UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2005
Commission File Number 333-69414
SOURCE DIRECT HOLDINGS, INC.
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(Exact name of registrant as specified in charter)
Nevada 98-0191489
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4323 Commerce Circle, Idaho Falls, Idaho 83401
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(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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 25, 2005, the Company had
outstanding 74,231,400 shares of its common stock, no par value.
This Quarterly Report is amended to correct certain typoqraphical errors and to
clarify certain items in the Management's Discussion and Analysis or Plan of
Operation section.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE
PART I
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONS 8
ITEM 3. CONTROLS AND PROCEDURES 15
PART II
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
2
PART I
ITEM 1. FINANCIAL STATEMENTS
SOURCE DIRECT HOLDINGS, INC.
Condensed Consolidated Balance Sheet
March 31, 2005
(Unaudited)
ASSETS
Current Assets
Cash $ 1,312
Undeposited Funds 178
Trade Receivables 103,574
Inventory 342,119
Employee Advance 5,437
-----------
Total Current Assets 452,620
Property and Equipment
Property and equipment 82,888
Less: Accumulated Depreciation (10,350)
-----------
Net Property and Equipment 72,538
Other Assets
Formula, Trademark, Trade-name 115,000
Accumulated Amortization (11,049)
-----------
Net Other Assets 103,951
-----------
TOTAL ASSETS $ 629,109
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 87,638
Equipment Loans (current) 1,000
Payroll Liabilities 20,228
Taxes Payable --
-----------
Total Current Liabilities 108,865
Long-Term Liabilities
Note Payable - Daren Nelson 35,000
-----------
Total Long-Term Liabilities 35,000
-----------
Total Liabilities 143,865
-----------
Stockholders' Equity
Common Stock -- $.001 par value; 200,000,000
shares authorized; 71,986,000 issued and
outstanding 71,986
Additional paid-in capital 1,416,494
Accumulated deficit (1,003,236)
-----------
Total Stockholders' Equity 485,244
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 629,109
===========
See accompanying notes to financial statements.
3
SOURCE DIRECT HOLDINGS, INC.
Condensed Consolidated Statements of Operations
For the three month periods ended March 31, 2005 and 2004
(Unaudited)
For the Three For the Three
Months Ended Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues $ 120,711 $ --
Cost of Goods Sold 38,327 --
-------------- --------------
Gross Profit 82,385 --
General and admin. Expense 169,930 100,858
-------------- --------------
Operating Loss (87,545) (100,858)
Interest income -- --
Interest expense -- --
Gain/(loss) on asset sales -- --
Income taxes -- --
-------------- --------------
Net Loss before extraordinary (87,545) (100,858)
Extraordinary gain, net -- --
-------------- --------------
Net Loss $ (87,545) $ (100,858)
============== ==============
Net Loss per share $ (0.01) $ (0.01)
Weighted Average Number
of shares outstanding 71,945,956 58,839,642
See accompanying notes to financial statements.
4
SOURCE DIRECT HOLDINGS, INC.
Condensed Consolidated Statements of Operations
For the nine month periods ended March 31, 2005 and 2004
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues $ 190,117 $ --
Cost of Goods Sold 72,103 --
-------------- --------------
Gross Profit 118,015 --
General and admin. Expense 559,356 427,588
-------------- --------------
Operating Loss (441,341) (427,588)
Interest income -- --
Interest expense -- --
Gain/(loss) on asset sales -- --
Income taxes -- --
-------------- --------------
Net Loss before extraordinary (441,341) (427,588)
Extraordinary gain, net -- --
-------------- --------------
Net Loss $ (441,341) $ (427,588)
============== ==============
Net Loss per share $ (0.01) $ (0.01)
Weighted Average Number
of shares outstanding 71,945,956 39,444,964
See accompanying notes to financial statements.
