UNITED STATES

10QSB 1 f10qsb033106.htm 10QSB UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2006

COMMISSION FILE NUMBER 333-69414

SOURCE DIRECT HOLDINGS, INC.

(Exact name of registrant as specified in charter)


NEVADA		20-0858264
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


4323 Commerce Circle, Idaho Falls, Idaho		83401
Address of principal executive offices)		(Zip Code)


Registrant's telephone number, including area code	(877) 529-4114

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 18, 2006, the Company had outstanding 91,767,975 shares of its common stock, no par value.

TABLE OF CONTENTS


ITEM NUMBER AND CAPTION		PAGE

PART I

ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND PLAN OF OPERATIONS	7
ITEM 3.	CONTROLS AND PROCEDURES	16

PART II

ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 2.	UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	17

PART I

ITEM 1. FINANCIAL STATEMENTS

SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Balance Sheets

March 31, 2006

(Unaudited)


	31-Mar-06		30-Jun-05
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	2,732	$	1,406
Accounts receivable		103,765		123,741
Inventory		398,811		332,802
Prepaid expenses		400,572		150,000
Total Current Assets		905,880		607,949

Property and Equipment
Property and equipment		886,084		884,084
Less: Accumulated depreciation		(61,541)		(29,954)
Net Property and Equipment		824,543		854,130

Other Assets
Intangible assets		115,000		115,000
Accumulated amortization		(17,890)		(12,139)
Net Other Assets		97,110		102,861

TOTAL ASSETS	$	1,827,533	$	1,564,940

LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	60,725	$	95,135
Accrued expenses		33,866		38,757
Current portion of building loan		7,670		4,284
Shareholder loan		75,305		-
Notes payable		129,263		136,263
Total Current Liabilities		306,829		274,439

Long-Term Liabilities
Building loan, net of current portion		755,160		762,114
Total Long-Term Liabilities		755,160		762,114

Total Liabilities		1,061,989		1,036,553

Stockholders' Equity
Common stock -- $.001 par value; 200,000,000 shares authorized;
91,767,975 and 79,001,800 issued and outstanding, respectively		91,768		79,002
Additional paid-in capital		3,444,520		2,584,548
Accumulated deficit		(2,770,744)		(2,135,163)
Total Stockholders' Equity		765,544		528,387
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,827,533	$	1,564,940

See accompanying notes to financial statements

SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Statement of Operations

For the three and nine month periods ended March 31, 2006 and 2005

(Unaudited)



	For the Three		For the Three		For the Nine		For the Nine
	Months Ended		Months Ended		Months Ended		Months Ended
	31-Mar-06		31-Mar-05		31-Mar-06		31-Mar-05

Revenues	$	137,603	$	120,711	$	267,581	$	190,117
Cost of goods sold		48,790		38,326		96,359		72,103
Gross Profit		88,813		82,385		171,222		118,014

General and admin. expense		182,549		169,930		749,151		589,362

Income (Loss) from Operations		(93,736)		(87,545)		(577,929)		(471,348)

Interest expense		(18,387)		-		(57,652)		-

Net Income (Loss)	$	(112,123)	$	(87,545)	$	(635,581)	$	(471,348)

Net Loss per share	$	(0.001)	$	(0.001)	$	(0.008)	$	(0.006)

Weighted Average Number
of shares outstanding		84,543,531		78,370,289		82,404,526		73,077,495

See accompanying notes to financial statements

SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

For the nine month periods ended March 31, 2006 and 2005

(Unaudited)


	For the nine		For the nine
	Months Ended		Months Ended
	31-Mar-06		31-Mar-05

Cash Flow Used for Operating Activities
Net Income (Loss)	$	(635,581)	$	(471,348)
Adjustments to Reconcile net loss to net cash used
for operating activities:
Depreciation		31,587		6,816
Amortization expense		5,751		6,577
Stock issued for services		23,678		-
(Increase)/decrease in trade receivables		19,976		(83,506)
(Increase)/decrease in inventory		(66,009)		(239,266)
(Increase)/decrease in employee advance		-		(5,437)
(Increase)/decrease in prepaid expenses		141,960		-
Increase/(decrease) in accounts payable		(34,410)		87,638
Increase/(decrease) in accrued liabilities		(4,892)		(3,014)
Increase/(decrease) in income taxes payable		-		(60)
Net Cash Flows Used for Operating Activities		(517,940)		(701,600)

Cash Flows used for Investing Activities
Purchase equipment		(2,000)		(31,857)
Net Cash Flows Used for Investing Activities		(2,000)		(31,857)

Cash Flows used for Financing Activities
Payment on equipment loans		-		(14,602)
Proceeds from shareholder loans		75,905		-
Payments on shareholder loans		(600)		(36,563)
Net borrowing (payments) on long-term debt		(3,568)		-
Increase (decrease) in note payable		(7,000)		35,000
Proceeds from stock issuance		456,529		749,980
Net Cash Flows Used for Financing Activities		521,266		733,815

