##### 



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:  September 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
    
    (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 September 30, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2007 and September 30, 2006
    
    
    3Consolidated Statement of Stockholders Equity for the period ended
September 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2007 and September 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




---



##### 



September
    
    
    December30, 2007
    
    
    31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,785
    
    
    $
    4,465Receivables, net
    
    
    2,147
    
    
    
    5,170Inventories
    
    
    436
    
    
    
    156Prepaid expenses & Other current assets
    
    
    499
    
    
    
    333Total current assets
    
    
    5,867
    
    
    
    10,124Property and equipment, net
    
    
    5,685
    
    
    
    5,737Goodwill
    
    
    3,529
    
    
    
    3,529Other intangibles, net
    
    
    8,465
    
    
    
    9,007Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    210
    
    
    
    1,356TOTAL ASSETS
    
    $
    24,067
    
    
    $
    30,064LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    306
    
    
    $
    717Accrued expenses
    
    
    2,033
    
    
    
    2,517Deferred revenues
    
    
    102
    
    
    
    319Current portion of long-term debt
    
    
    112
    
    
    
    68Total current liabilities
    
    
    2,553
    
    
    
    3,621Long-term liabilities:Long term debt, less current portion
    
    
    1,999
    
    
    
    1,926TOTAL LIABILITIES
    
    
    4,552
    
    
    
    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 41,272,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    78,606
    
    
    
    78,371Accumulated deficit
    
    
    (59,095
    )
    
    
    (53,858
    )Total stockholders equity
    
    
    19,515
    
    
    
    24,517TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    24,067
    
    
    $
    30,064
  2




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##### 



Three months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesServices
    
    $
    1,647
    
    
    $
    3,721
    
    
    $
    13,460
    
    
    $
    19,939Products
    
    
    696
    
    
    
    1,068
    
    
    
    1,629
    
    
    
    3,829Total
    
    
    2,343
    
    
    
    4,789
    
    
    
    15,089
    
    
    
    23,768Cost of revenuesServices
    
    
    1,404
    
    
    
    2,953
    
    
    
    11,948
    
    
    
    16,795Products
    
    
    847
    
    
    
    1,293
    
    
    
    2,152
    
    
    
    4,017Total
    
    
    2,251
    
    
    
    4,246
    
    
    
    14,100
    
    
    
    20,812Gross profit(loss)Services
    
    
    243
    
    
    
    768
    
    
    
    1,512
    
    
    
    3,144Products
    
    
    (151
    )
    
    
    (225
    )
    
    
    (523
    )
    
    
    (188
    )Total
    
    
    92
    
    
    
    543
    
    
    
    989
    
    
    
    2,956Operating expenses
    
    
    2,626
    
    
    
    2,374
    
    
    
    6,946
    
    
    
    7,213Loss from operations
    
    
    (2,534
    )
    
    
    (1,831
    )
    
    
    (5,957
    )
    
    
    (4,257
    )Total non-operating income, net
    
    
    451
    
    
    
    310
    
    
    
    722
    
    
    
    347Loss before provision for income taxes
    
    
    (2,083
    )
    
    
    (1,521
    )
    
    
    (5,235
    )
    
    
    (3,910
    )Income tax expense
    
    
    0
    
    
    
    (11
    )
    
    
    (2
    )
    
    
    (9
    )Loss before discontinued operations
    
    
    (2,083
    )
    
    
    (1,532
    )
    
    
    (5,237
    )
    
    
    (3,919
    )Loss from discontinued operations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2,682
    )Net Loss
    
    $
    (2,083
    )
    
    $
    (1,532
    )
    
    $
    (5,237
    )
    
    $
    (6,601
    )Weighted average common shares outstanding:Basic and diluted
    
    
    41,774,082
    
    
    
    41,880,896
    
    
    
    41,617,836
    
    
    
    43,333,738Basic and diluted earnings per shareLoss from continuing operations
    
    
    (0.05
    )
    
    
    (0.04
    )
    
    
    (0.13
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    (0.06
    )Net loss
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    
    (0.13
    )
    
    $
    (0.15
    )
  3




---



##### 



Common Stock
    
    AccumulatedShares
    
    Amount
    
    APIC
    
    Deficit
    
    TotalBalance as of January 1, 2007
    
    
    41,272,200
    
    
    $
    4
    
    
    $
    78,371
    
    
    $
    (53,858
    )
    
    $
    24,517Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,237
    )
    
