UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


FORM 10-Q





þ
                
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended September 30, 2009





OR


 ̈
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




Commission
File Number 0-12992





SYNTHETECH, INC.


(Exact
name of registrant as specified in its charter)


Oregon
                  
                  84-0845771(State
      or other jurisdiction of
                    incorporation
      or organization)
                  
                  (I.R.S.
      Employer
                    Identification
      Number)1290 Industrial Way, Albany,
      Oregon
                  
                  97322(Address
      of principal executive offices)
                  
                  (Zip
      Code)





Registrant’s
telephone number, including area code (541) 967-6575





NONE


(Former
name or former address, if changed since last report.)





Indicate
by checkmark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes þ No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).  Yes
o No o





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


Large
      Accelerated Filer  ̈
              
              Accelerated
      Filer  ̈
              
              Non-Accelerated Filer  ̈
              
              Smaller reporting companyþ





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


Yes o No þ





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:


Class
                
                Outstanding as of November 11,
      2009Common
      stock, $0.001 par value
                
                14,650,614








SYNTHETECH,
INC





INDEX





PagePart
      I.
                  Financial
      InformationItem
      1
                  Condensed
      Financial StatementsBalance
      Sheets
                  1Statements
      of Operations
                  3Statements
      of Cash Flows
                  4Notes
      to Unaudited Condensed Financial Statements
                  5Item
      2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  13Item
      4T
                  Controls
      and Procedures
                  26Part
      II.
                  Other
      InformationItem
      1A
                  Risk
      Factors
                  27Item
      4
                  Submission
      of Matters to a Vote of Security Holders
                  27Item
      6
                  Exhibits
                  28Signatures
                  29








PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements





SYNTHETECH,
INC.





Condensed
Balance Sheets


(unaudited)





September
      30,
                
                
                March
      31,2009
                
                
                2009AssetsCurrent
      Assets:Cash
      and cash equivalents
                
                $
                2,403,000
                
                
                $
                588,000Accounts
      receivable, less allowance for doubtful accounts of $15,000 for both
      periods
                
                
                1,767,000
                
                
                
                2,669,000Inventories
                
                
                5,151,000
                
                
                
                5,027,000Prepaid
      expenses
                
                
                151,000
                
                
                
                338,000Total
      Current Assets
                
                
                9,472,000
                
                
                
                8,622,000Property,
      Plant and Equipment, net
                
                
                4,217,000
                
                
                
                4,385,000Total
      Assets
                
                $
                13,689,000
                
                
                $
                13,007,000





The
accompanying notes are an integral part of these condensed financial
statements.





SYNTHETECH,
INC.





Condensed
Balance Sheets


(continued)


(unaudited)





September
      30,
                
                
                March
      31,2009
                
                
                2009Liabilities
      and Shareholders’ EquityCurrent
      Liabilities:Current
      portion of long-term debt
                
                $
                210,000
                
                
                $
                210,000Note
      payable
                
                
                -
                
                
                
                102,000Accounts
      payable
                
                
                746,000
                
                
                
                1,255,000Accrued
      compensation
                
                
                812,000
                
                
                
                1,046,000Deferred
      revenue
                
                
                51,000
                
                
                
                51,000Other
      accrued liabilities
                
                
                20,000
                
                
                
                23,000Total
      Current Liabilities
                
                
                1,839,000
                
                
                
                2,687,000Long-term
      debt
                
                
                610,000
                
                
                
                715,000Total
      Liabilities
                
                
                2,449,000
                
                
                
                3,402,000Shareholders'
      Equity:Common
      stock, $.001 par value; authorized 100,000,000 shares; issued and
      outstanding, 14,650,614 and 14,648,614 shares
                
                
                15,000
                
                
                
                15,000Paid-in
      capital
                
                
                9,500,000
                
                
                
                9,473,000Retained
      earnings
                
                
                1,725,000
                
                
                
                117,000Total
      Shareholders' Equity
                
                
                11,240,000
                
                
                
                9,605,000Total
      Liabilities and Shareholders' Equity
                
                $
                13,689,000
                
                
                $
                13,007,000





The
accompanying notes are an integral part of these condensed financial
statements.


2


SYNTHETECH,
INC.





Condensed
Statements of Operations


(unaudited)





For
      the Three Months Ended
                
                
                For
      the Six Months EndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
                
                $
                4,001,000
                
                
                $
                3,291,000
                
                
                $
                8,665,000
                
                
                $
                8,208,000Cost
      of revenue
                
                
                2,361,000
                
                
                
                2,649,000
                
                
                
                5,014,000
                
                
                
                6,277,000Gross
      income
                
                
                1,640,000
                
                
                
                642,000
                
                
                
                3,651,000
                
                
                
                1,931,000Research
      and development
                
                
                239,000
                
                
                
                335,000
                
                
                
                542,000
                
                
                
                632,000Selling,
      general and administrative
                
                
                733,000
                
                
                
                640,000
                
                
                
                1,435,000
                
                
                
                1,318,000Total
      operating expenses
                
                
                972,000
                
                
                
                975,000
                
                
                
                1,977,000
                
                
                
                1,950,000Operating
      income (loss)
                
                
                668,000
                
                
                
                (333,000
                )
                
                
                1,674,000
                
                
                
                (19,000
                )Interest
      income
                
                
                2,000
                
                
                
                -
                
                
                
                5,000
                
                
                
                5,000Interest
      expense
                
                
                (31,000
                )
                
                
                (34,000
                )
                
                
                (71,000
                )
                
                
                (58,000
                )Income
      (loss) before income taxes
                
                
                639,000
                
                
                
                (367,000
                )
                
                
                1,608,000
                
                
                
                (72,000
                )Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      income (loss)
                
                $
                639,000
                
                
                $
                (367,000
                )
                
                $
                1,608,000
                
                
                $
                (72,000
                )Net
      income (loss) per common share:Basic
      and diluted income (loss) per share
                
                $
                0.04
                
                
                $
                (0.03
                )
                
                $
                0.11
                
                
                $
                (0.00
                )Weighted
      average shares outstanding:Basic
                
                
                14,650,614
                
                
                
                14,635,201
                
                
                
                14,649,762
                
                
                
                14,633,417Diluted
                
                
                15,263,270
                
                
                
                14,635,201
                
                
                
                15,183,545
                
                
                
                14,633,417





The
accompanying notes are an integral part of these condensed financial
statements.


3


SYNTHETECH,
INC.





Condensed
Statements of Cash Flows


(unaudited)





For The Six Months Ended September
      30,
                
                2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                1,608,000
                
                
                $
                (72,000
                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      expense
                
                
                269,000
                
                
                
                250,000Loss
      on retirement of equipment
                
                
                12,000
                
                
                
                -Stock-based
      compensation expense
                
                
                27,000
                
                
                
                35,000(Increase)
      decrease in assets:Accounts
      receivable, net
                
                
                902,000
                
                
                
                39,000Inventories
                
                
                (124,000
                )
                
                
                (530,000
                )Prepaid
      expenses
                
                
                187,000
                
                
                
                225,000Increase
      (decrease) in liabilities:Accounts
      payable
                
                
                (509,000
                )
                
                
                (214,000
                )Accrued
      compensation
                
                
                (234,000
                )
                
                
                42,000Deferred
      revenue
                
                
                -
                
                
                
                (1,004,000
                )Other
      accrued liabilities
                
                
                (3,000
                )
                
                
                (12,000
                )Cash
      Provided By (Used In) Operating Activities
                
                
                2,135,000
                
                
                
                (1,241,000
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property,
      plant and equipment purchases
                
                
                (113,000
                )
                
                
                (678,000
                )Cash
      Used In  Investing Activities
                
                
                (113,000
                )
                
                
                (678,000
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from (repayments of) line of credit
                
                
                -
                
                
                
                603,000Borrowings
      under long-term debt obligations
                
                
                -
                
                
                
                550,000Principal
      payments under long-term debt obligations
                
                
                (105,000
                )
                
                
                (37,000
                )Repayment
      of note payable
                
                
                (102,000
                )
                
                
                (135,000
                )Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                4,000Cash
      Provided By (Used In) Financing Activities
                
                
                (207,000
                )
                
                
                985,000Increase
      (Decrease) in Cash and Cash Equivalents
                
                
                1,815,000
                
                
                
                (934,000
                )Cash
      and Cash Equivalents at Beginning of Period
                
                
                588,000
                
                
                
                1,062,000Cash
      and Cash Equivalents at End of Period
                
                $
                2,403,000
                
                
                $
                128,000





The
accompanying notes are an integral part of these condensed financial
statements.


