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: December 31, 2008


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. 333-148392


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.)10990
      Wilshire Blvd., Suite 1410, Los Angeles, California
            
            90024(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 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  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈  (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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of February 11, 2009, there were
12,961,830 shares of common stock outstanding.








TABLE OF
CONTENTS





PART
      I — FINANCIAL INFORMATION
                    3Item 1.
      Financial Statements
                    3Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                    15Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
                    20Item 4T.
      Controls and Procedures
                    20PART
      II — OTHER INFORMATION
                    20Item 1.
      Legal Proceedings
                    20Item 1A.
      Risk Factors
                    21Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
                    21Item 3.
      Defaults Upon Senior Securities
                    21Item 4.
      Submission of Matters to a Vote of Security Holders
                    21Item 5.
      Other Information
                    21Item 6.
      Exhibits
                    21SIGNATURES
                    22


2


PART 1 — FINANCIAL
INFORMATION





Item 1. Financial
Statements


Derycz
Scientific, Inc.
 Condensed
Consolidated Balance Sheets
 
 December 31,
                                  
                                  
                                  June 30,2008
                                  
                                  
                                  2008(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                  
                                  $
                                  1,576,897
                                  
                                  
                                  $
                                  954,834Short
      term investments
                                  
                                  
                                  1,624,525
                                  
                                  
                                  
                                  1,631,630Accounts
      receivable
                                  
                                  
                                  2,816,100
                                  
                                  
                                  
                                  3,119,158Inventory
                                  
                                  
                                  9,745
                                  
                                  
                                  
                                  15,956Prepaid
      royalties
                                  
                                  
                                  79,168
                                  
                                  
                                  
                                  326,077Other
      current assets
                                  
                                  
                                  64,461
                                  
                                  
                                  
                                  80,739TOTAL
      CURRENT ASSETS
                                  
                                  
                                  6,170,896
                                  
                                  
                                  
                                  6,128,394PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $139,260
      and  $89,711
                                  
                                  
                                  359,787
                                  
                                  
                                  
                                  362,807INTANGIBLE
      ASSETSCustomer
      lists, net of accumulated amortization of $244,166
      and  $182,222
                                  
                                  
                                  30,834
                                  
                                  
                                  
                                  92,778Other
      intellectual property, net of amortization of $109,784 and
      $64,016
                                  
                                  
                                  560,641
                                  
                                  
                                  
                                  518,959Goodwill
                                  
                                  
                                  318,343
                                  
                                  
                                  
                                  189,185TOTAL
      ASSETS
                                  
                                  $
                                  7,440,501
                                  
                                  
                                  $
                                  7,292,123LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                  
                                  $
                                  1,790,962
                                  
                                  
                                  $
                                  1,997,233Capital
      lease obligation, current
                                  
                                  
                                  16,973
                                  
                                  
                                  
                                  16,129Outstanding
      credit line
                                  
                                  
                                  1,319,142
                                  
                                  
                                  
                                  1,291,855Income
      tax payable
                                  
                                  
                                  15,524
                                  
                                  
                                  
                                  -Other
      current liabilities
                                  
                                  
                                  50,306
                                  
                                  
                                  
                                  88,430TOTAL
      CURRENT LIABILITIES
                                  
                                  
                                  3,192,907
                                  
                                  
                                  
                                  3,393,647CAPITAL
      LEASE OBLIGATIONS
                                  
                                  
                                  52,776
                                  
                                  
                                  
                                  61,479LONG-TERM
      DEFERRED TAX LIABILITY
                                  
                                  
                                  98,895MINORITY
      INTEREST
                                  
                                  
                                  16,939
                                  
                                  
                                  
                                  50,102COMMITMENTS
      AND CONTINGENCIES
                                  
                                  
                                  
                                  
                                  
                                  
                                  -STOCKHOLDERS'
      EQUITYPreferred
      stock; $0.001 par value; 20,000,000 shares authorized; no shares issued
      and outstandingCommon
      stock; $0.001 par value; 100,000,000 shares authorized; 12,961,830 and
      12,561,813 shares issued and outstanding
                                  
                                  
                                  12,962
                                  
                                  
                                  
                                  12,562Additional
      paid-in capital
                                  
                                  
                                  5,301,896
                                  
                                  
                                  
                                  4,645,364Accumulated
      deficit
                                  
                                  
                                  (1,235,874
                                  )
                                  
                                  
                                  (871,031
                                  )TOTAL
      STOCKHOLDERS' EQUITY
                                  
                                  
                                  4,078,984
                                  
                                  
                                  
                                  3,786,895TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                  
                                  $
                                  7,440,501
                                  
                                  
                                  $
                                  7,292,123
 
 See notes
to condensed consolidated financial statements
  3
 
 Derycz
Scientific, Inc.
 Condensed
Consolidated Statements of Operations
 (unaudited)
 
 Three Months Ended
                                
                                
                                Six Months EndedDecember 31,
                                
                                
                                December 31,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007NET
      SALES
                                
                                $
                                3,426,953
                                
                                
                                $
                                2,905,489
                                
                                
                                $
                                6,629,679
                                
                                
                                $
                                5,156,576COST
      OF SALES
                                
                                
                                2,671,290
                                
                                
                                
                                2,404,255
                                
                                
                                
                                5,228,119
                                
                                
                                
                                4,215,827GROSS
      PROFIT
                                
                                
                                755,663
                                
                                
                                
                                501,234
                                
                                
                                
                                1,401,560
                                
                                
                                
                                940,749OPERATING
      EXPENSES:General
      and administrative
                                
                                
                                810,267
                                
                                
                                
                                603,397
                                
                                
                                
                                1,581,891
                                
                                
                                
                                1,021,328Marketing
      and advertising
                                
                                
                                24,425
                                
                                
                                
                                13,738
                                
                                
                                
                                38,588
                                
                                
                                
                                17,508Depreciation
      and amortization
                                
                                
                                66,826
                                
                                
                                
                                63,493
                                
                                
                                
                                131,899
                                
                                
                                
                                104,777Other
      expenses
                                
                                
                                174
                                
                                
                                
