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 December 31, 2009




or




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




For the
Transition Period From  to




Commission
File number: 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 filer
x Non-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
February 9, 2010, 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
                
                16Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                
                28Item
      4. Controls and Procedures
                
                29PART
      IIItem
      1. Legal Proceedings
                
                30Item
      1A. Risk Factors
                
                30Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                
                31Item
      3. Defaults Upon Senior Securities
                
                31Item
      4. Submission of Matters to a Vote of Security Holders
                
                31Item
      5. Other Information
                
                31Item
      6. Exhibits
                
                32Signatures
                
                33




2




PART
I


FINANCIAL
INFORMATION




ITEM
1. FINANCIAL STATEMENTS.




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share par value)


(unaudited)





December 31,
                                              2009
                                            
                                            
                                            March 31,
                                              2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                            
                                            $
                                            56,452
                                            
                                            
                                            $
                                            37,736Restricted
      cash
                                            
                                            
                                            63,478
                                            
                                            
                                            
                                            84,338Accounts
      receivable, net of allowance of $1,059 and $1,452,
      respectively
                                            
                                            
                                            25,810
                                            
                                            
                                            
                                            23,826Inventories
                                            
                                            
                                            63,176
                                            
                                            
                                            
                                            114,724Due
      from related parties
                                            
                                            
                                            2,516
                                            
                                            
                                            
                                            2,463Deferred
      tax assets
                                            
                                            
                                            16,294
                                            
                                            
                                            
                                            16,276Income
      tax receivable
                                            
                                            
                                            3,902
                                            
                                            
                                            
                                            1,476Receivable
      from assets disposal
                                            
                                            
                                            6,980
                                            
                                            
                                            
                                            —Prepaid
      expenses and other current assets
                                            
                                            
                                            11,438
                                            
                                            
                                            
                                            13,436Assets
      held for sale
                                            
                                            
                                            408
                                            
                                            
                                            
                                            —Total
      current assets
                                            
                                            
                                            250,454
                                            
                                            
                                            
                                            294,275Property,
      plant and equipment, net
                                            
                                            
                                            110,721
                                            
                                            
                                            
                                            144,481Land
      use rights, net
                                            
                                            
                                            6,030
                                            
                                            
                                            
                                            6,374Intangible
      assets, net
                                            
                                            
                                            3,413
                                            
                                            
                                            
                                            3,136Goodwill
                                            
                                            
                                            1,436
                                            
                                            
                                            
                                            1,435Deferred
      tax assets
                                            
                                            
                                            18,467
                                            
                                            
                                            
                                            18,464Receivable
      from assets disposal
                                            
                                            
                                            4,403
                                            
                                            
                                            
                                            —Other
      assets
                                            
                                            
                                            3,357
                                            
                                            
                                            
                                            4,406TOTAL
      ASSETS
                                            
                                            $
                                            398,281
                                            
                                            
                                            $
                                            472,571LIABILITIES
      AND EQUITYCurrent
      Liabilities:Short-term
      loans
                                            
                                            $
                                            223,960
                                            
                                            
                                            $
                                            224,647Accounts
      payable
                                            
                                            
                                            57,281
                                            
                                            
                                            
                                            112,968Due
      to related parties
                                            
                                            
                                            2,675
                                            
                                            
                                            
                                            5,172Advances
      from customers
                                            
                                            
                                            11,145
                                            
                                            
                                            
                                            5,448Product
      recall provision
                                            
                                            
                                            —
                                            
                                            
                                            
                                            4,547Other
      current liabilities
                                            
                                            
                                            21,577
                                            
                                            
                                            
                                            21,925Total
      current liabilities
                                            
                                            
                                            316,638
                                            
                                            
                                            
                                            374,707Long-term
      debt
                                            
                                            
                                            26,361
                                            
                                            
                                            
                                            8,777Deferred
      revenue
                                            
                                            
                                            4,686
                                            
                                            
                                            
                                            4,681Capital
      lease obligations
                                            
                                            
                                            5,377
                                            
                                            
                                            
                                            5,254Other
      long-term liabilities
                                            
                                            
                                            1,408
                                            
                                            
                                            
                                            1,756Total
      liabilities
                                            
                                            
                                            354,470
                                            
                                            
                                            
                                            395,175Equity:Synutra
      International, Inc., shareholders' equityCommon
      stock, $.0001 par value: 250,000 authorized; 54,001 and 54,001 issued and
      outstanding at December 31, 2009 and March 31, 2009,
      respectively
                                            
                                            
                                            5
                                            
                                            
                                            
                                            5Additional
      paid-in capital
                                            
                                            
                                            76,607
                                            
                                            
                                            
                                            76,607Accumulated
      deficit
                                            
                                            
                                            (57,367
                                            )
                                            
                                            
                                            (23,674
                                            )Accumulated
      other comprehensive income
                                            
                                            
                                            24,046
                                            
                                            
                                            
                                            23,921Total
      Synutra common shareholders’ equity
                                            
                                            
                                            43,291
                                            
                                            
                                            
                                            76,859Noncontrolling
      interest
                                            
                                            
                                            520
                                            
                                            
                                            
                                            537Total
      equity
                                            
                                            
                                            43,811
                                            
                                            
                                            
                                            77,396TOTAL
      LIABILITIES AND EQUITY
                                            
                                            $
                                            398,281
                                            
                                            
                                            $
                                            472,571




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




3




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(in
thousands except earnings per share data)


(unaudited)




Three Months Ended
                              
                              
                              Nine Months EndedDecember 31,
                              
                              
                              December 31,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Net
      sales
                              
                              $
                              96,795
                              
                              
                              $
                              17,658
                              
                              
                              $
                              209,475
                              
                              
                              $
                              239,829Cost
      of sales
                              
                              
                              84,175
                              
                              
                              
                              27,418
                              
                              
                              
                              165,004
                              
                              
                              
                              209,417Gross
      profit (loss)
                              
                              
                              12,620
                              
                              
                              
                              (9,760
                              )
                              
                              
                              44,471
                              
                              
                              
                              30,412Selling
      and distribution expense
                              
                              
                              11,635
                              
                              
                              
                              11,347
                              
                              
                              
                              32,446
                              
                              
                              
                              33,428Advertising
      and promotion expenses
                              
                              
                              4,596
                              
                              
                              
                              34,582
                              
                              
                              
                              27,248
                              
                              
                              
                              85,315General
      and administrative expenses
                              
                              
                              5,466
                              
                              
                              
                              8,197
                              
                              
                              
                              15,016
                              
                              
                              
                              18,917Impairment
      loss
                              
                              
                              53
                              
                              
                              
                              —
                              
                              
                              
                              5,974
                              
                              
                              
                              —Other
      operating income, net
                              
                              
                              274
                              
                              
                              
                              70
                              
                              
                              
                              498
                              
                              
                              
                              803Loss
      from operations
                              
                              
                              (8,856
                              )
                              
                              
                              (63,816
                              )
                              
                              
                              (35,715
                              )
                              
                              
                              (106,445
                              )Interest
      expense
                              
                              
                              1,051
                              
                              
                              
                              1,378
                              
                              
                              
                              6,217
                              
                              
                              
                              2,444Interest
      income
                              
                              
                              716
                              
                              
                              
                              110
                              
                              
                              
                              1,604
                              
                              
                              
                              494Other
      expense, net
                              
                              
                              (40
                              )
                              
                              
                              (431
                              )
                              
                              
                              (1,091
                              )
                              
                              
                              (785
                              )Loss
      before income tax expense (benefit)
                              
                              
                              (9,231
                              )
                              
                              
                              (65,515
                              )
                              
                              
                              (41,419
                              )
                              
                              
                              (109,180
                              )Income
      tax expense (benefit)
                              
                              
                              638
                              
                              
                              
                              (16,147
                              )
                              
                              
                              (7,497
                              )
                              
                              
                              (25,778
                              )Net
      loss
                              
                              
                              (9,869
                              )
                              
                              
                              (49,368
                              )
                              
                              
                              (33,922
                              )
                              
                              
                              (83,402
                              )Net
      loss attributable to the noncontrolling interest
                              
                              
                              (141
                              )
                              
                              
                              (26
                              )
                              
                              
                              (229
                              )
                              
                              
                              (24
                              )Net
      loss attributable to Synutra International, Inc. common
      shareholders
                              
                              $
                              (9,728
                              )
                              
                              $
                              (49,342
                              )
                              
                              $
                              (33,693
                              )
                              
                              $
                              (83,378
                              )Loss
      per share - basic and diluted
                              
                              $
                              (0.18
                              )
                              
                              $
                              (0.91
                              )
                              
                              $
                              (0.62
                              )
                              
                              $
                              (1.54
                              )Weighted
      average common share outstanding - basic and diluted
                              
                              
                              54,001
                              
                              
                              
                              54,001
                              
                              
                              
                              54,001
                              
                              
                              
                              54,001




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




4




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(in
thousands)


(unaudited)




Three Months Ended
                        
                        Nine Months EndedDecember 31,
                        
                        December 31,2009
                        
                        2008
                        
                        2009
                        
                        2008Net
      loss
                        
                        $
                        (9,869
                        )
                        
                        $
                        (49,368
                        )
                        
                        $
                        (33,922
                        )
                        
                        $
                        (83,402
                        )Currency
      translation adjustment
                        
                        
                        11
                        
                        
                        
                        (359
                        )
                        
                        
                        125
                        
                        
                        
                        6,193Total
      comprehensive loss
                        
                        
                        (9,858
                        )
                        
                        
                        (49,727
                        )
                        
                        
                        (33,797
                        )
                        