    $
    (5,237
    )Stock Issuances
    
    
    501,882
    
    
    $
    
    
    
    $
    200
    
    
    
    
    
    
    $
    200Option Issuances
    
    
    
    
    
    
    
    
    
    $
    35
    
    
    
    
    
    
    $
    35Balance as of September 30, 2007
    
    
    41,774,082
    
    
    $
    4
    
    
    $
    78,606
    
    
    $
    (59,095
    )
    
    $
    19,515
  4




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##### 



Statement of Cash Flows
Nine Months Ended September 30,
 2007
    
    
    2006Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (5,237
    )
    
    $
    (3,919
    )Adjustments
to reconcile net loss to net Cash used in operating activitiesStock option issued to employees
    
    
    35
    
    
    
    126Depreciation/Amortization
    
    
    1,045
    
    
    
    1,449Allowance
for bad debt
    
    
    230
    
    
    
    Loss on disposal of equipment
    
    
    
    
    
    
    4Decrease (increase) in balance sheet itemsReceivables
    
    
    2,793
    
    
    
    5,258Accounts Payable
    
    
    (411
    )
    
    
    (5,477
    )Other balance sheet changes
    
    
    (776
    )
    
    
    (807
    )Net cash used in
continuing
operations
    
    
    (2,321
    )
    
    
    (3,366
    )Cash flows from investing activitiesPayment on note receivable
    
    
    830
    
    
    
    Cash received from sale of subsidiary
    
    
    
    
    
    
    6,202Purchase of property and equipment
    
    
    (164
    )
    
    
    (199
    )Proceeds from the sale of equipment
    
    
    44
    
    
    
    10Net cash (used in)provided by investing
activities
    
    
    710
    
    
    
    6,013Cash flows from financing activitiesRepayment of debt, net
    
    
    (69
    )
    
    
    (53
    )Legal settlement costs not included in net income
    
    
    
    
    
    
    (175
    )Net cash used in financing activities
    
    
    (69
    )
    
    
    (228
    )Cash flows provided by discontinued operations
Operating
    
    
    
    
    
    
    (269
    )Net (decrease)increase in cash and cash equivalents
    
    
    (1,680
    )
    
    
    2,150Cash and cash equivalents at beginning of period
    
    
    4,465
    
    
    
    1,813Cash and cash equivalents at end of period
    
    $
    2,785
    
    
    $
    3,963
    5




---



##### 



1. BASIS OF PRESENTATION
   2. RECEIVABLES (000s)
  September
    
    
    December30, 2007
    
    
    31, 2006Accounts ReceivableBilled AR
    
    $
    1,710
    
    
    $
    3,779Unbilled AR
    
    
    545
    
    
    
    1,197Holdbacks
    
    
    104
    
    
    
    205Other
    
    
    29Bad Debt Reserve
    
    
    (241
    )
    
    
    (11
    )Total AR
    
    $
    2,147
    
    
    $
    5,170
  3. INVENTORIES (000s)
  September
    
    
    December30, 2007
    
    
    31, 2006InventoryRaw materials, net of reserve
    
    $
    341
    
    
    $
    100Work in Process
    
    
    95
    
    
    
    56Total Inventory
    
    $
    436
    
    
    $
    156
 6




---



##### 



4. PROPERTY AND EQUIPMENT (000s)
 September
    
    
    December30, 2007
    
    
    31, 2006Property & EquipmentLand
    
    $
    575
    
    
    $
    575Buildings & Improvements
    
    
    4,427
    
    
    
    4,270Furniture & Fixtures
    
    
    288
    
    
    
    256Manufacturing Equipment
    
    
    1,506
    
    
    
    1,283Tools & Equipment
    
    
    350
    
    
    
    354Office Equipment
    
    
    656
    
    
    
    644Vehicles
    
    
    242
    
    
    
    303Investment Property
    
    
    221
    
    
    
    221Total
    
    $
    8,265
    
    
    $
    7,906Accumulated Depreciation
    
    
    (2,580
    )
    
    
    (2,169
    )Property & Equipment, net
    
    $
    5,685
    
    
    $
    5,737
 5. INTANGIBLES
  6. BORROWINGS AND LINES OF CREDIT
   7. STOCK TRANSACTIONS
  8. STOCK-BASED COMPENSATION
  7




---



##### 



Number of shares
    
    Option Price
    
    Weighted Average PriceOptions Outstanding 12/31/2006
    
    
    3,104,476Granted
    
    
    535,000
    
    
    
