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, 2010




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


For
the transition period from _____________ to _____________





Commission
File No. 000-53501


DERYCZ
SCIENTIFIC, INC.


(Exact
name of registrant as specified in its charter)





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





(310)
477-0354


(Registrant’s
telephone number, including area code)





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





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o





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





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





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





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




Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of February 9, 2011, there were 15,263,469
shares of common stock outstanding.












TABLE OF
CONTENTS





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









2




PART
1 — FINANCIAL INFORMATION





Item
1. Financial Statements





Derycz
Scientific, Inc.


Condensed
Consolidated Balance Sheets




December
      31,
                                          
                                          
                                          June
      30,2010
                                          
                                          
                                          2010(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                          
                                          $
                                          3,194,945
                                          
                                          
                                          $
                                          1,852,231Accounts
      receivable, net of allowance of $59,061and $59,061
                                          
                                          
                                          5,512,203
                                          
                                          
                                          
                                          4,448,269Inventory
                                          
                                          
                                          9,315
                                          
                                          
                                          
                                          6,628Prepaid
      expenses
                                          
                                          
                                          1,296,515
                                          
                                          
                                          
                                          714,287Other
      current assets
                                          
                                          
                                          71,617
                                          
                                          
                                          
                                          84,470TOTAL
      CURRENT ASSETS
                                          
                                          
                                          10,084,595
                                          
                                          
                                          
                                          7,105,885PROPERTY
      AND EQUIPMENT, net of
                                            accumulated
      depreciation of $390,095 and $317,629
                                          
                                          
                                          322,117
                                          
                                          
                                          
                                          372,868INTANGIBLE
      ASSETSIntellectual
      property licenses, net of amortization of $387,310 and
      $297,887
                                          
                                          
                                          755,604
                                          
                                          
                                          
                                          674,779GOODWILL
                                          
                                          
                                          223,385
                                          
                                          
                                          
                                          223,385TOTAL
      ASSETS
                                          
                                          $
                                          11,385,701
                                          
                                          
                                          $
                                          8,376,917LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                          
                                          $
                                          5,400,681
                                          
                                          
                                          $
                                          4,887,636Payable
      on Credit Line
                                          
                                          
                                          1,284,987
                                          
                                          
                                          
                                          -Capital
      lease obligation, current
                                          
                                          
                                          35,079
                                          
                                          
                                          
                                          33,682Other
      current liabilities
                                          
                                          
                                          84,931
                                          
                                          
                                          
                                          97,824TOTAL
      CURRENT LIABILITIES
                                          
                                          
                                          6,805,678
                                          
                                          
                                          
                                          5,019,142CAPITAL
      LEASE OBLIGATIONS
                                          
                                          
                                          25,253
                                          
                                          
                                          
                                          43,514COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock; $0.001 par value; 20,000,000 sharesauthorized;
      no shares issued and outstandingCommon
      stock; $0.001 par value; 100,000,000 sharesauthorized;
      15,244,297 and 13,001,830 shares issued and
    outstanding
                                          
                                          
                                          15,244
                                          
                                          
                                          
                                          13,002Additional
      paid-in capital
                                          
                                          
                                          8,492,504
                                          
                                          
                                          
                                          5,510,620Accumulated
      deficit
                                          
                                          
                                          (3,952,978
                                          )
                                          
                                          
                                          (2,244,265
                                          )TOTAL
      STOCKHOLDERS' EQUITY
                                          
                                          
                                          4,554,770
                                          
                                          
                                          
                                          3,279,357NONCONTROLLING
      INTEREST
                                          
                                          
                                          -
                                          
                                          
                                          
                                          34,904TOTAL
      EQUITY
                                          
                                          
                                          4,554,770
                                          
                                          
                                          
                                          3,314,261TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                          
                                          $
                                          11,385,701
                                          
                                          
                                          $
                                          8,376,917




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 31,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009NET
      SALES
                                  
                                  $
                                  8,514,233
                                  
                                  
                                  $
                                  7,590,459
                                  
                                  
                                  $
                                  14,530,890
                                  
                                  
                                  $
                                  12,374,158COST
      OF SALES
                                  
                                  
                                  7,944,794
                                  
                                  
                                  
                                  6,497,316
                                  
                                  
                                  
                                  13,144,602
                                  
                                  
                                  
                                  10,564,711GROSS
      PROFIT
                                  
                                  
                                  569,439
                                  
                                  
                                  
                                  1,093,143
                                  
                                  
                                  
                                  1,386,288
                                  
                                  
                                  
                                  1,809,447OPERATING
      EXPENSES:General
      and administrative
                                  
                                  
                                  1,638,793
                                  
                                  
                                  
                                  791,793
                                  
                                  
                                  
                                  2,672,298
                                  
                                  
                                  
                                  1,737,226Marketing
      and advertising
                                  
                                  
                                  135,329
                                  
                                  
                                  
                                  25,113
                                  
                                  
                                  
                                  249,855
                                  
                                  
                                  
                                  63,566Depreciation
      and amortization
                                  
                                  
                                  66,375
                                  
                                  
                                  
                                  48,921
                                  
                                  
                                  
                                  125,925
                                  
                                  
                                  
                                  98,494TOTAL
      OPERATING EXPENSES
                                  
                                  
                                  1,840,497
                                  
                                  
                                  
                                  865,827
                                  
                                  
                                  
                                  3,048,078
                                  
                                  
                                  
                                  1,899,286INCOME
      (LOSS) FROM OPERATIONS
                                  
                                  
                                  (1,271,058
                                  )
                                  
                                  
                                  227,316
                                  
                                  
                                  
                                  (1,661,790
                                  )
                                  
                                  
                                  (89,839
                                  )Other
      Income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,191
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  13,260Interest
      expense
                                  
