UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q


(Mark
      One)þ
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended: September 30, 2010




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from _____________ to _____________





Commission
File No. 000-53501


DERYCZ
SCIENTIFIC, INC.


(Exact
name of registrant as specified in its charter)





Nevada
            11-3797644(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)1524
      Cloverfield Blvd., Suite E, Santa Monica, California
            90404(Address
      of principal executive offices)
            (Zip
      Code)





(310)
477-0354


(Registrant’s
telephone number, including area code)





(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 
o No  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
        (Do not check if a smaller reporting company)
            Smaller
      reporting company þ





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




Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of November 10, 2010, there were
13,096,223 shares of common stock outstanding.







TABLE OF
CONTENTS





PART I — FINANCIAL
    INFORMATION
                
                3Item 1. Financial Statements
      (unaudited)
                
                3Item 2. Management’s Discussion and Analysis
      of Financial Condition and Results of Operations
                
                14Item 3. Quantitative and Qualitative
      Disclosures About Market Risk
                
                18Item 4. Controls and
      Procedures
                
                18PART II — OTHER INFORMATION
                
                19Item 1. Legal
    Proceedings
                
                19Item 1A. Risk Factors
                
                19Item 2. Unregistered Sales of Equity
      Securities and Use of Proceeds
                
                19Item 3. Defaults Upon Senior
      Securities
                
                19Item 4. Removed and
      Reserved
                
                19Item 5. Other
    Information
                
                19Item 6. Exhibits
                
                19SIGNATURES
                
                20


2




PART
1 — FINANCIAL INFORMATION





Item
1. Financial Statements





Derycz
Scientific, Inc.


Condensed
Consolidated Balance Sheets




September
      30,
                                                                                              
                                                                                              
                                                                                              June
      30,2010
                                                                                              
                                                                                              
                                                                                              2010(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                                                              
                                                                                              $
                                                                                              1,997,067
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,852,231Accounts
      receivable, net of allowance of $59,061
                                                                                              
                                                                                              
                                                                                              4,830,156
                                                                                              
                                                                                              
                                                                                              
                                                                                              4,448,269Inventory
                                                                                              
                                                                                              
                                                                                              11,011
                                                                                              
                                                                                              
                                                                                              
                                                                                              6,628Prepaid
      expenses
                                                                                              
                                                                                              
                                                                                              692,052
                                                                                              
                                                                                              
                                                                                              
                                                                                              714,287Other
      current assets
                                                                                              
                                                                                              
                                                                                              64,208
                                                                                              
                                                                                              
                                                                                              
                                                                                              84,470TOTAL
      CURRENT ASSETS
                                                                                              
                                                                                              
                                                                                              7,594,494
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,105,885PROPERTY
      AND EQUIPMENT, net of
                                                                                                accumulated
      depreciation of $355,012 and $317,629
                                                                                              
                                                                                              
                                                                                              350,929
                                                                                              
                                                                                              
                                                                                              
                                                                                              372,868INTANGIBLE
      ASSETSIntellectual
      property licenses, net of amortization of $336,967 and
      $297,887
                                                                                              
                                                                                              
                                                                                              635,699
                                                                                              
                                                                                              
                                                                                              
                                                                                              674,779GOODWILL
                                                                                              
                                                                                              
                                                                                              308,481
                                                                                              
                                                                                              
                                                                                              
                                                                                              223,385TOTAL
      ASSETS
                                                                                              
                                                                                              $
                                                                                              8,889,603
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,376,917LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                                                              
                                                                                              $
                                                                                              4,492,874
                                                                                              
                                                                                              
                                                                                              $
                                                                                              4,887,636Payable
      on Credit Line
                                                                                              
                                                                                              
                                                                                              1,375,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Capital
      lease obligation, current
                                                                                              
                                                                                              
                                                                                              34,314
                                                                                              
                                                                                              
                                                                                              
                                                                                              33,682Other
      current liabilities
                                                                                              
                                                                                              
                                                                                              40,494
                                                                                              
                                                                                              
                                                                                              
                                                                                              97,824TOTAL
      CURRENT LIABILITIES
                                                                                              
                                                                                              
                                                                                              5,942,682
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,019,142CAPITAL
      LEASE OBLIGATIONS
                                                                                              
                                                                                              
                                                                                              34,656
                                                                                              
                                                                                              
                                                                                              
                                                                                              43,514COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock; $0.001 par value; 20,000,000 sharesauthorized;
      no shares issued and outstandingCommon
      stock; $0.001 par value; 100,000,000 sharesauthorized;
      13,021,223 and 13,001,830 shares issued and
    outstanding
                                                                                              
                                                                                              
                                                                                              13,021
                                                                                              
                                                                                              
                                                                                              
                                                                                              13,002Additional
      paid-in capital
                                                                                              
                                                                                              
                                                                                              5,548,778
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,510,620Accumulated
      deficit
                                                                                              
                                                                                              
                                                                                              (2,649,534
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (2,244,265
                                                                                              )TOTAL
      STOCKHOLDERS' EQUITY
                                                                                              
                                                                                              
                                                                                              2,912,265
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,279,357NONCONTROLLING
      INTEREST
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              34,904TOTAL
      EQUITY
                                                                                              
                                                                                              
                                                                                              2,912,265
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,314,261TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                              
                                                                                              $
                                                                                              8,889,603
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,376,917




See notes
to condensed consolidated financial statements




3





Derycz
Scientific, Inc.


Condensed
Consolidated Statements of Operations


(unaudited)





Three
      Months EndedSeptember
      30,2010
                                        
                                        
                                        2009NET
      SALES
                                        
                                        $
                                        6,016,656
                                        
                                        
                                        $
                                        4,783,699COST
      OF SALES
                                        
                                        
                                        5,199,811
                                        
                                        
                                        
                                        4,067,395GROSS
      PROFIT
                                        
                                        
                                        816,845
                                        
                                        
                                        
                                        716,304OPERATING
      EXPENSES:General
      and administrative
                                        
                                        
                                        1,033,497
                                        
                                        
                                        
                                        945,433Marketing
      and advertising
                                        
                                        
                                        114,526
                                        
                                        
                                        
                                        38,453Depreciation
      and amortization
                                        
                                        
                                        59,550
                                        
                                        
                                        
                                        49,573TOTAL
      OPERATING EXPENSES
                                        
                                        
                                        1,207,573
                                        
                                        
                                        
                                        1,033,459LOSS
      FROM OPERATIONS
                                        
                                        
                                        (390,728
                                        )
                                        
                                        
                                        (317,155
                                        )Other
      Income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,069Interest
      expense
                                        
                                        
                                        (15,150
                                        )
                                        
                                        
                                        (1,539
                                        )Interest
      income
                                        
                                        
                                        609
                                        
                                        
                                        
                                        1,549NET
      LOSS BEFORE NONCONTROLLING INTEREST
                                        
                                        
                                        (405,269
                                        )
                                        
                                        
                                        (316,076
                                        )NET
      LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,385NET
      LOSS ATTRIBUTABLE TO DERYCZ SCIENTIFIC, INC.
                                        
                                        $
                                        (405,269
                                        )
                                        
                                        $
                                        (310,691
                                        )NET
      LOSS PER SHARE:BASIC
      AND DILUTED
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.02
                                        )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
                                        
                                        
                                        13,011,527
                                        
                                        
                                        
                                        12,961,830





See notes
to condensed consolidated financial statements




4




Derycz
Scientific, Inc.





