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 June 30,
2009





OR




o
            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 o
            
            Accelerated
      Filer o
            
            Non-Accelerated
      Filer o
            
            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 August 10,
      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
                25Part
      II.
                Other
      InformationItem
      1A.
                Risk
      Factors
                26Item
      6.
                Exhibits
                26Signatures
                
                27


ii





PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements





SYNTHETECH,
INC.





Condensed
Balance Sheets


(unaudited)





June 30,
                
                
                March 31,2009
                
                
                2009AssetsCurrent
      Assets:Cash
      and cash equivalents
                
                $
                3,079,000
                
                
                $
                588,000Accounts
      receivable, less allowance for doubtful accounts of $15,000 for both
      periods
                
                
                795,000
                
                
                
                2,669,000Inventories
                
                
                5,153,000
                
                
                
                5,027,000Prepaid
      expenses
                
                
                239,000
                
                
                
                338,000Total
      Current Assets
                
                
                9,266,000
                
                
                
                8,622,000Property,
      Plant and Equipment, net
                
                
                4,263,000
                
                
                
                4,385,000Total
      Assets
                
                $
                13,529,000
                
                
                $
                13,007,000





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


1





SYNTHETECH,
INC.





Condensed
Balance Sheets


(continued)


(unaudited)





June 30,
                
                
                March 31,2009
                
                
                2009Liabilities
      and Shareholders’ EquityCurrent
      Liabilities:Current
      portion of long-term debt
                
                $
                210,000
                
                
                $
                210,000Note
      payable
                
                
                2,000
                
                
                
                102,000Accounts
      payable
                
                
                746,000
                
                
                
                1,255,000Accrued
      compensation
                
                
                1,254,000
                
                
                
                1,046,000Deferred
      revenue
                
                
                51,000
                
                
                
                51,000Other
      accrued liabilities
                
                
                18,000
                
                
                
                23,000Total
      Current Liabilities
                
                
                2,281,000
                
                
                
                2,687,000Long-term
      debt
                
                
                662,000
                
                
                
                715,000Total
      Liabilities
                
                
                2,943,000
                
                
                
                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
                
                
                9,485,000
                
                
                
                9,473,000Retained
      earnings
                
                
                1,086,000
                
                
                
                117,000Total
      Shareholders' Equity
                
                
                10,586,000
                
                
                
                9,605,000Total
      Liabilities and Shareholders' Equity
                
                $
                13,529,000
                
                
                $
                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 June 30,
                                
                                2009
                                
                                
                                2008Revenue
                                
                                $
                                4,664,000
                                
                                
                                $
                                4,917,000Cost
      of revenue
                                
                                
                                2,653,000
                                
                                
                                
                                3,628,000Gross
      income
                                
                                
                                2,011,000
                                
                                
                                
                                1,289,000Research
      and development
                                
                                
                                303,000
                                
                                
                                
                                297,000Selling,
      general and administrative
                                
                                
                                702,000
                                
                                
                                
                                678,000Total
      operating expense
                                
                                
                                1,005,000
                                
                                
                                
                                975,000Operating
      income
                                
                                
                                1,006,000
                                
                                
                                
                                314,000Interest
      income
                                
                                
                                3,000
                                
                                
                                
                                5,000Interest
      expense
                                
                                
                                (40,000
                                )
                                
                                
                                (24,000
                                )Income
      before income taxes
                                
                                
                                969,000
                                
                                
                                
                                295,000Income
      taxes
                                
                                
                                -
                                
                                
                                
                                -Net
      income
                                
                                $
                                969,000
                                
                                
                                $
                                295,000Net
      income per common share:Basic
      income per share
                                
                                $
                                0.07
                                
                                
                                $
                                0.02Diluted
      income per share
                                
                                $
                                0.06
                                
                                
                                $
                                0.02Weighted
      average shares outstanding:Basic
                                
                                
                                14,648,900
                                
                                
                                
                                14,631,614Diluted
                                
                                
                                15,103,809
                                
                                
                                
                                15,002,705





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


3




SYNTHETECH,
INC.





