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: March 31, 2010
 
  ̈
              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  ̈





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   ̈ No   ̈





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes   ̈  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 May 12, 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
              
              14Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
              
              19Item 4.
      Controls and Procedures
              
              19PART
      II — OTHER INFORMATION
              
              19Item 1.
      Legal Proceedings
              
              19Item 1A.
      Risk Factors
              
              19Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
              
              19Item 3.
      Defaults Upon Senior Securities
              
              19Item 4.
      [Removed and Reserved]
              
              19Item 5.
      Other Information
              
              19Item 6.
      Exhibits
              
              20SIGNATURES
              
              21




2




PART
1 — FINANCIAL INFORMATION





Item
1. Financial Statements





Derycz
Scientific, Inc.


Condensed
Consolidated Balance Sheets





March 31,
                            
                            
                            June 30,2010
                            
                            
                            2009(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            2,248,767
                            
                            
                            $
                            1,854,093Accounts
      receivable, net of allowance of $35,000
                            
                            
                            4,138,459
                            
                            
                            
                            3,499,848Inventory
                            
                            
                            9,992
                            
                            
                            
                            10,188Prepaid
      royalties
                            
                            
                            35,770
                            
                            
                            
                            217,980Other
      current assets
                            
                            
                            81,735
                            
                            
                            
                            37,890TOTAL
      CURRENT ASSETS
                            
                            
                            6,514,723
                            
                            
                            
                            5,619,999PROPERTY
      AND EQUIPMENT, net of  accumulated depreciation of $281,052
      and  $188,266
                            
                            
                            363,860
                            
                            
                            
                            340,776INTANGIBLE
      ASSETSCustomer
      lists, net of accumulated amortization of $0 and $43,056
                            
                            
                            -
                            
                            
                            
                            6,944Intellectual
      property licenses, net of amortization of $259,086 and
      $163,209
                            
                            
                            712,681
                            
                            
                            
                            600,887GOODWILL
                            
                            
                            223,385
                            
                            
                            
                            223,385TOTAL
      ASSETS
                            
                            $
                            7,814,649
                            
                            
                            $
                            6,791,991LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            4,057,348
                            
                            
                            $
                            3,036,615Capital
      lease obligation, current
                            
                            
                            33,008
                            
                            
                            
                            17,861Income
      tax payable
                            
                            
                            3,054
                            
                            
                            
                            3,659Other
      current liabilities
                            
                            
                            75,989
                            
                            
                            
                            116,769TOTAL
      CURRENT LIABILITIES
                            
                            
                            4,169,399
                            
                            
                            
                            3,174,904CAPITAL
      LEASE OBLIGATIONS
                            
                            
                            52,191
                            
                            
                            
                            43,617COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock; $0.001 par value; 20,000,000 sharesauthorized;
      no shares issued and outstandingCommon
      stock; $0.001 par value; 100,000,000 sharesauthorized;
      12,961,830 shares issued and outstanding
                            
                            
                            12,962
                            
                            
                            
                            12,962Additional
      paid-in capital
                            
                            
                            5,453,524
                            
                            
                            
                            5,450,223Accumulated
      deficit
                            
                            
                            (1,914,870
                            )
                            
                            
                            (1,937,072
                            )TOTAL
      STOCKHOLDERS' EQUITY
                            
                            
                            3,551,616
                            
                            
                            
                            3,526,113NONCONTROLLING
      INTEREST
                            
                            
                            41,443
                            
                            
                            
                            47,357TOTAL
      EQUITY
                            
                            
                            3,593,059
                            
                            
                            
                            3,573,470TOTAL
      LIABILITIES AND EQUITY
                            
                            $
                            7,814,649
                            
                            
                            $
                            6,791,991





See notes
to condensed consolidated financial statements




3





Derycz
Scientific, Inc.


