##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act of 1934
 For the transition period from __________ to __________
 001-31711
 HOME SOLUTIONS OF AMERICA, INC.
 
  Delaware
    
    99-0273889(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
  
  (214) 623-8446
 
   
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance SheetsConsolidated Statements of IncomeConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal Proceedings.Item 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other informationItem 6. ExhibitsSignaturesExhibit IndexExhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 
 PART I  FINANCIAL INFORMATION
 
 
 Item 1. Financial Statements
 
 
 Home Solutions of America, Inc.
Consolidated Balance Sheets
 March 31,
    
    
    December 31,2007
    
    
    2006Assets
    
    (unaudited)
    
    
    (audited)Current assets:Cash
    
    $
    5,540
    
    
    $
    8,713Accounts receivable, net
    
    
    67,544
    
    
    
    58,106Current portion of notes receivable
    
    
    1,093
    
    
    
    703Inventories
    
    
    3,408
    
    
    
    4,000Prepaid expenses and other current assets
    
    
    6,126
    
    
    
    4,654Costs in excess of billings
    
    
    14,981
    
    
    
    6,292Deferred tax asset
    
    
    1,269
    
    
    
    1,337Total current assets
    
    
    99,961
    
    
    
    83,805Property and equipment, net
    
    
    6,284
    
    
    
    6,129Intangibles, net
    
    
    12,742
    
    
    
    8,732Goodwill
    
    
    118,026
    
    
    
    122,500Notes receivable, net of current portion
    
    
    
    
    
    
    750Other assets
    
    
    778
    
    
    
    809$
    237,791
    
    
    $
    222,725Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    21,499
    
    
    $
    15,608Billings in excess of costs
    
    
    3,713
    
    
    
    688Current portion of debt
    
    
    26,824
    
    
    
    26,816Current portion of capital lease obligations
    
    
    284
    
    
    
    254Total current liabilities
    
    
    52,320
    
    
    
    43,366Long-term Liabilities:Debt, net of current portion
    
    
    9,190
    
    
    
    10,448Line of credit
    
    
    15,111
    
    
    
    13,111Amounts due to seller
    
    
    8,736
    
    
    
    9,855Deferred tax liabilities
    
    
    890
    
    
    
    890Capital lease obligations, net of current portion
    
    
    1,023
    
    
    
    929Total liabilities
    
    
    87,270
    
    
    
    78,599Minority interest
    
    
    317
    
    
    
    237Commitments and contingenciesStockholders equity:Common stock, $0.001 par value, 100,000 shares
authorized; 47,327 and
47,297 shares issued and outstanding, respectively
    
    
    47
    
    
    
    47Additional paid-in capital
    
    
    141,104
    
    
    
    140,497Retained earnings
    
    
    9,053
    
    
    
    3,345Total stockholders equity
    
    
    150,204
    
    
    
    143,889$
    237,791
    
    
    $
    222,725
 See Notes to Consolidated Financial Statements.
  1




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##### Table of Contents



Home Solutions of America, Inc.
Consolidated Statements of Income
 For the Three Months EndedMarch 31,2007
    
    
    2006Net sales
    
    $
    39,931
    
    
    $
    19,280Costs and expenses:Cost of sales
    
    
    20,206
    
    
    
    9,332Selling, general and administrative expenses
    
    
    9,185
    
    
    
    5,94929,391
    
    
    
    15,281Operating income
    
    
    10,540
    
    
    
    3,999Other income (expense), net:Loss on sale of assets
    
    
    (7
    )
    
    
    (2
    )Interest income
    
    
    63
    
    
    
    51Interest expense
    
    
    (1,105
    )
    
    
    (60
    )Other income, net
    
    
    24
    
    
    
    25Total other (expense) income, net
    
    
    (1,025
    )
    
    
    14Income from continuing operations before
income taxes and minority interest
    
    
    9,515
    
    
    
    4,013Income taxes
    
    
    (3,652
    )
    
    
    (1,413
    )Minority interest
    
    
    (155
    )
    
    
    (258
    )Income before discontinued operations
    
    
    5,708
    
    
    
    2,342Gain on disposal, net of loss from discontinued
operations, net of taxes
    
    
    
    
    
    
    781Net income
    
    $
    5,708
    
    
    $
    3,123Net income available to common shareholders:Basic
    
    $
    5,708
    
    
    $
    3,123Diluted
    
    $
    5,708
    
    
    $
    3,123Basic earnings per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.07Gain from discontinued operations, net of taxes
    
    
    
    
    
    
    0.02$
    0.12
    
    
    $
    0.09Diluted earnings per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.06Gain from discontinued operations, net of taxes
    
    
    
    
    
    
    0.02$
    0.12
    
    
    $
    0.08Weighted average number of common shares
outstanding:Basic
    
    
    47,322
    
    
    
    35,898Diluted
    
    
    48,084
    
    
    
