DRS Inc. - FORM 10-Q - February 14, 2011

Attached files

file	filename
EX-32.2 - DRS Inc.	ex32-2.htm
EX-31.1 - DRS Inc.	ex31-1.htm
EX-31.2 - DRS Inc.	ex31-2.htm
EX-32.1 - DRS Inc.	ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending: December 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 Number:

DRS Inc.

(Exact Name of Registrant as Specified in its Charter)

Nevada	20-5914452
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

8245 SE 36th St. , Mercer Island, Washington	98040
(Address of principal executive offices)	(Zip Code)

(206) 920-9104
(Registrant’s Telephone Number, Including Area Code)

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. [X] Yes [ ] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [X] 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 [ ]	Smaller reporting company [X]

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

We had 18,882,268 shares outstanding of common stock as of February 11, 2011.

Table of Contents
PART I – FINANCIAL INFORMATION
Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis and Plan of Operation	16
Item 3	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4	Controls and Procedures	18
PART II – OTHER INFORMATION
Item 1	Legal Procedures	20
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3	Defaults upon Senior Securities	21
Item 4	Submission of Matters to a Vote of Security Holders	21
Item 5	Other Information	22
Item 6	Exhibits	22

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets

As of December 31 and June 30, 2010

ASSETS	30-Dec-10			30-Jun-10
Current assets:
Cash & short term deposits	$	97		$	24,500
Accounts receivable (net of allowance for bad debt)		8,041			139,461
Accounts receivable- related parties		0			6,882
Stock subscription receivable		0			4,950
Total current assets	$	8,138		$	175,793

Other assets:
Fixed assets- net		203,321			362,067
Security deposit- related party		227,681			227,681
Security deposits		27,088			27,088
Total assets	$	466,228		$	792,629

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable & accrued expenses	$	631,916		$	438,402
Deferred income		40,000			40,000
Notes payable		300,000			300,000
Loan payable- shareholder		415,547			328,545
Capital lease payable- short term		65,012			119,718
Total current liabilities	$	1,450,475		$	1,226,665

Convertible debenture payable		25,057			0
Capital lease payable- long term		185,903			214,999

Shareholders' deficit
17,785,718 at 9/30/10	$	17,785		$	17,785
Additional paid in capital		12,356,973			11,747,036
Retained deficit		(13,569,965	)		(12,413,856	)
Total shareholders' deficit		(1,195,207	)		(649,035	)

Total Liabilities & Shareholders' Deficit	$	466,228		$	792,629

See the notes to the financial statements.

-3-

Statements of Operations

For the Quarters Ended December 31, 2010 and December 31, 2009

	6 Months			6 Months			3 Months			3 Months
Revenues:	31-Dec-10			31-Dec-09			31-Dec-10			31-Dec-09
Net revenues	$	316,549		$	936,586		$	0		$	439,617
Net revenues - related parties		7,051			104,339			0			34,225
Cost of revenues		(591,477	)		(878,873	)		(64,795	)		(406,318	)
Cost of revenues- related party		(9,000	)		(69,750	)		0			(33,4700	)
Gross margin (loss)	$	(276,877	)	$	92,302		$	(64,795	)	$	34,054

General and administrative expenses:
General administration	$	800,894		$	314,476		$	153,610		$	69,846
Total general & administrative expenses	$	800,894			314,476			153,610			69,846

Net loss from operations	$	(1,077,771	)	$	(222,174	)	$	(218,405	)	$	(35,792	)

Other revenues (expenses):
Interest expense		(78,338	)		(46,191	)		(54,424	)		(23,815	)

Net loss before provision for income taxes	$	(1,156,109	)	$	(268,365	)	$	(272,829	)	$	(59,607	)

Provision for income taxes		0			0			0			0

Net loss	$	(1,156,109		$	(268,365	)		(272,829	)	$	(59,607	)

Loss per common share:
Basic & fully diluted	$	(0.07	)	$	(0.02	)	$	(0.02	)	$	(0.00	)

Weighted average of common shares:
Basic & fully diluted		17,785,718			15,917,292			17,785,718			15,921,718

See the notes to the financial statements.