Condensed
Consolidated Statements of Operations


(unaudited)





Three Months Ended
                      
                      
                      Nine Months EndedMarch 31,
                      
                      
                      March 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009NET
      SALES
                      
                      $
                      6,201,431
                      
                      
                      $
                      3,818,500
                      
                      
                      $
                      18,575,589
                      
                      
                      $
                      10,448,179COST
      OF SALES
                      
                      
                      4,843,169
                      
                      
                      
                      2,802,344
                      
                      
                      
                      14,965,411
                      
                      
                      
                      8,030,463GROSS
      PROFIT
                      
                      
                      1,358,262
                      
                      
                      
                      1,016,156
                      
                      
                      
                      3,610,178
                      
                      
                      
                      2,417,716OPERATING
      EXPENSES:General
      and administrative
                      
                      
                      1,154,177
                      
                      
                      
                      826,770
                      
                      
                      
                      3,333,872
                      
                      
                      
                      2,409,883Marketing
      and advertising
                      
                      
                      60,222
                      
                      
                      
                      33,267
                      
                      
                      
                      123,788
                      
                      
                      
                      71,855Depreciation
      and amortization
                      
                      
                      52,523
                      
                      
                      
                      58,517
                      
                      
                      
                      151,017
                      
                      
                      
                      190,416TOTAL
      OPERATING EXPENSES
                      
                      
                      1,266,922
                      
                      
                      
                      918,554
                      
                      
                      
                      3,608,677
                      
                      
                      
                      2,672,154INCOME
      (LOSS) FROM OPERATIONS
                      
                      
                      91,340
                      
                      
                      
                      97,602
                      
                      
                      
                      1,501
                      
                      
                      
                      (254,438
                      )Realized
      gain on marketable securities
                      
                      
                      -
                      
                      
                      
                      60,833
                      
                      
                      
                      -
                      
                      
                      
                      33,668Other
      income
                      
                      
                      6,101
                      
                      
                      
                      -
                      
                      
                      
                      19,361
                      
                      
                      
                      -Interest
      expense
                      
                      
                      (1,955
                      )
                      
                      
                      (1,753
                      )
                      
                      
                      (5,098
                      )
                      
                      
                      (32,853
                      )Interest
      income
                      
                      
                      1,273
                      
                      
                      
                      2,709
                      
                      
                      
                      3,578
                      
                      
                      
                      34,469INCOME
      (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
                      
                      
                      96,759
                      
                      
                      
                      159,391
                      
                      
                      
                      19,342
                      
                      
                      
                      (219,154
                      )PROVISON
      FOR INCOME TAXES
                      
                      
                      (3,054
                      )
                      
                      
                      (35,751
                      )
                      
                      
                      (3,054
                      )
                      
                      
                      (24,338
                      )NET
      INCOME (LOSS)
                      
                      
                      93,705
                      
                      
                      
                      123,640
                      
                      
                      
                      16,288
                      
                      
                      
                      (243,492
                      )NET
      LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
                      
                      
                      4,456
                      
                      
                      
                      (2,823
                      )
                      
                      
                      5,914
                      
                      
                      
                      (534
                      )NET
      INCOME (LOSS) ATTRIBUTABLE TO DERYCZ SCIENTIFIC, INC.
                      
                      $
                      98,161
                      
                      
                      $
                      120,817
                      
                      
                      $
                      22,202
                      
                      
                      $
                      (244,026
                      )NET
      INCOME (LOSS) PER SHARE:BASIC
      AND DILUTED
                      
                      $
                      0.01
                      
                      
                      $
                      0.01
                      
                      
                      $
                      0.00
                      
                      
                      $
                      (0.02
                      )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
                      
                      
                      12,961,830
                      
                      
                      
                      12,961,830
                      
                      
                      
                      12,961,830
                      
                      
                      
                      12,939,607





See notes
to condensed consolidated financial statements




4





Derycz
Scientific, Inc.





Condensed
Consolidated Statement of Stockholders' Equity


For
the nine months ended March 31, 2010


(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
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,301
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,301Net
      income (loss) for the period
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  22,202
                  
                  
                  
                  (5,914
                  )
                  
                  
                  16,288Balance,
      March 31, 2010
                  
                  
                  12,961,830
                  
                  
                  $
                  12,962
                  
                  
                  $
                  5,453,524
                  
                  
                  $
                  (1,914,870
                  )
                  
                  $
                  41,443
                  
                  
                  $
                  3,593,059





See notes
to condensed consolidated financial statements




5





Derycz
Scientific, Inc.