                                  
                                  (33,508
                                  )
                                  
                                  
                                  (1,604
                                  )
                                  
                                  
                                  (48,658
                                  )
                                  
                                  
                                  (3,143
                                  )Interest
      income
                                  
                                  
                                  1,124
                                  
                                  
                                  
                                  758
                                  
                                  
                                  
                                  1,735
                                  
                                  
                                  
                                  2,307INCOME
      (LOSS) BEFORE NONCONTROLLING INTEREST
                                  
                                  
                                  (1,303,442
                                  )
                                  
                                  
                                  238,661
                                  
                                  
                                  
                                  (1,708,713
                                  )
                                  
                                  
                                  (77,415
                                  )NET
      LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,927
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,458
                                  )NET
      INCOME (LOSS) ATTRIBUTABLE TO DERYCZ SCIENTIFIC, INC.
                                  
                                  $
                                  (1,303,442
                                  )
                                  
                                  $
                                  234,734
                                  
                                  
                                  $
                                  (1,708,713
                                  )
                                  
                                  $
                                  (75,957
                                  )NET
      INCOME (LOSS) PER SHARE:BASIC
      AND DILUTED
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  0.02
                                  
                                  
                                  $
                                  (0.13
                                  )
                                  
                                  $
                                  (0.01
                                  )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
                                  
                                  
                                  14,157,760
                                  
                                  
                                  
                                  12,961,830
                                  
                                  
                                  
                                  13,584,643
                                  
                                  
                                  
                                  12,961,830





See notes
to condensed consolidated financial statements












4





Derycz
Scientific, Inc.





Condensed
Consolidated Statement of Stockholders' Equity


For
the six months ended December 31, 2010


(unaudited)




AdditionalCommon stock
                          
                          
                          paid-in
                          
                          
                          Accumulated
                          
                          
                          NoncontrollingShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          Interest
                          
                          
                          TotalBalance,
      July 1, 2010
                          
                          
                          13,001,830
                          
                          
                          $
                          13,002
                          
                          
                          $
                          5,510,620
                          
                          
                          $
                          (2,244,265
                          )
                          
                          $
                          34,904
                          
                          
                          $
                          3,314,261Acquisition
      of remaining interest in Pools Press
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (120,000
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (120,000
                          )Adjustment for noncontrolling interest in Pools
      Press
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          34,904
                          
                          
                          
                          
                          
                          
                          
                          (34,904
                          )
                          
                          
                          -Fair
      value of common shares issued for services
                          
                          
                          19,393
                          
                          
                          
                          19
                          
                          
                          
                          17,629
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          17,648Fair
      value of options issued to employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          47,475
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          47,475Common
      shares issued upon exercise of warrants
                          
                          
                          2,148,074
                          
                          
                          
                          2,148
                          
                          
                          
                          2,482,039
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,484,187Fair
      value of common shares issued for customer list
                          
                          
                          75,000
                          
                          
                          
                          75
                          
                          
                          
                          71,175
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          71,250Fair
      value of warrants issued for services
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          408,336
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          408,336Fair
      value of warrants issued to directors
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          40,326
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          40,326Net
      loss for the period
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,708,713
                          )
                          
                          
                          
                          
                          
                          
                          (1,708,713
                          )Balance,
      December 31, 2010
                          
                          
                          15,244,297
                          
                          
                          $
                          15,244
                          
                          
                          $
                          8,492,504
                          
                          
                          $
                          (3,952,978
                          )
                          
                          
                          -
                          
                          
                          $
                          4,554,770





See notes
to condensed consolidated financial statements









5





Derycz
Scientific, Inc.





Condensed
Consolidated Statements of Cash Flows


(unaudited)





Six
      months endedDecember
      31,2010
                                  
                                  
                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                  
                                  $
                                  (1,708,713
                                  )
                                  
                                  $
                                  (75,957
                                  )Adjustment
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  161,893
                                  
                                  
                                  
                                  125,844Fair
      value of vested stock options
                                  
                                  
                                  47,475
                                  
                                  
                                  
                                  -Fair
      value of vested warrants issued for services
                                  
                                  
                                  448,662
                                  
                                  
                                  
                                  -Fair
      value of common stock issued for services
                                  
                                  
                                  17,648
                                  
                                  
                                  
                                  963Changes
      in assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (1,063,934
                                  )
                                  
                                  
                                  (2,167,186
                                  )Accounts
      payable and accrued expenses
                                  
                                  
                                  13,044
                                  
                                  
                                  
                                  3,659,601Inventory
                                  
                                  
                                  (2,687
                                  )
                                  
                                  
                                  2,322Prepaid
      expenses
                                  
                                  
                                  (82,228
                                  )
                                  
                                  
                                  (474,848
                                  )Other
      current assets
                                  
                                  
                                  12,853
                                  
                                  
                                  
                                  (30,885
                                  )Other
      current liabilities
                                  
                                  
                                  (12,892
                                  )
                                  
                                  
                                  (33,179
                                  )Income
      taxes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,659
                                  )Net
      cash provided by (used in) operating activities
                                  
                                  
                                  (2,168,879
                                  )
                                  
                                  
                                  1,003,016CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of furniture and equipment
                                  
                                  
                                  (21,719
                                  )
                                  
                                  
                                  (50,181
                                  )Purchase
      of Intellectual Property licenses
                                  
                                  
                                  (98,998
                                  )
                                  
                                  
                                  (109,572
                                  )Acquisition
      of remaining interest in Pools Press
                                  
                                  
                                  (120,000
                                  )
                                  
                                  
                                  -Net
      cash used in investing activities
                                  
                                  
                                  (240,717
                                  )
                                  