4


SYNTHETECH,
INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


(Information
as of September 30, 2009 and for the three and six month


periods
ended September 30, 2009 are unaudited)





NOTE
A.       GENERAL AND BUSINESS





Synthetech,
Inc., an Oregon corporation, is a fine chemicals company specializing in organic
synthesis, biocatalysis and chiral technologies.  Synthetech develops
and manufactures proprietary custom chiral intermediates, amino acid
derivatives, specialty amino acids, peptide fragments, and specialty resins
primarily for the pharmaceutical industry.  Synthetech’s products
support the development and manufacture of therapeutic peptides and
peptidomimetic (peptide-like) small molecule drugs at every stage of a
customer’s clinical development pipeline, and are used as ingredients in drugs
for the treatment of AIDS, cancer, cardiovascular and other
diseases.  Synthetech’s products also support the production of
chemically based medical devices.





The
condensed financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although Synthetech management
believes that the disclosures are adequate to make the information presented not
misleading.  Synthetech’s management suggests that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in Synthetech’s Annual Report on Form 10-K for the
year ended March 31, 2009.  Synthetech's fiscal year ends March 31 of
each year.





The
interim period information included in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting of normal recurring adjustments, that are,
in the opinion of Synthetech’s management, necessary for a fair statement of the
results of the respective interim periods.  Results of operations for
interim periods are not necessarily indicative of results to be expected for an
entire year.





Subsequent
events have been evaluated through November 11, 2009, the date these condensed
financial statements were issued.





NOTE
B.       SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Use of
Estimates:The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period.  Actual results
could differ from those estimates.  Significant items subject to such
estimates and assumptions include the valuation of inventory, accounts
receivable, deferred tax assets and the carrying amount of property, plant and
equipment.




5





Cash and Cash
Equivalents:  Cash and cash equivalents include demand cash and
highly liquid debt instruments with maturities of three months or less when
purchased.





Cash and
cash equivalents consist of the following:





September
      30,
                      
                      
                      March
      31,2009
                      
                      
                      2009Cash
                      
                      $
                      232,000
                      
                      
                      $
                      -Cash
      equivalents
                      
                      
                      2,171,000
                      
                      
                      
                      588,000$
                      2,403,000
                      
                      
                      $
                      588,000





Accounts Receivable:Accounts
receivable are recorded at the invoiced amount and do not bear
interest.  Synthetech does not finance its trade receivables by
factoring the balances to a third party.   The allowance for
doubtful accounts is established by a review of aged accounts receivable and a
review for collectibility of specific accounts.  The allowance for
doubtful accounts as of September 30, 2009 and March 31, 2009 was
$15,000.  For the six month period ended September 30, 2009 and 2008,
Synthetech’s provision for credit losses were insignificant.





Concentrations of Credit
Risk:  Financial instruments that potentially subject
Synthetech to significant concentrations of credit risk consist principally of
cash equivalents and trade accounts receivable. Cash equivalents primarily
consist of money market accounts with maturities at purchase of less than three
months.  Synthetech’s customers consist primarily of major and
mid-size pharmaceutical companies as well as contract drug synthesis firms,
emerging and established biopharmaceutical and medical device
companies.  Synthetech’s customers are primarily located in the United
States and Western Europe.  At September 30, 2009, four customers had
accounts receivable balances of 27%, 26%, 15% and 12% of total accounts
receivable.  At March 31, 2009, five customers had accounts receivable
balances of 24%, 18%, 14%, 13% and 11% of total accounts
receivable.  During the first half of fiscal 2010, sales to three
customers, each exceeding 10% of revenue for the six month period, accounted for
approximately 76% of Synthetech’s revenue.  During the first half of
fiscal 2009, sales to two customers, each exceeding 10% of revenue for the six
month period, accounted for approximately 30% of Synthetech’s
revenue.  Synthetech’s reliance on major customers and the absence of
long term contracts could adversely affect operating results if a major customer
were lost or failed to pay Synthetech.





Inventories:  Inventories
are stated at the lower of cost or market, determined on the first-in, first-out
basis.  Costs include direct material, direct labor, applicable
manufacturing overhead, and other direct costs.





Management
evaluates Synthetech’s inventory for impairment whenever it becomes aware that
indicators of impairment exist.  It is Synthetech’s policy to
write-down inventories to reflect an estimate for impairment in an amount equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market
conditions.  Write-downs of inventory are reported as a component of
cost of revenue in the relevant period.




6





Property, Plant and
Equipment:  Property, plant and equipment are recorded at
cost.  Expenditures for maintenance and repairs are expensed as
incurred.  Expenditures that materially increase values, change
capacities or extend useful lives are capitalized.  When assets are
retired, sold or otherwise disposed of, the applicable costs and accumulated
depreciation are removed from the accounts and the resulting gain or loss is
recognized.  Depreciation and amortization are provided on the
straight-line basis over the estimated useful lives of the individual assets
which range from three to 40 years.  In Synthetech’s statements of
operations, depreciation and amortization are charged to cost of revenue,
research and development and selling, general and administrative, on a basis
consistent with the utilization of the underlying asset.





Synthetech
assesses the impairment of property, plant and equipment whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable.  If Synthetech determines that the carrying value of
property, plant and equipment may not be recoverable, Synthetech compares the
carrying values of its property, plant and equipment to the undiscounted cash
flows expected to be generated by the asset group.  If the carrying
value exceeds the undiscounted cash flows an impairment charge may be
recorded.  An impairment charge is recognized to the extent that the
carrying amount of property, plant and equipment is in excess of their
determined fair value.





Income
Taxes:Deferred tax assets arise from the tax benefit of
amounts expensed for financial reporting purposes but not yet deducted for tax
purposes and from unutilized tax credits and net operating loss
carryforwards.  Synthetech evaluates its deferred tax assets on a
regular basis to determine if a valuation allowance is
required.  Synthetech will record a valuation allowance to the extent
it is determined that it is more likely than not that Synthetech will be unable
to recognize a deferred tax asset.





A tax
position is a position in a previously filed tax return or a position expected
to be taken in a future tax filing that is reflected in measuring current or
deferred income tax assets and liabilities.  Tax positions are
recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position would be sustained upon
examination by taxing authorities.  The amount recognized is the
largest benefit that the Company believes has a greater than 50% likelihood of
being realized upon settlement.  Fiscal years 2006 through 2009 remain
open and subject to audit by the Internal Revenue Service and equivalent state
agencies.





Deferred
Revenue:Deferred revenue represents customer advances for
materials that have not yet been manufactured.  From period to period,
the amount of deferred revenue will vary significantly depending on the customer
agreements that are in place at the time.  Deferred revenue is
recognized as revenue consistent with Synthetech’s revenue recognition
policy.





Revenue
Recognition:  Synthetech recognizes revenue, including shipping
and handling charges billed to customers, upon shipment of product when title
and risk of loss pass to customers.  Shipping and handling costs are
classified as part of cost of revenue.





Research and Development
Costs:  Research and development costs are expensed as
incurred.





Stock-Based
Compensation:Stock-based compensation expense for stock-based
compensation awards is based on the grant-date fair value.  Synthetech
recognizes these compensation costs net of estimated forfeitures over the
requisite service period of the award, which is generally the vesting term of
one to five years for stock options.  Please refer to Note I to these
condensed financial statements for a further discussion of stock-based
compensation.




7





Fair value of financial
instruments:The carrying value of all financial instruments
classified as current assets or current liabilities is deemed to approximate
fair value because of the short maturity of these instruments.  The
interest rate on Synthetech’s long-term debt adjusts with changes in the prime
rate subject to minimums, and management estimates that fair value closely
approximates carrying values.  Synthetech’s long-term debt was
originated in fiscal 2009.





