Source Direct Holdings, Inc.

10QSB 1 f10qsb033108.htm 10QSB Source Direct Holdings, Inc.

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, 2008

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 11, 2008, the Company had outstanding 10,715,630 shares of its common stock, no par value.

Transitional Small Business Disclosure Format (check one): Yes ¨ No x

TABLE OF CONTENTS


ITEM NUMBER AND CAPTION		PAGE

PART I FINANCIAL INFORMATIONS

ITEM 1. FINANCIAL STATEMENTS		3
ITEM 2. MANAGEMENT'S DI SCUSSION AND ANALYSIS OR PLAN OF OPERATION		9
ITEM 3. CONTROLS AND PROCEDURES		13

PART II OTHER INFORMATION

ITEM 1. LEGAL PR OCEEDINGS		15
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		15
ITEM 5. OTHER INFORMATION		15
ITEM 6. EXHIBITS		16

PART I

ITEM 1. FINANCIAL STATEMENTS

Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets

March 31, 2008


	31-Mar-08		30-Jun-07
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash	$	4,023	$	3,215
Accounts receivable		25,574		31,963
Inventory		247,039		257,095
Total Current Assets		276,636		292,273

Property and Equipment
Property and equipment		101,843		101,843
Less: Accumulated depreciation		(53,614)		(41,809)
Net Property and Equipment		48,229		60,034

Other Assets
Deposits		8,333		8,333
Intangible assets		115,000		115,000
Accumulated amortization		(33,223)		(27,473)
Net Other Assets		90,110		95,860

TOTAL ASSETS	$	414,975	$	448,167

See accompanying notes to financial statements

Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets

March 31, 2007

(continued)


	31-Mar-08		30-Jun-07
	(Unaudited)		(Audited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable	$	193,574	$	138,880
Accrued expenses		6,906		69,351
Deferred gain on sale of asset		36,941		36,941
Notes payable		457,310		393,810
Total Current Liabilities		694,731		638,982

Long-Term Liabilities
Deferred gain on sale of building		89,274		116,979
Total Long-Term Liabilities		89,274		116,979

Total Liabilities		784,005		755,961

Stockholders' Equity (Deficit)
Common stock -- $.001 par value; 200,000,000 shares authorized; 10,033,812 and 3,818,329 issued and outstanding, respectively		10,033		8,589
Treasury Stock At Cost		(13,835)		-
Additional paid-in capital		7,515,421		7,117,805
Accumulated deficit		(7,880,649)		(7,434,188)
Total Stockholders' Equity (Deficit)		(369,030)		(307,794)
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)	$	414,975	$	448,167

See accompanying notes to financial statements.

Source Direct Holdings, Inc.

Condensed Consolidated Statements of Operations

For the three and nine month periods ended March 31, 2008 and 2007

(Unaudited)


	For the Three Months Ended 31-Mar-08		For the Three Months Ended 31-Mar-07		For the Nine Months Ended 31-Mar-08		For the Nine Months Ended 31-Mar-07
Revenues	$	37,912	$	117,849	$	180,618	$	409,985
Cost of goods sold		18,735		37,877		99,599		165,676
Gross Profit		19,177		79,972		81,019		244,309

General and administrative expense		121,476		299,061		529,440		2,253,702

Income (Loss) from Operations		(102,299)		(219,089)		(448,421)		(2,009,393)

Other income		9,236		-		27,706		-
Interest expense		(45,856)		(1,459)		(25,746)		(7,837)

Net Income (Loss)	$	(138,919)	$	(220,548)	$	(446,461)	$	(2,017,230)

Net Loss per share	$	(0.02)	$	(0.03)	$	(0.05)	$	(0.34)

Weighted Average Number of shares outstanding		8,909,484		8,191,091		8,909,484		5,900,557

See accompanying notes to financial statements.