-4-

Statements of Cash Flows

For the Quarters Ended December 31, 2010 and December 31, 2009

Operating Activities:	31-Dec-10			31-Dec-09

Net loss	$	(1,156,109	)	$	(268,365	)
Adjustments to reconcile net loss items
not requiring the use of cash:
Consulting expense		571,042			0
Depreciation expense		55,151			112,434
Bad debt expense		(22,180	)		0
Interest expense		0			3,448
Loss on asset disposals		40,702			0

Changes in other operating assets and liabilities :
Accounts receivable		153,600			127658
Accounts receivable- related parties		6,882			0
Stock subscription receivable		4,950			0
Accounts payable		193,514			11,619
Net cash used by operations	$	(152,448	)	$	(13,206	)

Investing Activities:
Purchase of equipment	$	0		$	(31,236	)
Net cash used by investing activities		0			(31,236	)

Financing Activities:
Proceeds from convertible debenture issuance		63,952			0
Issuance of common stock	$	0		$	18,000
Loans from shareholder		87,002			97,441
Payment of capital lease		(22,909	)		(75,040	)
Net cash provided by financing activities		128,045			40,401

Net increase (decrease) in cash during the period	$	(24,403	)	$	(4,041	)
Cash balance at July 1st		24,500			18,481
Cash balance at September 30th	$	97		$	14,440

Supplemental disclosures of cash flow information:
Interest paid during the period	$	11,170		$	42,743
Income taxes paid during the period	$	0		$	0

See the notes to the financial statements.

-5-

Statement of Changes in Shareholder’s Deficit

For the Quarters Ended December 31, 2010 and December 31, 2009

	Common Shares		Common Par Value		Paid in Capital		Accumulated Deficit			Total			Issue Price Per Share
Balance at June 30, 2010		17,785,718	$	17,785	$	11,747,036	$	(12,413,856	)	$	(649,035	)
Issuance of options						571,042					571,042
Issuance of convertible debenture						38,895					38,895
Net loss for the fiscal year								(1,156,109	)		(1,156,109	)
Balance at December 31, 2010		17,785,718	$	17,785	$	12,356,973	$	(13,569,965	)	$	(1,195,207	)

Balance at June 30, 2009		15,903,718	$	15,903	$	11,458,893	$	(11,627,483	)	$	(152,687	)
Issuance of common stock		18,000		18		17,982					18,000		$	1.00
Net loss for the period								(268,365	)		(268,365	)
Balance at December 31, 2009		15,921,718	$	15,921	$	11,476,875	$	(11,895,848	)	$	(403,052	)

See the note to the Financial Statements

-6-

DRS Inc.

Notes to the Financial Statements

For the Quarters Ended December 31, 2010 and December 31, 2009

1. Organization of the Company and Significant Accounting Principles

DRS Inc. (the “Company”) is a corporation formed in November 2006 in the state of Nevada. The Company removes drywall and other rubbish from construction sites for disposal and recycling. The Company operates mainly in the state of Washington.

Use of Estimates- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses at the date of the financial statements and for the year they include. Actual results may differ from these estimates.

Cash- For the purpose of calculating changes in cash flows, cash includes all cash balances and highly liquid short-term investments with maturity dates of three months or less.

Fixed Assets- Fixed assets are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful life of the asset. The following is a summary of the estimated useful lives used in computing depreciation expense:

Office equipment	3 years
Vehicles	5 years
Equipment	3 Years
Furniture & fixtures	5 Years

Expenditures for major repairs and renewals that extend the useful life of the asset are capitalized. Minor repair expenditures are charged to expense as incurred.

Long Lived Assets- The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.

Income taxes- The Company accounts for income taxes in accordance with generally accepted accounting principles which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between financial statement and income tax bases of assets and liabilities that will result in taxable income or deductible expenses in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities.

-7-

The Company follows the accounting requirements associated with uncertainty in income taxes using the provisions of Financial Accounting Standards Board (FASB) ASC 740, Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the positions will be sustained upon examination by the tax authorities. It also provides guidance for de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2010, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. All tax returns from fiscal years 2006 to 2009 are subject to IRS audit.

Revenue Recognition- The Company realizes revenues from drywall removal, scrapping, and installation jobs when the existence of an unconditional binding arrangement with a client is present, the work has been performed, the Company fees are determined and fixed, and the assurance of the revenue collection is reasonably secured. Costs incurred to remove or install the drywall and dispose waste are charged to cost of revenues. Such costs include the cost of labor and supplies needed to remove waste from construction sites, the depreciation cost on the vehicles need to remove the waste, and fuel costs.

