Unassociated Document
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended: March 31, 2009
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from _____________ to _____________
Commission File
No. 333-148392
DERYCZ SCIENTIFIC,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
11-3797644
|
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
1524
Cloverfield Blvd. Ste E, Santa Monica, California
|
|
90404
|
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(310)
477-0354
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period than the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of May 11, 2009, there were 12,961,830
shares of common stock outstanding.
TABLE OF
CONTENTS
PART
I — FINANCIAL INFORMATION
|
|
3
|
|
|
|
Item 1.
Financial Statements
|
|
3
|
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
15
|
|
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
|
19
|
|
|
|
Item 4T.
Controls and Procedures
|
|
19
|
|
|
|
PART
II — OTHER INFORMATION
|
|
19
|
|
|
|
Item 1.
Legal Proceedings
|
|
19
|
|
|
|
Item 1A.
Risk Factors
|
|
20
|
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
20
|
|
|
|
Item 3.
Defaults Upon Senior Securities
|
|
20
|
|
|
|
Item 4.
Submission of Matters to a Vote of Security Holders
|
|
20
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|
|
|
Item 5.
Other Information
|
|
20
|
|
|
|
Item 6.
Exhibits
|
|
20
|
|
|
|
SIGNATURES
|
|
21
|
PART 1 — FINANCIAL
INFORMATION
Item 1. Financial
Statements
Derycz
Scientific, Inc.
Condensed
Consolidated Balance Sheets
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,336,606 |
|
|
$ |
954,834 |
|
Short
term investments
|
|
|
- |
|
|
|
1,631,630 |
|
Accounts
receivable
|
|
|
2,659,717 |
|
|
|
3,119,158 |
|
Inventory
|
|
|
10,222 |
|
|
|
15,956 |
|
Prepaid
royalties
|
|
|
23,104 |
|
|
|
326,077 |
|
Other
current assets
|
|
|
61,823 |
|
|
|
80,739 |
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
5,091,472 |
|
|
|
6,128,394 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $163,501
and $89,711
|
|
|
334,466 |
|
|
|
362,807 |
|
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS
|
|
|
|
|
|
|
|
|
Customer
lists, net of accumulated amortization of $38,889
and $182,222
|
|
|
11,111 |
|
|
|
92,778 |
|
Other
intellectual property, net of amortization of $135,939 and
$64,016
|
|
|
628,157 |
|
|
|
518,959 |
|
Goodwill
|
|
|
223,385 |
|
|
|
189,185 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
6,288,591 |
|
|
$ |
7,292,123 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,907,168 |
|
|
$ |
1,997,233 |
|
Capital
lease obligation, current
|
|
|
17,411 |
|
|
|
16,129 |
|
Outstanding
credit line
|
|
|
- |
|
|
|
1,291,855 |
|
Other
current liabilities
|
|
|
65,131 |
|
|
|
88,430 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
1,989,710 |
|
|
|
3,393,647 |
|
CAPITAL
LEASE OBLIGATIONS
|
|
|
48,255 |
|
|
|
61,479 |
|
LONG-TERM
DEFERRED TAX LIABILITY
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
50,636 |
|
|
|
50,102 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.001 par value; 20,000,000 shares authorized; no shares issued
and outstanding
|
|
|
|
|
|
|
|
|
Common
stock; $0.001 par value; 100,000,000 shares authorized; 12,961,830 and
12,561,813 shares issued and outstanding
|
|
|
12,962 |
|
|
|
12,562 |
|
Additional
paid-in capital
|
|
|
5,301,896 |
|
|
|
4,645,364 |
|
Accumulated
deficit
|
|
|
(1,115,057 |
) |
|
|
(871,031 |
) |
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
4,199,801 |
|
|
|
3,786,895 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
6,288,591 |
|
|
$ |
7,292,123 |
|
See notes
to condensed consolidated financial statements
Condensed
Consolidated Statements of Operations
(unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$ |
3,818,500 |
|
|
$ |
2,910,183 |
|
|
$ |
10,448,179 |
|
|
$ |
8,066,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
2,802,344 |
|
|
|
2,342,128 |
|
|
|
8,030,463 |
|
|
|
6,557,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,016,156 |
|
|
|
568,055 |
|
|
|
2,417,716 |
|
|
|
1,508,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
826,770 |
|
|
|
591,002 |
|
|
|
2,408,661 |
|
|
|
1,612,330 |
|
Marketing
and advertising
|
|
|
33,267 |
|
|
|
10,980 |
|
|
|
71,855 |
|
|
|
28,488 |
|
Depreciation
and amortization
|
|
|
58,517 |
|
|
|
69,557 |
|
|
|
190,416 |
|
|
|
174,334 |
|
Other
expenses
|
|
|
- |
|
|
|
- |
|
|
|
1,222 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
918,554 |
|
|
|
671,539 |
|
|
|
2,672,154 |
|
|
|
1,815,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
97,602 |
|
|
|
(103,484 |
) |
|
|
(254,438 |
) |
|
|
(306,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (Unrealized loss) on marketable securities
|
|
|
60,833 |
|
|
|
(50,895 |
) |
|
|
33,668 |
|
|
|
(50,895 |
) |
Interest
expense
|
|
|
(1,753 |
) |
|
|
(6,169 |
) |
|
|
(32,853 |
) |
|
|
(17,854 |
) |
Interest
income
|
|
|
2,709 |
|
|
|
22,827 |
|
|
|
34,469 |
|
|
|
90,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE TAXES AND MINORITY INTEREST
|
|
|
159,391 |
|
|
|
(137,721 |
) |
|
|
(219,154 |
) |
|
|
(284,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
(2,823 |
) |
|
|
(16 |
) |
|
|
(534 |
) |
|
|
(6,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE TAXES
|
|
|
156,568 |
|
|
|
(137,737 |
) |
|
|
(219,688 |
) |
|
|
(290,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(35,751 |
) |
|
|
- |
|
|
|
(24,338 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
120,817 |
|
|
$ |
(137,737 |
) |
|
$ |
(244,026 |
) |
|
$ |
(290,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED
|
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED
|
|
|
12,961,830 |
|
|
|
12,561,813 |
|
|
|
12,939,607 |
|
|
|
12,527,474 |
|
See notes
to condensed consolidated financial statements
Derycz
Scientific, Inc.