    0.35 - 0.53
    
    
    
    0.44Exercised
    
    
    Cancelled
    
    
    (1,345,443
    )
    
    
    1.40 - 1.95
    
    
    
    1.50Options Outstanding 9/30/2007
    
    
    2,294,033
  Options Exercisable & Outstanding
 Exercise
    
    Shares
    
    Shares
    
    Weighted AveragePrice
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs)0.35
    
    
    180,000
    
    
    
    
    
    
    
    5.00.37
    
    
    50,000
    
    
    
    
    
    
    
    5.00.40
    
    
    60,000
    
    
    
    39,000
    
    
    
    5.00.50
    
    
    75,000
    
    
    
    45,000
    
    
    
    9.00.80
    
    
    150,000
    
    
    
    50,000
    
    
    
    2.01.28
    
    
    3,000
    
    
    
    3,000
    
    
    
    1.01.40
    
    
    323,300
    
    
    
    323,300
    
    
    
    0.21.55
    
    
    852,733
    
    
    
    852,733
    
    
    
    0.71.65
    
    
    600,000
    
    
    
    600,000
    
    
    
    0.42,294,033
    
    
    
    1,913,033
 9. LOSS PER SHARE
  10. SEGMENT INFORMATION (000s)
  8




---



##### 



Three months ended September 30,
    
    Nine months ended September 30,2007
    
    2006
    
    2007
    
    2006Security SolutionsTotal revenue
    
    $
    696
    
    
    $
    1,142
    
    
    $
    1,762
    
    
    $
    3,368Gross Profit
    
    
    (151
    )
    
    
    (219
    )
    
    
    (528
    )
    
    
    (591
    )Operating loss
    
    $
    (604
    )
    
    $
    (446
    )
    
    $
    (1,346
    )
    
    $
    (1,207
    )Repair and OverhaulTotal revenue
    
    $
    228
    
    
    $
    250
    
    
    $
    1,176
    
    
    $
    1,772Gross Profit
    
    
    29
    
    
    
    70
    
    
    
    345
    
    
    
    596Operating
(loss) gain
    
    $
    (113
    )
    
    $
    (68
    )
    
    $
    (89
    )
    
    $
    220ServicesTotal revenue
    
    $
    1,419
    
    
    $
    3,397
    
    
    $
    12,151
    
    
    $
    18,628Gross Profit
    
    
    214
    
    
    
    692
    
    
    
    1,172
    
    
    
    2,951Operating
(loss) gain
    
    $
    (178
    )
    
    $
    3
    
    
    $
    189
    
    
    $
    1,221HeadquartersOperating loss
    
    $
    (1,639
    )
    
    $
    (1,320
    )
    
    $
    (4,711
    )
    
    $
    (4,491
    )TotalTotal revenue
    
    $
    2,343
    
    
    $
    4,789
    
    
    $
    15,089
    
    
    $
    23,768Gross Profit
    
    
    92
    
    
    
    543
    
    
    
    989
    
    
    
    2,956Operating loss
    
    
    (2,534
    )
    
    
    (1,831
    )
    
    
    (5,957
    )
    
    
    (4,257
    )Non-Operating income
    
    
    451
    
    
    
    310
    
    
    
    722
    
    
    
    347Net Loss before tax
    
    $
    (2,083
    )
    
    $
    (1,521
    )
    
    $
    (5,235
    )
    
    $
    (3,910
    )
 11. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  Plum Island Claim
  12. FINANCING EVENTS
  9




---



##### 



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 SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006
  FISCAL QUARTER ENDED SEPTEMBER 30, 2007 COMPARED WITH FISCAL QUARTER ENDED SEPTEMBER 30, 2006
 Consolidated Overview (000s)
 Three months ended September 30,2007
    
    2006Total revenue
    
    $
    2,343
    
    
    
    100.0
    %
    
    $
    4,789
    
    
    
    100.0
    %Gross profit
    
    
    92
    
    
    
    3.9
    %
    
    
    543
    
    
    
    11.3
    %Operating loss
    
    
    (2,534
    )
    
    
    -108.2
    %
    
    
    (1,831
    )
    
    
    -38.2
    %
    11




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##### 



Security Solutions (000s)
 Three months ended September 30,2007
    
    2006Security SolutionsTotal revenue
    
    $
    696
    
    
    
    100.0
    %
    
    $
    1,142
    
    
    
    100.0
    %Gross loss
    
    
    (151
    )
    
