UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934




For the
quarterly period ended June 30, 2009




or




 ̈
            Transition
      Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of
      1934




For the
Transition Period From to




Commission
File number: 001-33397





SYNUTRA
INTERNATIONAL, INC.




DELAWARE
              
              13-4306188(State or other jurisdiction of
                incorporation or organization)
              
              (IRS Employer Identification No.)




2275
Research Blvd., Suite 500


Rockville,
Maryland 20850


(Address
of Principal Executive Offices, Zip Code)




(301)
840-3888


(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.




Yes x    
No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




Yes  ̈    No
 ̈





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2of the Exchange Act).





Yes  ̈    
No x




As of
August 7, 2009, there were 54,000,713 shares of Common Stock issued and
outstanding.








TABLE OF
CONTENTS




PagePART
      IItem
      1. Financial Statements (unaudited)
                  
                  3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  
                  21Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                  
                  
                  33Item
      4. Controls and Procedures
                  
                  
                  35PART
      IIItem
      1. Legal Proceedings
                  
                  
                  37Item
      1A. Risk Factors
                  
                  
                  38Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  
                  
                  38Item
      3. Defaults Upon Senior Securities
                  
                  
                  38Item
      4. Submission of Matters to a Vote of Security Holders
                  
                  
                  38Item
      5. Other Information
                  
                  
                  38Item
      6. Exhibits
                  
                  
                  38Signatures
                  
                  
                  40




2




PART
I


FINANCIAL
INFORMATION




ITEM
1. FINANCIAL STATEMENTS.




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share par value)


(unaudited)





June 30,
                    2009
                  
                  
                  March 31,
                    2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  29,579
                  
                  
                  $
                  37,736Restricted
      cash
                  
                  
                  104,113
                  
                  
                  
                  84,338Accounts
      receivable, net of allowance of $1,049 and $1,452,
      respectively
                  
                  
                  24,098
                  
                  
                  
                  23,826Inventories
                  
                  
                  135,381
                  
                  
                  
                  114,724Due
      from related parties
                  
                  
                  3,201
                  
                  
                  
                  2,463Deferred
      tax assets
                  
                  
                  16,285
                  
                  
                  
                  16,276Income
      tax receivable
                  
                  
                  5,068
                  
                  
                  
                  1,476Prepaid
      expenses and other current assets
                  
                  
                  11,227
                  
                  
                  
                  13,436Total
      current assets
                  
                  
                  328,952
                  
                  
                  
                  294,275Property,
      plant and equipment, net
                  
                  
                  145,280
                  
                  
                  
                  144,481Land
      use rights, net
                  
                  
                  6,361
                  
                  
                  
                  6,374Intangible
      assets, net
                  
                  
                  3,453
                  
                  
                  
                  3,136Goodwill
                  
                  
                  1,436
                  
                  
                  
                  1,435Deferred
      tax assets
                  
                  
                  18,469
                  
                  
                  
                  18,464Other
      assets
                  
                  
                  4,232
                  
                  
                  
                  4,406TOTAL
      ASSETS
                  
                  $
                  508,183
                  
                  
                  $
                  472,571LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      loans
                  
                  $
                  282,587
                  
                  
                  $
                  224,647Accounts
      payable
                  
                  
                  100,132
                  
                  
                  
                  112,968Due
      to related parties
                  
                  
                  2,680
                  
                  
                  
                  5,172Advances
      from customers
                  
                  
                  4,404
                  
                  
                  
                  5,448Product
      recall provision
                  
                  
                  3,202
                  
                  
                  
                  4,547Other
      current liabilities
                  
                  
                  19,686
                  
                  
                  
                  21,925Total
      current liabilities
                  
                  
                  412,691
                  
                  
                  
                  374,707Long-term
      debt
                  
                  
                  16,101
                  
                  
                  
                  8,777Deferred
      revenue
                  
                  
                  4,684
                  
                  
                  
                  4,681Capital
      lease obligations
                  
                  
                  5,783
                  
                  
                  
                  5,254Other
      long term liabilities
                  
                  
                  1,369
                  
                  
                  
                  1,756Total
      liabilities
                  
                  
                  440,628
                  
                  
                  
                  395,175Shareholders’
      equity:Common
      stock, $.0001 par value: 250,000 authorized; 54,001 and 54,001 issued and
      outstanding at June 30, 2009 and March 31, 2009,
    respectively
                  
                  
                  5
                  
                  
                  
                  5Additional
      paid-in capital
                  
                  
                  76,607
                  
                  
                  
                  76,607Noncontrolling
      interests
                  
                  
                  572
                  
                  
                  
                  537Accumulated
      deficit
                  
                  
                  (33,620
                  )
                  
                  
                  (23,674
                  )Accumulated
      other comprehensive income
                  
                  
                  23,991
                  
                  
                  
                  23,921Total
      shareholders’ equity
                  
                  
                  67,555
                  
                  
                  
                  77,396TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
                  $
                  508,183
                  
                  
                  $
                  472,571




The
accompanying notes are an integral part of the unaudited
condensed  consolidated financial statements.


3




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


AND
COMPREHENSIVE INCOME


(in
thousands except earnings per share data)


(unaudited)





Three Months Ended
                  June 30,2009
                
                
                2008Net
      sales
                
                $
                47,350
                
                
                $
                127,380Cost
      of sales
                
                
                27,778
                
                
                
                60,485Gross
      profit
                
                
                19,572
                
                
                
                66,895Selling
      and distribution expenses
                
                
                10,477
                
                
                
                11,423Advertising
      and promotion expenses
                
                
                15,145
                
                
                
                32,096General
      and administrative expenses
                
                
                4,641
                
                
                
                3,930Other
      operating income, net
                
                
                117
                
                
                
                -Income
      (loss) from operations
                
                
                (10,574
                )
                
                
                19,446Interest
      expense
                
                
                2,378
                
                
                
                521Interest
      income
                
                
                518
                
                
                
                198Other
      expense, net
                
                
                (784
                )
                
                
                (434
                )Income
      (loss) before provision (benefit) for income tax
                
                
                (13,218
                )
                
                
                18,689Provision
      (benefit) for income tax
                
                
                (3,223
                )
                
                
                3,044Net
      income (loss)
                
                
                (9,995
                )
                
                
                15,645Net
      income (loss) attributable to the noncontrolling
    interests
                
                
                (49
                )
                
                
                1Net
      income (loss) attributable to common shareholders
                
                $
                (9,946
                )
                
                $
                15,644Earnings
      (loss) per share – basic
                
                $
                (0.18
                )
                
                $
                0.29Earnings
      (loss) per share – diluted
                
                $
                (0.18
                )
                
                $
                0.29Weighted
      average common share outstanding – basic
                
                
                54,001
                
                
                
                54,001Weighted
      average common share outstanding – diluted
                
                
                54,001
                
                
                
                54,291




The
accompanying notes are an integral part of the unaudited
condensed  consolidated financial statements.


4




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)




Three Months Ended
                                  June 30,2009
                                
                                
                                2008Cash
      flow from operating activities:Net
      income (loss)
                                
                                $
                                (9,946
                                )
                                
                                $
                                15,644Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Amortization
      of debt issuance costs
                                
                                
                                80
                                
                                
                                
                                80Depreciation
      and amortization
                                
                                
                                2,588
                                
                                
                                
                                1,585Bad
      debt expense reversal
                                
                                (403
                                )
                                
                                
                                (6
                                )Loss
      on disposal of property, plant and equipment
                                
                                
                                13
                                
                                
                                
                                3Deferred
      income tax
                                
                                
                                (6
                                )
                                
                                
                                31Noncontrolling
      interests
                                
                                
                                35
                                
                                
                                
                                1Changes
      in assets and liabilities:Accounts
      receivable
                                
                                
                                662
                                
                                
                                
                                (1,132
                                )Inventories
                                
                                
                                (20,593
                                )
                                
                                
                                5,151Due
      from related parties
                                
                                
                                (760
                                )
                                
                                
                                (2,560
                                )Prepaid
      expenses and other current assets
                                
                                
                                2,208
                                
                                
                                
                                (115
                                )Accounts
      payable
                                
                                
                                (14,727
                                )
                                
                                
                                4,670Due
      to related parties
                                
                                
                                (2,464
                                )
                                
                                
                                4,043Advances
      from customers
                                
                                
                                (1,047
                                )
                                
                                
                                (3,457
                                )Income
      tax receivable
                                
                                
                                (3,592
                                )
                                
                                
                                -Income
      tax payable
                                
                                
                                -
                                
                                
                                
                                (1,810
                                )Deferred
      revenue
                                
                                
                                (270
                                )
                                
                                
                                -Product
      recall provision
                                
                                
                                (1,345
                                )
                                
                                
                                -Other
      liabilities
                                
                                
                                (334
                                )
                                
                                
                                (1,639
                                )Net
      cash provided by (used in) operating activities
                                
                                
                                (49,901
                                )
                                
                                
                                20,489Cash
      flow from investing activities:Acquisition
      of property, plant and equipment
                                
                                
                                (2,172
                                )
                                
                                
                                (19,000
                                )Change
      in restricted cash
                                
                                
                                (19,728
                                )
                                
                                
                                5,465Payment
      for business acquisition
                                
                                
                                (1,468
                                )
                                
                                
                                -Net
      cash used in investing activities
                                
                                
                                (23,368
                                )
                                
                                
                                (13,535
                                )Cash
      flow from financing activities:Proceeds
      from short-term loans
                                
                                
                                118,111
                                
                                
                                
                                -Proceeds
      from long-term loans
                                
                                
                                7,324
                                
                                
                                
                                -Repayment
      of short-term loans
                                
                                
                                (60,346
                                )
                                
                                
                                (7,389
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                65,089
                                
                                
                                
                                (7,389
                                )Effect
      of exchange rate changes on cash and cash equivalents
                                
                                
                                23
                                
                                
                                
                                2,225Net
      change in cash and cash equivalents
                                
                                
                                (8,157
                                )
                                
                                
                                1,790Cash
      and cash equivalents, beginning of period
                                
                                
                                37,736
                                
                                
                                
                                97,425Cash
      and cash equivalents, end of period
                                
                                $
                                29,579
                                
                                
                                $
                                99,215Supplemental
      cash flow information:Interest
      paid
                                
                                $
                                2,419
                                
                                
                                $
                                1,016Income
      tax paid
                                
                                $
                                335
                                
                                
                                $
                                2,527Non-cash
      investing and financing activities:Purchase
      of property, plant and equipment by accounts payable
                                
                                $
                                923
                                
                                
                                $
                                1,537Disposal
      of property by due from related parties
                                
                                $
                                -
                                
                                
                                $
                                1,726




The
accompanying notes are an integral part of the unaudited
condensed  consolidated financial statements




5





SYNUTRA
INTERNATIONAL, INC.