                                  
                                  (159,753
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Capital
      lease obligation
                                  
                                  
                                  (16,864
                                  )
                                  
                                  
                                  (11,075
                                  )Issuance
      of shares upon exercise of warrants
                                  
                                  
                                  2,484,187Advances
      under line of credit
                                  
                                  
                                  1,284,987
                                  
                                  
                                  
                                  -Net
      cash provided by (used in) financing activities
                                  
                                  
                                  3,752,310
                                  
                                  
                                  
                                  (11,075
                                  )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  1,342,714
                                  
                                  
                                  
                                  832,188CASH
      AND CASH EQUIVALENTS, Beginning of period
                                  
                                  
                                  1,852,231
                                  
                                  
                                  
                                  1,854,093CASH
      AND CASH EQUIVALENTS, End of period
                                  
                                  $
                                  3,194,945
                                  
                                  
                                  $
                                  2,686,281SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Taxes
      paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Interest
      paid
                                  
                                  $
                                  33,508
                                  
                                  
                                  $
                                  3,143SUPPLEMENTAL DISCLOSURES OF NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Adjustment
      to additional paid in capital to reflect acquisition of
      remaining noncontrolling interest
                                  
                                  $
                                  34,904
                                  
                                  
                                  
                                  -Accrual
      for prepaid royalty
                                  
                                  $
                                  500,000Acquisition
      of customer list through the issuance of common shares
                                  
                                  $
                                  71,250Capital
      lease obligation
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  42,640Minority
      share of losses of subsidiary
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  1,458





See notes
to condensed consolidated financial statements









6


DERYCZ
SCIENTIFIC, INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


For
the Six Months Ended December 31, 2010 and 2009 (Unaudited)





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





(a)
Organization and nature of business





Derycz
Scientific, Inc. (the “Company”) was incorporated in the State of Nevada on
November 2, 2006. Derycz Scientific seeks to facilitate the use of scientific
and technical information in both traditional and innovative
ways.  The Company serves both the publishers who own the rights to
use such information and the customers who use it.  The Company
utilizes web-based platforms as well as traditional delivery channels and is
developing products and services that make it easier for our customers to find
and use scientific and technical information. The Company operates within the
periodicals publishing industry which is a large market. The Company has
developed products in the following areas:





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





(b) Basis
of Presentation





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





The
accompanying condensed consolidated financial statements of the Company have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  Certain information and
footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations.  The unaudited
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2010.





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
Company's financial position and results of operations for the interim periods
reflected.  Except as noted, all adjustments contained herein are of a
normal recurring nature.  Results of operations for the fiscal periods
presented herein are not necessarily indicative of fiscal year-end
results.





Note
2 — Summary of Significant Accounting Policies





(a) Use
of estimates





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




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





(b)
Concentration of credit risk




Two
customers accounted for 22% and 11%, respectively, of the revenues for the three
months ended December 31, 2010 and one customer accounted for 16% of the revenue
for the six months ended December 31, 2010.  One customer accounted
for 35% of the revenues for the three months ended December 31, 2009, and one
customer accounted for 24% of the revenue for the six months ended December 31,
2009.





As of
June 30, 2010, three customers accounted for 14%, 13% and 12% of accounts
receivable, and one customer accounted for 29% of accounts receivable at
December 31, 2010.




7




During
the three months ended December 31, 2010 the Company's purchases from two
vendors represented 18% and 17%  of our content costs and during the
six months ended December 31, 2010 the Company's purchases from two vendors
represented 19% and 13% of our content costs.




(c)
Stock-based compensation





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




(d)
Shipping and handling costs





The
Company includes shipping and handling charges billed to its customers in its
revenues, and classifies shipping and handling costs of the sale of its products
as a component of cost of sales. Those costs were approximately $148,675 and
$74,160, respectively, for the three months ended December 31, 2010 and 2009 and
$244,639 and $101,828 for the six months ended December 31, 2010 and
2009.





(e)
Net Income (Loss) per share





The FASB
requires presentation of basic earnings per share and diluted earnings per
share.   Basic net income (loss) per share is computed by dividing the
net income (loss) by the weighted average number of common shares 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. Warrants to
purchase 2,548,684 and 2,855,009 shares of common stock and options to purchase
1,401,000 and 1,022,000 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, 2010 and 2009, respectively, as the effect
would have been anti-dilutive.





(f)
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 $135,329 and $25,113 for
the three months ended December 31, 2010 and 2009 and $249,855 and $63,566, for
the six months ended December 31, 2010, respectively.





(g)
Reclassifications





The
Company has reclassified $260,852 and $442,469 of costs previously
included in general administrative costs in the three and six months ended
December 31, 2009, respectively, to costs of sales to conform to 2010
presentation.  These costs represent employee costs directly attributable
to production.





(h)  Recently
issued accounting pronouncements




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




8





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







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




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





Note
3 — Property and Equipment





Property
and equipment consists of the following as of December 31, 2010 and June 30,
2010:





December
      31,
                          2010
                        
                        
                        June
      30,
                          2010Computer
      equipment
                        
                        $
                        138,151
                        
                        
                        $
                        122,687Software
                        
                        
                        180,266
                        
                        
                        
                        176,586Printing
      equipment
                        
                        
                        329,248
                        
                        
                        
                        329,092Furniture
      and fixtures
                        
                        
                        60,547
                        
                        
                        
                        58,132Autos
      and vans
                        
                        
                        4,000
                        
                        
                        
                        4,000712,212
                        
                        
                        
                        690,497Less
      accumulated depreciation
                        
                        
                        (390,095
                        )
                        
                        
                        (317,629
                        )$
                        322,117
                        
                        
                        $
                        372,868




Printing
equipment includes $134,432 of equipment under capital lease and related
accumulated depreciation of $79,307 and $53,545 as of December 31, 2010 and June
30, 2010, respectively.