Net Increase / (Decrease in cash		1,326		358
Beginning Cash Balance		1,406		954

Ending Cash Balance	$	2,732	$	1,312

Supplemental Disclosures
Interest paid	$	57,652	$	-
Income taxes paid		-		-
Shares and share equivalents issued for expenses		416,210		-

See accompanying notes to financial statements

Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2005

(Unaudited)

Note 1

ORGANIZATION AND INTERIM FINANCIAL STATEMENTS

Interim financial statements - The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles for complete financial statements generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2006. There has not been any change in the significant accounting policies of Source Direct Holdings, Inc., for the periods presented. The results of operations for the three and nine month periods ended March 31, 2006, are not necessarily indicative of the results for a full-year period. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2005 filed with the Securities and Exchange Commission (the “SEC”).

Note 2

INVENTORY

Inventories are stated at lower of cost or market and consist of the following:


Raw Materials	$	198,035
Finished Goods		200,776

Total Inventory	$	398,811

Note 3

ISSUANCE OF COMMON SHARES AND WARRANTS

During the period from January 1, 2006, through March 31, 2006, the Company issued 2,260,000 common shares and an equal number of attached warrants for cash of $113,000 at $0.05 per share. Additionally, the Company issued 6,000,000 common shares for services. This transaction was valued at $275,193 or $0.046 per share.

In March 2006, the Company issued 5,220,000 warrants in exchange for professional services to be provided over two years. The warrants are exercisable at $0.125 per share and expire in three years. The Company valued this transaction at $103,313. This transaction is accounted for in accordance with SFAS 123(R), Share-Based Payment and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The Company has booked a prepaid expense for this transaction and will amortize it straight-line over two years.

Note 4

RELATED PARTY / SHAREHOLDER LOANS

As of March 31, 2006, shareholders had loaned the Company $75,305. The loans are unsecured, due on demand, and non-interest bearing.

The Company has borrowed funds for operating purposes from an individual pursuant to a note. The terms of the note include principal of $50,000 and interest of $3,763. If the principal and interest was not paid within 60 days of 6/15/05, then additional interest of 10% annually will be due on original amounts. This note is currently in default. The Company is working with the individual to make payment arrangements.

Note 5

GOING-CONCERN

The Company has accumulated losses since inception totaling $2,778,083 and was still developing operations as of March 31, 2006. Financing for the Company’s activities to date has been provided primarily by the issuance of stock, by advances from stockholders and by borrowing funds. The Company’s ability to achieve a level of profitable operations and/or additional financing impacts the Company’s ability to continue as it is presently organized. Management’s plans are to continue the development of the Company’s principal operations. Should management be unsuccessful in its operating activities, the Company may experience material adverse effects.

Note 6

SUBSEQUENT EVENTS

On April 5, 2006, the Company issued 1,100,000 shares of common stock in exchange for advertising. On April 18, 2006, the Company issued 400,000 shares of common stock for $20,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward Looking Statements

This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of Source Direct Holdings, Inc. (“we” or the “Company”), that reflect management’s assumptions and beliefs based on information currently available. Additionally, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer, or in various filings made by the Company with the Securities and Exchange Commission. Words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project or projected," or similar expressions are intended to identify "forward-looking statements." Such statements are qualified in their entirety by reference to and are accompanied by the below discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.

Management is currently unaware of any trends or conditions other than those mentioned in this management's discussion and analysis that could have a material adverse effect on the Company's consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue, (ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so, (iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future (vi) a very competitive and rapidly changing operating environment, (vii) changes in business strategy, (viii) market acceptance of our products and, (ix) a failure to successfully market the Company’s products.

The risks identified here are not all inclusive. New risk factors emerge from time to time, and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company disclaims any obligation or intention to update any forward-looking statement.

All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934.

COMPANY HISTORY

Source Direct, Inc. (“SDI”) was incorporated under the laws of the State of Idaho on July 8, 2002. Since its inception, SDI was in the business of promoting and marketing cleaning products and supplies, and developing new products.

On October 14, 2003, SDI, the predecessor of the Company, merged with a wholly owned subsidiary of Global Tech Capital Corp. (“GTCC”), a publicly traded Nevada corporation which was incorporated on July 21, 1998. As a result of the merger, SDI was the surviving entity, and became a wholly owned subsidiary of GTCC. GTCC’s name was then changed to Source Direct Holdings, Inc.

References in these financial statements to the “Company” refer to Source Direct Holdings, Inc., and its subsidiary, Source Direct, Inc., unless otherwise stated.

SUMMARY OF OUR BUSINESS

We acquired the formulas for two cleaning products. These products are Simply Wow® and Stain Pen®. The formulas for these products were developed by Deren Z. Smith, the President of Source Direct and one of its directors. Kevin Arave, the Secretary/Treasurer of Source Direct and a director, also assisted in the funding for the development of the formulas. Any and all rights and interests of these parties in and to the formulas or the trademarks were transferred to the Company for 11,500,000 shares each of the Subsidiary. These shares converted into 17,250,000 of the parent company as a result of the Merger.

