##### 



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: March 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    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 March 31, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the fiscal quarters ended March 31, 2007 and
March 31, 2006
    
    
    3Consolidated Statement of Stockholders Equity for the fiscal quarter ended
March 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the fiscal quarters ended
March 31, 2007 and March 31, 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A Risk Factors
    
    
    19Item 6. Exhibits
    
    
    19




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March
    
    
    December31, 2007
    
    
    31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,424
    
    
    $
    4,465Receivables, net
    
    
    3,117
    
    
    
    5,170Inventories
    
    
    125
    
    
    
    156Prepaid expenses & other current assets
    
    
    358
    
    
    
    333Total current assets
    
    
    8,024
    
    
    
    10,124Property and equipment, net
    
    
    5,628
    
    
    
    5,737Goodwill
    
    
    3,529
    
    
    
    3,529Other intangibles, net
    
    
    8,826
    
    
    
    9,007Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    1,193
    
    
    
    1,356TOTAL ASSETS
    
    $
    27,511
    
    
    $
    30,064LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    329
    
    
    $
    717Accrued expenses
    
    
    2,117
    
    
    
    2,517Deferred revenues
    
    
    335
    
    
    
    319Current portion of long-term debt
    
    
    68
    
    
    
    68Total current liabilities
    
    
    2,849
    
    
    
    3,621Long-term liabilities:Long term debt, less current portion
    
    
    1,909
    
    
    
    1,926TOTAL LIABILITIES
    
    
    4,758
    
    
    
    5,547Commitments and contingencies (Note 10)Stockholders 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 44,272,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    78,576
    
    
    
    78,371Accumulated deficit
    
    
    (55,827
    )
    
    
    (53,858
    )Total stockholders equity
    
    
    22,753
    
    
    
    24,517TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    27,511
    
    
    $
    30,064
  2




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Three months endedMarch 31,2007
    
    
    2006RevenuesServices
    
    $
    2,486
    
    
    $
    11,210Products
    
    
    512
    
    
    
    1,536Total
    
    
    2,998
    
    
    
    12,746Cost of revenuesServices
    
    
    2,131
    
    
    
    9,770Products
    
    
    690
    
    
    
    1,448Total
    
    
    2,821
    
    
    
    11,218Gross profit(loss)Services
    
    
    355
    
    
    
    1,440Products
    
    
    (178
    )
    
    
    88Total
    
    
    177
    
    
    
    1,528Operating expenses
    
    
    2,294
    
    
    
    1,784Income (Loss) from operations
    
    
    (2,117
    )
    
    
    (256
    )Total non-operating income (expense), net
    
    
    150
    
    
    
    16Loss before provision for income taxes
    
    
    (1,967
    )
    
    
    (240
    )Income tax benefit (expense)
    
    
    (2
    )
    
    
    2Loss before discontinued operations
    
    
    (1,969
    )
    
    
    (238
    )Loss from discontinued operations
    
    
    
    
    
    
    (269
    )Net Loss
    
    $
    (1,969
    )
    
    $
    (507
    )Weighted average common shares outstanding:Basic and diluted
    
    
    41,406,035
    
    
    
    44,072,200Basic and diluted earnings per shareLoss from continuing operations
    
    
    (0.05
    )
    
    
    (0.01
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net loss
    
    $
    (0.05
    )
    
    $
    (0.01
    )
  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
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,969
    )
    
    $
    (1,969
    )Stock Issuances
    
    
    501,882
    
    
    $
    
    
    
    $
    200
    
    
    
    
    
    
    $
    200Option Issuances
    
    
    
    
    
    
    
    
    
    $
    5
    
    
    
    
    
    
    $
    5Balance as of March 31, 2007
    
    
    41,774,082
    
    
    $
    4
    
    
    $
    78,576
    
    
    $
    (55,827
    )
    
    $
    22,753
  4




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Three months ended March 31,2007
    
    
    2006Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (1,969
    )
    
    $
    (238
    )Adjustments
to reconcile net loss to net cash used in operating activitiesStock option issued to employees
    
    
    5
    
    
    
    112Depreciation/Amortization
    
    
    353
    
    
    
    157Deferred income taxes
    
    
    
    
    
    
    (1
    )Decrease (increase) in balance sheet itemsReceivables
    
    
    2,053
    
    
    
    (1,545
    )Inventory
    
    
    30
    
    
    
    69Prepaid Expenses
    
    
    (25
    )
    
    
    (311
    )Accounts Payable
    
    
    (189
    )
    
    
    (499
    )Accrued Expenses
    
    
    (393
    )
    
    
    419Deferred Revenue
    
    
    17
    
    
    
    135Other balance sheet changes
    
    
    157
    
    
    