Condensed
Consolidated Statement of Stockholders' Equity
For
the nine months ended March 31, 2009
(unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 1, 2008
|
|
|
12,561,813 |
|
|
$ |
12,562 |
|
|
$ |
4,645,364 |
|
|
$ |
(871,031 |
) |
|
$ |
3,786,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of vested options issued to employees
|
|
|
- |
|
|
|
- |
|
|
|
12,944 |
|
|
|
- |
|
|
|
12,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrant for services
|
|
|
|
|
|
|
|
|
|
|
43,963 |
|
|
|
- |
|
|
|
43,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
400,017 |
|
|
|
400 |
|
|
|
599,625 |
|
|
|
- |
|
|
|
600,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244,026 |
) |
|
|
(244,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
12,961,830 |
|
|
$ |
12,962 |
|
|
$ |
5,301,896 |
|
|
$ |
(1,115,057 |
) |
|
$ |
4,199,801 |
|
See notes
to condensed consolidated financial statements
Derycz
Scientific, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine
months
|
|
|
|
ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(244,026 |
) |
|
$ |
(290,639 |
) |
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
227,381 |
|
|
|
219,083 |
|
Fair
value of vested stock options
|
|
|
12,944 |
|
|
|
92,585 |
|
Fair
value of common stock warrant issued for services
|
|
|
43,963 |
|
|
|
11,810 |
|
(Realized
gain) unrealized loss on investment
|
|
|
(33,668 |
) |
|
|
50,895 |
|
Deferred
income taxes
|
|
|
189 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
459,441 |
|
|
|
(1,011,888 |
) |
Accounts
payable and accrued expenses
|
|
|
(90,065 |
) |
|
|
408,640 |
|
Inventory
|
|
|
5,734 |
|
|
|
3,497 |
|
Prepaid
royalties
|
|
|
302,973 |
|
|
|
192,671 |
|
Other
current assets
|
|
|
18,916 |
|
|
|
(47,628 |
) |
Other
current liabilities
|
|
|
(23,299 |
) |
|
|
77,841 |
|
Minority
share of earnings in subsidiary
|
|
|
534 |
|
|
|
6,111 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
681,017 |
|
|
|
(287,022 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of furniture and equipment
|
|
|
(45,449 |
) |
|
|
(108,704 |
) |
Purchase
of Intellectual Property
|
|
|
(181,122 |
) |
|
|
(330,000 |
) |
Additional
investment in Pools Press
|
|
|
(34,200 |
) |
|
|
- |
|
Proceeds
from sale of (investment in) short term investments
|
|
|
1,665,298 |
|
|
|
832,621 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
1,404,527 |
|
|
|
393,917 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
600,025 |
|
|
|
- |
|
Capital
lease obligation
|
|
|
(11,942 |
) |
|
|
(10,403 |
) |
Payments
on notes on Pools Press
|
|
|
- |
|
|
|
(162,392 |
) |
Advances
under (payments on) line of credit
|
|
|
(1,291,855 |
) |
|
|
1,273,206 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(703,772 |
) |
|
|
1,100,411 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
|
1,381,772 |
|
|
|
1,207,306 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, Beginning of period
|
|
|
954,834 |
|
|
|
382,587 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, End of period
|
|
$ |
2,336,606 |
|
|
$ |
1,589,893 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
paid
|
|
$ |
27,500 |
|
|
$ |
- |
|
Interest
paid
|
|
$ |
(32,853 |
) |
|
$ |
90,569 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance
of common stock for customer list
|
|
$ |
- |
|
|
|
50,000 |
|
Capital
lease obligation
|
|
$ |
- |
|
|
|
91,792 |
|
DERYCZ
SCIENTIFIC, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Nine Months Ended March 31, 2009 and 2008 (Unaudited)
Note
1 — Organization, Nature of Business and Basis of
Presentation
(a)
Organization
Derycz
Scientific, Inc. (“Derycz” or the “Company”) was incorporated in the State of
Nevada on November 2, 2006. On November 2, 2006 the Company entered into a Share
Exchange Agreement with Reprints Desk, Inc., a Delaware corporation formed on
January 6, 2006 (“Reprints”). Derycz was formed to facilitate a holding company
structure. At the closing of the transaction contemplated by the Share Exchange
Agreement, the Company acquired all of the 550,000 outstanding shares of
Reprints from the shareholders of Reprints and issued 8,000,003 of its common
shares to the shareholders of Reprints. As the intention behind forming Derycz
was the creation of a holding company structure and Derycz had no appreciable
assets prior to the acquisition of Reprints, the exchange ratio was determined
arbitrarily and was not based on any determination of the value of shares of
Derycz common stock as compared to Reprints shares acquired. As each former
Reprints shareholder acquired a percentage interest in Derycz equal to the
percentage interest such shareholder held in Reprints immediately prior to the
transaction, there was no dilution of the interest of any former Reprints
shareholder. Following completion of the exchange transaction, Reprints became a
wholly owned subsidiary of the Company. The transaction was accounted as a
statutory merger of companies under common control. As such, the historical
financial statements of the Company are combined with the operations of Reprints
since its inception, and the merger shares are accounted for as a stock split as
of the inception of Reprints for financial reporting purposes.
(b)
Nature of business
Reprints is a content repurposing and
rights management company, with a focus on content re-use services and products.