Additionally, the company developed a new product called Odor Annihilator in May 2005 and Tuff Buff ® wash-n-wax in November 2005.

We have applied for the trademarks to all four of our products but have not made application for any patents. Management believes it would be difficult, if not impossible, to duplicate the formulas for the Company’s products. We maintain confidentiality agreements with all parties who have access to the formulas. Nevertheless, there is no assurance that someone could not duplicate the formulas and directly compete with the company. The cost of litigating the issue of illegal competition may preclude us from being able to protect the secrecy of the formulas.

Our business is currently organized into three operational divisions: Household products, Automotive products and Industrial products.

HOUSEHOLD PRODUCTS

Simply Wow®

Organic Simply Wow® is an all-purpose cleaner that safely and effectively cleans any washable surface. Simply Wow® is developed with nonionic surfactants that contain penetrating and suspending agents that dissolve the toughest grease, protein, dirt, and oil stains. The product is a water-based, multipurpose, biodegradable, nontoxic degreaser with a pleasant lemon fragrance that effectively replaces flammable or combustible solvent cleaners. It contains no hazardous solvents or acidic-type chemicals, and its formulation safely accomplishes the cleaning that previously required solvent or acid cleaners, which exposed the user and the environment to the inherent hazards of such chemicals. The following are what we believe to be specific advantages of using Simply Wow®:

It is designed with nonionic surfactants and wetting, penetrating, and suspending agents to dissolve the toughest grease, protein, dirt and oil stains.

It replaces most or all cleaners in a person’s home and can be used to clean stains on various surfaces, including walls and cars.

It will keep carpets cleaner longer by removing previously uncleanable spots.

It is biodegradable and nontoxic, making this product environmentally safe and friendly.

It removes all types of spots and stains including ink, permanent marker, fingernail polish, scuff marks, crayon, coke, coffee, tea, grease, oil, mildew, pet stains and food stains from materials ranging from clothing to upholstery.

Stain Pen®

Stain Pen® is an on-the-spot stain remover. The convenient size makes it easy to keep at home, in the car, or at the office. This product has a proprietary formula that safely removes food stains, oil paint (wet or dry), makeup, wine, blood, grass stains, grease, coffee and tea stains and copy machine stains with no harmful fumes or large quantities of liquid to spill. Stain Pen® works simply by applying a small amount of stain pen solution to the stain and applying a damp cloth.

Simply Wow Odor Annihilator™

We recently introduced the Odor Annihilator into the market and have applied for a trademark. The Odor Annihilator is an organic, biodegradable cleaning product designed to eliminate household odors. Odor Annihilator™ does more than just remove the odor, it annihilates the source of the odor.

Odors are caused by organisms that send off molecules that your nose detects. Air fresheners try to overpower the odor by covering it up. Fabric refreshers try to remove the odor, but Simply WoW® Odor Annihilator™ goes further by removing the source of the odor so that it doesn't return. Odor control consists of perfumes or other masking agents that are applied to hide the odor. This however does not decrease the odor itself, but adds to it to try and make it les objectionable. Unfortunately, the odor often becomes overpowering, or only less objectionable than before. Odor Annihilator™ annihilates the source of the odor first by applying a fast-acting neutralizer that binds the odor-causing molecules. This reduces their volatility and prevents them from reaching your nose. Then a special select bacteria degrades the odor-causing molecules, destroying them by converting them into microbial cell components, carbon dioxide and water, thereby eliminating the odor at its source.

AUTOMOTIVE PRODUCTS

Simply Wow® Tuff Buff®

In November 2005, Source Direct launched its newest all-organic, waterless wash-n-wax product. Tuff Buff® provides solutions for the discerning driver, professional and hobbyist alike, who demand the highest quality for all their automotive needs -- and it does so at a price point that means exceptional volume sales for Source Direct through its rapidly expanding distribution network. Tuff Buff® contains no acids, V.O.C.s, petroleum distillates, Hexane, or Silicone, eliminating annoying "fish eyes" in the paint and making it safe for even the most prestigious automotive retailers. Tuff Buff® restores factory shine, safely removes bugs and bird droppings, cleans and protects all finishes including plexiglass and black chrome, is safe for aftermarket window tint, and will not leave white residue in seams. Tuff Buff® polishes & protects virtually any hard nonporous surface including windshields.

Tuff Buff® has been designed to improve the appearance of car paint, engine, trim and components. It is intended to restore dull or faded rubber, tires, trim, vinyl, paint, chrome, and other surfaces. Tuff Buff is safe to use on most surfaces and leaves no caking or residue. Most important, Tuff Buff works to protect and shine virtually any surface and is as organic as an apple.

Simply Wow Odor Annihilator

We recently introduced the Odor Annihilator into the automotive market as well as the household market.