Condensed
Statements of Cash Flows


(unaudited)





For The Three Months Ended June
      30,
                
                2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                969,000
                
                
                $
                295,000Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      expense
                
                
                137,000
                
                
                
                123,000Stock-based
      compensation expense
                
                
                12,000
                
                
                
                18,000(Increase)
      decrease in assets:Accounts
      receivable, net
                
                
                1,874,000
                
                
                
                (237,000
                )Inventories
                
                
                (126,000
                )
                
                
                214,000Prepaid
      expenses
                
                
                99,000
                
                
                
                89,000Increase
      (decrease) in liabilities:Accounts
      payable
                
                
                (509,000
                )
                
                
                67,000Accrued
      compensation
                
                
                208,000
                
                
                
                29,000Deferred
      revenue
                
                
                -
                
                
                
                (1,004,000
                )Other
      accrued liabilities
                
                
                (5,000
                )
                
                
                (16,000
                )Cash
      Provided By (Used In) Operating Activities
                
                
                2,659,000
                
                
                
                (422,000
                )CASH
      FLOWS FROM INVESTING ACTIVITY:Property,
      plant and equipment purchases
                
                
                (15,000
                )
                
                
                (336,000
                )Cash
      Used In  Investing Activity
                
                
                (15,000
                )
                
                
                (336,000
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of line of credit
                
                
                -
                
                
                
                (527,000
                )Borrowings
      under long-term debt obligation
                
                
                -
                
                
                
                550,000Principal
      payments under long-term debt obligation
                
                
                (53,000
                )
                
                
                (9,000
                )Repayment
      of note payable
                
                
                (100,000
                )
                
                
                (101,000
                )Cash
      Used In Financing Activities
                
                
                (153,000
                )
                
                
                (87,000
                )Increase
      (Decrease) in Cash and Cash Equivalents
                
                
                2,491,000
                
                
                
                (845,000
                )Cash
      and Cash Equivalents at Beginning of Period
                
                
                588,000
                
                
                
                1,062,000Cash
      and Cash Equivalents at End of Period
                
                $
                3,079,000
                
                
                $
                217,000





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


4





SYNTHETECH,
INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


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


period
ended June 30, 2009 is 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
summary 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 summary
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 August 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 U.S. generally accepted accounting principles 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.  Synthetech may have cash and cash equivalents in financial
institutions in excess of federally insured limits.





Cash and
cash equivalents consist of the following:


June 30,
                    
                    
                    March 31,2009
                    
                    
                    2009Cash
                    
                    $
                    1,000
                    
                    
                    $
                    -Cash
      equivalents
                    
                    
                    3,078,000
                    
                    
                    
                    588,000$
                    3,079,000
                    
                    
                    $
                    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 receivables and a
review for collectability of specific accounts.  The allowance for
doubtful accounts as of June 30, 2009 and March 31, 2009 was
$15,000.  For the quarter ended June 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 June 30, 2009, four customers had
accounts receivable balances of 29%, 17%, 16% 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 quarter of fiscal 2010, sales to two
customers, each exceeding 10% of revenue for the quarter, accounted for
approximately 63% of Synthetech’s revenue.  During the first quarter
of fiscal 2009, sales to three customers each exceeding 10% of revenue for the
quarter, accounted for approximately 55% 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.  Revenue from emerging
biopharmaceutical companies could be adversely impacted if these customers are
unable to obtain necessary additional funding from the financial
markets.





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.





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets”, 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:Synthetech accounts for income taxes in accordance with
SFAS No. 109 “Accounting for Income Taxes.”  In accordance with SFAS
No. 109, 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.





FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109” (“FIN 48”) provides recognition
criteria and a related measurement model for tax positions taken by
companies.  In accordance with FIN 48, 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 a 50% likelihood of being realized upon
settlement.  Fiscal 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.


7





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 estimated in
accordance with the provisions of SFAS No. 123(R), “Share-Based
Payment”.  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.





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 the Company’s long-term debt adjusts with changes in the prime
rate subject to minimums, and management estimates that fair value closely
approximates carrying values.  The Company’s long-term debt was
originated in fiscal 2009.





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





Income Per
Share:  Basic income per share is computed by dividing net
income 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 as defined in SFAS No. 128.