Bad Debt Expense- The Company provides, through charges to income, a charge for bad debt expense, which is based upon management's evaluation of numerous factors. These factors include economic conditions prevailing, a predictive analysis of the outcome of the current portfolio by client, and prior credit loss experience of each client. The Company uses the information from this analysis to develop an estimate of bad debt reserve based upon the amount of accounts receivable by client at the balance sheet date. The Company’s reserve for bad debt is $49,893 at December 31, 2010 and $72,073 at June 30, 2010.

2. Net Loss per Share

Basic net loss per share has been computed based on the weighted average of common shares outstanding during the years. Diluted net loss per share gives the effect of outstanding common stock equivalents of the options outstanding at period end. The effects on net loss per share of the common stock equivalents, however, are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.

Net loss per common share has been computed as follows:

	31-Dec-10			31-Dec-09
Net loss	$	(1,156,109	)	$	(268,365	)
Total common shares outstanding		17,785,718			15,921,718
Weighted average of shares outstanding		17,785,718			15,917,292
Loss per common share:
Basic & fully diluted	$	(0.07	)	$	(0.00	)

-8-

3. Concentration of Credit Risks

The Company’s president and former secretary/treasurer have provided personal guarantees on some of the leased vehicles. A withdrawal of this support may have a material adverse effect on the Company’s ability to lease equipment. In addition, the president and former secretary/treasurer combined own approximately 61% of the Company and therefore have the majority votes to elect all of the board of directors and control all of the Company’s operations.

4. Provision for Income Taxes

Provision for income taxes is comprised of the following:	31-Dec-10			31-Dec-09
Net loss before provision for income taxes	$	(1,156,109	)	$	(268,365	)
Current tax expense:
Federal	$	0		$	0
State		0			0
Total	$	0		$	0

Less deferred tax benefit:
Timing differences		(749,112	)		(402,892	)
Allowance for recoverability		749,112			402,892
Provision for income taxes	$	0		$	0

A reconciliation of provision for income taxes at the statutory rate to provision
for income taxes at the Company's effective tax rate is as follows:
Statutory U.S. federal rate		34	%		34	%
Statutory state and local income tax		10	%		10	%
Less allowance for tax recoverability		-44	%		-44	%
Effective rate		0	%		0	%

Deferred income taxes are comprised of the following:
Timing differences	$	749,112		$	402,892
Allowance for recoverability		(749,112	)		(402,892	)
Deferred tax benefit	$	0		$	0

Note: The deferred tax benefits arising from the timing differences expires in fiscal year 2030 and 2029
may not be recoverable upon the purchase of the Company under current IRS statutes.

-9-

5. Issuance of Common Stock Options

During the six months ended December 31, 2010, the Company issued 1,500,000 options to purchase 1,500,000 shares of common stock at $0.07 per share to a financing company as part of a factoring agreement. The factoring agreement allows the Company to sell certain receivables to the factoring company at an interest rate of 2%. This agreement has expired and all amounts repaid in full. The options expire in July 2011, unless exercised.

The Company applies the Black Sholes option pricing model to value its issuance of options. The Company estimated certain parameters of the model at issuance as follows; volatility is 21%, dividend yield is 0%, and a risk free interest rate of 0.5%. Using the model, the Company determined the value of the issuance to be $571,042 and expensed the amount in the statement of operations for the six months ended December 31, 2010.

A list of options outstanding is as follows:

						Average
				Average		Years to
	Amount			Exercise Price		Maturity

Outstanding at June 30, 2010		3,251,664		$	0.41		1.63
Issued		1,500,000
Expired		(8,000	)
Exercised		0
Outstanding at December 31, 2010		4,743,664		$	0.29		1.44

6. Fixed Assets- Net

The following table is a summary of fixed assets at December 31, 2010 and June 30, 2010:

	31-Dec-10			30-Jun-10
Vehicles	$	240,000		$	457,000
Equipment		190,062			227,459
Office equipment		6,532			6,532
Furniture & fixtures		0			15,035
Accumulated depreciation		(233,273	)		(343,959	)
Fixed assets- net	$	203,321		$	362,067

-10-

Assets leased under capital lease agreements, more fully discussed in Note 7, are $390,081 at December 31, 2010 and $597,081 at June 30, 2010. Depreciation expense on these leased assets for the six months ended December 31, 2010 and December 31, 2009 is $50,454 and $88,725, respectively.