Comprehensive Income or
Loss:Synthetech has no material components of comprehensive
income/loss other than net income/loss.  Accordingly, comprehensive
income/loss was equal to net income/loss for all periods presented.





Income (Loss) Per
Share:  Basic income (loss) per share and diluted loss per
share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period.  Diluted
income per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period, calculated using the treasury stock method.  Common stock
equivalents are not used to calculate diluted loss per share because their
effect would be anti-dilutive.





Shares
used to compute income (loss) per share are as follows:


For
      the Three Months
                                                                    
                                                                    
                                                                    For
      the Six MonthsEnded September
      30,
                                                                    
                                                                    
                                                                    Ended September
      30,2009
                                                                    
                                                                    
                                                                    2008
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    2008Net
      income (loss)
                                                                    
                                                                    $
                                                                    639,000
                                                                    
                                                                    
                                                                    $
                                                                    (367,000
                                                                    )
                                                                    
                                                                    $
                                                                    1,608,000
                                                                    
                                                                    
                                                                    $
                                                                    (72,000
                                                                    )Basic,
      weighted average shares
                                                                    
                                                                    
                                                                    14,650,614
                                                                    
                                                                    
                                                                    
                                                                    14,635,201
                                                                    
                                                                    
                                                                    
                                                                    14,649,762
                                                                    
                                                                    
                                                                    
                                                                    14,633,417Dilutive
      effect of stock options
                                                                    
                                                                    
                                                                    612,656
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    533,783
                                                                    
                                                                    
                                                                    
                                                                    -Diluted,
      weighted average shares
                                                                    
                                                                    
                                                                    15,263,270
                                                                    
                                                                    
                                                                    
                                                                    14,635,201
                                                                    
                                                                    
                                                                    
                                                                    15,183,545
                                                                    
                                                                    
                                                                    
                                                                    14,633,417Basic
      income per share
                                                                    
                                                                    $
                                                                    0.04
                                                                    
                                                                    
                                                                    $
                                                                    (0.03
                                                                    )
                                                                    
                                                                    $
                                                                    0.11
                                                                    
                                                                    
                                                                    $
                                                                    (0.00
                                                                    )Diluted
      income per share
                                                                    
                                                                    $
                                                                    0.04
                                                                    
                                                                    
                                                                    $
                                                                    (0.03
                                                                    )
                                                                    
                                                                    $
                                                                    0.11
                                                                    
                                                                    
                                                                    $
                                                                    (0.00
                                                                    )





NOTE
C.       STATEMENTS OF CASH
FLOWS





Supplemental
cash flow disclosures:


For
      the Three Months
                
                
                For
      the Six MonthsCash Paid
                
                Ended September 30,
                
                
                Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
                
                $
                31,000
                
                
                $
                34,000
                
                
                $
                71,000
                
                
                $
                58,000





8





NOTE
D.       INVENTORIES





The major
components of inventories, net of reserves, are as follows:





September
      30,
                  
                  
                  March
      31,2009
                  
                  
                  2009Finished
      products
                  
                  $
                  2,063,000
                  
                  
                  $
                  1,782,000Work
      in process
                  
                  
                  1,408,000
                  
                  
                  
                  1,403,000Raw
      materials
                  
                  
                  1,680,000
                  
                  
                  
                  1,842,000$
                  5,151,000
                  
                  
                  $
                  5,027,000





NOTE
E.        PROPERTY, PLANT AND
EQUIPMENT





Property,
plant and equipment and depreciable lives are summarized as
follows:




Depreciable
                              Life
                            
                            
                            September
      30,
                            
                            
                            March
      31,In Years
                            
                            
                            2009
                            
                            
                            2009Land
                            
                            
                            
                            
                            $
                            241,000
                            
                            
                            $
                            241,000Buildings
                            
                            15
      – 40
                            
                            
                            
                            1,617,000
                            
                            
                            
                            1,617,000Machinery
      and equipment
                            
                            5 –
      17
                            
                            
                            
                            3,479,000
                            
                            
                            
                            3,371,000Laboratory
      equipment
                            
                            5 –
      17
                            
                            
                            
                            1,472,000
                            
                            
                            
                            1,409,000Furniture
      and fixtures
                            
                            3 –
      5
                            
                            
                            
                            129,000
                            
                            
                            
                            120,000Construction
      in process
                            
                            
                            
                            
                            
                            
                            13,000
                            
                            
                            
                            95,0006,951,000
                            
                            
                            
                            6,853,000Less:Accumulated
      depreciation
                            
                            
                            
                            
                            
                            
                            (2,734,000
                            )
                            
                            
                            (2,468,000
                            )$
                            4,217,000
                            
                            
                            $
                            4,385,000




9




NOTE
F.        ACCRUED
COMPENSATION





Accrued
compensation consists of the following:




September
      30,
                  
                  
                  March
      31,2009
                  
                  
                  2009Employee
      incentives
                  
                  $
                  516,000
                  
                  
                  $
                  742,000Accrued
      vacation
                  
                  
                  248,000
                  
                  
                  
                  242,000Accrued
      compensation
                  
                  
                  48,000
                  
                  
                  
                  62,000$
                  812,000
                  
                  
                  $
                  1,046,000





NOTE
G.       LINE OF CREDIT





Synthetech’s
credit facility, with a finance company, provides for borrowings of up to $2.0
million or the maximum available under the borrowing base, whichever is
less.  Interest is payable at (a) 9% or (b) the prime rate
plus 5%, whichever is higher.  The annual fee for the credit facility
is $20,000. Additionally, the credit facility has a minimum monthly fee of
$2,500, which is reduced by interest charges.  The facility contains
no financial covenants and is collateralized by cash, cash equivalents, accounts
receivable, inventories and property, plant and equipment.  The credit
facility is scheduled to expire on September 15, 2010.  As of
September 30, 2009, Synthetech had no borrowings outstanding under the facility
and $2.0 million in availability.  Availability is computed as the
total commitment of $2.0 million less amounts which are utilized by borrowings
or other commitments, less amounts not supported by eligible accounts receivable
or inventory.




NOTE
H.       LONG-TERM DEBT




Synthetech
has entered into term loan facilities from the same finance company that
provided Synthetech’s line of credit facility.  The loans contain no
financial covenants and are collateralized by cash, cash equivalents, accounts
receivable, inventories, and property, plant and equipment.  Terms of
the loans are as follows:





·
            On
      November 5, 2008, Synthetech entered into a term loan facility under which
      it borrowed $500,000.  The loan matures on November 5, 2011, and
      requires 36 monthly principal payments equal to $8,333, plus interest,
      beginning on December 1, 2008, with a balloon payment of $200,000 due on
      maturity.  The note bears interest at (a) 9% or
      (b) the prime rate plus 5%, whichever is higher.  The
      amount outstanding under this term loan facility as of September 30, 2009
      was $417,000.





·
            On
      May 5, 2008, Synthetech entered into a term loan facility under which it
      borrowed $550,000. The loan matures on May 5, 2011, and requires 36
      monthly principal payments equal to $9,167, plus interest, beginning on
      June 1, 2008, with a balloon payment of $220,000 due on
      maturity.  The note bears interest at (a) 8% or (b) the
      prime rate plus 4%, whichever is higher.  In May 2010,
      Synthetech will pay an annual loan fee equal to 1% of the then outstanding
      principal balance of the loan.  The amount outstanding under
      this term loan facility as of September 30, 2009 was
    $403,000.


10




Scheduled
long-term debt principal repayments under the term loan facilities are as
follows:





Years
      ending March 31,2010
                    
                    $
                    105,0002011
                    
                    
                    210,0002012
                    
                    
                    505,000Total
                    
                    $
                    820,000





NOTE
      I.
            EMPLOYEE
      STOCK BENEFIT PLAN





Description
of the Plan





Stock
Plan


Synthetech
grants equity-based compensation under its 2005 Equity Incentive Plan (the 2005 Plan).  Stock
options, restricted stock awards and stock appreciation rights are authorized
for issuance to employees, consultants and non-employee directors under the 2005
Plan.  Stock options are granted with an exercise price equal to the
fair market value of Synthetech’s common stock on the date of
grant.  Employee options generally vest (a) one-third on the date of
grant and in equal annual installments between the date of grant and the
subsequent two years or (b) over a three year period on their annual anniversary
dates. On occasion, individual options may have different vesting
terms.  Options granted to non-management Directors generally vest
ratably over the five succeeding years from the date of grant.  All
options expire no later than ten years from the date of grant.  As of
September 30, 2009, 110,350 shares were available for issuance under the 2005
Plan.