Condensed
Consolidated Statement of Stockholders' Equity


For
the three months ended September 30, 2010


(unaudited)




AdditionalCommon stock
                      
                      
                      paid-in
                      
                      
                      Accumulated
                      
                      
                      NoncontrollingShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      Interest
                      
                      
                      TotalBalance,
      July 1, 2010
                      
                      
                      13,001,830
                      
                      
                      $
                      13,002
                      
                      
                      $
                      5,510,620
                      
                      
                      $
                      (2,244,265
                      )
                      
                      $
                      34,904
                      
                      
                      $
                      3,314,261Acquisition
      of remaining interest in Pools Press
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (34,904
                      )
                      
                      
                      (34,904
                      )Fair
      value of shares issued for services
                      
                      
                      19,393
                      
                      
                      
                      19
                      
                      
                      
                      17,629
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17,648Fair
      value of options issued to employees
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20,529
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20,529Net
      loss for the period
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (405,269
                      )
                      
                      
                      
                      
                      
                      
                      (405,269
                      )Balance,
      September 30, 2010
                      
                      
                      13,021,223
                      
                      
                      $
                      13,021
                      
                      
                      $
                      5,548,778
                      
                      
                      $
                      (2,649,534
                      )
                      
                      
                      -
                      
                      
                      $
                      2,912,265





See notes
to condensed consolidated financial statements




5




Derycz
Scientific, Inc.





Condensed
Consolidated Statements of Cash Flows


(unaudited)





Three
      months endedSeptember
      30,2010
                                  
                                  
                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                  
                                  $
                                  (405,269
                                  )
                                  
                                  $
                                  (316,076
                                  )Adjustment
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                                  
                                  
                                  76,467
                                  
                                  
                                  
                                  61,872Fair
      value of vested stock options
                                  
                                  
                                  20,529
                                  
                                  
                                  
                                  -Fair
      value of common stock issued for services
                                  
                                  
                                  17,648
                                  
                                  
                                  
                                  -Changes
      in assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (381,887
                                  )
                                  
                                  
                                  (550,098
                                  )Accounts
      payable and accrued expenses
                                  
                                  
                                  (394,762
                                  )
                                  
                                  
                                  406,042Inventory
                                  
                                  
                                  (4,383
                                  )
                                  
                                  
                                  1,668Prepaid
      expenses
                                  
                                  
                                  22,235
                                  
                                  
                                  
                                  172,800Other
      current assets
                                  
                                  
                                  20,262
                                  
                                  
                                  
                                  (20,390
                                  )Other
      current liabilities
                                  
                                  
                                  (57,330
                                  )
                                  
                                  
                                  2,432Income
      taxes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,659
                                  )Net
      cash used in operating activities
                                  
                                  
                                  (1,086,490
                                  )
                                  
                                  
                                  (245,409
                                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of furniture and equipment
                                  
                                  
                                  (15,448
                                  )
                                  
                                  
                                  (25,398
                                  )Acquisition
      of remaining interest in Pools Press
                                  
                                  
                                  (120,000
                                  )
                                  
                                  
                                  -Net
      cash used in investing activities
                                  
                                  
                                  (135,448
                                  )
                                  
                                  
                                  (25,398
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Capital
      lease obligation
                                  
                                  
                                  (8,226
                                  )
                                  
                                  
                                  (4,296
                                  )Advances
      under line of credit
                                  
                                  
                                  1,375,000
                                  
                                  
                                  
                                  -Net
      cash provided by (used in) financing activities
                                  
                                  
                                  1,366,774
                                  
                                  
                                  
                                  (4,296
                                  )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  144,836
                                  
                                  
                                  
                                  (275,103
                                  )CASH
      AND CASH EQUIVALENTS, Beginning of period
                                  
                                  
                                  1,852,231
                                  
                                  
                                  
                                  1,854,093CASH
      AND CASH EQUIVALENTS, End of period
                                  
                                  $
                                  1,997,067
                                  
                                  
                                  $
                                  1,578,990SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Taxes
      paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Interest
      paid
                                  
                                  $
                                  15,150
                                  
                                  
                                  $
                                  1,539SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Adjustment
      to Goodwill to reflect acquisition of remaining noncontrolling
      interest
                                  
                                  $
                                  34,904
                                  
                                  
                                  
                                  -Minority
      share of losses of subsidiary
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  5,385





See notes
to condensed consolidated financial statements




6





DERYCZ
SCIENTIFIC, INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


For
the Three Months Ended September 30, 2010 and 2009 (Unaudited)





Note
1 — Organization, Nature of Business and Basis of
Presentation





(a)
Organization





Derycz
Scientific, Inc. (the “Company”) was incorporated in the State of Nevada on
November 2, 2006. On November 2, 2006 the Company entered into a Share Exchange
Agreement with Reprints Desk, Inc., a Delaware corporation formed on January 6,
2006. Derycz was formed to facilitate a holding company structure. At the
closing of the transaction contemplated by the Share Exchange Agreement, the
Company acquired all of the 550,000 outstanding shares of Reprints from the
shareholders of Reprints and issued 8,000,003 of its common shares to the
shareholders of Reprints. As the intention behind forming Derycz was the
creation of a holding company structure and Derycz had no appreciable assets
prior to the acquisition of Reprints, the exchange ratio was determined
arbitrarily and was not based on any determination of the value of shares of
Derycz common stock as compared to Reprints shares acquired. As each former
Reprints shareholder acquired a percentage interest in Derycz equal to the
percentage interest such shareholder held in Reprints immediately prior to the
transaction, there was no dilution of the interest of any former Reprints
shareholder. Following completion of the exchange transaction, Reprints became a
wholly owned subsidiary of the Company. The transaction was accounted as a
statutory merger of companies under common control. As such, the historical
financial statements of the Company are combined with the operations of Reprints
since its inception, and the merger shares are accounted for as a stock split as
of the inception of Reprints for financial reporting purposes.





(b)
Nature of business




Derycz
Scientific seeks to facilitate the use of scientific and technical information
in both traditional and innovative ways.  The Company serves both the
publishers who own the rights to use such information and the customers who use
it.  The Company utilizes web-based platforms as well as traditional
delivery channels and is developing products and services that make it easier
for our customers to find and use scientific and technical information. The
Company operates within the periodicals publishing industry which is a large
market. The Company has developed products in the following areas:





•
            Reprints,
      ePrints and Article Distribution Systems•
            Commercial
      Printing Services•
            Publisher
      Outsourced Reprint Management•
            Logistics
      Services for copyright and regulatory sensitive
  documents





(c) Basis
of Presentation





The
accompanying financial statements are consolidated and include the accounts of
the Company and its wholly owned subsidiaries. The consolidated accounts include
100% of assets and liabilities of our wholly owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation.