During the six months ended December 31, 2010, the Company disposed of $253,625 of assets and recorded a loss on the disposal of $40,701. In addition, the Company abandoned some of its furniture and fixtures in unused warehouse space and recorded an impairment expense of $10,473.

7. Commitments and Contingencies

The Company has entered into various capital lease agreements for the vehicle equipment. Future minimum lease payments required under these leases is as follows:

2011	$	80,781
2012		74,401
2013		74,401
2014		51,595
2015		8,826
Total minimum lease payments	$	290,006

Less amounts representing interest		(41,091	)

Present value of net minimum lease payments	$	248,915

8. Litigation

The following is a summary of litigation at was commenced in each quarter since the period ended June 30, 2009. There are currently three lawsuits outstanding.

Lawsuit filed during the quarter ended June 30, 2009:

McEvoy Oil Company sued for non-payment of invoices totalling $17,709.51. On December 16, 2010, a judgment was granted to the plaintiff, awarding interest and costs totalling $5,445.06. In addition, plaintiff is entitled to 18% interest on the judgment amount until it is paid in full. As of December 31, 2010, the total amount accrued was $23,325.85, including additional interest calculated from the date of judgment. The additional accrual was booked in the quarter ended December 31, 2010 and no estimate was made previously.

-11-

Lawsuit filed during the quarter ended September 30, 2009:

Pacific Fibre Products Inc. filed a lawsuit for non-payment of invoices totalling $8,853.60. On September 24, 2010, the plaintiff was granted a judgment, awarding interest and costs totalling $1,913.54. In addition, plaintiff is entitled to receive 12% interest on the judgment amount until it is paid in full. As of December 31, 2010, the total amount accrued was $11,113.22, including additional interest calculated from the date of judgment. The additional accrual was booked in the quarter ended December 31, 2010 and no estimate was made previously.

Poly-America L.P. filed a lawsuit for non-payment of invoices totalling $7,540.60. On October 22, 2009, plaintiff was granted a judgment, awarding it interest and costs totalling $1,708.00. In addition, plaintiff is entitled to receive 5% interest on the judgment amount until it is paid in full. As of December 31, 2010, the total amount accrued was $9,799.72, including additional interest calculated from the date of judgment. The additional accrual was booked in the quarter ended December 31, 2010 and no estimate was made previously.

Lawsuits filed during the quarter ended December 31, 2009:

Scan Coin North, Inc. filed a lawsuit for non-payment of invoices totalling $5,762.55. On December 7, 2010, plaintiff was granted a judgment, awarding it interest and costs totalling $3,323.28. In addition, plaintiff is entitled to receive 5% interest on the judgment amount until it is paid in full. As of December 31, 2010, the total amount accrued was $9,193.37, including additional interest calculated from the date of judgment. The additional accrual was booked in the quarter ended December 31, 2010 and no estimate was made previously.

Industrial Hydraulic Services filed a lawsuit for non-payment of invoices totalling $3,047.91, which has not been concluded. An additional accrual of $1,000 was made as of December 31, 2010, as an estimate of potential court costs and interest.

National Service bureau filed a lawsuit for non-payment of invoices totaling $4,488.21, which has not been concluded. An additional accrual of $1,000 was made as of December 31, 2010, as an estimate of potential court costs and interest.

Lawsuits filed during the quarter ended December 31, 2010:

Nelson Distributing, Inc. filed a lawsuit for non-payment of invoices totaling $37,320.07. On December 15, 2010, plaintiff was granted a judgment, awarding it interest and costs totalling $6,827.13. In addition, plaintiff is entitled to receive 18% interest on the judgment amount until it is paid in full. As of December 31, 2010, the total amount accrued was $44,495.54, including additional interest calculated from the date of judgment. The additional accrual was booked in the quarter ended December 31, 2010 and no estimate was made previously.