INDUSTRIAL PRODUCTS

Simply Wow Industrial Cleaner

The Wow Industrial Cleaner has been designed to remove grease, oil, wax, tar dirt and other industrial cleaning needs. It is a highly concentrated cleaning solution that can be diluted up a 40:1 ratio. The following are what we believe to be specific advantages of using the Wow Industrial Cleaner:

Safe and effective

Biodegradable

Non-abrasive

Non-flammable

Industrial strength

PRODUCT PRODUCTION

We currently produce our products in-house. Stain Pen® and Simply Wow All Purpose Cleaner are produced in our facility. We also have agreed with other production facilities to help in manufacturing of our products, in the event we could not produce anticipated future needs. We also believe other production facilities are available if needed to meet any demand for production. We also believe sufficient quantities of raw materials for our products are reasonably available such that production would not be unreasonably delayed, although we do not have any contracts for production of these raw materials. We have not secured any form of financing for significant production of our products. We will attempt to secure funding either from private sources or through a bank loan or factoring arrangement. There is no assurance that we will be able to obtain any of these sources of financing, or that if we could obtain it that the financing terms would be favorable to the company.

Since inception, we have spent approximately $71,884 on research and development of the business, our products, and our marketing strategy.

PRODUCT DISTRIBUTION

The most critical phase of our operations is the marketing of our products. We market our products using both current management personnel and outside independent marketing companies. We currently have several outside marketing arrangements, which we consider significant. These agreements are with the following organizations:

Morgan & Sampson SCA,

Daymon Associates, Inc.

Bridgeworks Marketing & Sales, Inc. (Canada)

The Morgan & Sampson agreement grants Morgan & Sampson SCA the exclusive marketing and distribution rights to Source Direct's proprietary Stain Pen™ Twin Pack to more than 5,000 grocery retailers in the Western United States and Hawaii. In January 2005, through this agreement, we began shipments of our Stain Pen™ product to all Safeway® stores and Kmart Super Centers® nationwide. Odor Annihilator™, an all-organic, biodegradable odor remover, has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful Morgan & Sampson and ATA Retail Services network.

The Daymon Associates broker contract designates Daymon Associates, Inc. as the exclusive sales agent and broker in connection with all sales and/or contracts for merchandise designated to Costco® Warehouses in the following regions:

Domestic: Bay Area; Los Angeles Region; Midwest Region; Northeast Region; Northwest Region; San Diego Region; Southeast Region; Texas Region; Mexico Region; Eastern Canada Region; and the Western Canada Region.

International: Japan; Korea; Taiwan; and United Kingdom.

The Daymon Associates agreement provides that the Company will pay to Daymon a commission on the Company's products sold, shipped, and invoiced to Costco® within the above-defined territory. The Commissions paid will be based on the gross amount of sales generated, defined as the amount of the invoice, less any cash discounts. The Company agreed to pay a 3% commission.

Under the Daymon Associates agreement, Daymon agreed to devote its efforts to the sale of the Company's products during the term of the agreement, which is one year, with automatic one-year renewals unless terminated by either party on 90 days' written notice. Daymon agreed to provide weekly sales data, by location, as well as analytical reviews of such data. Daymon agreed to devote adequate facilities and personnel to perform the services required in the Agreement.

The Bridgeworks agreement designates Bridgeworks Marketing & Sales, Inc. (“Bridgeworks”), as our exclusive Canadian agents. Bridgeworks has over 15 years of industry experience marketing and selling to a variety of retailers, wholesales and industrial accounts in Canada. With a proven track record of generating business by establishing and maintaining positive working relationships, Bridgeworks will continue to expand into other territories and increase customer base where networking will become the foundation in developing Bridgeworks and its clients as industry leaders. As a national company, Bridgeworks offers flexibility and diversification to both customer and client in an always growing and changing industry.

Though our agreement with Bridgeworks, we have received orders and began shipments in March 2006 of the Simply WoW® organic cleaner, Simply WoW® Odor Annihilator, and the Stain Pen® to Army & Navy Department Stores Ltd. which operates stores in downtown Vancouver, British Columbia; New Westminster, British Columbia; Langley, British Columbia; Calgary, Alberta; and Edmonton's historic Strathcona District, as well as a new 60,000 sq. ft. store in Edmonton's popular Londonderry Mall, both in Alberta.

In addition to the above agreements, we also utilize internal marketing efforts to advertise and distribute our products. In October 2005, we appointed a new National Director of Business Development. Sharon Kirkwood brings 27 years of high-level experience in the consumer packaged goods industry. Ms. Kirkwood also has many key industry contacts.

In January 2005, our internal marketing staff contracted with Bi-Mart Membership Discount Stores. The Company has begun shipments of our proprietary 3-ounce Stain Pen™ to all Bi-Mart Membership Discount Stores throughout the northwest region.