                        
                        (77,209
                        )Less:
      Comprehensive loss attributable to noncontrolling interest
                        
                        
                        141
                        
                        
                        
                        26
                        
                        
                        
                        229
                        
                        
                        
                        24Comprehensive
      loss attributable to Synutra International, Inc. common
      shareholders
                        
                        $
                        (9,717
                        )
                        
                        $
                        (49,701
                        )
                        
                        $
                        (33,568
                        )
                        
                        $
                        (77,185
                        )




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




5




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY


(in
thousands)


(unaudited)




Common StockShares
                        
                        
                        Amount
                        
                        
                        Additional
                          paid-in
                          capital
                        
                        
                        Retained
                          earnings
                          (accumulated
                          deficit)
                        
                        
                        Accumulated
                          other
                          comprehensive
                          income
                        
                        
                        Noncontrolling
                          Interest
                        
                        
                        Total
                          equityBalance,
      March 31, 2008
                        
                        
                        54,001
                        
                        
                        $
                        5
                        
                        
                        $
                        76,607
                        
                        
                        $
                        76,875
                        
                        
                        $
                        17,772
                        
                        
                        $
                        385
                        
                        
                        $
                        171,644Net
      loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (83,378
                        )
                        
                        
                        —
                        
                        
                        
                        (24
                        )
                        
                        
                        (83,402
                        )Currency
      translation adjustment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,193
                        
                        
                        
                        —
                        
                        
                        
                        6,193Other
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        113
                        
                        
                        
                        113Balance,
      December 31, 2008
                        
                        
                        54,001
                        
                        
                        $
                        5
                        
                        
                        $
                        76,607
                        
                        
                        $
                        (6,503
                        )
                        
                        $
                        23,965
                        
                        
                        $
                        474
                        
                        
                        $
                        94,548




Common StockShares
                        
                        
                        Amount
                        
                        
                        Additional
                          paid-in
                          capital
                        
                        
                        Accumulated
                          deficit
                        
                        
                        Accumulated
                          other
                          comprehensive
                          income
                        
                        
                        Noncontrolling
                          Interest
                        
                        
                        Total
                          equityBalance,
      March 31, 2009
                        
                        
                        54,001
                        
                        
                        $
                        5
                        
                        
                        $
                        76,607
                        
                        
                        $
                        (23,674
                        )
                        
                        $
                        23,921
                        
                        
                        $
                        537
                        
                        
                        $
                        77,396Net
      loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (33,693
                        )
                        
                        
                        —
                        
                        
                        
                        (229
                        )
                        
                        
                        (33,922
                        )Currency
      translation adjustment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        125
                        
                        
                        
                        *
                        
                        
                        
                        125Other
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        212
                        
                        
                        
                        212Balance,
      December 31, 2009
                        
                        
                        54,001
                        
                        
                        $
                        5
                        
                        
                        $
                        76,607
                        
                        
                        $
                        (57,367
                        )
                        
                        $
                        24,046
                        
                        
                        $
                        520
                        
                        
                        $
                        43,811





* Less
than 1.




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




6




SYNUTRA
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)




Nine Months Ended
                                        December 31,2009
                                      
                                      
                                      2008Operating
      activities:Net
      loss
                                      
                                      $
                                      (33,922
                                      )
                                      
                                      $
                                      (83,402
                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of debt issuance costs
                                      
                                      
                                      240
                                      
                                      
                                      
                                      241Depreciation
      and amortization
                                      
                                      
                                      7,305
                                      
                                      
                                      
                                      6,190Bad
      debt expense (reversal)
                                      
                                      (867
                                      )
                                      
                                      
                                      541Loss
      on disposal of property, plant and equipment
                                      
                                      
                                      10
                                      
                                      
                                      
                                      12Impairment
      loss
                                      
                                      
                                      5,974
                                      
                                      
                                      
                                      —Deferred
      income tax
                                      
                                      
                                      (6
                                      )
                                      
                                      
                                      66Other
      compensation expense
                                      
                                      
                                      212
                                      
                                      
                                      
                                      113Changes
      in assets and liabilities:Accounts
      receivable
                                      
                                      
                                      (741
                                      )
                                      
                                      
                                      (9,408
                                      )Inventories
                                      
                                      
                                      50,271
                                      
                                      
                                      
                                      (31,255
                                      )Due
      from related parties
                                      
                                      
                                      (97
                                      )
                                      
                                      
                                      (4,124
                                      )Prepaid
      expenses and other current assets
                                      
                                      
                                      204
                                      
                                      
                                      
                                      (3,508
                                      )Accounts
      payable
                                      
                                      
                                      (54,554
                                      )
                                      
                                      
                                      58,945Due
      to related parties
                                      
                                      
                                      (2,446
                                      )
                                      
                                      
                                      2,389Advances
      from customers
                                      
                                      
                                      5,699
                                      
                                      
                                      
                                      12,972Income
      tax receivable
                                      
                                      
                                      (2,428
                                      )
                                      
                                      
                                      (31,740
                                      )Product
      recall provision
                                      
                                      
                                      (4,547
                                      )
                                      
                                      
                                      15,006Other
      liabilities
                                      
                                      
                                      454
                                      
                                      
                                      
                                      359Net
      cash used in operating activities
                                      
                                      
                                      (29,239
                                      )
                                      
                                      
                                      (66,603
                                      )Investing
      activities:Acquisition
      of property, plant and equipment
                                      
                                      
                                      (8,206
                                      )
                                      
                                      
                                      (38,445
                                      )Acquisition
      of intangible assets
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,474
                                      )Change
      in restricted cash
                                      
                                      
                                      20,991
                                      
                                      
                                      
                                      (30,906
                                      )Payment
      for business acquisition
                                      
                                      
                                      (1,468
                                      )
                                      
                                      
                                      (5,088
                                      )Proceeds
      from assets disposal
                                      
                                      
                                      20,201
                                      
                                      
                                      
                                      —Net
      cash provided by (used in) investing activities
                                      
                                      
                                      31,518
                                      
                                      
                                      
                                      (76,913
                                      )Financing
      activities:Proceeds
      from short-term loans
                                      
                                      
                                      313,351
                                      
                                      
                                      
                                      146,362Proceeds
      from long-term loans
                                      
                                      
                                      17,584
                                      
                                      
                                      
                                      —Repayment
      of short-term loans
                                      
                                      
                                      (314,509
                                      )
                                      
                                      
                                      (45,860
                                      )Payment
      on capital lease obligations
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (530
                                      )Net
      cash provided by financing activities
                                      
                                      
                                      16,426
                                      
                                      
                                      
                                      99,972Effect
      of exchange rate changes on cash and cash equivalents
                                      
                                      
                                      11
                                      
                                      
                                      
                                      1,779Net
      change in cash and cash equivalents
                                      
                                      
                                      18,716
                                      
                                      
                                      
                                      (41,765
                                      )Cash
      and cash equivalents, beginning of period
                                      
                                      
                                      37,736
                                      
                                      
                                      
                                      97,425Cash
      and cash equivalents, end of period
                                      
                                      $
                                      56,452
                                      
                                      
                                      $
                                      55,660Supplemental
      cash flow information:Interest
      paid
                                      
                                      $
                                      8,614
                                      
                                      
                                      $
                                      3,002Income
      tax paid
                                      
                                      $
                                      762
                                      
                                      
                                      $
                                      6,138Non-cash
      investing and financing activities:Purchase
      of property, plant and equipment by accounts payable
                                      
                                      $
                                      9,346
                                      
                                      
                                      $
                                      12,002Assets
      acquired under capital lease
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      5,350Acquisition
      of subsidiary by accounts payable
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      2,400Disposal
      of property by due from related parties
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      1,726




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




7




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 the “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 nine months ended December 31, 2009 and, as of December 31,
2009, had a working capital deficit of approximately $66.2 million caused
primarily by the subsequent loss of sales following the product recall. The
occurrence of these economic events, the ensuing operating losses and the
negative cash flows raise substantial doubt as to the Company's ability to
continue as a going concern. Management is 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 reflect any adjustments relating to the recoverability and reclassification
of assets and liabilities as might be necessary if the Company is unable to
continue as a going concern.





The
unaudited condensed consolidated financial statements include the financial
statements of Synutra International, Inc. and its subsidiaries, its variable
interest entity, Beijing Shengyuan Huimin Technology Service Co., Ltd., 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 December 31,
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.




8




3.
            RECENTLY
      ADOPTED ACCOUNTING PRONOUNCEMENTS




The
Company adopted ASC No. 855, Subsequent
Events(pre-codification reference as SFAS No. 165, Subsequent
Events) on April 1, 2009 on a prospective basis. ASC No. 855 includes
guidance for the accounting and disclosure of events that happen after the date
of the balance sheet but before the release of the financial statements. The
adoption of this topic did not have a material effect on the Company’s
consolidated financial statements.




In June
2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification and the Hierarchy of GAAP (Codification). The
Codification is the single official source of authoritative U.S. accounting and
reporting standards applicable for all nongovernmental entities, with the
exception of guidance issued by the Securities and Exchange Commission. The
Codification did not change GAAP, but organized it into an online research
system sorted by individual accounting topics, which are further divided into
subtopics. The FASB now issues new standards in the form of Accounting Standards
Updates. The Codification is effective for financial statements issued for
periods ending after September 15, 2009. The adoption of the Codification did
not have a material impact on the Company’s financial statements.