    40,702
 See Notes to Consolidated Financial Statements.
  2




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Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
 For the Three Months EndedMarch 31,2007
    
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    5,708
    
    
    $
    3,123Adjustments-Depreciation and amortization
    
    
    681
    
    
    
    428Minority interest in income of consolidated subsidiary
    
    
    155
    
    
    
    258Provision for doubtful accounts
    
    
    
    
    
    
    1,200Loss on sale of assets
    
    
    12
    
    
    
    2Stock-based compensation
    
    
    673
    
    
    
    154Gain on sale of discontinued operations
    
    
    
    
    
    
    (1,698
    )Changes in assets and liabilities, net of acquisitions and divestitures:Accounts receivable
    
    
    (9,438
    )
    
    
    (1,352
    )Prepaid expenses and other current assets
    
    
    (1,575
    )
    
    
    301Costs in excess of billings, net
    
    
    (5,664
    )
    
    
    Inventories
    
    
    592
    
    
    
    (523
    )Other assets
    
    
    31
    
    
    
    721Deferred tax asset
    
    
    68
    
    
    
    Accounts payable and accrued expenses
    
    
    5,965
    
    
    
    (2,191
    )Net cash (used in) provided by operating activities
    
    
    (2,792
    )
    
    
    423Cash Flows from Investing ActivitiesCash received under note receivable
    
    
    360
    
    
    
    650Cash acquired in acquisition, net of cash paid
    
    
    
    
    
    
    87Purchases of property and equipment
    
    
    (230
    )
    
    
    (97
    )Net cash provided by investing activities
    
    
    130
    
    
    
    640Cash Flows from Financing ActivitiesPrincipal payments on debt and capital leases
    
    
    (1,354
    )
    
    
    (2,083
    )Proceeds on line of credit, net of repayments
    
    
    2,000
    
    
    
    Excess tax benefit from options exercises
    
    
    
    
    
    
    218Proceeds from exercise of warrants and options
    
    
    37
    
    
    
    250Payments on amounts due to seller
    
    
    (1,119
    )
    
    
    Distributions to minority stockholder
    
    
    (75
    )
    
    
    (487
    )Net cash used in financing activities
    
    
    (511
    )
    
    
    (2,102
    )Net decrease in cash
    
    
    (3,173
    )
    
    
    (1,039
    )Cash at beginning of period
    
    
    8,713
    
    
    
    8,225Cash at end of period
    
    $
    5,540
    
    
    $
    7,186
 See Notes to Consolidated Financial Statements.
  3




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##### Table of Contents



Home Solutions of America, Inc.
Consolidated Statements of Cash Flows
 For the Three Months EndedMarch 31,2007
    
    
    2006Cash paid for:Interest
    
    $
    654
    
    
    $
    389Income taxes
    
    $
    106
    
    
    $
    59Supplemental schedule of non-cash investing and financing activities:Issuance of stock for conversion of debt and accrued interest
    
    $
    
    
    
    $
    902Fixed assets acquired through debt and capital lease obligations
    
    $
    228
    
    
    $
    104Deferred
gain on discontinued operations
    
    $
    
    
    
    $
    1,433Issuance of notes payable for acquisition
    
    $
    
    
    
    $
    725Reclassification of goodwill to intangibles
    
    $
    4,400
    
    
    $
    Goodwill adjustment
    
    $
    74
    
    
    $
    
 See Notes to Consolidated Financial Statements.
  4




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Home Solutions of America, Inc.
Notes to Consolidated Financial Statements
March 31, 2007
 NOTE 1  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Interim Unaudited Condensed Consolidated Financial Statements
  Company Description and Nature of Operations
   Restoration and Construction Services
    5




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##### Table of Contents




    
    Recovery: Our recovery services include providing initial set up services in an impacted
area (including power, lodging, and training) and then providing the drying,
dehumidification, cleanup and removal of debris from commercial and residential areas to
prepare the areas for the next stage of restoration. We provide these services on an hourly
rate to our commercial and residential clients, both as a contractor and as a subcontractor
to customers providing additional services in these markets.
 
    
    Fire and Water Damage Restoration: We provide trained employees to respond to fire, water
and weather-related emergencies, to inspect structural members and contents damaged by
water, to determine the likelihood or extent of mold growth and to provide immediate
cleaning, drying, moving, storage and deodorization, among other services.
 
    
    Construction: The Companys construction services include providing services to a number
of high growth companies and specialized building markets, including hospitality and gaming,
insurance, education and healthcare markets. We believe our success in construction services
results from our proven ability to manage and perform meaningful, complex projects while
providing accurate budgeting and strict quality control. Although price is a key competitive
factor, we believe our strong reputation, long-standing customer relationships and
significant level of repeat and referral business have enabled us to achieve our leading
position.
 