                                -
                                
                                
                                
                                1,222
                                
                                
                                
                                -TOTAL
      OPERATING EXPENSES
                                
                                
                                901,692
                                
                                
                                
                                680,628
                                
                                
                                
                                1,753,600
                                
                                
                                
                                1,143,613LOSS
      FROM OPERATIONS
                                
                                
                                (146,029
                                )
                                
                                
                                (179,394
                                )
                                
                                
                                (352,040
                                )
                                
                                
                                (202,864
                                )Unrealized
      loss on marketable securities
                                
                                
                                (9,015
                                )
                                
                                
                                -
                                
                                
                                
                                (27,165
                                )
                                
                                
                                -Interest
      expense
                                
                                
                                (15,860
                                )
                                
                                
                                (7,080
                                )
                                
                                
                                (31,100
                                )
                                
                                
                                (11,685
                                )Interest
      income
                                
                                
                                12,302
                                
                                
                                
                                33,940
                                
                                
                                
                                31,760
                                
                                
                                
                                67,742LOSS
      BEFORE TAXES AND MINORITY INTEREST
                                
                                
                                (158,602
                                )
                                
                                
                                (152,534
                                )
                                
                                
                                (378,545
                                )
                                
                                
                                (146,807
                                )MINORITY
      INTEREST
                                
                                
                                6,449
                                
                                
                                
                                (4,044
                                )
                                
                                
                                2,289
                                
                                
                                
                                (6,095
                                )LOSS
      BEFORE TAXES
                                
                                
                                (152,153
                                )
                                
                                
                                (156,578
                                )
                                
                                
                                (376,256
                                )
                                
                                
                                (152,902
                                )BENEFIT
      FOR INCOME TAXES
                                
                                
                                19,976
                                
                                
                                
                                -
                                
                                
                                
                                11,413
                                
                                
                                
                                -NET
      LOSS
                                
                                $
                                (132,177
                                )
                                
                                $
                                (156,578
                                )
                                
                                $
                                (364,843
                                )
                                
                                $
                                (152,902
                                )NET
      LOSS PER SHARE:BASIC
      AND DILUTED
                                
                                $
                                (0.01
                                )
                                
                                $
                                (0.01
                                )
                                
                                $
                                (0.03
                                )
                                
                                $
                                (0.01
                                )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
                                
                                
                                12,961,830
                                
                                
                                
                                12,500,003
                                
                                
                                
                                12,928,495
                                
                                
                                
                                12,510,305
 
 See notes
to condensed consolidated financial statements
  4
 
 Derycz
Scientific, Inc.
 
 Condensed
Consolidated Statement of Stockholders' Equity
 For
the six months ended December 31, 2008
 (unaudited)
 
 Additional
                    
                    
                    
                    
                    
                    TotalCommon
      stock
                    
                    
                    paid-in
                    
                    
                    Accumulated
                    
                    
                    stockholders'Shares
                    
                    
                    Amount
                    
                    
                    capital
                    
                    
                    Deficit
                    
                    
                    equityBalance,
      July 1, 2008
                    
                    
                    12,561,813
                    
                    
                    $
                    12,562
                    
                    
                    $
                    4,645,364
                    
                    
                    $
                    (871,031
                    )
                    
                    $
                    3,786,895Fair
      value of vested options issued to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,944
                    
                    
                    
                    -
                    
                    
                    
                    12,944Issuance
      of warrant for services
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    43,963
                    
                    
                    
                    -
                    
                    
                    
                    43,963Issuance
      of common stock for cash
                    
                    
                    400,017
                    
                    
                    
                    400
                    
                    
                    
                    599,625
                    
                    
                    
                    -
                    
                    
                    
                    600,025Net
      loss for the period
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (364,843
                    )
                    
                    
                    (364,843
                    )Balance,
      December 31, 2008
                    
                    
                    12,961,830
                    
                    
                    $
                    12,962
                    
                    
                    $
                    5,301,896
                    
                    
                    $
                    (1,235,874
                    )
                    
                    $
                    4,078,984
 
 See notes
to condensed consolidated financial statements
  5
 
 Derycz
Scientific, Inc.
 
 Condensed
Consolidated Statements of Cash Flows
 
 Six
      monthsended
      December 31,2008
                        
                        
                        2007(unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                        
                        $
                        (364,843
                        )
                        
                        $
                        (152,902
                        )Adjustment
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        157,261
                        
                        
                        
                        126,279Fair
      value of vested stock options
                        
                        
                        12,944
                        
                        
                        
                        86,113Fair
      value of common stock warrant issued for services
                        
                        
                        43,963
                        
                        
                        
                        11,810Unrealized
      loss on investment
                        
                        
                        27,165
                        
                        
                        
                        -Changes
      in assets and liabilities:Accounts
      receivable
                        
                        
                        303,058
                        
                        
                        
                        (763,447
                        )Accounts
      payable and accrued expenses
                        
                        
                        (206,271
                        )
                        
                        
                        178,125Inventory
                        
                        
                        6,211
                        
                        
                        
                        2,546Prepaid
      royalties
                        
                        
                        246,909
                        
                        
                        
                        88,833Other
      current assets
                        
                        
                        16,278
                        
                        
                        
                        (11,007
                        )Accrued
      interest on notes payable
                        
                        
                        -
                        
                        
                        
                        7,687Other
      current liabilities
                        
                        
                        (38,124
                        )
                        
                        
                        66,611Income
      taxes payable
                        
                        
                        (12,192
                        )
                        
                        
                        -Minority
      share of earnings in subsidiary
                        
                        
                        (1,510
                        )
                        
                        
                        6,095Net
      cash provided by (used in) operating activities
                        
                        
                        190,849
                        
                        
                        
                        (353,257
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of furniture and equipment
                        
                        
                        (46,529
                        )
                        
                        
                        (111,362
                        )Purchase
      of Intellectual Property
                        
                        
                        (87,450
                        )
                        
                        
                        (330,000
                        )Additional
      investment in Pools Press
                        
                        
                        (34,200
                        )
                        
