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, 2009
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the transition period from _____________ to _____________
 
 Commission
File No. 333-148392
 DERYCZ
SCIENTIFIC, INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
                  
                  11-3797644(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)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 than 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
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS:
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of February 10, 2010, there were
12,961,830 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
                      
                      13Item 3. Quantitative and Qualitative
      Disclosures About Market Risk
                      
                      18Item 4. Controls and
      Procedures
                      
                      18PART II — OTHER INFORMATION
                      
                      18Item 1. Legal
    Proceedings
                      
                      18Item 1A. Risk Factors
                      
                      18Item 2. Unregistered Sales of Equity
      Securities and Use of Proceeds
                      
                      18Item 3. Defaults Upon Senior
      Securities
                      
                      18Item 4. Submission of Matters to a Vote of
      Security Holders
                      
                      18Item 5. Other
    Information
                      
                      19Item 6. Exhibits
                      
                      19SIGNATURES
                      
                      20
  2
  PART
1 — FINANCIAL INFORMATION
 
 Item
1. Financial Statements
 
 Derycz
Scientific, Inc.
 Condensed
Consolidated Balance Sheets
 
 December 31,
                        
                        
                        June 30,2009
                        
                        
                        2009(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        2,686,281
                        
                        
                        $
                        1,854,093Accounts
      receivable, net of allowance of $35,000
                        
                        
                        5,667,034
                        
                        
                        
                        3,499,848Inventory
                        
                        
                        7,866
                        
                        
                        
                        10,188Prepaid
      royalties
                        
                        
                        692,828
                        
                        
                        
                        217,980Other
      current assets
                        
                        
                        68,774
                        
                        
                        
                        37,890TOTAL
      CURRENT ASSETS
                        
                        
                        9,122,783
                        
                        
                        
                        5,619,999PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $245,934 and 
      $188,266
                        
                        
                        375,929
                        
                        
                        
                        340,776INTANGIBLE
      ASSETSCustomer
      lists, net of accumulated amortization of $0 and $43,056
                        
                        
                        -
                        
                        
                        
                        6,944Intellectual
      property licenses, net of amortization of $224,441 and
      $163,209
                        
                        
                        649,227
                        
                        
                        
                        600,887GOODWILL
                        
                        
                        223,385
                        
                        
                        
                        223,385TOTAL
      ASSETS
                        
                        $
                        10,371,324
                        
                        
                        $
                        6,791,991LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        6,696,216
                        
                        
                        $
                        3,036,615Capital
      lease obligation, current
                        
                        
                        32,347
                        
                        
                        
                        17,861Income
      tax payable
                        
                        
                        -
                        
                        
                        
                        3,659Other
      current liabilities
                        
                        
                        85,047
                        
                        
                        
                        116,769TOTAL
      CURRENT LIABILITIES
                        
                        
                        6,813,610
                        
                        
                        
                        3,174,904CAPITAL
      LEASE OBLIGATIONS
                        
                        
                        60,696
                        
                        
                        
                        43,617COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock; $0.001 par value; 20,000,000 shares authorized; no shares issued
      and outstandingCommon
      stock; $0.001 par value; 100,000,000 shares authorized; 12,961,830 shares
      issued and outstanding
                        
                        
                        12,962
                        
                        
                        
                        12,962Additional
      paid-in capital
                        
                        
                        5,451,186
                        
                        
                        
                        5,450,223Accumulated
      deficit
                        
                        
                        (2,013,029
                        )
                        
                        
                        (1,937,072
                        )TOTAL
      STOCKHOLDERS' EQUITY
                        
                        
                        3,451,119
                        
                        
                        
                        3,526,113NONCONTROLLING
      INTEREST
                        
                        
                        45,899
                        
                        
                        
                        47,357TOTAL
      EQUITY
                        
                        
                        3,497,018
                        
                        
                        
                        3,573,470TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        10,371,324
                        
                        
                        $
                        6,791,991
 
 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 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008NET
      SALES
                    
                    $
                    7,590,459
                    
                    
                    $
                    3,426,953
                    
                    
                    $
                    12,374,158
                    
                    
                    $
                    6,629,679COST
      OF SALES
                    
                    
                    6,236,464
                    
                    
                    
                    2,671,290
                    
                    
                    
                    10,122,242
                    
                    
                    
                    5,228,119GROSS
      PROFIT
                    
                    
                    1,353,995
                    
                    
                    
                    755,663
                    
                    
                    
                    2,251,916
                    
                    
                    
                    1,401,560OPERATING
      EXPENSES:General
      and administrative
                    
                    
                    1,052,645
                    
                    
                    
                    810,441
                    
                    
                    
                    2,179,695
                    
                    
                    
                    1,583,113Marketing
      and advertising
                    
                    
                    25,113
                    
                    
                    
                    24,425
                    
                    
                    
                    63,566
                    
                    
                    
                    38,588Depreciation
      and amortization
                    
                    
                    48,921
                    
                    
                    
                    66,826
                    
                    
                    
                    98,494
                    
                    
                    
                    131,899TOTAL
      OPERATING EXPENSES
                    
                    
                    1,126,679
                    
                    
                    
                    901,692
                    
                    
                    
                    2,341,755
                    
                    
                    
                    1,753,600INCOME
      (LOSS) FROM OPERATIONS
                    
                    
                    227,316
                    
                    
                    
                    (146,029
                    )
                    
                    
                    (89,839
                    )
                    
                    
                    (352,040
                    )Unrealized
      loss on marketable securities
                    
                    
                    -
                    
                    
                    
                    (9,015
                    )
                    
                    
                    -
                    
                    
                    
                    (27,165
                    )Other
      Income
                    
                    
                    12,191
                    
                    
                    
                    -
                    
                    
                    
                    13,260
                    
                    
                    
                    -Interest
      expense
                    
                    
                    (1,604
                    )
                    
                    
                    (15,860
                    )
                    
                    
                    (3,143
                    )
                    
                    
                    (31,100
                    )Interest
      income
                    
                    
                    758
                    
                    
                    
                    12,302
                    
                    
                    
                    2,307
                    
                    
                    
                    31,760INCOME
      (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
                    
                    
                    238,661
                    
                    
                    
                    (158,602
                    )
                    
                    
                    (77,415
                    )
                    
                    
                    (378,545
                    )BENEFIT
      FOR INCOME TAXES
                    
                    
                    -
                    
                    
                    
                    19,976
                    
                    
                    
                    -
                    
                    
                    
                    11,413INCOME
      (LOSS) BEFORE NONCONTROLLING INTEREST
                    
                    
                    238,661
                    
                    
                    
                    (138,626
                    )
                    
                    
                    (77,415
                    )
                    
                    
                    (367,132
                    )NET
      LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
                    
                    
                    (3,927
                    )
                    
                    
                    6,449
                    
                    
                    
                    1,458
                    
                    
                    
                    2,289NET
      INCOME (LOSS) ATTRIBUTABLE TO DERYCZ SCIENTIFIC, INC.
                    