    
    Indoor Air Contamination: Through PWS, we provide indoor air contamination services,
including contamination from mold, asbestos and lead paint. With increased media attention
regarding the health threat of mold, fewer insurance options and property transfers at risk,
current market conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist of property and system
inspections, surface and air testing, project design, microbial removal, light interior
demolition, repair and specialized cleaning work. Customer opportunities are developed
through a regional sales force as well as through referrals by real estate firms, insurance
adjusters, mortgage companies, attorneys and nationally-branded retailers. The Company
believes it can use its industry experience to give efficacy to its processes and provide
homeowners with quality assurance.
 
    
    Cleaning and Fabric Protection: Through FSS, we provide fabric protection services to
protect furniture, carpet and draperies from stains and daily wear through both
Company-owned locations and over forty licensed locations. This niche market is primarily
targeted at above-average income homeowners. We also provide air duct cleaning services to
remove particulate (organic and inorganic) material, which can cause allergic reactions and
is often the breeding ground for many types of mold, from heating and air conditioning
systems.
 Interior Services
 
  6




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##### Table of Contents



Principles of Consolidation
  Fair Value of Financial Instruments
  Use of Estimates
  Concentration of Credit Risk
     Property and Equipment
   7




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##### Table of Contents



Long-Lived Assets
  Inventories
  Intangibles
  Estimated UsefulBalance
    
    
    Life (Years)Trade name
    
    $
    4,540
    
    
    
    15Customer list
    
    
    8,300
    (1)
    
    
    15Supply agreement
    
    
    1,350
    
    
    
    20Non-compete
    
    
    641
    (1)
    
    
    614,831Accumulated amortization
    
    
    (2,089
    )$
    12,742
 (1)
    
    Additions during the three months ended March 31,
2007 to identifiable intangible assets are based on the Companys estimate pending a final
valuation analysis expected to be completed by June 30, 2007.
  Goodwill
 Goodwill and Other Intangible Assets.
  8




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##### Table of Contents



Balance as of December 31, 2006
    
    $
    122,500Goodwill adjustment related to acquisitions
    
    
    (74
    )Preliminary estimate of identifiable intangibles related to the
Fireline and Associated acquisitions (1)
    
    
    (4,400
    )Balance as of March 31, 2007
    
    $
    118,026
 (1)
    
    See discussion above
 Revenue Recognition
 Revenue Recognition in Financial Statements
    Costs in Excess of Billings
  Costs incurred on uncompleted contracts
    
    $
    51,603Estimated earnings
    
    
    19,57171,174Billings to date
    
    
    (59,906
    )$
    11,268Costs in excess of billings
    
    $
    14,981Billings in excess of costs
    
    
    (3,713
    )$
    11,268
  9




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##### Table of Contents



Stock-Based Compensation
  Share Based Payment Accounting for Stock-Based Compensation
  Stock Plans
   March 31, 2007Shares Reserved
    
    
    Awards Availablefor Grant
    
    
    for Grant1998 Stock Plan
    
    
    3,500
    
    
    
    3932001 Stock Plan
    
    
    6,500
    
    
    
    3,00810,000
    
    
    
    3,401
  10




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##### Table of Contents



, Implementation of FASB 123R
 For the Three Months Ended March 31,2007
    
    
    2006Expected term (in years)
    
    
    
    
    
    
    10Expected volatility
    
    
    
    
    
    
    80
    %Risk-free interest rate
    
    
    
    
    
    
    4.5
    %Dividend yield
    
    
    
    
    
    
    
  March 31, 2007Weighted-AverageRemaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOutstanding at December 31, 2006
    
    
    1,897
    
    
    $
    4.31Granted
    
    
    
    
    
    
    Cancelled/forfeited
    
    
    (60
    )
    
    
    6.85Exercised
    
    
    (32
    )
    
    
    1.48
    
    
    
    
    
    
    $
    153Outstanding at March 31, 2007
    
    
    1,805
    
    
    $
    4.27
    
    
    
    7.0
    
    
    $
    1,989Options vested and expected to vest
    
    
    1,787
    
    
    $
    4.27
    
    
    
    7.0
    
    
    $
    1,969Options exercisable at end of period
    
    
    1,170
    
    
    $
    3.40
    
    
    
    4.3
    
    
    $
    1,577
  Summary of Restricted Stock Awards
   11




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##### Table of Contents



Weighted-AverageNumber
    
    
    Grant Dateof Shares
    
    
    Fair ValueNonvested at December 31, 2006
    
    
    203
    
    
    $
    6.40Granted
    
    
    
    
    
    
    Vested
    
    
    (47
    )
    
    
    6.47Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2007
    
    
    156
    
    
    $
    6.37
  Issuance of Stock for Non-Cash Consideration
  Income Taxes
 Accounting for Income Taxes.
 Comprehensive Income
  Per Share Data
   12