Note
2 — Summary of Significant Accounting Policies





(a) Use
of estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these
estimates.




The more
significant items subject to such estimates and assumptions include fair value
of our equity securities, carrying amount and useful lives of property and
equipment, goodwill, other intangible assets, valuations of accounts
receivable and accounting for income taxes.




7





(b)
Concentration of credit risk




No
customers accounted for more than 10% of the revenues for the three months ended
September 30, 2010 and one customer accounted for 14% of the revenue for the
three months ended September 30, 2009.





As of
June 30, 2010, three customers accounted for 14%, 13% and 12% of accounts
receivable, and no customers accounted for more than 10% of accounts receivable
at September 30, 2010.




During
the three months ended September 30, 2010 the Company's purchases from one
vendor represented 21% of our content costs.




(c)
Impairment of long-lived assets




The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. Impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of future cash flows from other asset
groups.





Based
upon management's assessment, there were no indicators of impairment of the
Company's long-lived assets as of September 30, 2010 and June 30,
2010.





(d)
Stock-based compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. The Company accounts for share-based payments under the guidance as set
forth in the Share-Based
Payment Topic of the FASB Accounting Standards Codification, which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees, officers, directors, and
consultants, including employee stock options based on estimated fair values.
The Company estimates the fair value of share-based payment awards to employees
and directors on the date of grant using an option-pricing model, and the value
of the portion of the award that is ultimately expected to vest is recognized as
expense over the required service period in the Company's Statements of
Operations.  The Company accounts for stock option and warrant grants
issued and vesting to non-employees in accordance with the authoritative
guidance whereas the value of the stock compensation is based upon the
measurement date as determined at either a) the date at which a performance
commitment is reached, or b) the date at which the necessary performance to earn
the equity instruments is complete.  Stock-based compensation is based on
awards ultimately expected to vest and is reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant and revised, as necessary, in
subsequent periods if actual forfeitures differ from those
estimates.




(e)
Goodwill and intangible assets





Management
performs impairment tests of goodwill and indefinite-lived intangible assets
whenever an event occurs or circumstances change that indicate impairment has
more likely than not occurred. Also, management performs impairment testing of
goodwill and indefinite-lived intangible assets at least annually.




The
Company accounts for acquisition of a business in accordance with guidance
issued by the FASB, which may result in the recognition of goodwill. Goodwill is
related to the Company's acquisition of  Pools Press.   Goodwill
is not amortized. Rather, goodwill is assessed for impairment at least
annually.  Management tests goodwill for impairment at the reporting unit
level.  The Company has two reporting units. The Company tests goodwill by
using a two-step process. In the first step, the fair value of the reporting
unit is compared with the carrying amount of the reporting unit, including
goodwill. If the carrying amount of the reporting unit exceeds its fair value,
goodwill is considered impaired and a second step is performed to measure the
amount of impairment loss, if any.





The
Company reviews intangible assets subject to amortization at least annually to
determine if any adverse conditions exist or a change in circumstances has
occurred that would indicate impairment or a change in the remaining useful
life.  If the carrying value of an asset exceeds its undiscounted cash
flows, the Company writes down the carrying value of the intangible asset to its
fair value in the period identified.  If the carrying value of assets is
determined not to be recoverable, the Company records an impairment loss equal
to the excess of the carrying value over the fair value of the assets.  The
Company’s estimate of fair value is based on the best information available, in
the absence of quoted market prices.  The Company generally calculates fair
value as the present value of estimated future cash flows that the Company
expects to generate from the asset using a discounted cash flow income approach
as described above.  If the estimate of an intangible asset’s remaining
useful life is changed, the Company amortizes the remaining carrying value of
the intangible asset prospectively over the revised remaining useful
life.




Based
upon management's annual assessment, there were no indicators of impairment of
the Company's goodwill or intangible assets as of September 30, 2010
or June 30, 2010.




8





(f)
Shipping and handling costs





The
Company includes shipping and handling charges billed to its customers in its
revenues, and classifies shipping and handling costs of the sale of its products
as a component of cost of sales. Those costs were approximately $95,964 and
$27,668, respectively, for the three months ended September 30, 2010 and
2009.





(g)
Net Income (Loss) per share





The FASB
requires presentation of basic earnings per share and diluted earnings per
share.   Basic net income (loss) per share is computed by dividing the
net income (loss) by the weighted average number of common shares available.
Weighted average number of shares outstanding reflects the equivalent number of
shares received as a result of the exchange transaction as if these shares had
been outstanding as of the beginning of the earliest period presented. Diluted
income (loss) per share is computed similar to basic income (loss) per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Warrants to
purchase 2,855,009 and 2,800,009 shares of common stock have been excluded from
the calculation of diluted net loss per share for the three
months  ended September  30, 2010 and 2009, respectively,
and options to purchase 1,401,000 and 1,022,000 shares of common stock
outstanding as of September 30, 2010 and 2009, respectively, have been
excluded from the calculation as the effect would have been
anti-dilutive.





(h)
Marketing and advertising expenses





Marketing
and advertising expenses are expensed as incurred and consist primarily of
various forms of media purchased from Internet-based marketers and search
engines. Marketing and advertising expense amounted to $114,524 and $38,453 for
the three months ended September 30, 2010 and 2009, respectively.





(i)
Reclassifications





The
Company has reclassified $181,617 of costs previously included in
general administrative costs in the three months ended September 30, 2009 to
costs of sales to conform to 2010 presentation.





(j)  Recently
issued accounting pronouncements




In
April 2010, the FASB issued new accounting guidance in applying the
milestone method of revenue recognition to research or development arrangements.
Under this guidance management may recognize revenue contingent upon the
achievement of a milestone in its entirety, in the period in which the milestone
is achieved, only if the milestone meets all the criteria within the guidance to
be considered substantive. This standard is effective on a prospective basis for
research and development milestones achieved in fiscal years, beginning on or
after June 15, 2010. Early adoption is permitted; however, adoption of this
guidance as of a date other than January 1, 2011 will require the Company
to apply this guidance retrospectively effective as of January 1, 2010 and
will require disclosure of the effect of this guidance as applied to all
previously reported interim periods in the fiscal year of adoption. As the
Company plans to implement this standard prospectively, the effect of this
guidance will be limited to future transactions. The Company does not expect
adoption of this standard to have a material impact on its financial position or
results of operations as it has no material research and development
arrangements which will be accounted for under the milestone
method.





In
January 2010, the FASB issued new accounting guidance which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements, as well as requiring presentation on a gross basis of information
about purchases, sales, issuances and settlements in Level 3 fair value
measurements. The guidance also clarifies existing disclosures regarding level
of disaggregation, inputs and valuation techniques. The new guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009.  Disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after December 15,
2010.  As this guidance requires only additional disclosure, there
should be no impact on the consolidated financial statements of the Company upon
adoption.