Depreciation
expense for the three months ended December 31, 2010 and 2009 was $41,208 and
$30,575, respectively, and $72,470 and $57,668, respectively, for the six months
ended December 31, 2010 and 2009.





Note
4 — Stockholders’ Equity





Stock
Options





On
December 21, 2007, the Company established the 2007 Equity Compensation Plan
(the “Plan”). The Plan was approved by our Board of Directors and security
holders holding a majority of the shares of our common stock outstanding. The
total amount of shares subject to the Plan is 1,500,000 shares.





On July
27, 2010, the Company issued options to purchase 379,000 shares of the Company’s
common stock to thirteen employees, which expire on July 27,
2020.  These options have an exercise price of $1.25 per share and
vest over 2 to 3 years, with one-twelfth of the grant vesting on the last day of
each calendar quarter through September 30, 2013. The fair market value of the
options upon grant was $250,350, of which $47,475 was amortized during the six
months ended December 31, 2010, based upon a Black-Scholes pricing model with
the following assumptions; no dividend yield, risk free interest rate of 4.5%,
expected volatility of 73%, and an expected term of the options of 4
years.




As of
December 31, 2010, the unamortized value of these options was $202,875, which
will be amortized as stock-based compensation cost over three years as the
options vest.





At
December 31, 2010 options outstanding are as follows:





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




9




Additional
information regarding options outstanding as of December 31, 2010 is as
follows:




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










As of
December 31, 2010, the intrinsic value of the outstanding options was
approximately $2,039,070 based on the trading price of the Company’s common
stock on December 31, 2010.





Warrants





At
December 31, 2010 warrants outstanding are as follows:





Number of
                        Warrants
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceBalance,
      July 1, 2010
                      
                      
                      2,855,009
                      
                      
                      $
                      1.34Granted
                      
                      
                      2,143,675
                      
                      
                      
                      2.00Exercised
                      
                      
                      2,368,250
                      
                      
                      
                      —Expired
                      
                      
                      81,750Balance
      at December 31, 2010
                      
                      
                      2,548,684
                      
                      
                      $
                      1.82




The
intrinsic value of the warrants outstanding at December 31, 2010 was
approximately $2,113,000 based on the trading price of the Company’s common
stock on December 31, 2010.





On
November 12, 2010, the Company accepted an unsolicited offer made to the Company
on behalf of certain of the holders of the common stock purchase warrants
whereby the holders of those warrants offered to exercise those warrants for
cash if the Company would issue an additional warrant exercisable for one-half
of the number of shares obtained upon the exercise. The Company agreed to issue
new warrants to any of the holders of the warrants upon the cash exercise of
these warrants on substantially the terms set forth in the offer letter. The
holders of 1,987,350 of those warrants exercised for $2,484,187 in cash and
received warrants to purchase 993,675 shares of our common stock at $2.00 per
share.





During
the three months ended December 31, 2010, warrants to purchase 380,900 shares of
the Company’s common stock were exercised under the cashless exercise provisions
of the warrants.  The Company issued 160,724 shares of common stock as
a result of those exercises.





Warrants
to purchase 81,750 shares of the Company’s common stock expired on December 22,
2010.





On
October 29, 2010, the Company issued warrants to purchase an aggregate of
600,000 shares of the Company’s common stock to two consultants for services to
be rendered under consulting agreements with the Company. All of the warrants
have a four year exercise term. Of the aggregate issuance, warrants to purchase
400,000 shares are exercisable at $1.25 per share, vest immediately and were
valued at $256,148. The remaining warrants to purchase 200,000 shares are
exercisable at $1.75 per share and vest over a one year period. The fair market
value of the warrants amortized during the six months ended December 31, 2010,
was $283,421 using a Black-Scholes pricing model with the following assumptions;
no dividend yield, risk free interest rate of 4.5%, expected volatility of 73%,
and an expected term of the warrants of 4 years.





In
connection with the appointments of Gnl. McPeak, Mr. Ogilvie and Mr. Suess to
the Company’s Board of Directors, on November 5, 2010 the Company issued to each
of them a warrant to purchase up to 50,000 shares of the Company’s common stock
at an exercise price of $1.25 per share. Each of the warrants is subject to the
following vesting schedule: 12,500 shares vest and become exercisable under the
Warrant on each of December 31, 2010, March 31, 2011, June 30, 2011 and
September 30, 2011. Each Warrant expires on November 5, 2015. The fair market
value of the warrants upon issuance was $161,304 of which $40,326 was amortized
during the six months ended December 31, 2010, using a Black-Scholes pricing
model with the following assumptions; no dividend yield, risk free interest rate
of 4.5%, expected volatility of 73%, and an expected term of the warrants of 4
years.




10




On
December 21, 2010, the Company issued warrants to purchase an aggregate of
400,000 shares of the Company’s common stock to two consultants for services to
be rendered under consulting agreements with the Company. All of the consultant
warrants have a four-year exercise term. Of the aggregate issuance, warrants to
purchase 133,333 shares are exercisable at $1.75 per share and warrants to
purchase 266,667 shares are exercisable at $2.25 per share. All of the
consultant warrants vest over a one-year period, subject to certain
exceptions.  The fair market value of the warrants amortized during
the six months ended December 31, 2010 was $124,915 using a Black-Scholes
pricing model with the following assumptions; no dividend yield, risk free
interest rate of 4.5%, expected volatility of 73%, and an expected term of the
warrants of 4 years.





Shares
issued for services





During
the six months ended December 31, 2010, the Company issued 19,393 shares of its
common stock valued at $17,648 based on the trading price of the Company’s
common stock on the date of the grant to a consultant.  Such costs are
included in operating expenses in our accompanying statement of operations for
the six months ended December 31, 2010.