The Company operates within the Periodicals Publishing industry which is a large
and growing market. The Company has developed products in the following
areas:
|
•
|
Reprints, ePrints and Article
Distribution Systems
|
|
•
|
Commercial Printing
Services
|
|
•
|
Publisher Outsourced Reprint
Management
|
|
•
|
Print-on-Demand Services for
copyright and regulatory sensitive
documents
|
(c) Basis
of Presentation
The
accompanying interim financial statements for the three and nine months ended
March 31, 2009 and 2008 are unaudited, but in the opinion of management, contain
all adjustments, which include normal recurring adjustments necessary to present
fairly the financial position at March 31, 2009 and the results of operations
and cash flows for the three and nine months ended March 31, 2009 and 2008. The
results of operations for the three and nine months ended March 31, 2009 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending June 30, 2009. The financial statements presented herein
should be read in conjunction with the financial statements included in the
Company’s Annual Report on Form 10-K for the year ended June 30, 2008 filed with
the Securities and Exchange Commission.
The
accompanying financial statements are consolidated and include the accounts of
the Company and its wholly and majority owned subsidiaries. The consolidated
accounts include 100% of assets and liabilities of our majority owned
subsidiary, and the ownership interests of minority investors are recorded as a
minority interest. Intercompany balances and transactions have been eliminated
in consolidation.
Note
2 — Summary of Significant Accounting Policies
(a) Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these
estimates.
(b) Fair
value of financial instruments
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. This Statement defines fair value for
certain financial and nonfinancial assets and liabilities that are recorded at
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This guidance applies to other
accounting pronouncements that require or permit fair value measurements. On
February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2,
Effective Date of FASB Statement No. 157. This Staff Position delays the
effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years, except for those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of SFAS No. 157 had no effect on the Company’s consolidated financial position
or results of operations.
(c) Short
term investments
Our short
term investments at June 30, 2008 consisted of corporate and municipal debt and
preferred stock auction rate securities held in an account with UBS. . In
January 2009, we received cash for the par value of the outstanding auction rate
securities. The proceeds received in January 2009 exceeded the book
value of the investment at December 31, 2008 by approximately $61,000. The
realized gain was recorded in the third quarter ending March 31,
2009.
(d)
Concentration of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and cash equivalents and accounts receivables. The Company
places its cash with high quality financial institutions and at times may exceed
the FDIC $250,000 insurance limit. The Company does not anticipate incurring any
losses related to these credit risks. The Company extends credit based on an
evaluation of the customer's financial condition, generally without collateral.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
intends to maintain allowances for anticipated losses, as required.
Two
customers accounted for 16% and 11% of the revenues for the three months ended
March 31, 2009 and one customer accounted for 24% of the revenues for the nine
months ended March 31, 2009. One customer accounted for 15% of the
revenues for the three months ended March 31, 2008 and one customer accounted
for 14% of the revenues for the nine months ended March 31, 2008.
As of
March 31, 2009, one customer accounted for 16% of accounts receivable and one
customer accounted for 38% of accounts receivable at June 30, 2008.
(e)
Revenue recognition
The
Company applies the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial
Statements,” which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB No. 104
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In general, the
Company recognizes revenue when (i) persuasive evidence of an arrangement
exists, (ii) shipment of products has occurred or services have been rendered,
(iii) the sales price charged is fixed or determinable and (iv) collection is
reasonably assured.
The
Company recognizes revenues from printing services when services have been
rendered and accepted by the customer while revenues from the re-use of
published articles and rights management services are recognized upon shipment
or electronic delivery to the customer.
(f) Stock
based compensation
The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. The Company adopted SFAS No. 123R effective January 1, 2006, and is using
the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective date.
The Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
(g)
Shipping and handling costs
The
Company accounts for shipping and handling fees and costs in accordance with
EITF 00-10. As such, the Company includes shipping and handling charges billed
to its customers in its revenues, and classifies shipping and handling costs of
the sale of its products as a component of cost of sales. Those costs were
approximately $38,830 and $19,785, respectively, for the three months ended
March 31, 2009 and 2008 and $114,461 and $110,395, respectively, for the nine
months ended March 31, 2009 and 2008.
(h) Net
Income (Loss) per share
The
Company reports net income (loss) per share in accordance with SFAS No. 128,
“Earnings per Share.” Basic net income (loss) per share is computed by dividing
the net income (loss) by the weighted average number of common shares
outstanding. Weighted average number of shares outstanding reflects the
equivalent number of shares received as a result of the exchange transaction as
if these shares had been outstanding as of the beginning of the earliest period
presented. Diluted income (loss) per share is computed similar to basic income
(loss) per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Options and warrants to purchase 2,980,000 shares of common stock have been
excluded from the calculation of diluted net loss per share for the three and
nine months ended March 31, 2008 and options and warrants to purchase 3,330,009
shares of common stock have been excluded from the calculation of diluted net
loss per share for the three and nine months ended March 31, 2009 as the effect
would have been anti-dilutive.
(i)
Marketing and Advertising expenses
Marketing
and Advertising expenses are expensed as incurred and consist of various forms
of media purchased from Internet-based marketers and search engines as well as
expenses related to marketing campaigns for new products. Marketing and
advertising expense amounted to $33,267 and $10,980 for the three months ended
March 31, 2009 and 2008, respectively and $71,855 and $14,722, respectively, for
the nine months ended March 31, 2009 and 2008.
(j)
Recently issued accounting pronouncements
In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued. SFAS 141R
replaces SFAS 141 “Business Combinations”. SFAS 141R requires the acquirer
of a business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling
interest in the acquiree at fair value. SFAS 141R also requires transactions
costs related to the business combination to be expensed as incurred. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.