                        
                        -Proceeds
      from sale of (investment in) short term investments
                        
                        
                        (20,060
                        )
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (188,239
                        )
                        
                        
                        (441,362
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the issuance of common stock
                        
                        
                        600,025
                        
                        
                        
                        -Capital
      lease obligation
                        
                        
                        (7,859
                        )
                        
                        
                        (6,716
                        )Payments
      on notes on Pools Press
                        
                        
                        -
                        
                        
                        
                        (7,266
                        )Advances
      under (payments on) line of credit
                        
                        
                        27,287
                        
                        
                        
                        (6,244
                        )Net
      cash provided by (used in) financing activities
                        
                        
                        619,453
                        
                        
                        
                        (20,226
                        )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                        
                        
                        622,063
                        
                        
                        
                        (814,845
                        )CASH
      AND CASH EQUIVALENTS, Beginning of period
                        
                        
                        954,834
                        
                        
                        
                        2,971,997CASH
      AND CASH EQUIVALENTS, End of period
                        
                        $
                        1,576,897
                        
                        
                        $
                        2,157,152SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Taxes
      paid
                        
                        $
                        -
                        
                        
                        $
                        -Interest
      paid
                        
                        $
                        31,100
                        
                        
                        $
                        11,685SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Adjustment
      to goodwill to reflect deferred tax assets and liabilities
                        
                        $
                        126,611
                        
                        
                        
                        -Issuance
      of common stock for customer list
                        
                        $
                        -
                        
                        
                        
                        50,000Capital
      lease obligation
                        
                        $
                        -
                        
                        
                        
                        91,792Adjustment
      to goodwill to reflect minority interest of deferred tax
      liability
                        
                        $
                        31,653
                        
                        
                        
                        -
  6


DERYCZ
SCIENTIFIC, INC.
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For
the Three and Six Months Ended December 31, 2008 and 2007
(Unaudited)
  Note
1 — Organization, Nature of Business and Basis of
Presentation
  (a)
Organization
  Derycz
Scientific, Inc. (“Derycz” or 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 (“Reprints”). 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
  Reprints is a content repurposing and
rights management company, with a focus on content re-use services and products.
The Company operates within the Periodicals Publishing industry which is a large
and growing market. The Company has developed products in the following
areas:
  •
                Reprints,
      ePrints and Article Distribution
Systems
 
 •
                Commercial
      Printing Services
 
 •
                Publisher
      Outsourced Reprint Management
 
 •
                Print-on-Demand
      Services for copyright and regulatory sensitive
  documents
  (c) Basis
of Presentation
  The
accompanying interim financial statements for the three and six months ended
December 31, 2008 and 2007 are unaudited, but in the opinion of management,
contain all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position at December 31, 2008 and the results of
operations and cash flows for the three and six months ended December 31, 2008
and 2007. The results of operations for the three and six months ended December
31, 2008 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending June 30, 2009. The financial statements
presented herein should be read in conjunction with the financial statements
included in the Company’s Annual Report on Form 10-K for the year ended June 30,
2008 filed with the Securities and Exchange Commission.
  The
accompanying financial statements are consolidated and include the accounts of
the Company and its wholly and majority owned subsidiaries. The consolidated
accounts include 100% of assets and liabilities of our majority owned
subsidiary, and the ownership interests of minority investors are recorded as a
minority interest. 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.
  7
  (b) Fair
value of financial instruments
  Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. This Statement defines fair value for
certain financial and nonfinancial assets and liabilities that are recorded at
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This guidance applies to other
accounting pronouncements that require or permit fair value measurements. On
February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2,
Effective Date of FASB Statement No. 157. This Staff Position delays the
effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years, except for those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of SFAS No. 157 had no effect on the Company’s consolidated financial position
or results of operations.
  (c) Short
term investments
  Our short
term investments at December 31, 2008 and 2007 consisted of corporate and
municipal debt and preferred stock auction rate securities held in an account
with UBS. During 2008, several auctions have failed as a result of illiquidity
and imbalance in order flow for auction rate securities. A failed auction is not
an indication of an increased credit risk or a reduction in the underlying
collateral, however, parties wishing to sell securities could not do so. Based
on current market conditions, it is not known when or if the capital markets
will come back into balance to achieve successful auctions for these securities.
If these auctions continue to fail, it could result in our holding securities
beyond their next scheduled auction reset dates and will limit the short-term
liquidity of these investments. We currently believe these securities are not
significantly impaired, primarily due to the collateral underlying these
securities and/or the creditworthiness of the issuer.  Furthermore, on
September 8, 2008, the Massachusetts Secretary of State announced that UBS has
pledged to buy back almost $40 billion worth of bonds that their retail clients
have been unable to sell.  As part of the settlement, UBS customers with
less than $1 million in auction rate securities were to get their money back by
October 31, 2008, while others were to get their refund by January 1, 2009. In
January 2009, we received cash for the par value of the outstanding auction rate
securities.  In accordance with Statement of Financial Standards No.
115, the Company determined that these investments should be accounted for as
trading securities and recorded on the Company’s consolidated financial
statements at fair market value, with the unrealized losses amounting to $27,165
at December 31, 2008 reflected as a charge in our statement of operations. The
proceeds received in January 2009 exceeded the book value of the investment at
December 31, 2008 by approximately $61,000.  The realized gain will be
recorded in the third quarter ending March 31, 2009.
  (d)
Concentration of credit risk
  Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and cash equivalents and accounts receivables. The Company
places its cash with high quality financial institutions and at times may exceed
the FDIC $250,000 insurance limit. The Company does not anticipate incurring any
losses related to these credit risks. The Company extends credit based on an
evaluation of the customer's financial condition, generally without collateral.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
intends to maintain allowances for anticipated losses, as required.
  Two
customers accounted for 18% and 12% of the revenues for the three months ended
December 31, 2008 and one customer accounted for 18% of the revenues for the six
months ended December 31, 2008.  One customer accounted for 13% of the
revenues for the three months ended December 31, 2007 and two customers
accounted for 13% and 10% of the revenues for the six months ended December 31,
2007.
  As of
December 31, 2008, two customers accounted for 23% and 11% of accounts
receivable and one customer accounted for 38% of accounts receivable at June 30,
2008.
  (e)
Revenue recognition
  The
Company applies the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial
Statements,” which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB No. 104
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In general, the
Company recognizes revenue when (i) persuasive evidence of an arrangement
exists, (ii) shipment of products has occurred or services have been rendered,
(iii) the sales price charged is fixed or determinable and (iv) collection is
reasonably assured.
  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.
  8
  (f) 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 adopted SFAS No. 123R effective January 1, 2006, and is using
the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective date.
The Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” 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) at the date at which the necessary performance to
earn the equity instruments is complete.
  (g)
Shipping and handling costs
  The
Company accounts for shipping and handling fees and costs in accordance with
EITF 00-10. As such, 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 $31,331 and $51,705, respectively, for the three months ended
December 31, 2008 and 2007 and $70,599 and $61,800, respectively, for the six
months ended December 31, 2008 and 2007.
  (h) Net
Income (Loss) per share
  The
Company reports net income (loss) per share in accordance with SFAS No. 128,
“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
outstanding. 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.
Options and warrants to purchase 2,980,000 shares of common stock have been
excluded from the calculation of diluted net loss per share for the three and
six months ended December 31, 2007 and options and warrants to purchase
3,330,009 shares of common stock have been excluded from the calculation of
diluted net loss per share for the three and six months ended December 31,
2008 as the effect would have been anti-dilutive.
  (i)
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 $24,425 and $13,738 for
the three months ended December 31, 2008 and 2007, respectively and $38,588 and
$17,508, respectively, for the six months ended December 31, 2008 and
2007.
  (j)
Recently issued accounting pronouncements
  In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (“FAS 141(R)”), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. FAS 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income; and changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 also requires that any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value
when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
requirements to identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements are applied retrospectively for all periods
presented.
  9
  In March
2008, the FASB issued SFAS No. 161 (FAS 161), “Disclosures About Derivative
Instruments and Hedging Activities * an amendment of FAS 133.” FAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. FAS 161
is effective for fiscal years beginning after November 15, 2008. The Company
does not expect the implementation of FAS 161 to have a material impact on its
consolidated financial statements.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.” The Company is currently evaluating
the potential impact the new pronouncement will have on its 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 December 31, 2008 and June 30,
2008:
 