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







Note 5 —
Line of
Credit





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





The line
of credit is subject to certain financial and performance covenants which the
Company was in compliance with as of December 31, 2010.  The balance
outstanding as of December 31, 2010 was $1,284,987.  As of December
31, 2010, $1,565,013 was available under the line of credit.





Note
6 – Acquisition of Remaining Interest in Pools Press





On August
31, 2010, the Company purchased for $120,000 the remaining 20% interest in Pools
Press.  Upon acquisition of the remaining interest, the accumulated losses
attributable to the minority interest in Pools Press at the time of the
acquisition of $34,904 was added to paid in capital and the Company decreased
paid in capital for the purchase price of $120,000.  This accounting
treatment is a change from the first quarter amount reported as an addition to
goodwill and now is recorded as a decrease to paid in capital.  The Company
determined that this change was not material either qualitatively or
quantitatively to the previously reported amount.





Note
7 — Contingencies and Commitments








The
Company has entered into agreements with publishers wherein the publishers have
granted the Company an exclusive right to sell reprints of certain of each of
the publishers’ publications. In exchange for the grant of rights the Company
has agreed to pay to publishers, in aggregate, the following
amounts:





Fiscal Year
                    Ending June 30
                  Payment Amount2011
                  $2,690,0002012
                  4,395,0002013
                  4,650,0002014
                  5,000,0002015
                  5,400,0002016
                  2,800,000Total
                  $24,935,000





During
the six months ended December 31, 2010, the Company paid the publishers
$2,140,000, in aggregate, for these rights.




11





The
Company is amortizing the cost of each of these contracts each reporting period
on a straight line basis over the terms of the agreements including the period
being reported on.  During the six months ended December 31, 2010, the
Company amortized $1,678,125 of these costs and $371,875 is recorded as a
prepaid expense as of December 31, 2010.








Note
8  — Income
Taxes




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





Six
      Months Ended December 31,2010
                        
                        
                        2009Federal
      income tax rate
                        
                        
                        (34.00
                        )%
                        
                        
                        (34.00
                        )%State
      tax, net of federal benefit
                        
                        
                        (4.31
                        )%
                        
                        
                        (3.17
                        )%Permanent
      differences
                        
                        
                        0.90
                        %
                        
                        
                        (0.07
                        )%Change
      in valuation allowance
                        
                        
                        37.41
                        %
                        
                        
                        9.70
                        %Benefit
      for interim period loss not recorded
                        
                        
                        —
                        %
                        
                        
                        27.54
                        %Effective
      income tax rate
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %




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





The
Company has provided a full valuation allowance on the deferred tax assets at
December 31, 2010 and June 30, 2010 to reduce such asset to zero since there is
no assurance that the Company will generate future taxable income to utilize
such asset. Management will review this valuation allowance requirement
periodically and make adjustments as warranted.





At
December 31, 2010 and June 30, 2010, the Company had federal net operating loss
(“NOL”) carryforwards of approximately $1,461,000 and state NOL carryforwards of
approximately $1,094,000. Federal NOLs could, if unused, expire in 2030. State
NOLs, if unused, could expire in 2020.




Effective
January 1, 2007, the Company adopted FASB guidelines that address the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under this guidance, we
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. This guidance also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of December 31, 2010 and June 30, 2010, the
Company did not have a liability for unrecognized tax benefits, and no
adjustment was required at adoption.





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







The Company’s policy is to record interest and penalties on
uncertain tax provisions as income tax expense. As of December 31, 2010 and June
30, 2010, the Company has no accrued interest or penalties related to uncertain
tax positions. Additionally, tax years 2006 through 2010 remain open to
examination by the major taxing jurisdictions to which the Company is
subject.




Note 9 — Subsequent
Events





On
January 11, 2011, the Company issued options to purchase 10,000 shares of the
Company’s common stock to one employee under the 2007 Equity Compensation Plan,
at an exercise price of $3.00.  These options vest over 3 years, with
one-twelfth of the grant vesting on the last day of each calendar quarter though
March 31, 2014.





On
February 9, 2011, the Company issued 19,172 shares of the Company’s common stock
to two consultants in exchange for services.





On
February 9, 2011, the Company issued options to purchase 10,000 shares of the
Company’s common stock to one employee under the 2007 Equity Compensation Plan,
at an exercise price of $3.05.  These options vest over 3 years, with
one-twelfth of the grant vesting on the last day of each calendar quarter though
March 31, 2014.




12





On
February 9, 2011, the Company approved the issuance of options to purchase
10,000 shares of the Company’s common stock to one employee under the 2007
Equity Compensation Plan, at an exercise price of $1.50.  These option
were erroneously excluded from the option grants approved on July 27,
2010.  These options vest over 3 years, with one-twelfth of the grant
vesting on the last day of each calendar quarter though September 30,
2013.






































13




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





MANAGEMENT’S
DISCUSSION


AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




The
following discussion and analysis of our results of operations and financial
condition for the three and six months ended December 31, 2010 and 2009 should
be read in conjunction with the notes to those financial statements that are
included in Item 1 of Part 1 of this Quarterly Report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including our limited operating history, our ability to compete
successfully with existing and new reprint companies, and the sufficiency of our
cash and cash equivalents. We use words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements. All forward-looking statements included in this
Quarterly Report are based on information available to us on the date hereof
and, except as required by law, we assume no obligation to update any such
forward-looking statements.