                    $
                    234,734
                    
                    
                    $
                    (132,177
                    )
                    
                    $
                    (75,957
                    )
                    
                    $
                    (364,843
                    )NET
      INCOME (LOSS) PER SHARE:BASIC
      AND DILUTED
                    
                    $
                    0.02
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.03
                    )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
                    
                    
                    12,961,830
                    
                    
                    
                    12,961,830
                    
                    
                    
                    12,961,830
                    
                    
                    
                    12,928,495
 
 See notes
to condensed consolidated financial statements
  4
 
 Derycz
Scientific, Inc.
 
 Condensed
Consolidated Statement of Stockholders' Equity
 For
the six months ended December 31, 2009
 (unaudited)
 
 Additional
                      
                      
                      
                      
                      
                      
                      
                      
                      TotalCommon stock
                      
                      
                      paid-in
                      
                      
                      Accumulated
                      
                      
                      Noncontrolling
                      
                      
                      stockholders'Shares
                      
                      
                      Amount
                      
                      
                      capital
                      
                      
                      Deficit
                      
                      
                      Interest
                      
                      
                      equityBalance,
      July 1, 2009
                      
                      
                      12,961,830
                      
                      
                      
                      12,962
                      
                      
                      
                      5,450,223
                      
                      
                      
                      (1,937,072
                      )
                      
                      
                      47,357
                      
                      
                      
                      3,573,470Fair
      value of warrants issued for services
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      963
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      963Net
      loss for the period
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (75,957
                      )
                      
                      
                      (1,458
                      )
                      
                      
                      (77,415
                      )Balance,
      December 31, 2009
                      
                      
                      12,961,830
                      
                      
                      $
                      12,962
                      
                      
                      $
                      5,451,186
                      
                      
                      $
                      (2,013,029
                      )
                      
                      $
                      45,899
                      
                      
                      $
                      3,497,018
 
 See notes
to condensed consolidated financial statements
  5
 
 Derycz
Scientific, Inc.
 
 Condensed
Consolidated Statements of Cash Flows
 (unaudited)
 
 Six
      months endedDecember 31,2009
                            
                            
                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                            
                            $
                            (75,957
                            )
                            
                            $
                            (364,843
                            )Adjustment
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                            
                            
                            125,844
                            
                            
                            
                            157,261Fair
      value of vested stock options
                            
                            
                            -
                            
                            
                            
                            12,944Fair
      value of common stock warrant issued for services
                            
                            
                            963
                            
                            
                            
                            43,963Unrealized
      loss on investment
                            
                            
                            -
                            
                            
                            
                            27,165Changes
      in assets and liabilities:Accounts
      receivable
                            
                            
                            (2,167,186
                            )
                            
                            
                            303,058Accounts
      payable and accrued expenses
                            
                            
                            3,659,601
                            
                            
                            
                            (206,271
                            )Inventory
                            
                            
                            2,322
                            
                            
                            
                            6,211Prepaid
      royalties
                            
                            
                            (474,848
                            )
                            
                            
                            246,909Other
      current assets
                            
                            
                            (30,885
                            )
                            
                            
                            16,278Other
      current liabilities
                            
                            
                            (31,721
                            )
                            
                            
                            (38,124
                            )Income
      taxes payable
                            
                            
                            (3,659
                            )
                            
                            
                            (12,192
                            )Net
      loss attributable to noncontolling interest
                            
                            
                            (1,458
                            )
                            
                            
                            (1,510
                            )Net
      cash provided by operating activities
                            
                            
                            1,003,016
                            
                            
                            
                            190,849CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of furniture and equipment
                            
                            
                            (50,181
                            )
                            
                            
                            (46,529
                            )Purchase
      of Intellectual Property licenses
                            
                            
                            (109,572
                            )
                            
                            
                            (87,450
                            )Additional
      investment in Pools Press
                            
                            
                            -
                            
                            
                            
                            (34,200
                            )Investment
      in short term investments
                            
                            
                            -
                            
                            
                            
                            (20,060
                            )Net
      cash used in investing activities
                            
                            
                            (159,753
                            )
                            
                            
                            (188,239
                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the issuance of common stock
                            
                            
                            -
                            
                            
                            
                            600,025Capital
      lease obligation
                            
                            
                            (11,075
                            )
                            
                            
                            (7,859
                            )Advances
      under line of credit
                            
                            
                            -
                            
                            
                            
                            27,287Net
      cash provided by (used in) financing activities
                            
                            
                            (11,075
                            )
                            
                            
                            619,453NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                            
                            
                            832,188
                            
                            
                            
                            622,063CASH
      AND CASH EQUIVALENTS, Beginning of period
                            
                            
                            1,854,093
                            
                            
                            
                            849,834CASH
      AND CASH EQUIVALENTS, End of period
                            
                            $
                            2,686,281
                            
                            
                            $
                            1,471,897SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Taxes
      paid
                            
                            $
                            -
                            
                            
                            $
                            -Interest
      paid
                            
                            $
                            3,143
                            
                            
                            $
                            31,100SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Adjustment
      to Goodwill to reflect deferred tax assets and liabilities
                            
                            $
                            -
                            
                            
                            
                            126,611Adjustment
      to Goodwill to reflect minority interest of deferred tax
      liability
                            
                            $
                            -
                            
                            
                            
                            31,653Capital
      lease obligation
                            
                            $
                            42,640
                            
                            
                            
                            -
 
 See notes
to condensed consolidated financial statements
  6
 
 DERYCZ
SCIENTIFIC, INC.
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For
the Six Months Ended December 31, 2009 and 2008 (Unaudited)
 