    (134
    )Net cash provided
by(used in) continuing
operations
    
    
    38
    
    
    
    (1,836
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (72
    )
    
    
    (58
    )Proceeds from the sale of equipment
    
    
    10
    
    
    
    1Net cash used in investing activities
    
    
    (62
    )
    
    
    (57
    )Cash flows from financing activitiesRepayment of debt, net
    
    
    (17
    )
    
    
    (97
    )Net repayments on lines of credit
    
    
    
    
    
    
    376Net cash (used in)provided by financing activities
    
    
    (17
    )
    
    
    279Cash flows provided by discontinued operations
Operating
    
    
    
    
    
    
    898Net decrease in cash and cash equivalents
    
    
    (41
    )
    
    
    (716
    )Cash and cash equivalents at beginning of period
    
    
    4,465
    
    
    
    1,813Cash and cash equivalents at end of period
    
    $
    4,424
    
    
    $
    1,097
    5




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1. BASIS OF PRESENTATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
   Revenue Recognition
   6




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Inventory Valuation
  Income Taxes
   Earnings (Loss) Per Share
   7




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Impairment of Long-Lived Assets
  Foreign Currency Translation
  3. RECEIVABLES (000s)
  March
    
    
    December31, 2007
    
    
    31, 2006Accounts ReceivableBilled AR
    
    $
    1,824
    
    
    $
    3,779Unbilled AR
    
    
    1,100
    
    
    
    1,197Holdbacks
    
    
    177
    
    
    
    194Other
    
    
    16
    
    
    
    Total AR
    
    $
    3,117
    
    
    $
    5,170
  4. INVENTORIES (000s)
  March
    
    
    December31, 2007
    
    
    31, 2006InventoryRaw materials, net of reserve
    
    $
    113
    
    
    $
    100Work in Process
    
    
    12
    
    
    
    56Finished Goods
    
    
    
    
    
    
    Total Inventory
    
    $
    125
    
    
    $
    156
 8




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5. PROPERTY AND EQUIPMENT (000s)
 March
    
    
    December31, 2007
    
    
    31, 2006Property & EquipmentLand
    
    $
    575
    
    
    $
    575Buildings & Improvements
    
    
    4,261
    
    
    
    4,270Furniture & Fixtures
    
    
    269
    
    
    
    256Manufacturing Equipment
    
    
    1,306
    
    
    
    1,283Tools & Equipment
    
    
    347
    
    
    
    354Office Equipment
    
    
    646
    
    
    
    644Vehicles
    
    
    283
    
    
    
    303Investment Property
    
    
    221
    
    
    
    221Total
    
    $
    7,908
    
    
    $
    7,906Accumulated Depreciation
    
    
    (2,280
    )
    
    
    (2,169
    )Property & Equipment, net
    
    $
    5,628
    
    
    $
    5,737
 6. BORROWINGS AND LINES OF CREDIT
   Bank of America Facility
  7. STOCK TRANSACTIONS
  9




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8. STOCK-BASED COMPENSATION
   Number
    
    
    
    
    
    
    Weightedof Shares
    
    
    Option Price
    
    
    Average PriceOptions outstanding January
1, 2007
    
    
    3,104,476Granted
    
    
    230,000
    
    
    
    0.52 - 0.53
    
    
    
    0.53Exercised
    
    
    Cancelled
    
    
    (710,465
    )
    
    
    1.40 - 1.95
    
    
    
    1.56Options outstanding March
31, 2007
    
    
    2,624,011
  Options Exercisable & OutstandingExercise
    
    Shares
    
    Shares
    
    Weighted AveragePrice
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs)0.50
    
    
    60,000
    
    
    
    20,000
    
    
    
    9.30.52
    
    
    50,000
    
    
    
    
    
    
    
    4.50.53
    
    
    180,000
    
    
    
    
    
    
    
    4.50.80
    
    
    150,000
    
    
    
    
    
    
    
    2.21.28
    
    
    4,500
    
    
    
    4,500
    
    
    
    1.21.40
    
    
    328,750
    
    
    
    328,750
    
    
    
    0.71.55
    
    
    925,261
    
    
    
    925,261
    
    
    
    1.21.65
    
    
    925,500
    
    
    
    925,500
    
    
    
    0.62,624,011
    
    
    
    2,204,011
 9. SEGMENT INFORMATION
  10




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For the Quarter ended March 31,2007
    
    2006Security SolutionsTotal revenue
    
    $
    586
    
    
    $
    1,051Gross Profit
    
    
    (187
    )
    
    
    (161
    )Operating loss
    
    $
    (376
    )
    
    $
    (320
    )Repair and OverhaulTotal revenue
    
    $
    446
    
    
    $
    797Gross Profit
    
    
    127
    
    
    