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##### Table of Contents



For the Three Months Ended March 31, 2007Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    5,708Income available to common stockholders
    
    
    5,708
    
    
    
    47,322
    
    
    $
    0.12Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    762Diluted EPS:Income available to common stockholders
    
    $
    5,708
    
    
    
    48,084
    
    
    $
    0.12
  For the Three Months Ended March 31, 2006Numerator
    
    
    Denominator
    
    
    Per Share(Income)
    
    
    (Shares)
    
    
    AmountBasic EPS:Net income
    
    $
    3,123Income available to common stockholders
    
    
    3,123
    
    
    
    35,898
    
    
    $
    0.09Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    4,804Diluted EPS:Income available to common stockholders
    
    $
    3,123
    
    
    
    40,702
    
    
    $
    0.08
 Recent Accounting Pronouncements
 The Fair
Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115
  Accounting for
Uncertainty in Income Taxes
  NOTE 2  SEGMENT INFORMATION
   13




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##### Table of Contents



NOTE 3  NOTES RECEIVABLE
   NOTE 4  DEBT
  
    
    the percentage of eligible accounts receivable (as defined in the credit agreement) used
to calculate the borrowing base is increased from 80% to 85% from the period from April 1,
2007 through December 31, 2007, and thereafter, is reduced to 80%; and
 
    
    the interest rate on advances under the line of credit will remain at its current rate
of prime less 0.25% until December 31, 2007, and thereafter, it will be reduced to prime
less 0.50%. Prior to the modification, the credit agreement provided for the reduction in
the interest rate to begin on July 1, 2007.
   Line of CreditRevolving credit note payable to bank, interest of prime less
0.25%. The note matures in November 2009. At March 31, 2007 the
interest rate was 8.00%.
    
    $
    15,111Notes PayableNote payable to bank, interest of prime less 0.25%. Interest and
principal payable quarterly beginning January 1, 2007. The note
matures in November 2009. At March 31, 2007 the interest rate
was 8.00%. In April 2007, the Company paid $1,851 in principal
and accrued interest payable on the note.
    
    $
    13,750Note payable, non-interest bearing, payable in $5 monthly
installments until paid in full to the seller of FSS of Los Angeles (FSSLA).
    
    
    145
  14




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##### Table of Contents



Note payable to Brian Marshall, the Fireline seller, interest at
12% at March 31, 2007 and due January 31, 2007. Accrued interest on the outstanding
principal balance is due monthly. The seller has agreed to pay
interest to the Company at 8% on certain accounts receivable
beginning January 31, 2007 and if the accounts receivable are
uncollected as of June 30, 2007, the seller has agreed to pay the
Company the outstanding balance of such accounts receivable. The
note is subordinated to the Companys credit facility. As of May
10, 2007 the note payable is outstanding and a portion of the
related accounts receivable are uncollected. The Company is
negotiating with Mr. Marshall to extend the maturity date of the
note.
    
    
    21,650Notes and leases payable to various financial institutions,
collateralized by various equipment and automobiles, bearing
interest at various annual interest rates ranging from prime plus
0.75% to 13.21% with principal and interest payable in monthly
installments ranging from $0.4 to $1 through March 2011.
    
    
    331Term loans with various financial institutions with interest at
various annual interest rates ranging from 7.5% to 9.25%, payable
in monthly installments ranging from $0.5 to $2, due through
September 2009, secured by accounts receivable and equipment.
    
    
    138Total notes payable
    
    
    36,104Less current portion of notes payable
    
    
    (26,824
    )Non-current portion of notes payable
    
    $
    9,190
 NOTE 5  EQUITY
 Common Stock
      15




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NOTE 6  COMMITMENTS AND CONTINGENCIES
 Litigation
      Indemnities and Guarantees
    16




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##### Table of Contents



Employment Agreements
  Consulting Agreements
  NOTE 7  SEGMENT REPORTING
  For the Three Months EndedMarch 31,2007
    
    
    2006Net sales:Restoration and Construction Services
    
    $
    31,290
    
    
    $
    8,621Interior Services
    
    
    8,641
    
    
    
    10,659Total segment net sales
    
    $
    39,931
    
    
    $
    19,280Operating
Income (Loss):Restoration and Construction Services
    
    $
    12,127
    
    
    $
    2,569Interior Services
    
    
    863
    
    
    
    2,430Corporate
    
    
    (2,450
    )
    
    
    (999
    )Total segment operating income
    
    $
    10,540
    
    
    $
    3,999Depreciation and amortization included in operating
income (loss):Restoration and Construction services
    
    $
    454
    
    
    $
    200Interior Services
    
    
    206
    
    
    
    187Corporate
    
    
    21
    
    
    