Source Direct Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine month periods ended March 31, 2008 and 2007

(Unaudited)


	For the Nine Months Ended 31-Mar-08		For the Nine Months Ended 31-Mar-07
Cash Flow Used for Operating Activities
Net (Loss)	$	(446,461)	$	(2,017,230)
Adjustments to Reconcile net loss to net cash used for operating activities:
Depreciation		11,805		15,288
Amortization expense		5,750		5,751
(Gain)/loss on sale of property		-		(20,434)
Stock issued for services		-		1,920,714
Decrease in trade receivables		6,389		21,952
(Increase)/decrease in inventory		10,056		(6,179)
(Increase)/decrease in deposits		-		(208,333)
(Increase) in prepaid expenses		-		(22,921)
Increase in accounts payable		54,694		21,336
Increase/(decrease) in accrued liabilities		(62,445)		21,038
Deferred gain on sale of assets		(27,705)		-
Increase/(decrease) in bank overdraft		-		(1,873)
Net Flows Used for Operating Activities		(447,917)		(270,891)

Cash Flows used for Investing Activities
Sale of Property		-		926,664
Purchase equipment		-		(14,965)
Purchase of treasury stock		(13,835)		-
Net Cash Flows Provided (Used) for Investing Activities		(13,835)		911,699

Cash Flows used for Financing Activities
Net borrowing (payments) on long-term debt		-		(763,962)
Increase in note payable		63,500		95,154
Proceeds from stock issuance		399,060		28,000
Net Cash Flow Provided (Used) for Financing Activities		462,560		(640,808)

Net Increase / (Decrease) in cash		808		-
Beginning Cash Balance		3,215		-

Ending Cash Balance	$	4,023	$	-

Supplemental Disclosures
Interest paid	$	25,745	$	190
Income taxes paid	$	-	$	-

See accompanying notes to financial statements.

Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2008

(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, 2008. 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 month and nine months periods ended March 31, 2008, 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, 2007, filed with the U.S. 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	$	185,643
Finished Goods		61,396

Total Inventory	$	247,039

NOTE 3 - ISSUANCE OF COMMON SHARES AND WARRANTS

During the period from July 1, 2007, through March 31, 2008, 1,444,328 additional shares of common stock and 622,532 warrants were issued. The Company received $399,060 in proceeds.

NOTE 4 - NOTES PAYABLE

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, 83401. Effective January 14, 2006, the amendment changed the following loan components for the remaining principal of $763,594: accruing interest was changed from 8.5% to 11.25%, and monthly payments were changed from $5,882 to $6,681, of which the first payment was due on February 3, 2006. The amendment further stated that no principal payments could be made unless in full. A late fee of 5% would 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. In August 2006, the Company sold the building and the note was paid in full.

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 the note bears a 10% interest rate. If the principal was not paid within 60 days of June 15, 2005, then interest of 10% annually would be due on original amounts. The Company made a $15,000 payment on the note which was applied to interest and then principal during the current year, leaving a principal balance of $44,779 as of March 31, 2008. This note is currently in default. The Company is working with the individual to work out a monthly payment program. The balance on the note at December 31, 2007, was $44,779.

The Company has borrowed funds for operating purposes from another individual in the amount of $84,500. The loan is unsecured, due on demand, and non-interest bearing. The Company repaid $5,000 during the period ended December 31, 2007, and the remaining unpaid balance at December 31, 2007, was $71,000. During the period ended March 31, 2008 the loan balance increased to $84,500.

The Company has borrowed funds for operating purposes from another individual in the amount of $181,031. The loan is unsecured, due on demand, and non-interest bearing.

The Company has borrowed funds for operating purposes from another individual in the amount of $150,000. The loan is unsecured, due on demand, and bears a 2% interest rate. The unpaid balance at March 31, 2008 and December 31, 2007, was $147,000 and $150,000 respectively. The loan was converted to 681,818 shares of common stock in April 2008.

NOTE 5 - PROPERTY AND EQUIPMENT

Source Direct purchased a manufacturing facility and headquarters building 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. In August 2006, this manufacturing facility was sold. Also in August 2006, the Company signed a new agreement to lease this facility for 60 months. The lease agreement calls for monthly payments of $8,333.