 Note
1 — Organization, Nature of Business and Basis of
Presentation
 
 (a)
Organization
 
 Derycz
Scientific, Inc. was incorporated in the State of Nevada on November 2, 2006. On
November 2, 2006, the Company entered into a Share Exchange Agreement with
Reprints Desk, Inc., a Delaware corporation formed on January 6, 2006. Derycz
was formed to facilitate a holding company structure. At the closing of the
transaction contemplated by the Share Exchange Agreement, the Company acquired
all of the 550,000 outstanding shares of Reprints from the shareholders of
Reprints and issued 8,000,003 of its common shares to the shareholders of
Reprints. As the intention behind forming Derycz was the creation of a holding
company structure and Derycz had no appreciable assets prior to the acquisition
of Reprints, the exchange ratio was determined arbitrarily and was not based on
any determination of the value of shares of Derycz common stock as compared to
Reprints shares acquired. As each former Reprints shareholder acquired a
percentage interest in Derycz equal to the percentage interest such shareholder
held in Reprints immediately prior to the transaction, there was no dilution of
the interest of any former Reprints shareholder. Following completion of the
exchange transaction, Reprints became a wholly owned subsidiary of the Company.
The transaction was accounted as a statutory merger of companies under common
control. As such, the historical financial statements of the Company are
combined with the operations of Reprints since its inception, and the merger
shares are accounted for as a stock split as of the inception of Reprints for
financial reporting purposes.
 
 (b)
Nature of business
  Reprints
is a content repurposing and rights management company with a focus on content
re-use services and products. The Company operates within the periodicals
publishing industry, which is a large and growing market. The Company has
developed products in the following areas:
 
 •
              Reprints, ePrints and Article
      Distribution Systems
 •
              Commercial Printing
      Services
 •
              Publisher Outsourced Reprint
      Management
 •
              Print-on-Demand Services for
      copyright and regulatory sensitive
  documents
 
 (c) Basis
of Presentation
 
 The
accompanying interim financial statements for the three and six months ended
December 31, 2009 and 2008 are unaudited, but in the opinion of management,
contain all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position at December 31, 2009 and the results of
operations for the three and six months ended December 31, 2009 and 2008 and the
cash flows for the six months ended December 31, 2009 and 2008. The results of
operations for the three and six months ended December 31, 2009 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending June 30, 2010. The financial statements presented herein
should be read in conjunction with the financial statements included in the
Company’s Annual Report on Form 10-K for the year ended June 30, 2009 filed with
the Securities and Exchange Commission.
 
 The
accompanying financial statements are consolidated and include the accounts of
the Company and its wholly and majority owned subsidiaries. The consolidated
accounts include 100% of assets and liabilities of our majority owned
subsidiary, and the ownership interests of minority investors are recorded as
a noncontrolling interest. Intercompany balances and transactions have been
eliminated in consolidation.
 
 Note
2 — Summary of Significant Accounting Policies
  (a)
Change in Accounting Principle
 
 On
January 1, 2009, the Company adopted authoritative guidance issued by the
Financial Accounting Standards (FASB) on noncontrolling interest in consolidated
financial statements.  This guidance establishes accounting and reporting
standards for a noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement clarifies that a noncontrolling
interest in a subsidiary is an ownership in the consolidated entity that should
be reported as equity in the consolidated financial statements. The adoption of
this did not have any material impact on the Company’s financial condition and
results of operations. However, it did impact the presentation and disclosure of
noncontrolling (minority) interests in the Company’s condensed consolidated
financial statements. The presentation and disclosure requirements were
retrospectively applied to the condensed consolidated financial
statements.  As such, all prior periods presented have been conformed to
current year’s presentation.  The noncontrolling (minority) interest
relates to third party shareholders of Pools Press, Inc., who own 20% of Pools
Press as of December 31, 2009.
  7
 
 (b) 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.
 
 (c) Fair
value of financial instruments
  The
carrying amounts of financial instruments, including cash, accounts receivables,
accounts payable and accrued liabilities approximate fair value because of their
short maturity. The carrying amounts of capital lease obligations approximate
fair value because the related effective interest rates on these instruments
approximate the rates currently available to the Company.
 
 (d)
Concentration of credit risk
 
 Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and cash equivalents and accounts receivables. The Company
places its cash with high quality financial institutions and at times may exceed
the FDIC $250,000 insurance limit. The Company does not anticipate incurring any
losses related to these credit risks. The Company extends credit based on an
evaluation of the customer's financial condition, generally without collateral.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
intends to maintain allowances for anticipated losses, as required.
 
 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.  Two customers accounted for 18% and 24% of the
revenues for the three months ended December 31, 2008, and one customer
accounted for 18% of the revenue for the six months ended December 31,
2008.
 
 As of
June 30, 2009, two customers accounted for 15% and 14% of accounts receivable,
and one customer accounted for 43% of accounts receivable at December 31,
2009.
  (e)
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 $74,160 and
$31,331, respectively, for the three months ended December 31, 2009 and 2008 and
$101,828 and $61,800, respectively, for the six months ended December 31, 2009
and 2008.
 
 (f) Net
Income (Loss) per share
 
 The
Financial Accounting Standards Board requires presentation of basic earnings per
share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”).  Basic
net income (loss) per share is computed by dividing the net income (loss) by the
weighted average number of common shares available to the common stockholders.
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
earnings per share reflects the potential dilution, using the treasury stock
method, that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. In computing
diluted earnings per share, the treasury stock method assumes that outstanding
options and warrants are exercised and the proceeds are used to purchase common
stock at the average market price during the period.  Options and
warrants will have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds the
exercise price of the options and warrants. 
 Warrants
to purchase 2,855,009 and 2,800,009 shares of common stock and options to
purchase 1,022,000 shares of common stock have been excluded from the
calculation of diluted net loss per share for the six months ended December 31,
2009 as the effect would have been anti-dilutive due to the net loss for the
period.
 
 Warrants
to purchase 2,855,009 shares of common stock and options to purchase 1,022,000
shares of common stock at various prices exceeding $0.07 per
share were outstanding during the three months ended December 31, 2009 but were
not included in the computation of diluted earnings per share for that period
because the respective warrant and option exercise prices were greater than the
average market price of the shares of common stock during those periods and
their effect would be anti-dilutive.
 