NOTES
TO CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES




Directly
or through its wholly owned subsidiary, Synutra Inc., an Illinois corporation
(“Synutra Illinois”), Synutra International, Inc. (collectively with
its subsidiaries, the “Company” or “Synutra”) owns all or majority of the
equity interests of the entities in the People’s Republic of China (“China” or
“PRC”) that are principally engaged in the production, marketing and
distribution of dairy based nutritional products under the Company’s own
brands in China. The Company is a leader in sales of infant formula products in
China.





The
Company produces, markets and sells nutritional products under “Shengyuan”, or
“Synutra”, name, together with other complementary brands. The Company
focuses on selling premium infant formula products, which are supplemented by
more affordable infant formula products targeting the mass market as
well as other nutritional products, such as adult powdered formula and prepared
baby food, and certain nutritional ingredients and supplements.





2.
            BASIS
      OF PRESENTATION




The
Company is responsible for the unaudited condensed  consolidated
financial statements included in this document, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and include all normal and recurring adjustments that
management of the Company considers necessary for a fair presentation of its
financial position and operating results.  The Company prepared these
statements following the requirements of the U.S. Securities and Exchange
Commission (the “SEC”) for interim reporting. As permitted under those rules,
the Company condensed or omitted certain footnotes or other financial
information that are normally required by GAAP for annual financial statements.
These statements should be read in combination with the consolidated financial
statements in the Company’s Annual Report on Form 10-K and its subsequent
amendments, if any, for the fiscal year ended March 31, 2009.





The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. Under that
assumption, it is expected that assets will be realized and liabilities will be
satisfied in the normal course of business. Following the government
announcement in mid September 2008 that formula products of the Company and 21
other manufacturers had been contaminated with melamine, the Company conducted a
compulsory recall of certain lots of U-Smart products and a voluntary recall of
all other products produced before September 16, 2008 at the same facilities,
where the Company believed the contaminated milk supplies
originated.  As a direct result of the incident, the Company has
experienced significant operating losses and negative cash flows from operations
for the fiscal year ended March 31, 2009 and the fiscal quarter ended June 30,
2009 and, as of June 30, 2009, has a working capital deficit of approximately
$83.7 million caused primarily by the product recall costs including cost of
replacing products, shipping charges and inventory write down and write off, and
subsequent loss of sales. As discussed in Note 10 to the unaudited condensed
consolidated  financial statements, at June 30, 2009, the Company was
not in compliance with certain covenants of its loan agreement due to the losses
suffered as a result of the melamine issue.  The occurrence of these
recent economic events, the ensuing operating losses and negative cash flows and
the failure of the Company to meet its debt covenants raise substantial doubt as
to the Company's ability to continue as a going concern.  Management
is attempting to renegotiate the terms and covenants of the loan agreement and
is in the process of evaluating funding alternatives including seeking refinance
of certain short-term loans from PRC banks. The accompanying unaudited condensed
consolidated financial statements do not reflect any adjustments relating to the
recoverability and reclassification of assets and liabilities as that might be
necessary if the Company is unable to continue as a going
concern.


6




The
unaudited condensed consolidated financial statements include the financial
statements of Synutra International, Inc. and its subsidiaries, its variable
interest entity and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. The variable interest entity
and its subsidiaries have not commenced their planned operations as of June 30,
2009.





Revenues,
expenses, assets and liabilities can vary during each quarter of the year.
Therefore, the results and trends in these interim unaudited condensed
consolidated  financial statements may not be the same as those for the
full year.





3.
            RECENTLY
      ADOPTED ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 141, “Business Combinations: (Revised
2007)” (“SFAS 141R”). SFAS 141R is relevant to all transactions or events in
which one entity obtains control over one or more other businesses. SFAS 141R
requires an acquirer to recognize any assets and noncontrolling interest
acquired and liabilities assumed to be measured at fair value as of the
acquisition date. Liabilities related to contingent consideration are recognized
and measured at fair value on the date of acquisition rather than at a later
date when the amount of the consideration may be resolved beyond a reasonable
doubt. This revised approach replaces SFAS 141, “Business Combinations” (“SFAS
141”) cost allocation process in which the cost of an acquisition was allocated
to the individual assets acquired and liabilities assumed based on their
respective fair value. SFAS 141R requires any acquisition-related costs and
restructuring costs to be expensed as incurred as opposed to allocating such
costs to the assets acquired and liabilities assumed as previously required by
SFAS 141. Under SFAS 141R, an acquirer recognizes liabilities for a
restructuring plan in purchase accounting only if the requirements of SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities”, are
met. SFAS 141R allows for the recognition of pre-acquisition contingencies at
fair value only if these contingencies are likely to materialize. If this
criterion is not met at the acquisition date, then the acquirer accounts for the
non-contractual contingency in accordance with recognition criteria set forth
under SFAS No. 5, “Accounting for Contingencies”, in which case no amount should
be recognized in purchase accounting. SFAS 141R is effective as of the beginning
of an entity’s first fiscal year that begins after December 15, 2008 with the
exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. SFAS 141R amends SFAS 109, “Accounting for Income
Taxes,” such that adjustments made to valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions that closed prior to the
effective date of SFAS 141R would also apply the provisions of SFAS 141R. The
adoption of SFAS 141R did not have a significant effect on the consolidated
financial position, results of operations or cash flows.


7





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. 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. Pursuant to the transition provisions of
SFAS No. 160, the company adopted the Statement on April 1, 2009 via
retrospective application of the presentation and disclosure requirements.
Noncontrolling interests of $537,000 at March 31, 2009 were reclassified
from the Liabilities section to the Stockholders’ Equity section in the
Consolidated Statement of Financial Position as of April 1,
2009.





In April
2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful
Life of Intangible Assets” (FSP FAS 142-3). This position amends the factors an
entity should consider when developing renewal or extension assumptions used in
determining the useful life over which to amortize the cost of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP
FAS 142-3 requires an entity to consider its own historical experience in
renewing or extending similar arrangements in determining the amortizable useful
life. Additionally, this position requires expanded disclosures related to the
determination of intangible asset useful lives. FSP FAS 142-3 is effective for
fiscal years beginning after December 15, 2008, and may impact any intangible
assets the Company acquires in future transactions. The guidance for determining
the useful life of a recognized intangible asset must be applied prospectively
to intangible assets acquired after the effective date. The disclosure
requirements, though, shall be applied prospectively to all intangible assets
recognized as of the effective date. Early adoption is prohibited. The adoption
of SFAS 142-3 did not have a significant effect on the consolidated financial
position, results of operations or cash flows.





In June
2008, the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). This Issue
addresses the determination of whether an instrument (or an embedded feature) is
indexed to an entity’s own stock. The EITF will be effective for years beginning
after December 15, 2008. The adoption of EITF 07-5 did not have a
significant effect on the consolidated financial position, results of operations
or cash flows.





On April
1, 2009, the FASB issued FASB Staff Position ("FSP") No. 141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies (“FSP 141(R)-1”), which amends the guidance in SFAS 141R to
establish a model for pre-acquisition contingencies that is similar to the one
entities used under SFAS 141. Under the FSP, an acquirer is required to
recognize at fair value an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value cannot be determined, then the acquirer follows the
recognition criteria in SFAS 5 Accounting for Contingencies and FIN 14
Reasonable Estimation of the Amount of a Loss—an interpretation of FASB
Statement No. 5 to determine whether the contingency should be recognized as of
the acquisition date or after it. The FSP is effective for business combinations
whose acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of FSP
141(R)-1 did not have a significant effect on the consolidated financial
position, results of operations or cash flows.


8





On April
9, 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB
28-1”), to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. The adoption of FSP FAS 107-1 and APB 28-1 did not
have a significant effect on the consolidated financial position, results of
operations or cash flows.





In
February 2008, the FASB issued FASB Staff Position
No. SFAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP 157-2”). FSP 157-2 defers the effective date of
SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), to fiscal years, and interim periods
within those fiscal years, beginning after November 15, 2008. The adoption
of FSP 157-2 did not have a significant effect on the consolidated
financial position, results of operations or cash flows.





In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS
No.165).  SFAS 165 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
SFAS 165 provides (i) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; (ii)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (iii)
the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, the Company adopted
SFAS 165 on April 1, 2009 on a prospective basis. The adoption of SFAS 165 did
not have a significant effect on the consolidated financial position, results of
operations or cash flows.





4.
            RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS




In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)" or SFAS 167, which modifies how a company determines when an entity that
is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. SFAS 167 clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity's purpose and design and a company's ability to direct the
activities of the entity that most significantly impact the entity's economic
performance. SFAS 167 requires an ongoing reassessment of whether a company is
the primary beneficiary of a variable interest entity. SFAS 167 also requires
additional disclosures about a company's involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is
effective for the Company on  April 1, 2010. The Company is currently
evaluating the impact that the adoption of SFAS 167 will have on the financial
condition, results of operations, and disclosures.


9





In June
2009, the FASB approved the "FASB Accounting Standards Codification"
("Codification") as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the Codification will be considered
nonauthoritative. The Codification is effective for interim and annual periods
ending after September 15, 2009. The Codification is effective for the Company
during the interim period ending September 30, 2009 and will not have an impact
on the financial condition or results of operations.