The effective date was January 1, 2009, while the adoption date for
the Company is July 1, 2009. Although SFAS 141R may impact our
reporting in future financial periods, we have determined that the standard did
not have any impact on our historical consolidated financial statements at the
time of adoption.
In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142.
This pronouncement requires enhanced disclosures concerning a company’s
treatment of costs incurred to renew or extend the term of a recognized
intangible asset. FST 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The effective date was
January 1, 2009, while the adoption date for the Company is
July 1, 2009. Although
FSP 142-3 may impact our reporting in future financial periods, we have
determined that the standard did not have any impact on our historical
consolidated financial statements at the time of adoption. .
In March
2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes
accounting and reporting standards that require that the ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; the amount of consolidated
net income attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated statement of
income; and changes in a parent’s ownership interest while the parent retains
its controlling financial interest in its subsidiary be accounted for
consistently. SFAS No. 160 also requires that any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value when a
subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
requirements to identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements are applied retrospectively for all periods presented. The
Company will implement this statement in the first quarter of its 2010 fiscal
year.
In March
2008, the FASB issued SFAS No. 161 (FAS 161), “Disclosures About Derivative
Instruments and Hedging Activities * an amendment of FAS 133.” FAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. FAS 161
is effective for fiscal years beginning after November 15, 2008. The Company
does not expect the implementation of FAS 161 to have a material impact on its
consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.” The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated
financial statements.
Note
3 — Property and Equipment
Property
and equipment consists of the following as of March 31, 2009 and June 30,
2008:
|
|
March 31, 2008
|
|
|
June 30, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Computer
equipment
|
|
$ |
67,440 |
|
|
$ |
32,344 |
|
Software
|
|
|
105,398 |
|
|
|
95,045 |
|
Printing
equipment
|
|
|
286,452 |
|
|
|
286,452 |
|
Furniture
and fixtures
|
|
|
34,677 |
|
|
|
34,677 |
|
Autos
and vans
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
497,967 |
|
|
|
452,518 |
|
Less
accumulated depreciation
|
|
|
(163,501 |
) |
|
|
(89,711 |
) |
|
|
$ |
334,466 |
|
|
$ |
362,807 |
|
Printing
equipment includes $91,792 of equipment under capital lease and related
accumulated amortization of $30,597 and $16,829 as of March 31, 2008 and June
30, 2008, respectively.
Depreciation
expense for the three months ended March 31, 2009 and 2008 was $25,320 and
$29,904, respectively and $74,869 and $69,500, respectively, for the nine months
ended March 31, 2009 and 2008.
Note
4 — Intangible Assets
Intangible
assets consist of the following at March 31, 2008 and June 30,
2008:
|
|
March 31,
2008
|
|
|
June 30,
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Customer
list
|
|
$ |
50,000 |
|
|
$ |
275,000 |
|
Other
intellectual property
|
|
|
764,096 |
|
|
|
582,975 |
|
Accumulated
amortization
|
|
|
(174,828 |
) |
|
|
(246,238 |
) |
|
|
$ |
639,268 |
|
|
$ |
611,737 |
|
Customer
lists are amortized using an accelerated method that management presently
estimates matches the utilization of those lists over an estimated useful life
of 2 years.
The
Company has purchased licenses to use certain intellectual property, including
computer software. These licenses are depreciated using the straight-line method
over their estimated useful lives of 7 years.
At June
30, 2008, the Company had recorded Goodwill of $189,185 that arose from its
acquisition of Pools Press in February 2007. On December 31, 2008,
the Company acquired an additional 5% interest in Pools Press for
$34,200 and recorded the amount as an addition to Goodwill, the
Company’s recorded Goodwill at March 31, 2009 was $223,385.
Note
5 — Leases
The
Company leases space in Northbrook, Illinois in accordance with the terms of a
non-cancelable operating lease agreement. The lease requires monthly payments
between $7,446 and $8,000 through November 2011 and is being accounted for by
the Company on a straight-line basis over the term of the lease. In addition to
monthly rentals, the lease requires the payment of real estate taxes and
maintenance. Rent, including real estate taxes, for the three months ended March
31, 2009 and 2008 was $44,381 and $45,662, respectively and $119,884 and
$105,026, respectively, for the nine months ended March 31, 2009 and
2008.
The
Company also has a non-cancelable lease for machinery and equipment that is
accounted for as a capital lease that requires monthly payment of $1,945
including interest at a rate of 10.25% per annum. Annual future minimum rentals
under operating and capital leases as of March 31, 2009 are as
follows:
Fiscal Year
|
|
Operating Leases
|
|
|
Capital
Leases
|
|
2009
|
|
$ |
26,642 |
|
|
$ |
5,835 |
|
2010
|
|
|
93,250 |
|
|
|
23,340 |
|
2011
|
|
|
88,000 |
|
|
|
23,340 |
|
Thereafter
|
|
|
|
|
|
|
25,285 |
|
Total
minimum lease payments
|
|
$ |
203,892 |
|
|
$ |
77,800 |
|
Amounts
representing interest
|
|
|
|
|
|
|
12,134 |
|
Total
|
|
|
|
|
|
|
65,666 |
|
Less
current portion
|
|
|
|
|
|
|
(17,411 |
) |
Long
term
|
|
|
|
|
|
$ |
48,255 |
|
Note 6 — Line of Credit
The
Company entered into a credit agreement with UBS Financial Services Inc. on
March 1, 2007. The credit facility was secured by the Company’s marketable
securities, described in Note 2(c), above, which was held by UBS. The Company
wasa able to borrow up to 80% of the value of the securities held in that
account. There is no stated maturity on the credit facility. The interest rate
is 30 Day LIBOR plus 150 basis points. The balance of the credit
facility on June 30, 2008 was $1,291,855. The credit line was repaid upon the
sale of the marketable securities to UBS during January 2009.