Shares
used to compute earnings per share are as follows:




For the three months ended June 30,2009
                                              
                                              
                                              2008Net
      income
                                              
                                              $
                                              969,000
                                              
                                              
                                              $
                                              295,000Basic,
      weighted average shares
                                              
                                              
                                              14,648,900
                                              
                                              
                                              
                                              14,631,614Dilutive
      effect of stock options
                                              
                                              
                                              454,909
                                              
                                              
                                              
                                              371,091Diluted,
      weighted average shares
                                              
                                              
                                              15,103,809
                                              
                                              
                                              
                                              15,002,705Basic
      income per share
                                              
                                              $
                                              0.07
                                              
                                              
                                              $
                                              0.02Diluted
      income per share
                                              
                                              $
                                              0.06
                                              
                                              
                                              $
                                              0.02





Supplemental
cash flow disclosures are as follows:


Cash paid
during the period for interest is set forth below:


For the three months ended June 30,2009
                  
                  
                  2008Interest
                  
                  $
                  40,000
                  
                  
                  $
                  24,000





8





NOTE C.
              INVENTORIES





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





June 30,
                      
                      
                      March 31,2009
                      
                      
                      2009Finished
      products
                      
                      $
                      2,138,000
                      
                      
                      $
                      1,782,000Work
      in
      process
                      
                      
                      1,226,000
                      
                      
                      
                      1,403,000Raw
      materials
                      
                      
                      1,789,000
                      
                      
                      
                      1,842,000$
                      5,153,000
                      
                      
                      $
                      5,027,000





NOTE
      D.
            PROPERTY,
      PLANT AND EQUIPMENT





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




Depreciable
                                    Life
                                  
                                  
                                  June 30,
                                  
                                  
                                  March 31,In
      Years
                                  
                                  
                                  2009
                                  
                                  
                                  2009Land
                                  
                                  
                                  
                                  
                                  
                                  $
                                  241,000
                                  
                                  
                                  $
                                  241,000Buildings
                                  
                                  
                                  15
      – 40
                                  
                                  
                                  
                                  1,617,000
                                  
                                  
                                  
                                  1,617,000Machinery
      and equipment
                                  
                                  
                                  5 –
      17
                                  
                                  
                                  
                                  3,474,000
                                  
                                  
                                  
                                  3,371,000Laboratory
      equipment
                                  
                                  
                                  5 –
      17
                                  
                                  
                                  
                                  1,413,000
                                  
                                  
                                  
                                  1,409,000Furniture
      and fixtures
                                  
                                  
                                  3 –
      5
                                  
                                  
                                  
                                  120,000
                                  
                                  
                                  
                                  120,000Construction
      in process
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,000
                                  
                                  
                                  
                                  95,0006,868,000
                                  
                                  
                                  
                                  6,853,000Less:Accumulated
      depreciation
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,605,000
                                  )
                                  
                                  
                                  (2,468,000
                                  )$
                                  4,263,000
                                  
                                  
                                  $
                                  4,385,000





9




NOTE
      E.
            ACCRUED
      COMPENSATION





Accrued
compensation consists of the following:




June 30,
                  
                  
                  March 31,2009
                  
                  
                  2009Employee
      incentives
                  
                  $
                  964,000
                  
                  
                  $
                  742,000Accrued
      vacation
                  
                  
                  246,000
                  
                  
                  
                  242,000Accrued
      compensation
                  
                  
                  44,000
                  
                  
                  
                  62,000$
                  1,254,000
                  
                  
                  $
                  1,046,000





Employee
incentives approximating $700,000, which were earned in fiscal 2009, were paid
to employees in July 2009.





NOTE
      F.
            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 June 30,
2009, Synthetech had no borrowings outstanding under the facility and $1.3
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.


10




NOTE
      G.
            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 June 30, 2009 was
      $442,000.





·
            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 June 30, 2009 was
  $430,000.





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





Years
      ending March 31,2010
                    
                    $
                    157,0002011
                    
                    
                    210,0002012
                    
                    
                    505,000Total
                    
                    $
                    872,000





NOTE
      H.
            NOTES
      PAYABLE





During
November and December 2008, Synthetech financed $322,000 of annual premiums for
certain of its insurance policies.  The amount outstanding under the
finance agreement as of June 30, 2009 was $2,000.