5
SOURCE DIRECT HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended March 31, 2005 and 2004
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Cash Flow Used for Operating Activities
Net Loss $ (471,348) $ (427,588)
Adjustments to Reconcile net loss to
to net cash used for operating activities:
Depreciation 6,816 --
Amortization Expense 6,577 --
(Increase)/Decrease in Trade Receivables (83,328) --
(Increase) in undeposited funds (178) --
Increase in Inventory (239,266) (42,707)
Increase in employee advance (5,437) --
Increase in accounts payable 87,638 4,809
Increase/(Decrease) in payroll Liabilities (3,014) --
(Decrease) in income taxes payable (60) --
-------------- --------------
Net Cash Flows Used for Operating Activities (701,600) (465,486)
Cash Flows used for Investing Activities
Purchase equipment (31,857) (8,490)
Acquisition of Intangible Assets -- (115,000)
-------------- --------------
Net Cash Flows Used for Investing Activities (31,857) (123,490)
Cash Flows used for Financing Activities
Decrease in Shareholder Loans (36,563) (1,318)
Decrease in equipment loans (14,602) --
Increase in Note Payable 35,000 (20,000)
Issued stock for cash 749,980 736,500
-------------- --------------
Net Cash Flows Used for Financing Activities 733,815 715,182
Net Increase / (Decrease in cash 357 126,206
Beginning Cash Balance 955 83
Ending Cash Balance $ 1,312 $ 126,289
============== ==============
See accompanying notes to financial statements.
6
Source Direct Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 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, 2005 and 2004. 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 months
ended March 31, 2005, 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
December 31, 2004, 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:
3/31/05
---------
Materials $ 342,119
---------
Total $ 342,119
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7
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.
All forward-looking statements are intended to be covered by the safe
harbor created by Section 21E of the Securities Exchange Act of 1934.
BUSINESS
We are an emerging company, which has acquired the formulas for two
cleaning products. These products are Simply Wow(R) and Stain Pen(TM). 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 with Global Tech Capital Corp. in October
2003. In addition to these two products, we have developed a new product called
Prompt(TM) that was introduced in August 2004. In May 2005, we received an
additional registered trademark for Works On The Spot(R).
We own the trademarks to all three 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.
8
PRODUCTS
Simply Wow(R)
Simply Wow(R) is an all-purpose cleaner that safely and effectively
cleans any washable surface. Simply Wow(R) 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. We recently introduced a new version of this cleaning product called
Simply Wow(R) All Organic Multi-Purpose Cleaner Degreaser to meet the demand of
ecologically friendly consumers.
The following are what we believe to be specific advantages of using
Simply Wow(R):
o It is designed with nonionic surfactants and wetting, penetrating,
and suspending agents to dissolve the toughest grease, protein,
dirt and oil stains.
o It replaces most or all cleaners in a person's home and can be
used to clean stains on walls, cars, etc.
o It will keep carpets cleaner longer by removing previously
uncleanable spots.
o It is biodegradable and nontoxic, making this product
environmentally safe and friendly.
o 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(TM)
Stain Pen(TM) 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(TM) works simply by applying a small amount of stain pen solution to
the stain and applying a damp cloth.
Prompt(TM)
Prompt(TM) is a multi-purpose, low foaming, non-toxic, biodegradable
industrial strength cleaner for multiple commercial and industrial cleaning
applications. It is a non-hazardous, user friendly, VOC (Volatile Organic
Compounds) compliant product and is highly effective in many commercial cleaning
applications. Prompt's proprietary formulation encapsulates dirt and oil in many
industrial applications that include: floors, walls, metal fabricating
equipment, smoke and fire damage, as well as equipment restoration.
Future Products
We have also completed development of formulas for other proprietary
cleaning products, which we intend to introduce to the market in the future
under private label. These products include an automotive vinyl protector and
cleaner, an all-purpose automotive wheel cleaner, an automotive engine cleaner,
and a liquid laundry product.
9
We are subject to risks that existing or new manufacturers could
develop new or better products than the ones offered by us. While we devote a
portion of our funds to on-going research and development, the amount of our
funding in this area is extremely limited when compared to the manufacturers of
products, which compete with ours. We believe that most other companies in the
household cleaning industry are significantly better funded than are we and
devote significantly more funds to developing new, or improving existing,
products which compete with ours.
PRODUCT PRODUCTION
We do not currently produce our products in-house except for Stain
Pen(TM), which is produced in our facility. We believe that the production
facility, which has agreed to manufacture our other products, would be adequate
to produce our products in sufficient quantities to meet any anticipated future
needs. 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.