In
October 2009, a new accounting consensus was issued for
multiple-deliverable revenue arrangements. This consensus amends existing
revenue recognition accounting standards. This consensus provides accounting
principles and application guidance on whether multiple deliverables exist, how
the arrangement should be separated and the consideration allocated. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. Previously the existing accounting consensus required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under the existing accounting
consensus, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or
fair value was determined. This new approach is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is in the process of
evaluating whether the adoption of this standard will have a material effect on
its financial position, results of operations or cash flows.




9





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the Securities Exchange Commission did not or are not believed by management to
have a material impact on the Company's present or future consolidated financial
statements.




The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.





Note
3 — Property and Equipment





Property
and equipment consists of the following as of September 30, 2010 and June 30,
2010:





September
      30,
                          2010
                        
                        
                        June
      30,
                          2010Computer
      equipment
                        
                        $
                        134,871
                        
                        
                        $
                        122,687Software
                        
                        
                        179,159
                        
                        
                        
                        176,586Printing
      equipment
                        
                        
                        328,606
                        
                        
                        
                        329,092Furniture
      and fixtures
                        
                        
                        59,305
                        
                        
                        
                        58,132Autos
      and vans
                        
                        
                        4,000
                        
                        
                        
                        4,000705,941
                        
                        
                        
                        690,497Less
      accumulated depreciation
                        
                        
                        (355,012
                        )
                        
                        
                        (317,629
                        )$
                        350,929
                        
                        
                        $
                        372,868




Printing
equipment includes $91,792 of equipment under capital lease and related
accumulated depreciation of $71,164 and $53,545 as of September 30, 2010 and
June 30, 2010, respectively.





Depreciation
expense for the three months ended September 30, 2010 and 2009 was $37,383 and
$27,090, respectively.





Note
4 — Stockholders’ Equity





Stock
Options





On
December 21, 2007, the Company established the 2007 Equity Compensation Plan
(the “Plan”). The Plan was approved by our Board of Directors and security
holders holding a majority of the shares of our common stock outstanding. The
total amount of shares subject to the Plan is 1,500,000 shares. On December 21,
2007, we granted options to purchase 530,000 shares of common stock at $1.50 per
share to eight employees and one consultant, which expire on December 21, 2017.
The options were valued at $112,000 using a Black-Scholes valuation model and
will be amortized over the vesting period.  The exercise price for the
options was $1.50 per share and was based on the fair value of the shares on the
date of issuance. For the Black-Scholes calculation, the Company assumed no
dividend yield, a risk free interest rate of 4.18%, expected volatility of 25%
and an expected term for the options of 7 years.




On May
28, 2009, we granted options to purchase 492,000 shares of common stock at $1.00
per share to nine employees, which expire on May 28, 2019. The options were
valued at $148,327 using a Black-Scholes valuation model and were expensed on
the grant date as the options all vested immediately. The exercise price for the
options was $1.00 per share and was based on the fair value of the shares on the
date of issuance. For the Black-Scholes calculation, the Company assumed no
dividend yield, a risk free interest rate of 3.67%, expected volatility of 83%
and an expected term for the options of 10 years.





On July
27, 2010, the Company issued options to purchase 379,000 shares of the Company’s
common stock to thirteen employees, which expire on July 27,
2020.  These options vest over 3 years, with one-twelfth of the grant
vesting on the last day of each calendar quarter through September 30,
2013.





Stock-based
compensation expense of $20,529 and $0 was recognized during the three months
ended September 30, 2010 and 2009, respectively, relating to the vesting of such
options. As of September 30, 2010, the unamortized value of these options was
$225,821, which will be amortized as stock-based compensation cost over three
years as the options vest.  As of September 30, 2010, these options
have no intrinsic value.




10





At
September 30, 2010 options outstanding are as follows:





Number of
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceBalance
      at July 1, 2010
                    
                    
                    1,022,000
                    
                    
                    $
                    1.26Granted
                    
                    
                    379,000
                    
                    
                    $
                    1.02Exercised
                    
                    
                    —Cancelled
                    
                    
                    —Balance
      at September 30, 2010
                    
                    
                    1,401,000
                    
                    
                    $
                    1.19




Additional
information regarding options outstanding as of September 30, 2010 is as
follows:




Options Outstanding
                          
                          
                          Options
                            ExercisableWeighted Average Exercise
                            Price
                          
                          Number
                            Outstanding
                          
                          
                          Weighted Average
                            Remaining Contractual Life
                            (Years)
                          
                          
                          Weighted
                            Average
                            Exercise Price
                          
                          
                          Number
                            Exercisable$
                          1.19
                          
                          
                          1,401,000
                          
                          
                          
                          8
                          
                          
                          $
                          1.19
                          
                          
                          
                          1,053,590




Warrants





At
September 30, 2010 warrants outstanding are as follows:





Number of
                          Warrants
                        
                        
                        Weighted
                          Average
                          Exercise
                          PriceBalance,
      July 1, 2010
                        
                        
                        2,855,009
                        
                        
                        $
                        1.34Granted
                        
                        
                        —
                        
                        
                        $
                        —Exercised
                        
                        
                        —Balance
      at September 30, 2010
                        
                        
                        2,855,009
                        
                        
                        $
                        1.34




On July
1, 2008, the Company issued warrants to acquire 150,000 shares of our stock at
an exercise price of $2.00 per share and a life of five years to a
consultant.  The warrants were valued at $43,693 using a Black-Scholes
pricing model with the following assumptions; no dividend yield, risk free
interest rate of 4.5%, expected volatility of 25%, and an expected term of the
warrants of five years.




On
October 8, 2009, the Company issued warrants to acquire 55,000 shares of our
stock to a consultant at an exercise price of $1.50 per share and with a life of
five years and which vest over a period of one year.  The fair market value
of the warrants amortized during the year was $14,437 using a Black-Scholes
pricing model with the following assumptions; no dividend yield, risk free
interest rate of 4.5%, expected volatility of 25%, and an expected term of the
warrants of five years.




The above
warrants are fully vested and have a five year contractual life.  There was
no intrinsic value to these warrants as of September 30, 2010 and June 30, 2010
based on the trading price of the Company’s common stock on September 30, 2010
and June 30, 2010.





On
November 12, 2010, the Company accepted an unsolicited offer made to the Company
on behalf of certain of the holders of the common stock purchase warrants
whereby the holders of those warrants offered to exercise those warrants for
cash if the Company would issue an additional warrant exercisable for one-half
of the number of shares obtained upon the exercise. The Company has agreed to
issue new warrants to these holders upon the cash exercise of these
warrants on substantially the terms set forth in the offer letter. The Company
cannot determine or control how many of those warrants will actually be
exercised under these terms.




Shares
issued for services





During
the three months ended September 30, 2010, the Company issued 19,393 shares of
its common stock valued at $17,648 based on the trading price of the Company’s
common stock on the date of the grant to a consultant.  Such costs are
included in operating expenses in our accompanying statement of operations for
the three months ended September 30, 2010.