In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Fair Value
Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value”.
ASU 2009-05 amends ASC 820-10, “Fair Value Measurements and Disclosures—
Overall”, for the fair value measurement of liabilities. It provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure the fair value using (1) a valuation technique that uses the quoted
price of the identical liability when traded as an asset or quoted prices for
similar liabilities or similar liabilities when traded as assets or (2) another
valuation technique that is consistent with the principles of Topic 820. It also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability and that both a quoted price in an active market for the identical
liability at measurement date and that the quoted price for the identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value measurements. The
provisions of ASU 2009-05 are effective for the first reporting period
(including interim periods) beginning after issuance. Early application is
permitted. The adoption of the ASU did not have a material impact on the
Company’s financial statements.





4.
            RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued Accounting Standards Codification (ASC) No. 810-10,
"Consolidation – Overall (previously Statement of Financial Accounting Standards
(“SFAS”) No. 167, "Amendments to FASB Interpretation No. 46(R)"). ASC No.810-10
amends FIN 46(R) in determining whether an enterprise has a controlling
financial interest in a variable interest entity. This determination identifies
the primary beneficiary of a variable interest entity as the enterprise that has
both the power to direct the activities of a variable interest entity that most
significantly impacts the entity’s economic performance, and the obligation to
absorb losses or the right to receive benefits of the entity that could
potentially be significant to the variable interest entity. SFAS No. 167 also
requires ongoing reassessments of whether an enterprise is the primary
beneficiary and eliminates the quantitative approach previously required for
determining the primary beneficiary. SFAS No. 167 is effective for the Company
April 1, 2010. The Company does not expect the adoption of this pronouncement to
have a material effect on the consolidated financial statements.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) —Improving Disclosures about Fair Value Measurements”.
The ASU amends ASC 820 (formerly SFAS 157) to add new requirements for
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and
3. The guidance in the ASU is effective for the first reporting period beginning
after December 15, 2009, except for the requirement to provide the Level 3
activity of purchases, sales, issuances, and settlements on a gross basis, which
will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. In the period of initial adoption,
entities will not be required to provide the amended disclosures for any
previous periods presented for comparative purposes. However, those disclosures
are required for periods ending after initial adoption. Early adoption is
permitted. The Company is currently evaluating the impact of adoption on its
consolidated financial statements.




9





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
nine months ended December 31, 2009, the Company reversed recall expenses of
$0.9 million, mostly being overestimated product replacement costs. The Company
believes that the product recall has been substantially completed as of December
31, 2009 and estimates that there should be no further material product recall
costs incurred. The following is a summary of the liabilities related to the
product recall that were recorded during the fiscal year ended March 31, 2009
and nine months ended December 31, 2009:




(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)
                      
                      
                      (886
                      )Replacement
      of products
                      
                      
                      (3,421
                      )Payment
      of cash, net
                      
                      
                      (243
                      )Foreign
      currency translation
                      
                      
                      3Balance
      at December 31, 2009
                      
                      $
                      —





6.
            IMPAIRMENT
      LOSS





On
September 9, 2009, two subsidiaries of Synutra International, Inc., Heilongjiang
Baoquanling Shengyuan Dairy Co., Ltd. (“Baoquanling”) and Heilongjiang
Baoquanling Shengyuan Dairy Cow Breeding Co., Ltd. (“Cow Breeding”) entered into
an asset purchase agreement (the “Agreement”) with Heilongjiang Wondersun Dairy
Co., Ltd. (“Wondersun”), to sell three dairy farms and two milk processing
factories in China for approximately $28.9 million, plus reimbursement for
certain qualified construction in progress assets acquired subsequent to the
valuation date. The assets were classified as held for sale assets on September
9, 2009 and were written down to the fair value less estimated cost to sell. No
depreciation or amortization was recorded after September 9, 2009. The
previous operating results of these assets was not reported as discontinued
operation, as the assets group is part of a larger cash-flow-generating group,
and on its own is not a component of the entity, and therefore the conditions in
paragraph 205-20-45-1, Reporting Discontinued
Operations, for reporting in discontinued operations the operations
(losses) of the assets group would not be met. After the melamine
contamination incident, the Company began to use imported milk powder in the
powdered formula products and decreased the consumption of domestically produced
milk powder, hence the Company decided to sell the Baoquanling and Cow
Breeding’s assets. As of December 31, 2009, the Company has transferred majority
of the assets group to Wondersun and the transaction is expected to be
completed in early 2010. The estimated impairment loss on the assets
group for the three and nine months ended December 31, 2009 was $53,000 and
$6.0 million, respectively.





7.
            FAIR
      VALUE MEASUREMENTS





The
carrying value of financial instruments including cash, receivables, accounts
payable, accrued expenses and debt, approximates their fair value at December
31, 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 ASC No.820, Fair Value Measurements and
Disclosures, which was not delayed by ASC No. 820-10-65-1, Transition related to FASB Staff
Position Financial Accounting Standards (“FAS”) 157-2, Effective Date of FASB
statement No. 157 (pre-codification reference as FASB Staff Position FAS
157-2). ASC 820-10-65-1 delays the effective date of ASC No.820 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, ASC
No.820 was applied to the Company’s non-financial assets and liabilities
effective on April 1, 2009. ASC No.820 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). ASC No.820 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 ASC No.820 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.





The
following table sets forth by level, within the fair value hierarchy, the
Company’s assets and liabilities accounted for at fair value on a
nonrecurring basis as of December 31, 2009. The Company did not have any items
recorded at fair value on a recurring basis subsequent to initial recognition as
of March 31, 2009 and December 31, 2009.





Description
                          
                          For the nine months ended
                            December 31,2009
                          
                          Quoted
                            Prices in
                            Active
                            Markets for
                            Identical
                            Assets
                            (Level 1)
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)
                          
                          Total
                            Loss(In
      thousands)Assets
      held for sale
                          
                          $
                          30,131
                          
                          —
                          
                          $
                          30,131
                          
                          —
                          
                          $
                          5,974





In
accordance with the provisions of ASC No.360, Property, Plant and
Equipment, assets held for sale with a carrying amount of $35.1 million
were written down to their fair value of $30.1 million, less cost to sell
of $1.0 million, resulting in a loss of $6.0 million, which was included in
impairment loss for the nine months ended December 31, 2009. The fair value of
the assets held for sale was determined by executed transaction price with
a third party.  The Company has categorized this as a significant
other observable input (level 2).




10





8.
            INVENTORIES




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





December 31,
                      2009
                    
                    
                    March 31,
                      2009(In thousands)Raw
      materials
                    
                    $
                    45,203
                    
                    
                    $
                    96,361Work-in-progress
                    
                    
                    14,470
                    
                    
                    
                    11,739Finished
      goods
                    
                    
                    3,503
                    
                    
                    
                    6,624Total
      Inventories
                    
                    $
                    63,176
                    
                    
                    $
                    114,724




The value
of goods-in-transit included in raw materials was $8.0 million and $43.5 million
as of December 31, 2009 and March 31, 2009, respectively, which mainly
represented the overseas purchase of milk powder and whey protein.





9.
            DUE
      FROM (TO) RELATED PARTIES AND RELATED PARTY
  TRANSACTIONS


A.
            Classification
      of related party balances by name


a.
            Due
      from related parties





December 31,
                      2009
                    
                    
                    March 31,
                      2009(In thousands)Sheng
      Zhi Da Dairy Group Corporation
                    
                    $
                    1,728
                    
                    
                    $
                    1,726Beijing
      Honnete Dairy Co., Ltd.
                    
                    
                    754
                    
                    
                    
                    737St.
      Angel (Beijing) Business Service Co., Ltd.
                    
                    
                    34
                    
                    
                    
                    —Total
      Due from Related Parties
                    
                    $
                    2,516
                    
                    
                    $
                    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 December 31, 2009 and March 31, 2009.





b.
            Due
      to related parties




December 31,
                      2009
                    
                    
                    March 31,
                      2009(In thousands)Sheng
      Zhi Da Dairy Group Corporation
                    
                    $
                    2,101
                    
                    
                    $
                    2,113Beijing
      Honnete Dairy Co., Ltd.
                    
                    
                    568
                    
                    
                    
                    3,057Beijing
      St. Angel Cultural Communication Co., Ltd.
                    
                    
                    6
                    
                    
                    
                    —St.
      Angel (Beijing) Business Service Co., Ltd.
                    
                    
                    —
                    
                    
                    
                    2Total
      Due to Related Parties
                    
                    $
                    2,675
                    
                    
                    $
                    5,172




The
Company had certain related party borrowings which
were recorded in short-term loan. See Note 11. 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
three and nine months ended December 31, 2009, the Company’s sales to the
related parties were whey protein to Beijing Honnete Dairy Co., Ltd., or
Honnete, industrial milk powder to Beijing Kelqin Dairy Co., Ltd. and
powdered formula products to St. Angel (Beijing) Business Service Co., Ltd., or
St. Angel. In the three and nine months ended December 31, 2008, the Company’s
sales to the related parties included whey protein to Honnete.




Three Months Ended
                          
                          
                          Nine Months EndedDecember 31,
                          
                          
                          December 31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008(In thousands)Beijing
      Honnete Dairy Co., Ltd.
                          
                          $
                          1,770
                          
                          
                          $
                          815
                          
                          
                          $
                          6,048
                          
                          
                          $
                          815Beijing
      Kelqin Dairy Co., Ltd
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          31
                          
                          
                          
                          —St.
      Angel (Beijing) Business Service Co., Ltd.
                          
                          
                          76
                          
                          
                          
                          —
                          
                          
                          
                          76
                          
                          
                          
                          —Total
                          
                          $
                          1,846
                          
                          
                          $
                          815
                          
                          
                          $
                          6,155
                          
                          
                          $
                          815





C.
            Purchases
      from related parties




In the
three and nine months ended December 31, 2009, the Company’s purchases from
related parties were whey protein powders from Honnete. In the three and nine
months ended December 31, 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 Beijing St. Angel
Cultural Communication Co., Ltd.