    319Operating (loss)gain
    
    $
    (9
    )
    
    $
    201ServicesTotal revenue
    
    $
    1,966
    
    
    $
    10,898Gross Profit
    
    
    236
    
    
    
    1,370(loss)
    
    $
    (105
    )
    
    $
    867HeadquartersTotal revenue
    
    
    Gross Profit
    
    
    Operating loss
    
    $
    (1,627
    )
    
    $
    (1,004
    )TotalTotal revenue
    
    $
    2,998
    
    
    $
    12,746Gross Profit
    
    
    177
    
    
    
    1,528Operating loss
    
    
    (2,117
    )
    
    
    (256
    )Non-Operating income
    
    
    150
    
    
    
    16Net Loss before tax
    
    $
    (1,967
    )
    
    $
    (240
    )
 10. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  11. SUBSEQUENT EVENTS
 Line of Credit Expiration
  Procurement Contract
  11




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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
     12




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CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
     13




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Net Operating Loss Carryforwards
  Impairment of Long-Lived Assets
  Off Balance Sheet Risk
  COMPARISON OF THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
  FISCAL QUARTER ENDED MARCH 31, 2007 COMPARED TO FISCAL QUARTER ENDED MARCH 31, 2006
 Consolidated Overview
 For the Quarter ended March 31,(numbers in 000s)2007
    
    2006Total CompanyTotal revenue
    
    $
    2,998
    
    
    
    100.0
    %
    
    $
    12,746
    
    
    
    100.0
    %Gross Profit
    
    
    177
    
    
    
    5.9
    %
    
    
    1,528
    
    
    
    12.0
    %Operating loss
    
    
    (2,117
    )
    
    
    -70.6
    %
    
    
    (256
    )
    
    
    -2.0
    %
  14




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Security Solutions
 For the Quarter ended March 31,(numbers in 000s)2007
    
    2006Security SolutionsTotal revenue
    
    $
    586
    
    
    
    100.0
    %
    
    $
    1,051
    
    
    
    100.0
    %Gross loss
    
    
    (187
    )
    
    
    -31.9
    %
    
    
    (161
    )
    
    
    -15.3
    %Operating loss
    
    $
    (376
    )
    
    
    -64.2
    %
    
    $
    (320
    )
    
    
    -30.4
    %
   Repair and Overhaul Segment
 For the Quarter ended March 31,(numbers in 000s)2007
    
    2006Repair and OverhaulTotal revenue
    
    $
    446
    
    
    
    100.0
    %
    
    $
    797
    
    
    
    100.0
    %Gross Profit
    
    
    127
    
    
    
    28.5
    %
    
    
    319
    
    
    
    40.0
    %Operating (loss)profit
    
    $
    (9
    )
    
    
    -2.0
    %
    
    $
    201
    
    
    
    25.2
    %
  15




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Services Segment (000s)
 For the Quarter ended March 31,(numbers in 000s)2007
    
    2006ServicesTotal revenue
    
    $
    1,966
    
    
    
    100.0
    %
    
    $
    10,898
    
    
    
    100.0
    %Gross Profit
    
    
    236
    
    
    
    12.0
    %
    
    
    1,370
    
    
    
    12.6
    %Operating (loss)profit
    
    $
    (105
    )
    
    
    -5.3
    %
    
    $
    867
    
    
    
    8.0
    %
    Corporate Expenses
 For the Quarter ended March 31,(numbers in 000s)2007
    
    2006Operating Loss
    
    $
    (1,627
    )
    
    $
    (1,004
    )
  Other Income
  Liquidity and Capital Resources
  16




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Contractual Obligations and Commitments (000s)
  2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Operating Leases
    
    $
    410
    
    
    $
    564
    
    
    $
    505
    
    
    $
    519
    
    
    $
    349
    
    
    $
    Capital Leases
    
    
    18
    
    
    
    26
    
    
    
    28
    
    
    
    15
    
    
    
    
    
    
    
    Mortgage Payable
    
    
    32
    
    
    
    47
    
    
    
    51
    
    
    
    56
    
    
    
    61
    
    
    
    1,643Total Commitments
    
    $
    460
    
    
    $
    637
    
    
    $
    584
    
    
    $
    590
    
    
    $
    410
    
    
    $
    1,643
  17




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Foreign Exchange Risk
   ITEM 4. CONTROLS AND PROCEDURES
   18




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PART II - OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  Item 1A. Risk Factors.
  Obtaining new long-term financing to replace our expired credit line may be difficult.
  ITEM 6. EXHIBITS
      19




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20




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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. Horne
President and Chief Executive OfficerBy :
    
    /s/ Michael M. MeglessMichael M. Megless
Chief Financial Officer
 22