11





Note 5 — Line of Credit





The
Company entered into a Loan and Security Agreement with Silicon Valley Bank
(“SVB”) on July 23, 2010, which provides for a $3,000,000 revolving line of
credit that matures on July 23, 2011.  The SVB line of credit bears
interest at the prime rate plus 2% for periods in which we maintain an account
balance with SVB (less all indebtedness owed to SVB) of at least $800,000 at all
times during the prior calendar month (the “Streamline Period”), and at the
prime rate plus 4% when a Streamline Period is not in effect.  The
line of credit is secured by all our and our subsidiaries’
assets.  Approximately $150,000 of the line of credit is committed to
our corporate credit cards.





The line
of credit is subject to certain financial and performance covenants which the
companywas in compliance with as of September 30, 2010.  The balance
outstanding as of September 30, 2010 was $1,375,000.  As of September
30, 2010, $1,475,000 was available under the line of credit.





Note
6 – Acquisition of Remaining Interest in Pools Press





On August
31, 2010, the Company purchased the remaining 20% interest in Pools Press, which
it did not already own.  The Company paid $120,000 in cash for such
interest.  The accumulated losses attributable to the minority
interest in Pools Press at the time of the acquisition was
$34,904.  The Company increased the goodwill attributable to Pools
Press by $85,096 at the time of the acquisition, which represents the purchase
price of $120,000 reduced by the accumulated losses attributable to the minority
interest of $34,904.





Note
7 — Contingencies and Commitments





The
Company has long-term contractual commitments with several vendors to purchase
content during the next several fiscal years.  These commitments total
in aggregate $4,650,000, $4,350,000, $4,650,000, $5,000,000, $5,400,000, and
$2,800,000 for the fiscal years ending June 30, 2011, 2012, 2013, 2014, 2015 and
2016, respectively.





Note
8 — Income
Taxes




The
reconciliation of the effective income tax rate to the federal statutory rate is
as follows:





Three
      months Ended September 30,2010
                                                  
                                                  
                                                  2009Federal
      income tax rate
                                                  
                                                  
                                                  (34.00
                                                  )%
                                                  
                                                  
                                                  (34.00
                                                  )%State
      tax, net of federal benefit
                                                  
                                                  
                                                  (4.31
                                                  )%
                                                  
                                                  
                                                  (3.17
                                                  )%Permanent
      differences
                                                  
                                                  
                                                  0.90
                                                  %
                                                  
                                                  
                                                  (0.07
                                                  )%Change
      in valuation allowance
                                                  
                                                  
                                                  37.41
                                                  %
                                                  
                                                  
                                                  9.70
                                                  %Benefit
      for interim period loss not recorded
                                                  
                                                  
                                                  —
                                                  %
                                                  
                                                  
                                                  27.54
                                                  %Effective
      income tax rate
                                                  
                                                  
                                                  0.00
                                                  %
                                                  
                                                  
                                                  0.00
                                                  %




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes.





The
Company has provided a full valuation allowance on the deferred tax assets at
September 30, 2010 and June 30, 2010 to reduce such asset to zero since there is
no assurance that the Company will generate future taxable income to utilize
such asset. Management will review this valuation allowance requirement
periodically and make adjustments as warranted.





At
September 30, 2010 and June 30, 2010, the Company had federal net operating loss
(“NOL”) carryforwards of approximately $1,461,000 and state NOL carryforwards of
approximately $1,094,000. Federal NOLs could, if unused, expire in 2030. State
NOLs, if unused, could expire in 2020.




Effective
January 1, 2007, the Company adopted FASB guidelines that address the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under this guidance, we
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. This guidance also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of September 30, 2010 and June 30, 2010, the
Company did not have a liability for unrecognized tax benefits, and no
adjustment was required at adoption.





The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2006.




12





The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of September 30, 2010 and June 30, 2010 , the Company
has no accrued interest or penalties related to uncertain tax positions.
Additionally, tax years 2006 through 2010 remain open to examination by the
major taxing jurisdictions to which the Company is subject.




Note 9 — Subsequent
events





On
October 12, 2010, the Company purchased a customer list in exchange for 75,000
shares of common stock valued at
$71,250 based on the trading price of the Company’s common stock on the date of
the grant.





On
October 29, 2010, the Company issued warrants to purchase 600,000 shares of the
Company’s common stock to two consultants for services.  All of the
warrants have a four year term.  400,000 of the warrants are
exercisable at $1.25 and vest immediately.  The remaining 200,000
warrants vest over one year and are exercisable at $1.75 per
share.  These warrants were valued using a Black-Scholes option
pricing model at $378,000 and such cost will be recognized as an expense in
future periods.





On
November 5, 2010, the Company issued warrants to purchase up to 50,000 shares of
the Company’s common stock at an exercise price of $1.25 per share to each of
General Merrill McPeak, Mr. Scott Ogilvie and Mr. Gregory Suess, in connection
with their appointments to the Company’s board of directors on that date. Each
of the Warrants is subject to the following vesting schedule: 12,500 shares vest
and become exercisable under the Warrant on each of December 31, 2010, March 31,
2011, June 30, 2011 and September 30, 2011. Each Warrant expires on November 5,
2015.





On
November 12, 2010, the Company accepted an unsolicited offer made to the Company
on behalf of certain of the holders of the common stock purchase warrants issued
on December 22, 2006 (the “December 2006 Warrants”) whereby these holders of the
December 2006 Warrants offered to exercise those warrants for cash if the
Company would issue an additional warrant exercisable for one-half of the number
of shares obtained upon the exercise, with an exercise price of $2.00 per share,
and with an expiration date of November 17, 2013. The Company has agreed to
issue new warrants to these holders upon the cash exercise of the December
2006 Warrants on substantially the terms set forth in the offer letter. The
Company cannot determine or control how many of the December 2006 Warrants will
actually be exercised under these terms, however, the maximum amount of cash
proceeds that the Company may receive from the cash exercise of the December
2006 Warrants is $3,062,500 and the maximum number of shares of common stock
issuable upon the exercise of the new warrants that may be issued under these
terms (assuming all of the December 2006 Warrants are exercised for
cash) is 1,225,000.  The December 2006 Warrants expire on
December 22, 2010 and cannot be exercised after that date. The Company will
undertake to register the shares underlying the new warrants that are issued and
the shares of common stock obtained by the holders on the cash exercise of the
December 2006 Warrants, on a best efforts basis prior to March 1,
2011.




13




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





MANAGEMENT’S
DISCUSSION


AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




The
following discussion and analysis of our results of operations and financial
condition for the three months ended September 30, 2010 and 2009 should be read
in conjunction with the notes to those financial statements that are included in
Item 1 of Part 1 this Quarterly Report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including our
limited operating history, our ability to compete successfully with existing and
new reprint companies, and the sufficiency of our cash and cash equivalents. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements. All forward-looking
statements included in this Quarterly Report are based on information available
to us on the date hereof and, except as required by law, we assume no obligation
to update any such forward-looking statements.