NOTE
      I.
            EMPLOYEE
      STOCK BENEFIT PLAN





Description
of the Plans





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
June 30, 2009, 82,550 shares were available for issuance under the 2005
Plan.


11





Stock
Option Activity





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





Number
              
              
              Weighted
                Average
              
              
              Weighted Average
                Remaining
              
              
              AggregateOf
              
              
              Exercise
              
              
              Contractual Term
              
              
              IntrinsicOptions
              
              
              Price
              
              
              (years)
              
              
              ValueOptions outstanding, March 31, 2009
              
              
              2,595,400
              
              
              $
              0.92
              
              
              
              6.6Exercised
              
              
              (2,000
              )
              
              $
              0.29Forfeited
              
              
              (22,700
              )
              
              $
              2.02Options
      outstanding, June 30, 2009
              
              
              2,570,700
              
              
              $
              0.91
              
              
              
              6.4
              
              
              $
              157,000Options
      exercisable, June 30, 2009
              
              
              1,881,701
              
              
              $
              1.05
              
              
              
              5.4
              
              
              $
              121,000





No
options were granted during the first quarters of fiscal 2010 and
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 first quarter of fiscal 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 June 30,
2009.  This amount changes based upon changes in the fair market value
of Synthetech’s stock.





As of
June 30, 2009, $149,000 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 1.6
years.





Expense
Information under SFAS No. 123(R)


Stock-based
compensation expense was allocated as follows:





For the three months ended June 30,2009
                
                
                2008Stock-based
      compensation expense:Cost
      of revenue
                
                $
                3,000
                
                
                $
                3,000Operating
      expenses
                
                
                9,000
                
                
                
                15,000Stock-based
      compensation expense before income taxes
                
                
                12,000
                
                
                
                18,000Income
      tax expense (benefit)
                
                
                -
                
                
                
                -Total
      stock-based compensation expense after income taxes
                
                $
                12,000
                
                
                $
                18,000


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; recurrence of large-scale projects; resolution of
manufacturing process difficulties; estimated quarterly stock-based compensation
amounts; the conditions of the fine chemicals industry; 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; 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 or
suspension 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, peptide fragments, and specialty resins primarily for the
pharmaceutical industry.  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 biopharmaceutical, 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 $4.7 million for the first quarter of fiscal
2010.  Related gross income was $2.0 million, or 43% of revenue, and
net income was $969,000, or $0.07 per basic share, which was an improvement of
$674,000 over the first quarter of fiscal 2009 net income of $295,000 on revenue
of $4.9 million.  The improvement in net income on slightly lower
sales is primarily the result of: a more favorable product mix; improved
throughput and efficiencies; and raw material and other cost
reductions.  Additionally, gross income for the first quarter of
fiscal 2009 was hindered by: lower than normal margins on certain products which
encountered production difficulties in prior quarters; higher than average raw
material costs on certain projects; and low margins on material purchased for
direct resell.  The first quarter of fiscal 2010 includes $224,000 of
employee incentives compared to $41,000 in the comparable period of fiscal
2009.  As a cautionary measure, in May 2009, Synthetech implemented a
reduction in force and modified its shift schedules to reduce the cost of
overtime pay. As a result of these changes, Synthetech incurred $53,000 of
severance costs in the first quarter of fiscal 2010.





During
the first quarter of fiscal 2010, Synthetech generated $2.7 million in cash from
operations and used $168,000 to repay borrowings and for capital
expenditures.  The outstanding balance on our credit facility at the
beginning and end of the first quarter of fiscal 2010 was
$-0-.  During the quarter, working capital increased $1.1 million to
$7.0 million as of June 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 experienced chemists and research and development
group.





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.


14





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 quarters of fiscal 2010 and 2009 was as
follows:





Customer
                  
                  For the Three Months Ended June
      30,Market Category
                  
                  2009
                  
                  
                  2008Major
      and mid-size pharmaceutical
                  
                  $
                  3,845,000
                  
                  
                  $
                  3,022,000Contract
      drug synthesis
                  
                  
                  262,000
                  
                  
                  
                  743,000Medical
      device
                  
                  
                  235,000
                  
                  
                  
                  8,000Emerging
      biopharmaceutical
                  
                  
                  210,000
                  
                  
                  
                  825,000Established
      biopharmaceutical
                  
                  
                  45,000
                  
                  
                  
                  304,000Other
                  
                  
                  67,000
                  
                  
                  
                  15,000Total
      revenue
                  
                  $
                  4,664,000
                  
                  
                  $
                  4,917,000





Information
relating to the above table includes the following:





·
            Increased
      revenue in the first quarter 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 future
      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.