Condensed
Consolidated Statements of Cash Flows


(unaudited)





Nine months endedMarch 31,2010
                            
                            
                            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                            
                            $
                            16,288
                            
                            
                            $
                            (243,492
                            )Adjustment
      to reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
      and amortization
                            
                            
                            195,608
                            
                            
                            
                            227,381Fair
      value of vested stock options
                            
                            
                            -
                            
                            
                            
                            12,944Fair
      value of common stock warrant issued for services
                            
                            
                            3,301
                            
                            
                            
                            43,963Realized
      gain loss on investment
                            
                            
                            -
                            
                            
                            
                            (33,668
                            )Deferred
      income taxes
                            
                            
                            -
                            
                            
                            
                            189Changes
      in assets and liabilities:Accounts
      receivable
                            
                            
                            (638,611
                            )
                            
                            
                            459,441Accounts
      payable and accrued expenses
                            
                            
                            1,020,733
                            
                            
                            
                            (90,065
                            )Inventory
                            
                            
                            196
                            
                            
                            
                            5,734Prepaid
      royalties
                            
                            
                            182,210
                            
                            
                            
                            302,973Other
      current assets
                            
                            
                            (43,846
                            )
                            
                            
                            18,916Other
      current liabilities
                            
                            
                            (40,779
                            )
                            
                            
                            (23,299
                            )Income
      taxes payable
                            
                            
                            (605
                            )
                            
                            
                            -Net
      cash provided by operating activities
                            
                            
                            694,495
                            
                            
                            
                            681,017CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of furniture and equipment
                            
                            
                            (73,231
                            )
                            
                            
                            (45,449
                            )Purchase
      of Intellectual Property licenses
                            
                            
                            (207,671
                            )
                            
                            
                            (181,122
                            )Additional
      investment in Pools Press
                            
                            
                            -
                            
                            
                            
                            (34,200
                            )Proceeds
      from sale of short term investments
                            
                            
                            -
                            
                            
                            
                            1,665,298Net
      cash provided by (used in) investing activities
                            
                            
                            (280,902
                            )
                            
                            
                            1,404,527CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the issuance of common stock
                            
                            
                            -
                            
                            
                            
                            600,025Capital
      lease obligation
                            
                            
                            (18,919
                            )
                            
                            
                            (11,942
                            )Payments
      on line of credit
                            
                            
                            -
                            
                            
                            
                            (1,291,855
                            )Net
      cash used in financing activities
                            
                            
                            (18,919
                            )
                            
                            
                            (703,772
                            )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                            
                            
                            394,674
                            
                            
                            
                            1,381,772CASH
      AND CASH EQUIVALENTS, Beginning of period
                            
                            
                            1,854,093
                            
                            
                            
                            954,834CASH
      AND CASH EQUIVALENTS, End of period
                            
                            $
                            2,248,767
                            
                            
                            $
                            2,336,606SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Taxes
      paid
                            
                            $
                            -
                            
                            
                            $
                            27,500Interest
      paid
                            
                            $
                            1,955
                            
                            
                            $
                            32,853SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Capital
      lease obligation included in fixed assets
                            
                            $
                            42,640
                            
                            
                            
                            -Minority
      share of earnings (losses) in subsidiary
                            
                            $
                            (5,914
                            )
                            
                            
                            534





See notes
to condensed consolidated financial statements




6




DERYCZ
SCIENTIFIC, INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


For
the Nine Months Ended March 31, 2010 and 2009 (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 nine months ended
March 31, 2010 and 2009 are unaudited, but in the opinion of management, contain
all adjustments, which include normal recurring adjustments necessary to present
fairly the financial position at March 31, 2010 and the results of operations
for the three and nine months ended March 31, 2010 and 2009 and the cash flows
for the nine months ended March 31, 2010 and 2009. The results of operations for
the three and nine months ended March 31, 2010 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 March 31, 2010.


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 18% of the revenues for the three months ended March 31,
2010, and one customer accounted for 22% of the revenue for the nine months
ended March 31, 2010.  Two customers accounted for 16% and 11% of the
revenues for the three months ended March 31, 2009, and one customer accounted
for 16% of the revenue for the nine months ended March 31, 2009.





As of
June 30, 2009, two customers accounted for 15% and 14% of accounts receivable,
and no customers accounted for more than 10% of accounts receivable at March 31,
2010.