 Warrants
to purchase 2,800,009 shares of common stock and options to purchase 530,000
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, 2008 as the
effect would have been anti-dilutive due to the net loss for the
period.
   (g)
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 as well as the costs associated with our participation in trade shows
and other advertising expenditures. Marketing and advertising expense amounted
to $25,113 and $24,425 for the three months ended December 31, 2009 and 2008,
respectively, and $63,566 and $38,588 for the six months ended December 31, 2009
and 2008.
 
 (h)
Recently issued accounting pronouncements
  In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.” The
FASB Accounting Standards Codification* (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its consolidated financial statements now use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
  8
  In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for the Company beginning July 1, 2010, with earlier
adoption permitted.  Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition
guidance.  We believe adoption of this new guidance will not have a
material impact on our financial statements.
 
 In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.
 
 The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
 
 Note
3 — Property and Equipment
 
 Property
and equipment consists of the following as of December 31 and June 30,
2009:
 
 December 31,
                                      2009
                                    
                                    
                                    June 30,
                                      2009(unaudited)Computer
      equipment
                                    
                                    $
                                    90,385
                                    
                                    
                                    $
                                    68,640Software
                                    
                                    
                                    139,512
                                    
                                    
                                    
                                    112,570Printing
      equipment
                                    
                                    
                                    329,092
                                    
                                    
                                    
                                    286,452Furniture
      and fixtures
                                    
                                    
                                    58,874
                                    
                                    
                                    
                                    57,380Autos
      and vans
                                    
                                    
                                    4,000
                                    
                                    
                                    
                                    4,000621,863
                                    
                                    
                                    
                                    529,042Less
      accumulated depreciation
                                    
                                    
                                    (245,934
                                    )
                                    
                                    
                                    (188,266
                                    )$
                                    375,929
                                    
                                    
                                    $
                                    340,776
 
 Printing
equipment includes $91,792 of equipment under capital lease and related
accumulated depreciation of $35,187 as of June 30, 2009 and $134,432 of
equipment under capital lease and related accumulated depreciation of $46,735 as
of December 31, 2009.
 
 Depreciation
expense for the three months ended December 31, 2009 and 2008 was $30,575 and
$25,304, respectively, and $57,668 and $49,549, respectively, for the six months
ended December 31, 2009 and 2008.
  9
 
 Note
4 — Intangible Assets
 
 Intangible
assets consist of the following at December 31 and June 30, 2009:
 
 December 31,
                              2009
                            
                            
                            June 30,
                              2009(unaudited)Customer
      list
                            
                            $
                            -
                            
                            
                            $
                            50,000Intellectual
      property licenses
                            
                            
                            873,668
                            
                            
                            
                            764,096Accumulated
      amortization
                            
                            
                            (224,441
                            )
                            
                            
                            (206,265
                            )$
                            649,227
                            
                            
                            $
                            607,831
 
 Customer
lists were amortized using an accelerated method that management presently
estimates matches the utilization of those lists over an estimated useful life
of 2 years. The customer lists were fully amortized at December 31,
2009.
 
 The
Company has purchased licenses to use certain intellectual property, including
computer software. These licenses are depreciated using the straight-line method
over their estimated useful lives of 7 years.
 
 Note
5 — Leases
 
 The
Company leases space in Northbrook, Illinois in accordance with the terms of a
non cancelable operating lease agreement. The lease requires monthly payments
between $7,750 and $8,000 through May 2011 and is being accounted for by the
Company on a straight-line basis over the term of the lease. In addition to
monthly rentals, the lease requires the payment of real estate taxes and
maintenance. Rent, including real estate taxes, for the three months ended
December 31, 2009 and 2008 was $36,473 and $30,024, respectively.
 
 The
Company leases space in Santa Monica, California in accordance with the terms of
a non cancelable operating lease agreement. The lease requires monthly payments
between $5,200 and $5,517 through May 2012 and is being accounted for by the
Company on a straight-line basis over the term of the lease. In addition to
monthly rentals, after June 1, 2010, the lease requires the payment of any
increases in real estate taxes. Rent, including real estate taxes, for the three
months ended December 31, 2009 was $15,600.
 
 The
Company also has two non-cancelable leases for machinery and equipment that is
accounted for as a capital lease that requires monthly payments of $1,945
including interest at a rate of 10.25% per annum through July 2012 and $1,275
including interest at a rate of 5.13% per annum through October 2012,
respectively. Annual future minimum rentals under operating and capital leases
as of December 31, 2009 are as follows:
 
 Fiscal Year
                                                              
                                                              Operating
                                                                Leases
                                                              
                                                              
                                                              Capital
                                                                Leases2010
                                                              
                                                              $
                                                              78,106
                                                              
                                                              
                                                              $
                                                              19,3202011
                                                              
                                                              
                                                              152,433
                                                              
                                                              
                                                              
                                                              38,6402012
                                                              
                                                              
                                                              60,687
                                                              
                                                              
                                                              
                                                              38,640Thereafter
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              7,045Total
      minimum lease payments
                                                              
                                                              $
                                                              291,226
                                                              
                                                              
                                                              $
                                                              103,645Amounts
      representing interest
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (10,602
                                                              )Total
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              93,043Less
      current portion
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (32,347
                                                              )Long
      term
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              60,696
  Note
6 — Stockholders’ Equity
 
 Stock
Options
 
 On
December 21, 2007, the Company established the 2007 Equity Compensation Plan
(the “Plan”). The Plan was approved by our Board of Directors and security
holders holding a majority of the shares of our common stock outstanding. The
total amount of shares subject to the Plan is 1,500,000 shares. On December 21,
2007, we granted options to purchase 530,000 shares of common stock at $1.50 per
share to eight employees and one consultant, which expire on December 21, 2017.
The options were valued at $112,000 using a Black-Scholes valuation model and
will be amortized over the vesting period.  The exercise price for the
options was $1.50 per share and was based on the fair value of the shares on the
date of issuance. For the Black-Scholes calculation, the Company assumed no
dividend yield, a risk free interest rate of 4.18%, expected volatility of 25 %
and an expected term for the options of 7 years.
  On May
28, 2009, we granted options to purchase 492,000 shares of common stock at $1.00
per share to nine employees, which expire on May 28, 2019. The options were
valued at $148,327 using a Black-Scholes valuation model and were expensed on
the grant date as the options all vested immediately. The exercise price for the
options was $1.00 per share and was based on the fair value of the shares on the
date of issuance. For the Black-Scholes calculation, the Company assumed no
dividend yield, a risk free interest rate of 3.67 %, expected volatility of 83 %
and an expected term for the options of 10 years.
  10
 Stock
based compensation expense of $0 and $6,472 was recognized during the three
months ended December 31, 2009 and 2008, respectively, and $0 and $12,944,
respectively, for the six months ended December 31, 2009 and 2008, relating to
the vesting of such options. No future compensation expense related to
these options remains as of December 31, 2009.  As of December 31, 2009,
these options have no intrinsic value.
  At
December 31, 2009, options outstanding are as follows:
 