    41Total segment depreciation and amortization
    
    $
    681
    
    
    $
    428Identifiable assets:Restoration and Construction Services
    
    $
    192,790Interior Services
    
    
    34,290Corporate
    
    
    10,711Total segment identifiable assets
    
    $
    237,791
  17




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##### Table of Contents



NOTE 8  RELATED PARTY TRANSACTIONS
    RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENT INCLUDED IN THIS FORM 10-Q
  
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (Dollars and shares in thousands except per share data).
 Overview
  Growth Strategy
   18




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##### Table of Contents



Service Offerings
  Restoration and Construction Services
     
    
    Recovery: Our recovery services include providing initial set up services in an impacted
area (including power, lodging, and training) and then providing the drying,
dehumidification, cleanup and removal of debris from commercial and residential areas to
prepare the areas for the next stage of restoration. We provide these services on an hourly
rate to our commercial and residential clients, both as a contractor and as a subcontractor
to customers providing additional services in these markets.
 
    
    Fire and Water Damage Restoration: We provide trained employees to respond to fire, water
and weather-related emergencies, to inspect structural members and contents damaged by
water, to determine the likelihood or extent of mold growth and to provide immediate
cleaning, drying, moving, storage and deodorization, among other services.
  19




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##### Table of Contents




    
    Construction: The Companys construction services include providing services to a number
of high growth companies and specialized building markets, including hospitality and gaming,
insurance, education and healthcare markets. We believe our
success in construction services results from our proven ability to manage and perform
meaningful, complex projects while providing accurate budgeting and strict quality control.
Although price is a key competitive factor, we believe our strong reputation, long-standing
customer relationships and significant level of repeat and referral business have enabled us
to achieve our leading position.
 
    
    Indoor Air Contamination: Through PWS, we provide indoor air contamination services,
including contamination from mold, asbestos and lead paint. With increased media attention
regarding the health threat of mold, fewer insurance options and property transfers at risk,
current market conditions have created significant demand for mold inspections,
certifications and remediation services. These services consist of property and system
inspections, surface and air testing, project design, microbial removal, light interior
demolition, repair and specialized cleaning work. Customer opportunities are developed
through a regional sales force as well as through referrals by real estate firms, insurance
adjusters, mortgage companies, attorneys and nationally-branded retailers. The Company
believes it can use its industry experience to give efficacy to its processes and provide
homeowners with quality assurance.
 
    
    Cleaning and Fabric Protection: Through FSS, we provide fabric protection services to
protect furniture, carpet and draperies from stains and daily wear through both
Company-owned locations and over forty licensed locations. This niche market is primarily
targeted at above-average income homeowners. We also provide air duct cleaning services to
remove particulate (organic and inorganic) material, which can cause allergic reactions and
is often the breeding ground for many types of mold, from heating and air conditioning
systems.
 Interior Services
 
 Use of Estimates and Critical Accounting Policies
  Allowance for Doubtful Accounts
   20




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Impairment of Long-Lived Assets
  Goodwill
 Goodwill and Other Intangible
Assets.
 Revenue Recognition
 Revenue Recognition in Financial
Statements
    Stock-Based Compensation
  Share-Based Payment Accounting for Stock-Based Compensation
  21




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(a)
    
    The expected volatility of our common stock price, which we determine based on
historical volatility of our common stock over the prior eighteen month period;(b)
    
    Expected dividends (which do not apply, as we do not anticipate issuing dividends);
 (c)
    
    Expected life of the award, which is estimated based on the historical award exercise
behavior of our employees; and
 (d)
    
    Expected forfeitures of awards, which is estimated based on the historical turnover of
our employees and expected turnover in the future. Prior to adoption of SFAS No. 123(R),
we recognized forfeitures under SFAS No. 123 as they occurred.
  Deferred Taxes
 Accounting for Income Taxes. Accounting for Uncertainty in Income
Taxe
 Results of Operations (Dollars and Shares in Thousands)
 Comparison of three months ended March 31, 2007 to three months ended March 31, 2006
 Restoration and Construction Services
 Net Sales .
 Costs of Sales .
  22




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##### Table of Contents



Selling, General and Administrative Expenses .
 Interior Services
 Net Sales .
 Costs of Sales .
 Selling, General and Administrative Expenses .
 Corporate
 Selling, General and Administrative Expenses
 Other Income (Expense) .
 Income Taxes .
 Discontinued Operations .
 Liquidity and Capital Resources
   23




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##### Table of Contents




    
    the percentage of eligible accounts receivable (as defined in the credit agreement) used
to calculate the borrowing base is increased from 80% to 85% from the period from April 1,
2007 through December 31, 2007, and thereafter, is reduced to 80%; and
 
    
    the interest rate on advances under the line of credit will remain at its current rate
of prime less 0.25% until December 31, 2007, and thereafter, it will be reduced to prime
less 0.50%. Prior to the modification, the credit agreement provided for the reduction in
the interest rate to begin on July 1, 2007.
    Contractual Obligations
  Payments Due by PeriodLess than
    
    
    1  3
    
    
    4  5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsCapital lease obligations
    
    $
    1,307
    
    
    $
    284
    
    
    $
    492
    
    
    $
    435
    
    
    $
    96Notes payable and lines
of credit
    
    
    51,125
    
    
    
    26,824
    
    
    
    24,253
    
    
    
    48
    
    
    
    Operating leases
    
    
    1,403
    
    
    
    727
    
    
    
    499
    
    
    
    177
    
    
    
    Total
    
    $
    53,835
    
    
    $
    27,835
    
    
    $
    25,244
    
    
    $
    660
    
    
    $
    96
  
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    24




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
 
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and
 
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect
on the consolidated financial statements.
   