Bi-Mart stores are membership-only stores, which means that customers must join Bi-Mart or be a guest of a member before shopping with them. Bi-Mart currently has over one million members at more than 60 stores in Washington, Oregon, and Montana, with plans to continue aggressive expansion throughout the greater Northwest. Each store is approximately 30,000 square feet and deals mainly in hard goods in the following departments: photo, house-wares, sporting goods, automotive, hardware, health & beauty, toys, clothing/shoes, beer/food/wine, and a full service pharmacy.

During the quarter ended September 30, 2005, our internal marketing staff expanded our distribution into the Home Shopping Network catalogue, Improvements. Home Shopping Network is a global, multi-channel retailer reaching more than 85 million U.S. households. Management believes this will offer greater distribution opportunities with this mega-retailer, as HSN expands its catalogue portfolio through numerous acquisitions currently under way.

During the quarter ended March 31, 2006, Source Direct received the initial purchase order for Simply WoW® Odor Annihilator for delivery by June 20, 2006, to ATA Retail Services, Inc. ATA Retail Services is a privately owned, national company with 15 years in operation as a supplier of full-service merchandising programs to over 6,500 stores in 48 states, including the country's three largest supermarket chains, many regional supermarket chains and numerous drug stores. ATA Retail Services is headquartered in the San Francisco Bay area, employing more than 1,000 people.

Source Direct became a title sponsor on a NASCAR sponsorship agreement with Erik Darnell and Darnell Motor Sports for the 2004 and 2005 NASCAR racing seasons. Erik Darnell was a featured competitor in "Roush Racing: Driver X," a 13-week series debuting on the Discovery Channel. After 13 weeks of intense competition, competing on two of the toughest racetracks in NASCAR, selected out of 1,700 applicants and winning the approval of ROUSH RACING's toughest judges, Erik Darnell was recognized as the best talent for 2006. In addition, Source Direct sponsored Roush Racing's No. 99 Ford F-150 and NASCAR driver Erik Darnell in the NASCAR Craftsman Truck Series races at the Martinsville Speedway on April 1, 2006, and at the Gateway International Raceway on April 29, 2006. As a result of these two races, the Company is in negotiations with two major distributors to sell the Simply Wow products. The Company is one of Erik Darnell’s primary sponsors.

In March 2006, Source Direct became a sponsor for the Simply WoW® Lacey Racers, the only all-female professional race team competing for more than $250,000 in prize money in the National Guard Great Race 2006, the world’s richest, transcontinental vintage car rally. The event begins June 24, 2006, in Philadelphia, Pennsylvania; crosses 15 states, with stops in 50 cities; and finishes 14 days and 4,200 miles later in San Rafael, California. Through this sponsorship, we anticipate that exposure for Source Direct's Simply WoW® family of organic, biodegradable cleaning products will span the continent, with Simply WoW® product sampling taking place at overnight stops in York and Washington, Pennsylvania; Dublin, Ohio; Indianapolis, Indiana; Saint Louis, and Springfield Missouri; Wichita, Kansas; Pueblo and Durango, Colorado; Page, Arizona; Tonopah, Nevada; Sacramento, Vallejo, and San Rafael, California; and at free, family-focused activities including parades, local car shows, and festivals throughout the route.

Linda Pike, driver, and Sheila Watson, navigator, will be competing in a 1937 Ford Cabriolet against approximately 120 other drivers in vintage cars that will compete in five divisions: Grand Championship, Expert, Sportsman, Rookie, and X-Cup.

In November 2005, we attended the SEMA Show in Las Vegas where we introduced our automotive specialty products. This gave our products exposure to automotive enthusiasts and key domestic and international distributors. The SEMA Show attracts more than 100,000 industry leaders from over 100 countries.

In December 2005, Simply Wow® was featured on Epinions.com, a popular online consumer reviews hot spot provided as a service of Shopping.com, Inc., an eBay company. Epinions provides a trusted, global, grassroots resource of unbiased consumer insights, in-depth product reviews, and personal recommendations by the general public. We anticipate that validation on Epinions.com may translate into enormous consumer awareness, instant credibility and huge potential for mass-market penetration of featured products.

In February 2006, Source Direct received an order for Stain Pen® to be featured in the popular LTD Commodities Catalog, which is known for shopping the world in order to sell the best merchandise from house wares, gifts, toys and apparel.

OTHER AGREEMENTS

During the quarter ended March 31, 2006 we entered into agreements with four firms for professional services including corporate governance guidance, legal services, public relations and development of business and marketing support. These agreements provide for the issuance of shares and warrants of our common stock in lieu of cash payments for the services rendered. The agreements are for a period of 2 years.

Significant Customers

Through March 31, 2006, we received revenues through sales of our products by three divisions of Albertsons®: the Salt Lake division, the Denver division, and the Vacaville, California division. We believe that we have a good relationship with these divisions. Additionally, we have received purchase orders from additional divisions of Albertsons®. Also, we have received orders from ATA Retail Services. In June 2005, we began shipments of the Stain Pen™ product to the Flying J Travel Plaza chain. We continue to develop many different outlets for our unique line of products. Odor Annihilator™, an all-organic, biodegradable odor remover, has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful ATA Retail Services network. With the addition of these new customers and increased sales Source Direct views this as positive steps in making the company profitable.