 Number of
                            Options
                          
                          
                          Weighted
                            Average
                            ExercisePriceBalance
      at July 1, 2009
                          
                          
                          1,002,000
                          
                          
                          $
                          1.26Granted
                          
                          
                          —
                          
                          
                          $Exercised
                          
                          
                          —
                          
                          
                          
                          —Cancelled
                          
                          
                          —
                          
                          
                          $
                          —Balance
      at December 31, 2009
                          
                          
                          1,022,000
                          
                          
                          $
                          1.26
  Additional
information regarding options outstanding as of December 31, 2009 is as
follows:
  Options Outstanding
                                  
                                  
                                  Options
                                    ExercisableWeighted Average
                                    Exercise Price
                                  
                                  Number
                                    Outstanding
                                  
                                  
                                  Weighted Average
                                    Remaining Contractual
                                    Life (Years)
                                  
                                  
                                  Weighted Average
                                    Exercise Price
                                  
                                  
                                  Number
                                    Exercisable$
                                  1.26
                                  
                                  
                                  1,022,000
                                  
                                  
                                  
                                  9
                                  
                                  
                                  $
                                  1.26
                                  
                                  
                                  
                                  1,022,000
  Warrants
 
 At
December 31, 2009, warrants outstanding are as follows:
 
 Number of
                                Warrants
                              
                              
                              Weighted
                                Average
                                Exercise PriceBalance,
      July 1, 2009
                              
                              
                              2,800,009
                              
                              
                              $
                              1.34Granted
                              
                              
                              55,000
                              
                              
                              
                              1.50Exercised
                              
                              
                              —Balance
      at December 31, 2009
                              
                              
                              2,855,009
                              
                              
                              $
                              1.34
  On July
1, 2008, the Company issued warrants to acquire 150,000 shares of our stock at
an exercise price of $2.00 per share and a life of five years to a
consultant.  The warrants were valued at $43,693 using a Black-Scholes
pricing model with the following assumptions; no dividend yield, risk free
interest rate of 4.5%, expected volatility of 25%, and an expected term of the
warrants of five years.
 
 On
October 8, 2009, the Company issued warrants to acquire 55,000 shares of our
stock at an exercise price of $1.50 per share and a life of five years to a
consultant and vest over a period of one year.  The warrants were valued at
$3,850 using a Black-Scholes pricing model with the following assumptions; no
dividend yield, risk free interest rate of 4.5%, expected volatility of 25%, and
an expected term of the warrants of five years.
  The above
warrants are fully vested, except for the 55,000 warrants issued on October 8,
2009, and have a five year contractual life.  There was no intrinsic value
to these warrants as of December 31 and June 30, 2009.
 
 Note
7 — Related Party Transactions
 
 The
Company leased furniture and office space on a month to month basis from a
stockholder of the Company until May 31, 2009. The total rent expense paid to
the stockholder for the three months ended December 31, 2009 and 2008 were $0
and $5,481, respectively, and $0 and $19,183, respectively, for the six months
ended December 31, 2009 and 2008.
  11
 
 Note
8 — Income Taxes
 
 The
provision (benefit) for income taxes consists of the following for the six
months ended December 31, 2009 and 2008:
 
 Three
      months ended December 31,
                                                            
                                                            
                                                            Six months ended
      December 31,2009
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            2009
                                                            
                                                            
                                                            2008CurrentFederal
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            278
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            11,964State
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            60
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            2,569DeferredFederal
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (3,320
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (6,413
                                                            )State
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (16,994
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (19,533
                                                            )Provision
      for income tax expense
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            (19,976
                                                            )
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            (11,413
                                                            )
  The
reconciliation of the effective income tax rate to the federal statutory rate is
as follows:
 
 Three
      months ended December 31,
                                    
                                    
                                    Six Months Ended December 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Federal
      income tax rate
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    (34.00
                                    )%
                                    
                                    
                                    (34.00
                                    )%State
      tax, net of federal benefit
                                    
                                    
                                    0.01
                                    %
                                    
                                    
                                    (3.18
                                    )%
                                    
                                    
                                    (3.16
                                    )%
                                    
                                    
                                    (3.18
                                    )%Permanent
      differences
                                    
                                    
                                    (0.01
                                    )%
                                    
                                    
                                    0.01
                                    %
                                    
                                    
                                    (0.08
                                    )%
                                    
                                    
                                    0.00
                                    %Change
      in valuation allowance
                                    
                                    
                                    0.83
                                    %
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    10.53
                                    %
                                    
                                    
                                    0.00
                                    %Benefit
      for interim period loss not recorded
                                    
                                    
                                    (0.83
                                    )%
                                    
                                    
                                    (3.75
                                    )%
                                    
                                    
                                    26.71
                                    %
                                    
                                    
                                    34.15
                                    %Effective
      income tax rate
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    (6.92
                                    )%
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    (3.03
                                    )%
  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, 2009 and June 30, 2009 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, 2009 the Company had federal net operating loss (“NOL”)
carryforwards of approximately $1,349,000 and state NOL carryforwards of
approximately $792,000. Federal NOLs could, if unused, expire in 2029. State
NOLs, if unused, could expire in 2019.
  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, 2009, 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, 2009 and 2008, the Company has no
accrued interest or penalties related to uncertain tax positions. Additionally,
tax years 2006 through 2009 remain open to examination by the major taxing
jurisdictions to which the Company is subject.
  12
 