    
    Management did not maintain effective controls over management review of user accounts
at any location within the Company because of a lack of segregation of duties within each
application.
 
    
    The Company did not maintain effective control environment because it lacked (1) the
appropriate communication of the code of conduct, employee handbook and fraud policy (2)
the appropriate documentation related to personnel responsibilities and performance, (3)
appropriate human resource policies regarding personnel matters, and (4) an internal audit
function.
 
    
    Management did not maintain effective controls over stock/options. A reconciliation of
the Companys outstanding shares against the stock transfer agents records historically is
not performed. Also, journal entries to record compensation expense and option exercises
were not reviewed and approved by the CFO. Finally, the Companys registered public
auditing firm noted during the financial statement audit for the year ended December 31,
2006 that Board of Director compensation expense was erroneously recorded as prepaid
expenses ($254,000) in the second quarter of 2006.
 
    
    The Company did not maintain effective internal controls over income taxes because
documentation of the review and approval of the income tax returns, quarterly tax
estimates, and tax journal entries were not present.
 
    
    The Company did not maintain effective controls over the accounts payable and
expenditures cycle because (1) vendor maintenance request forms were incomplete and were
completed after all additions had already been entered into the system, (2) vendor
maintenance requests were not approved, (3) no purchases journal was maintained by the
accounts payable clerk and not all purchase orders matched the invoices (and there was
support for variances), (4) managers were not signing all invoices when the product/service
is received to ensure that the product/service is acceptable prior to payment, (5) not all
invoices contained documentation of the approval and GL coding provided by the controller,
(6) expense reports were not reviewed and approved prior to payment, (7) wire transfers
were not approved and one person has the ability to initiate and perform a wire transfer,
(8) goods and services received but not invoiced are not tracked to ensure timely recording
of all
expenditures, (9) the accounts payable system did not prevent entry of duplicate invoices,
(10) there was no indication that review of check registers tested had occurred, (11) for
invoices that did not match the amount paid per the check stub, there was no explanation
provided on the invoice explaining or reconciling the variance, (12) lack of segregation of
duties, (13) check registers were not reviewed and approved, (14) the Companys registered
public accounting firm noted several adjustments related to the accounts payable cycle and
the fact that a vendor statement did not agree to the general ledger.
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
    
    At three locations, management did not maintain effective controls over accounts
receivables and sales because: (1) masterfile changes were not approved, and the masterfile
was not reviewed for validity, accuracy, completeness and timely recording of changes, (2)
individual contracts were not approved, (3) copies of lien waivers and copies of invoices
were not provided as support for several sales, (4) there was no evidence of a reviewed and
approval of invoices, (5) cash receipts were not reviewed and approved, (6) posted cash
receipt entries were not reviewed, (7) the appropriate accounts receivable and sales were
not reviewed and approved, (8) a lack of access and segregation of duties was noted, (9)
management noted during the financial statement audit that some sales were recorded twice,
(10) the appropriate approval of contracts were not documented, (11) invoices to accounts
receivable subledger reconciliation was not independently reviewed, (12) account receivable
subledger to general ledger reconciliation was not independently reviewed, (13) cash
receipts record (log) was not reviewed and no one verified that cash receipts are posted to
the correct account.
 
    
    At one location, management did not maintain effective controls over the inventory
function because (1) an inventory tracking system (subledger) was not maintained;
therefore, no reconciliation to the general ledger could be performed, (2) an inventory
master list was not being maintained, (3) matching of the receipts with the purchase order
and bill of lading was not performed and the quality inspection is not performed, (4)
the entries to record the receipt of inventory in the general ledger were not
reviewed/approved, (5) a review of the inventory records to ensure that all issuances were
properly approved was not performed, (6) lack of segregation of duties and access
authorization was noted, (7) quarter inventory adjustments were not reviewed, (8) lack of
appropriate documentation for the inventory count was noted, (9) finally, during the
financial statement audit the auditor made an adjustment to inventory.
 