Overview




Derycz
Scientific, Inc. (the “Company” or “Derycz”) was incorporated in the State of
Nevada on November 2, 2006. In November 2006 the Company entered into a Share
Exchange Agreement with Reprints Desk, Inc. (“Reprints”). At the closing of the
transaction contemplated by the Share Exchange Agreement, the Company acquired
all of the outstanding shares of Reprints from the shareholders of Reprints and
issued 8,000,003 of its common shares to the shareholders. Following completion
of the exchange transaction, Reprints became a wholly-owned subsidiary of the
Company.




On
February 28, 2007, the Company entered into an agreement with Pools Press, Inc.
(“Pools”) of Northbrook, Illinois, a privately held company, pursuant to which
the Company acquired 75% of the issued and outstanding common stock of Pools for
consideration of $616,080. The Company purchased the remaining interest in Pools
that it did not already own on August 31, 2010.  Pools is a commercial
printer, specializing in reprints of copyrighted articles. The results of Pools
Press’ operations have been included in the consolidated financial statements
since March 1, 2007.




Derycz,
through Reprints and Pools, seeks to facilitate the use of scientific and
technical information in both traditional and innovative
ways.   The Company serves both the publishers who own the rights
to use the information and the customers who use the information.  The
Company utilizes web-based platforms as well as traditional delivery channels
and is developing products and services that make it easier for our customers to
find and use information.  The publishers of scientific and technical
information publish hundreds of thousands of new articles each year in addition
to the tens of millions of existing articles that have been published in the
past.  Derycz Scientific, through Reprints, provides its customers
with access to that published content and related software, systems and
services.  Our customers use this content for marketing, regulatory or
research purposes. Generally, marketing departments order large quantities of
printed copies, called “reprints,” that they distribute to interested parties,
including customers and doctors who may prescribe a customer’s products, and
electronic copies, called “eprints”, for distribution through the Internet and
other electronic mechanisms. Researchers and regulatory personnel generally
order single copies, called “document delivery”, for use in their research
activities.  In order to use the content, our customers must pay
appropriate copyright fees and our services ensure that we have obtained the
necessary permissions from the owners of the published content so that our
customers’ use of the content complies with applicable copyright laws. Our
services alleviate the need for our customers to contact multiple publishers in
order to obtain the required permissions. Pools Press also offers other
commercial printing products, such as the production of documents, and
newsletters as well as distribution logistics for printed
materials.




Critical
Accounting Policies




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements and accompanying notes, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. When making these estimates and assumptions, we consider
our historical experience, our knowledge of economic and market factors and
various other factors that we believe to be reasonable under the circumstances.
Actual results may differ under different estimates and
assumptions.




The
accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our financial statements
because they inherently involve significant judgments and uncertainties.




(a)
Revenue recognition




The
Company's primary source of revenue is from information and printing
services.  The Company recognizes revenue when the sales process is
deemed complete and associated revenue has been earned.  The Company's
policy is to recognize revenue when services have been performed, risk of loss
and title to the product transfers to the customer, the selling price is fixed
and determinable and collectibility is reasonably assured.




14




The
Company recognizes revenues from printing services when services have been
rendered and accepted by the customer while revenues from the re-use of
published articles and rights management services are recognized upon shipment
or electronic delivery to the customer.




(b) Stock
based compensation





The
Company adopted FASB guidelines that require that the cost resulting from all
share-based payment transactions be recognized in the financial statements. This
guidance establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
Effective January 1, 2006, we adopted the fair value recognition provisions of
the current guidelines of the FASB, using the modified prospective method. Under
this method, the provisions of such guidance apply to all awards granted or
modified after the date of adoption and all previously granted awards not yet
vested as of the date of adoption.





Determining
the appropriate fair value model and calculating the fair value of stock-based
payment awards require the input of highly subjective assumptions, including the
expected life of the stock-based payment awards and stock price volatility. We
use the Black-Scholes option-pricing model to value compensation expense. The
assumptions used in calculating the fair value of stock-based payment awards
represent management’s best estimates, but the estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based compensation
expense could be materially different in the future.




(c)
Goodwill and Intangible Assets




As
required by the Financial Accounting Standards Board, management performs
impairment tests of goodwill and indefinite-lived intangible assets whenever an
event occurs or circumstances change that indicate impairment has more likely
than not occurred. Also, management performs impairment testing of goodwill and
indefinite-lived intangible assets at least annually.




In
accordance with guidance of the Financial Accounting Standards Board, management
tests goodwill for impairment at the reporting unit level.  The
Company has only one reporting unit.  At the time of goodwill
impairment testing, management determines fair value through the use of a
discounted cash flow valuation model incorporating discount rates commensurate
with the risks involved its reporting unit. If the calculated fair value is less
than the current carrying value, impairment of the Company may exist. The use of
a discounted cash flow valuation model to determine estimated fair value is
common practice in impairment testing in the absence of available domestic and
international transactional market evidence to determine the fair value. The key
assumptions used in the discounted cash flow valuation model for impairment
testing include discount rates, growth rates, cash flow projections and terminal
value rates.




In
accordance with guidance of the Financial Accounting Standards Board, the
Company reviews intangible assets subject to amortization at least annually to
determine if any adverse conditions exist or a change in circumstances has
occurred that would indicate impairment or a change in the remaining useful
life.  If the carrying value of an asset exceeds its undiscounted cash
flows, the Company writes down the carrying value of the intangible asset to its
fair value in the period identified.  If the carrying value of assets
is determined not to be recoverable, the Company records an impairment loss
equal to the excess of the carrying value over the fair value of the
assets.  The Company’s estimate of fair value is based on the best
information available, in the absence of quoted market prices.  The
Company generally calculates fair value as the present value of estimated future
cash flows that the Company expects to generate from the asset using a
discounted cash flow income approach as described above.  If the
estimate of an intangible asset’s remaining useful life is changed, the Company
amortizes the remaining carrying value of the intangible asset prospectively
over the revised remaining useful life.




(d)
Recently issued accounting pronouncements




In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.” The
FASB Accounting Standards Codification* (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its consolidated financial statements now use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.




On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred. We have applied
this guidance to business combinations completed since July 1,
2009.  Adoption of the new guidance did not have a material impact on
our financial statements.




15




In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for the Company beginning July 1, 2010, with earlier
adoption permitted.  Under the new guidance on arrangements that
include software elements, tangible products that have software components that
are essential to the functionality of the tangible product will no longer be
within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue
recognition guidance.  We believe adoption of this new guidance will
not have a material impact on our financial statements.




In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.




The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.




Results
of Operations




Three
Months Ended September 30, 2010 Compared to the Three Months Ended September 30,
2009:




Sales
and Cost of Goods Sold




Our
revenues increased significantly from the same period in 2009. We achieved
revenue of $6,016,656 for the three months ended September 30, 2010, compared to
revenue of $4,783,699 for the three months ended September 30, 2009, an increase
of 26%.