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A total of $23,417.90 was accrued in the quarter ended December 31, 2010 to account for costs and interest as of that date. This estimate could have been spread over the several quarters that elapsed since the original lawsuit filed in the quarter ended June 30, 2009; however, management chose not to do that due to the lack of materiality. Management intends to disclose each quarter going forward any new lawsuits that are filed, as well as to provide periodic updates on existing lawsuits.

On January 22, 2011, Teletrac Inc. filed a suit against the company claiming and unpaid invoice balance of $30,960.30 plus 12% interest since March 28, 2010, attorney’s fees and court costs. The company has not yet responded to this complaint.

9. Related Party Transactions

The Company has entered into equipment rental agreements with the former secretary/treasurer of the Company and a majority shareholder. The rental agreements are on a month to month basis and the Company has deposited $227,681 as security with this related party to secure the rental agreements. The deposits are unsecured and non interest bearing.

The Company has received advances from the president of the Company and other shareholders of $415,547 through December 31, 2010. The advances are secured by the receivables of the Company, are due on demand, and have no stated interest rate. The Company imputed an interest rate of 10.67% on the advances and has recorded the interest expense in the statement of operations.

10. Debt

In September 2010, the Company issued a convertible debenture to a creditor and received proceeds of $55,564. The debenture matures in September 2013, has an interest rate of 7%, and is convertible at $0.40 per share. As a result of the issue, the Company recorded a beneficial conversion feature of $38,895. The beneficial conversion feature is recorded as equity and will be amortized to interest expense over the life of the debenture.

A schedule of debt outstanding at December 31, 2010 is as follows:

					Approximate
	Face	Interest	Maturity		Fair
Lender	Amount	Rate	Date	Collateral	Value
Creditor	$200,000	10.00%	Demand	Accounts receivable	$198,500
Creditor	$100,000	12.00%	Demand	Accounts receivable	$99,250
Related party	$390,000	10.67%	Demand	Accounts receivable	$387,500
Net debenture	$25,057	7.00%	30-Sep-13	None	$24,950

-13-

11. Going Concern

The accompanying financial statements have been presented in accordance with generally accepted accounting principles, which assume the continuity of the Company as a going concern. However, the Company has incurred significant losses since its inception and continues to rely on financing and the issuance of shares to raise capital to fund its business operations.

Based upon current plans, the company expects to incur operating losses in future periods. The Company intends to refocus its attention on the drywall scrap recycling business and anticipates that an initial capital infusion of $1 million is needed to repurchase the drywall scrap recycling operation previously owned by the Company. Follow-on investment will be required depending upon the rate of expansion of the recycling business. The Company intends to raise the needed capital through two separate means. Firstly, the principal shareholders intend to continue to sell restricted common shares owned by them by offering them on the OTCBB and Pink Sheet OTCQB markets. This has and will continue to be accomplished by compliance with the conditions set forth in Rule 144 of the Securities Act of 1933 (the “Act”). In turn, the proceeds of such sales will be loaned to the Company on terms favorable to the Company, on the same or similar terms as on previous transactions between the principals and the Company, wherein loans were made to the Company with zero interest. Secondly, The Company intends to issue stock through a private placement pursuant to Section 4(2) of the Act. The offering will be made to a select group of individuals who either are current shareholders or who are sufficiently familiar with the Company to successfully evaluate the risks associated with this endeavor. By focusing on recycling, it is anticipated that the Company will reach markets not burdened by the sluggish housing market. The Company has successfully concluded small private offerings in the past and feel confident in our ability to raise needed capital in the future. The Company considers a private raise to be the most cost effective way to meet its capital needs. The Company is considering engaging a FINRA broker-dealer to assist in its efforts, but have not as of this date, identified an appropriate broker-dealer. While there can be no assurance of a successful raise, management has every expectation that it can meet the Company’s capital needs until such time as the recycling operations achieve profitability. The Company is in the process of setting the amount of the raise-up and the offering price based upon our assessment of the Company’s current operating results.