Stock
Option Activity





A summary
of the changes in stock options outstanding under Synthetech’s 2005 Plan and
otherwise during the six months ended September 30, 2009 is presented
below:





WeightedWeighted
                      
                      
                      AverageNumber
                      
                      
                      Average
                      
                      
                      Remaining
                      
                      
                      AggregateOf
                      
                      
                      Exercise
                      
                      
                      Contractual
      Term
                      
                      
                      IntrinsicOptions
                      
                      
                      Price
                      
                      
                      (years)
                      
                      
                      ValueOptions
      outstanding, March 31, 2009
                      
                      
                      2,595,400
                      
                      
                      $
                      0.92
                      
                      
                      
                      6.6Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      (2,000
                      )
                      
                      $
                      0.29Forfeited
                      
                      
                      (55,500
                      )
                      
                      $
                      1.72Options
      outstanding, September 30, 2009
                      
                      
                      2,537,900
                      
                      
                      $
                      0.90
                      
                      
                      
                      6.1
                      
                      
                      $
                      856,000Options
      exercisable, September 30, 2009
                      
                      
                      1,887,901
                      
                      
                      $
                      1.04
                      
                      
                      
                      5.2
                      
                      
                      $
                      515,000





No
options were granted during the first half of fiscal 2010 or
2009.  The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between Synthetech’s closing stock
price on the last trading day of the quarter ended September 30, 2009 and the
exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had option holders exercised their
options on September 30, 2009.  This amount changes based upon changes
in the fair market value of Synthetech’s stock.


11


As of
September 30, 2009, $135,000 of total unrecognized compensation cost, net of
estimated forfeitures, related to nonvested stock options is expected to be
recognized over a weighted-average period of approximately 1.5
years.





Stock-based
compensation expense was allocated as follows:





For the Three Months
                        
                        
                        For the Six MonthsEnded September 30,
                        
                        
                        Ended September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Stock-based
      compensation expense:Cost
      of revenue
                        
                        $
                        3,000
                        
                        
                        $
                        2,000
                        
                        
                        $
                        6,000
                        
                        
                        $
                        5,000Operating
      expenses
                        
                        
                        12,000
                        
                        
                        
                        15,000
                        
                        
                        
                        21,000
                        
                        
                        
                        30,000Stock-based
      compensation expensebefore
      income taxes
                        
                        
                        15,000
                        
                        
                        
                        17,000
                        
                        
                        
                        27,000
                        
                        
                        
                        35,000Income
      tax benefit
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      stock-based compensationexpense
      after income taxes
                        
                        $
                        15,000
                        
                        
                        $
                        17,000
                        
                        
                        $
                        27,000
                        
                        
                        $
                        35,000


12




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




The
following discussion of the results of Synthetech’s operations and financial
condition should be read in conjunction with the accompanying condensed
financial statements and the notes thereto included within this
report.





FORWARD
LOOKING STATEMENTS





This Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  All statements, other than statements
of historical fact, including statements regarding industry prospects and future
results of operations or financial position, made in this Quarterly Report are
forward looking. Words such as “anticipates,”“believes,” “expects,” “future” and
“intends” and similar expressions may identify forward-looking statements. In
particular, forward-looking statements in this report include statements
regarding:  our future performance and operating results; expected
revenue from and shipping dates for customer orders; future revenue for a
customer market category; future revenue from multiple customer drug development
projects all for a certain indication; customer budgetary or other
considerations regarding order placement or timing of market demand; recurrence
of large-scale projects; resolution of manufacturing process difficulties;
estimated quarterly stock-based compensation amounts; the conditions of the fine
chemicals industry; research and development in the pharmaceutical industry;
impact of healthcare reform on the drug development industry; initiatives
related to organic growth or corporate development strategies; obtaining
regulatory approval for new drugs and other matters relating to drug development
progress; financing our current and future capital expenditures and the timing
and amount of such expenditures; the effect any change in foreign currency
exchange rates would have on our operating results; whether our cash and cash
equivalents, borrowing capacity and internally-generated funds will be adequate
to operate our business; general economic conditions; and our inability to
recognize deferred tax assets. Forward-looking statements reflect management’s
current expectations, plans or projections and are inherently
uncertain.  Actual results could differ materially from
management’s expectations, plans or
projections.  Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The risks and uncertainties that may cause actual results to vary
materially from any forward-looking statements include, but are not limited to,
the following: the uncertain market for our products; potential loss of a
significant customer; customer concentration; potential termination, suspension
or delay by customers of significant projects or orders; potential production or
shipping delays; potential period-to-period revenue or expense fluctuations; our
limited financial and other resources; higher than expected cash use, or
inability to borrow funds under our line of credit or to raise other debt or
equity capital required to continue operations; production factors and timely
access to raw materials; industry cost factors; competition; government
regulation; labor disputes; technological change; future incentive stock awards;
and international business risks.  Investors are urged to read our
filings with the Securities and Exchange Commission, including our Annual Report
on Form 10-K for the fiscal year ended March 31, 2009, for a further description
of risks and uncertainties related to forward-looking statements made by us as
well as to other aspects of our business. Synthetech does not intend to release
any revisions to these forward-looking statements to reflect events or
circumstances that may occur or arise after the date hereof or to reflect the
occurrence of unanticipated events.


13


OVERVIEW


Synthetech,
Inc., based in Albany, Oregon, is a fine chemicals company specializing in
organic synthesis, biocatalysis and chiral technologies.  We develop
and manufacture proprietary custom chiral intermediates, amino acid derivatives,
specialty amino acids, and peptide fragments and specialty resins primarily for
the pharmaceutical industry, and offer customers a full range of “kilograms to
tons” production capability.  Synthetech produces advanced
pharmaceutical intermediates in accordance with Current Good Manufacturing
Practices (cGMP) in
compliance with U.S. Food and Drug Administration (FDA)
regulations.  Our products support the development and manufacture of
therapeutic peptides and peptidomimetic (peptide-like) small molecule drugs from
early stages of a customer’s clinical development through market launch and into
commercial production.  Synthetech’s products also support the
production of chemically-based medical devices.  Synthetech’s domestic
and international customer base includes major and mid-size pharmaceutical,
contract drug synthesis, emerging and established biopharmaceutical and medical
device companies.  We also supply catalog quantities of specialty
amino acids to research institutions, universities and drug discovery
firms.





Financial
Results




Synthetech
reported revenue of $4.0 million for the second quarter of our fiscal year
ending March 31, 2010.  Related gross income was $1.6 million, or
41% of revenue, and net income was $639,000, or $0.04 per share, which was an
improvement of $1.0 million over the second quarter of fiscal 2009 net loss of
$367,000 on revenue of $3.3 million.





Revenue
for the first six months of fiscal 2010 was $8.7 million.  Related
gross income was $3.7 million, or 42% of revenue, and net income was $1.6
million, or $0.11 per share, which was an improvement of $1.7 million over the
first six months of fiscal 2009 net loss of $72,000 on revenue of $8.2
million.





The
improvement in net income for the three and six months ended September 30,
2009 compared to the corresponding periods for the prior fiscal year is
attributable primarily to: increases in revenue between the corresponding
periods; more favorable product mix; improved throughput and efficiencies; and
raw material and other cost reductions.





The first
six months of fiscal 2010 includes $478,000 of employee incentives compared to
$62,000 in the comparable period of fiscal 2009.  In May 2009,
Synthetech implemented a reduction in force, resulting in $53,000 of severance
costs in the first quarter of fiscal 2010.





During
the first six months of fiscal 2010, Synthetech generated $2.1 million in cash
from operations and used $207,000 to repay borrowings and $113,000 for capital
expenditures.  The outstanding balance on our credit facility at both
March 31, 2009 and September 30, 2009 was $-0-.  Working capital
increased $1.7 million to $7.6 million as of September 30, 2009, compared to
$5.9 million at March 31, 2009.