 December 31, 2008
                        
                        June 30, 2008(unaudited)Computer
      equipment
                        
                        $
                        67,440
                        
                        
                        $
                        32,344Software
                        
                        
                        106,478
                        
                        
                        
                        95,045Printing
      equipment
                        
                        
                        286,452
                        
                        
                        
                        286,452Furniture
      and fixtures
                        
                        
                        34,677
                        
                        
                        
                        34,677Autos
      and vans
                        
                        
                        4,000
                        
                        
                        
                        4,000499,047
                        
                        
                        
                        452,518Less
      accumulated depreciation
                        
                        
                        (139,260
                        )
                        
                        
                        (89,711
                        )$
                        359,787
                        
                        
                        $
                        362,807
  Printing
equipment includes $91,792 of equipment under capital lease and related
accumulated amortization of $26,008 and $16,829 as of December 31, 2008 and June
30, 2008, respectively.
  Depreciation
expense for the three months ended December 31, 2008 and 2007 was $25,304 and
$23,322, respectively and $49,549 and $36,596, respectively, for the six months
ended December 31, 2008 and 2007.
  Note
4 — Intangible Assets
  Intangible
assets consist of the following at December 31, 2008 and June 30,
2008:
 
 December 31,
                        2008
                      
                      June 30,
                        2008(unaudited)Customer
      list
                      
                      $
                      275,000
                      
                      
                      $
                      275,000Other
      intellectual property
                      
                      
                      670,425
                      
                      
                      
                      582,975Accumulated
      amortization
                      
                      
                      (353,950
                      )
                      
                      
                      (246,238
                      )$
                      591,475
                      
                      
                      $
                      611,737
  10
  Customer
lists are amortized using an accelerated method that management presently
estimates matches the utilization of those lists over an estimated useful life
of 2 years.
  The
Company has purchased licenses to use certain intellectual property, including
computer software. These licenses are depreciated using the straight-line method
over their estimated useful lives of 7 years.
  Note
5 — Leases
  The
Company leases space in Northbrook, Illinois in accordance with the terms of a
non-cancelable operating lease agreement. The lease requires monthly payments
between $7,446 and $8,000 through November 2011 and is being accounted for by
the Company on a straight-line basis over the term of the lease. In addition to
monthly rentals, the lease requires the payment of real estate taxes and
maintenance. Rent, including real estate taxes, for the three months ended
December 31, 2008 and 2007 was $45,480 and $29,682, respectively and $75,503 and
$59,364, respectively, for the six months ended December 31, 2008 and
2007.
  The
Company also has a non-cancelable lease for machinery and equipment that is
accounted for as a capital lease that requires monthly payment of $1,945
including interest at a rate of 10.25% per annum. Annual future minimum rentals
under operating and capital leases as of December 31, 2008 are as
follows:
  Fiscal
      Year
                                    
                                    Operating Leases
                                    
                                    Capital
                                      Leases2009
                                    
                                    $
                                    44,980
                                    
                                    
                                    $
                                    11,6702010
                                    
                                    
                                    93,250
                                    
                                    
                                    
                                    23,3402011
                                    
                                    
                                    88,000
                                    
                                    
                                    
                                    23,340Thereafter
                                    
                                    
                                    
                                    
                                    
                                    
                                    25,285Total
      minimum lease payments
                                    
                                    $
                                    226,230
                                    
                                    
                                    $
                                    83,635Amounts
      representing interest
                                    
                                    
                                    
                                    
                                    
                                    
                                    13,886Total
                                    
                                    
                                    
                                    
                                    
                                    
                                    69,749Less
      current portion
                                    
                                    
                                    
                                    
                                    