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:
o Marden Distribution, Inc.,
o Integritas, Inc.,
o Media Corp Worldwide,
o Fusion Packaging Solutions, Inc.,
o Impact Sales, Inc.,
o Morgan & Sampson SCA,
o New Frontier Marketing, Inc. and
o Daymon Associates, Inc.
The Marden Agreement grants Marden Distribution, Inc. the exclusive
right to distribute our products to Wal-Mart(R), Sam's Club(R), and ACE
Hardware(R). Marden is an approved vendor with these retail organizations. We
believe that the ability of Marden to present our products to these national
chains will reduce the cost to the company.
Our agreement with Marden is exclusive in the sense that no one else
can market Simply Wow(R), Stain Pen(TM), and derivatives of these products such
as our engine cleaner, upholstery cleaner, and wheel cleaner, to Wal-Mart(R),
Sam's Club(R), or ACE Hardware(R). We have agreed to pay Marden a flat
percentage fee based on the gross "sell-in" price to each retailer based on the
wholesale cost of the goods sold to the retailer, plus the flat percentage
amount. Marden has agreed to pay all of the costs and expenses associated with
the marketing and distribution of the products to the retailers. We have agreed
to maintain product liability insurance, which we currently have in place, and
to hold Marden harmless from any liability associated with the use of our
products.
The Integritas agreement provides that Integritas, Inc., will provide
product distribution, customer relations, and investor relations services.
The Media Corp agreement grants Media Corp Worldwide exclusive direct
response "As Seen on TV" commercial marketing. Media Corp Worldwide will create
infomercial advertising for Source Direct's proprietary cleaning products, and
will work to further market its proprietary product lines Simply Wow(R) and
Stain Pen(TM) on television only.
10
In September 2004, we signed two additional agreements with Media Corp
Worldwide. The first, designated as the "QVC Agreement," extends the marketing
relationship between the Company and Media Corp. The QVC Agreement grants to
Media Corp the exclusive right to sell the Company's products to the QVC Home
Shopping Network. The second, designated the Mail Order Catalog Agreement (the
"Catalog Agreement"), granted to Media Corp the exclusive right to sell the
products to mail order catalog companies within the United States.
The Fusion Packaging Solutions agreement is an exclusive mass
merchandising and co-branding distribution agreement. Fusion Packaging
Solutions, Inc., has a proprietary solution called Pig Spit(R). Pig Spit(R) was
introduced at the Sturgis Motorcycle Rally in 1994 and has won the respect of
motorcycle enthusiast around the world. Pig Spit(R) makes black wrinkle and
powder coat finishes look like new. It wicks into hard-to-reach areas like motor
fins and transmissions and eliminates wax stains. Pig Spit(R) is available at
most Harley Davidson(R) motorcycle shops in the U.S. and will now be made
available exclusively for distribution to mass merchandisers through Source
Direct Holdings, Inc., and marketed under the co-branded name of Simply Wow(R)
Pig Spit(R).
The Impact Sales agreement grants Impact Sales, Inc., the distribution
rights for all Source Direct proprietary cleaning products to more than 6,800
grocery retailers in the United States, including Albertsons, Inc.(R); Kroger
Co.(R); and Safeway, Inc.(R). Impact Sales has been servicing large national
retail grocery accounts for more than 20 years and employs more 200 sales
associates from their 13 offices in California, Colorado, Florida, Idaho,
Illinois, Oregon, Utah, and Washington.
The Morgan & Sampson agreement grants Morgan & Sampson SCA the
exclusive marketing and distribution rights to Source Direct's proprietary Stain
Pen(TM) Twin Pack to more than 5,000 grocery retailers in the Western United
States and Hawaii. In January 2005, through this agreement, we have begun
shipments of our Stain Pen(TM) product to all Safeway(R) stores and Kmart Super
Centers(R) nationwide.