(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 $94,419 and
$38,830, respectively, for the three months ended March 31, 2010 and 2009 and
$196,247 and $114,461, respectively, for the nine months ended March 31, 2010
and 2009.





(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 shares of common stock and options to purchase 1,022,000
shares of common stock at various prices exceeding $0.57 per share were
outstanding during the three and nine months ended March 31, 2010 but were not
included in the computation of diluted earnings per share for either 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 nine months ended March 31, 2009 as the effect would have
been anti-dilutive due to the net loss for the period.


8





Warrants
to purchase 2,800,009 shares of common stock and options to purchase 530,000
shares of common stock at various prices exceeding $0.57 per share were
outstanding during the three months ended March 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.




(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 $60,222 and $33,267 for the three months ended March 31, 2010 and 2009,
respectively, and $123,788 and $71,855 for the nine months ended March 31, 2010
and 2009.





(h)
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.





(i) 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.




(j)
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.


9




(k)
Recently issued accounting pronouncements




In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective in fiscal years beginning on or after June 15, 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.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition.   We believe the adoption of this new
guidance will not have a material impact on our financial
statements.





In
January 2010, the FASB issued guidance on improving disclosures about fair value
measurements to add new disclosure requirements for significant transfers in and
out of Level 1 and 2 measurements and to provide a gross presentation of the
activities within the Level 3 rollforward.  The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value.  The
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the requirement to present
the Level 3 rollforward on a gross basis, which is effective for fiscal years
beginning after December 15, 2010.  The adoption of this guidance was
limited to the form and content of disclosures, and will not have a material
impact on our consolidated results of operations and financial
condition.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





Note 3 — Property and
Equipment





Property
and equipment consists of the following as of March 31, 2010 and June 30,
2009:





March 31,
                  
                  
                  June 30,2010
                  
                  
                  2009(unaudited)Computer
      equipment
                  
                  $
                  107,294
                  
                  
                  $
                  68,640Software
                  
                  
                  146,395
                  
                  
                  
                  112,570Printing
      equipment
                  
                  
                  329,092
                  
                  
                  
                  286,452Furniture
      and fixtures
                  
                  
                  58,132
                  
                  
                  
                  57,380Autos
      and vans
                  
                  
                  4,000
                  
                  
                  
                  4,000644,913
                  
                  
                  
                  529,042Less
      accumulated depreciation
                  
                  
                  (281,053
                  )
                  
                  
                  (188,266
                  )$
                  363,860
                  
                  
                  $
                  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 $54,878 as
of March 31, 2010.





Depreciation
expense for the three months ended March 31, 2010 and 2009 was $26,536 and
$25,320, respectively, and $92,787 and $74,869, respectively, for the nine
months ended March 31, 2010 and 2009.





Note
4 — Intangible Assets





Intangible
assets consist of the following at March 31 and June 30, 2009:





March 31,
                  2010
                
                
                June 30,
                  2009(unaudited)Customer
      list
                
                $
                -
                
                
                $
                50,000Intellectual
      property licenses
                
                
                971,763
                
                
                
                764,096Accumulated
      amortization
                
                
                (259,086
                )
                
                
                (206,265
                )$
                712,681
                
                
                $
                607,831




10





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 March 31,
2010.





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 March
31, 2010 and 2009 was $34,872 and $44,381, respectively, and $107,818 and
$119,884 for the nine months ended March 31, 2010 and 2009,
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 $5,720 and $6,037 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 March 31, 2010 was $16,640.





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 March 31, 2010 are as follows:




Fiscal Year
                    
                    Operating
                      Leases
                    
                    
                    Capital
                      Leases2010
                    
                    $
                    40,816
                    
                    
                    $
                    9,6602011
                    
                    
                    158,673
                    
                    
                    
                    38,6402012
                    
                    
                    66,407
                    
                    
                    
                    38,640Thereafter
                    
                    
                    
                    
                    
                    
                    7,045Total
      minimum lease payments
                    
                    $
                    265,896
                    
                    
                    $
                    93,985Amounts
      representing interest
                    
                    
                    
                    
                    
                    
                    (8,786
                    )Total
                    
                    
                    
                    
                    
                    
                    85,199Less
      current portion
                    
                    
                    
                    
                    
                    
                    (33,008
                    )Long
      term
                    
                    
                    
                    
                    
                    $
                    52,191




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.