    
    At three locations, the Company did not maintain effective internal controls over
Financial Closing and Reporting because (1) not all journal entries have adequate support,
nor are all journal entries approved, (2) all required elements were not included in the
controllers monthly binder(s), (e.g. bank reconciliations, bank statements, and the
reconciliation for intercompany accounts), (3) no supporting inventory documentation was
submitted as a part of the financial package, (4) no sales and expenses cutoff review were
performed, (5) lack of access controls to the chart of accounts and the rights within the
accounting software, (6) no approval for changes to the chart of accounts was noted, (7) no
review and approval of the financial reporting packages to the supporting general ledgers
was noted, (8) management did not use a generally accepted accounting principles (GAAP)
disclosure checklist in preparing and reviewing draft financial statements to ensure
accuracy, completeness and consistency of required disclosures, and (9) each
financial-statement disclosure was not independently reviewed and validated for appropriate
assumptions, methodology, and presentation of all relevant information in accordance with
generally accepted accounting principles.
 
    
    At one location, management did not maintain effective controls over the fixed asset
cycle because (1) a fixed asset policy existed but there was no evidence of review and
approval and the fixed asset policy had not been distributed to the person who codes and
records all purchases, including fixed asset purchases to the general ledger (accounts
payable clerk), (2) capital expenditure forms were not completed for all fixed asset
acquisitions. One asset was purchased using the expense reimbursement process and not
recorded, (3) reconciliation of fixed assets and accumulated depreciation was not performed
and reviewed, (4) management did not review the fixed asset ledger at least quarterly to
ensure compliance, (5) fixed asset inventory review, documentation and approval are not
performed, any required impairment adjustments are not recorded, (6) the monthly
depreciation expense journal entry prepared is not reviewed as part of the monthly closing
and journal entry review processes, (7) no documentation of the approval of the disposal of
assets was noted, (8) management does not review the purchase journal and invoices to
ensure that fixed assets are recorded in the proper period. The journal entry and support
was not put into a monthly binder and reviewed quarterly by the corporate controller.
 
    
    At one location, management did not maintain effective controls over the payroll
function because (1) no authorization for hiring employees was noted, (2) no review of the
employee master file occurred, (3) no review and approval of timekeeping was noted, (4) no
reconciliation was prepared and there was no documented review of the comparison of
timesheets to paychecks, and (5) no control over the distribution of paychecks was noted.
   26




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##### Table of Contents




    
    We plan to devote more resources to developing and communicating an anti-fraud program,
code of conduct policies and human resource polices to our employees and management. The
program may include the hiring of outside or in-house counsel to be dedicated to the
development and enforcement of compliance programs. Background checks will be performed on
personnel being placed into positions of material responsibility. The compliance program
also will include a communication project to set the right tone from the top. Additionally,
we also plan to put more resources to following up on addressing control deficiencies
identified in the previous audits;
 
    
    The Company intends to develop additional policies and procedures to further strengthen
its reporting, including the areas of, sales and expense cut-off and sales returns,
financial reporting and disclosure procedures. In addition, we plan to evaluate hiring
additional resources to perform the internal audit function;
 
    
    The Company is evaluating the implementation of an ERP Suite to address certain of the
material weaknesses listed in the Management Report on Internal Controls Over Financial
Reporting, including the effective control over period-end financial close and reporting
and the effective control over certain accounting functions. The ERP implementation should
facilitate the appropriate review and approval over the recording of journal entries to
ensure the accuracy and completeness of the journal entries recorded. Additionally, the
Company will make changes to its corporate accounting staff, including the hiring or
contracting of additional personnel;
 
    
    Additional segregation of duties and appropriate review, approval, and supporting
documentation will be installed in 2007 to maintain effective controls over the
disbursement function. We are developing policies for proper documentation, review and
approval related to subsidiary operations, compensation, expense reimbursements;
 
    
    Additional segregation of duties and appropriate review, approval, and supporting
documentation will be implemented in 2007 to maintain effective controls over the fixed
asset and payroll functions;
 
    
    With the implementation of an ERP the financial reporting package, we should be able to
further restrict access to the inventory detail schedule used to support the general ledger
balances. With additional implementation of ERP applications, we plan to eventually replace
the current periodic inventory system, relying on monthly inventory counts using physical
inventory count sheets, with a perpetual inventory system. Meanwhile, more procedures will
be installed for review of inventory count documentation; and
 
    
    Additional processes will be instituted to timely resolve identified accounting and
legal issues so that period-end financial statements and reporting can be timely completed.
    27




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##### Table of Contents



Changes in internal controls
   28




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##### Table of Contents



PART II
OTHER INFORMATION
 
 
 Item 1. Legal Proceedings.
      29




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##### Table of Contents



Item 1A. Risk Factors
  
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 
 Item 3. Defaults Upon Senior Securities
  