5.
            PRODUCT
      RECALL





On
September 16, 2008, the Company announced a compulsory recall on certain lots of
U-Smart products and a voluntary recall of other products that were contaminated
or suspected to be contaminated by melamine, a substance not approved for use in
food and linked to recent illnesses among infants and children in China. The
cost of this action during the year ended March 31, 2009 was $101.5 million,
including the cost of product replacement of $48.1 million in cost of sales, the
write-down and write-off of affected inventory of $48.5 million in cost of
sales, the net amount of $2.3 million to a compensation fund set up by China
Dairy Industry Association to settle existing and potential claims arising in
China from families of infants affected by melamine contamination in general and
administrative expenses, and freight charges of $2.6 million in selling and
distribution expenses, of which $4.5 million was recorded as a product recall
provision in the consolidated balance sheet as of March 31, 2009. In the fiscal
quarter ended June 30, 2009, the Company reversed recall expense of $0.7
million, mostly being overestimated product replacement cost. These costs
represent the Company’s estimate of probable costs based on available data and
take into account factors such as expected return rates for the affected units,
unit replacement costs, logistical expenses and expenses relating to the hiring
of temporary contractors to assist with the Company’s recall
efforts.





Should
actual product recall costs differ from the estimated costs, the Company would
have to reassess the impact of the product recall on the Company’s financial
results and revise the estimated product recall accrual accordingly. Following
is a summary of the liabilities related to the product recall that were recorded
during the fiscal year ended March 31, 2009 and fiscal quarter ended June 30,
2009:


10





(In thousands)Balance
      at April 1, 2008
                    
                    $
                    —Product
      recall expenses
                    
                    
                    53,038Replacement
      of products
                    
                    
                    (44,002
                    )Payment
      of cash, net
                    
                    
                    (4,395
                    )Foreign
      currency translation
                    
                    
                    (94
                    )Balance
      at March 31, 2009
                    
                    
                    4,547Product
      recall expenses (reversal)
                    
                    
                    (780)Replacement
      of products
                    
                    
                    (416)Payment
      of cash, net
                    
                    
                    (151)Foreign
      currency translation
                    
                    
                    2Balance
      at June 30, 2009
                    
                    $
                    3,202




6.
            FAIR
      VALUE MEASUREMENTS





The
carrying value of financial instruments including cash, receivables,
accounts payable, accrued expenses and debt, approximates their fair value at
June 30, 2009 and March 31, 2009 due to the relatively short-term nature of
these instruments. The carrying value of long-term debt approximates its fair
value as it bears variable interest rate which reflects the current market yield
level for comparable loans.
 
 On April
1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”)
that was not delayed by FASB Staff Position FAS 157-2 (“FSP FAS 157-2”). FSP FAS
157-2 delays the effective date of SFAS 157 as it applies to non-financial
assets and liabilities that are not required to be measured at fair value on a
recurring (at least annual) basis. As a result of the delay, SFAS 157 was
applied to the Company’s non-financial assets and liabilities effective on April
1, 2009. SFAS 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (also referred to as an exit price).
SFAS 157 also establishes a three-level fair value hierarchy for classifying
financial instruments that is based on whether the inputs to the valuation
techniques used to measure fair value are observable or unobservable. The three
levels of the SFAS 157 fair value hierarchy are described below:
 
 Level 1:
              Quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.
 
 Level 2:
              Observable market-based inputs,
      other than quoted prices in active markets for identical assets or
      liabilities.
 
 Level 3:
              Unobservable
      inputs.
 
 As of
June 30, 2009, the Company did not have any financial assets or liabilities that
were measured at fair value on a recurring basis subsequent to initial
recognition.


7.
            INVENTORIES




The
Company’s inventories at June 30, 2009 and March 31, 2009 are summarized as
follows:





June 30,
                    2009
                  
                  
                  March 31,
                    2009(In
      thousands)Raw
      materials
                  
                  $
                  108,063
                  
                  
                  $
                  96,361Work-in-progress
                  
                  
                  17,627
                  
                  
                  
                  11,739Finished
      goods
                  
                  
                  9,691
                  
                  
                  
                  6,624Total
      Inventories
                  
                  $
                  135,381
                  
                  
                  $
                  114,724




11





8.
            DUE
      FROM (TO) RELATED PARTIES AND RELATED PARTY
  TRANSACTIONS




A.
            Classification
      of related party balances by name





a.
            Due
      from related parties





June 30,
                      2009
                    
                    
                    March 31,
                      2009(In thousands)Sheng
      Zhi Da Dairy Group Corporation
                    
                    $
                    1,727
                    
                    
                    $
                    1,726Beijing
      Honnete Dairy Co., Ltd.
                    
                    
                    1,474
                    
                    
                    
                    737Total
      Due from Related Parties
                    
                    $
                    3,201
                    
                    
                    $
                    2,463




In June
2008, the Company sold two commercial buildings, one of which was classified as
assets held for sale as of March 31, 2008, to Sheng Zhi Da Dairy Group
Corporation, an entity 100% controlled by the Company’s CEO, at the carrying
value of $1.7 million. The amount represents the balance due from Sheng Zhi Da
Dairy Group Corporation as of June 30, 2009 and March 31, 2009.





b.
            Due
      to related parties




June 30,
                      2009
                    
                    
                    March 31,
                      2009(In
      thousands)Sheng
      Zhi Da Dairy Group Corporation
                    
                    $
                    2,107
                    
                    
                    $
                    2,113St.
      Angel (Beijing) Business Service Co., Ltd.
                    
                    
                    5
                    
                    
                    
                    2Beijing
      Honnete Dairy Co., Ltd.
                    
                    
                    568
                    
                    
                    
                    3,057Total
      Due to Related Parties
                    
                    $
                    2,680
                    
                    
                    $
                    5,172




12





The
Company had certain related party borrowings. See Note 10. Except for the
related party borrowings, the amount due to and due from related parties were
unsecured and interest free.





B.
            Sales
      to related parties




In the
fiscal quarters ended June 30, 2009 and 2008, the Company’s sales to the related
parties were whey protein to Beijing Honnete Dairy Co., Ltd.





Three Months Ended
                            June 30,2009
                          
                          
                          2008(In
      thousands)Beijing
      Honnete Dairy Co., Ltd.
                          
                          $
                          2,239
                          
                          
                          $
                          —Total
                          
                          $
                          2,239
                          
                          
                          $
                          —





C.
            Purchases
      from related parties




In the
fiscal quarter ended June 30, 2008, the Company’s purchases from related parties
included whey protein powders from Honnete, catalogues, brochures, and marketing
materials from St. Angel, and advertising service from Shenglong
Media.


13




Three Months Ended
                                  June 30,2009
                                
                                2008(In
      thousands)Beijing
      Honnete Dairy Co., Ltd.
                                $
                                
                                -
                                
                                $
                                
                                1,881St.
      Angel (Beijing) Business Service Co., Ltd.
                                
                                
                                -
                                
                                
                                
                                1,639Beijing
      Shenglong Media Co., Ltd.
                                
                                
                                -
                                
                                
                                
                                154Total
                                $
                                
                                -
                                
                                $
                                
                                3,674




14




9.
            PROPERTY,
      PLANT AND EQUIPMENT, NET





June 30,
                    2009
                  
                  
                  March 31,
                    2009(In thousands)Property,
      plant and equipment, cost:Buildings
                  
                  $
                  58,554
                  
                  
                  $
                  51,693Plant
      and machinery
                  
                  
                  78,380
                  
                  
                  
                  65,020Office
      equipment and furnishings
                  
                  
                  3,200
                  
                  
                  
                  3,076Motor
      vehicles
                  
                  
                  2,975
                  
                  
                  
                  2,963Others
                  
                  
                  594
                  
                  
                  
                  543Total
      cost
                  
                  $
                  143,703
                  
                  
                  $
                  123,295Less:
      Accumulated depreciation:Buildings
                  
                  
                  5,075
                  
                  
                  
                  4,472Plant
      and machinery
                  
                  
                  13,446
                  
                  
                  
                  11,804Office
      equipment and furnishings
                  
                  
                  1,304
                  
                  
                  
                  1,183Motor
      vehicles
                  
                  
                  990
                  
                  
                  
                  885Others
                  
                  
                  294
                  
                  
                  
                  273Total
      accumulated depreciation
                  
                  
                  21,109
                  
                  
                  
                  18,617Construction
      in progress
                  
                  
                  22,686
                  
                  
                  
                  39,803Property,
      plant and equipment, net
                  
                  $
                  145,280
                  
                  
                  $
                  144,481




Construction
in progress primarily represents the construction of manufacturing facilities
and related equipment, and administrative buildings.




The
Company recorded depreciation expense of $2.5 million and $1.5 million for the
fiscal quarters ended June 30, 2009 and 2008,
respectively.


15




10.
            DEBT




On
October 11, 2007, ABN and another lender provided a three year term loan,
or the New ABN Loan, to the Company in the aggregate amount of $35 million. The
principal amount, and any unpaid accrued interest on the New ABN Loan, will be
due on October 11, 2010 and may be prepaid without penalty. The proceeds of
the New ABN Loan were used to pay the outstanding principal and accrued interest
of a six-month term loan provided to the Company by ABN on April 19, 2007,
or the Original ABN Loan. The New ABN Loan bears interest at LIBOR for deposits
in U.S. dollars plus 3.5% with interest payable on the last day of each
three-month period. The loan is secured by a pledge of 10,000 shares of common
stock, or 100% of the outstanding common stock of Synutra Illinois.