Stock
based compensation expense of $0 and $0 was recognized during the three months
ended March 31, 2010 and 2009, respectively, and $0 and $12,944, respectively,
for the nine months ended March 31, 2010 and 2009, relating to the vesting of
such options. No future compensation expense related to these options
remains as of March 31, 2010.  As of March 31, 2010, these options have no
intrinsic value.




At March
31, 2010, options outstanding are as follows:


11




Number of
                        Options
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceBalance
      at July 1, 2009
                      
                      
                      1,002,000
                      
                      
                      $
                      1.26Granted
                      
                      
                      —
                      
                      
                      $Exercised
                      
                      
                      —
                      
                      
                      
                      —Cancelled
                      
                      
                      —
                      
                      
                      $
                      —Balance
      at March 31, 2010
                      
                      
                      1,022,000
                      
                      
                      $
                      1.26




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




Options Outstanding
                      
                      
                      Options
                        ExercisableWeighted Average
                        Exercise Price
                      
                      
                      Number
                        Outstanding
                      
                      
                      Weighted Average
                        Remaining Contractual
                        Life (Years)
                      
                      
                      Weighted Average
                        Exercise Price
                      
                      
                      Number
                        Exercisable$
                      1.26
                      
                      
                      
                      1,022,000
                      
                      
                      
                      9
                      
                      
                      $
                      1.26
                      
                      
                      
                      1,022,000




Warrants





At March
31, 2010, 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 March 31, 2010
                  
                  
                  2,855,009
                  
                  
                  $
                  1.34




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





On
October 8, 2009, the Company issued warrants to acquire 55,000 shares of our
stock 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 March 31, 2010 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 March 31, 2010 and 2009 were $0 and
$8,223, respectively, and $0 and $27,406, respectively, for the nine months
ended March 31, 2010 and 2009.




12




Note
8 — Income Taxes





The
provision (benefit) for income taxes consists of the following for the three and
nine months ended March 31, 2010 and 2009:




Three months ended March 31,
                      
                      
                      Nine months ended March 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009CurrentFederal
                      
                      $
                      2,154
                      
                      
                      $
                      5,056
                      
                      
                      $
                      2,154
                      
                      
                      $
                      17,020State
                      
                      
                      900
                      
                      
                      
                      4,558
                      
                      
                      
                      900
                      
                      
                      
                      7,127DeferredFederal
                      
                      
                      —
                      
                      
                      
                      (3,293
                      )
                      
                      
                      —
                      
                      
                      
                      (9,706
                      )State
                      
                      
                      —
                      
                      
                      
                      29,430
                      
                      
                      
                      —
                      
                      
                      
                      9,897Provision
      for income tax expense
                      
                      $
                      3,054
                      
                      
                      $
                      35,751
                      
                      
                      $
                      3,054
                      
                      
                      $
                      24,338




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





Three months ended March 31,
                
                
                Nine Months Ended March 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Federal income tax rate
                
                
                34.00
                %
                
                
                34.00
                %
                
                
                34.00
                %
                
                
                (34.00
                )%State tax, net of federal
      benefit
                
                
                3.16
                %
                
                
                (1.90
                )%
                
                
                3.15
                %
                
                
                4.15
                %Permanent differences
                
                
                .10
                %
                
                
                0.00
                %
                
                
                0.16
                %
                
                
                0.00
                %Change in valuation
      allowance
                
                
                (12.72
                )%
                
                
                6.25
                %
                
                
                (21.52
                )%
                
                
                (13.63
                )%Other
                
                
                0.00
                %
                
                
                0.74
                %
                
                
                0.00
                %
                
                
                (1.63
                )%Benefit for interim period loss
      not recorded
                
                
                (21.38
                )%
                
                
                (16.66
                )%
                
                
                0.00
                %
                
                
                34.00
                %Effective income tax rate
                
                
                3.16
                %
                
                
                22.43
                %
                
                
                15.79
                %
                
                
                (11.11
                )%




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
March 31, 2010 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 March
31, 2010 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 March 31, 2010, the Company did not have a
liability for unrecognized tax benefits, and no adjustment was required at
adoption.