Market
Overview


We
believe that Synthetech has been able to capitalize on new revenue opportunities
because of our proprietary technology positions in both amino acid chemistry and
multi-step chiral organic synthetic chemistry.  Several large
multi-national pharmaceutical companies have made a strategic decision to
outsource more of their manufacturing requirements. We believe we are well
positioned to compete for these new opportunities because of our long
association with the pharmaceutical industry, large-scale domestic manufacturing
facility and an experienced research and development group.


14


We have
increasingly targeted market opportunities at both established and emerging
biopharmaceutical and chemically-based medical device companies. These
opportunities are being driven in large part by the need of large pharmaceutical
companies to develop new drugs. A number of block-buster drugs will lose patent
protection and become generic over the next five years, and large pharmaceutical
companies are seeking to offset the impact of this development with increased
internal drug development efforts augmented by the in-licensing of promising new
drug candidates from emerging biopharmaceutical companies. Most emerging
biopharmaceutical companies have limited manufacturing expertise, which we
believe provides a company like Synthetech with additional market
opportunities.





Synthetech’s
revenues are largely based on the status of individual, large-scale customer
projects and can vary significantly from period to period and by customer market
category.  Approximate revenue by customer market category for all
types of projects for the first six months of fiscal 2010 and 2009 was as
follows:





Customer
                                      
                                      For the six Months Ended September 30,Market Category
                                      
                                      2009
                                      
                                      
                                      2008Major
      and mid-size pharmaceutical
                                      
                                      $
                                      5,450,000
                                      
                                      
                                      $
                                      3,965,000Contract
      drug synthesis
                                      
                                      
                                      2,055,000
                                      
                                      
                                      
                                      2,040,000Emerging
      biopharmaceutical
                                      
                                      
                                      794,000
                                      
                                      
                                      
                                      1,164,000Medical
      device
                                      
                                      
                                      235,000
                                      
                                      
                                      
                                      627,000Established
      biopharmaceutical
                                      
                                      
                                      49,000
                                      
                                      
                                      
                                      331,000Other
                                      
                                      
                                      82,000
                                      
                                      
                                      
                                      81,000Total
      revenue
                                      
                                      $
                                      8,665,000
                                      
                                      
                                      $
                                      8,208,000





Information
relating to the above table includes the following:





·
            Increased
      revenue in the first six months of fiscal 2010 from major and mid-size
      pharmaceutical companies was primarily the result of growth in existing
      large-scale projects.  We believe that our fiscal 2010 revenue
      from major and mid-size pharmaceutical companies may be mildly impacted by
      the current economic downturn.  However, we believe that revenue
      from these types of companies will depend more upon the status of
      individual drug development projects and customer acceptance of marketed
      products rather than on the prevailing economic
    environment.


15


·
            A
      portion of our fiscal 2010 revenue from contract drug synthesis companies
      will be affected by the level of business they receive from emerging
      biopharmaceutical customers.  To a larger extent, our fiscal
      2010 revenues from this customer category will depend upon the status of
      individual drug development and marketed projects for which we supply
      material.





·
            Medical
      device revenue for the first six months of fiscal 2010 resulted from a
      project with a single customer.  Due to existing high customer
      inventory levels, we do not anticipate further revenue in fiscal 2010 from
      this customer.  Market expectations from our customer suggest
      demand may return beginning in early fiscal
  2011.




·
            Despite
      the difficult economic environment, we continue to receive new orders and
      significant inquiries from some of our emerging biopharmaceutical
      customers.  Due to expanding requirements from several drug
      development projects, we anticipate that fiscal 2010 revenues from this
      customer market category may outpace fiscal 2009
  revenues.




·
            Revenue
      during fiscal 2009 from established biopharmaceutical companies primarily
      represents sales to a single company in support of a particular drug
      development project.  We believe that this drug development
      project remains active but are uncertain regarding the timing of future
      customer orders.




Business
Conditions


Synthetech’s
order backlog as of September 30, 2009 and 2008 was approximately $1.9 million
and $5.7 million, respectively.  The decrease in the backlog between
the two periods primarily relates to a large order which was shipped in fiscal
2009 and the first quarter of fiscal 2010.  We expect that most of the
September 30, 2009 backlog will ship during the third quarter of fiscal 2010,
which ends December 31, 2009, and a substantial portion of the remainder is
scheduled to ship during the fourth quarter of fiscal 2010.





Customer
inquiries remain active and there are multiple large projects where Synthetech
is pursuing orders.  Over the past two quarters, customers have
increasingly appeared more cautious in placing orders and we believe that some
order decisions are being deferred as a result of customers’ economic and
regulatory considerations.  Uncertainty related to the present
national debate on healthcare reform may also be hindering the funding of
certain customer drug development projects.  We have yet to be able to
ascertain the extent of the impact on financial results for the second half of
fiscal 2010.  Given this environment, we continue to focus on
expanding our project pipeline and further developing a culture of improving
operational efficiencies and cost reductions.





A
substantial portion of Synthetech’s annual revenue has been derived from
multiple customers’ development projects which are targeting a common indication
and is commonly referenced by management as its “franchise”
business.  While this franchise business had a significant impact on
our operating results in the first quarter of fiscal 2010, it was in a temporary
quiet cycle for the second quarter of fiscal 2010.  This fluctuation
is not uncommon for projects moving through clinical development.  For
the first six months of fiscal 2010, approximately 42% of our revenue was
derived from these franchise projects.  Management believes the
franchise business has strong growth potential but that revenues from these
projects will continue to fluctuate on a quarterly basis.  With
quarter to quarter revenue fluctuations common in our industry, management
believes year over year results are more indicative of our
performance.





16




In
addition to our organic growth initiatives and as a potential means of smoothing
quarterly revenue and expanding our markets, Synthetech from time to time may
evaluate potential acquisition opportunities with complementary technologies and
markets.


Our
primary competition is from a variety of fine chemical companies headquartered
in Western Europe.  We occasionally encounter competition from
developing countries in Asia that have substantially lower cost
structures.





Customer
Project Pipeline




Our
portfolio of clinical pipeline projects remains active and consists of a variety
of projects with significant revenue generating
potential.  Large-scale customer projects represent our main source of
revenue.  We are unable to determine with reasonable certainty our
revenues relating to large-scale projects beyond our current order base, in part
due to unpredictable drug approval processes and the short-term supply chain
planning by many of our customers.





RESULTS
OF OPERATIONS





The
following table sets forth, for the periods indicated, the percentage of
revenues represented by each item included in our condensed Statements of
Operations.





Percentage of RevenueFor the Three Months Ended
                    
                    
                    For the Six Months EndedSeptember 30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of revenue
                    
                    
                    59.0
                    
                    
                    
                    80.5
                    
                    
                    
                    57.9
                    
                    
                    
                    76.5Gross
      income
                    
                    
                    41.0
                    
                    
                    
                    19.5
                    
                    
                    
                    42.1
                    
                    
                    
                    23.5Research
      and development
                    
                    
                    6.0
                    
                    
                    
                    10.2
                    
                    
                    
                    6.3
                    
                    
                    
                    7.7Selling,
      general and administrative
                    
                    
                    18.3
                    
                    
                    
                    19.4
                    
                    
                    
                    16.5
                    
                    
                    
                    16.0Total
      operating expenses
                    
                    
                    24.3
                    
                    
                    
                    29.6
                    
                    
                    
                    22.8
                    
                    
                    
                    23.7Operating
      income (loss)
                    
                    
                    16.7
                    
                    
                    
                    (10.1
                    )
                    
                    
                    19.3
                    
                    
                    
                    (0.2
                    )Interest
      income
                    
                    
                    0.0
                    
                    
                    
                    0.0
                    
                    
                    
                    0.0
                    
                    
                    
                    0.0Interest
      expense
                    
                    
                    (0.8
                    )
                    
                    
                    (1.0
                    )
                    
                    
                    (0.8
                    )
                    
                    
                    (0.7
                    )Income
      (loss) before income taxes
                    
                    
                    15.9
                    
                    
                    
                    (11.1
                    )
                    
                    
                    18.5
                    
                    
                    
                    (0.9
                    )Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income (loss)
                    
                    
                    15.9
                    %
                    
                    
                    (11.1
                    )%
                    
                    
                    18.5
                    %
                    
                    
                    (0.9
                    )%


17


Revenue





Revenue
of $4.0 million for the second quarter of fiscal 2010 increased by $710,000, or
22%, from revenue of $3.3 million for the second quarter of fiscal
2009.  Revenue of $8.7 million for the first six months of fiscal 2010
increased by $457,000, or 6%, from $8.2 million for the first half of fiscal
2009.