NOTE 6 – GOING CONCERN

The Company has accumulated losses since inception totaling $7,880,649 and was still developing operations as of March 31, 2008. 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 developing the Company’s operating activities, the Company may experience material adverse effects.

NOTE 7 - REVERSE STOCK SPLIT AND STOCK ISSUANCES

On November 16, 2006, the Company’s Board of Directors and majority of the Company’s shareholders approved a reverse split of the Company’s common stock on the basis of 1 share for each 25 shares outstanding. This stock split is reflected in the current year financial statements presented herein.

NOTE 8 – SUBSEQUENT EVENTS

During April 2008, the outstanding $147,000 note payable outstanding at March 31, 2008 was converted to 681,818 shares of common stock.

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 available at the time of the preparation of this Report. 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." Statements relating to business or financial projections or estimates, potential business strategies, product pricing or marketing strategies, future financing opportunities, or related topics may also constitute 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. The Company disclaims any obligation or intention to update any forward-looking statement.

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.

OVERVIEW

Source Direct Holdings, Inc., was incorporated under the laws of the state of Nevada on July 21, 1998, under the name Global Tech Capital Corp. (“GTCC”), and began filing public reports with the filing of a registration statement on Form SB-2 on September 4, 2001. From July 1998 until October 2003, GTCC had minimal business operations. GTCC was in the development stage and seeking profitable business opportunities.

On October 14, 2003, GTCC and Source Direct, Inc., an Idaho corporation (“SDI”), entered into an Agreement and Plan of Merger (the “Merger”), under which a wholly owned subsidiary of GTCC was merged with and into SDI, with SDI being the surviving entity. Under the agreement, we acquired 100% of the outstanding shares of SDI, in exchange for 63,030,000 shares of GTCC, making SDI our wholly owned subsidiary. In connection with this transaction, we changed our name to Source Direct Holdings, Inc.

The Company is a manufacturer of eco-friendly cleaning products for a variety of uses including household, automotive and industrial. The products offered by the company currently include Simply Wow® All Purpose Cleaner, Stain Pen®, Simply WoW® Odor Annihilator®, Simply WoW® Laundry Detergent, Simply Wow® Tuff Buff™ and Simply WoW® Industrial Cleaner

We have applied for the trademarks to all 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.

The Company's earnings are primarily dependent upon the distribution agreements and ultimately the sales of their products. Management is in discussion with several nationally recognized retail outlets for potential distribution agreements. If successful, the Companies revenue should increase significantly with the receipt of the initial purchased order. However, there can be no guarantees that the revenue will be sustainable until consumer demand for the products can be determined by the retail outlets. The Company’s competition has significantly more financial resources allowing it to advertise its products to the ultimate consumer putting the Company at a competitive disadvantage.

To address this disadvantage, the Company has initiated a sales campaign aimed at large industrial cleaners. Many of these companies are looking for eco-friendly products to use in their cleaning process. Since this market is more focused on the quality of the product and cost and is less likely to be influenced by advertising, the Company believes it can be competitive in this market.

The Company is currently in discussion with various parties in an attempt to increase the capital of the company. 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. At this time, management is uncertain if this process will be successful.

If the Company is not successful, and possibly even if it is successful, in implementing these actions, it may continue to experience operating losses, which would hinder its ability to pay down existing indebtedness, fund future growth and provide returns to stockholders.

Financial Condition and Changes in Financial Condition

RESULTS OF OPERATIONS

Revenues were $38,000 and $118,000 for the three months ended March 31, 2008 and 2007, respectively. Revenues for the nine months ended March 31, 2008 were $181,000, compared to $410,000 for the nine months ended March 31, 2007, a decrease of $229,000 or 56%.