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





The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of March 31, 2010 and June 30, 2009, the Company has
no accrued interest or penalties related to uncertain tax positions.
Additionally, tax years 2007 through 2009 remain open to examination by the
major taxing jurisdictions to which the Company is subject.




13




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  MANAGEMENT’S
DISCUSSION
 AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The
following discussion and analysis of our results of operations and financial
condition for the three and nine months ended March 31, 2010 and 2009 should be
read in conjunction with the notes to those financial statements that are
included in Item 1 of Part 1 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.




(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.




14


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
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective in fiscal years beginning on or after June 15, 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.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition.   We believe the adoption of this new
guidance will not have a material impact on our financial
statements.





In
January 2010, the FASB issued guidance on improving disclosures about fair value
measurements to add new disclosure requirements for significant transfers in and
out of Level 1 and 2 measurements and to provide a gross presentation of the
activities within the Level 3 rollforward.   The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value.  The
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the requirement to present
the Level 3 rollforward on a gross basis, which is effective for fiscal years
beginning after December 15, 2010.  The adoption of this guidance was
limited to the form and content of disclosures, and will not have a material
impact on our consolidated results of operations and financial
condition.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.




Results
of Operations




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




Sales
and Cost of Goods Sold




Our
revenues increased 62% compared to the same period in 2009. We achieved revenue
of $6,201,431 for the three months ended March 31, 2010, compared to revenue of
$3,818,500 for the three months ended March 31, 2009.




15





The
revenue of our main operating company, Reprints, increased from $3,366,231 for
the three months ended March 31, 2009 to $5,595,513 for the three months ended
March 31, 2010, an increase of 66%. This was a result of a steady increase in
our document delivery revenue during the past year.  Pools Press
contributed the remainder of the revenue. We expect to continue to experience
significant growth over the 2010 fiscal year.




Our cost
of goods sold likewise increased from $2,802,344 for the three months ended
March 31, 2009 to $4,843,169 for the three months ended March 31, 2010, which
represents an increase of 73%. This percentage increase is roughly equivalent to
the increase in our revenues. However, the overall gross margin percentage
decreased from 27% of sales in the 2009 period to 21% in the 2010 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 $826,770 for the three
months ended March 31, 2009 to $1,154,177 for the three months ended March 31,
2010. Pools’ share of these expenses was approximately $52,000 for the 2010
period and $49,000 in the 2009 period. These expenses include Reprints’ salary
costs, which were $657,494 in the 2010 period and $499,099 in the 2009 period,
an increase of $158,395 or 32%. 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 significantly from $33,267 for the
three months ended March 31, 2009 to $60,222 for the three months ended March
31, 2010. These costs have become a more significant expense for us as a result
of increased participation in publishing industry trade shows and other
advertising and marketing efforts.




Depreciation
and Amortization




Our
depreciation and amortization expense increased approximately 22% from $58,517
for three months ended March 31, 2009 to $71,404 for the three months ended
March 31, 2010. Pools’ share of these expenses in the 2008 period included
$9,167 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 $52,322 for the 2010 period and $49,149 for the 2009
period was primarily attributable to amortization on software and intellectual
property licenses as well as amortization of customer lists.




Gains
on marketable securities




We
recognized realized gains on our short-term investments of $60,833 and $0 during
the three months ended March 31, 2009 and 2010, 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 $1,753 for the three months ended March 31, 2009 and $1,955 for the
three months ended March 31, 2010.




Interest
Income




Interest
income was $2,709 for the three months ended March 31, 2009 and $1,273 for the
three months ended March 31, 2010.




Net
Income




We
recorded net income of $123,640 for the three months ended March 31, 2009
compared to net income of $93,705 for the three months ended March 31, 2010.
This is the first time we have achieved profitability two quarters in a
row.  This result is attributable to strong sales at Reprints during the
2010 period.  We hope to continue to be modestly profitable for the
remainder of the 2010 fiscal year.




16




Nine
Months Ended March 31, 2010 Compared to the Nine Months Ended March 31,
2009:





Sales
and Cost of Goods Sold




Our
revenues increased significantly from the same period in 2009. We achieved
revenue of $18,575,589 for the nine months ended March 31, 2010, compared to
revenue of $10,448,179 for the nine months ended March 31, 2009, an increase of
78%.