12. Subsequent Events

-14-

13. Segment Reporting

The result of operations by segment is as follows:

	31-Dec-10			31-Dec-09
Sales:
Drywall recycling	$	47		$	90,275
Scrapping		45,330			502,018
Drywall installation		278,223			448,632
Total sales	$	323,600		$	1,040,925
Earnings
Drywall recycling	$	(121,586	)	$	82,982
Scrapping		(208,394	)		77,949
Drywall installation		53,102			(68,629	)
Corporate		(879,232	)		(360,667	)
Total earnings	$	(1,156,109	)	$	(268,365	)
Depreciation
Drywall recycling	$	6,067		$	12,251
Scrapping		37,503			75,735
Drywall Installation		11,582			23,389
Corporate		0			1,059
Total depreciation	$	55,151		$	112,434

-15-

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

You should read the following discussion and analysis in conjunction with the Consolidated Financial Statements and Notes thereto, and the other financial data appearing elsewhere in this Report.

The information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in the Company’s revenues and profitability, (ii) prospective business opportunities and (iii) the Company’s strategy for financing its business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes”, “anticipates”, “intends” or “expects”. These forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. In light of these risks and uncertainties, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The foregoing review of important factors should not be construed as exhaustive. The Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

The Company was incorporated in November 2006 and during the fiscal year ended June 30, 2010 and the first quarter of the current fiscal year was focused on the installation of drywall and the removal of drywall waste from construction sites for disposal and recycling in the Northwest United States. Until May, 2009, DRS had owned a facility that recycles scrap drywall into gypsum powder and paper for sale to farmers in Washington State. At that time, the recycling operation was taken over by a former employee and DRS began receiving a royalty of 2% of the revenues of the recycling facility.

In September, 2010, we decided to refocus our attention on the drywall scrap recycling operations, while withdrawing for the time-being from both the drywall installation business and the drywall scrapping business. To this end, we intend to rise capital to repurchase the drywall scrap recycling processing operation that we previously owned, as well as to expand the recycling operation to other regions of the country by opening new facilities, based on what we learned when we were previously involved in the drywall scrap recycling business. We believe we need an initial capital infusion of at least $1 million in order to re-enter the scrap drywall recycling business, with follow-on investment required depending on how aggressively we intend to expand.

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Results of Operations

For the Six Months ending December 31, 2010 and December 31, 2009

Sales revenue in the six month period ended December 31, 2010 was $323,600, compared to $1,040,925 in the corresponding period in 2009. Cost of Revenue in the period was $600,447, resulting in a negative Gross Margin of $276,877, compared to Cost of Revenue of $948,623 and a positive Gross Margin of $92,302 in the corresponding period in 2009. The negative trends result primarily from two factors:

1.	The deteriorating ability of the Company to attract profitable bidding opportunities for its installation and scrapping businesses as reported and discussed in the previous quarter; and

2.	The process of winding-down operations stemming from our decision in September 2010 to exit, for the time-being at least, the installation and scrapping businesses.

General & Administrative expenses were $800,894 in the six months ended December 31, 2010, compared to $314,476 in the six months ended December 31, 2009. As reported in the previous quarter, these expenses included a one-time, non-cash charge if $571,042 to record the cost of stock options that were issued to a company that entered into an agreement with the company to factor accounts receivable. Without this non-cash item, General & Administrative expense was $229,852, compared to $314,476 in the corresponding period in 2009. This decrease resulted from efforts to reduce administrative costs as much as possible in order to minimize external funding required to support operations while the Company executed on its plan to raise new capital and re-enter the drywall recycling business as previously reported.

Net loss for the six months ended December 31, 2010 was $1,156,109, compared to $268,365 in the same period in 2009. The increased loss resulted primarily from the non-cash charge described in the preceding paragraph, and the process of wind-down our installation and scrapping operations.

Basic and diluted loss per share was $.07 in the for the six month period ending December 31, 2010, compared to $.02 in the same period in. Weighted average common shares outstanding increased from 15,917,292 to 17,785,718, as the company issued shares for services and to source cash to offset losses.

Liquidity & Capital Resources

Cash on hand at September 30, 2010 was $97, compared to $24,500 at June 30, 2010. During the six month period, the company used $152,448 in operations, comprised of the net loss of $1,156,109, offset by non-cash charges of $626,193, and reductions in accounts receivable and increases in accounts payable. The cash that was used in operations was offset by shareholder loans and a convertible loan, as well as using up the cash on hand at June 30, 2010. $22,909 was used to make payments on a capital lease during the six months, compared to $75,040 in the first six months of 2009.