Three Months Ended
                          
                          
                          Nine Months EndedDecember 31,
                          
                          
                          December 31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008(In thousands)Beijing
      Honnete Dairy Co., Ltd.
                          
                          $
                          98
                          
                          
                          $
                          459
                          
                          
                          $
                          98
                          
                          
                          $
                          8,459St.
      Angel (Beijing) Business Service Co., Ltd.
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,639Beijing
      St. Angel Cultural Communication Co., Ltd.
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          154Total
                          
                          $
                          98
                          
                          
                          $
                          459
                          
                          
                          $
                          98
                          
                          
                          $
                          10,252




11





10.
            PROPERTY,
      PLANT AND EQUIPMENT, NET





December 31,
                              2009
                            
                            
                            March 31,
                              2009(In thousands)Property,
      plant and equipment, cost:Buildings
                            
                            $
                            48,658
                            
                            
                            $
                            51,693Plant
      and machinery
                            
                            
                            62,852
                            
                            
                            
                            65,020Office
      equipment and furnishings
                            
                            
                            3,248
                            
                            
                            
                            3,076Motor
      vehicles
                            
                            
                            2,573
                            
                            
                            
                            2,963Others
                            
                            
                            392
                            
                            
                            
                            543Total
      cost
                            
                            $
                            117,723
                            
                            
                            $
                            123,295Less:
      Accumulated depreciation:Buildings
                            
                            
                            5,654
                            
                            
                            
                            4,472Plant
      and machinery
                            
                            
                            15,485
                            
                            
                            
                            11,804Office
      equipment and furnishings
                            
                            
                            1,501
                            
                            
                            
                            1,183Motor
      vehicles
                            
                            
                            997
                            
                            
                            
                            885Others
                            
                            
                            322
                            
                            
                            
                            273Total
      accumulated depreciation
                            
                            
                            23,959
                            
                            
                            
                            18,617Construction
      in progress
                            
                            
                            16,957
                            
                            
                            
                            39,803Property,
      plant and equipment, net
                            
                            $
                            110,721
                            
                            
                            $
                            144,481




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




The
Company recorded depreciation expense of $2.2 million and $2.0 million for the
three months ended December 31, 2009 and 2008, respectively, and recorded
depreciation expense of $7.1 million and $5.3 million for the nine months ended
December 31, 2009 and 2008, respectively.





11.
            DEBT




On
October 11, 2007, ABN AMRO Bank, N.V. (“ABN”) and another lender provided a
three year term loan, or the New ABN Loan, to the Company in the aggregate
amount of $35.0 million. The principal amount, and any unpaid accrued interest
on the New ABN Loan, will be due on October 12, 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 nine-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 and subsequent loss of sales, the
Company has not been able to meet two of the financial covenants since September
30, 2008 and all four financial covenants since December 31, 2008. The
Company has requested the lenders to waive these breaches and to reset the
financial covenants for the next few quarters, and had placed $5.0 million in
cash deposit with ABN by December 31, 2009.  On February 5, 2010, the
Company and the lenders signed a term sheet pursuant to which the lenders agreed
to waive and release prior claims against the
Company and prior breaches of the loan covenants covered in the
period from September 2008 to December 2009. In addition, both parties agreed on
certain proposed changes to the loan terms, which include: payment of a one-off
waiver fee by the Company equal to 0.5% of the aggregate principal amount
outstanding; an increase in the interest rate from LIBOR plus 3.5% to LIBOR plus
4.5% effective from the date on which the amended loan agreement is to be
signed; placement of additional cash deposits under certain circumstances to
increase the cash deposit to an aggregate amount not in excess of $10.0 million;
and reset of the financial covenants to only one covenant measured against a
minimum Earnings Before Internet, Taxes, Depreciation and Amortization (“EBITDA”) to be
tested quarterly beginning with the quarter ended December 31, 2009. The Company
has performed an analysis on the EBITDA and confirmed that the financial
covenant was satisfied as of December 31, 2009.




12





In
addition to the ABN Loan, as of December 31, 2009 and March 31, 2009, the
Company had short-term loans from PRC banks in the amount of $185.4 million and
$182.6 million, respectively.  The maturity dates of the short term
loans outstanding from PRC banks at December 31, 2009 range from January
2010 to December 2010. As of the
date of filing of this 10-Q, all outstanding short-term loans from local banks
that have become due have been repaid.The weighted average interest rate
on short-term loans from PRC banks outstanding at December 31, 2009 and
March 31, 2009 was 3.7% and 4.1%, respectively. The loans at December 31,
2009 and March 31, 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 $31.7
million and $34.2 million as of December 31, 2009 and March 31, 2009,
respectively.  The value of land use right pledged was both $3.4
million as of December 31, 2009 and March 31, 2009, respectively. The value of
cash pledged was $47.7 million and $66.1 million which were recorded in
restricted cash as of December 31, 2009 and March 31, 2009,
respectively.




As of
December 31, 2009 and March 31, 2009, the Company had long-term loans which are
unsecured debt, from PRC banks in the amount of $26.4 million and $8.8 million,
respectively. The maturity dates of the long-term loans outstanding from PRC
banks at December 31, 2009 are from March 2011 to June 2012. The weighted
average interest rate of outstanding long-term loans at December 31, 2009 and
March 31, 2009 was 5.2% 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 $3.9 million and $7.5
million as of December 31, 2009 and March 31, 2009, respectively. The maturity
dates of the short term loans outstanding from related parties at December 31,
2009 are from January 2010 to November 2010, and are extendable on the same
terms upon maturity. The weighted average interest rate of outstanding short
term loans from related parties at December 31, 2009 and March 31, 2009
was 10.0% and 7.8%, respectively.





12.
            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 ASC No. 740-270, “Income tax – Interim
reporting” (previously FIN 18, " Accounting for Income Taxes in Interim Period
"). 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.





13.
            LOSS
      PER SHARE





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




Three Months Ended
                    
                    
                    Nine Months EndedDecember 31,
                    
                    
                    December 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      loss attributable to Synutra International, Inc.
                    
                    $
                    (9,728
                    )
                    
                    $
                    (49,342
                    )
                    
                    $
                    (33,693
                    )
                    
                    $
                    (83,378
                    )Basic
      and diluted weighted average common shares
outstanding
                    
                    
                    54,001
                    
                    
                    
                    54,001
                    
                    
                    
                    54,001
                    
                    
                    
                    54,001Loss
      per share – basic and diluted
                    
                    $
                    (0.18
                    )
                    
                    $
                    (0.91
                    )
                    
                    $
                    (0.62
                    )
                    
                    $
                    (1.54
                    )





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 loss
per share for all periods presented as they would be anti-dilutive.





13





14.
            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”).





"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.





Three Months Ended
                              
                              
                              Nine Months EndedDecember 31,
                              
                              
                              December 31,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008(In thousands)NET
      SALES TO EXTERNAL CUSTOMERSPowdered
      formula
                              
                              $
                              40,082
                              
                              
                              $
                              12,384
                              
                              
                              $
                              124,583
                              
                              
                              $
                              215,613Baby
      food
                              
                              
                              65
                              
                              
                              
                              —
                              
                              
                              
                              676
                              
                              
                              
                              —Nutritional
      ingredients and supplements
                              
                              
                              114
                              
                              
                              
                              —
                              
                              
                              
                              630
                              
                              
                              
                              —All
      other
                              
                              
                              56,534
                              
                              
                              
                              5,274
                              
                              
                              
                              83,586
                              
                              
                              
                              24,216Net
      sales
                              
                              $
                              96,795
                              
                              
                              $
                              17,658
                              
                              
                              $
                              209,475
                              
                              
                              $
                              239,829INTERSEGMENT
      SALESPowdered
      formula
                              
                              $
                              1
                              
                              
                              $
                              —
                              
                              
                              $
                              6
                              
                              
                              $
                              —Baby
      food
                              
                              
                              62
                              
                              
                              
                              —
                              
                              
                              
                              446
                              
                              
                              
                              —Nutritional
      ingredients and supplements
                              
                              
                              2,850
                              
                              
                              
                              504
                              
                              
                              
                              6,213
                              
                              
                              
                              504All
      other
                              
                              
                              409
                              
                              
                              
                              —
                              
                              
                              
                              1,463
                              
                              
                              
                              —Intersegment
      sales
                              
                              $
                              3,322
                              
                              
                              $
                              504
                              
                              
                              $
                              8,128
                              
                              
                              $
                              504GROSS
      PROFIT (LOSS)Powdered
      formula
                              
                              $
                              16,664
                              
                              
                              $
                              (11,429
                              )
                              
                              $
                              58,134
                              
                              
                              $
                              26,726Baby
      food
                              
                              
                              (15
                              )
                              
                              
                              —
                              
                              
                              
                              162
                              
                              
                              
                              —Nutritional
      ingredients and supplements
                              
                              
                              (227
                              )
                              
                              
                              —
                              
                              
                              
                              (1,106
                              )
                              
                              
                              —All
      other
                              
                              
                              (3,802
                              )
                              
                              
                              1,669
                              
                              
                              
                              (12,719
                              )
                              
                              
                              3,686Gross
      profit (loss)
                              
                              
                              12,620
                              
                              
                              
                              (9,760
                              )
                              
                              
                              44,471
                              
                              
                              
                              30,412Selling
      and distribution expenses
                              
                              
                              11,635
                              
                              
                              
                              11,347
                              
                              
                              