·
            A
      portion of our fiscal 2010 revenue from contract drug synthesis companies
      will be affected by business that 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 which we supply material
      for.





·
            Medical
      device revenue for the first quarter of fiscal 2010 resulted from a
      project with a single customer.  Due to high customer inventory
      levels we expect that any meaningful fiscal 2010 revenue from our medical
      device customers would be generated late in fiscal 2010, if at
      all.


15


·
            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 have the potential to outpace fiscal 2009
      revenues.





·
            Revenue
      during fiscal 2009 from established biopharmaceutical companies was
      substantially composed of sales to a single company in support of a
      particular drug development project.  We anticipate that fiscal
      2010 revenue in this customer category may be comparable to or exceed
      fiscal 2009 revenue.





If, as a
result of the recent economic environment, our customers are unsuccessful in
generating sufficient revenue or are unable from securing financing, they may
reduce their purchases of our products or not be able to pay, or may delay
payment of, accounts receivable that are owed to us.  In addition, the
economic downturn may cause some of our customers to discontinue
operations.  Any inability of current or future customers to continue
to purchase products or to pay us for purchased products would adversely affect
our results of operations and cash flow.





Business
Conditions




Synthetech’s
order backlog as of June 30, 2009 and 2008 was approximately $4.6 million and
$6.9 million, respectively.  We expect that a majority of the June 30,
2009 backlog will ship during the second quarter of fiscal 2010, which ends
September 30, 2009, and substantially all of the remainder is scheduled to ship
during the second half of fiscal 2010.





Our
primary competition is from a variety of fine chemical companies headquartered
in Western Europe.  We continue to encounter competition from
developing countries in Asia that have substantially lower cost
structures.  This trend has resulted in pricing pressures and is
affecting our ability to maintain historical margins and to retain and attract
business for some of our products.







Customer
Project Pipeline




Our
portfolio of clinical pipeline projects remains active and consists of a variety
of projects with significant revenue generating potential.  Many of
these projects have the potential to grow into large-scale projects in the
future.





Synthetech
is involved in many active customer projects.  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.


16


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.





Three
      MonthsEnded June 30,2009
                    
                    
                    2008Revenue
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of revenue
                    
                    
                    56.9
                    
                    
                    
                    73.8Gross
      income
                    
                    
                    43.1
                    
                    
                    
                    26.2Research
      and development
                    
                    
                    6.5
                    
                    
                    
                    6.0Selling,
      general and administrative
                    
                    
                    15.0
                    
                    
                    
                    13.8Total
      operating expenses
                    
                    
                    21.5
                    
                    
                    
                    19.8Operating
      income
                    
                    
                    21.6
                    
                    
                    
                    6.4Interest
      income
                    
                    
                    0.1
                    
                    
                    
                    0.1Interest
      expense
                    
                    
                    (0.9
                    )
                    
                    
                    (0.5
                    )Income
      before income taxes
                    
                    
                    20.8
                    
                    
                    
                    6.0Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    
                    20.8
                    %
                    
                    
                    6.0
                    %





Revenue





Revenue
of $4.7 million for the first quarter of fiscal 2010 decreased by $253,000, or
5%, from revenue of $4.9 million for the first quarter of fiscal
2009.





Because
large-scale customer projects represent our primary source of revenue, the size
and timing of shipments related to these projects can cause significant
fluctuations in quarter-to-quarter revenue.  Revenue earned from four
large-scale projects was $3.6 million during the first quarter of fiscal
2010.  These four large-scale projects support three drug development
projects on behalf of two major pharmaceutical companies and a medical device
project.





Revenue
earned from three large-scale projects was $2.4 million during the first quarter
of fiscal 2009.  These three large-scale projects support two drug
development projects and one marketed drug and are on behalf of two major
pharmaceutical companies and one emerging pharmaceutical company.