Note
7 — Stockholders’ Equity
Common
Stock
The
Company has authorized 120,000,000 shares of $0.001 par value stock. 100,000,000
have been authorized as common stock and 20,000,000 have been authorized as
preferred stock.
On July
17, 2008, the Company sold 400,017 shares of common stock and warrants to
purchase 200,009 shares of common stock at an exercise price of $2.00 per share
at anytime prior to July 17, 2011, for an aggregate purchase price of
$600,025. The common stock and warrants were sold to a total of 4
investors
Stock
Options
On March
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 March 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 March 21, 2017. The options
were valued at $112,000 using a Black-Scholes valuation model and will be
amortized over the vesting period. Stock based compensation expense of $0 and
$6,472 were recognized during the three months ended March 31, 2009 and 2008,
respectively, and $12,944 and $92,585, respectively, for the nine months ended
March 31, 2009 and 2008, relating to the vesting of such options. As of March
31, 2009, the unamortized value of these option awards was $0. As of
March 31, 2009, these options have no intrinsic value.
At March
31, 2009 options outstanding are as follows:
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Balance
at July 1, 2008
|
|
|
530,000 |
|
|
$ |
1.50 |
|
Granted
|
|
|
— |
|
|
|
— |
|
Exercised
|
|
|
— |
|
|
|
— |
|
Cancelled
|
|
|
— |
|
|
|
— |
|
Balance
at March 31, 2009
|
|
|
530,000 |
|
|
$ |
1.50 |
|
Additional
information regarding options outstanding as of March 31, 2009 is as
follows:
|
|
|
Options Outstanding
|
|
|
Options
Exercisable
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
$ |
1.50 |
|
|
|
530,000 |
|
|
|
6 |
|
|
$ |
1.50 |
|
|
|
530,000 |
|
Warrants
At March
31, 2009 warrants outstanding are as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Balance,
July 1, 2008
|
|
|
2,450,000 |
|
|
$ |
1.25 |
|
Granted
|
|
|
350,009 |
|
|
$ |
2.00 |
|
Exercised
|
|
|
— |
|
|
|
— |
|
Balance
at March 31, 2009
|
|
|
2,800,009 |
|
|
$ |
1.34 |
|
The above
warrants are fully vested and have a five year contractual
life. There was no intrinsic value to these warrants as of March 31,
2009 and June 30, 2008.
Note
8 — Related Party Transactions
The
Company leases furniture and office space on a month to month basis from a
stockholder of the Company. The total rent expense paid to the stockholder for
the three months ended March 31, 2009 and 2008 were $8,223 and $10,748,
respectively and $27,406 and $27,190, respectively, for the nine months ended
March 31, 2009 and 2008..
Note
9 — Income Taxes
The
provision (benefit) for income taxes consists of the following for the nine
months ended March 31, 2009 and 2008:
|
|
Nine
months
ended
March
31, 2009
|
|
|
Nine
months
ended
March 31, 2008
|
|
Current
tax provision - federal
|
|
$ |
17,020 |
|
|
$ |
0 |
|
-
state
|
|
|
7,127 |
|
|
|
0 |
|
Deferred tax
provision - federal
|
|
|
(9,706 |
) |
|
|
0 |
|
-
state
|
|
|
9,897 |
|
|
|
0 |
|
Income
tax provision
|
|
$ |
24,338 |
|
|
$ |
0 |
|
The
reconciliation of the effective income tax rate to the federal statutory rate is
as follows:
|
|
Nine Months
Ended March
31,
(Unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
Federal income tax rate
|
|
|
(34.00 |
)%
|
|
|
(34.00 |
)% |
Benefit for interim period loss
not recorded
|
|
|
34.00 |
%
|
|
|
0.00 |
% |
State tax, net of federal
benefit
|
|
|
4.15 |
%
|
|
|
(6.00 |
)% |
Permanent differences
|
|
|
0.00 |
%
|
|
|
0.00 |
% |
Change
in valuation allowance
|
|
|
(13.63 |
)% |
|
|
40.00 |
% |
Other
|
|
|
(1.57 |
)% |
|
|
0.00 |
% |
Effective income tax rate
|
|
|
(11.05 |
)% |
|
|
0.00 |
% |
At March
31, 2009, the Company had federal and state net operating loss (“NOL”)
carryforwards of approximately $574,000 and $406,000, respectively. Federal NOLs
could, if unused, expire in 2029. State NOLs, if unused, could expire in
2019.
The
Company has provided a full valuation allowance on the deferred tax assets at
March 31, 2009 and June 30, 2008 to reduce such asset to zero, since there is no
assurance that the Company will generate future taxable income to utilize such
asset. Management will review this valuation allowance requirement periodically
and make adjustments as warranted.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”)
— an
interpretation of FASB Statement No. 109, Accounting for Income Taxes . ” The Interpretation
addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, we may recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of March 31, 2009 and June 30, 2008, the Company
did not have a liability for unrecognized tax benefits, and no adjustment was
required at adoption.
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years 2006 and thereafter.
The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of March 31, 2009 and March 31, 2008, the Company has
no accrued interest or penalties related to uncertain tax positions.
Additionally, tax years 2006 through 2008 remain open to examination by the
major taxing jurisdictions to which the Company is subject.
Item 2. Management’s Discussion and
Analysis of Financial
Condition and Results of
Operations
The
following discussion and analysis of our results of operations and financial
condition for the three months ended March 31, 2009 and 2008 should be read in
conjunction with the notes to those financial statements that are included in
Item 1 of Part 1 this Quarterly Report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors. We use words such
as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar
expressions to identify forward-looking statements. All forward-looking
statements included in this Quarterly Report are based on information available
to us on the date hereof and, except as required by law, we assume no obligation
to update any such forward-looking statements.