                              32,446
                              
                              
                              
                              33,428Advertising
      and promotion expenses
                              
                              
                              4,596
                              
                              
                              
                              34,582
                              
                              
                              
                              27,248
                              
                              
                              
                              85,315General
      and administrative expenses
                              
                              
                              5,466
                              
                              
                              
                              8,197
                              
                              
                              
                              15,016
                              
                              
                              
                              18,917Impairment
      loss
                              
                              
                              53
                              
                              
                              
                              —
                              
                              
                              
                              5,974
                              
                              
                              
                              —Other
      operating income, net
                              
                              
                              274
                              
                              
                              
                              70
                              
                              
                              
                              498
                              
                              
                              
                              803Loss
      from operations
                              
                              
                              (8,856
                              )
                              
                              
                              (63,816
                              )
                              
                              
                              (35,715
                              )
                              
                              
                              (106,445
                              )Interest
      expense
                              
                              
                              1,051
                              
                              
                              
                              1,378
                              
                              
                              
                              6,217
                              
                              
                              
                              2,444Interest
      income
                              
                              
                              716
                              
                              
                              
                              110
                              
                              
                              
                              1,604
                              
                              
                              
                              494Other
      expense, net
                              
                              
                              (40
                              )
                              
                              
                              (431
                              )
                              
                              
                              (1,091
                              )
                              
                              
                              (785
                              )Loss
      before income tax benefit
                              
                              $
                              (9,231
                              )
                              
                              $
                              (65,515
                              )
                              
                              $
                              (41,419
                              )
                              
                              $
                              (109,180
                              )





December 31,
                      2009
                    
                    
                    March 31,
                      2009(In thousands)TOTAL ASSETSPowdered
      formula
                    
                    $
                    374,535
                    
                    
                    $
                    443,946Baby
      food
                    
                    
                    35,184
                    
                    
                    
                    30,291Nutritional
      ingredients and supplements
                    
                    
                    39,076
                    
                    
                    
                    49,611All
      other
                    
                    
                    114,325
                    
                    
                    
                    115,923Intersegment
      elimination
                    
                    
                    (164,839
                    )
                    
                    
                    (167,200
                    )Total
                    
                    $
                    398,281
                    
                    
                    $
                    472,571


14





15.
            CONTINGENCIES




As of
December 31, 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.





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 responded to the Opposition on June 15,
2009 with an additional filing. 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 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 these above
cases.





16.
            SUBSEQUENT
      EVENTS




The
Company has evaluated subsequent events, as defined by ASC No. 855, Subsequent Events, through
the date that the unaudited condensed consolidated financial
statements were issued on February 9, 2010. Except for the modification of the
terms of the ABN loan discussed in Note 11, there was no other material event to
be reported.


15


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 Securities and Exchange
Commission, or 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.





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 December 31, 2009, this network
comprised over 540 distributors and over 1,000 sub-distributors who sell
our products in over 67,000 retail outlets.





We
currently have three reportable segments which are:





o
            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;





o
            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 2010;





o
            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 which we
      launched in the fiscal quarter ended December 31,
    2008.





Other
business includes non-core businesses such as toll packaging, toll drying
service and sales of ingredients and materials to industrial customers. The
major portion of other business for the fiscal quarter ended December 31, 2009
was sales of surplus industrial milk powder.





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 nine
months ended December 31, 2009, the Company reversed recall expense of $0.9
million, mostly being overestimated product replacement cost. The Company
believes that the product recall has been substantially completed and estimates
that there should be no further material product recall costs incurred. We
believe that our fast response to the melamine crisis, as well as recall
efforts, including instituting a voluntary recall were well recognized by the
public and helped us to maintain our reputation, brand recognition and
relationships with our distributors and suppliers.




16





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 nine months ended December 31, 2009 decreased by 12.6% to $209.5
million from $239.8 million for the same period in the previous year. Our gross
profit for the nine months ended December 31, 2009 increased by 46.4% to
$44.5 million from $30.4 million for the same period in the previous year. Our
net loss attributable to Synutra International, Inc. common
shareholders for the nine months ended December 31, 2009 was $33.7 million,
as compared to net loss attributable to Synutra International, Inc. common
shareholders of $83.4 million for the same period in the previous
year.





The
decrease in the Company’s net sales reflected in part the lingering impact of
the product recall carried out in late 2008, as well as a greater proportion of
rebates to distributors and the additional product discounts we provided to
distributors beginning August 2009 to compensate distributors as they were
carrying out certain product promotion activities that were previously handled
by the Company.  However, there have been strong signs of recovery in
end-market sales. According to data released by the Ministry of
Commerce’s Commercial Information Center (CIC), the Company’s market share
has stabilized at approximately 7.0% for the fiscal quarter ended December 31,
2009, representing a significant increase from the 3.4% as reported in October
2008, the month immediately following the melamine contamination incident. In
addition, the Company’s powdered formula segment recorded a gross margin of
$16.7million, or 41.6% from net sales of $40.1 million for the fiscal quarter
ended December 31, 2009, representing a significant improvement from fiscal
quarters that immediately followed the product recall. The improvement was
driven primarily through sales of the Company’s premium line of Super
series infant formula products. The sales of Super series infant formula
accounted for about 59.6% of the volume of sales and 70.9% of the net sales for
the segment for the fiscal quarter ended December 31, 2009. The Company believes
that the improvement in sales of its Super series infant formula has led
the segment in market recovery and helped to stabilize the Company’s market
position. The Company also believes that Super’s success has laid a solid
foundation for its future growth.




Though
powdered formula sales have improved since the quarter ended December 31, 2008
that immediately followed the recall, the Company has not yet recovered its
pre-recall market share of approximately 10.5% in August 2008, according to
CIC.  In order to regain its market leadership, 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 control and monitoring mechanism
aimed at improving sales efficiency and managing the effectiveness of our
distribution channels which comprise of more than 540 distributors across the
market. The Company believes that these initiatives are generating favorable
results as reflected in the improved market share data for the fiscal quarter
ended December 31, 2009 compared to the fiscal quarter ended December 31, 2008.
As the Company’s operations gradually return to its normal condition, the
Company expects that its operating results would improve
significantly.





On
September 9, 2009, two subsidiaries of Synutra International, Inc., Baoquanling
and Cow Breeding, entered into an asset purchase agreement (the “Agreement”)
with Wondersun, to sell three dairy farms and two milk processing factories in
China for approximately $28.9 million plus reimbursement for certain qualified
construction in progress assets acquired subsequent to the valuation date. The
assets were classified as held for sale assets and were written down to the fair
value less estimated cost to sell. No depreciation or amortization was recorded
after September 9, 2009. The past operating results of these assets was not
reported as discontinued operation, as the assets group is part of a larger
cash-flow-generating group, and on its own is not a component of the entity, and
therefore the conditions in paragraph 205-20-45-1, Reporting Discontinued
Operations, for reporting in discontinued operations the operations
(losses) of the assets group would not be met. After the melamine contamination
incident, the Company began to use imported milk powder in the powdered formula
products and decreased the consumption of domestically produced milk powder. In
light of the decrease in demand for domestically produced milk powder as well as
increasing competition from other domestic raw milk suppliers, the Company
decided to sell Baoquanling and Cow Breeding’s assets. As of December 31, 2009,
the Company has transferred majority of the assets group to Wondersun and the
transaction is expected to be completed in early 2010. The estimated
impairment loss on the assets group during the nine months ended
December 31, 2009 was $6.0 million. The Company believes the sales of these
facilities will streamline the Company’s operations and benefit the Company’s
long-term operating efficiency.


17




Since the
melamine contamination incident, we switched to imported milk powder for the
production of our Super, U-Smart and Helanruniu series of products. In the
meantime, our domestic production facilities continue to purchase raw milk
locally to produce milk powder for commercial resale and for our Mingshan series
of products. We intend to continue relying on imported milk powder for use in
our Super, U-Smart and Helanruniu series of products in the foreseeable
future. Due to the subsequent decline in the consumption of dairy based
products in the PRC as a result of the melamine contamination incident and the
significant increase in milk powder imports, there has been a nationwide
inventory build-up of domestically produced milk powder in the PRC. Such
inventory build-up has caused a decline in milk powder prices and has resulted
in us taking a write-down of our inventory of industrial milk powder of $4.9
million and $8.2 million for the three and nine months ended December 31, 2009,
respectively. Currently milk powder, whether imported or domestically produced,
accounts for approximately 53% of our raw materials inventory. We managed to
reduce our overall inventory level by selling down significant portion of
domestically produced raw milk powder at a loss for the quarter ended December
31, 2009 , and resulting in a corresponding increase in our cost of goods sold
of our “Other” business for the period. We also sold some surplus imported
milk powder. Sales of these surplus milk powder generated immediate cash flow,
which was important to our operations. As of December 31, 2009, our
inventory has decreased from $114.7 million as of March 31, 2009 to $63.2
million, which management believes is optimal for our normal operating needs and
close to the pre-recall inventory level.




The
Company’s main operations are located in mainland China. Nevertheless, the
current global economic disruption in the overall economy and financial markets
could lead to reduced consumer confidence in the economy and consumer spending,
which could negatively affect 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.





Unless
otherwise noted, all translations from Renminbi to U.S. dollars were made at the
mid rate published by the People’s Bank of China, or the mid rate, as of
December 31, 2009, which was RMB6.8282 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 February 9, 2010, the mid rate was RMB6.8271 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 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.