Principal Suppliers

The principal suppliers of the raw materials we use to manufacture our products include Michelman Incorporated, Norman Fox & Co., Chemcentral Inc., and VoPak USA. We believe that we have good relationships with our suppliers.

COMPETITION

The market for cleaning products is intensely competitive and dominated by a small number of large, well-established and well-financed companies. Many if not all of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than does the Company. In addition, we also face competition from potential new entrants into the market who may develop new cleaning products. We cannot guarantee that the Company will be able to compete successfully against current and future competitors or that competitive pressures will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business. We also cannot guarantee that the life cycle of the products of the Company will be sufficient for it to realize profitability.

DESCRIPTION OF PROPERTY

Source Direct purchased a manufacturing facility in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho. The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space. The Company anticipates that the new facilities will be suitable, appropriate, and adequate for its needs for the foreseeable future. Our monthly obligation for interest only payments for this facility total $6,681.45.

We currently own the following trademarks and web domains:

Trademarks:

Simply Wow®

Stain Pen®

Prompt™

Works On The Spot®

Tuff Buff™

Web Domains:

http://www.simplywow.com

http://www.worksonthespot.com

http://www.multipurposecleaner.com

http://www.stainpen.com

http://www.stainstick.com

http://www.laundrystain.com

http://www.organicsimplywow.com

http://www.tuffbuff.com

http://www.allpurposecleaner.com

Risk Factors

There are various risks involved in any investment in the Company, including those described below. Any shareholder or potential investor in the Company should consider carefully these risk factors.

The financial statements of the Company include a "going concern" limitation.

The Company has a limited operating history and may require additional funding.

The Company has not applied for a patent on its products.

The loss of the services of current management would have a material negative impact on the operations of the Company.

The Company will be in competition with a number of other companies, which may be better financed than the Company.

There is no active public market for the common stock of the Company.

The Company’s shares are designated as penny stock.

The market for the Company’s shares is volatile.

Future issuances of stock could adversely affect holders of the Company’s common stock.

The risks and uncertainties described in this section are not the only ones facing Source Direct. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the foregoing risks actually occur, our business, financial condition, or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline.

Financial Condition and Changes in Financial Condition

Three Months ended March 31, 2006 and 2005

Revenues for the quarter ended March 31, 2006, totaled $137,603. These revenues were primarily generated from purchase orders from various retail stores including Albertsons®, Wal-Mart®, ATA Retail Services and the Flying J Travel Plaza chain. We anticipate receiving additional orders from these sources as well as from the other distribution agreements that are in place, but we can give no assurance that such sales will occur. Our cost of goods sold for these sales totaled $48,790, which resulted in a gross profit margin of $88,813 or 64.5% of sales. Revenues for the prior year quarter totaled $120,711 with a gross margin of $82,385.

Operating expenses for the quarter ended March 31, 2006, totaled $182,549, a decrease of $100,490 from the prior quarter ended December 31, 2005. Compensation related expenses were $68,370. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $20,929. We incurred $42,076 in consulting, legal and accounting related expenses as a result of the various marketing agreements we entered into and expenses related to fulfilling our filing requirements with the SEC. We did not incur any research and development expenses during the quarter. The remaining expenses were incurred for general business purposes.

Operating expenses for the quarter ended March 31, 2005 totaled $169,930. Compensation related expenses were $76,654. Travel and marketing expenses incurred for product promotion and general business activities totaled $23,776. We incurred $15,464 in legal and accounting related expenses related to fulfilling our filing requirements with the SEC. Research and development expenses totaled $1,337 for the quarter.

Nine Months ended March 31, 2006 and 2005

We generated revenues from sales of our cleaning products of $267,581 during the nine months ended March 31, 2006. Our cost of goods sold for these sales totaled $96,359, which resulted in a gross profit margin of $171,222 or 64.0% of sales. Revenue for the nine-month period ended March 31, 2005 was $190,117 with a gross margin of $118,014.

Operating expenses for the nine months ended March 31, 2006, totaled $749,151. Compensation related expenses were $233,224. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $245,289. We incurred $117,884 in consulting, legal and accounting related expenses as a result of the various marketing agreements we entered into and expenses related to fulfilling our filing requirements with the SEC. The remaining expenses were incurred for general business purposes.

Operating expenses for the nine-month period ended March 31, 2005, totaled $589,362. These expenses were incurred in connection with the start up costs related to our operations as well as compensation, legal and accounting fees, marketing and travel.

We believe we will continue to incur substantial expenses for the near term as we increase our marketing efforts to introduce our products to the market.

Liquidity and Capital Resources:

Since inception to March 31, 2006, we have funded our operations from the sale of securities and loans.

