332
    
    
    
    100.0
    %Gross Profit
    
    
    721
    
    
    
    8.2
    %
    
    
    902
    
    
    
    20.8
    %Operating gain
    
    $
    473
    
    
    
    5.4
    %
    
    $
    363
    
    
    
    8.4
    %
    Corporate Expenses (000s)
 Three months ended June 30,2007
    
    2006Operating Loss
    
    $
    (1,446
    )
    
    $
    (2,165
    )
  Other Income
  COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006
  SIX MONTHS ENDED JUNE 30, 2007 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2006
 Consolidated Overview (000s)
 Six months ended June 30,2007
    
    2006Total revenue
    
    $
    12,746
    
    
    
    100.0
    %
    
    $
    18,979
    
    
    
    100.0
    %Gross Profit
    
    
    897
    
    
    
    7.0
    %
    
    
    2,413
    
    
    
    12.7
    %Operating loss
    
    
    (3,424
    )
    
    
    -26.9
    %
    
    
    (2,425
    )
    
    
    -12.8
    %
 13




---



##### 



Security Solutions (000s)
 Six months ended June 30,2007
    
    2006Total revenue
    
    $
    1,066
    
    
    
    100.0
    %
    
    $
    2,227
    
    
    
    100.0
    %Gross loss
    
    
    (377
    )
    
    
    -35.4
    %
    
    
    (378
    )
    
    
    -17.0
    %Operating loss
    
    $
    (743
    )
    
    
    -69.7
    %
    
    $
    (761
    )
    
    
    -34.2
    %
    Repair and Overhaul Segment (000s)
 Six months ended June 30,2007
    
    2006Total revenue
    
    $
    948
    
    
    
    100.0
    %
    
    $
    1,522
    
    
    
    100.0
    %Gross Profit
    
    
    316
    
    
    
    33.3
    %
    
    
    527
    
    
    
    34.6
    %Operating gain
    
    $
    25
    
    
    
    2.6
    %
    
    $
    254
    
    
    
    16.7
    %
  14




---



##### 



Services Segment (000s)
 Six months ended June 30,2007
    
    2006Total revenue
    
    $
    10,732
    
    
    
    100.0
    %
    
    $
    15,230
    
    
    
    100.0
    %Gross profit
    
    
    958
    
    
    
    8.9
    %
    
    
    2,264
    
    
    
    14.9
    %Operating gain
    
    $
    368
    
    
    
    3.4
    %
    
    $
    1,217
    
    
    
    8.0
    %
    Corporate Expenses (000s)
 Six months ended June 30,2007
    
    2006Operating Loss
    
    $
    (3,074
    )
    
    $
    (3,135
    )
  Other Income
  Liquidity and Capital Resources
   15




---



##### 



Contractual Obligations and Commitments (000s)
  2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Operating Leases
    
    $
    263
    
    
    $
    564
    
    
    $
    504
    
    
    $
    527
    
    
    $
    349
    
    
    $
    Capital Leases
    
    
    12
    
    
    
    25
    
    
    
    28
    
    
    
    15
    
    
    
    
    
    
    
    Mortgage Payable
    
    
    22
    
    
    
    47
    
    
    
    51
    
    
    
    56
    
    
    
    61
    
    
    
    1,643Total Lease Commitments
    
    $
    297
    
    
    $
    636
    
    
    $
    583
    
    
    $
    598
    
    
    $
    410
    
    
    $
    1,643
  16




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Foreign Exchange Risk
   ITEM 4. CONTROLS AND PROCEDURES
   17




---



##### 



PART II - OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  Plum Island Claim
  Item 1A. Risk Factors
  Obtaining new long-term financing to replace our expired credit line may be difficult.
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ITEM 6. EXHIBITS
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*
    
    Indicates management contract or compensatory arrangement. 21




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SIGNATURES
  HORNE INTERNATIONAL, INC.
 By:
    /s/ Darryl K. HorneDarryl K. HornePresident and Chief Executive OfficerBy:
    /s/ Michael M. MeglessMichael M. MeglessChief Financial Officer 22