18


RESULTS
OF OPERATIONS





Three
months ended December 31, 2009 and 2008





Net
Sales





Net sales
for the fiscal quarter ended December 31, 2009 increased by 446.9% to $96.8
million from $17.7 million for the same period in the previous year. This
increase in net sales was mainly due to the recovery of our business from the
melamine contamination incident, and an increase in sales of surplus industrial
milk powder in this period.





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 41.4% of our total sales for
the fiscal quarter ended December 31, 2009. Net sales of our powdered formula
products for the fiscal quarter ended December 31, 2009 increased by 223.4% to
$40.1 million from $12.4 million for the same period in the previous year,
primarily as a result of the following factors:




·
            Sales volumeof powdered formula productsincreased by209.5% to5,714tons for the fiscal quarter
      endedDecember
      31, 2009 from1,855tons for the same period in the previous
      year, due primarily tous regainingsome market share
      followingthe
      melamine contamination
incident.





·
            The average selling price of our
      powdered formula products for the fiscal quarter endedDecember 31, 2009increased by5.1% to $7,015perton from $6,677per ton for the same period in
      the previous
      year.Although the average selling
      price has improved compared to the prior fiscal quarter, it has yet to
      recover tothe
      pre-melamine incident level.While our quoted product prices
      have not changed significantly since August 2008 and our revenue mix is
      shifting to higher-priced products,our average selling price has
      remained below pre-recall level, because management believes more
      aggressive rebates and discounts to distributors, which are recorded as a
      reduction to our net sales, are important incentives to motivate our sales
      and distribution networks in regaining market share. As the company
      continues to recover from the melamine incident, we expect the average
      selling price will gradually return to the pre-recall
      level.





Baby
food segment




Net sales
of prepared baby food business for the fiscal quarter ended December 31, 2009
was $65,000, representing sales of prepared baby food, such as cooked meat and
vegetables. This is a new product line. We are introducing it to the market and
there were no sales of this line of products before March 2009.





Nutritional
ingredients and supplements segment




Net sales
of nutritional ingredients and supplements segment for the fiscal quarter ended
December 31, 2009 was $114,000, representing chondroitin sulfate sold to third
parties. We did not have any external sales in the fiscal quarter ended December
31, 2008.





Other




Other
sales for the fiscal quarter ended December 31, 2009 was $56.5 million, which
mainly included sales of surplus milk powder to industrial customers of $53.4
million, as compared to $5.3 million for the same period in the previous
year.





Cost
of Sales





Cost of
sales for the fiscal quarter ended December 31, 2009 increased by 207.3% to
$84.2 million from $27.4 million for the same period in the previous year. The
increase in the cost of sales is mainly due to recovery of our business from the
melamine contamination incident, and increase in sale of surplus industrial milk
powder in this period.





Powdered
formula segment




Cost of
sales for the powdered formula products for the fiscal quarter ended December
31, 2009 decreased by 1.7% to $23.4 million from $23.8 million for the same
period in the previous year. The slight decrease in the cost of sales is due
primarily to the cost of free products offered to our customers in order to
recover our lost market share and additional product recall expenses in
the prior period and partially offset by an increase in sales volume in
this period. In order to restock the shelf spaces that were vacant after
the melamine incident, we sold a large volume of products, including Super,
U-Smart and Mingshan, to our distributors in the fiscal quarter ended December
31, 2008, and part of them remained unsold on the shelves until recently.
In this fiscal quarter, we replaced these slow-moving products with newly
produced ones, and the estimated cost of this replacement was $3.4 million for
the fiscal quarter ended December 31, 2009.





Baby
food segment




Cost of
sales of prepared baby food business for the fiscal quarter ended December 31,
2009 was $80,000, representing cost of sales of prepared baby food, such as
cooked meat and vegetables. This is a new product line. We are introducing it to
the market and there were no sales of this line of products before March
2009.





Nutritional
ingredients and supplements segment




Cost of
sales of nutritional ingredients and supplements segment for the fiscal quarter
ended December 31, 2009 was $342,000, representing chondroitin sulfate sold to
third parties. We did not have any external cost of sales in the fiscal quarter
ended December 31, 2008.





Other




Other
cost of sales for the fiscal quarter ended December 31, 2009 was $60.3 million,
which mainly included the cost of sales of surplus milk powder to industrial
customers of $50.3 million and write-down of industrial milk
powder of $4.9 million due to a decline in selling price as a result of
lower-priced domestically produced milk powder, as compared to $3.6 million for
the same period in the previous year.




19





Gross
Profit (loss) and Gross Margin





As a
result of the foregoing, gross profit for the fiscal quarter ended December 31,
2009 was $12.6 million, as compared to gross loss of $9.8 million for the
same period in the previous year. Gross profit for our powdered formula products
for the fiscal quarter ended December 31, 2009 was $16.7 million, as compared to
gross loss of $11.4 million for the same period in the previous
year, primarily due to the recovery of sales after the melamine incident.
Gross loss for our baby food segment for the fiscal quarter ended December 31,
2009 was $15,000. Gross loss for our nutritional ingredients and
supplements segment for the fiscal quarter ended December 31, 2009 was $227,000,
as the business was still in its early stage and we were in the process of
developing a new sales channel. Gross loss for other business for the fiscal
quarter ended December 31, 2009 was $3.8 million, primarily due to the
write-down of domestically produced milk powder in inventory. In order to
improve our working capital situation, we sold part of milk powder which was
surplus to our own requirement for the fiscal quarter ended December 31,
2009.





Our
overall gross margin was 13.0% for the fiscal quarter ended December 31,
2009, as compared to negative margin of 55.3% for the same period in the
previous year. Our gross margin for powdered formula products was 41.6% for the
fiscal quarter ended December 31, 2009, representing a significant increase as
compared to negative margin of 92.3% for the same period in the previous year.
Gross margin for baby food segment for the fiscal quarter ended December
31, 2009 was negative 22.4%. Gross margin for nutritional ingredients and
supplements segment for the fiscal quarter ended December 31, 2009 was negative
199.1%. Gross margin for other business for the fiscal quarter ended
December 31, 2009 was negative 6.7%.





Selling
and Distribution Expenses





Selling
and distribution expenses for the fiscal quarter ended December 31, 2009
increased by 2.5% to $11.6 million from $11.3 million for the same period in the
previous year. This increase was the combined result of an increase in
compensation expenses for our sales force, partially offset by a decrease
in sales administration expense, such as entertainment expense and meeting
expenses, due to tightened budgetary control. Total compensation for our sales
force for the fiscal quarter ended December 31, 2009 increased by 19.1% to $6.7
million from $5.6 million for the same period in the previous year, due to a pay
rise of sales staff in the fiscal quarter ended June 30, 2009 and an increase in
the number of sales staff to 2,939 as of December 31, 2009 from 2,916 as of
December 31, 2008.





Advertising
and Promotion Expenses





Advertising
and promotion expenses for the fiscal quarter ended December 31, 2009 decreased
by 86.7% to $4.6 million from $34.6 million for the same period in the previous
year. Advertising expenses for the fiscal quarter ended December 31, 2009, which
accounted for 24.6% of total advertising and promotion expenses, decreased
by 92.2% to $1.1 million from $14.5 million for the same period in the
previous year. Promotion expenses for the fiscal quarter ended December 31,
2009, which accounted for 75.4% of total advertising and promotion
expenses, decreased by 82.7% to $3.5 million from $20.0 million for the
same period in the previous year, as certain field promotions were carried out
directly by distributors in exchange for us providing such distributors with an
increase in product discount which was recorded as a reduction to net
sales. The
significant decrease in Advertising and Promotion Expenses for the three months
ended December 31 2009 reflected a redeployment of resources to support
increased activities on the consumer-end and beyond the distribution channels by
our field promoters in the communities and our nutrition education professionals
at the medical and healthcare facilities.  Following aggressive
advertising and promotional campaigns in the fiscal quarter ended March 31, 2009
to regain market share in the immediate aftermath of the melamine contamination
incident, we have refocused our efforts in the subsequent quarters to achieve
effective market pull-through with new customers and to improve brand
loyalty.




20


General
and Administrative Expenses





General
and administrative expenses for the fiscal quarter ended December 31, 2009
decreased by 32.8% to $5.5 million from $8.2 million for the same period in
the previous year. The decrease in general and administrative expenses was
primarily due to a net contribution of $2.3 million made to the compensation
fund set up by China Dairy Industry Association for the settlement of
existing and potential claims in China from families of infants affected by
melamine contamination in the prior period.





Impairment
Loss





We
recorded impairment loss of $53,000 for the fiscal quarter ended December
31, 2009, which relates to the Baoquanling disposal. We do not intend to dispose
any other major assets.





Other
Operating Income, Net





Other
operating income for the fiscal quarter ended December 31, 2009 was $274,000, as
compared to $70,000 for the same period in the previous year.




Interest
Expense





Interest
expense for the fiscal quarter ended December 31, 2009 decreased to $1.1 million
from $1.4 million for the same period in the previous year, due primarily to the
revised terms for the loan agreement with ABN under the term sheet being
more favorable than we expected, which caused us to revise our previous
estimation of interest expense for the current period.





Interest
Income





Interest
income for the fiscal quarter ended December 31, 2009 increased to $716,000 from
$110,000 for the same period in the previous year, due primarily to the
increased cash deposit pledged for short-term loans, which had
a higher interest rate than cash equivalents.





Income
Tax Expense (Benefit)





Due to
the decrease in estimated effective tax rate in this fiscal quarter, we
recorded an income tax expense of $638,000 for the fiscal quarter ended December
31, 2009, as compared to an income tax benefit of $16.1 million for the fiscal
quarter ended December 31, 2008.