Revenue
from four large-scale projects was $2.5 million during the second quarter of
fiscal 2010.  Five large-scale projects contributed $1.3 million to
revenue during the second quarter of fiscal 2009.





During
the first six months of fiscal 2010, six large-scale projects contributed $6.1
million to revenue, compared to seven large-scale projects contributing $3.7
million during the comparable period of fiscal 2009.





As
discussed above, large-scale project revenue for the first six months of fiscal
2010 includes $235,000 in revenue in support of a medical device project
compared to $627,000 in the comparable period of fiscal 2009.  Medical
device revenue for the first six months of fiscal 2010 resulted from a project
with a single customer.  Due to existing high customer inventory
levels, we do not anticipate further revenues in fiscal 2010 from this
customer.





International
sales, mainly to Europe, were $1.9 million and $5.0 million in the second
quarter and first six months of fiscal 2010, respectively, compared to $1.1
million and $4.0 million in the second quarter and first six months of fiscal
2009, respectively.  International sales, like all of our revenues,
are subject to significant quarterly fluctuations.





The
market environment for smaller customer projects continues to be
active.  While generally smaller in dollar value individually, these
projects support a wide variety of programs for our major pharmaceutical,
emerging biopharmaceutical and contract drug synthesis
customers.  Synthetech’s large-scale projects typically originate from
our portfolio of successful small-scale, early-stage drug development
projects.





Gross
income





Gross
income for the second quarter of fiscal 2010 increased $998,000 to $1.6 million,
or 41% of revenue, compared to gross income of $642,000, or 20% of revenue, for
the second quarter of fiscal 2009.  Gross income for the first six
months of fiscal 2010 increased $1.7 million, to $3.7 million, or 42% of
revenue, compared to gross income of $1.9 million, or 24% of revenue, for the
first six months of fiscal 2009.





The
improvement in gross income is attributable to: increased revenue between the
two periods; a more favorable product mix; improved throughput and efficiencies;
and raw material and other cost reductions.





Manufacturing
department costs incurred during the second quarter and first six months of
fiscal 2010 decreased $198,000 and $262,000, respectively, compared to the
comparable periods of fiscal 2009.  Variable operating costs such as
maintenance and supplies decreased between the respective periods primarily as a
result of Synthetech’s cost containment efforts.





Synthetech
routinely develops manufacturing processes to produce new products or to refine
procedures for existing products.  It is not unusual for manufacturing
costs associated with new processes or certain existing processes to exceed the
selling price for batches of product, which results in an inventory
write-off.  It remains difficult to rework certain materials on a
cost-effective basis.  Synthetech also writes off inventory that is
specific to any customer project that has been discontinued.


18


Cost of
revenue includes raw materials, direct labor, manufacturing overhead, other
direct costs, and adjustments to inventory.





Operating
Expenses





R&D
Expense.  Research and development (R&D) expense for the
second quarter of fiscal 2010 decreased $96,000 to $239,000, or 6% of revenue,
compared to $335,000, or 10% of revenue, for the second quarter of fiscal
2009.  R&D expense in the first six months of fiscal 2010
decreased $90,000 to $542,000, or 6% of revenue, compared to $632,000, or 8% of
revenue, in the first six months of fiscal 2009.  The decreases in
R&D expense between these periods included:




·
            aggregate
      decreases during the second quarter and first six months of fiscal 2010 in
      compensation and related costs of $62,000 and $49,000, respectively,
      primarily due to the transfer of an R&D chemist to the Production
      Department and temporary vacancies, partially offset by general increases
      in salaries and benefits;




·
            decreases
      during the second quarter and first six months of fiscal 2010 in
      laboratory supplies of $40,000 for both periods;
  and




·
            a
      net decrease during the second quarter and first six months of fiscal 2010
      in various expenses of $33,000 and $48,000,
  respectively;




partially
offset by:




·
            increases
      during the second quarter and first six months of fiscal 2010 of $39,000
      and $47,000, respectively, arising from decreases in the amount of R&D
      department costs allocated to inventory for the manufacture of customer
      products, as described below.





Synthetech’s
R&D department primarily develops processes to manufacture and optimize the
production of our products and their related scale-up to manufacturing
quantities.  Additionally, the R&D department at times
manufactures small-scale products.  The cost of producing these
small-scale products is captured in inventory and not reflected in R&D
expense.  The amount of R&D department costs charged to the
manufacture of small-scale products can cause fluctuations between reporting
periods in the amount of reported R&D expense.  R&D department
costs charged to inventory in the first six months of fiscal 2010 and 2009 were
$53,000 and $100,000, respectively.





SG&A
Expense.  Selling, general and administrative (SG&A) expense in the
second quarter of fiscal 2010 increased $93,000 to $733,000, or 18% of revenue,
compared to $640,000, or 19% of revenue, in the second quarter of fiscal
2009.





The
increase in SG&A expense between these two periods includes:





·
            an
      aggregate $161,000 increase in compensation expense, comprised of an
      increase in employee incentives of $130,000 and various net increases in
      compensation and related benefit
costs;




19




partially
offset by:


·
            a
      decrease in professional fees of $46,000;
and





·
            a
      net decrease in various expenses of
$22,000.





SG&A
expense in the first six months of fiscal 2010 increased $117,000 to $1.4
million, or 17% of revenue, compared to $1.3 million, or 16% of revenue, in the
first six months of fiscal 2009.





The
increase in SG&A expense between the two six-month periods
included:




·
            an
      aggregate $254,000 increase in compensation expense for the first six
      months of fiscal 2010, comprised of an increase in employee incentives of
      $231,000 and various net increases in compensation and related benefit
      costs, and




·
            a
      net increase in various expenses of
$13,000;




partially
offset by:





·
            a
      decrease in professional fees of $79,000;
and





·
            a
      decrease in travel and sales and marketing expenses of
      $71,000.





SG&A
expense consists of compensation and related fringe benefits for sales and
administrative employees, costs of professional services, marketing costs, costs
associated with being a public company, and costs related to administrative
facilities and information services.





Interest
Expense





Interest
expense in the second quarter and first six months of fiscal 2010 was $31,000
and $71,000 respectively, compared to $34,000 and $58,000, respectively, in the
comparable periods of fiscal 2009.  The change in interest expense
between the periods primarily relates to the level of borrowings on Synthetech’s
line of credit and long-term debt.





Income
Taxes





Based on
Synthetech’s history of losses in certain prior years and management’s
evaluation of available tax planning strategies, we have concluded that for the
foreseeable future Synthetech may be unable to recognize its net deferred tax
assets as an income tax benefit, continuing for an uncertain period of
time.





Net Income
(Loss)





As a
result of the foregoing factors, net income for the second quarter and first six
months of fiscal 2010 was $639,000 and $1.6 million, respectively, compared to
net losses of $367,000 and $72,000, respectively, for the comparable periods of
fiscal 2009.


20


LIQUIDITY AND CAPITAL
RESOURCES





Synthetech’s
cash and cash equivalents totaled $2.4 million at September 30, 2009, compared
to $588,000 at March 31, 2009.





At
September 30, 2009, Synthetech had working capital of $7.6 million, compared to
$5.9 million at March 31, 2009.  The $1.7 million increase in working
capital between the two periods was primarily the result of net income for the
six-month period of $1.6 million, non-cash charges for depreciation of $269,000,
stock-based compensation of $27,000 and a loss on the retirement of equipment of
$12,000, partially offset by repayments of long-term debt of $105,000 and
capital expenditures of $113,000.





