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Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) SUBSEQUENT EVENTS (Reserved) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information which management believes is relevant to an assessment and an understanding of the Company's operations and financial condition. This discussion should be read in conjunction with the attached unaudited consolidated financial statements and accompanying notes as well as our annual report on Form 10-K for the fiscal year ended December 26, 2010. FORWARD-LOOKING STATEMENTS The matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, activity levels, performance or achievements to be materially different from any future results, activity levels, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "could", "expect", "estimate", "may", "potential", "will", and "would", or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. We believe it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict or control accurately. The factors listed in the section captioned "Risk Factors," contained in our Annual Report of Form 10-K for the fiscal year ended December 26, 2010, as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, activity levels, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Subsequent events and developments may cause our views to change. While we may elect to update the forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. DESCRIPTION OF THE COMPANY The Company provides a variety of services through its wholly-owned subsidiary, Horne Engineering Services, LLC. The Company focuses on providing program engineering, energy solutions, occupational safety and health, environmental sciences, acquisition and procurement, business process engineering, public outreach, and product solutions. Our primary customer in this segment is the U.S. Government, with specific focus within the Departments of Homeland Security, Defense, Transportation and other civilian agencies. The Company has devoted a significant amount of resources to its partnership with Intelligent Decisions, from which a five quarter development strategy has been launched. A principal purpose of the partnership has been the development of an information technology capability related to the Company's core competencies. The Company signed a reseller agreement with the IT product and professional services company ThoughtWorks, Inc., a global leader in Lean and Agile products and training. The Company expects this capability to enable it to further its goal of being a total solutions provider to its customers. The Company entered into reseller agreements with Ingram Micro, Juniper, Cisco, Lenovo, IBM, EMC2, and Dell related to the IT capability. The aforementioned agreements were entered into to support the Company's acceleration of the go-to-market strategy with its partnership Intelligent Decisions. The Company was awarded a five-year GSA Schedule 70 contract effective April 15th, 2011. This contract allows the Company to provide federal customers with high-value Lean and Agile software development process solutions. The Company signed a marketing and reseller agreement with G2 Environmental Technologies, LLC to provide Enerburn®, a diesel fuel combustion catalyst, to government customers. 12 -------------------------------------------------------------------------------- HORNE INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations CRITICAL ACCOUNTING POLICIES AND ESTIMATES In our Form 10-K for the fiscal year ended December 26, 2010, our most critical accounting policies and estimates upon which our financial status depends were identified as those relating to revenue recognition, stock-based compensation, net operating losses and tax credit carryforwards, and impairment of long-lived assets. We reviewed our policies and determined that those policies remain our most critical accounting policies for the three and six months ended June 26, 2011. COMPARISON OF THREE MONTHS ENDED JUNE 26, 2011, AND JUNE 27, 2010 The following discussion and analysis should be read in conjunction with the unaudited financial statements (and notes thereto) and other financial information of the Company appearing elsewhere in this report. Consolidated Overview (000's) Three months ended June 26, 2011 June 27, 2010 Total revenue $ 1,303 100.0 % $ 850 100.0 % Gross profit 146 11.2 % 175 20.5 % Operating loss (322 ) -24.7 % (133 ) -15.8 % Revenue for the quarter ended June 26, 2011, increased by approximately $453,000, as compared to the quarter ended June 27, 2010. The main driver of revenue increase was the new task orders under our Army Corps of Engineers (ACE) contract. Gross profit as a percentage of revenue declined due to the significant amount of low-margin revenues. The overall operating loss increased in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the significant amount of low margin revenues. COMPARISON OF SIX MONTHS ENDED JUNE 26, 2011, AND JUNE 27, 2010 The following discussion and analysis should be read in conjunction with the unaudited financial statements (and notes thereto) and other financial information of the Company appearing elsewhere in this report. Consolidated Overview (000's) Six months ended June 26, 2011 June 27, 2010 Total revenue $ 2,344 100.0 % $ 1,842 100.0 % Gross profit 310 13.3 % 471 25.6 % Operating loss (561 ) -23.9 % (699 ) -34.9 % Revenue for the six months ended June 26, 2011, increased by approximately $502,000, as compared to the six months ended June 27, 2010. The main driver of revenue increase was the new task orders under our ACE contract. Gross profit as a percentage of revenue declined due to the significant amount of low-margin revenues. The overall operating loss decreased in the first six months of 2011 compared to the first six months of 2010 primarily due to the stock option expense of $515,885 in the first quarter of 2010 offset by low margin revenues in 2011. Discontinued Operations Discontinued operations include the result of Spectrum Sciences & Software, Inc. subsidiary that was closed in June 2008. Net income of $1,084,000 from discontinued operations was the result of the legal judgment described in note 9 to our unaudited consolidated financial statements contained in this Report. Liquidity and Capital Resources Cash and cash equivalents totaled approximately $48,000 at June 26, 2011. The Company received a judgment award of $1,211,754 the Munitions Assembly Conveyor (MAC) Lawsuit in June 2011. The Company made payments of $633,135 against the costs of litigation and repaid related parties debt of $340,000. Our overall cash position has decreased by approximately $14,000 since year-end primarily due to our operating losses. We have been able to offset some of the cash impact of our losses through several receivables financing agreements. 13 -------------------------------------------------------------------------------- HORNE INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations During 2008, the Company entered into a loan agreement with Darryl K. Horne, the Company's President. The agreement permitted the Company to borrow up to $525,000 at 8 percent interest rate. The interest is payable quarterly beginning in July 1, 2008, with principal payable upon demand. The note is unsecured and is not convertible into any Company securities. As of June 26, 2011, the outstanding balance and accrued interest is $275,000 and $70,948 respectively. On August 6, 2008, the Company entered into a receivables financing agreement with Mr. Horne. Under the terms of the agreement, Mr. Horne agreed to finance specific accounts receivable under a line of credit for up to $790,000 at an interest rate of 8.5 percent. As of June 26, 2011 and December 26, 2010, the outstanding balance was $0 and $220,000 respectively. In March 2011, the Company entered into a receivables financing agreement with Evan Auld-Susott, the Company's Chief Executive Officer, as agent of the Susott Family Limited Partnership. Under the terms of the agreement, Mr. Auld-Susott agreed to finance specific accounts receivable under a line of credit for up to $500,000 at an interest rate of 13 percent. The Company has taken draw of $310,000 and repaid $120,000 during the period ending June 26, 2011. The outstanding balance and accrued interest is $190,000 and $5,420 respectively as of June 26, 2011. The loan is not convertible into any Company securities. In March 2011, the Company entered into a financing agreement with United Capital Funding Corporation under which the Company is able to factor certain eligible accounts receivable up to $500,000. The agreement calls for a fee of .425 percent of the factored amount for each 5 day period that the amount is outstanding. The Company is able to receive 80 percent of any invoices factored to the lender. As of June 26, 2011, there is no balance outstanding. On March 22, 2010, the Company entered into a strategic partnership with Intelligent. The partnership provides for the Company to have a cash line of credit in the amount of $250,000 against business/projects jointly developed by Intelligent and the Company. This line of credit will be secured by the Company's eligible Accounts Receivable on such projects or on the receivables from the Company's full-time equivalent employees arising after the inception of the partnership that are billed against projects as decided by Intelligent in its sole discretion. No cash will be advanced by Intelligent until Intelligent receives a perfected security interest (i.e., first lien on the orders to be advanced under this cash line of credit). As of June 26, 2011, no funds have been advanced to the Company under this line of credit. As discussed in our 2010 Form 10-K, the Company has substantial liquidity challenges. While we continue to work towards profitability, there is a significant uncertainty that the Company will have sufficient cash flow to sustain its operations. The Company continues to pursue additional funding sources in the event that funds from operations and financing are not sufficient to provide for our operations. These funding sources would primarily be in the form of bank credit lines. Given our past financial performance, the costs and fees associated with funding sources may be more expensive than the Company has historically paid. The Company can not determine if the funds available from operations will be sufficient for any acquisitions or facility expansions that may be undertaken during the year. Should the Company make any acquisitions or expansions, other sources of financing may be required. 14 -------------------------------------------------------------------------------- HORNE INTERNATIONAL, INC. |