Overview
Derycz
Scientific, Inc. (the “Company” or “Derycz”) was incorporated in the State of
Nevada on November 2, 2006. In November 2006 the Company entered into a Share
Exchange Agreement with Reprints Desk, Inc. (“Reprints”). At the closing of the
transaction contemplated by the Share Exchange Agreement, the Company acquired
all of the outstanding shares of Reprints from the shareholders of Reprints and
issued 8,000,003 of its common shares to the shareholders. Following completion
of the exchange transaction, Reprints became a wholly-owned subsidiary of the
Company.
On
February 28, 2007, the Company entered into an agreement with Pools Press, Inc.
(“Pools”) of Northbrook, Illinois, a privately held company, pursuant to which
the Company acquired 75% of the issued and outstanding common stock of Pools for
consideration of $616,080. Pools is a commercial printer, specializing in
reprints of copyrighted articles. The results of Pools Press’ operations have
been included in the consolidated financial statements since March 1,
2007. On December 31, 2008, the Company acquired an additional 5%
interest in Pools for $34,200, increasing the Company’s ownership to
80%.
Derycz,
through Reprints and Pools, provides copies of published content, such as
articles from published journals, in either electronic or hard copy form. Our
customers use this content for marketing or research purposes. Generally,
marketing departments order large quantities of printed copies that they
distribute to their customers. Researchers generally order single copies of the
content. Our service alleviates the need for our customers to contact any
publisher or obtain permissions themselves. In addition, we ensure that we have
obtained the necessary permissions from the owners of the content’s copyrights
so that the reproduction complies with copyright laws. We also offer reprints
service to publishers, whereby we are responsible for all aspects of reprint
production, from taking orders to final shipment. This service eliminates the
need for the publishers to establish a dedicated reprints sales force or arrange
for delivery of reprinted materials. Pools Press also offers other commercial
printing products, such as the production of business cards, and
newsletters.
Results
of Operations
Three
Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
2008:
Sales
and Cost of Goods Sold
Our
revenues increased by approximately 31% from the same period in 2008 and we
expect our revenues to continue to increase modestly, despite the overall
economy, as we continue to add new customers. We achieved revenue of $3,818,500
for the three months ended March 31, 2009, compared to revenue of $2,910,183 for
the three months ended March 31, 2008.
The
revenue of our main operating company, Reprints, increased from $2,464,429 for
the three months ended March 31, 2008 to $3,366,231 for the three months ended
March 31, 2009, an increase of 37%. Pools Press contributed the remainder of the
revenue. We expect to continue with revenue growth this
year. However, the economic climate may significantly slow our sales
growth if our customers reduce their marketing budgets.
Our cost
of goods sold likewise increased from $2,342,128 for the three months ended
March 31, 2008 to $2,802,344 for the three months ended March 31, 2009, which
represents an increase of 19%. This percentage increase is somewhat lower than
the increase in our revenues. At Reprints, we only purchase articles when they
have been requested by our clients. We generally charge a margin or a set fee
over the actual cost to us. We attempt to negotiate discounts with our
publishers and have a few such agreements in place. We also have prepaid some
publishers for articles in exchange for discounts. At March 31, 2009, we had
prepaid $23,104 for royalties that were not yet used. The publishers set the
price for each order and do not generally grant significant discounts. We expect
that our cost of goods sold will keep pace with our revenue growth, unless
additional publisher discounts can be achieved.
Operating
Expenses
General
and Administrative
Our
general and administrative expenses increased 40% from $591,002 for the three
months ended March 31, 2008 to $826,770 for the three months ended March 31,
2009. Pools’ share of these expenses was approximately $49,000 for the 2009
period and $59,000 for the 2008 period. These expenses include Reprints’ salary
costs, which were $499,099 in the 2009 period and $277,808 in the 2008 period,
an increase of $221,291 or 80%. Our sales and marketing team has increased
during the past year and we have added additional employees as
needed. We continue to attempt to contain the expansion of our
workforce. However, in order to pursue a large number of sales leads and to
continue to develop our computer system, we expect to add a small number of new
employees in the near future. The 2009 figure also includes
approximately $22,500 in investor relations expenses incurred in preparation for
the public trading of our common stock.
Marketing
and Advertising
Our
marketing and advertising expenses increased from $10,980 for the three months
ended March 31, 2008 to $33,267 for the three months ended March 31, 2009, an
increase of $22,287 or 203%. These costs have increased as we have undertaken
targeted adverting and other marketing campaigns that will likely cost
approximately $120,000 over the next year, in addition the cost of our
participation in publishing industry trade shows and sponsorship of publishing
industry programs.
Depreciation
and Amortization
Our
depreciation and amortization expense decreased approximately 16% from $69,557
for three months ended March 31, 2008 to $58,517 for the three months ended
March 31, 2009. Pools’ share of these expenses in the 2009 period included
$9,167 related to the amortization of Pools’ customer list, which is now fully
amortized. Reprints’ depreciation and amortization expense of $49,149 for the
2009 period was primarily attributable to amortization on software and
intellectual property licenses as well as amortization of two customer lists,
one of which is now fully amortized.
Other
Expenses
Other
expenses were $0 for the three months ended March 31, 2009 and
2008.
Gain
(Loss) on marketable securities
We
recognized realized gains on our short-term investments of $60,833 during the
three months ended March 31, 2009, compared to unrealized losses of $50,895
during the 2008 period. 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. All of these assets were sold in January 2009 when we
recognized the gain.
Interest
Expense
Interest
expense was $6,169 for the three months ended March 31, 2008 and $1,753 for the
three months ended March 31, 2009. The interest expense is primarily
attributable to the interest paid on a credit line secured by the marketable
securities owned by the Company.