Cost of goods sold for these sales for the three months ended March 31, 208 and 2007 totaled $19,000 and $38,000 which resulted in a gross profit margin of $19,000 and $80,000 for three months ended March 31, 2008 and 2007, respectively. Cost of goods sold for the nine month period ending March 31, 2008 and 2007 totaled $100,000 and $166,000 with a gross margin of $81,000 and 244,000. The decrease in revenues was attributable to the decrease in orders during the period from Bed Bath and Beyond® for our Stain Pen product. This was due to several factors including problems with the packaging of the product, a change in display locations within the stores as well as a revised marketing plan for eco-friendly cleaning products at Bed Bath and Beyond®. Management believes there is significant opportunity to sell additional products to Bed Bath and Beyond® in the future.

General and administrative expenses for the three months ended March 31, 2008 and 2007, totaled $121,000 and $299,000. The decrease of $178,000 was due to a $75,000 decrease in marketing expenses primarily due to lack of available cash to continue with previous marketing strategies. Compensation related expenses decreased $26,000 as management continued to adjust compensation levels to maintain liquidity within the company. The remaining reductions were dispersed among numerous categories and were attributable to managements diligent monitoring of expenses.

General and administrative expenses for the nine months ended March 31, 2008 and 2007, totaled $529,000 and $2.3 million. The decrease of $1.7 million was due to a $1.2 million decrease in research and development costs and a $140,000 decrease in board of director fees. These expenses were attributable to stock granted for various services provided to the company by management and the board of directors. Marketing expenses decreased $327,000 due to lack of available cash to continue with previous marketing strategies.

Liquidity and Capital Resources:

Since inception to March 31, 2008, we have funded our operations primarily from the sale of securities and loans. During the nine months ended March 31, 2008, we sold a total of 1,444,328 shares of our common stock for total cash proceeds of $399,060. 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 and other individuals. As of March 31, 2008, we were indebted to these note holders for a total amount of $457,310. The notes consist of the following:

The Company has borrowed funds for operating purposes from another individual in the amount of $181,031. The loan is unsecured, due on demand, and non-interest bearing.

On August 22, 2006, the Company sold its new headquarters building for a total sales price of $1,000,000, which resulted in a net profit to the Company of $175,148 net of settlement expenses. In conjunction with the sale, the Company signed a new agreement to lease this facility for 60 months. The lease agreement calls for monthly payments of $8,333.

At December 31, 2008, we had cash balances of $4,023. 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 other form of financing 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 any other forms of 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.

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.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair Value Measurements,” which replaces and amends various other pronouncements. This statement establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to other pronouncements that fair value is the relevant measurement attribute. This pronouncement is effective for financial statements for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is allowed. Management is in the process of evaluating the effect this pronouncement will have on the financial statements of the Company.

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans.” This pronouncement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income. Management does not expect this pronouncement to have a material effect on the Company’s results from operations or financial position because the Company does not have a defined benefit plan.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and must be applied to the entire instrument and not to specified risks, specific cash flows or portions of that instrument. An entity is restricted in choosing the date to elect the fair value option for an eligible item. Management is in the process of evaluating the effect this pronouncement will have on the financial statements of the Company.

In November 2007, the FASB issued SFAS 160, “Non-controlling Interest in Consolidated Financial Statements – an amendment to ARB No. 51. SFAS 160 changes the way consolidate net earnings are presented. The standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest and will require disclosure on the face of the consolidated statement of earnings amounts attributable to the parent and non-controlling interest. The adoptions of this statement will result in more transparent reporting of the net earnings attributable to non-controlling interest. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. The statement also requires that a parent recognize a gain or loss in net earnings when a subsidiary is deconsolidated. Management does not expect this pronouncement to have a material effect on the Company’s results from operations or financial position

ITEM 3. CONTROLS 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, 2008. 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.

In connection with our quarterly reports for the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, management carried out an evaluation of the effectiveness of our controls and procedures, and determined, for each of the periods listed, that the controls and procedures were effective. However, subsequent to the filing of those reports, we received notice from the SEC that the Commission’s Staff had reviewed certain of our periodic filings and had several comments relating to the financial statements and notes included in the Company’s reports. Following a consultation with our accountants and the SEC staff, our Board of Directors concluded that the consolidated financial statements included in our quarterly reports on Form 10-QSB for the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, should no longer be relied upon due to errors contained therein. After consultation with the Company’s management and the Company’s independent registered public accounting firm, Mantyla McReynolds (“Mantyla”), the Board of Directors determined that restatements of the consolidated financial statements for the affected periods were required. These restatements relate to the deferred gain on the sale of the Company’s headquarters and manufacturing building which took place in August 2006.