Net
Loss Attributable to Synutra International, Inc. Common
Shareholders





As a
result of the foregoing, net loss attributable to Synutra International, Inc.
for the fiscal quarter ended December 31, 2009 was $9.7 million, as
compared to net loss of $49.3 million for the same period in the previous
year.


21





Nine
months ended December 31, 2009 and 2008





Net
Sales





Net sales
for the nine months ended December 31, 2009 decreased by 12.6% to $209.5 million
from $239.8 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, partially offset by an increase in the sales of surplus
industrial milk powder.





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 59.5% of our total sales
for the nine months ended December 31, 2009. Net sales of our powdered formula
products for the nine months ended December 31, 2009 decreased by 42.2% to
$124.6 million from $215.6 million for the same period in the previous year,
primarily as a result of the following factors:


·
              Sales volume of powdered formula
      products decreased by31.1% to16,340tons for theninemonths endedDecember 31, 2009 from 23,719tons for the same period in the
      previous year, due primarily to a slow-down in sales
      activities following the melamine contamination
      incident.
 
 ·
              The average selling price of our
      powdered formula products for theninemonths endedDecember 31, 2009 decreased by16.1% to $7,624per ton from $9,090per ton forthe same period in the previous
      year.In addition,
      the average selling price has yet to recover tothe pre-melamine incident
      level.While our quoted product prices
      have not changed significantly since August 2008 and our revenue mix is
      shifting to higher-priced products,our average selling price has
      remained below pre-recall level, because management believes more
      aggressive rebates and discounts to distributors, which are recorded as a
      reduction to our net sales, are important incentives to motivate our sales
      and distribution networks in regaining market share. As the company
      continues to recover from the melamine incident, we expect the average
      selling price will gradually return to the pre-recall
      level.


Baby
food segment




Net sales
of prepared baby food segment for the nine months ended December 31, 2009
was $677,000, representing sales of prepared baby food, such as cooked meat and
vegetables. This is a new product line. We are introducing it to the market and
there were no sales of this line of products before March 2009.





Nutritional
ingredients and supplements segment




Net sales
of nutritional ingredients and supplements segment for the nine months ended
December 31, 2009 was $630,000, representing chondroitin sulfate sold to third
parties. We did not have any external net sales in the nine months ended
December 31, 2008.





Other




Other
sales for the nine months ended September 20, 2009 was $83.6 million, which
mainly included sales of surplus milk powder to industrial customers of $71.8
million, as compared to $24.2 million for the same period in the previous
year.





Cost
of Sales





Cost of
sales for the nine months ended December 31, 2009 decreased by 21.2% to $165.0
million from $209.4 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 in the nine months ended December 31, 2009, and
the product recall cost which was recorded in the nine months ended December 31,
2008, and partially offset by an increase in cost of sales of surplus industrial
milk powder in the nine months ended December 31, 2009.





Powdered
formula segment




Cost of
sales for the powdered formula products for the nine months ended December 31,
2009 decreased by 64.8% to $66.4 million from $188.9 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 for the nine
months ended December 31, 2009 due to the melamine incident, and the
significant product recall cost recorded in the nine months ended December 31,
2008. In order to restock the shelf spaces that were vacant after the
melamine incident, we sold a large volume of products, including Super, U-Smart
and Mingshan, to our distributors in the fiscal quarter ended December 31, 2008,
and part of them remained unsold on the shelves until recently. In this
fiscal quarter, we replaced these slow moving products with newly produced ones,
and the estimated cost of this replacement was $3.4 million for the nine
months ended December 31, 2009.





Baby
food segment




Cost of
sales of baby food segment for the nine months ended December 31, 2009 was
$514,000, representing cost of sales of prepared baby food, such as cooked meat
and vegetables. This is a new product line. We are introducing it to the market
and there were no sales of this line of products before March 2009.





Nutritional
ingredients and supplements segment




Cost of
sales of nutritional ingredients and supplements segment for the nine
months ended December 31, 2009 was $1.7 million, representing chondroitin
sulfate sold to third parties. We did not have any external cost of sales in the
nine months ended December 31, 2008.





Other




Other
cost of sales for the nine months ended December 31, 2009 was $96.3 million,
which mainly included the cost of sales of surplus milk powder of $74.5
million and write-down of industrial milk powder of $8.2 million due
to a decline in selling price as a result of lower-priced domestically
produced milk powder, as compared to $20.5 million for the same period in the
previous year.


22





Gross
Profit and Gross Margin




As a
result of the foregoing, gross profit for the nine months ended December 31,
2009 increased by 46.4% to $44.5 million from $30.4 million for the same period
in the previous year. Gross profit for our powdered formula products for the
nine months ended December 31, 2009 increased 117.6% to $58.1 million from $26.7
million for the same period in the previous year. Gross profit for our baby food
segment for the nine months ended December 31, 2009 was $162,000. Gross loss for
our nutritional ingredients and supplements segment for the nine months ended
December 31, 2009 was $1.1 million, as the business was still at its early stage
and we were in the process of developing a new sales channel. Gross loss for
other business for the fiscal quarter ended December 31, 2009 was $12.7 million,
primarily due to the loss from sales of domestically produced milk powder and
write-down of domestically produced milk powder in inventory. In order to
improve our working capital situation, we sold part of milk powder which was
surplus to our own requirement for the nine months ended December 31,
2009.




Our
overall gross margin was 21.2% for the nine months ended December 31, 2009, as
compared to 12.7% for the same period in the previous year. Our gross margin for
powdered formula products was 46.7% for the nine months ended December 31,
2009, as compared to 12.4% for the same period in the previous year. Our gross
margin for baby food segment for the nine months ended December 31, 2009
was 24.0%. Gross margin for nutritional ingredients and supplements segment for
the nine months ended December 31, 2009 was negative 175.8%. Gross margin
for other business for the fiscal quarter ended December 31, 2009 was negative
15.2%.





Selling
and Distribution Expenses





Selling
and distribution expenses for the nine months ended December 31, 2009 decreased
by 2.9% to $32.4 million from $33.4 million for the same period in the previous
year. This decrease was a combined result of a decrease in freight charges
and sales administration expense due to tightened budgetary control, partially
offset by an increase in compensation expenses for our sales force. Total
compensation for our sales force for the nine months ended December 31, 2009
increased by 20.0 % to $18.6 million from $15.5 million for the same period in
the previous year, due to a pay rise of sales staff in the fiscal quarter ended
June 30, 2009 and an increase in the number of sales staff to 2,939 as of
December 31, 2009 from 2,916 as of December 31, 2008. Freight charges for the
nine months ended December 31, 2009 decreased by 43.2% to $3.4 million from $5.9
million for the same period in the previous year, due primarily to the freight
charges accrual for product recall in the fiscal quarter ended December 31,
2008.





Advertising
and Promotion Expenses





Advertising
and promotion expenses for the nine months ended December 31, 2009 decreased by
68.1% to $27.2 million from $85.3 million for the same period in the previous
year. Advertising expenses for the nine months ended December 31, 2009, which
accounted for 49.0% of total advertising and promotion expenses, decreased by
71.0% to $13.4 million from $46.0 million for the same period in the previous
year. Promotion expenses for the nine months ended December 31, 2009, which
accounted for 51.0% of total advertising and promotion expenses, decreased by
64.7% to $13.9 million from $39.3 million for the same period in the previous
year, as certain promotions were carried out directly by distributors in
exchange for us providing such distributors with increase in product discount
which was recorded as reduction to net sales. The
significant decrease in Advertising and Promotion Expenses for the nine months
ended December 31 2009 reflected a redeployment of resources to support
increased activities on the consumer-end and beyond the distribution channels by
our field promoters in the communities and our nutrition education professionals
at the medical and healthcare facilities.  Following aggressive advertising
and promotional campaigns in the fiscal quarter ended March 31, 2009 to regain
market share in the immediate aftermath of the melamine contamination
incident, we have refocused our efforts in the subsequent quarters to
achieve effective market pull-through with new customers and to improve brand
loyalty.






23




General
and Administrative Expenses





General
and administrative expenses for the nine months ended December 31, 2009
decreased by 20.6% to $15.1 million from $18.9 million for the same period in
the previous year. The decrease in general and administrative expenses was
primarily due to a decrease of $2.1 million in legal and professional fees
incurred for the terminated follow-on offering in the fiscal quarter ended
September 30, 2008.




Impairment
Loss





We
recorded impairment loss of $6.0 million for the nine months ended December
31, 2009, which represented the difference between the estimated fair value
and carrying value of the assets to be sold by our subsidiaries, Baoquanling and
Cow Breeding. We do not intend to dispose any other major assets.




Other
Operating Income, Net





Other
operating income for the nine months ended December 31, 2009 was $498,000, as
compared to $803,000 for the same period in the previous year.





Interest
Expense





Interest
expense for the nine months ended December 31, 2009 increased to $6.2 million
from $2.4 million for the same period in the previous year, due primarily to the
significant increase in bank borrowings after the melamine contamination
incident.





Interest
Income





Interest
income for the nine months ended December 31, 2009 increased to $1.6 million
from $494,000 for the same period in the previous year, due primarily to the
increased cash deposit pledged for short-term loans, which had
a higher interest rate than cash equivalents.





Income
Tax Benefit





As a
result of the net loss, we recorded an income tax benefit of $7.5 million
for the nine months ended December 31, 2009, as compared to $25.8 million for
the same period in the previous year. Our effective tax rate decreased to 18.1%
for nine months ended December 31, 2009 from 23.6% for the same period in the
previous year. The decrease of effective tax rate was mainly due to a change in
the expected operating results of one of our subsidiaries.