The New Frontier Marketing agreement authorizes New Frontier Marketing,
Inc., to act as principal agent for all the Source Direct proprietary cleaning
products to all United Natural Foods, Inc. ("UNFI"), and grocery trade customers
in the Northwest region. UNFI is the largest publicly traded wholesale
distributor to the natural and organic foods industry. Carrying more than 43,000
SKUs, the company supplies over 21,000 customers nationwide and services a wide
variety of retail formats including super natural chains, independent natural
products retailers and conventional supermarkets located in Washington State,
Oregon, Montana, Idaho and Alaska.
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(R) 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 Agreement provides that the Company will pay to Daymon a commission
on the Company's products sold, shipped, and invoiced to Costco(R) 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 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.
11
In addition to the above agreements, we also utilize internal marketing
efforts to advertise and distribute our products. We recently became a title
sponsor on a NASCAR sponsorship agreement with Erik Darnell and Darnell Motor
Sports for the 2004 and 2005 NASCAR racing seasons.
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(TM) 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.
In May 2005 we will be introducing our new Simply Wow(R) All Organic
Multi-Purpose Cleaner Degreaser and Stain Pen(TM) at the 60th annual National
Hardware Show(R) and Lawn & Garden World(R). The National Hardware Show(R) and
Lawn & Garden Expo is an annual gathering that connects hundreds of retailers,
dealers, wholesalers, distributors, and manufacturers from 50 states and 80
countries to the home marketplace by showcasing products, building relationships
and educating the industry through insightful conference sessions, seminars, and
research.
DESCRIPTION OF PROPERTY
The offices of Source Direct recently relocated to 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.
We currently own the following trademarks and web domains:
Trademarks:
Simply Wow(R)
Stain Pen(TM)
Prompt(TM)
Works On The Spot(R)
Web Domains:
o http://www.simplywow.com (the Company's primary web site)
o http://www.worksonthespot.com
o http://www.multipurposecleaner.com
o http://www.stainpen.com
o http://www.stainstick.com
o http://www.laundrystain.com
o http://www.organicsimplywow.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.
o The financial statements of the Company include a "going concern"
limitation.
o The Company has a limited operating history and may require
additional funding.
o The Company has not applied for a patent on its products.
o The loss of the services of current management would have a
material negative impact on the operations of the Company.
o The Company will be in competition with a number of other
companies, which may be better financed than the Company.
o There is no active public market for the common stock of the
Company.
o The Company's shares are designated as penny stock.
o The market for the Company's shares is volatile.
o Future issuances of stock could adversely affect holders of the
Company's common stock.
12
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
We generated revenues from sales of our cleaning products of $120,711
during the quarter ended March 31, 2005. Sales for the nine months ended March
31, 2005 totaled $190,117. We had no sales for the prior year comparable periods
as we were in our start up phase of operations. Our profit margins have
continued to grow as a result of manufacturing efficiencies. We anticipate
revenues to continue increasing through the various marketing agreements we have
entered into during the past year.
Quarter ended
---------------------------------------------------------- Nine Months
March 31, 2005 December 31, 2004 September 30, 2004 March 31, 2005
----------------------------------------------------------------------------
Sales $ 120,711 $ 35,908 $ 33,498 $ 190,117
Cost of Goods Sold 38,326 15,657 18,119 72,102
----------------------------------------------------------------------------
Gross Profit 82,385 20,251 15,379 118,015
Profit Margin 68.2% 56.4% 45.9% 62.1%
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 as a
result of the various marketing agreements we entered into and expenses related
to fulfilling our filing requirements with the SEC. Research and development
expenses totaled $1,337 for the quarter. The remaining expenses were incurred
for general business purposes.
Operating expenses for the nine-month period ended March 31, 2005,
totaled $559,356. 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.
Operating expenses for the prior year quarter and nine month period
ended March 31, 2004, totaled $100,858 and $427,588 respectively. Expenses
incurred with the start up of our operation were approximately $101,000. All of
the remaining expenses relate to the business of the prior operations before the
October 2003 merger, and we do not believe they have any significance on our
current business operations or our future plans.
Liquidity and Capital Resources:
Since inception to March 31, 2005, we have funded our operations from
the sale of securities and loans from shareholders.
13
During the quarter ended March 31, 2005, we sold 949,600 shares of our
common stock for total proceeds of $94,980. We have utilized these funds for our
various marketing and promotion efforts and general business activities. Daren
Nelson loaned the Company $35,000 during the quarter ended March 31, 2005.