Interest
Income
Interest
income was $22,827 for the three months ended March 31, 2008 and $2,709 for the
three months ended March 31, 2009. This interest income is primarily
attributable to the interest earned on investments in marketable
securities.
Income
taxes
The
Company recorded a provision for income taxes of $35,751 for the three months
ended March 31, 2009. We recorded no income tax provision in the 2008
period. This provision is attributable to the net taxable income of
Pools Press. We were unable to offset the net income of Pools Press
in 2008 since we did not own 80% of Pools. As of December 31, 2008 we
will be able to file a consolidated tax return after the acquisition of an
additional 5% of Pools Press.
Net
Loss
We
recorded a net income of $120,817 for the three months ended March 31, 2009
compared to a net loss of $137,737 in the 2008 period. We hope to continue to be
modestly profitable in the near future, but as we are still a new business, we
do not expect profits to be significant for the next year.
Nine-Month
Period Ended March 31, 2009 Compared to Nine Month Period Ended March 31,
2008:
Sales
and Cost of Goods Sold
Our
revenues increased over the past year and we expect to continue to increase
revenue at a modest pace as we add new customers. We achieved revenue of
$10,448,179 for the nine months ended March 31, 2009, compared to revenue of
$8,066,759 for the nine months ended March 31, 2008, an increase of
30%.
The
revenue of our main operating company, Reprints increased from $6,593,076 for
the nine months ended March 31, 2008 to $9,284,132 for the nine months ended
March 31, 2009, an increase of 41%. Pools Press contributed the remainder of the
revenue. Our cost of goods sold likewise increased from $6,557,955 for the nine
months ended March 31, 2008 to $8,030,463 for the nine months ended March 31,
2009, which represents a 22% increase. This increase is lower as a percentage
that the increase in our revenues as a result of the increase in our document
delivery service, which has a higher margin than our reprint
service.
Operating
Expenses
General
and Administrative
Our
general and administrative expenses increased 49% from $1,612,330 for the nine
months ended March 31, 2008 to $2,408,661 for the nine months ended March 31,
2009. Pools’ share of these expenses was approximately $174,000 for the 2009
period and $173,000 for the 2008 period. These expenses include Reprints’ salary
costs, which were $1,352,533 in the 2009 period and $788,698 in the 2008 period,
an increase of $563,835 or 71%. These costs have increased at a faster rate than
our cost of good sold because we have increased both the sales and marketing
staff and staff to manage the increased volume of our document delivery service,
which has a higher margin than our reprint service, but requires more staff to
manage the process. The 2009 figure also includes approximately $138,291 in
investor relations expenses incurred in preparation for the public trading of
our common stock. This figure includes $43,963, which is the value
attributable to the issuance of a warrant to purchase 150,000 shares of the
Company’s common stock.
Marketing
and Advertising
Our
marketing and advertising expenses increased $43,367 or 152% from $28,488 for
the nine months ended March 31, 2008 to $71,855 for the nine months ended March
31, 2009. We expect these costs to increase as our sales efforts increase during
the next year as we launch new products.
Depreciation
and Amortization
Our
depreciation expense increased 9% from $174,334 for the nine months ended March
31, 2008 to $190,416 for the nine months ended March 31, 2009. Pools’ share of
these expenses was $37,270 in the 2009 period and included $36,667 related to
the amortization of Pools’ customer list, which is now fully amortized.
Reprints’ depreciation expense of $153,146 for the 2009 period was primarily
attributable to amortization of customer lists as well as amortization on
intellectual property licenses.
Other
Expenses
Other
expenses were $1,222 for the nine months ended March 31, 2009 and were $0 for
the nine months ended March 31, 2008.
Interest
Expense
Interest
expense was $32,853 for the nine months ended March 31, 2009 and $17,854 for the
nine months ended March 31, 2008. The 2008 interest expense is primarily
attributable to the interest paid on the note payable to the former owner of
Pools Press, which we issued at the time of the purchase of our majority
interest on February 28, 2007. The 2009 interest expense is primarily
attributable to interest paid on a credit line secured by the marketable
securities owned by the Company.
Interest
Income
Interest
income was $34,469 for the nine months ended March 31, 2009 and $90,569 for the
nine months ended March 31, 2008. This interest income is primarily attributable
to the interest earned on investments in marketable securities.
Income
taxes
The
Company recorded a provision for income taxes of $24,338 for the nine months
ended March 31, 2009. We recorded no income tax provision in the 2008
period. This provision is attributable to the net taxable income of
Pools Press. We were unable to offset the net income of Pools Press
in 2008 since we did not own 80% of Pools. As of December 31, 2008 we
will be able to file a consolidated tax return after the acquisition of an
additional 5% of Pools Press.
Net
Loss
We
recorded a net loss of $290,639 for the nine months ended March 31, 2008
compared to a net loss of $244,026 in the 2009 period. Over half of the 2008 net
loss was attributable to the grants of stock options to several employees and a
consultant which represented a non-cash expense of $86,113. The loss in 2009 is
a result of slower than expected sales growth in our 2009 fiscal year as well as
increased salary costs that we incurred to manage the increased sales volume
that we have experienced. As the third quarter of our 2009 fiscal
year was profitable, we hope to continue to be modestly profitable, but as we
are still a new business, we do not expect profits to be significant for the
next year.
Liquidity
and Capital Resources
As of
March 31, 2009, we had cash and cash equivalents of $2,336,606, compared to
$954,834 as of June 30, 2008. This increase is partially attributable to the
sale of 400,017 shares of the Company’s common stock and warrants to purchase
200,009 shares of the Company’s common stock on July 17, 2008 for an aggregate
purchase price of $600,025.