In connection with responding to the SEC staff’s comments in the review, and in light of the corrections required to the accounting treatment of the deferred gain on the sale of the building, our Chief Executive Officer and Chief Financial Officer determined that our controls and procedures were not effective as of the dates of the reviews conducted in connection with the periods ending September 30, 2006, December 31, 2006, and March 31, 2007, although at the time, the Company’s executive officers believed that such controls and procedures were effective. Management of the Company has taken and intends to take steps to improve the effectiveness of its disclosure controls and procedures, including working with outside contract accountants in connection with reviewing the financial information and preparing financial statements of the Company; continuing to improve our working relationship with our current certified public accounting firm, HJ & Associates; and implementation of better systems, methods, and software for tracking and recording the Company’s transactions. With these changes in our controls and procedures, management believes that past material deficiencies can be cured and will not be repeated.

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. The Company believes that there is a material weakness in its internal controls regarding the ability to timely prepare its financial statements. Management is currently addressing this weakness and intends to resolve the issues prior to its next filing. The Company has taken and intends to take additional steps to remedy this weakness including better communications with HJ & Associates, additional assistance from contract accountants in preparing and tracking financial statements and transactions, and implementing new systems, methods, and software for tracking and recording transactions.

The changes in the Company’s internal control over financial reporting that occurred in the period covered by this report that could materially affect, or could be reasonably likely to affect, the Company’s internal control over financial reporting, consist solely of those discussed above.

(b) Changes in Internal Controls. As noted above, management of the Company has taken and intends to take steps to improve the effectiveness of its disclosure controls and procedures, and to remedy the material weakness in the Company’s internal controls over financial reporting including working with outside contract accountants in connection with reviewing the financial information and preparing financial statements of the Company; continuing to improve our working relationship with our current certified public accounting firm, HJ & Associates; and implementation of better systems, methods, and software for tracking and recording the Company’s transactions. The Certifying Officers have discussed the implementation of each of the changes with the Company’s Board of Directors.

Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal controls beginning with our Form 10-KSB for the fiscal year ending on June 30, 2008, and an attestation of the effectiveness of these controls by our independent registered public accountants beginning with our Form 10-KSB for the fiscal year ending on June 30, 2009. We plan to dedicate significant resources, including management time and effort, in connection with our Section 404 assessment. The evaluation of our internal controls will be conducted under the direction of our senior management. We will continue to work to improve our controls and procedures, and to educate and train our employees on our existing controls and procedures in connection with our efforts to maintain an effective controls infrastructure at our Company.

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 320,000 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 20,000 shares of Source Direct stock on January 24, 2006, and 282,000 additional shares of Source Direct stock on February 7, 2006. The tendered shares of stock will remain in the court’s custody until 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.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

From January 1, 2007 through June 30, 2007, the Company issued a total of 922,545 shares of its common stock for various services provided to the Company. These shares were valued at $235,720. The Company also issued 200,032 shares for $50,008 in cash.

During the nine months ended March 31, 2008, the Company sold 1,444,328 of its common stock for $399,060 in cash. In conjunction with these transactions, the Company issued 622,532 common stock warrants.

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.

We have utilized the funds received from the stock sales for our various marketing and promotion efforts and general working capital and business activities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

This item is not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

This item is not applicable.

ITEM 5. OTHER INFORMATION.

This item is not applicable.

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.

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.

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.

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 15, 2008

By: /s/ Deren Z. Smith

Deren Z. Smith, President

(Principal executive officer)

Date: May 15, 2008

By: /s/ Kevin Arave

Kevin Arave, Treasurer

(Principal financial officer and

Principal accounting officer)