                                    
                                    (16,973
                                    )Long
      term
                                    
                                    
                                    
                                    
                                    
                                    $
                                    52,776
  Note 6 — Line of Credit
  The
Company entered into a credit agreement with UBS Financial Services Inc. on
March 1, 2007. The credit facility is secured by the Company’s marketable
securities, described in Note 2(c), above, which are held by UBS. The Company
may borrow up to 80% of the value of the securities held in that account. The
balance of the credit facility on December 31, 2008 and June 30, 2008 was
$1,319,142 and $1,291,855, respectively. There is no stated maturity on the
credit facility. The interest rate is 30 Day LIBOR plus 150 basis
points.  The interest rate outstanding as of December 31, 2008 was
2.6% per annum.  The credit line was repaid upon the sale of the
marketable securities to UBS during January 2009.
  Note
7 — Stockholders’ Equity
  Common
Stock
  The
Company has authorized 120,000,000 shares of $0.001 par value stock. 100,000,000
have been authorized as common stock and 20,000,000 have been authorized as
preferred stock.
  On July
17, 2008, the Company sold 400,017 shares of common stock and warrants to
purchase 200,009 shares of common stock at an exercise price of $2.00 per share
at anytime prior to July 17, 2011, for an aggregate purchase price of
$600,025.  The common stock and warrants were sold to a total of 4
investors
  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. Stock based compensation expense of
$6,472 and $86,113 were recognized during the three months ended December 31,
2008 and 2007, respectively, and $12,944 and $86,113, respectively, for the six
months ended December 31, 2008 and 2007, relating to the vesting of such
options. As of December 31, 2008, the unamortized value of these option awards
was $0..  As of December 31, 2008, these options have no intrinsic
value.
  11
  At
December 31, 2008 options outstanding are as follows:
  Number of Options
                                  
                                  
                                  Weighted Average
                                    Exercise PriceBalance
      at July 1, 2008
                                  
                                  
                                  530,000
                                  
                                  
                                  $
                                  1.50Granted
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —Exercised
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Cancelled
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —Balance
      at December 31, 2008
                                  
                                  
                                  530,000
                                  
                                  
                                  $
                                  1.50
  Additional
information regarding options outstanding as of December 31, 2008 is as
follows:
  Options
      Outstanding
                                      
                                      
                                      Options
      ExercisableExercise
      Price
                                      
                                      Number
                                        Outstanding
                                      
                                      
                                      Weighted Average
                                        Remaining Contractual Life
                                        (Years)
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise Price
                                      
                                      
                                      Number
                                        Exercisable$                       1.50
                                      
                                      
                                      530,000
                                      
                                      
                                      
                                      6
                                      
                                      
                                      $
                                      1.50
                                      
                                      
                                      
                                      530,000
  Warrants
  During
the six months ended December 31, 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.  The shares 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.
  At
December 31, 2008 warrants outstanding are as follows:
  Number of
                                    Warrants
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise PriceBalance,
      July 1, 2008
                                  
                                  
                                  2,450,000
                                  
                                  
                                  $
                                  1.25Granted
                                  
                                  
                                  350,009
                                  
                                  
                                  $
                                  1.50Exercised
                                  
                                  
                                  -Balance
      at December 31, 2008
                                  
                                  
                                  2,800,009
                                  
                                  
                                  $
                                  1.38
 
 The above
warrants are fully vested and have a five year contractual
life.  There was no intrinsic value to these warrants as of December
31, 2008 and June 30, 2008.
  Note
8 — Related Party Transactions
  The
Company leases furniture and office space on a month to month basis from a
stockholder of the Company. The total rent expense paid to the stockholder for
the three months ended December 31, 2008 and 2007 were $5,481 and $8,221,
respectively and $19,183 and $16,442, respectively, for the six months ended
December 31, 2008 and 2007.
  12
  Note
9 — Income Taxes
  The
provision (benefit) for income taxes consists of the following for the six
months ended December 31, 2008 and 2007:
 
 Six months
                                          ended
                                          December 31,
                                          2008
                                        
                                        Six months ended
                                          December 31,
                                          2007Current
      tax provision - federal
                                        
                                        
                                        11,964
                                        
                                        0-
      state
                                        
                                        
                                        2,569
                                        
                                        0Deferred tax
      provision - federal
                                        
                                        
                                        (6,413
                                        )
                                        0-
      state
                                        
                                        
                                        (19,533
                                        )
                                        0Income
      tax provision
                                        
                                        
                                        (11,413
                                        )
                                        0
  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. At December 31, 2008, the Company had
federal and state net operating loss (“NOL”) carryforwards of approximately
$660,000 and $463,000, respectively. Federal NOLs could, if unused, expire in
2026. State NOLs, if unused, could expire in 2016.
  The
Company has provided a full valuation allowance on the deferred tax assets at
December 31 and June 30, 2008 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.
  During
the three months ended September 30, 2008, the Company recorded an adjustment to
reflect a deferred tax liability of $126,611 that arose on the purchase of its
75% owned subsidiary that occurred in February 2007, and should have been
recorded at the date of acquisition.  The effect of recording the deferred
tax liability at September 30, 2008 was to increase recorded goodwill by $94,958
and to increase minority interest by $31,653 to reflect their share of the
liability.
  The
Company analyzed the quantitative and qualitative effect of the adjustment on
prior year financial statements and determined that as such adjustment was a
reclassification within the balance sheet, that such adjustment did not affect
the previously reported net losses for the periods ending June 30, 2008 and
2007, and that such adjustment did not cause the previously issued financial
statements to be materially misstated.
  13
  Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”)
— an
interpretation of FASB Statement No. 109, Accounting for Income Taxes . ” The Interpretation
addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, 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. FIN 48 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 December 31 and June 30, 2008, 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.
  The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of December 31 and June 30, 2008, the Company has no
accrued interest or penalties related to uncertain tax positions. Additionally,
tax years 2006 through 2008 remain open to examination by the major taxing
jurisdictions to which the Company is subject.
  The
reconciliation of the effective income tax rate to the federal statutory rate is
as follows:
 Six Months
                            Ended December
      31,
                            (Unaudited)2008
                          