The loan
agreement for the New ABN Loan provides for mandatory prepayment upon the
occurrence of certain events, and contains customary covenants for financings of
this type, including restrictions on the incurrence of liens, payment of
dividends, and disposition of properties. The loan agreement for the New ABN
Loan also contains certain financial covenants, including a requirement to
maintain specified leverage and interest coverage ratio, tangible net worth, and
indebtedness to tangible net worth ratio. The Company has performed an analysis
of the relevant ratios and found that due to the net loss which resulted from
the significant costs of the product recall, including inventory write-down and
write-off, the Company was not able to meet any of the financial covenant
requirements as of June 30, 2009. Further, the Company anticipates that it may
have difficulty meeting these financial covenant requirements for the next
several fiscal quarters. The Company has requested the lenders to waive these
financial covenants for the next several fiscal quarters. The lenders have
proposed waiver fee which equals to 0.75% of the aggregate principal amount
outstanding and an increase in the interest rate of 200 basis points to LIBOR
for deposits in U.S. dollars plus 5.5%. The lenders have also proposed a revised
repayment schedule of quarterly amortizations commencing in October 2009 with
$5.0 million in October 2009, $5.0 million in January 2010, $10.0 million in
April 2010, $10.0 million in July 2010, and $5.0 million on maturity. Any
non-payment would constitute a default, for which the banks have rights to
enforce on the existing share pledge. As of the issuance date of the
unaudited condensed consolidated financial statements , the waiver has
not been granted. The Company is currently in discussions with the lenders on
the waiver and is unable to predict when, or if the waiver will be granted.
Accordingly, the Company has reclassified the outstanding balance of $34.5
million under the loan to current liabilities since the Company considers this
debt callable by the bank. The Company may also incur additional expenses in
connection with the modification of loan arrangements.





In
addition to the ABN Loan, as of June 30, 2009 and March 31, 2009, the
Company had short-term loans from PRC banks in the amount of $241.4 million and
$186.2 million, respectively.  The maturity dates of the short term
loans outstanding from PRC banks at June 30, 2009 range from July 2009 to
June 2010. The weighted average interest rate on short-term loans from PRC banks
outstanding at June 30, 2009 and March 31, 2009 was 3.51% and 4.1%,
respectively. The loans at June 30, 2009 were secured by the pledge of certain
fixed assets held by the Company and its subsidiaries, a pledge of the Company’s
land use right and pledge of cash deposits. The value of fixed assets pledged
was $38.9 million and $34.2 million as of June 30, 2009 and March 31,
2009, respectively.  The value of land use right pledged was $4.3
million and $3.4 million as of June 30, 2009 and March 31, 2009, respectively.
The value of cash pledged was $80.8 million and $66.1 million which were
recorded in restricted cash as of June 30, 2009 and March 31, 2009,
respectively.


16





As of
June 30, 2009 and March 31, 2009, the Company had long-term loans which are
unsecured debt, from PRC banks in the amount of $16.1 million and $8.8 million,
respectively. The maturity dates of the long-term loans outstanding from PRC
banks at June 30, 2009 are from November 2011 to June 2012. The weighted average
interest rate of outstanding long-term loans at June 30, 2009 and March 31,
2009 was 5.4% and 5.4%, respectively.





Apart
from the short-term loans and long-term loans from banks, the Company also had
short term loans from related parties in the amount of $6.6 million and $7.5
million as of June 30, 2009 and March 31, 2009 respectively. The maturity dates
of the short term loans outstanding from related parties at June 30,
2009 are from October 2009 to January 2010. The balance as of June 30, 2009
included a US dollar loan of $3.9 million and a RMB loan of RMB 19.0 million,
and the interest rates were 10.0% and 5.5% respectively. The interest rate of
the US dollar loan is benched mark to that of US dollar borrowing from third
parties.





11.
            INCOME
      TAX




The
effective tax rate is based on expected income, statutory tax rates and
incentives available in the various jurisdictions in which the Company operates.
For interim financial reporting, the Company estimates the annual tax rate based
on projected taxable income for the full year and records a quarterly income tax
provision in accordance with the FIN 18, “Accounting for Income Taxes in Interim
Period” and APB 18, “Interim Financial Reporting”. As the year progresses, the
Company refines the estimates of the year’s taxable income as new information
becomes available. This continual estimation process often results in a change
to the expected effective tax rate for the year. When this occurs, the Company
adjusts the income tax provision during the quarter in which the change in
estimate occurs so that the year-to-date provision reflects the expected annual
tax rate.





The
effective tax rate for the three months ended June 30, 2009 increased 8.1% from
the 16.3% effective rate for the three months ended June 30, 2008 to 24.4%. This
increase was due primarily to the expiration of the tax holidays enjoyed by
certain subsidiaries in China.





12.
            EARNINGS
      (LOSS) PER SHARE (EPS)




For
purposes of calculating basic and diluted earnings per share, the Company used
the following weighted average common shares outstanding:


17




Three Months Ended June 30,2009
                    
                    
                    2008(In thousands except for per share data)Net
      income (loss) attributable to common shareholders
                    
                    $
                    (9,946
                    )
                    
                    $
                    15,644Basic
      weighted average common shares outstanding
                    
                    
                    54,001
                    
                    
                    
                    54,001Dilutive
      potential common shares from warrants
                    
                    
                    -
                    
                    
                    
                    290Diluted
      weighted average shares outstanding
                    
                    
                    54,001
                    
                    
                    
                    54,291Earnings
      (loss)  per share—basic
                    
                    $
                    (0.18
                    )
                    
                    $
                    0.29Earnings
      (loss) per share—diluted
                    
                    $
                    (0.18
                    )
                    
                    $
                    0.29




The
warrants to purchase 400,000 shares of common stock granted to ABN in connection
with the Original ABN Loan were excluded from the computation of diluted
earnings per share for the three months ended June 30, 2009 as they would be
anti-dilutive. There were no anti-dilutive warrants excluded from the
computation of diluted earnings per share for the three months ended June 30,
2008.




13.
            SEGMENT
      REPORTING




The
Company focuses on selling premium infant formula products, which are
supplemented by more affordable infant formula products targeting the
mass market as well as other nutritional products, such as adult powdered
formula and prepared baby food, and certain nutritional ingredients and
supplements. The activities of each segment are as follows:





Powdered Formula- Sales of
powdered infant and adult formula products.





Baby Food - Sales of prepared
baby food and nutritional snacks for babies and children.





Nutritional Ingredients and
Supplements - Sales of nutritional ingredients and supplements such as
chondroitin sulfate, and microencapsulated Docosahexanoic Acid (“DHA”) and
Arachidonic Acid (“ARA”).


18





"All
Other" includes non-core businesses such as toll packaging, toll drying service
and sales of ingredients and materials to industrial customers.





The
Company’s underlying accounting records are maintained on a legal entity basis
for government and public reporting requirements. Segment disclosures are on a
performance basis consistent with internal management reporting. The following
segment information has been prepared in accordance with the internal accounting
policies of the Company, as described above.





Three Months Ended June 30,2009
                
                
                2008(In thousands)NET
      SALES TO EXTERNAL CUSTOMERSPowdered
      formula
                
                $
                42,470
                
                
                $
                118,063Baby
      food
                
                
                343
                
                
                
                -Nutritional
      ingredients and supplements
                
                
                56
                
                
                
                -All
      other
                
                
                4,481
                
                
                
                9,317Net
      sales
                
                $
                47,350
                
                
                $
                127,380INTERSEGMENT
      SALESPowdered
      formula
                
                $
                4
                
                
                $
                -Baby
      food
                
                
                232
                
                
                
                -Nutritional
      ingredients and supplements
                
                
                1,522
                
                
                
                -All
      other
                
                
                8
                
                
                
                -Intersegment
      sales
                
                $
                1,766
                
                
                $
                -GROSS
      PROFITPowdered
      formula
                
                $
                20,201
                
                
                $
                65,807Baby
      food
                
                
                132
                
                
                
                -Nutritional
      ingredients and supplements
                
                
                (648
                )
                
                
                -All
      other
                
                
                (113
                )
                
                
                1,088Gross
      profit
                
                $
                19,572
                
                
                $
                66,895Selling
      and distribution expenses
                
                
                10,477
                
                
                
                11,423Advertising
      and promotion expenses
                
                
                15,145
                
                
                
                32,096General
      and administrative expenses
                
                
                4,641
                
                
                
                3,930Other
      operating income, net
                
                
                117
                
                
                
                -Income
      (loss) from operations
                
                
                (10,574
                )
                
                
                19,446Interest
      expense
                
                
                2,378
                
                
                
                521Interest
      income
                
                
                518
                
                
                
                198Other
      expense, net
                
                
                (784
                )
                
                
                (434
                )Income
      (loss) before provision (benefit) for income tax
                
                $
                (13,218
                )
                
                $
                18,689




19





June 30,
                  2009
                
                
                March 31,
                  2009(In thousands)TOTAL ASSETSPowdered
      formula
                
                $
                478,222
                
                
                $
                443,946Baby
      food
                
                
                36,385
                
                
                
                30,291Nutritional
      ingredients and supplements
                
                
                37,205
                
                
                
                49,611All
      other
                
                
                115,321
                
                
                
                115,923Intersegment
      elimination
                
                
                (158,950
                )
                
                
                (167,200
                )Total
                
                $
                508,183
                
                
                $
                472,571





14.
            CONTINGENCIES





As of
June 30, 2009, the end of the period covered by this report, the Company was
subject to  various legal proceedings and claims discussed below, as
well as certain other legal proceedings and claims that have not been fully
resolved and that have arisen in the ordinary course of business. Other than as
discussed below, in the opinion of management, the Company does not have a
potential liability related to any current legal proceedings and claims that
would individually or in the aggregate have a material adverse effect on its
financial condition or operating results. However, the results of legal
proceedings cannot be predicted with certainty. The Company intends to contest
each lawsuit vigorously but should the Company fail to prevail in any of these
legal matters or should several of these legal matters be resolved against the
Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected. Management continues to
evaluate the lawsuits discussed below and based on the stage of these
proceedings, management is unable to reasonably estimate the likelihood of any
loss or the amount or range of any potential loss that could result from the
litigation. Therefore, no accrual has been established for any potential loss in
connection with these lawsuits.


20




On
January 15, 2009 , a lawsuit was filed in the U.S. on behalf of 54 Chinese
families alleged to be affected by melamine contamination, against Synutra
International, Inc. and Synutra Inc. in the U.S. District Court for the District
of Maryland, alleging negligent or intentional infliction of personal injury,
negligent or intentional infliction of emotional distress, battery, breach of
warranty, fraudulent or negligent misrepresentation, seeking compensation for
punitive damages in the amount of US$500 million, together with any compensatory
damages. We filed a motion in April 2009 to dismiss the case on grounds of
"Forum Non-Convenience,” failure to state a claim, and failure to join an
indispensable party, and the opposition filed a Memorandum of Opposition to
Motion to Dismiss on May 20, 2009. We have been given time to respond to the
Opposition, and we did so on June 15 2009 with an additional filing. After June
15, 2009, the presiding Judge of the Court will decide, with no time limit, if
the Court will take the case or render its dismissal. To date, the presiding
Judge of the Court has not rendered a decision.