Net cash
provided by operating activities was $681,017 for the nine months ended March
31, 2009 compared to cash used in operating activities of $287,022 for the nine
months ended March 31, 2008. During the 2008 period, our accounts receivable
increased by $1,011,888 and our accounts payable increased by $408,640, compared
to decreases increases of $459,441 and $90,065, respectively, in the 2009
period. Additionally, during the nine months ended March 31, 2009, we expensed
$227,381 to depreciation and amortization and used $302,973 of prepaid
royalties. 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.
Net cash
provided by investing activities was $1,404,527 for the nine months ended March
31, 2009 compared to net cash provided by investing activities of $393,917 for
the nine months ended March 31, 2008. This difference was primarily due to the
sale of the Company’s marketable securities in the 2009 period.
Net cash
used in financing activities was $703,772 for the nine months ended March 31,
2009 compared to net cash provided by financing activities of $1,100,411 for the
corresponding period in 2008. In the 2008 period the Company had drawn a large
amount on its credit line, which was completely repaid in January
2009.
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
material losses from bad debts, we expect our accounts receivable to increase as
a result of significant increases in our sales. We also expect to incur
significant investor relations expenses in conjunction with the listing of our
common stock. In addition, we may need to obtain additional cash resources
during the next year in order to acquire complementary businesses. The need for
cash 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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
required.
Item
4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain a set of disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), that are designed to ensure that information required to be
disclosed by us in the reports filed by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities Exchange Commission’s rules and forms. We carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-15(b)
and 15d-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.
Notwithstanding
the foregoing, there can be no assurance that the Company’s disclosure controls
and procedures will detect or uncover all failures of persons within the Company
to disclose material information otherwise required to be set forth in the
Company’s periodic reports. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can
only provide reasonable, not absolute, assurance of achieving their control
objectives.
Changes
in Internal Control Over Financial Reporting
An
evaluation was performed under the supervision of the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, as
required under Exchange Act Rules 13a-15(d) and 15d-15(d) of whether any change
in the Company’s internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the fiscal quarter
ended March 31, 2009. Based on that evaluation, the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, concluded
that no change in the Company’s internal control over financial reporting
occurred during the fiscal quarter ended March 31, 2009 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART II — OTHER
INFORMATION
Item 1. Legal
Proceedings
Not
applicable.
Item
1A. Risk Factors
Not
required.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
Not
applicable.
Item 3. Defaults Upon Senior
Securities
Not
applicable.
Item 4. Submission of Matters to a
Vote of Security Holders
Not
applicable.
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
2.1
|
|
Share
Exchange Agreement between Derycz and Reprints Desk dated November 13,
2006 (1)
|
3.1
|
|
Articles
of Incorporation (1)
|
3.2
|
|
Bylaws
(1)
|
4.1
|
|
Form
of Warrant (1)
|
4.2
|
|
Form
of Warrant (3)
|
10.1
|
|
2007
Equity Compensation Plan (1)
|
10.2
|
|
Lease
agreement between Pools Press and JJ Properties (1)
|
10.3
|
|
Peter
Derycz employment agreement (1)
|
10.4
|
|
Richard
McKilligan employment agreement (1)
|
10.5
|
|
Scott
Ahlberg employment agreement (1)
|
10.6
|
|
Janice
Peterson employment agreement (1)
|
10.7
|
|
Matt
Sampson employment agreement (1)
|
10.8
|
|
CapCas
License Agreement (1)
|
10.9
|
|
Dainippon
Equipment Purchase Agreement (1)
|
10.10
|
|
Form
of Subscription Agreement (2)
|
10.11
|
|
Form
of Subscription Agreement (3)
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer (4)
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer (4)
|
32.1
|
|
Section
1350 Certification of Chief Executive Officer (4)
|
32.2
|
|
Section
1350 Certification of Chief Financial Officer (4)
|
|
(1)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Registration Statement on Form SB-2 filed on December 28,
2007.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Registration Statement on Form S-1/A (Amendment No. 1) filed on February
27, 2008.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Quarterly Report on Form 10-Q filed on November 19,
2008.
|
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 Derycz
|
|
|
|
|
|
|
|
Peter
Derycz
|
|
Date:
May 14, 2009
|
|
Chief
Executive Officer
|
|
|
|
By:
|
/s/
Richard McKilligan
|
|
|
|
|
|
|
|
Richard
McKilligan
|
|
Date:
May 14, 2009
|
|
Chief
Financial Officer
|
|
EXHIBIT
INDEX
2.1
|
|
Share
Exchange Agreement between Derycz and Reprints Desk dated November 13,
2006 (1)
|
3.1
|
|
Articles
of Incorporation (1)
|
3.2
|
|
Bylaws
(1)
|
4.1
|
|
Form
of Warrant (1)
|
4.2
|
|
Form
of Warrant (3)
|
10.1
|
|
2007
Equity Compensation Plan (1)
|
10.2
|
|
Lease
agreement between Pools Press and JJ Properties (1)
|
10.3
|
|
Peter
Derycz employment agreement (1)
|
10.4
|
|
Richard
McKilligan employment agreement (1)
|
10.5
|
|
Scott
Ahlberg employment agreement (1)
|
10.6
|
|
Janice
Peterson employment agreement (1)
|
10.7
|
|
Matt
Sampson employment agreement (1)
|
10.8
|
|
CapCas
License Agreement (1)
|
10.9
|
|
Dainippon
Equipment Purchase Agreement (1)
|
10.10
|
|
Form
of Subscription Agreement (2)
|
10.11
|
|
Form
of Subscription Agreement (3)
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer (4)
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer (4)
|
32.1
|
|
Section
1350 Certification of Chief Executive Officer (4)
|
32.2
|
|
Section
1350 Certification of Chief Financial Officer (4)
|
|
(1)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Registration Statement on Form SB-2 filed on December 28,
2007.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Registration Statement on Form S-1/A (Amendment No. 1) filed on February
27, 2008.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
Quarterly Report on Form 10-Q filed on November 19,
2008.
|