The
revenue of our main operating company, Reprints, increased from $9,284,132 for
the nine months ended March 31, 2009 to $16,198,106 for the nine months ended
March 31, 2009, an increase of 74%. This is primarily a result of steady
increases in our document delivery sales as well as increases in our reprints
sales.  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 $8,030,463 for the nine months ended March
31, 2009 to $14,965,411 for the nine months ended March 31, 2010, which
represents an increase of 86%. This percentage increase is roughly equivalent to
the increase in our revenues. The overall gross margin percentage decreased from
23% of sales in the 2009 period to 19% in the 2010 period.  This reduction
is a result of a pressure on our gross margins as we aggressively market our
products.




Operating
Expenses




General
and Administrative




Our
general and administrative expenses increased 38% from $2,409,883 for the nine
months ended March 31, 2009 to $3,333,872 for the nine months ended March 31,
2010. Pools’ share of these expenses was approximately $174,000 in the 2009
period and $166,000 during the 2010 period. These expenses include Reprints’
salary costs, which were $1,352,533 in the 2009 period and $1,911,565 in the
2010 period, an increase of $559,032 or 41%.  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 $71,855 for the nine
months ended March 31, 2009 to $123,788 for the nine months ended March 31,
2010. These costs have become a more significant expense for us as a result of
increased participation in publishing industry trade shows and other advertising
and marketing efforts and we expect these costs to continue to increase over the
next year.




Depreciation
and Amortization




Our
depreciation and amortization expense decreased 11% from $190,416 for nine
months ended March 31, 2009 to $169,898 for the nine months ended March 31,
2010. Pools’ share of these expenses in the 2009 period included $36,667 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.





Gains
on marketable securities




We
recognized realized gains on our short-term investments of $33,668 and $0 during
the nine months ended March 31, 2009 and 2010, 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 $32,853 for the nine months ended March 31, 2009 and $5,098 for the
nine months ended March 31, 2010. The 2009 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 $34,469 for the six nine months ended March 31, 2009 and $3,580 for
the nine months ended March 31, 2010.  The interest earned during the 2009
period was primarily attributable to the interest earned on investments in
marketable securities.




Net
Income (Loss)




We
recorded a net loss of $243,492 for the nine months ended March 31, 2009
compared to net income of $16,288 for the nine months ended March 31,
2010.  The 2010 net income was attributable to two successive
profitable quarters and we hope to achieve profitability for the 2010 fiscal
year.




17





Liquidity
and Capital Resources




As of
March 31, 2010, we had cash and cash equivalents of $2,248,767, compared to
$1,854,093 as of June 30, 2009. This increase is primarily attributable to an
increase in accounts payable of $1,020,733 and a decrease in prepaid royalties
of $182,210, partially offset by an increase in accounts receivable of
$638,611.




Net cash
provided by operating activities was $694,495 for the nine months ended March
31, 2010 compared to cash provided by operating activities of $681,017 for the
nine months ended March 31, 2009. During the 2010 period, our accounts
receivable increased by $683,611 and our accounts payable increased by
$1,020,733, compared to decreases of $90,065 and $459,441, respectively, in the
2009 period. During the nine months ended March 31, 2010, we used $182,210 of
prepaid royalties, compared to use of $302,973 in the 2009 period. Also, during
the 2009 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 $3,301 related to a common stock warrant issued
for services in the 2010 period.




Net cash
used in investing activities was $280,902 for the nine months ended March 31,
2010 compared to net cash provided by investing activities of $1,404,527 for the
nine months ended March 31, 2009. This difference was primarily due to the
receipt of proceeds form the sale of short term investments.




Net cash
used in financing activities was $18,919 for the nine months ended March 31,
2010 compared to net cash used in financing activities of $703,772 for the
corresponding period in 2009. The cash used in financing activities for the 2009
period was primarily attributable to payment on our credit line.




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.


18




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 March 31, 2010 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 March 31, 2010 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




None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. [Removed and Reserved]





Item
5. Other Information





(a)
            None.




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




19





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.


20




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:  May
      13, 2010
            
            Chief
      Executive OfficerBy:
            /s/
      Richard McKilliganRichard
      McKilliganDate:
      May 13, 2010
            
            Chief
      Financial Officer




21