On March
2, 2009, a lawsuit was filed in China on behalf of 54 Chinese families alleged
to be affected by melamine contamination against our subsidiary, Shengyuan
Nutritional Food Co., Ltd. at Qingdao Intermediate People’s Court, seeking
compensation for damages, including medical and other expenses, emotional harm
and punitive damages, for an aggregate amount over US$1.0 million (RMB6.9
million). Further, on April 14, 2009, a lawsuit was filed on behalf of 73
families (including the original 54 families) against our subsidiary, Shengyuan
Nutritional Food Co., Ltd. at Shandong Higher People’s Court on April 14, 2009,
seeking compensation for damages of over US$1.7 million (RMB11.3
million). To date, we have not been notified by either court of acceptance
of any case against us in China.




15.
SUBSEQUENT EVENTS
 
 The
Company has evaluated subsequent events, as defined by Statement of Financial
Accounting Standards (SFAS) No. 165, “Subsequent Events,” through the
date that the  unaudited condensed consolidated  financial
statements were issued on August 10, 2009.




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




Sections
of this Quarterly Report on Form 10-Q (the “Form 10-Q”) including, in
particular, the Company’s Management’s Discussion and Analysis of Financial
Condition and Results of Operations contain forward-looking
statements. These forward-looking statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed, implied or forecasted in any such forward-looking
statements.





Expressions
of future goals and expectations or similar expressions including, without
limitation, “may,” “should,” “could,” “expects,” “does not currently expect,”
“plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,”
“potential,” “targets,” or “continue,” reflecting something other than
historical fact are intended to identify forward-looking statements. The
factors described in the Company’s Annual Report on Form 10-K under Part I. Item
1A. Risk Factors and below in Part II. Other Information – Item 1A. Risk Factors
could cause the Company’s actual results to differ materially from those
described in the forward-looking statements. Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. However, readers should carefully review the reports and
documents the Company files from time to time with the SEC, particularly its
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on
Form 8-K and all amendments to those reports.


21





Available
Information





The
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), are filed with the SEC. Such reports and other information
filed by the Company with the SEC are available on the Company’s website at
http://www.synutra.com when such reports are available on the SEC website. The
public may read and copy any materials filed by the Company with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The contents of these websites are not incorporated
into this filing. Further, the Company’s references to the URLs for these
websites are intended to be inactive textual references only.





OVERVIEW




We are a
leading infant formula company in China. We principally produce, market and sell
our products under the “Shengyuan,” or “Synutra,” name, together with other
complementary brands. We focus on selling premium infant formula products, which
are supplemented by more affordable infant formulas targeting the mass market as
well as other nutritional products and ingredients. We sell our products through
an extensive nationwide sales and distribution network covering 30 provinces and
provincial-level municipalities in China. As of June 30, 2009, this network
comprised over 480 distributors and over 1,000 sub-distributors who sell our
products in over 72,000 retail outlets.





We
currently have three reportable segments which are:





·
            Powdered formula segment:
      Powdered formula segment covers the sale of powdered infant and adult
      formula products. It includes the brands of Super, U-Smart, Mingshan which
      was launched in October 2008 and Helanruniu which was launched in December
      2008;





·
            Baby food segment: Baby food
      segment covers the sale of prepared baby food and nutritional snacks for
      babies and children. It includes the brand of Huiliduo which was launched
      in March 2009 and the nutritional snacks component which we expect to
      launch in late 2009;





·
            Nutritional ingredients and
      supplements segment: Nutritional ingredients and supplements segment
      covers the production and sale of nutritional ingredients and supplements
      such as chondroitin sulfate, and microencapsulated DHA and
      ARA.




22





On
September 16, 2008, we announced a compulsory recall on certain lots of U-Smart
products and a voluntary recall of other products that were contaminated or
suspected to be contaminated by melamine, a substance not approved for use in
food and linked to recent illnesses among infants and children in China. The
cost of this action during the year ended March 31, 2009 was $101.5 million,
including the cost of product replacement of $48.1 million in cost of sales, the
write-down and write-off of affected inventory of $48.5 million in cost of
sales, the net amount of $2.3 million to a compensation fund set up by China
Dairy Industry Association to settle existing and potential claims arising in
China from families of infants affected by melamine contamination in general and
administrative expenses, and freight charges of $2.6 million in selling and
distribution expenses, of which $4.5 million was recorded as a product recall
provision in the consolidated balance sheet as of March 31, 2009. In the fiscal
quarter ended June 30, 2009, the Company reversed recall expense of $0.7
million, mostly being overestimated product replacement cost. These costs
represent the Company’s estimate of probable costs based on available data and
take into account factors such as expected return rates for the affected units,
unit replacement costs, logistical expenses and expenses relating to the hiring
of temporary contractors to assist with the Company’s recall
efforts.





There
have been certain legal proceedings brought against us in connection with the
melamine contamination incident, which may have an adverse effect on our results
of operations, see Part II - Item 1.  Legal Proceedings below and
“Part I - Item 1A. Risk
Factors - Product liability claims against us could result in adverse publicity
and potential significant monetary damages” in our Annual Report on Form
10-K for the fiscal year ended March 31, 2009. Although management is not aware
of any additional significant issues associated with the melamine contamination
incident, there can be no assurance that additional issues will not be
identified in the future and this may have an adverse effect on our results of
operations. See “Part I - Item 1A. Risk Factors - We are highly
dependent upon consumers’ perception of the safety and quality of our products.
Any ill effects, product liability claims, recalls, adverse publicity or
negative public perception regarding particular ingredients or products or our
industry in general could harm our reputation and damage our brand and adversely
affect our results of operations” in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2009.





Our net
sales for the fiscal quarter ended June 30, 2009 decreased by 62.8% to
$47.4 million from $127.4 million for the same period in the previous year. Our
gross profit for the fiscal quarter ended June 30, 2008 decreased by 70.7%
to $19.6 million from $66.9 million for the same period in the previous year.
Our net loss for the fiscal quarter ended June 30, 2009 was $9.9 million,
as compared to net income $15.6 million for the same period in the previous
year.





The drop
in the Company’s net sales reflected in part the lingering impact of the product
recall carried out in late 2008.  Also, the distribution of free
replacements for recalled products created an inventory glut in the sales
channel that was shrinking but still present and contributing to the depressed
sales during the quarter ended June 30, 2009.  The absence of its
products from shelves (for the duration before product replacement completed)
has resulted in loss of customers, especially for the U-Smart product line. In
this first fiscal quarter, the Company’s infant formula segment recorded net
sales of $42.47 million with a gross profit of $20.20 million.  The
Company believes its premium line of Super series infant formula products which
account for about 56% of segment sales have led the segment in market recovery
and helped to stabilize the Company’s market position.
 
 Though
powdered formula sales have improved since the quarter (ending December 31,
2008) that immediately followed the recall, the Company has not yet recovered
its pre-recall market share.  In meeting the considerable challenges,
including the significant brand equity damage sustained by the U-Smart series,
the Company has focused on fundamental approaches to procure new customers
through its integrated marketing platform, capitalizing on database resources
built with a nationwide deployed team of more than 500 nutrition education
specialists who work directly with medical and healthcare professionals at
maternity wards or clinics throughout the country.  The Company also
made sales and distribution system adjustments including a new inventory control
and monitoring mechanism aimed at improving sales efficiency and effectively
managing inventory level within the distribution channel which comprises of more
than 480 distributors across the market.





The
Company’s main operations are located in mainland China. Though the recent
disruptions in the overall economy and financial markets is less severe in China
than in the U.S., it could reduce consumer confidence in the economy and
negatively affect consumers’ spending, which could be harmful to our financial
position and results of operations. See “Part I - Item 1A. Risk Factors - The recent
disruptions in the overall economy and the financial markets may adversely
impact our business and results of operations and may limit our access to
additional financing”in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2009.


23





Unless
otherwise noted, all translations from Renminbi to U.S. dollars were made at the
middle rate published by the People’s Bank of China, or the middle rate, as of
June 30, 2009, which was RMB6.8319 to $1.00. We make no representation that the
Renminbi amounts referred to in this Quarterly Report on Form
10-Q  could have been or could be converted into U.S. dollars at any
particular rate or at all. On August 7, 2009, the middle rate was
RMB 6.8316 to $1.00.




CRITICAL
ACCOUNTING POLICIES




We follow
certain significant accounting policies when preparing our consolidated
financial statements. A summary of these policies is included in our Annual
Report on Form 10-K for the year ended March 31, 2009 (Form 10-K) under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates”. The preparation of
these financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and
judgments that affect our reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures of contingent assets and liabilities at
the date of the financial statements. We evaluate these estimates and judgments
on an ongoing basis and base our estimates on historical experience, current
conditions and various other assumptions that are believed to be reasonable
under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities as well as
identifying and assessing the accounting treatment with respect to commitments
and contingencies. Our actual results may differ from these
estimates.





We
believe that the estimates, assumptions and judgments involved in the accounting
policies described in the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section of our most recent Annual Report on
Form 10-K have the greatest potential impact on our financial statements, so we
consider these to be our critical accounting policies.





RESULTS
OF OPERATIONS




Three
months ended June 30, 2009 and 2008




Net
Sales




Net sales
for the fiscal quarter ended June 30, 2009 decreased by 62.8% to $47.4 million
from $127.4 million for the same period in the previous year. This decrease
in net sales was mainly due to the loss of market share caused by the melamine
contamination incident.


24





Powdered
formula segment





Net sales
of our powdered formula products, including infant milk formula and other
powdered formula products for children and adults under our Super, U-Smart,
Mingshan and Helanruniu brand names, accounted for 89.7% of our total sales for
the fiscal quarter ended June 30, 2009. Net sales of our powdered formula
products for the fiscal quarter ended June 30, 2009 decreased by 64.0% to $42.5
million from $118.1 million for the same period in the previous year, primarily
as a result of the following factors:




·
            Sales volume of powdered formula
      products decreased by 61.8% to 4,996 tons for the fiscal quarter ended
      June 30, 2009 from 13,066 tons for the same period in the previous year,
      due primarily to a slow-down in sales activities from September 2008 to
      June 2009 following the melamine contamination
      incident.