We
generated cash in our operating activities of $2.1 million in the first six
months of fiscal 2010, compared to cash used in operating activities of $1.2
million in the first six months of fiscal 2009.





In the
first six months of fiscal 2010, net income of $1.6 million, adjusted for
non-cash charges of $308,000, contributed $1.9 million to cash provided by
operating activities.  Accounts receivable decreased $902,000 to $1.8
million at September 30, 2009, from $2.7 million at March 31, 2009, primarily
due to the timing of shipments between the two quarters.  Inventory
increased $124,000 to $5.2 million at September 30, 2009, from $5.0 million at
March 31, 2009.  Finished goods inventory increased $281,000 for the
quarter in response to customer orders and increases in quantities of commonly
sold items.  Primarily as a result of the amortization of insurance
premiums and property taxes, prepaid expenses decreased $187,000 to $151,000 at
September 30, 2009, from $338,000 at March 31, 2009.  Accounts payable
decreased $509,000 to $746,000 at September 30, 2009, from $1.3 million at March
31, 2009.  Accrued compensation, which is primarily composed of
accrued employee incentives, accrued vacation pay and accrued compensation,
decreased $234,000 to $812,000 at September 30, 2009, from $1.0 million at March
31, 2009.  Employee incentives approximating $700,000, which were
earned in fiscal 2009, were paid to employees in July 2009.  Other
accrued liabilities decreased $3,000 to $20,000 at September 30, 2009, from
$23,000 at March 31, 2009.





Cash used
in investing activities consists of expenditures for capital
equipment.  Capital expenditures for the first six months of fiscal
2010 were $113,000, compared to $678,000 in the comparable period of fiscal
2009.  Synthetech’s capital budget for fiscal 2010 is $1.0 million and
is intended to increase manufacturing and analytical capacity, address
opportunities for cost savings and replace aging equipment.  As a
result of the current economic environment, Synthetech will closely manage and
may defer certain of its capital expenditures scheduled for fiscal
2010.  Synthetech expects to finance additional capital expenditures
from cash on hand, any internal cash flow or debt financing.





Cash used
in financing activities for the first six months of fiscal 2010 was $207,000,
compared to cash provided by financing activities of $985,000 in the first six
months of fiscal 2009.  During the first six months of fiscal 2010
Synthetech had scheduled debt repayments of $207,000.  During the
first six months of fiscal 2009 Synthetech had net borrowings of $603,000 on its
line of credit, $550,000 of borrowings pursuant to a long-term promissory note,
scheduled debt repayments of $172,000 and proceeds from the exercise of stock
options of $4,000.





Cash and
cash equivalents increased $1.8 million during the first six months of fiscal
2010, to $2.4 million at September 30, 2009, from $588,000 at March 31,
2009.


21


The
downturn in the economic environment and resulting difficulties in the credit
markets did not have a significant unfavorable impact on Synthetech’s business
and resulting cash flows in the first six months of fiscal 2010 or during fiscal
2009.  Recently, customers have generally appeared more cautious in
placing orders and we believe that some order decisions are being deferred as a
result of customers' economic and regulatory considerations, as well as the
uncertainty related to the national healthcare reform
debate.  Although we are unable to determine the extent to which our
operating results for the second half of fiscal 2010 will be impacted by these
factors, customer orders for the third and fourth quarters of fiscal 2010 may be
unfavorably impacted.





As noted
above, for the first six months of fiscal 2010, our primary source of cash
included funds generated from operations, and we had no borrowings under our
$2.0 million line of credit.  Generally, we finance our more
significant insurance premiums and may do this again during the third quarter of
fiscal 2010.  Other than the potential financing of our insurance
premiums, we do not anticipate a need to enter into additional debt facilities,
but may do so as needs arise or to provide flexibility for working capital
purposes or the implementation of growth strategies.  From time to
time, we may explore options to refinance our borrowings.





As
discussed above, as of September 30, 2009 we had $2.4 million of cash and cash
equivalents, $1.8 million of accounts receivable, no outstanding borrowings
under our line of credit, and our backlog was $1.9 million.  Our line
of credit facility matures in September 2010 and our term debt facilities mature
in fiscal 2012.  Based on these items and other assessments by
management, we believe that our existing cash and cash equivalents, anticipated
availability under our line of credit facility, and any funds generated from
operations will be sufficient to support our operations for the next twelve
months.  However, any projections of future cash needs and cash flows
are subject to substantial uncertainty.  There can be no assurance
that current cash and cash equivalent balances and any proceeds that may be
available under our line of credit facility or any funds generated from
operations or from other sources will be sufficient to satisfy our liquidity
requirements.





Synthetech’s
current lender is a finance company that receives its liquidity and lending
capacity from bank borrowings.  If, as a result of the recent
difficulties in the credit markets or otherwise, our lender is unable to borrow
funds from its banks, then our ability to borrow under our line of credit with
the lender or refinance our term debt with such lender if needed would be
impaired.  In addition, we are subject to a cash management system as
part of our credit facility arrangement pursuant to which a significant portion
of our cash flows to accounts controlled by our lender.  If the
current economic difficulties or other factors were to affect the continued
viability of our lender, our access to cash subject to this system could be
harmed.  We currently believe our lender will remain
viable.




OFF-BALANCE SHEET
ARRANGEMENTS


Synthetech
does not have special purpose entities or other off-balance sheet financing
techniques that we believe have or are reasonably likely to have a current or
future material effect on our financial condition, results of operations,
liquidity or capital resources.  As of September 30, 2009, Synthetech
had employee agreements with its President and Chief Executive Officer, Vice
President of Finance and Chief Financial Officer and Vice President of
Operations.  The agreements generally provide that a termination of
the executive without "cause" (as defined) or termination by the executive for
"good reason" (as defined) obligates us to pay certain severance benefits
specified in the agreement.


22





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES


The
discussion and analysis of Synthetech’s financial condition and results of
operations are based upon its financial statements, which have been prepared in
conformity with generally accepted accounting principles in the United States.
The preparation of these financial statements requires Synthetech to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and
liabilities.  On an ongoing basis, Synthetech evaluates its estimates,
including those related to deferred tax asset realization, inventory
realization, allowance for doubtful accounts and long-lived asset
impairments.  Synthetech bases its estimates on historical experience
and on various other assumptions. Actual results may differ from these estimates
under different assumptions or conditions.  Synthetech believes the
following are among the critical accounting policies and the related judgments
and estimates that affect the preparation of its financial
statements.  Please see the Notes to the Financial Statements under
Item 1.




Allowance for Doubtful
Accounts


We
analyze a customer’s creditworthiness by reviewing the customer’s payment
history and financial stability.  We establish the allowance for
doubtful accounts by reviewing aged accounts receivables and the collectability
of specific accounts.  The allowance for doubtful accounts as of
September 30, 2009 and March 31, 2009 was $15,000.  Synthetech’s
provisions for credit losses for the first six months of fiscal 2010 and 2009
were insignificant.  If circumstances related to a specific customer
change, Synthetech’s estimate of the recoverability of receivables could
materially change.





Inventories


Inventories
are valued at the lower of cost or market value, determined on the first-in
first-out (FIFO)
basis.  Costs include direct material, direct labor, applicable
manufacturing overhead, and other direct costs.





Management
evaluates Synthetech’s inventory for impairment whenever it becomes aware that
indicators of impairment exist.  Factors contributing to inventory
impairment include, but are not limited to: decreases in selling price; changes
in customer specifications; project terminations or holds; variations in
material produced by Synthetech from customer specifications; and production
costs materially in excess of current market price.  It is our policy
to write-down inventories to reflect an estimate for impairment in an amount
equal to the excess, if any, of the cost of inventory compared to the estimated
market value based upon assumptions about future demand and market
conditions.  If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required in the
future.  Write-downs of inventory are reported as a component of cost
of revenue in the relevant period.





Long-Lived Asset
Impairment


Synthetech
assesses the impairment of long-lived assets such as property, plant and
equipment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable.  Factors that could trigger an
impairment review include, among others:




·
            a
      significant change in the extent or manner in which a long-lived asset is
      being used;


·
            a
      significant change in the business climate that could affect the value of
      a long-lived asset; and


·
            a
      significant decrease in the market value of
  assets.