The
market environment for smaller customer projects is active.  While
generally individually smaller in dollar value, these projects support a wide
variety of programs for our major pharmaceutical, emerging and established
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.


17


International
sales, mainly to Europe, were $2.9 million and $2.6 million in the first quarter
of fiscal 2010 and 2009, respectively.  International sales, like all
of our revenues, are subject to significant quarterly fluctuations.





To the
extent successful customer projects develop into larger volumes, either during
late stage clinical trials, pre-launch or as a marketed product, Synthetech’s
per unit pricing may decline.  There is a risk that the impact on
future sales and profitability from declines in pricing may not be offset by an
increase in volume.





The level
of Synthetech’s business from period to period is largely unpredictable.
Although revenue associated with marketed products is more likely to provide a
longer term, on-going revenue stream than revenue associated with drugs at the
clinical or discovery stages, continuation of customer demand for our products
from customers with marketed products remains subject to various market
conditions, including potential use of alternative manufacturing methods,
continued market demand for drugs that we support, and competition from other
suppliers.  Accordingly, while significant orders related to marketed
products provide substantial and more predictable revenue, we expect revenue to
continue to fluctuate from period to period.





Gross
income





Gross
income for the first quarter of fiscal 2010 increased $722,000, to $2.0 million,
or 43% of revenue, compared to gross income of $1.3 million, or 26% of revenue,
for the first quarter of fiscal 2009.  Gross income for the first
quarter of fiscal 2010 benefited from: a more favorable product mix; improved
throughput and efficiencies; and raw material and other cost
reductions.





Gross
income for the first quarter of fiscal 2009 was hindered by: lower than normal
margins on certain products which encountered production difficulties in prior
quarters; higher than average raw material costs on certain projects; and low
margins on material purchased for direct resell.





Manufacturing
department costs incurred during the first quarter of fiscal 2010 decreased
$64,000 compared to the comparable period of fiscal
2009.  Manufacturing department costs for the first quarter of fiscal
2010 included approximately $87,000 for employee incentives and severance costs
compared to $-0- in the comparable period of fiscal 2009.





Gross
income for the first quarters of fiscal 2010 and 2009 reflect charges for
impaired inventory of $147,000 and $191,000, respectively.  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.





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


18


Operating
Expenses





R&D
Expense.  Research and development (R&D) expense for the
first quarter of fiscal 2010 increased $6,000 to $303,000, or 6% of revenue,
compared to $297,000, or 6% of revenue, for the first quarter of fiscal
2009.





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 assists in the
manufacture small-scale products for sale.  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 three months of fiscal 2010 and 2009
were $33,000 and $41,000, respectively.





SG&A
Expense.  Selling, general and administrative (SG&A)
expense for the first quarter of fiscal 2010 increased $24,000 to $702,000, or
15% of revenue, compared to $678,000, or 14% of revenue, in the first quarter of
fiscal 2009.  The increase in the components of SG&A expense
between the two periods included:




·
            An
      aggregate increase in compensation expense of $94,000, primarily composed
      of an increase in employee incentives of $101,000, less net aggregate
      decreases in salaries and benefits of $7,000;
  and




·
            A
      net aggregate decrease in professional fees, travel and other expense
      categories of $70,000.





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 first quarter of fiscal 2010 was $40,000, compared to $24,000 in
the same period of fiscal 2009.  Synthetech’s interest expense is
primarily derived from expense on its long-term debt, line of credit and notes
payable.  The increase in interest expense between the periods
primarily relates to the level of borrowings and the interest rates in effect
during the periods.





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





As a
result of the foregoing factors, net income for the first quarter of fiscal 2010
was $969,000, compared to net income of $295,000 for the comparable period of
fiscal 2009.


19




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 June
30, 2009 and March 31, 2009 was $15,000.  Synthetech’s provision for
credit losses for the first quarters 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


In
accordance with the provisions of SFAS No. 144, 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.





20


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 EITF No. 00-21, “Revenue Arrangements with
Multiple Deliverables,” and SAB 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.


21


INDUSTRY
FACTORS





Market
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. A substantial amount of
activity continues to occur at the earlier stages of R&D and clinical
trials.





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.