Based upon current plans, we expect to incur operating losses in future periods. We cannot guarantee that we will be successful in generating sufficient revenues to support operations in the future. Failure to generate sufficient revenues will cause us to go out of business. Due to the significant decreases in housing starts between 2006 and 2009, there is a great deal of uncertainty regarding the amount of revenue that can be generated. However, we believe that by focusing on the processing of drywall scrap into recycled products, we will be operating in the segment of the business that is least likely to fluctuate with rises and falls in housing starts because a significant portion of the revenues will be derived from sources outside of the housing industry.

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It is our intention to refocus our attention on the drywall scrap recycling business. For this purpose, we anticipate that an initial capital infusion of $1 million is needed to repurchase the drywall scrap recycling operation previously owned by the Company. Follow-on investment will be required depending upon the rate of expansion of the recycling business. It is our intention to raise the needed capital through two separate means. Firstly, our principal shareholders intend to continue to sell restricted common shares owned by them by offering them on the OTCBB and Pink Sheet OTCQB markets. This has and will continue to be accomplished by compliance with the conditions set forth in Rule 144 of the Securities Act of 1933 (the “Act”). In turn, the proceeds of such sales will be loaned to the Company on terms favorable to the Company, on the same or similar terms as on previous transactions between the principals and the Company, wherein loans were made to the Company with zero interest. Secondly, we intend to issue stock through a private placement pursuant to Section 4(2) of the Act. The offering will be made to a select group of individuals who either are current shareholders or who are sufficiently familiar with the Company to successfully evaluate the risks associated with this endeavor. By focusing on recycling, it is anticipated that the Company will reach markets not burdened by the sluggish housing market. We have successfully concluded small private offerings in the past and feel confident in our ability to raise needed capital in the future. The Company considers a private raise to be the most cost effective way to meet its capital needs. We are considering engaging a FINRA broker-dealer to assist in our efforts, but have not as of this date, identified an appropriate broker-dealer. While there can be no assurance of a successful raise, we have every expectation that we can meet our capital needs until such time as the recycling operations achieve profitability. We are in the process of setting the amount of the raise-up and the offering price based upon our assessment of the Company’s current operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not hold and assets or liabilities requiring disclosure under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Our management, with the participation of our President, who is our chief executive officer, and our Secretary/Treasurer, who is our chief financial officer, (the role of Secretary/Treasurer and hence Chief Financial Officer has temporarily been assumed by our President, stemming from the resignation of our former Secretary/Treasurer), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), in connection with the preparation of this Annual Report on Form 10-K, as of June 30, 2010. Based on the review described above, our President and Secretary/Treasurer determined that our disclosure controls and procedures were effective as of the end of the period covered by this report, and that no changes to controls and procedures were made or were needed to be during the last quarter that materially affected, or was reasonably likely to materially affect, internal control over financial reporting.

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Internal Control Over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

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. In addition, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Our management assessed our internal control over financial reporting as of June 30, 2010 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that our internal control over financial reporting was effective as of June 30, 2010 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

There were no changes in our internal control over financial reporting that occurred during the first fiscal quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following is a summary of litigation that was commenced in each quarter since the period ended June 30, 2009. There are currently three lawsuits outstanding.

Lawsuit filed during the quarter ended June 30, 2009:

Lawsuit filed during the quarter ended September 30, 2009:

Lawsuits filed during the quarter ended December 31, 2009:

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Lawsuits filed during the quarter ended December 31, 2010:

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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ITEM 5. OTHER INFORMATION

On November 15, 2010, George Guimont, our Director and Secretary/Treasurer, announced his resignation from these positions with the Company, effective November 30, 2010. We are currently considering our options to replace Mr. Guimont in these positions. In the interim, our President, Daniel Mendes, has assumed the role of Secretary/Treasurer.

ITEM 6. EXHIBITS

Please see Exhibit Index located behind the signature.

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

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.

February 11, 2011	DRS Inc.
	By:
		Daniel Mendes
		Principal Executive Officer
	By:
		Daniel Mendes
		Principal Financial Officer

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EXHIBIT INDEX

* The Exhibit attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

Exhibit No. SEC Ref. No. Title of Document

1.	31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

2.	31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

3.	32.1 Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

4.	32.2 Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

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Attached files

DRS Inc. Reports

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