                          
                          2007Federal
      income tax rate
                          
                          
                          (34.00
                          )%
                          
                          
                          (34.00
                          )%Benefit
      for interim period loss not recorded
                          
                          
                          34.15
                          %
                          
                          
                          -State
      tax, net of federal benefit
                          
                          
                          (3.18
                          )%
                          
                          
                          (6.00
                          )%Permanent
      differences
                          
                          
                          0.00
                          %
                          
                          
                          -Increase
      in valuation allowance
                          
                          
                          0.00
                          %
                          
                          
                          40.00
                          %Effective
      income tax rate
                          
                          
                          (3.03
                          )%
                          
                          
                          0.00
                          %
 14





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 December 31, 2008 and 2007 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. 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. 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.  On December 31,2008, the Company acquired an additional 5%
interest in Pools for $34,200, increasing the Company’s ownership to
80%.
  Derycz,
through Reprints and Pools, provides copies of published content, such as
articles from published journals, in either electronic or hard copy form. Our
customers use this content for marketing or research purposes. Generally,
marketing departments order large quantities of printed copies that they
distribute to their customers. Researchers generally order single copies of the
content. Our service alleviates the need for our customers to contact any
publisher or obtain permissions themselves. In addition, we ensure that we have
obtained the necessary permissions from the owners of the content’s copyrights
so that the reproduction complies with copyright laws. We also offer reprints
service to publishers, whereby we are responsible for all aspects of reprint
production, from taking orders to final shipment. This service eliminates the
need for the publishers to establish a dedicated reprints sales force or arrange
for delivery of reprinted materials. Pools Press also offers other commercial
printing products, such as the production of business cards, and
newsletters.
  Results
of Operations
  Three
Months Ended December 31, 2008 Compared to the Three Months Ended December 31,
2007:
  Sales
and Cost of Goods Sold
  Our
revenues increased by approximately 18% from the same period in 2007 and we
expect our revenues to continue to increase, as we add new customers. We
achieved revenue of $3,426,953 for the three months ended December 31, 2008,
compared to revenue of $2,905,489 for the three months ended December 30, 2007,
an increase of 18%.
  The
revenue of our main operating company, Reprints, increased from $2,327,455 for
the three months ended December 31, 2007 to $3,112,603 for the three months
ended December 31, 2008, an increase of 34%. Pools Press contributed the
remainder of the revenue. We expect to continue with revenue growth this
year.  However, the economic climate may significantly slow our sales
growth if our customers reduce their marketing budgets.
  15
  Our cost
of goods sold likewise increased from $2,404,255 for the three months ended
December 31, 2007 to $2,671,290 for the three months ended December 31, 2008,
which represents an increase of 11%. This percentage increase is somewhat lower
than the increase in our revenues. At Reprints, we only purchase articles when
they have been requested by our clients. We generally charge a margin over the
actual cost to us. We attempt to negotiate discounts with our publishers and
have a few such agreements in place. We also have prepaid some publishers for
articles in exchange for discounts. At December 31, 2008, we had prepaid $79,168
for royalties that were not yet used. The publishers set the price for each
order and do not generally grant significant discounts. We expect that our cost
of goods sold will keep pace with our revenue growth, unless additional
publisher discounts can be achieved.
  Operating
Expenses
  General
and Administrative
  Our
general and administrative expenses increased 34% from $603,397 for the three
months ended December 31, 2007 to $810,268 for the three months ended December
31, 2008. Pools’ share of these expenses was approximately $50,000 for the 2008
period and $57,000 for the 2007 period. These expenses include Reprints’ salary
costs, which were $447,539 in the 2008 period and $283,693 in the 2007 period,
an increase of $163,846 or 58%. Our sales and marketing team has increased
during the past year and we have added additional employees as
needed.  We continue to attempt to contain the expansion of our
workforce. However, in order to pursue a large number of sales leads and to
continue to develop our computer system, we expect to add a small number of new
employees in the near future.  The 2008 figure also includes
approximately $22,500 in investor relations expenses incurred in preparation for
the public trading of our common stock.
  Marketing
and Advertising
  Our
marketing and advertising expenses increased from $13,738 for the three months
ended December 31, 2007 to $24,425 for the three months ended December 31, 2008.
These costs have increased as we have undertaken targeted publishing adverting
campaigns that will likely cost approximately $120,000 over the next year, in
addition the cost of our participation in publishing industry trade shows and
sponsorship of publishing industry programs.
  Depreciation
and Amortization
  Our
depreciation and amortization expense increased approximately 5% from $63,493
for three months ended December 31, 2007 to $66,826 for the three months ended
December 31, 2008. Pools’ share of these expenses in the 2008 period included
$13,750 related to the amortization of Pools’ customer list. Reprints’
depreciation and amortization expense of $52,874 for the 2008 period was
primarily attributable to amortization on software and intellectual property
licenses as well as amortization of two customer lists.
  Other
Expenses
  Other
expenses were $0 for the three months ended December 31, 2007 and were $174 for
the three months ended December 31, 2008.
  Loss
on marketable securities
  We
recognized unrealized losses on our short-term investments of $9,015 and $0
during the three months ended December 31, 2008 and 2007,
respectively.  These investments consist of corporate and municipal
debt and preferred stock auction rate securities held in an account with UBS
Financial Services, Inc., and the losses were based on valuations by
UBS.   We will continue to monitor the market for these
securities to determine if they are properly valued and correctly classified.
Based on our expected operating cash flows, and our other sources and uses of
cash, we do not anticipate that the potential lack of liquidity on these
investments will affect our ability to execute our current business
plan.
  Interest
Expense
  Interest
expense was $7,080 for the three months ended December 31, 2007 and $15,860 for
the three months ended December 31, 2008. The 2008 interest expense is primarily
attributable to the interest paid on a credit line secured by the marketable
securities owned by the Company.
  Interest
Income
  Interest
income was $33,940 for the three months ended December 31, 2007 and $12,302 for
the three months ended December 31, 2008. This interest income is primarily
attributable to the interest earned on investments in marketable
securities.
  16
  Net
Loss
  We
recorded a net loss of $132,177 for the three months ended December 31, 2008
compared to a net loss of $156,578 in the 2007 period. We hope to be modestly
profitable in the near future, but as we are still a new business, we do not
expect profits to be significant for the next year.
  Six-Month
Period Ended December 31, 2008 Compared to Six Month Period Ended December 31,
2007:
  Sales
and Cost of Goods Sold
  Our
revenues increased significantly over the past year and we expect that trend to
continue as we add new customers and as the volume from existing customers