The
revenue of our main operating company, Reprints, increased to $5,266,277 for the
three months ended September 30, 2010 from $4,025,667 for the three months ended
September 30, 2009, an increase of 31%. Revenue from Pools Press decreased
slightly from $758,032 in the 2009 period to $750,379 in the 2010
period.  Approximately 9% of our revenues were derived from new
customers in the 2010 period.  We expect our revenue growth to
continue this year as we continue to aggressively market our products and
services.




Our cost
of goods sold likewise increased from $4,067,395 for the three months ended
September 30, 2009 to $5,199,811 for the three months ended September 30, 2010,
which represents an increase of 28%. This percentage increase is roughly
equivalent to the increase in our revenues. This direct relationship between our
cost of goods sold and sales is expected because our costs are incurred when we
purchase the rights to content requested by our customers.





However,
our overall gross margin percentage decreased from 15% of sales in the 2009
period to 14% in the 2010 period.  In general, reprints, or multiple
copies of an article have a lower margin, particularly when an individual order
is for an amount in excess of $100,000.  Because our customers could
order reprints directly from the publisher we must reduce our margins on large
orders in order to create incentive for the customer to arrange the order
through Reprints.  Pools provides reprint printing services for
several publishers and much of Pools’ revenues are derived from those
sales.  The margin on these sales is lower than the margin Reprints
charges for reprint sales because it is viewed as primarily providing printing
services and not other related services.




We expect
that our sales will increase in the 2011 fiscal year as a result of our existing
customers increasing their spending on existing products as well as new products
and from sales to new customers. We expect our gross margin to remain constant
or decline slightly due to the need for aggressive pricing in order to continue
to increase our revenues.  While we continue to develop and market
higher margin products, we face price competition in our core markets for
document delivery and reprints as well as commercial printing.  Most
of our costs are determined by the publishers from whom we purchase media for
each individual order and they do not generally grant significant discounts at
this time.




Operating
Expenses




General
and Administrative




Our
general and administrative expenses increased 9% from $945,433 for the three
months ended September 30, 2009 to $1,033,497 for the three months ended
September 30, 2010. Pools’ share of these expenses was approximately $52,000 in
the 2009 period and $49,347 for the 2010 period. These expenses include
Reprints’ administrative salary costs, which were $701,141 in the 2010 period
and $433,821 in the 2009 period, an increase of $267,320 or 62%. Our sales and
marketing team, information technology team and our accounting team have all
increased during the past year.  Due to the expansion of our sales
volume and in order to continue to develop our computer system and products, we
expect to add a small number of new employees in the next twelve
months.




16




Marketing
and Advertising




Our
marketing and advertising expenses increased from $38,453 for the three months
ended September 30, 2009 to $114,526 for the three months ended September 30,
2010, an increase of 198%. This increase was due to our expanded marketing
efforts during the 2010 period.  In 2011, we expect our marketing
costs to remain at the current level or increase marginally, to approximately
$500,000 for fiscal 2011. Our marketing costs include advertising, events,
direct response and integrated marketing campaigns, public relations and content
publicity, search engine optimization and marketing, thought leadership
programs, channel alliances training, and analyst relations.  In
addition, a portion of our marketing expenses are dedicated to research and
customer retention.





Depreciation
and Amortization




Our
depreciation and amortization expense increased approximately 20% from $49,573
for three months ended September 30, 2009 to $59,550 for the three months ended
September 30, 2010.  Our depreciation and amortization expense was
primarily attributable to amortization on software and intellectual property
licenses as well as depreciation on computer equipment which supports our order
processing systems.




Interest
Expense




Interest
expense was $15,150 for the three months ended September 30, 2010 and $1,539 for
the three months ended September 30, 2009. The 2010 interest expense was
primarily attributable to the interest paid on a credit line with Silicon Valley
Bank.




Interest
Income




Interest
income was $609 for the three months ended September 30, 2010 and $1,549 for the
three months ended September 30, 2009.  We maintain all of our cash in
our bank accounts and we do not expect these accounts to earn significant
amounts of interest.





Other
Income





The
Company earned $0 in other income during the three months ended September 30,
2010, and $1,069 during the three months ended September 30,
2009.  This income represents income we receive from publishers and
customers for miscellaneous services.




Net
Loss




As a
result of these factors, we recorded a net loss of $405,269 for the three months
ended September 30, 2010 compared to a net loss $310,691 in the 2009
period.




Liquidity
and Capital Resources




Since our
inception, we have funded our operations primarily through private sales of
equity securities, which have provided aggregate net cash proceeds to date of
approximately $5,100,000.





As of
September 30, 2010, we had cash and cash equivalents of $1,997,067, compared to
$1,852,231 as of June 30, 2010. This increase is primarily attributable to an
increase in accounts receivable of $381,887 and a decrease in accounts payable
of $394,762 as well as the net loss of $405,269 for the period.




Net cash
used in operating activities was $1,086,490 for the three months ended September
30, 2010 compared to cash used in operating activities of $245,409 for the three
months ended September 30, 2009. During the 2010 period, our accounts receivable
increased by $381,887 and our accounts payable decreased by $394,762, compared
to increases of $550,098 and $406,042, respectively, in the 2009 period. During
the three months ended September 30, 2009, we used $172,800 of prepaid expenses,
compared to use of $22,235 in the 2010 period.




Net cash
used in investing activities was $135,448 for the three months ended September
30, 2010 compared to net cash used in investing activities of $25,398 for the
three months ended September 30, 2009. This difference was primarily due to the
purchase of the remaining interest in Pools Press in the 2010
period.




Net cash
provided by financing activities was $1,366,774 for the three months ended
September 30, 2010 compared to net cash used in financing activities of $4,296
for the corresponding period in 2009. The cash provided by financing activities
for the 2010 period was primarily provided by advances on our line of
credit.





On July
23, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank
(“SVB”) for a $3,000,000 line of credit that matures on July 23,
2011.  The SVB line of credit bears interest at the prime rate plus 2%
for periods in which we maintain an account balance with SVB (less all
indebtedness owed to SVB) of at least $800,000 at all times during the prior
calendar month (the “Streamline Period”), and at the prime rate plus 4% when a
Streamline Period is not in effect.  The line of credit is secured by
all our and our subsidiaries’ assets.  Approximately $150,000 of the
line of credit is committed to our corporate credit cards.  At any
time, we may draw on that portion of the remaining $2,850,000 of the line of
credit equal to approximately (i) eighty percent (80%) of our then outstanding
accounts receivable, excluding certain accounts in arrears, foreign accounts and
accounts for which the debtor is our affiliate, less (ii) amounts then committed
under letters of credit and foreign exchange contracts and allocated to SVB’s
cash management services (e.g., merchant services, direct deposit of payroll,
business credit card and check cashing services).  As of September 30,
2010, approximately $1,475,000 was available for borrowing under the line of
credit.