·
            The average selling price of our
      powdered formula products for the fiscal quarter ended June 30, 2009
      decreased by 5.9% to $8,501 per ton from $9,036 per ton for the same
      period in the previous year. This decrease in average selling price was
      due to a greater proportion of rebates to distributors and slotting fees
      to supermarkets being recorded as reduction to net sales, partially offset
      by the effect of increased proportion of higher-priced products in our
      product mix and an increase of our sales price in August
      2008.





Baby
food segment





Net sales
of prepared baby food business for the fiscal quarter ended June 30, 2009 was
$343,000, representing sales of prepared baby food, such as cooked meat and
vegetables. We did not have any net sales of prepared baby food business for the
fiscal quarter ended June 30, 2008 as we acquired this business in October 2008.
Our nutritional snack business was still in its pre-operation stage and hence
did not have sales for the fiscal quarter ended June 30, 2009. We plan to begin
its operations in late 2009.





Nutritional
ingredients and supplements segment





Net sales
of nutritional ingredients and supplements segment for the fiscal quarter ended
June 30, 2009 was $56,000, representing chondroitin sulfate sold to third
parties. We did not have any net sales in the fiscal quarter ended June 30, 2008
as the nutritional ingredients and supplements segment had not begun its
operations by June 30, 2008.





Cost
of Sales




Cost of
sales for the fiscal quarter ended June 30, 2009 decreased by 54.0% to $27.8
million from $60.5 million for the same period in the previous year. The
decrease in the cost of sales is due primarily to a decrease in the sales volume
of our powdered formula products, partially offset by the increase in free
products offered as promotional materials in the current period to regain market
share following the melamine contamination incident.


25





Powdered
formula segment





Cost of
sales for the powdered formula products for the fiscal quarter ended June 30,
2009 decreased by 57.4% to $22.3 million from $52.3 million for the same period
in the previous year. The decrease in the cost of sales is due primarily to the
decrease in the sales volume of our powdered formula products. The sales volume
of powdered formula products sold for the fiscal quarter ended June 30, 2009
decreased by 8,070 tons as compared to the same period in the previous
year.





Baby
food segment





Cost of
sales of prepared baby food business for the fiscal quarter ended June 30, 2009
was $211,000, representing cost of sales of prepared baby food, such as cooked
meat and vegetables. We did not have any cost of sales of prepared baby food
business for the fiscal quarter ended June 30, 2008 as we acquired this business
in October 2008. Our nutritional snack business was still in its pre-operations
stage and hence did not have cost of sales for the fiscal quarter ended June 30,
2009. We plan to begin its operations in late 2009.





Nutritional
ingredients and supplements segment





Cost of
sales of nutritional ingredients and supplements segment for the fiscal quarter
ended June 30, 2009 was $704,000, representing chondroitin sulfate sold to third
parties. We did not have any cost of sales in the fiscal quarter ended June 30,
2008 as the nutritional ingredients and supplements segment had not begun its
operations by June 30, 2008.





Gross
Profit and Gross Margin




As a
result of the foregoing, gross profit for the fiscal quarter ended June 30, 2009
decreased by 70.7% to $19.6 million from $66.9 million for the same period in
the previous year. Gross profit for our powdered formula products for the fiscal
quarter ended June 30, 2009 decreased by 69.3% to $20.2 million from $65.8
million for the same period in the previous year due primarily to decreased
sales caused by the melamine contamination incident. Gross profit (loss) for our
baby food segment and nutritional ingredients and supplements segment for the
fiscal quarter ended June 30, 2009 were $132,000 and ($648,000),
respectively.





Our
overall gross margin decreased to 41.4% for the fiscal quarter ended June 30,
2009 from 52.5% for the same period in the previous year. Our gross margin for
powdered formula products was 47.6% for the fiscal quarter ended June 30, 2009,
as compared to 55.7% for the same period in the previous year. The decrease in
our gross margin for powdered formula products was primarily due to increased
free products offered to our customers in the aftermath of the melamine
contamination incident, partially offset by an increase in the proportion of
sales of our higher margin infant formula products. Our gross margin for baby
food segment for the fiscal quarter ended June 30, 2009 was
38.4%.


26





Selling
and Distribution Expenses




Selling
and distribution expenses for the fiscal quarter ended June 30, 2009 decreased
by 7.9% to $10.5 million from $11.4 million for the same period in the previous
year. This decrease was a combination result of an increase in compensation
expenses for our sales force, a decrease in freight charges and a decrease in
office expenses. Total compensation for our sales force for the fiscal quarter
ended June 30, 2009 increased by 15.4 % to $6.0 million from $5.2 million for
the same period in the previous year, due primarily to an increase in the number
of sales staff to 3,170 as of June 30, 2009 from 2,621 as of June 30, 2008.
Freight charges for the fiscal quarter ended June 30, 2009 decreased by 73.9 %
to $0.6 million from $2.3 million for the same period in the previous year, due
primarily to decreased sales volume. Office expenses for the fiscal quarter
ended June 30, 2009 decreased by 75.0 % to $0.3 million from $1.2 million for
the same period in the previous year, due primarily to tightened budgetary
control.





Advertising
and Promotion Expenses




Advertising
and promotion expenses for the fiscal quarter ended June 30, 2009 decreased by
52.8% to $15.1 million from $32.1 million for the same period in the previous
year. Advertising expenses for the fiscal quarter ended June 30, 2009, which
accounted for 54.7% of total advertising and promotion expenses, decreased by
55.9% to $8.3 million from $18.8 million for the same period in the previous
year. Promotion expenses for the fiscal quarter ended June 30, 2009, which
accounted for 45.3% of total advertising and promotion expenses, decreased by
48.1% to $6.9 million from $13.3 million for the same period in the previous
year. After an aggressive advertising and promotional campaign in the fiscal
quarter ended March 31, 2009 to regain market share in the aftermath of the
melamine contamination incident, we intentionally slowed down our advertising
and promotional expenses in the fiscal quarter ended June 30, 2009 to better
utilize our resources.




General
and Administrative Expenses




General
and administrative expenses for the fiscal quarter ended June 30, 2009 increased
by 18.1% to $4.6 million from $3.9 million for the same period in the previous
year. The increase in general and administrative expenses was primarily due to
an increase of $0.4 million in salary and social insurance as result of the
increased headcount, and an increase of $0.3 million in depreciation and
amortization expenses.


27





Other
operating income, net





Other
operating income for the fiscal quarter ended June 30, 2009 was $117,000, as
compared to nil for the same period in the previous year.





Interest
Income




Interest
income for the fiscal quarter ended June 30, 2009 increased to $0.5 million from
$0.2 million for the same period in the previous year.





Interest
Expense




Interest
expense for the fiscal quarter ended June 30, 2009 increased to $2.4 million
from $0.5 million for the same period in the previous year, due primarily to the
significant increase in bank borrowings after the melamine contamination
incident.




Provision
(Benefit) for Income Tax





As a
result of the net loss, we recorded an income tax benefit of $3.2 million
for the fiscal quarter ended June 30, 2009, as compared to an income tax expense
of $3.0 million for the fiscal quarter ended June 30, 2008. Our effective tax
rate increased to 24.4% for the fiscal quarter ended June 30, 2009 from 16.3%
for the same period in the previous year. This increase in our effective income
tax rate was primarily due to the expirations of tax holidays enjoyed by certain
subsidiaries in China.




Net
Income (Loss) Attributable to Stockholders




As a
result of the foregoing, net loss attributable to stockholders for the fiscal
quarter ended June 30, 2009 was $9.9 million, as compared to net income of $15.6
million for the same period in the previous year.


28





LIQUIDITY
AND CAPITAL RESOURCES




The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business.  As a result of the melamine contamination
incident and the subsequent product recall, we have experienced significant
operating losses and negative cash flows from operations for the fiscal year
ended March 31, 2009 and the fiscal quarter ended June 30, 2009. As of June
30, 2009, we had a working capital deficit of approximately $83.7 million. In
addition, we have not been in compliance with certain covenants in our New ABN
loan agreement as of June 30, 2009.  We are attempting to renegotiate
the terms and covenants of the New ABN loan agreement.  As a result of
the occurrence of these recent economic events, the ensuing operating losses and
negative cash flows and our failure to meet our debt covenants, the report of
our independent registered public accounting firm for the fiscal year ended
March 31, 2009 contains a reference raising substantial doubts about our ability
to continue as a going concern.   See Note 2(A) and Note 11 to
the consolidated  financial statements in our Annual Report on Form
10-K for the fiscal year ended March 31, 2009. We are currently in the process
of evaluating funding alternatives including seeking refinancing of certain
short-term loans from PRC banks.   The accompanying unaudited
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.




We intend
to seek to overcome any substantial doubt concerning our ability to continue as
going concern by continuing to pursue our strategic operating goals for enhanced
profitability and by obtaining new debt and/or equity financing. Any
substantial doubt about our ability to continue as a going concern could also
affect our relationship with our trade suppliers and their willingness to
continue to conduct business with us on terms consistent with historical
practice. These suppliers might respond to an apparent weakening of our
liquidity position and to address their own liquidity needs may request faster
payment of invoices, new or increased deposits or other
assurances.  If this were to happen, our need for cash would be
intensified and we might be unable to make payments to our suppliers as they
become due. See “Part I - Item 1A. Risk Factors - The report of our
Independent Registered Public Accounting Firm contains a reference raising
substantial doubt about our ability to continue as a “going concern”in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.





The
recent melamine contamination incident has significantly impacted our liquidity.
Since the damage to our reputation caused by the melamine contamination incident
will take time to recover, the net sales of our powdered formula products were
negatively impacted in the fiscal year ended March 31, 2009 and fiscal quarter
ended June 30, 2009. In the meantime, we incurred substantial cash outflow for
the purchase of raw materials and for operating expenses.