 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, 2009 and 2008 should
be read in conjunction with the notes to those financial statements that are
included in Item 1 of Part 1 this Quarterly Report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” and similar expressions to identify forward-looking statements. All
forward-looking statements included in this Quarterly Report are based on
information available to us on the date hereof and, except as required by law,
we assume no obligation to update any such forward-looking
statements.
  Overview
  Derycz
Scientific, Inc. (the “Company” or “Derycz”) was incorporated in the State of
Nevada on November 2, 2006. In November 2006 the Company entered into a Share
Exchange Agreement with Reprints Desk, Inc. (“Reprints”). At the closing of the
transaction contemplated by the Share Exchange Agreement, the Company acquired
all of the outstanding shares of Reprints from the shareholders of Reprints and
issued 8,000,003 of its common shares to the shareholders. Following completion
of the exchange transaction, Reprints became a wholly-owned subsidiary of the
Company.
  On
February 28, 2007, the Company entered into an agreement with Pools Press, Inc.
(“Pools”) of Northbrook, Illinois, a privately held company, pursuant to which
the Company acquired 75% of the issued and outstanding common stock of Pools for
consideration of $616,080. Pools is a commercial printer, specializing in
reprints of copyrighted articles. The results of Pools Press’ operations have
been included in the consolidated financial statements since March 1,
2007.
  Derycz,
through Reprints and Pools, provides order workflow software systems and
reproductions of published content, such as articles from published journals, in
either electronic or hard copy form. Our customers use this content for
marketing, regulatory or research purposes. Generally, marketing
departments order large quantities of printed copies that they distribute to
their customers. Regulatory departments generally use content to help satisfy
regulatory requirements for intellectual property and government filings.
Researchers generally order single copies of the content. Our systems, products
and services streamline workflow processes and alleviate the need for our
customers to contact any publisher or obtain permissions themselves. We also
offer reprints and eprint services to publishers, whereby we are responsible for
all aspects of reprint production, from taking orders to final shipment. This
service eliminates the need for the publishers to establish a dedicated reprints
sales force or arrange for delivery of reproduced materials. Pools Press also
offers other commercial printing products, such as the production of business
cards, and newsletters.
  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 collectability is reasonably assured.
  The
Company recognizes revenues from printing services when services have been
rendered and accepted by the customer while revenues from the re-use of
published articles and rights management services are recognized upon shipment
or electronic delivery to the customer.
  13
  (b) Stock
based compensation
 
 The
Company adopted FASB guidelines that require that the cost resulting from all
share-based payment transactions be recognized in the financial statements. This
guidance establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
Effective January 1, 2006, we adopted the fair value recognition provisions of
the current guidelines of the FASB, using the modified prospective method. Under
this method, the provisions of such guidance apply to all awards granted or
modified after the date of adoption and all previously granted awards not yet
vested as of the date of adoption.
 
 Determining
the appropriate fair value model and calculating the fair value of stock-based
payment awards require the input of highly subjective assumptions, including the
expected life of the stock-based payment awards and stock price volatility. We
use the Black-Scholes option-pricing model to value compensation expense. The
assumptions used in calculating the fair value of stock-based payment awards
represent management’s best estimates, but the estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based compensation
expense could be materially different in the future.
  (c)
Goodwill and Intangible Assets
  As
required by the Financial Accounting Standards Board, management performs
impairment tests of goodwill and indefinite-lived intangible assets whenever an
event occurs or circumstances change that indicate impairment has more likely
than not occurred. Also, management performs impairment testing of goodwill and
indefinite-lived intangible assets at least annually.
 
 In accordance with guidance of the Financial Accounting Standards
Board, management tests goodwill for impairment at the reporting unit
level.  The Company has only one reporting unit.  At the time of
goodwill impairment testing, management determines fair value through the use of
a discounted cash flow valuation model incorporating discount rates commensurate
with the risks involved its reporting unit. If the calculated fair value is less
than the current carrying value, impairment of the Company may exist. The use of
a discounted cash flow valuation model to determine estimated fair value is
common practice in impairment testing in the absence of available domestic and
international transactional market evidence to determine the fair value. The key
assumptions used in the discounted cash flow valuation model for impairment
testing include discount rates, growth rates, cash flow projections and terminal
value rates.
  In
accordance with guidance of the Financial Accounting Standards Board, the
Company reviews intangible assets subject to amortization at least annually to
determine if any adverse conditions exist or a change in circumstances has
occurred that would indicate impairment or a change in the remaining useful
life.  If the carrying value of an asset exceeds its undiscounted cash
flows, the Company writes down the carrying value of the intangible asset to its
fair value in the period identified.  If the carrying value of assets is
determined not to be recoverable, the Company records an impairment loss equal
to the excess of the carrying value over the fair value of the assets.  The
Company’s estimate of fair value is based on the best information available, in
the absence of quoted market prices.  The Company generally calculates fair
value as the present value of estimated future cash flows that the Company
expects to generate from the asset using a discounted cash flow income approach
as described above.  If the estimate of an intangible asset’s remaining
useful life is changed, the Company amortizes the remaining carrying value of
the intangible asset prospectively over the revised remaining useful
life.
 
 (d) Recently issued accounting pronouncements
  In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.” The
FASB Accounting Standards Codification* (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its consolidated financial statements now use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
   In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for the Company beginning July 1, 2010, with earlier
adoption permitted.  Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition
guidance.  We believe adoption of this new guidance will not have a
material impact on our financial statements.
  14
  In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.
 