17




On
November 12, 2010, the Company accepted an unsolicited offer made to the Company
on behalf of certain of the holders of the common stock purchase warrants issued
on December 22, 2006 whereby the holders of those warrants offered to exercise
those warrants for cash if the Company would issue an additional warrant
exercisable for one-half of the number of shares obtained upon the exercise,
with an exercise price of $2.00 per share. The Company has agreed to issue new
warrants to these holders upon the cash exercise of those warrants on
substantially the terms set forth in the offer letter. The Company cannot
determine or control how many of those warrants will actually be exercised under
these terms, however, the maximum amount of cash proceeds that the Company may
receive from the cash exercise of those warrants is $3,062,500




We have
significant contractual commitments to vendors to purchase content over the next
several fiscal years.  Payments of $3,500,000 are due in the fiscal
year ending June 30, 2011, which includes aggregate payments of approximately
$1,400,000 due on or prior to December 31, 2010.  Future commitments
total in aggregate $4,350,000, $4,650,000, $5,000,000, $5,400,000, and
$2,800,000 for the fiscal years ending June 30, 2012, 2013, 2014, 2015 and 2016,
respectively.




We
believe that our current cash resources and cash flow from operations will be
sufficient to sustain our current operations for the next twelve months.
However, we plan to raise additional funds for general working capital purposes
in the next twelve months through equity or debt financings or by other means to
support our operations and fund growth initiatives.  We can provide no
assurances, however, that such financing will be available in an amount or on
terms acceptable to us, if at all. The sale of additional equity or debt
securities would result in dilution to our shareholders.  The issuance
of additional debt would result in increased expenses and could subject us to
covenants that may have the effect of restricting our operations.




Off-Balance
Sheet Arrangements




The
Company does not have any off-balance sheet arrangements.




Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
required.





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined  in  Rules  13a-15(e) and
15d-15(e) of the  Exchange  Act (defined  below)).
Based upon that evaluation, our principal executive officer and principal
financial officer concluded that, as of the end of the period covered in this
report, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed,
summarized and reported within the required time periods and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.





Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error or fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Due to
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Accordingly, management believes that the financial
statements included in this report fairly present in all material respects our
financial condition, results of operations and cash flows for the periods
presented.





Changes
in Internal Control Over Financial Reporting





In
addition, our management with the participation of our Principal Executive
Officer and Principal Financial Officer have determined that no change in our
internal control over financial reporting (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred
during or subsequent to the quarter ended September 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




18





PART
II — OTHER INFORMATION





Item
1. Legal Proceedings




None.





Item
1A. Risk Factors





Not
required.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




On May
13, 2010, the Company issued 40,000 shares of its common stock valued at $46,000
based on the trading price of the Company’s common stock on the date of the
issuance. The issuance was made to a consultant in consideration of services
rendered.  The Company did not employ any form of general solicitation or
advertising in connection with the issuance of the shares. The issuance was made
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the “Securities
Act”).





On July
27, 2010, the Company issued options to purchase 379,000 shares of the Company’s
common stock to thirteen employees, which expire on July 27,
2020.  These options vest over 3 years, with one-twelfth of the grant
vesting on the last day of each calendar quarter though September 30, 2013. The
Company has subsequently registered the underlying shares on a Registration
Statement on Form S-8 filed with the SEC on October 8, 2010. The Company did not
employ any form of general solicitation or advertising in connection with the
issuance of the options. The issuance was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.




On August
13, 2010, the Company issued 19,393 shares of the Company’s common stock valued
at $17,648 based on the trading price of the Company’s common stock on the date
of issuance. The issuance was made to a consultant in consideration of services
rendered. The Company did not employ any form of general solicitation or
advertising in connection with the issuance of the shares. The issuance was made
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.




Item
3. Defaults Upon Senior Securities





None.





Item
4. Removed and Reserved





Item 5. Other Information





(a)
            None.





(b)
            There
      were no changes to the procedures by which security holders may recommend
      nominees to our board of directors.





Item
6. Exhibits





See
“Exhibit Index” on the page immediately following the signature page hereto for
a list of exhibits filed as part of this report, which is incorporated herein by
reference.




19





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





DERYCZ
      SCIENTIFIC, INC.By:
            /s/
      Peter DeryczPeter
      DeryczDate:
      November 15, 2010
            
            Chief
      Executive OfficerBy:
            /s/
      Richard McKilliganRichard
      McKilliganDate:
      November 15, 2010
            
            Chief
      Financial Officer




20




EXHIBIT
INDEX
 
 Exhibit
      No.
              
              Description2.1
              
              Share
      Exchange Agreement between Derycz and Reprints Desk dated November 13,
      2006 (1)3.1
              
              Articles
      of Incorporation (1)3.2
              
              Bylaws
      (1)4.1
              
              Form
      of Warrant (1)4.2
              
              Form
      of Warrant (2)4.3
              
              Form
      of Common Stock Purchase Warrant (3)4.4
              
              Form
      of Common Stock Purchase Warrant (exercise price of $1.25) (3)4.5
              
              Form
      of Common Stock Purchase Warrant (exercise price of $1.25) (3)10.1
              
              Employment
      Agreement between Reprints Desk, Inc. and Peter Derycz, dated
                July
      1, 2010 (4)10.2
              
              Employment
      Agreement between Reprints Desk, Inc. and Richard McKilligan,
      dated
                July
      1, 2010 (4)10.3
              
              Employment
      Agreement between Reprints Desk, Inc. and Scott Ahlberg,
dated
                July
      1, 2010 (4)10.4
              
              Employment
      Agreement between Reprints Desk, Inc. and Jan Peterson, dated
                July
      1, 2010 (4)10.5
              
              Loan
      and Security Agreement between Derycz Scientific, Inc., Reprints Desk,
      Inc., Pools Press, Inc. and Silicon Valley Bank, dated July 23, 2010 (5)10.6
              
              Intellectual
      Property Security Agreement between Derycz Scientific, Inc. and Silicon
      Valley Bank, dated July 23, 2010 (5)10.7
              
              Intellectual
      Property Security Agreement between Reprints Desk, Inc. and Silicon Valley
      Bank, dated July 23, 2010 (5)10.8
              
              Intellectual
      Property Security Agreement between Pools Press, Inc. and Silicon Valley
      Bank, dated July 23, 2010 (5)10.9
              
              Form
      of Indemnification Agreement (3)31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    *31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    *32.1
              
              Section
      1350 Certification of Chief Executive Officer *32.2
              
              Section
      1350 Certification of Chief Financial Officer
*
 
 *
              Filed
      herewith.(1)
              Incorporated
      by reference to the filing of such exhibit with the Company’s Registration
      Statement on Form SB-2 (File No. 333-148392), filed on December 28,
      2007.(2)
              Incorporated
      by reference to the filing of such exhibit with the Company’s Quarterly
      Report on Form 10-Q for the quarter ended September 30, 2008, filed on
      November 19, 2008.(3)
              Incorporated
      by reference to the filing of such exhibit with the Company’s Current
      Report on Form 8-K filed on November 12, 2010.(4)
              Incorporated
      by reference to the filing of such exhibit with the Company’s Annual
      Report on Form 10-K for the year ended June 30, 2010, filed on September
      28, 2010.(5)
              Incorporated
      by reference to the filing of such exhibit with the Company’s Current
      Report on Form 8-K filed on July 28,
2010.




21