increases. We achieved revenue of $6,629,679 for the six months ended December
31, 2008, compared to revenue of $5,156,576 for the six months ended December
31, 2007, an increase of 28%.
  The
revenue of our main operating company, Reprints increased from $4,128,647 for
the six months ended December 31, 2007 to $5,882,002 for the six months ended
December 31, 2008, an increase of 42%. Pools Press contributed the remainder of
the revenue. Our cost of goods sold likewise increased from $4,215,827 for the
six months ended December 31, 2007 to $5,228,119 for the six months ended
December 31, 2008, which represents a 24% increase. This increase is lower as a
percentage that the increase in our revenues as a result of the increase in our
document delivery service, which has a higher margin than our reprint
service.
  Operating
Expenses
  General
and Administrative
  Our
general and administrative expenses increased 55% from $1,021,328 for the six
months ended December 31, 2007 to $1,581,891 for the six months ended December
31, 2008. Pools’ share of these expenses was approximately $102,000 for the 2008
period and $114,000 for the 2007 period. These expenses include Reprints’ salary
costs, which were $853,434 in the 2008 period and $510,890 in the 2007 period,
an increase of $342,544 or 67%. These costs have increased at a faster rate than
our cost of good sold because we have increased staff to manage the increased
volume of our document delivery service, which has a higher margin than our
reprint service, but requires more staff to manage the process. The 2008 figure
also includes approximately $115,791 in investor relations expenses incurred in
preparation for the public trading of our common stock.  This figure
includes $43,963, which is the value attributable to the issuance of a warrant
to purchase 150,000 shares of the Company’s common stock.
  Marketing
and Advertising
  Our
marketing and advertising expenses increased $21,080 or 120% from $17,508 for
the six months ended December 31, 2007 to $38,588 for the six months ended
December 31, 2008. These costs have not been a significant expense for us, but
we expect these costs to increase as our sales efforts increase during the next
year
  Depreciation
and Amortization
  Our
depreciation expense increased 26% from $104,777 for the six months ended
December 31, 2007 to $131,899 for the six months ended December 31, 2008. Pools’
share of these expenses was $27,902 in the 2008 period and included $27,500
related to the amortization of Pools’ customer list. Reprints’ depreciation
expense of $103,997 for the 2008 period was primarily attributable to
amortization of customer lists as well as amortization on intellectual property
licenses.
  Other
Expenses
  Other
expenses were $1,222 for the six months ended December 31, 2008 and were $0 for
the six months ended December 31, 2007.
  Interest
Expense
  Interest
expense was $31,100 for the six months ended December 31, 2008 and $11,685 for
the six months ended December 31, 2007. The 2007 interest expense is primarily
attributable to the interest paid on the note payable to the former owner of
Pools Press, which we issued at the time of the purchase of our majority
interest on February 28, 2007.  The 2008 interest expense is primarily
attributable to interest paid on a credit line secured by the marketable
securities owned by the Company
  Interest
Income
  Interest
income was 31,760 for the six months ended December 31, 2008 and $67,742 for the
six months ended December 31, 2007. This interest income is primarily
attributable to the interest earned on investments in marketable
securities.
  17
  Net
Loss
  We
recorded a net loss of $152,902 for the six months ended December 31, 2007
compared to a net loss of $364,843 in the 2008 period. Over half of the 2007 net
loss was attributable to the grants of stock options to several employees and a
consultant which represented a non-cash expense of $86,113. The loss in 2008 is
a result of slower than expected sales growth in the second quarter of our 2009
fiscal year as well as increased salary costs that we incurred to manage the
increased sales volume that we have experienced.  We hope to be
modestly profitable in the near future, but as we are still a new business, we
do not expect profits to be significant for the next year.
  Liquidity
and Capital Resources
  As of
December 31, 2008, we had cash and cash equivalents of $1,576,897, compared to
$954,834 as of June 30, 2008. This increase is primarily attributable to the
sale of 400,017 shares of the Company’s common stock and warrants to purchase
200,009 shares of the Company’s common stock on July 17, 2008 for an aggregate
purchase price of $600,025.
  Net cash
provided by operating activities was $190,849 for the six months ended December
31, 2008 compared to cash used in operating activities of $353,257 for the six
months ended December 31, 2007. During the 2007 period, our accounts receivable
increased by $763,447 and our accounts payable increased by $178,125, compared
to increases of $303,058 and $206,271, respectively, in the 2008 period.
Additionally, during the six months ended December 31, 2008, we expensed
$157,261 to depreciation and amortization and  used of $246,909 of
prepaid royalties. Also during the 2008 period, we issued a common stock warrant
for services with a value of $43,963 and we amortized $12,944 for stock options
vesting in December 2008. No stock options vested in the 2007
period.
  Net cash
used in investing activities was $188,239 for the six months ended December 31,
2008 compared to net cash used in investing activities of $441,362 for the six
months ended December 31, 2007. This difference was primarily due to purchases
of intellectual property licenses at Reprints in the 2007 period.
  Net cash
provided by financing activities was $619,453 for the six months ended December
31, 2008 compared to net cash used in financing activities of $20,226 for the
corresponding period in 2007. The cash provided by financing activities for the
2008 period, the cash was primarily provided by the sale of common stock and
warrants in July 2008.
  We
believe that our current cash resources will be sufficient to sustain our
current operations for at least one year. While we have not experienced any
losses from bad debts, we expect our accounts receivable to increase as a result
of significant increases in our sales. We also expect to incur significant
investor relations expenses in conjunction with the listing of our common stock.
In addition, we may need to obtain additional cash resources during the next
year in order to acquire complementary businesses. The need for cash tofinance acquisitions will
depend on the businesses acquired and we cannot predict those needs with any
certainty. In the event such funds are needed, we may engage in additional sales
of debt or equity securities. The sale of additional equity or convertible debt
securities would result in additional 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. We have not
made arrangements to obtain additional financing and we can provide no assurance
that additional financing will be available in an amount or on terms acceptable
to us, if at all.
  Our
short-term investments consist of corporate and municipal debt and preferred
stock auction rate securities held in an account with UBS. Recently, several
auctions have failed as a result of illiquidity and imbalance in order flow for
auction rate securities. A failed auction is not an indication of an increased
credit risk or a reduction in the underlying collateral, however, parties
wishing to sell securities could not do so. Based on current market conditions,
it is not known when or if the capital markets will come back into balance to
achieve successful auctions for these securities. If these auctions continue to
fail, it could result in our holding securities beyond their next scheduled
auction reset dates and will limit the short-term liquidity of these
investments. We currently believe these securities are not significantly
impaired, primarily due to the collateral underlying these securities and/or the
creditworthiness of the issuer. Furthermore, on September 8, 2008, the
Massachusetts Secretary of State announced that UBS has pledged to buy back
almost $40 billion worth of bonds that their retail clients have been unable to
sell. As part of the settlement, UBS customers with less than $1 million in
auction rate securities will get their money back by October 31, 2008 while
others will get their refund by January 1, 2009. The Company received a payment
from UBS in January 2009 for the par value of these securities. The proceeds
received in January 2009 exceeded the book value of the investment at December
31, 2008 by approximately $61,000.  The realized gain will be recorded in
the third quarter ending March 31, 2009.
  18
  Off-Balance
Sheet Arrangements
  The
Company does not have any off-balance sheet arrangements.
  19