23





If
Synthetech determines that the carrying value of long-lived assets may not be
recoverable, based upon the existence of one or more indicators of impairment,
we compare the carrying value of the asset group to the undiscounted cash flows
expected to be generated by the asset group.  If the carrying value
exceeds the undiscounted cash flows, we may record an impairment
charge.  We recognize an impairment charge to the extent that the
carrying amount of the asset group exceeds its fair value and will reduce only
the carrying amount of the long-lived assets.




Revenue
Recognition


Synthetech
recognizes revenue, including shipping and handling charges billed to customers,
when the following criteria are met:




·
            persuasive
      evidence of an arrangement exists;


·
            delivery
      has occurred or services have been
rendered;


·
            Synthetech’s
      price to our customer is fixed or determinable;
  and


·
            collectability
      is reasonably assured.





Shipping
and handling costs are classified as part of cost of
revenue.  Synthetech analyzes its agreements to determine whether
elements can be separated and accounted for individually or as a single unit of
accounting in accordance with Emerging Issues Task Force No. 00-21, “Revenue
Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin 104,
“Revenue Recognition.”  Allocation of revenue to individual elements
which would qualify for separate accounting is based on the estimated fair value
of the respective elements.


24





INDUSTRY
FACTORS





The
market for Synthetech’s products is driven by the market for the drugs into
which they are incorporated. The drug development process is dictated by the
marketplace, drug companies and the regulatory
environment.  Synthetech has no control over the pace of these drug
development efforts, which drugs get selected for clinical trials, which drugs
are approved by the FDA or, even if approved, the ultimate market potential of
the drugs.





The three
stages of the drug development process include R&D (or discovery stage),
clinical trial stage and marketed drug stage. Synthetech’s customers can spend
years researching and developing new drugs, and take only a small percentage to
clinical trials and fewer yet to commercial market.





Recurring
sales of our products for development programs are intermittent.  Once
Synthetech ships an order to a customer for clinical trial studies, the next
order may not be placed for one to two years later as a result of waiting for
results from these ongoing studies.  Because of the inherent risk
associated with drug development programs, there is a significant likelihood
that there will be no “follow-on” sales for any particular drug development
program. Accordingly, the level and timing of customer orders relating to
specific drug development programs vary substantially from period to period and
we cannot rely on any one customer as a constant source of revenue.





The size
of customer orders for marketed drugs can be substantially larger than those for
the discovery or clinical trial stages. Sales of Synthetech’s products for
marketed drugs may provide an opportunity for continuing, longer-term sales.
While not subject to the same high cancellation rates faced by discovery and
clinical trial-stage drug development programs, the demand for approved drugs
remains subject to many uncertainties, including price, side effects and the
existence of competing drugs. These factors, which are outside of Synthetech’s
control, affect the level of demand for the drug itself and, therefore, the
demand for Synthetech’s products. Also, industry cost pressures can cause
pharmaceutical companies to explore and ultimately adopt alternative
manufacturing processes that may not include Synthetech’s products as an
intermediate.  In recent years, the international fine chemicals
industry has been marked by overcapacity and a resulting downward pressure on
pricing.  Downward pressure on pricing remains
persistent.  To the extent we are able to enter into longer-term,
significant or large-scale orders with customers, we expect increased
competition to supply these products.





Due to
the foregoing industry factors, Synthetech cannot predict with reasonable
certainty future demand beyond its current order base, and existing orders may
be subject to cancellation or delay by customers. Until there is stable demand
for our products, we are likely to continue to experience significant
fluctuations in our periodic results.


25





Item 4T.  Controls and
Procedures


Synthetech
maintains a system of disclosure controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in our reports under the Securities Exchange Act
of 1934.  In accordance with Rule 13a-15(b) of the Securities and
Exchange Act of 1934, our management evaluated, under the supervision and with
the participation of our principal executive officer and principal financial
officer, the effectiveness of the design and operation of Synthetech’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities and Exchange Act of 1934) as of the end of the period covered by this
report.  Based upon that evaluation, our principal executive officer
and the principal financial officer concluded that Synthetech’s disclosure
controls and procedures are effective in ensuring that information required to
be disclosed in our Exchange Act reports is (1) recorded, processed, summarized
and reported in a timely manner, and (2) accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.





There has
been no change in our internal control over financial reporting during the
second quarter ended September 30, 2009 that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.





Synthetech’s
principal executive officer and principal financial officer do not expect that
our disclosure controls and internal controls will prevent all errors and all
fraud.  Although our disclosure controls and procedures were designed
to provide reasonable assurance of achieving their objectives and our principal
executive officer and principal financial officer have determined that they are
effective in doing so, a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met.  Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their
costs.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Synthetech have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple mistakes or errors.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of any
system of controls also is based partly on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.


26


PART
II.  OTHER INFORMATION





Item
1A. Risk Factors





In
addition to other information set forth in this report, you should carefully
consider the factors discussed in Part 1, Item 1A Risk Factors in our Annual
Report on Form 10-K for the year ended March 31, 2009, which could materially
affect our business, financial condition or future results.  The risks
described in our Annual Report on Form 10-K are not the only risks facing
Synthetech.  Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may adversely affect our
business, financial condition and operating results.





Item
4.  Submission of Matters to a Vote of Security Holders





The
Annual Meeting of Shareholders was held on August 6, 2009 in Portland,
Oregon.





1)
            Election
      of Directors


All seven
director nominees, each of which was an incumbent director, were elected, all
without opposition, to serve one-year terms in office.  The results of
this election were as follows:





Name of Director
                  
                  For
                  
                  
                  WithheldPaul
      C. Ahrens
                  
                  
                  12,238,032
                  
                  
                  
                  476,770Daniel
      T. Fagan, Ph.D.
                  
                  
                  12,586,187
                  
                  
                  
                  128,615Howard
      L. Farkas
                  
                  
                  12,180,848
                  
                  
                  
                  533,954Gregory
      R. Hahn, Ph.D.
                  
                  
                  12,595,634
                  
                  
                  
                  119,168Donald
      E. Kuhla, Ph.D.
                  
                  
                  12,593,034
                  
                  
                  
                  121,768Hans
      C. Noetzli
                  
                  
                  12,596,034
                  
                  
                  
                  118,768Charles
      B. Williams
                  
                  
                  12,235,040
                  
                  
                  
                  479,762





2)
            Ratification
      of Independent Auditors


The
appointment of Peterson Sullivan LLP as the independent auditors for fiscal year
2010 was ratified.  The results of the shareholder vote were as
follows:


For
                  
                  
                  Against
                  
                  
                  AbstainAppointment
      of Peterson Sullivan LLP as independent auditor
                  
                  
                  12,675,785
                  
                  
                  
                  29,314
                  
                  
                  
                  9,703


27




Item
6.  Exhibits





(a)           Exhibits.


Exhibit
      3.1
                
                Articles
      of Incorporation of Synthetech, as amended (incorporated by reference to
      the exhibits filed with Synthetech’s Annual Report on Form 10-K for the
      fiscal year ended March 31, 1991).Exhibit
      3.2
                
                Bylaws
      of Synthetech, as amended (incorporated by reference to the exhibits filed
      with Synthetech’s Annual Report on Form 10-K for the fiscal year ended
      March 31, 2005).Exhibit
      4
                
                Amended
      and Restated Rights Agreement, (incorporated by reference to Synthetech’s
      Current Report on Form 8-K dated July 31, 2008).Exhibit
      31.1
                
                Rule
      13a-14(a) Certification of Chief Executive Officer.Exhibit
      31.2
                
                Rule
      13a-14(a) Certification of Chief Financial Officer.Exhibit
      32.1
                
                Section
      1350 Certification of Chief Executive Officer.Exhibit
      32.2
                
                Section
      1350 Certification of Chief Financial
Officer


28




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.





SYNTHETECH,
      INC.(Registrant)Date:
      November 11, 2009
                  By:
                  /s/ Gregory R. HahnGregory
      R. HahnPresident
      and Chief Executive OfficerDate:
      November 11, 2009
                  By:
                  /s/ Gary A. WeberGary
      A. WeberVice
      President Finance andChief
      Financial
Officer


29