Overview




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




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




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




Critical
Accounting Policies




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




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




(a)
Revenue recognition




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




14




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




(b) Stock
based compensation





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





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




(c)
Goodwill and Intangible Assets




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




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




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




(d)
Recently issued accounting pronouncements




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





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




15





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




Results
of Operations




Three
Months Ended December 31, 2010 Compared to the Three Months Ended December 31,
2009:




Sales
and Cost of Goods Sold




We
achieved revenue of $8,514,233 for the three months ended December 31, 2010,
compared to revenue of $7,590,459 for the three months ended December 31, 2009,
an increase of 12%.  Sales of reprints were strong in both
quarters.




The
revenue of our main operating company, Reprints, increased to $8,151,906 for the
three months ended December 31, 2010 from $6,576,926 for the three months ended
December 31, 2009, an increase of 24%. Revenue from Pools Press decreased from
$1,013,533 in the 2009 period to $278,639 in the 2010 period, after reducing
Pools’ revenues by the intercompany sales between Reprints Desk and Pools
Press.  Approximately 22% of our revenues were derived from new
customers in the 2010 period.  Our increased sales to new customers
have been driven both by our publisher relationships and our internet marketing
efforts, both of which provide sales leads.  Our product enhancements
and new products also contribute to additional sales to existing customers and
opportunities to sell to new customers.  We expect our revenue growth
to continue this year as we continue these efforts.




Our cost
of goods sold increased from $6,497,316 for the three months ended December 31,
2009 to $7,944,794 for the three months ended December 31, 2010, which
represents an increase of 22%.  Our overall gross margin percentage
decreased from 14% of sales in the 2009 period to 7% in the 2010
period.  This is primarily due to our accounting method which requires
us to amortize guaranteed payments due under certain publisher agreements on the
conservative straight line basis over the life of the contracts, which results
in higher amortized costs in the early periods of the agreements.  For
certain long term contracts, both the payments due and the revenues we expect to
generate related to the agreements are larger in the later
periods.  However, under our accounting method we are required to
accrue the greater of the amount we would accrue under a revenue method or the
straight line amortization method and the straight line amounts are
greater.  For the three months ended December 31, 2010, we recorded
approximately $438,000 more in cost of goods sold than we recorded in revenues
under those contracts, causing our cost of goods sold to increase significantly
relative to the revenue levels and therefore significantly reducing our gross
margin.  For our sales outside of those publisher agreements, sales of
reprints, or multiple copies of an article generally have a lower margin than
sales of single copies of articles, particularly when an individual order is for
an amount in excess of $100,000.  We must reduce our margins on large
orders in order to create incentive for the customer to arrange the order
through Reprints.  Pools provides reprint printing services for
several publishers and much of Pools’ revenues are derived from those
sales.  The margin on these sales is lower than the margin Reprints
charges for reprint sales because it is viewed as primarily providing printing
services and not other related services.




We expect
that our sales will increase in the 2011 fiscal year as a result of our existing
customers increasing their spending on existing products as well as new products
and from sales to new customers. We expect our gross margin to remain constant
or decline slightly due to the need for aggressive pricing in order to continue
to increase our revenues.  Additionally, some of our publisher
agreements require guaranteed minimum payments and those must be amortized over
the life of the contract.  The amortization of those costs could cause
our cost of goods sold to increase faster than our revenues at the beginning of
the terms of those contracts when revenues would be expected to be
lower.  While we continue to develop and market higher margin
products, we face price competition in our core markets for document delivery
and reprints as well as commercial printing.  Most of our costs are
determined by the publishers from whom we purchase media for each individual
order and they do not generally grant significant discounts at this
time.




Operating
Expenses




General
and Administrative




Our
general and administrative expenses increased 107% from $791,793 for the three
months ended December 31, 2009 to $1,638,793 for the three months ended December
31, 2010.  These costs included $185,750 paid to a consultant as well
as $408,336 recorded as an expense upon the issuance of warrants to two
consultants and $40,326 related to the amortization of warrants issued to three
of our directors.  Pools’ share of these expenses was approximately
$55,000 in the 2010 period and $52,000 for the 2009 period. These expenses
include Reprints’ administrative salary costs, which were $605,360 in the 2010
period and $442,469 in the 2009 period, an increase of $162,891 or 37%. Our
sales and marketing team, information technology team and our accounting team
have all increased during the past year.  Due to the expansion of our
sales volume and in order to continue to develop our computer system and
products, we expect to add a small number of new employees in the next twelve
months.




16





Marketing and Advertising




Our
marketing and advertising expenses increased from $25,113 for the three months
ended December 31, 2009 to $135,329 for the three months ended December 31,
2010, an increase of over 400%. This increase was due to our expanded marketing
efforts during the 2010 period.  In 2011, we expect our marketing
costs to remain at the current level or increase marginally, to approximately
$500,000 for fiscal 2011. Our marketing costs include advertising, events,
direct response and integrated marketing campaigns, public relations and content
publicity, search engine optimization and marketing, thought leadership
programs, channel alliances training, and analyst relations.  In
addition, a portion of our marketing expenses is dedicated to research and
customer retention.





Depreciation
and Amortization




Our
depreciation and amortization expense increased approximately 36% from $48,921
for three months ended December 31, 2009 to $66,375 for the three months ended
December 31, 2010.  Our depreciation and amortization expense was
primarily attributable to amortization on software and intellectual property
licenses as well as depreciation on computer equipment which supports our order
processing systems.




Interest
Expense




Interest
expense was $33,508 for the three months ended December 31, 2010 and $1,604 for
the three months ended December 31, 2009. The 2010 interest expense was
primarily attributable to the interest paid on a credit line with Silicon Valley
Bank.




Interest
Income




Interest
income was $1,124 for the three months ended December 31, 2010 and $758 for the
three months ended December 31, 2009.  We maintain all of our cash in
our bank accounts and we do not expect these accounts to earn significant
amounts of interest.