Accordingly,
we have had discussions with local banks to obtain short term financing to
support our operational needs. As of June 30, 2009, we had short-term borrowings
from local banks of $241.4 million with a weighted average interest rate of
3.51%. The loans were secured by the pledge of certain fixed assets held by the
Company’s subsidiaries, pledge of land use right in Qingdao, China and pledge of
cash deposits which was recorded as restricted cash.  The maturity
dates of the short-term loans from local banks outstanding at June 30,
2009 range from July 2009 to June 2010. As of the date of the filing of
this 10-Q, all outstanding short-term loans that have become due have been
repaid. As of June 30, 2009, we have unsecured long-term borrowing from local
banks of $16.1 million maturing from March 2011 to June 2012 with a weighted
average interest rate of 5.4 %. In addition to the loans from local banks, we
also borrowed from related parties short-term loans amounting to $6.6 million
with a weighted average interest rate of 8.1 % to finance our acquisition of the
Helanruniu trademarks and to support our normal operating needs. The maturity
dates of the short-term loans outstanding from related parties at June 30,
2009 are from October 2009 to January 2010. As of June 30, 2009, we are not
able to meet the financial covenants of the ABN loan and hence it was
reclassified to current liabilities since we considered this debt callable by
the bank. As of the date of the filing of this 10-Q, the waiver has not been
granted. Prior to the melamine contamination incident, cash generated from our
operating activities were sufficient for normal operating needs, and financing
from banks was normally related to investing activities such as expansion of our
manufacturing plant.


29


In order
to maintain sufficient funds for our operations, we have postponed the payment
of certain accounts payable. The payment terms of accounts payable were usually
three months. We negotiated with some suppliers and extended the payment
terms.





We do not
expect significant cash outflow in relation to the product recall and subsequent
replacement for future fiscal quarters other than the cash outflow for the
accrued freight charge of $104,000 at June 30, 2009. However, we cannot
provide assurance in this regard.





Our cash
and cash equivalent balance decreased by $8.1 million to $29.6 million at June
30, 2009, as compared to $37.7 million at March 31, 2009.





Cash
Flows from Operating Activities




Net cash
used in operating activities was $49.9 million for the fiscal quarter ended June
30, 2009, as compared to net cash provided by operating activities of
$20.5 million for the same period in the previous year. Net cash used in
operating activities for the fiscal quarter ended June 30, 2009 was mainly due
to net loss of $9.9 million, non-cash items not affecting cash flows of $2.3
million and a $42.3 million decrease in working capital. The changes in working
capital for the fiscal quarter ended June 30, 2009 were primarily related to a
$20.6 million increase in inventories mainly due to the increase in imported
industrial milk powder, a $14.7 million decrease in accounts payable, a $3.6
million increase in income tax receivable due to overpaid income tax before the
melamine incident, and a $1.3 million decrease in product recall provision. In
the fiscal quarter ended June 30, 2009, we spent $64.5 million in purchasing raw
materials and other production materials, $9.1 million in staff compensation and
social welfare, $4.3 million in other taxes, $40.9 million in selling and
distribution, advertising and promotion, and general and administrative
expenses, and received $68.9 million from our customers.





Cash
Flows from Investing Activities




Net cash
used in investing activities was $23.4 million for the fiscal quarter ended June
30, 2009, as compared to $13.5 million for the same period in the previous year.
Cash invested in purchases of property and equipment was $2.2 million and
$19.0 million for the fiscal quarters ended June 30, 2009, and 2008,
respectively. The decrease is mainly due to the suspension of major investing
projects in the aftermath of the melamine contamination incident. We expect the
suspension will slow down our expansion into the nutritional snack business
which we expect to launch in late 2009, but it will not materially affect our
production capacity to fulfill our customers’ order requirements. Restricted
cash increased by $19.7 million for the fiscal quarter ended June 30, 2009, as
compared to a decrease of $5.5 million for the same period in the previous
year due to a significant increase in our bank borrowings. Restricted cash
represents cash deposited with banks as security against the issuance of letters
of credit for the import of raw materials and as pledges for certain short-term
borrowings.


30


Cash
Flows from Financing Activities




Net cash
provided by financing activities was $65.1 million for the fiscal quarter ended
June 30, 2009, as compared to net cash used in financing activities of $7.4
million for the same period in the previous year. Cash provided by financing
activities during the fiscal quarter ended June 30, 2009 was primarily related
to $118.1 million short-term loans from PRC banks in China, $7.3 million
long-term loans from domestic banks in China, offset by $60.3 million repayment
of short-term loans from PRC banks.




Outstanding
Indebtedness




On
October 11, 2007, ABN and another lender provided a three year term loan,
or the New ABN Loan, to the Company in the aggregate amount of $35 million. The
principal amount, and any unpaid accrued interest on the New ABN Loan, will be
due on October 11, 2010 and may be prepaid without penalty. The proceeds of
the New ABN Loan were used to pay the outstanding principal and accrued interest
of a six-month term loan provided to the Company by ABN on April 19, 2007,
or the Original ABN Loan. The New ABN Loan bears interest at LIBOR for deposits
in U.S. dollars plus 3.5% with interest payable on the last day of each
three-month period. The loan is secured by a pledge of 10,000 shares of common
stock, or 100% of the outstanding common stock of Synutra Illinois.





The loan
agreement for the New ABN Loan provides for mandatory prepayment upon the
occurrence of certain events, and contains customary covenants for financings of
this type, including restrictions on the incurrence of liens, payment of
dividends, and disposition of properties. The loan agreement for the New ABN
Loan also contains certain financial covenants, including a requirement to
maintain specified leverage and interest coverage ratio, tangible net worth, and
indebtedness to tangible net worth ratio. The Company has performed an analysis
of the relevant ratios and found that due to the net loss which resulted from
the significant costs of the product recall, including inventory write-down and
write-off, the Company was not able to meet any of the financial covenant
requirements as of June 30, 2009. Further, the Company anticipates that it may
have difficulty meeting these financial covenant requirements for the next
several fiscal quarters. The Company has requested the lenders to waive these
financial covenants for the next several fiscal quarters. The lenders have
proposed waiver fee which equals to 0.75% of the aggregate principal amount
outstanding and an increase in the interest rate of 200 basis points to LIBOR
for deposits in U.S. dollars plus 5.5%. The lenders have also proposed a revised
repayment schedule of quarterly amortizations commencing in October 2009 with
$5.0 million in October 2009, $5.0 million in January 2010, $10.0 million in
April 2010, $10.0 million in July 2010, and $5.0 million on maturity. Any
non-payment would constitute a default, for which the banks have rights to
enforce on the existing share pledge. As of the issuance date of the
unaudited condensed consolidated financial statement s , the waiver has
not been granted. The Company is currently in discussions with the lenders on
the waiver and is unable to predict when, or if the waiver will be granted.
Accordingly, the Company has reclassified the outstanding balance of $34.5
million under the loan to current liabilities since the Company considers this
debt callable by the bank. The Company may also incur additional expenses in
connection with the modification of loan arrangements. See “Part I- Item 1A.
Risk Factors - As a result of losses
associated with the recent melamine contamination incident in China, we may not
be able to meet certain financial covenants under our credit facility and may
incur additional expense in connection with the change of loan arrangements”in our Annual Report on Form 10-K for the fiscal year ended March 31,
2009.


31


In
addition to the ABN Loan, as of June 30, 2009 and March 31, 2009, the
Company had short-term loans from PRC banks in the amount of $241.4 million and
$186.2 million, respectively.  The maturity dates of the short term
loans outstanding from PRC banks at June 30, 2009 range from July 2009 to
June 2010. The weighted average interest rate on short-term loans from PRC banks
outstanding at June 30, 2009 and March 31, 2009 was 3.51% and 4.1%,
respectively. The loans at June 30, 2009 were secured by the pledge of certain
fixed assets held by the Company and its subsidiaries, a pledge of the Company’s
land use right and pledge of cash deposits. The value of fixed assets pledged
was $38.9 million and $34.2 million as of June 30, 2009 and March 31,
2009, respectively.  The value of land use right pledged was $4.3
million and $3.4 million as of June 30, 2009 and March 31, 2009, respectively.
The value of cash pledged was $80.8 million and $66.1 million which were
recorded in restricted cash as of June 30, 2009 and March 31, 2009,
respectively.





As of
June 30, 2009 and March 31, 2009, the Company had long-term loans which are
unsecured debt, from PRC banks in the amount of $16.1 million and $8.8 million,
respectively. The maturity dates of the long-term loans outstanding from PRC
banks at June 30, 2009 are from November 2011 to June 2012. The weighted average
interest rate of outstanding long-term loans at June 30, 2009 and March 31,
2009 was 5.4% and 5.4%, respectively.





Apart
from the short-term loans and long-term loans from banks, the Company also had
short term loans from related parties in the amount of $6.6 million and $7.5
million as of June 30, 2009 and March 31, 2009 respectively. The maturity dates
of the short term loans outstanding from related parties at June 30,
2009 are from October 2009 to January 2010. The balance as of June 30, 2009
included a US dollar loan of $3.9 million and a RMB loan of RMB 19.0 million,
and the interest rates were 10.0% and 5.5% respectively. The interest rate of
the US dollar loan is benched mark to that of US dollar borrowing from third
parties.





Contractual
Obligations





For
information on our contractual obligations, please refer to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Tabular Disclosure of Contractual
Obligations.” as presented in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2009.


32


Capital
Expenditures




Our
capital expenditures for the fiscal quarter ended June 30, 2009 was $2.2
million. In order to meet our immediate working capital needs in the aftermath
of the melamine contamination incident, we have temporarily postponed projects
that are not urgently needed for our operations such as our baby beverage
project and the furnishing of our head office building. We do not anticipate
significant capital expenditure in the next several fiscal quarters. All future
capital expenditure plans will be dependent upon our cash position and operating
status.