 The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
  Results
of Operations
  Three
Months Ended December 31, 2009 Compared to the Three Months Ended December 31,
2008:
  Sales
and Cost of Goods Sold
  Our
revenues more than doubled compared to the same period in 2008. We achieved
revenue of $7,590,459 for the three months ended December 31, 2009, compared to
revenue of $3,426,953 for the three months ended December 31, 2008, an increase
of 121%.
  The
revenue of our main operating company, Reprints, increased from $3,112,603 for
the three months ended December 31, 2008 to $6,576,926 for the three months
ended December 31, 2009, an increase of 111%. This was a result of several large
reprint orders in December.  Pools Press contributed the remainder of the
revenue. The quarter ended December 31, 2009 was unusual and we do not expect
revenue growth to continue at that rate.  However, we do expect to continue
to experience significant growth over the 2009 fiscal year.
  Our cost
of goods sold likewise increased from $2,671,290 for the three months ended
December 31, 2008 to $6,236,464 for the three months ended December 31, 2009,
which represents an increase of 133%. This percentage increase is roughly
equivalent to the increase in our revenues and was likewise the result of
several large reprint orders. However, the overall gross margin percentage
decreased from 22% of sales in the 2008 period to 18% in the 2009 period. 
At Reprints, we only purchase articles when they have been requested by our
clients. We generally charge a margin over the actual cost to us. While we make
efforts to obtain discounts, the publishers set the prices for each order. 
However, as the amount of our purchases from individual publishers increases we
expect we may be better able to obtain discounts.   For the next year,
we expect that our cost of goods sold will keep pace with our revenue
growth.
  Operating
Expenses
  General
and Administrative
  Our
general and administrative expenses increased 30% from $810,441 for the three
months ended December 31, 2008 to $1,052,645 for the three months ended December
31, 2009. Pools’ share of these expenses was approximately $52,000 for both
periods. These expenses include Reprints’ salary costs, which were $447,539 in
the 2008 period and $699,884 in the 2009 period, an increase of $252,345 or 56%.
Both our sales and marketing team and our information technology team have
increased during the past year and we have added other additional employees as
needed.  We continue to attempt to contain the expansion of our workforce.
However, because of the expansion of our sales volume and in order to continue
to develop our computer system, we expect to add a small number of new employees
in the next year.
  Marketing
and Advertising
  Our
marketing and advertising expenses increased slightly from $24,425 for the three
months ended December 31, 2008 to $25,113 for the three months ended December
31, 2009. 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.
  Depreciation
and Amortization
  Our
depreciation and amortization expense decreased approximately 27% from $66,826
for three months ended December 31, 2008 to $48,921 for the three months ended
December 31, 2009. Pools’ share of these expenses in the 2008 period included
$13,750 related to the amortization of Pools’ customer list, which was fully
amortized during the fiscal year ending June 30, 2009. Reprints’ depreciation
and amortization expense of $52,874 for the 2008 period and $48,719 for the 2009
period was primarily attributable to amortization on software and intellectual
property licenses as well as amortization of customer lists.
  Loss
on marketable securities
  We
recognized unrealized losses on our short-term investments of $9,015 and $0
during the three months ended December 31, 2008 and 2009, respectively. 
These investments consisted of corporate and municipal debt and preferred stock
auction rate securities held in an account with UBS Financial Services, Inc.,
and the losses were based on valuations by UBS.   In January 2009 we
received cash for the par value of the outstanding auction rate
securities.
  15
  Interest
Expense
  Interest
expense was $15,860 for the three months ended December 31, 2008 and $1,604 for
the three months ended December 31, 2009. The 2008 interest expense was
primarily attributable to the interest paid on a credit line with UBS that was
secured by marketable securities.  This credit line was cancelled in
January 2009 when we liquidated our position in the marketable
securities.
  Interest
Income
  Interest
income was $12,302 for the three months ended December 31, 2008 and $758 for the
three months ended December 31, 2009.  The interest earned during the 2008
period was primarily attributable to the interest earned on investments in
marketable securities.
  Net
Income (Loss)
  We
recorded net income of $234,734 for the three months ended December 31, 2009
compared to a net loss of $132,177 for the three months ended December 31, 2008.
This is the first quarter we have achieved significant profitability.  This
result is attributable to strong sales at Reprints during the 2009 period. 
While we do not expect this level of sales to continue during the remainder of
the 2010 fiscal year, we hope to continue to be modestly
profitable.
 
 Six
Months Ended December 31, 2009 Compared to the Six Months Ended December 31,
2008:
  Sales
and Cost of Goods Sold
  Our
revenues increased significantly from the same period in 2008. We achieved
revenue of $12,374,158 for the six months ended December 31, 2009, compared to
revenue of $6,629,679 for the six months ended December 31, 2008, an increase of
87%.
  The
revenue of our main operating company, Reprints, increased from $5,882,002 for
the six months ended December 31, 2008 to $10,602,593 for the six months ended
December 31, 2009, an increase of 80%. This is primarily a result of several
large reprint orders in December 2009.  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 $5,228,119 for the six months ended
December 31, 2008 to $10,122,242 for the six months ended December 31, 2009,
which represents an increase of 94%. This percentage increase is roughly
equivalent to the increase in our revenues and is a result of the large reprint
orders from December 2009. However, the overall gross margin percentage
decreased from 21% of sales in the 2008 period to 18% in the 2009 period. 
This reduction is a result of a large increase in our reprint sales, which are
generally lower margin than our document delivery services.
  Operating
Expenses
  General
and Administrative
  Our
general and administrative expenses increased 38% from $1,583,113 for the six
months ended December 31, 2008 to $2,179,695 for the six months ended December
31, 2009. Pools’ share of these expenses was approximately $114,000 for both
periods. These expenses include Reprints’ salary costs, which were $853,434 in
the 2008 period and $1,315,320 in the 2009 period, an increase of $461,886 or
54%.  These costs have increased at a slower rate than our revenues as we
have tried to limit our hiring of new employees and to contain other
costs.
  Marketing
and Advertising
  Our
marketing and advertising expenses increased 64% from $38,588 for the six months
ended December 31, 2008 to $63,566 for the six months ended December 31, 2009.
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 continue to increase over the
next year.
  Depreciation
and Amortization
  Our
depreciation and amortization expense decreased 25% from $131,899 for six months
ended December 31, 2008 to $98,494 for the six months ended December 31, 2009.
Pools’ share of these expenses in the 2008 period included $27,500 related to
the amortization of Pools’ customer list, which was fully amortized during the
fiscal year ending June 30, 2009.  All of the Company’s customer lists are
now fully depreciated.
  16
 