    
    -21.7
    %
    
    
    (219
    )
    
    
    -19.2
    %Operating loss
    
    $
    (604
    )
    
    
    -86.8
    %
    
    $
    (446
    )
    
    
    -39.1
    %
    Repair and Overhaul Segment (000s)
 Three months ended September 30,2007
    
    2006Repair and OverhaulTotal revenue
    
    $
    228
    
    
    
    100.0
    %
    
    $
    250
    
    
    
    100.0
    %Gross profit
    
    
    29
    
    
    
    12.7
    %
    
    
    70
    
    
    
    28.0
    %Operating loss
    
    $
    (113
    )
    
    
    -49.6
    %
    
    $
    (68
    )
    
    
    -27.2
    %
  Services Segment (000s)
 Three months ended September 30,2007
    
    2006ServicesTotal revenue
    
    $
    1,419
    
    
    
    100.0
    %
    
    $
    3,397
    
    
    
    100.0
    %Gross profit
    
    
    214
    
    
    
    15.1
    %
    
    
    692
    
    
    
    20.4
    %Operating (loss)income
    
    $
    (178
    )
    
    
    -12.5
    %
    
    $
    3
    
    
    
    0.1
    %
    12




---



##### 



Corporate Expenses (000s)
 Operating loss
    
    $
    (1,639
    )
    
    $
    (1,320
    )
  Other Income
  COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006
  NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2006
 Consolidated Overview (000s)
 Nine months ended September 30,2007
    
    2006Total revenue
    
    $
    15,089
    
    
    
    100.0
    %
    
    $
    23,768
    
    
    
    100.0
    %Gross Profit
    
    
    989
    
    
    
    6.6
    %
    
    
    2,956
    
    
    
    12.4
    %Operating loss
    
    
    (5,957
    )
    
    
    -39.5
    %
    
    
    (4,257
    )
    
    
    -17.9
    %
   13




---



##### 



Security Solutions (000s)
 Nine months ended September 30,2007
    
    2006Security SolutionsTotal revenue
    
    $
    1,762
    
    
    
    100.0
    %
    
    $
    3,368
    
    
    
    100.0
    %Gross loss
    
    
    (528
    )
    
    
    -30.0
    %
    
    
    (591
    )
    
    
    -17.5
    %Operating loss
    
    $
    (1,346
    )
    
    
    -76.4
    %
    
    $
    (1,207
    )
    
    
    -35.8
    %
    Repair and Overhaul Segment (000s)
 Nine months ended September 30,2007
    
    2006Repair and OverhaulTotal revenue
    
    $
    1,176
    
    
    
    100.0
    %
    
    $
    1,772
    
    
    
    100.0
    %Gross profit
    
    
    345
    
    
    
    29.3
    %
    
    
    596
    
    
    
    33.6
    %Operating (loss)income
    
    $
    (89
    )
    
    
    -7.6
    %
    
    $
    220
    
    
    
    12.4
    %
  Services Segment (000s)
 Nine months ended September 30,2007
    
    2006ServicesTotal revenue
    
    $
    12,151
    
    
    
    100.0
    %
    
    $
    18,628
    
    
    
    100.0
    %Gross profit
    
    
    1,172
    
    
    
    9.6
    %
    
    
    2,951
    
    
    
    15.8
    %Operating income
    
    $
    189
    
    
    
    1.6
    %
    
    $
    1,221
    
    
    
    6.6
    %
  14




---



##### 



Corporate Expenses (000s)
 Nine months ended September 30,2007
    
    2006Operating loss
    
    $
    (4,711
    )
    
    $
    (4,491
    )
  Other Income
  Liquidity and Capital Resources
   Contractual Obligations and Commitments (000s)
  15




---



##### 



2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Operating Leases
    
    $
    126
    
    
    $
    564
    
    
    $
    504
    
    
    $
    527
    
    
    $
    349
    
    
    $
    Capital Leases
    
    
    15
    
    
    
    69
    
    
    
    73
    
    
    
    65
    
    
    
    19
    
    
    
    Mortgage Payable
    
    
    12
    
    
    
    47
    
    
    
    51
    
    
    
    56
    
    
    
    61
    
    
    
    1,643Total Lease Commitments
    
    $
    153
    
    
    $
    680
    
    
    $
    628
    
    
    $
    648
    
    
    $
    429
    
    
    $
    1,643
  16




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




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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.
  18




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ITEM 6. EXHIBITS
               19




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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