During the period from inception through December 31, 2005, we sold a total of 9,551,175 shares of our common stock for total proceeds of $854,658.

During the period from January 1, 2006, through April 18, 2006, we sold 2,660,000 shares of our common stock for total proceeds of $133,000. In addition we issued 7,100,000 shares of common stock for various consulting and advertising fees valued at $475,193. We also issued 5,220,000 warrants in exchange for professional services to be provided over two years. The warrants are exercisable at $0.125 per share and expire in two years. The Company valued this transaction at $103,313.

We have utilized the proceeds from these stock sales to fund our various marketing and promotion efforts and general business activities.

We have also funded our operations with loans from shareholders. As of March 31, 2006, we were indebted to these shareholders for a total amount of $75,305. The loans are unsecured, due on demand, and non-interest bearing. The Company has borrowed funds for operating purposes from an individual pursuant to a note. The terms of the note include principal of $50,000 and interest of $3,763. If the principal and interest was not paid within 60 days of 6/15/05, then additional interest of 10% annually will be due on original amounts. This note is currently in default. The Company is working with the individual to make payment arrangements.

On January 13, 2005, the Company entered into agreements to purchase a new headquarters building. The purchase price for the property was $800,000. Pursuant to the terms of a promissory note, the Company was required to pay $5,882.19 on or before March 3, 2005, and the same amount on or before the third of each month thereafter. The Company had made the required payments through the date of this Report. The Note bears interest at a rate of 11.25% and matured on January 13, 2006.

On January 13, 2006 an amendment was executed upon the note secured by a deed of trust on the Company’s building located at 4323 N. Commerce Circle, Idaho Falls, Idaho. Effective January 14, 2006, the amendment changed the following loan components for the then remaining principal balance of $763,594.09. The interest rate was changed from 8.5% to 11.25%. Monthly payments were changed from $5,882.19 to $6,681.45, of which the first payment was due on February 3, 2006. The amendment further states that no principal payments may be made unless in full. A late fee of 5% will be charged on any amount overdue by 30 days. The Company was to transfer 160,000 shares of the Company’s common stock to the creditor in lieu of warrants given as part of the original loan transaction. The remaining balance on this loan was $762,830 as of March 31, 2006.

At March 31, 2006, we had cash of $2,732, and net working capital of $599,051. Our cash requirements for the next twelve months will depend significantly on the number of purchase orders we receive for our products and our ability to secure financing for these orders. We anticipate that we will be able to secure either a business loan or a factoring arrangement for any purchase order that exceeds our current ability to fund internally. However, we have no current agreements or arrangements which would provide such funding. We have also not negotiated the terms of such funding and cannot provide any assurance that the terms will be favorable for the company. We are also unable to predict the number of orders for our products, or if we receive additional orders, the amount of operating profit such orders would generate. Therefore, we are unable to predict our future cash requirements until we secure additional purchase orders.

We continue to perform research and development to improve our existing cleaning products and to provide new cleaning products. We anticipate that we will continue to spend funds for research and development during the next twelve months, but we are unable to predict or anticipate the total amount of these future research and development expenses. In many instances, new products are developed as a result of interest expressed by a potential retail client in similar or ancillary products to the ones initially presented. This may occur especially in our private label products. Many retail outlets require a set of related private label cleaning products before ordering any cleaning products. Such was the case in our automotive cleaning products. Our wheel cleaning and tire cleaning products were developed as a result of responses from potential clients for our automotive vinyl-cleaning product who required a set of automotive cleaning products rather than the single vinyl-cleaning product.

Because we are in our startup phase, we believe we will need additional funding. We are assessing the possibilities for financing our business plan and trying to determine what sources of financing we might explore to raise the needed capital. We have no outside sources for funding our business plan at this time. We will need additional capital for any current or future expansion of our operations we might undertake. If we do not obtain funding, we will have to discontinue our current business plan. We do not believe traditional sources of funding such as bank loans would be available for these expenses, and therefore anticipate that if additional funding is required, such funding would be in the form of private lending arrangements or equity investment in the company.

Plan of Operation

The operating subsidiary has embarked on a two-fold growth program, which includes the following strategies and plans:

Our plan of operation includes the implementation of a multi-pronged marketing strategy to distributors, retail stores, and cleaning professionals, and direct to consumers to position the Company to become a major supplier in the U.S. all-purpose cleaning solution market. Management’s business model is to position the Company as an authority in this area, based on (i) its potential as a market innovator and future leader, (ii) careful attention to product quality, (iii) the Company’s tested and proven products, (iv) its ethical business practices, and (v) the confidence of a large number of loyal consumers.

We also intend to seek acquisitions or co-branding arrangements with small, under-capitalized suppliers of cleaning products whose products would compliment or extend our product line, and which could be acquired readily to support the corporate objectives. We intend to acquire only companies whose market presence, product mix, and profitability meet certain acquisition criteria, and to incorporate their products into the existing product line or into lines of supporting or related products.

