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As we approach the end of hurricane season, Stocklemon is pleased to note that the gulf region has not experienced even one hurricane and good weather is on the horizon. The New Orleans Saints are 3-0 and work is progressing.

What is good news for the people of New Orleans might be bad news for the investors of Home Solutions of America (HSOA). Yet, beyond the mild hurricane season, Stocklemon believes that the current balance sheet and book of business carried by HSOA might be a “natural disaster” in its own right.

Where is Barry Minkow???

Home Solutions has proven that they are a company that is driven by press releases and hype. Stocklemon was a critic of this practice as we noted that the CEO sold $6.8 million worth of stock just days after a PR about one such deal. Undisclosed in the PR were the facts that the company on the other end of the deal was less than a week old and funded by HSOA.

Stocklemon believed this practice to be unethical at best. The company responded by stating that the contract was small in value and should not reflect a big part of their revenues. Well that leaves one problem: the pink elephant in the room.

Where are the press releases about the companies that will take HSOA to its $165 million revenue guidance?

We did see a release about $5 million of it, even though Stocklemon believes that this contract will not be completed by the end of the year, and will not spill off the total $5 million to HSOA.

The company’s guidance asks us to believe that there is $80 million in restoration revenue in the pipeline to be recognized in the next 4 months….but we don’t know from whom. Pretty odd for a company that releases every little piece of incremental business to the public.

We were led to believe that their largest restoration partner was C&B Services. Yet, according to the last filing (9/14/06) of Charys (CHYS.OB), parent of C&B, the total Disaster Restoration and Remediation business for the previous quarter was only a bit over $4 million.

If HSOA is only a subcontractor to C&B, we know their share of that pie has to be substantially less. Something really stinks here. Is C&B understating their revenues, or is HSOA overstating their forecasts and receivables?

Category 5 Problem in the Making

Stocklemon believes that Home Solutions is currently facing a cash crunch that could bring on some real problems in the near future. Here are a few of the signs:

The company shows $22 million in accounts receivable. We still do not how much of that comes from C&B Services which seemed to have been one of HSOA’s larger customers. The reason for concern is not just idle speculation, but also from the parent company of C&B, Charys, who recently reported a balance sheet with only $3 million in total cash and a going concern letter from their auditor.

It Gets Worse

The company needed to borrow money from an insider (Brian Marshall of Fireline).

“On August 15, 2006, Mr. Marshall furnished $4,984,800 in cash to a financial institution to fund a letter of credit in the same amount, to support the issuance of a construction bond for the benefit of Home Solutions.“ The terms of the note (as buried in the bottom of an 8k) have it annualized at 18%, not a sign of a financially healthy company when you have to borrow money from an insider to secure a bond for your work.

Which leads to the most interesting of all questions: If HSOA was fortunate enough to get any other restoration business, which is questionable, how will they come up with the money to bond the business?

To make matters worse, HSOA would also like us to believe that there are 45% margins on the reconstruction work. OK, so we are supposed to believe that while people in New Orleans are struggling to rebuild a city and while FEMA and HANO are cutting corners to rebuild, Home Solutions is going to make 45% margins on paint and drywall? Who is being taken here? Is it the shareholders or the City of New Orleans?

Fireline Acquisition

Home Solutions still has not released audited financials from acquired company Fireline. So basically, they must have bought Fireline without looking at the financials themselves.

That means the company gave up 85% of its cash to acquire a company that could not even add to guidance AND did not have audited financials …what are we missing here?

Fireline Restoration was purchased from Brian Marshall in July 2006 for $11.5M cash, a $21.65M note and 4M shares of stock. Yet, as of yesterday’s conference call, guidance has not changed. Something smells in the state of Louisiana.

The Rest of the Biz Is Not So Great

The non-sexy part (if that’s possible) of HSOA is their remodeling business. This consists of Cornerstone (cabinets) and Southern Exposure (granite countertops). It is important to note that even though HSOA trumpets an agreement with Home Depot (NYSE:HD), it is not guaranteed and is not exclusive. As stated in the filings:

The Home Depot contract may be terminated at any time upon notice to us. Furthermore, Home Depot is not obligated to use our services under this contract.

Southern Exposure is just one company among a list of providers of these products.

New home construction is a sizable component of both Cornerstone’s and Southern Exposure’s business. Operating margins are 12% in the June quarter, down from 23% in March 06. What is happening there? Furthermore, the slowdown in the housing market will have a direct effect on the Centex’s cabinet purchases. Either way, Stocklemon believes this business is a non-event and adds no real shareholder value.

Conclusion

While Home Solutions is not a complete replica of ZZZ Best, they seem to share many characteristics. It is time for Home Solutions to come out and silence its critics by announcing all material contracts that comprise its the $167 million revenue guidance number. We don’t think they have it.

Disclosure: The author holds a short position in HSOA

Source: Home Solutions of America: Where are the Contracts?