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required.





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




We
maintain a set of disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), that are designed to ensure that information required to be
disclosed by us in the reports filed by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities Exchange Commission’s rules and forms. We carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-15(b)
and 15d-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.





Notwithstanding
the foregoing, there can be no assurance that the Company’s disclosure controls
and procedures will detect or uncover all failures of persons within the Company
to disclose material information otherwise required to be set forth in the
Company’s periodic reports. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can
only provide reasonable, not absolute, assurance of achieving their control
objectives.





Changes
in Internal Control Over Financial Reporting





An
evaluation was performed under the supervision of the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, as
required under Exchange Act Rules 13a-15(d) and 15d-15(d) of whether any change
in the Company’s internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the fiscal quarter
ended December 31, 2008. Based on that evaluation, the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, concluded
that no change in the Company’s internal control over financial reporting
occurred during the fiscal quarter ended December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.





PART II — OTHER
INFORMATION





Item 1. Legal
Proceedings





Not
applicable.


20


Item
1A. Risk Factors





Not
required.





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




Not
applicable.





Item 3. Defaults Upon Senior
Securities





Not
applicable.





Item 4. Submission of Matters to a
Vote of Security Holders





Not
applicable.





Item 5. Other
Information





Not
applicable.





Item
6. Exhibits





2.1
                      
                      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 (3)10.1
                      
                      2007
      Equity Compensation Plan (1)10.2
                      
                      Lease
      agreement between Pools Press and JJ Properties (1)10.3
                      
                      Peter
      Derycz employment agreement (1)10.4
                      
                      Richard
      McKilligan employment agreement (1)10.5
                      
                      Scott
      Ahlberg employment agreement (1)10.6
                      
                      Janice
      Peterson employment agreement (1)10.7
                      
                      Matt
      Sampson employment agreement (1)10.8
                      
                      CapCas
      License Agreement (1)10.9
                      
                      Dainippon
      Equipment Purchase Agreement (1)10.10
                      
                      Form
      of Subscription Agreement (2)10.11
                      
                      Form
      of Subscription Agreement (3)31.1
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer (4)31.2
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer (4)32.1
                      
                      Section
      1350 Certification of Chief Executive Officer (4)32.2
                      
                      Section
      1350 Certification of Chief Financial Officer (4)




(1)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form SB-2 filed on December 28,
      2007.(2)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form S-1/A (Amendment No. 1) filed on February
      27, 2008.(3)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Periodic Report on Form 10-Q for the quarter ended September 30, 2008
      filed on November 19, 2008.(4)
                  
                  Filed
      herewith.




21


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:
      February  17, 2009
              
              Chief
      Executive OfficerBy:
              /s/
      Richard McKilliganRichard
      McKilliganDate:
      February 17, 2009
              
              Chief
      Financial Officer


22


EXHIBIT
INDEX





2.1
                      
                      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 (3)10.1
                      
                      2007
      Equity Compensation Plan (1)10.2
                      
                      Lease
      agreement between Pools Press and JJ Properties (1)10.3
                      
                      Peter
      Derycz employment agreement (1)10.4
                      
                      Richard
      McKilligan employment agreement (1)10.5
                      
                      Scott
      Ahlberg employment agreement (1)10.6
                      
                      Janice
      Peterson employment agreement (1)10.7
                      
                      Matt
      Sampson employment agreement (1)10.8
                      
                      CapCas
      License Agreement (1)10.9
                      
                      Dainippon
      Equipment Purchase Agreement (1)10.10
                      
                      Form
      of Subscription Agreement (2)10.11
                      
                      Form
      of Subscription Agreement (3)31.1
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer (4)31.2
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer (4)32.1
                      
                      Section
      1350 Certification of Chief Executive Officer (4)32.2
                      
                      Section
      1350 Certification of Chief Financial Officer (4)




(1)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form SB-2 filed on December 28,
      2007.(2)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form S-1/A (Amendment No. 1) filed on February
      27, 2008.(3)
                  
                  Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Periodic Report on Form 10-Q for the quarter ended September 30, 2008
      filed on November 19, 2008.(4)
                  
                  Filed
      herewith.


23