 
 Item 4. Submission of Matters to a Vote of Security Holders
  
 
 Item 5. Other information
  
    
    the percentage of eligible accounts receivable (as defined in the credit agreement) used
to calculate the borrowing base is increased from 80% to 85% from the period from April 1,
2007 through December 31, 2007, and thereafter, is reduced to 80%; and
 
    
    the interest rate on advances under the line of credit will remain at its current rate
of prime less 0.25% until December 31, 2007, and thereafter, it will be reduced to prime
less 0.50%. Prior to the modification, the credit agreement provided for the reduction in
the interest rate to begin on July 1, 2007.
   30




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    Certificate of Incorporation of the Company, as restated on July 31, 2001 (filed with the SEC
on July 9, 2001 as Exhibit A to the Companys Information Statement on Schedule 14C and
incorporated herein by reference).3.2
    
    Certificate of Amendment to the Certificate of Incorporation of Nextgen Communications
Corporation, changing the corporations name to Home Solutions of America, Inc., as filed
with the Secretary of State of Delaware on December 23, 2002 (filed with the SEC on December
22, 2002 as Exhibit A to the Companys Information Statement on Schedule 14C and incorporated
herein by reference).3.3
    
    Certificate of Amendment to the Restated Certificate of Incorporation of Home Solutions of
America, Inc. as filed with the Delaware Secretary of State on June 16, 2006 (filed with the
SEC on July 14, 2006 as Exhibit 3.3 to the Companys Registration Statement on Form 8-A and
incorporated herein by reference).3.4
    
    Amended and Restated Bylaws of the Company, as amended on April 4, 2006 (filed with the SEC
on May 15, 2006 as Exhibit 3.3 to the Companys Quarterly Report on Form 10-Q and incorporated
herein by reference).10.1
    
    First Amendment to Credit Agreement among Home Solutions of America, Inc., Texas Capital
Bank, National Association, Amegy Bank, N.A., Bank of Oklahoma, NA, and Compass Bank, dated as
of March 30, 2007. +10.2
    
    Ratification and Confirmation of Guaranty among Cornerstone Marble & Granite, Inc.,
Fiber-Seal Systems, L.P., Home Solutions Restoration of Louisiana, Inc., P.W. Stephens, Inc.,
Southern Exposure Unlimited of Florida, Inc., S.E. Tops of Florida, Inc., FSS Holding Corp.,
Southern Exposure Holdings, Inc. and Fireline Restoration, Inc., for the benefit of Texas
Capital Bank, National Association, dated March 30, 2007.31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications. +32.1
    
    Section 1350 Certifications. +
 +
    
    Filed herewith.
  31




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##### Table of Contents



Signatures
  HOME SOLUTIONS OF AMERICA, INC.
RegistrantMay 10, 2007
    /s/ Frank J. FradellaFrank J. FradellaChairman, Chief Executive Officer and PresidentMay 10, 2007
    /s/ Jeffrey M. MattichJeffrey M. MattichChief Financial Officer  32




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##### Table of Contents



Exhibit Index
 ExhibitNo.
    
    Description3.1
    
    Certificate of Incorporation of the Company, as restated on July 31, 2001 (filed with the SEC
on July 9, 2001 as Exhibit A to the Companys Information Statement on Schedule 14C and
incorporated herein by reference).3.2
    
    Certificate of Amendment to the Certificate of Incorporation of Nextgen Communications
Corporation, changing the corporations name to Home Solutions of America, Inc., as filed
with the Secretary of State of Delaware on December 23, 2002 (filed with the SEC on December
22, 2002 as Exhibit A to the Companys Information Statement on Schedule 14C and incorporated
herein by reference).3.3
    
    Certificate of Amendment to the Restated Certificate of Incorporation of Home Solutions of
America, Inc. as filed with the Delaware Secretary of State on June 16, 2006 (filed with the
SEC on July 14, 2006 as Exhibit 3.3 to the Companys Registration Statement on Form 8-A and
incorporated herein by reference).3.4
    
    Amended and Restated Bylaws of the Company, as amended on April 4, 2006 (filed with the SEC
on May 15, 2006 as Exhibit 3.3 to the Companys Quarterly Report on Form 10-Q and incorporated
herein by reference).10.1
    
    First Amendment to Credit Agreement among Home Solutions of America, Inc., Texas Capital
Bank, National Association, Amegy Bank, N.A., Bank of Oklahoma, NA, and Compass Bank, dated as
of March 30, 2007. +10.2
    
    Ratification and Confirmation of Guaranty among Cornerstone Marble & Granite, Inc.,
Fiber-Seal Systems, L.P., Home Solutions Restoration of Louisiana, Inc., P.W. Stephens, Inc.,
Southern Exposure Unlimited of Florida, Inc., S.E. Tops of Florida, Inc., FSS Holding Corp.,
Southern Exposure Holdings, Inc. and Fireline Restoration, Inc., for the benefit of Texas
Capital Bank, National Association, dated March 30, 2007.31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications. +32.1
    
    Section 1350 Certifications. +
 +
    
    Filed herewith.
  33