Off-Balance
Sheet Arrangements




We have
not entered into any guarantee contract or commitments to guarantee the payment
obligations of any third parties except for the guarantee issued to the Zhangbei
Branch of the Agricultural Bank of China related to various bank loans of $1.1
million to 104 dairy farmers in the Zhangbei area of Hebei Province in China,
which was recorded as contingent liability of $0.4 million. Such loans matured
on December 15, 2007 but as of June 30, 2009, none of these loans have been
repaid. We do not have any retained or contingent interest in assets transferred
to an unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such assets. We do not have
any obligation, including a contingent obligation, under a contract that would
be accounted for as a derivative instrument, except that it is both indexed to
the registrant's own stock and classified in stockholders' equity in the
registrant's statement of financial position, and therefore excluded from the
scope of FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. We do not have any obligation,
including a contingent obligation, arising out of a variable interest in an
unconsolidated entity that is held by and material to us where such entity
provides financing, liquidity, market risk or credit risk support to, or engages
in leasing, hedging or research and development services with us.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




The
objective of our policies is to mitigate potential income statement, cash flow
and fair value exposures resulting from possible future adverse fluctuations in
rates. We evaluate our exposure to market risk by assessing the anticipated
near-term and long-term fluctuations in interest rates and foreign exchange
rates. This evaluation includes the review of leading market indicators,
discussions with financial analysts and investment bankers regarding current and
future economic conditions and the review of market projections as to expected
future rates.


33


Foreign
Exchange Risk





The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
the People’s Bank of China (“PBOC”) regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the
exchange rate, the Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the medium to long term. Moreover, it is possible
that in the future, PRC authorities may lift restrictions on fluctuations in the
Renminbi exchange rate and lessen intervention in the foreign exchange
market.





Because
substantially all of our earnings and cash assets are denominated in Renminbi,
appreciation or depreciation in the value of the Renminbi relative to the U.S.
dollar would affect our financial results reported in U.S. dollar terms without
giving effect to any underlying change in our business or results of operations.
As a result, we face exposure to adverse movements in currency exchange rates as
the financial results of our Chinese operations are translated from local
currency into U.S. dollars upon consolidation. If the U.S. dollar weakens
against the Renminbi, the translation of our foreign-currency-denominated
balances will result in increased net assets, net revenues, operating expenses,
and net income or loss. Similarly, our net assets, net revenues, operating
expenses, and net income or loss will decrease if the U.S. dollar strengthens
against the Renminbi. Additionally, foreign exchange rate fluctuations on
transactions denominated in Renminbi other than the functional currency result
in gains and losses that are reflected in our Consolidated Statement of Income.
Our operations are subject to risks typical of international business,
including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility.





Considering
the RMB balance of our cash and cash equivalents as of June 30, 2009, which
amounted to $29.6 million, a 1.0% change in the exchange rates between the
Renminbi and the U.S. dollar would result in an increase or decrease of
approximately $0.3 million of the balance.





Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.





Inflation





Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.


34


Interest
Rate Risk





We did
not experience any material changes in interest rate exposures during the fiscal
quarter ended June 30, 2009. Based upon economic conditions and leading market
indicators at June 30, 2009, we do not foresee a significant adverse change in
interest rates in the near future and do not use interest rate derivatives to
manage exposure to interest rate changes.





Currently,
we are exposed to interest rate risk primarily associated with: the New ABN
Loan, a variable-rate debt obligation based on LIBOR, with the carrying value of
$35.0 million which approximates its fair value at June 30, 2009.





Concentration
of Credit Risk





We are
subject to concentrations of credit risk consisting primarily of accounts
receivable. We perform ongoing credit evaluations with respect to the financial
condition of our debtors, but do not require collateral. In order to determine
the value of our accounts receivable, we record a provision for doubtful
accounts to cover probable credit losses. Our management reviews and adjusts
this allowance periodically based on historical experience and its evaluation of
the collectibility of outstanding accounts receivable.





Commodities
Risk





Raw milk,
imported milk powder and whey protein are the principal raw materials in the
Company’s business, accounting for over 70% of the Company’s cost of sales.
Domestically produced milk powder and other dairy based ancillary products are
also the Company’s products for commercial sales. As such, the Company’s is
exposed to the fluctuations in the price of raw milk, milk powder and whey
protein. During the past two years, the rise and fall in the prices of these
commodities have significantly affected the Company’s business operations and
profitability. A significant rise in the prices of these raw materials will
adversely affect the gross margin of the Company’s powdered formula products. In
the meantime, a significant decrease in the price of milk powder may also
adversely affect the gross margin of domestically produced milk powder and other
dairy based ancillary products for commercial sales.




ITEM
4. CONTROLS AND PROCEDURES




Conclusion Regarding Effectiveness
of Disclosure Controls and Procedures




The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s 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, or the Exchange Act) as of the end of the period covered by this
report.


35


Based on
such evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of June 30, 2009, the Company’s disclosure
controls and procedures were effective to ensure that the information required
to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is (a) recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms and
(b) accumulated and communicated to the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Remediation and Changes in Internal
Control over Financial Reporting




As
previously reported in the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2009, management had concluded that as of March 31, 2009,
the Company’s internal control over financial reporting was effective. However,
as of March 31, 2009, management concluded that we still have one significant
deficiency and four deficiencies as set forth below:





Our
significant deficiency related to:





·
            an inadequate control over cutoff
      of certain marketing expenses, primarily in the category of slotting fees,
      which could result in a material impact on our financial
      statements.





Our
deficiencies related to:





·
            an incomplete stock count of
      inventory at certain
warehouses;





·
            a malfunction of our anti-fraud
      hotline which may lead to ineffective monitoring over fraud
      risk;





·
            recording of investments outside
      of the months in which they occurred;
and





·
            an inappropriate delegation of
      authority in the financial reporting process of certain
      subsidiaries.





The
Company has discussed the significant deficiency and deficiencies identified
above with the Audit Committee, and has developed and implemented remediation
plans to address these deficiencies. These plans included improving the cutoff
procedures for marketing expenses despite our largely dispersed sales network,
implementing stricter controls to ensure complete coverage of the inventory
stock-taking process, clarifying the instructions on how to use our anti-fraud
hotline, implementing controls to ensure that all investments are accurately
calculated and recorded in the appropriate months, and revisiting certain job
allocations to ensure proper segregation of duties.





Other
than as described above, management does not believe that there have been any
other changes in the Company’s internal control over financial reporting during
the Company’s most recent fiscal quarter, which have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


36


PART
II


OTHER
INFORMATION





ITEM 1. LEGAL
PROCEEDINGS




As of
June 30, 2009, the end of the period covered by this report, the Company was
subject to  various legal proceedings and claims discussed below, as
well as certain other legal proceedings and claims that have not been fully
resolved and that have arisen in the ordinary course of business. Other than as
discussed below, in the opinion of management, the Company does not have a
potential liability related to any current legal proceedings and claims that
would individually or in the aggregate have a material adverse effect on its
financial condition or operating results. However, the results of legal
proceedings cannot be predicted with certainty. The Company intends to contest
each lawsuit vigorously but should the Company fail to prevail in any of these
legal matters or should several of these legal matters be resolved against the
Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected, see “Item 1A. Risk
Factors - Risks Related to Our Business - Product liability claims against us
could result in adverse publicity and potentially significant monetary
damages.” as presented in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2009. Management continues to evaluate the lawsuits
discussed below and based on the stage of these proceedings, management is
unable to reasonably estimate the likelihood of any loss or the amount or range
of any potential loss that could result from the litigation. Therefore, no
accrual has been established for any potential loss in connection with these
lawsuits.




On
January 15, 2009 , a lawsuit was filed in the U.S. on behalf of 54 Chinese
families alleged to be affected by melamine contamination, against Synutra
International, Inc. and Synutra Inc. in the U.S. District Court for the District
of Maryland, alleging negligent or intentional infliction of personal injury,
negligent or intentional infliction of emotional distress, battery, breach of
warranty, fraudulent or negligent misrepresentation, seeking compensation for
punitive damages in the amount of US$500 million, together with any compensatory
damages. We filed a motion in April 2009 to dismiss the case on grounds of
"Forum Non-Convenience,” failure to state a claim, and failure to join an
indispensable party, and the opposition filed a Memorandum of Opposition to
Motion to Dismiss on May 20, 2009. We have been given time to respond to the
Opposition, and we did so on June 15 2009 with an additional filing. After June
15, 2009, the presiding Judge of the Court will decide, with no time limit, if
the Court will take the case or render its dismissal. To date, the presiding
Judge of the Court has not rendered a decision.




37


On March
2, 2009, a lawsuit was filed in China on behalf of 54 Chinese families alleged
to be affected by melamine contamination against our subsidiary, Shengyuan
Nutritional Food Co., Ltd. at Qingdao Intermediate People’s Court, seeking
compensation for damages, including medical and other expenses, emotional harm
and punitive damages, for an aggregate amount over US$1.0 million (RMB6.9
million). Further, on April 14, 2009, a lawsuit was filed on behalf of 73
families (including the original 54 families) against our subsidiary, Shengyuan
Nutritional Food Co., Ltd. at Shandong Higher People’s Court on April 14, 2009,
seeking compensation for damages of over US$1.7 million (RMB11.3
million). To date, we have not been notified by either court of acceptance
of any case against us in China.




ITEM
1A. RISK FACTORS




For
information regarding the risks and uncertainties affecting our business, please
refer to “Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for
the fiscal year ended March 31, 2009. There have been no material changes to
these risks and uncertainties during the fiscal quarter ended June 30,
2009.




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.




ITEM
5. OTHER INFORMATION




None.




ITEM 6. EXHIBITS


38





EXHIBIT
                  NO.
                
                DOCUMENT
      DESCRIPTION3.1
                
                Amended
      and Restated Certificate of Incorporation of Synutra International, Inc.
      (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly
      Report on Form 10-Q filed on November 11, 2008)3.2
                
                Amended
      and Restated Bylaws of Synutra International, Inc. (incorporated by
      reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q
      filed on November 11, 2008)31.1
                
                Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
                
                Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
      Officer)32.2
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)


39


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.





SYNUTRA
      INTERNATIONAL, INC.Date:
      August 10, 2009
                By:
                /s/ Liang
      ZhangName: 
      Liang ZhangTitle: 
      Chief Executive
Officer


40