Production
Factors


Synthetech
has a full cycle “grams to tons” production capability and has made over 500
products. With over 20 years of experience, Synthetech has developed extensive
process technology and is recognized as one of the leaders in our area of
expertise.  Nevertheless, initial batches of new products and scaling
up production processes for existing products may result in significantly lower
than expected yields and extended processing time, and may require substantial
rework to meet the required customer specifications.  These factors
could cause increased costs and delayed shipments, either of which could
negatively affect periodic operating results.


22


LIQUIDITY AND CAPITAL
RESOURCES





Synthetech’s
cash and cash equivalents totaled $3.1 million at June 30, 2009, compared to
$588,000 at March 31, 2009.





At June
30, 2009, Synthetech reported working capital of $7.0 million, compared to $5.9
million at March 31, 2009.  The $1.1 million increase in working
capital between the two periods was primarily the result of net income for the
three month period of $969,000, non-cash charges for depreciation of $137,000
and for stock based compensation of $12,000, partially offset by repayments of
long-term debt of $53,000 and capital expenditures of $15,000.





We
generated cash in our operating activities of $2.7 million in the first three
months of fiscal 2010, compared to cash used in operating activities of $422,000
in the first three months of fiscal 2009.





In the
first three months of fiscal 2010, net income of $969,000, adjusted for non-cash
charges for depreciation and stock-based compensation expense of $137,000 and
$12,000, respectively, contributed $1.1 million to cash provided by operating
activities.  Accounts receivable decreased $1.9 million to $795,000 at
June 30, 2009, from $2.7 million at March 31, 2009, primarily due to the timing
and level of shipments between the two quarters.  Inventory increased
$126,000 to $5.2 million at June 30, 2009, from $5.0 million at March 31,
2009.  Finished good inventory increased $356,000 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 $99,000 to $239,000 at
June 30, 2009, from $338,000 at March 31, 2009.  Accounts payable
decreased $509,000 to $746,000 at June 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 increased
$208,000 to $1.3 million at June 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 $5,000 to $18,000 at June 30, 2009, from $23,000 at March
31, 2009.





Cash used
in investing activities for the first three months of fiscal 2010 was $15,000
compared to $336,000 in fiscal 2009.  All these amounts relate to
capital expenditures.  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 recent difficult 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, internal cash flow or debt
financing.





Cash used
in financing activities for the first three months of fiscal 2010 was $153,000,
compared to cash used in financing activities of $87,000 in the first three
months of fiscal 2009.  During the first three months of fiscal 2010
Synthetech had scheduled debt repayments of $153,000.  During the
first three months of fiscal 2009 Synthetech  borrowed $550,000
pursuant to a long-term promissory note and had debt repayments of
$637,000.





Cash and
cash equivalents increased $2.5 million during the first three months of fiscal
2010, to $3.1 million at June 30, 2009, from $588,000 at March 31,
2009.


23


The
downturn in the economic environment and resulting difficulties in the credit
markets have not had a significant unfavorable impact on Synthetech’s business
and resulting cash flows in the first quarter of fiscal 2010 or during fiscal
2009.  We have yet to be able to ascertain if the difficult economic
environment will have a significantly unfavorable impact on Synthetech’s fiscal
2010 operations and resulting cash flows.





As noted
above, for the first quarter of fiscal 2010, our primary sources of cash
included funds generated from operations, we had no borrowings under our $2.0
million line of credit and term loans.  Currently, 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.  From time to time, we may explore options to refinance our
borrowings.





As noted
above, as of June 30, 2009 we had $3.1 million of cash and cash equivalents,
$795,000 of accounts receivable, no outstanding borrowings under our line of
credit, and our backlog was $4.6 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, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
resources.  As of June 30, 2009, Synthetech has employee agreements
with its President and Chief Executive Officer, Vice President of Finance and
Chief Financial Officer and Director 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.


24


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,
as appropriate to allow timely decisions regarding required
disclosure.





There has
been no change in our internal control over financial reporting during the first
quarter ended June 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.


25


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
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




26


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:
      August 11, 2009
                      By:
                      /s/
      Gregory R. HahnGregory
      R. HahnPresident
      and Chief Executive OfficerDate:
      August 11, 2009
                      By:
                      /s/
      Gary A. WeberGary
      A. WeberVice
      President Finance andChief
      Financial
Officer




27