 Loss
on marketable securities
  We
recognized unrealized losses on our short-term investments of $27,165 and $0
during the six months ended December 31, 2008 and 2009, respectively. 
These investments consisted of corporate and municipal debt and preferred stock
auction rate securities held in an account with UBS Financial Services, Inc.,
and the losses were based on valuations by UBS.   In January 2009 we
received cash for the par value of the outstanding auction rate
securities.
  Interest
Expense
  Interest
expense was $31,100 for the six months ended December 31, 2008 and $3,143 for
the six months ended December 31, 2009. The 2008 interest expense was primarily
attributable to the interest paid on a credit line with UBS that was secured by
marketable securities.  This credit line was cancelled in January 2009 when
we liquidated our position in the marketable securities.
  Interest
Income
  Interest
income was $31,760 for the six months ended December 31, 2008 and $2,307 for the
six months ended December 31, 2009.  The interest earned during the 2008
period was primarily attributable to the interest earned on investments in
marketable securities.
  Net
Loss
  We
recorded a net loss of $364,843 for the six months ended December 31, 2008
compared to a net loss $75,957 in the 2009 period. As we recorded our first
significant profitable quarter for the three months ended December 31, 2009 we
hope to achieve a profitable fiscal year.  However, sales in the December
quarter were unexpectedly high and we do not expect that level of sales to
continue.
  Liquidity
and Capital Resources
  As of
December 31, 2009, we had cash and cash equivalents of $2,686,281, compared to
$1,854,093 as of June 30, 2009. This increase is primarily attributable to an
increase in accounts payable of $3,659,601, partially offset by an increase in
accounts receivable of $2,167,186 and an increase in prepaid royalties of
$474,848.
  Net cash
provided by operating activities was $1,003,016 for the six months ended
December 31, 2009 compared to cash provided by operating activities of $190,849
for the six months ended December 31, 2008. During the 2009 period, our accounts
receivable increased by $2,167,186 and our accounts payable increased by
$3,659,601, compared to decreases of $303,058 and $206,271, respectively, in the
2008 period. During the six months ended December 31, 2009, we purchased
$474,848 of prepaid royalties, compared to use of $246,909 in the 2008 period.
Also, during the 2008 period, we issued a common stock warrant for services with
a value of $43,963 and we amortized $12,944 for stock options vesting in
December 2008.  We amortized only $963 related to a common stock warrant
issued for services in the 2009 period.
  Net cash
used in investing activities was $188,239 for the six months ended December 31,
2008 compared to net cash used in investing activities of $159,753 for the six
months ended December 31, 2009. This difference was primarily due to the
purchase of and additional interest in Pools Press in the 2008
period.
  Net cash
provided by financing activities was $619,453 for the six months ended December
31, 2008 compared to net cash used in financing activities of $11,075 for the
corresponding period in 2009. The cash provided by financing activities for the
2008 period was primarily provided by the sale of common stock in July
2008.
  We
believe that our current cash resources will be sufficient to sustain our
current operations for at least one year. While we have not experienced any
significant losses from bad debts, we expect our accounts receivable to continue
to increase as a result of increases in our sales. We also expect to continue to
incur significant investor relations expenses in conjunction with the listing of
our common stock. In addition, we may need to obtain additional cash resources
during the next year in order to acquire complementary businesses. The need for
cash to finance acquisitions will depend on the businesses acquired and we
cannot predict those needs with any certainty. In the event such funds are
needed, we may engage in additional sales of debt or equity securities. The sale
of additional equity or convertible debt securities would result in additional
dilution to our shareholders. The issuance of additional debt would result in
increased expenses and could subject us to covenants that may have the effect of
restricting our operations. We have not made arrangements to obtain additional
financing and we can provide no assurance that additional financing will be
available in an amount or on terms acceptable to us, if at all.
  Off-Balance
Sheet Arrangements
  The
Company does not have any off-balance sheet arrangements.
  17
 
 Item 3. Quantitative and Qualitative
Disclosures About Market Risk
 
 Not
required.
 
 Item
4. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined  in  Rules  13a-15(e) and 15d-15(e) of
the  Exchange  Act (defined  below)). Based upon that evaluation,
our principal executive officer and principal financial officer concluded that,
as of the end of the period covered in this report, our disclosure controls and
procedures were effective to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is recorded, processed, summarized and reported within the
required time periods and is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
 
 Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error or fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Due to
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Accordingly, management believes that the financial
statements included in this report fairly present in all material respects our
financial condition, results of operations and cash flows for the periods
presented.
 
 Changes
in Internal Control Over Financial Reporting
 
 In
addition, our management with the participation of our principal executive
officer and principal financial officer have determined that no change in our
internal control over financial reporting (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred
during or subsequent to the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
 
 PART
II — OTHER INFORMATION
 
 Item
1. Legal Proceedings
 
 There
have been no material developments during the quarter ended December 31, 2009 in
any material pending legal proceedings to which the Company is a party or of
which any of our property is the subject.
 
 Item 1A.
Risk Factors
 
 Not
required.
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
  On
October 8, 2009, we issued warrants to purchase 55,000 shares of common stock at
$1.50 per share to a consultant.  These warrants have a life of five years
and vest over a period of one (1) year.  The warrants were issued in
exchange for investor relations services.  This issuance is exempt from
registration under the Act pursuant to section 4(2) as the warrants were issued
by the Company and did not involve any public offering.
 
 Item
3. Defaults Upon Senior Securities
 
 None.
 
 Item
4. Submission of Matters to a Vote of Security Holders
 
 None.
  18
 
 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
 
 Exhibit No.
                      
                      Description2.1
                      
                      Share
      Exchange Agreement between Derycz and Reprints Desk dated November 13,
      2006 (1)3.1
                      
                      Articles
      of Incorporation (1)3.2
                      
                      Bylaws
      (1)4.1
                      
                      Form
      of Warrant (1)4.2
                      
                      Form
      of Warrant (2)31.1
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer (3)31.2
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer (3)32.1
                      
                      Section
      1350 Certification of Chief Executive Officer (3)32.2
                      
                      Section
      1350 Certification of Chief Financial Officer (3)
 (1)
                Incorporated by reference to the
      exhibit of the same number to the registrant’s Registration Statement on
      Form SB-2 filed on December 28,
2007.
 (2)
                Incorporated by reference to the
      exhibit of the same number to the registrant’s Quarterly Report on Form
      10-Q filed on November 19,
2008
 (3)
                Filed
      herewith.
  19
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 DERYCZ
      SCIENTIFIC, INC.By:
                /s/
      Peter DeryczPeter
      DeryczDate:
      February 12, 2010
                
                Chief
      Executive OfficerBy:
                /s/
      Richard McKilliganRichard
      McKilliganDate:
      February 12, 2010
                
                Chief
      Financial Officer
    
 20