Other
Income





The
Company earned $0 in other income during the three months ended December 31,
2010, and $12,191 during the three months ended December 31,
2009.  This income represents income we receive from publishers and
customers for miscellaneous services.




Net
Income (Loss)




As a
result of these factors, we recorded a net loss of $1,303,442 for the three
months ended December 31, 2010 compared to net income of $234,734 in the 2009
period.  We continue to focus on sales growth and product development
while containing costs whenever possible.





Six
Months Ended December 31, 2010 Compared to the Six Months Ended December 31,
2009:




Sales
and Cost of Goods Sold




We
achieved revenue of $14,530,890 for the six months ended December 31, 2010,
compared to revenue of $12,374,158 for the six months ended December 31, 2009,
an increase of 17%.




The
revenue of our main operating company, Reprints, increased from $10,602,593 for
the six months ended December 31, 2009 to $13,418,183 for the six months ended
December 31, 2010, an increase of 27%. This is primarily a result of strong
reprint sales in both periods.   Pools Press contributed the
remainder of the revenue. We expect to continue with significant revenue growth
this year as we continue to aggressively market our products and
services.




Our cost
of goods sold likewise increased from $10,564,711 for the six months ended
December 31, 2009 to $13,144,602 for the six months ended December 31, 2010,
which represents an increase of 24%. This percentage increase is roughly
equivalent to the increase in our revenues. However, the overall gross margin
percentage decreased from 15% of sales in the 2009 period to 10% in the 2010
period.  This is primarily due to our accounting method which requires us
to amortize guaranteed payments due under certain publisher agreements on the
conservative straight line basis over the life of the contracts, which results
in higher amortized costs in the early periods of the agreements.  For
certain long term contracts, both the payments due and the revenues we expect to
generate related to the agreements are larger in the later
periods.  However, under our accounting method we are required to
accrue the greater of the amount we would accrue under a revenue method or the
straight line amortization method and the straight line amounts are
greater.  For the six months ended December 31, 2010, we recorded
approximately $378,000 more in cost of goods sold than we recorded in revenues
under those contracts, causing our cost of goods sold to increase significantly
relative to the revenue levels and therefore significantly reducing our gross
margin.




Operating
Expenses




General
and Administrative




Our
general and administrative expenses increased 54% from $1,737,226 for the six
months ended December 31, 2009 to $2,672,298 for the six months ended December
31, 2010. These costs included $185,750 paid to a consultant as well as $408,336
recorded as an expense upon the issuance of warrants to two consultants and
$40,326 related to the amortization of warrants issued to three of our
directors.  Pools’ share of these expenses was approximately $114,000
in the 2009 period and $104,500 for the 2010 period. These expenses include
Reprints’ administrative salary costs, which were $872,851 in the 2009 period
and $1,306,501 in the 2010 period, an increase of $433,650 or 50%.  These
costs have increased substantially over the past year as result of the addition
of accounting and administrative employees needed as result of our
growth.




17




Marketing
and Advertising




Our
marketing and advertising expenses increased 293% from $63,566 for the six
months ended December 31, 2009 to $249,855 for the six months ended December 31,
2010. These costs have become a more significant expense for us as a result of
increased participation in publishing industry trade shows and other advertising
and marketing efforts and we expect these costs to be approximately $500,000 for
fiscal 2011.




Depreciation
and Amortization




Our
depreciation and amortization expense increased 28% from $98,494 for six months
ended December 31, 2009 to $125,925 for the six months ended December 31, 2010.
Our depreciation and amortization expense was primarily attributable to
amortization on software and intellectual property licenses as well as
depreciation on computer equipment which supports our order processing
systems.




Interest
Expense




Interest
expense was $48,658 for the six months ended December 31, 2010 and $3,143 for
the six months ended December 31, 2009. The 2010 interest expense was primarily
attributable to the interest paid on a credit line with Silicon Valley
Bank.




Interest
Income




Interest
income was $1,735 for the six months ended December 31, 2010 and $2,307 for the
six months ended December 31, 2009.




Net
Loss




We
recorded a net loss of $1,708,713 for the six months ended December 31, 2010
compared to a net loss $75,957 in the 2009 period  Approximately
$514,000 of the loss is attributable to expenses related to warrant and option
grants issued to the Company’s consultants, directors and
employees.  We expect to continue to incur losses for the next year as
we focus on sales growth and product development.




Liquidity
and Capital Resources




Since our
inception, we have funded our operations primarily through private sales of
equity securities and the exercise of warrants, which have provided aggregate
net cash proceeds to date of approximately $7,580,000.





As of
December 31, 2010, we had cash and cash equivalents of $3,194,945, compared to
$1,852,231 as of June 30, 2010. This increase is primarily attributable to cash
received from the exercise of warrants of $2,484,187 and advances under our
credit line of $1,284,987 offset by an increase in accounts receivable of
$1,063,934 as well as the net loss of $1,270,588 for the period.




Net cash
used in operating activities was $2,168,879 for the six months ended December
31, 2010 compared to cash provided by operating activities of $1,003,016 for the
six months ended December 31, 2009. During the 2010 period, our accounts
receivable increased by $1,063,934 and our accounts payable increased by
$13,044, compared to increases of $2,167,186 and $3,659,601, respectively, in
the 2009 period. During the six months ended December 31, 2009, we increased the
amount of prepaid expenses by $474,878, compared to an increase of $82,228 in
the 2010 period.  We also recorded a much larger net loss for the six
months ended December 31, 2010 compared to the 2009 period.  A
significant amount of our sales in the 2009 period occurred late in the period
which caused the larger increase in both accounts payable and accounts
receivable in the 2009 period compared to the 2010 period.