At March 31, 2005, we had cash balances of $1,312, and net working
capital of $343,755. In addition, we had current trade account receivables of
$103,574, which was generated from the various purchase orders for our products.
Inventory of cleaning products amounted to $342,119. 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.
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 8.5%, and matures and
comes due on January 13, 2006. 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.
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.
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 other than the sales
of our common stock. We anticipate that we will need additional capital for any
current or future expansion of our operations we might undertake.
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.
14
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, 2005. 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.
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, 2005, that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
15
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
In January 2005, we issued an aggregate of 4,860,000 shares and
warrants to purchase up to an additional 960,000 shares of our common stock to
seven individuals for gross proceeds of $30,000, services rendered, and other
consideration. These shares and warrants were issued without registration under
the Securities Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as a transaction by an issuer not involving
a public offering.
In April 2005, we issued to Benper S.A. de C.V., warrants to purchase
up to 7,500,000 shares of our common stock, in connection with an agreement
pursuant to which Benper would act as our distributor in Mexico and Central
America. The warrants were issued without registration under the Securities Act
by reason of the exemption from registration afforded by the provisions of
Section 4(6) and Section 4(2) thereof, and Rule 506 promulgated there under, as
a transaction by an issuer not involving any public offering, and pursuant to
Regulation S.
We have utilized the funds received from the stock sales for our
various marketing and promotion efforts and general business activities.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Certificate of Amendment to Certificate of Incorporation (4)
3.2 Articles of Merger, without attachment (2)
10.1 Agreement and Plan of Merger Dated September 29, 2003, without
Attachments (2)
10.2 Distribution Agreement dated March 17, 2004, with Marden
Distribution, Inc. (3)
10.3 Consulting Agreement dated July 2, 2003 with Ageless Enterprises
LLC (4)
10.4 Agreement between Source Direct Holdings, Inc., and Integritas,
Inc., dated as of July 25, 2004. (4)
10.5 Television Marketing Agreement between Source Direct Holdings,
Inc., and MediaCorp Worldwide, LLC, dated as of September 8, 2004.
(4)
10.6 QVC Agreement between Source Direct Holdings, Inc., and MediaCorp
Worldwide, LLC, dated as of September 17, 2004. (5)
10.7 Mail Order Catalog Agreement between Source Direct Holdings, Inc.,
and MediaCorp Worldwide, LLC, dated as of September 17, 2004. (5)
10.8 Note Secured by Deed of Trust (6)
10.9 Deed of Trust (6)
10.10 Co-Branding Supply Agreement between Source Direct Holdings, Inc.
and Fusion Packaging Solutions, Inc., dated as of February 10,
2005 (7)
10.11 Brokerage Agreement between Source Direct Holdings, Inc. and
Daymon Associates, Inc., dated as of January 10, 2005 (8)
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)
99 Warranty Deed (6)
_______________________
(1) Filed herewith
(2) Incorporated by reference from Form 8-K (dated October 16, 2003)
(3) Incorporated by reference from Form 10-QSB (dated May 14, 2004)
(4) Incorporated by reference from Form 10-KSB (filed September 9, 2004)
(5) Incorporated by reference from Form 8-K (filed September 30, 2004)
(6) Incorporated by reference from Form 8-K (filed January 25, 2005)
(7) Incorporated by reference from Form 8-K (filed February 14, 2005)
(8) Incorporated by reference from Form 8-K (filed March 8, 2005)
17
b. Reports on Form 8-K
On January 26, 2005, the Company filed a Current Report on Form 8-K
relating to the purchase of new headquarters property for the Company.
On February 14, 2005, the Company filed a Current Report on Form 8-K
relating to the agreement with Fusion Packaging Solutions, Inc.
On Match 8, 2005, the Company filed a Current Report on Form 8-K
relating to the agreement with Daymon Associates, Inc.
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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: June 10, 2005 By: /s/ Deren Z. Smith
-------------------------
Deren Z. Smith, President
(Principal executive officer)
Date: June 10, 2005 By: /s/ Kevin Arave
----------------------
Kevin Arave, Treasurer
(Principal financial officer
and chief accounting officer)
19