In order to achieve the planned level of growth in both sales and profitability, we anticipate the need for a substantial amount of external capital, either from the sale of securities or incurring of debt, to permit us to execute the next stages of our business plan. We have no firm commitments or arrangements for this funding and there is no assurance that we will be able to secure the funding necessary to implement the business plan.

New Accounting Pronouncements

Source Direct does not expect the adoption of recently issued accounting pronouncements to have a significant impact on Source Direct’s results of operations, financial position, or cash flow.

ITEM 3. CONROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2006. Their evaluation was carried out with the participation of other members of the Company’s management. Based upon their evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Certifying Officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of the Company’s Board of Directors and management; 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 its financial statements. There has been no change in the Company’s internal control over financial reporting that occurred in the quarter ended March 31, 2006, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On December 9, 2005, Source Direct Holdings, Inc. filed a lawsuit in the Third Judicial District Court in Salt Lake County, Utah, Civil No. 050921794, against Integritas, Inc., International Marketing Group, Inc., Corporate Capital, Inc., Jonquil International, Inc., Asset Growth Strategies, Inc., Reyna Enterprises, Inc., OmniCap, Inc., Phillip Flynn and Scott Phillip Flynn. The Company’s complaint alleges that it was fraudulently induced by the defendants to enter into certain marketing, consulting, and distribution contracts. Based on the fraudulent inducement and the Company’s rescission of the contracts, the Company seeks to recover the approximately 8,000,000 shares of Source Direct stock that were issued to the defendants pursuant to the contracts. The defendants have counterclaimed against Source Direct, alleging that Source Direct was not authorized to place a stop hold order on the shares issued to the defendants, and that that Source Direct is liable for any decline in the market value of the stock that occurred after September 7, 2005.

The Company filed a motion for a writ of attachment in order to prevent the defendants from transferring the shares. The district court granted the motion and entered a writ of attachment, to be secured by a bond in the amount of $480,000, which Source Direct filed on December 16, 2005. Pursuant to the writ of attachment, the defendants tendered into the court’s possession 500,000 shares of Source Direct stock on January 24, 2006, and 7,050,000 additional shares of Source Direct stock on February 7, 2006. The tendered shares of stock will remain in the court’s custody the final disposition of the litigation or until further order of the court.

The Company denies that it is liable to the defendants and intends to defend vigorously against the counterclaim and prosecute its own claims for affirmative relief against the defendants.

Gordon Sage v. Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, US. District Court, District of Idaho, Case No. CIV06-82-E-BLW. On April 13, 2006, we were served with a complaint filed by Gordon Sage against Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, alleging claims including breach of contract, misrepresentations, civil conversion, tortious interference, negligence, employment discrimination, and seeking damages of approximately $470,000, plus other unspecified damages and attorneys’ fees. We filed an answer and counterclaim, denying the plaintiff’s allegations and bringing claims against Mr. Sage, including breach of contract, civil conversion, breach of fiduciary duty, tortious interference, and punitive damages. The case is proceeding into the discovery phase. We deny the plaintiff’s allegations and intend to defend vigorously against the claims and to pursue our claims against Mr. Sage.

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

During the quarter ended December 31, 2005, a shareholder purchased a total of 2,096,575 shares at $0.05 per share. Also in the same quarter 406,000 warrants were exercised at $.0125 per share. These shares have not yet been issued in certificate form, as per request of the shareholder. In addition 500,000 shares of restricted common stock were issued for advertising services in November 2005 at a value of $37,703.

During the quarter ended March 31, 2006, the Company issued 2,260,000 common shares and an equal number of attached warrants for cash of $113,000 at $0.05 per share. Additionally, the Company issued 6,000,000 common shares for services. This transaction was valued at $275,193 or $0.046 per share. The Company used the proceeds of this sale for working capital.

In March, the Company issued 5,220,000 warrants in exchange for professional services to be provided over two years. The warrants are exercisable at $0.125 per share and expire in three years. The Company valued this transaction at $103,313. The Company has booked a prepaid expense for this transaction and will amortize it straight-line over two years.

On April 5, 2006, the Company issued 1,100,000 shares of common stock in exchange for advertising. On April 18, 2006, the Company issued 400,000 shares of common stock for $20,000. The Company used the proceeds of this sale for working capital.

For each of these transactions, the Company relied on an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933 and the regulations promulgated thereunder.

ITEM 5. OTHER INFORMATION

As of March 31, 2006 various shareholders have loaned the Company $75,305. The loans are unsecured, due on demand, and non-interest bearing.

ITEM 6. EXHIBITS

a. Exhibits

31.1

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32.1

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (1)

_____________________

(1) Filed herewith

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		(Registrant) Source Direct Holdings, Inc.

Date: May 19, 2006		By: /s/ Deren Z. Smith
		Deren Z. Smith, President (Principal executive officer)

Date: May 19, 2006		By: /s/ Kevin Arave
		Kevin Arave, Treasurer (Principal financial officer and Principal accounting officer)