Net
Loss Attributable to Synutra International, Inc. Common
Shareholders





As a
result of the foregoing, net loss attributable to Synutra International, Inc.
for the nine months ended December 31, 2009 was $33.7 million, as compared
to net loss of $83.4 million for the same period in the previous
year.


24





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. As of March 31, 2009, we had a working capital
deficit of approximately $80.4 million. In addition, we were not
in compliance with certain covenants in our ABN loan agreement as of March 31,
2009. As a result of the occurrence of these 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 are
actively working to overcome any substantial doubt concerning our ability to
continue as a going concern by enhancing operating efficiency and exploring
various alternatives of 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 brand equity 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
nine months ended December 31, 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. We have enjoyed relatively open access to bank
credit among the domestic banks and have been able to renew all existing loans
successfully. As of December 31, 2009, we had short-term borrowings from
PRC banks of $185.4 million with a weighted average interest rate of 3.7%. 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 December 31,
2009 range from January 2010 to December 2010. As of the date of the filing
of this 10-Q, all outstanding short-term loans from local banks that have become
due have been repaid. As of December 31, 2009, we have unsecured long-term
borrowing from local banks of $26.4 million maturing from March 2011 to June
2012 with a weighted average interest rate of 5.2%. In addition to the loans
from local banks, we also borrowed from related parties short-term loans
amounting to $3.9 million with a weighted average interest rate of 10.0% to
finance our acquisition of the Helanruniu trademarks. The maturity dates of the
short-term loans outstanding from related parties at December 31, 2009 are
from January 2010 to November 2010, and are extendable on the same terms
upon maturity. On February 5, 2010, we signed a term sheet with the lenders of
our ABN loan pursuant to which lenders agreed to waive and release prior
breaches of the loan covenants or claims against us. 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.





In order
to maintain sufficient funds for our operations, we extended the payment date of
certain accounts payable. Payment to suppliers is typically due within
three months of purchase. We negotiated with certain suppliers and extended the
payment date with such suppliers to within six months of the purchase date.
As of December 31, 2009, we have extended the payment of approximately $14
million in accounts payable, constituting approximately 24% of our accounts
payable to within six months of the purchase date. We believe that our cash
flows would improve as we are beginning to see improvements in our net sales and
have been working on decreasing our raw milk powder inventory.





The
Company believes that the product recall has been substantially completed as of
December 31, 2009 and estimates that there should be no further material
cash outflow incurring.





Our cash
and cash equivalent balance increased by $18.8 million to $56.5 million at
December 31, 2009, as compared to $37.7 million at March 31,
2009.


25





Cash
Flows from Operating Activities





Net cash
used in operating activities was $29.2 million for the nine months ended
December 31, 2009, as compared to net cash used in operating activities of
$66.6 million for the same period in the previous year. Net cash used in
operating activities for the nine months ended December 31, 2009 was mainly due
to net loss of $33.9 million, non-cash items not affecting cash flows of $12.9
million and a $8.2 million increase in working capital. The changes in working
capital for the nine months ended December 31, 2009 were primarily related
to $50.3 million decrease in inventories due to sales of surplus industrial
milk powder, and $54.6 million decrease in accounts payable due to the
settlement of certain accumulated extended liabilities. In the nine months ended
December 31, 2009, we spent $184.0 million in purchasing raw materials and other
production materials, $28.2 million in staff compensation and social welfare,
$17.6 million in other taxes, $69.7 million in selling and distribution,
advertising and promotion, and general and administrative expenses, and received
$279.4 million from our customers.





Cash
Flows from Investing Activities





Net cash
provided by investing activities was $31.5 million for the nine months ended
December 31, 2009, as compared to net cash used in investing activities of $76.9
million for the same period in the previous year. Cash invested in purchases of
property, plant and equipment was $8.2 million and $38.4 million for
the nine months ended December 31, 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 2010,
but it will not materially affect our production capacity to fulfill our
customers’ order requirements. Restricted cash decreased by $20.9 million for
the nine months ended December 31, 2009 due to the release of cash deposit
pledged for certain short-term loans which were repaid during the period, as
compared to an increase of $30.9 million for the same period in the
previous year. Restricted cash represents cash deposited with banks as security
against the issuance of bank notes, letters of credit for the import of raw
materials and as pledges for certain short-term borrowings. Proceeds from assets
disposal of $20.2 million represent the first and second installments of
consideration paid by Wondersun to acquire Baoquanling and Cow Breeding’s
assets.





Cash
Flows from Financing Activities





Net cash
provided by financing activities was $16.4 million for the nine months ended
December 31, 2009, as compared to $100.0 million for the same period in the
previous year. Cash provided by financing activities during the nine months
ended December 31, 2009 was primarily related to $313.4 million short-term loans
from domestic banks in China and related parties, $17.6 million long-term
loans from domestic banks in China, offset by $314.5 million repayment of
short-term loans to domestic banks in China.





Outstanding
Indebtedness





On
October 11, 2007, ABN AMRO Bank, N.V. (“ABN”) and another lender provided a
three year term loan, or the New ABN Loan, to the Company in the aggregate
amount of $35.0 million. The principal amount, and any unpaid accrued interest
on the New ABN Loan, will be due on October 12, 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 nine-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 and subsequent loss of sales, the Company has not been able to meet
two of the financial covenants since September 30, 2008 and all four financial
covenants since December 31, 2008. The
Company has requested the lenders to waive these breaches and to reset the
financial covenants for the next few quarters, and had placed $5.0 million in
cash deposit with ABN by December 31, 2009.  On February 5, 2010, the
Company and the lenders signed a term sheet pursuant to which the lenders agreed
to waive and release prior claims against the
Company and prior breaches of the loan covenants covered in the
period from September 2008 to December 2009. In addition, both parties agreed on
certain proposed changes to the loan terms, which include: payment of a one-off
waiver fee by the Company equal to 0.5% of the aggregate principal amount
outstanding; an increase in the interest rate from LIBOR plus 3.5% to LIBOR plus
4.5% effective from the date on which the amended loan agreement is to be
signed; placement of additional cash deposits under certain circumstances to
increase the cash deposit to an aggregate amount not in excess of $10.0 million;
and reset of the financial covenants to only one covenant measured against a
minimum EBITDA to be tested quarterly beginning with the quarter ended December
31, 2009. The Company has performed an analysis on the EBITDA and confirmed that
the financial covenant was satisfied as of December 31,
2009.




In
addition to the ABN Loan, as of December 31, 2009 and March 31, 2009, the
Company had short-term loans from PRC banks in the amount of $185.4 million and
$182.6 million, respectively.  The maturity dates of the short term
loans outstanding from PRC banks at December 31, 2009 range from January
2010 to December 2010. As of the
date of filing of this 10-Q, all outstanding short-term loans from local banks
that have become due have been repaid.The weighted average interest rate
on short-term loans from PRC banks outstanding at December 31, 2009 and
March 31, 2009 was 3.7% and 4.1%, respectively. The loans at December 31,
2009 and March 31, 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 $31.7
million and $34.2 million as of December 31, 2009 and March 31, 2009,
respectively.  The value of land use right pledged was both $3.4
million as of December 31, 2009 and March 31, 2009, respectively. The value of
cash pledged was $47.7 million and $66.1 million which were recorded in
restricted cash as of December 31, 2009 and March 31, 2009,
respectively.




As of
December 31, 2009 and March 31, 2009, the Company had long-term loans which are
unsecured debt, from PRC banks in the amount of $26.4 million and $8.8 million,
respectively. The maturity dates of the long-term loans outstanding from PRC
banks at December 31, 2009 are from March 2011 to June 2012. The weighted
average interest rate of outstanding long-term loans at December 31, 2009 and
March 31, 2009 was 5.2% 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 $3.9 million and $7.5
million as of December 31, 2009 and March 31, 2009, respectively. The maturity
dates of the short term loans outstanding from related parties at December 31,
2009 are from January 2010 to November 2010, and are extendable on the same
terms upon maturity. The weighted average interest rate of outstanding short
term loans from related parties at December 31, 2009 and March 31, 2009
was 10.0% and 7.8%, respectively.


26


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.





Capital
Expenditures





Our
capital expenditures for the nine months ended December 31, 2009 was $8.2
million.





Off-Balance
Sheet Arrangements





We do not
have off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to
investors.


27


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.





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 December 31, 2009, which
amounted to $61.4 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 $0.6 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.





Interest
Rate Risk





We did
not experience any material changes in interest rate exposures during the fiscal
quarter ended December 31, 2009. Based upon economic conditions and leading
market indicators at December 31, 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 December 31,
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, surplus imported milk powder and other dairy
based ancillary products are also the Company’s products for commercial sales.
As such, the Company 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 and
imported milk powder and other dairy based ancillary products for commercial
sales.


28


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.





Based
on such evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 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 had 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. These
remediation plans had been fully implemented by the end of the fiscal quarter
ended September 30, 2009





There
were no changes in the Company’s internal control over financial reporting
during the fiscal quarter ended December 31, 2009, which were identified in
connection with management’s evaluation required by paragraph (d) of Rules
13a-15 and 15d-15 under the Exchange Act, that have materially affected, or
are reasonably likely to materially affect the Company’s internal control over
financial reporting.


29


PART
II


OTHER
INFORMATION





ITEM
1. LEGAL PROCEEDINGS





As of
December 31, 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.





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 responded to the Opposition on June 15,
2009 with an additional filing. 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 these above cases.





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 December 31,
2009.


30


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.


31


ITEM
6. EXHIBITS





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)


32


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:
      February 9, 2010
              By:
              /s/ Liang ZhangName: 
       Liang ZhangTitle:  
      Chief Executive
Officer


33