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Over the past few months, Stocklemon has published a collection of stories exposing the lack of clarity and disclosure at Home Solutions of America (NASDAQ:HSOA).

In our last report, we challenged management to disclose these “mystery contracts” that are supposed to rocket take the company to $160 million gross revenues in its guidance, and we were met with a silence. Stocklemon believes that HSOA has misled the public about the true nature of their business and it is all starting to unravel in front of our eyes.

Fireline
In January of 2006, HSOA announced the acquisition of Fireline Restoration Services. Home Solutions gave to Fireline:

- $11.5 million in cash (85% of HSOA’s total cash position)
- A promissory note for $21.65 Million
- 4 million shares of Home Solutions of America stock.

All this for a company that still does not have audited financials. Meanwhile, the unaudited financials look as abysmal as the current balance sheet of Home Solutions of America. It is the opinion of Stocklemon that with deteriorating revenues and accelerating debt, coupled with large accounts receivable, Fireline could have gone BANKRUPT if it were not for the intervention of Home Solutions of America (see Fireline balance sheet).

Our favorite part of the deal is the following: Brian Marshall, the head of Fireline used to lease his plane to Fireline, for $37,500 per month. He just amended that to $70,000/month through June 2007 -- to Home Solutions. That is good news for shareholders. Maybe with the time that management saves flying commercial like the rest of us, they can actually put together an audit or even better put together an 8K describing this missing revenue from their projections.

Balance Sheet:

Fireline had scant cash ($252K) and chunky $13.3M of short term debt. $5M of this is due in November of 2006 and $8M of this is a credit facility "due on demand."

DSOs are a “mere” 233 days. (It appears they haven't collected a drop of revenue in quite some time, given that they report $18.7M revenues YTD). Two customers accounted for 34% and 9% of this (concentration of credit risk).

And here is our favorite line on the subject: "The company's standard credit terms are net 30 days. In conjunction with billings to insurance companies terms may extend 90 days." Which begs the question: who is paying in 300+ days?!?

With regard to retained earnings, the company has generated $5.0M in earnings over its life, which began in 1996. And these should have been the best of times...

Not like this means anything about the business but it just goes to the thoroughness of the company -- we have never seen a filing with as many typos as this one! Considering it is not audited, at least take the time to make it look professional, guys. The number of typos is hilarious: "billing sin excess of cost" "Ling-term debt" "interest ioncome".

P&L
From original acquisition announcement by HSOA, we were told that Fireline had unaudited revenue for the first six months of 2006 of approximately $21 million and EBITDA of $5 million."

While the numbers are still unaudited, a lot has changed.

Revs for first 6 months of 06: $18.7M (11% less than HSOA's original estimate when they made the acquisition)

Ebitda for first 6 months of 06: $3.7M (26% less than HSOA's original estimate when they made the acquisition -- nice job.)

So the upshot is that they paid $21.2M in stock, $11.55M in cash, and assumed $13.7M of debt for the grand prize of a company that can't collect anything, has declining revenues and profit margins, burns cash, generated 26% less EBITDA than they thought, and just paid out all of its cash to the owner (see below).

Gross revenues are down 19% year over year. Profit margin is down from 21.6% to 15.9% year over year

Cash Flow Statement
Thanks to the little collections problem, cash flow from ops was negative 4.8 M the first 6 months of 06, down from negative 1.4 M for first 6 months of 05. That is certainly unsustainable with a cash balance of $252K.

Say it Ain’t So
Yet, in spite of all the bad financials at Fireline, it paid basically all of its cash direct to its owner before the acquisition. As we read there was a $2M DISTRIBUTION TO SHAREHOLDER (Brian Marshall) in the first 6 months of '06.

Related party contracts
Aside from his airplane leaseback to the company, we read these other disclosures:

Marshall used to lease a building for $5600/month to Fireline. That lease has been extended for 5 years (they say it is to June 2001, but since that is already long ago we think they meant to say 2011--add that to the typo tally)

In addition, $1.87M was paid in the first 6 months of 2006 to related parties: BSR Electrical, MTM Enterprise, MIG, Inc, Marshall Aviation, Total Remediation, Inc., all companies controlled by Mr. Marshall.

So, on top of the $2M distribution to shareholder, he also got paid $1.87M for various services. And then made out like a bandit in selling his company to HSOA. WOW! What a deal!

Conclusion
There is a reason HSOA doesn’t offer any explanation for how its going to meet its $160 M revenues guidance – and it is the same reason audited Fireline financials are still unavailable. Stocklemon believes this Home Solutions is a house of cards – with extra jokers. Cautious Investing To All.

Disclosure: Author is short HSOA

Source: Home Solutions of America: Story Gone From Bad to Worse