Net cash
used in investing activities was $240,717 for the six months ended December 31,
2010 compared to net cash used in investing activities of $159,753 for the six
months ended December 31, 2009. This difference was primarily due to the
purchase of the remaining interest in Pools Press in the 2010
period.




Net cash
provided by financing activities was $3,752,310 for the six months ended
December 31, 2010 compared to net cash used in financing activities of $11,075
for the corresponding period in 2009. The cash provided by financing activities
for the 2010 period was primarily provided by the exercise of warrants to
purchase the Company’s common stock as well as advances on our line of
credit.  The advances on our credit line are primarily used to pay
publisher invoices which are often due prior to receipt of payment for the
related orders from our customers.





On July
23, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank
(“SVB”) for a $3,000,000 line of credit that matures on July 23,
2011.  The SVB line of credit bears interest at the prime rate plus 2%
for periods in which we maintain an account balance with SVB (less all
indebtedness owed to SVB) of at least $800,000 at all times during the prior
calendar month (the “Streamline Period”), and at the prime rate plus 4% when a
Streamline Period is not in effect.  The line of credit is secured by
all our and our subsidiaries’ assets.  Approximately $150,000 of the
line of credit is committed to our corporate credit cards.  At any
time, we may draw on that portion of the remaining $2,850,000 of the line of
credit equal to approximately (i) eighty percent (80%) of our then outstanding
accounts receivable, excluding certain accounts in arrears, foreign accounts and
accounts for which the debtor is our affiliate, less (ii) amounts then committed
under letters of credit and foreign exchange contracts and allocated to SVB’s
cash management services (e.g., merchant services, direct deposit of payroll,
business credit card and check cashing services).  As of December 31,
2010, approximately $1,565,000 was available for borrowing under the line of
credit.




18




On
November 12, 2010, the Company accepted an unsolicited offer made to the Company
on behalf of certain of the holders of the common stock purchase warrants issued
on December 22, 2006 whereby the holders of those warrants offered to exercise
those warrants for cash if the Company would issue an additional warrant
exercisable for one-half of the number of shares obtained upon the exercise,
with an exercise price of $2.00 per share. The Company agreed to issue new
warrants to these holders upon the cash exercise of those warrants on
substantially the terms set forth in the offer letter. The holders of 1,987,350
of those warrants exercised for cash and received warrants to purchase 993,675
shares of our common stock at $2.00 per share.  The Company received
$2,484,187 from the warrant exercises.




We have
significant contractual commitments to vendors to purchase content over the next
several fiscal years.  Payments of $2,690,000 are due in the fiscal
year ending June 30, 2011.  Future commitments total in aggregate
$4,395,000, $4,650,000, $5,000,000, $5,400,000, and $2,800,000 for the fiscal
years ending June 30, 2012, 2013, 2014, 2015 and 2016,
respectively.




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




Off-Balance
Sheet Arrangements




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




Item 3. Quantitative and
Qualitative Disclosures About Market Risk





Not
required.





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




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





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





Changes
in Internal Control Over Financial Reporting





In
addition, our management with the participation of our Principal Executive
Officer and Principal Financial Officer have determined that no change in our
internal control over financial reporting (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Exchange Act) occurred during the quarter
ended December 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




19





PART II — OTHER
INFORMATION





Item
1. Legal Proceedings




None.





Item
1A. Risk Factors





Not
required.





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




The
Company has not sold any equity securities during the period covered by this
report that were not registered under the Securities Act of 1933, as amended,
and not reported previously by the Company in a Current Report on Form
8-K.




Item
3. Defaults Upon Senior Securities





None.





Item
4. Removed and Reserved





Item 5. Other Information





(a)
            None.





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





Item
6. Exhibits





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















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 14, 2011
            
            Chief
      Executive OfficerBy:
            /s/
      Richard McKilliganRichard
      McKilliganDate:
      February 14, 2011
            
            Chief
      Financial Officer







20












EXHIBIT
INDEX





Exhibit
      No.
                  
                  Description2.1
                  
                  Share
      Exchange Agreement between Derycz and Reprints Desk dated November 13,
      2006 (1)3.1
                  
                  Articles
      of Incorporation (1)3.2
                  
                  Bylaws
      (1)4.1
                  
                  Form
      of Warrant (1)4.2
                  
                  Form
      of Common Stock Purchase Warrant (2)4.3
                  
                  Form
      of Common Stock Purchase Warrant (exercise price of $1.25) (2)4.4
                  
                  Form
      of Common Stock Purchase Warrant (exercise price of $1.75) (2)4.5
                  
                  Form
      of Common Stock Purchase Warrant dated November 17, 2010 (3)4.6
                  
                  Form
      of Common Stock Purchase Warrant dated December 21, 2010 (exercise price
      of $1.75) (4)4.7
                  
                  Form
      of Common Stock Purchase Warrant dated December 21, 2010 (exercise price
      of $2.25) (4)10.1
                  
                  Form
      of Indemnification Agreement (2)31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    *31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    *32.1
                  
                  Section
      1350 Certification of Chief Executive Officer *32.2
                  
                  Section
      1350 Certification of Chief Financial Officer
*





*
            Filed
      herewith.(1)
            Incorporated
      by reference to the filing of such exhibit with the Company’s Registration
      Statement on Form SB-2 (File No. 333-148392), filed on December 28,
      2007.(2)
            Incorporated
      by reference to the filing of such exhibit with the Company’s Current
      Report on Form 8-K filed on November 12, 2010.(3)
            Incorporated
      by reference to the filing of such exhibit with the Company’s Current
      Report on Form 8-K filed on November 19, 2010.(4)
            Incorporated
      by reference to the filing of such exhibit with the Company’s Current
      Report on Form 8-K/A filed on January 10,
2011.











21