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 December 31, 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
 ̈ No  ̈
 
 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 February 11, 2010Common
      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
                          15Item
      4T
                          Controls
      and Procedures
                          29Part
      II.
                          Other
      InformationItem
      1A
                          Risk
      Factors
                          30Item
      6
                          Exhibits
                          31Signatures
                          
                          32
  ii
 
 PART
I.  FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 SYNTHETECH,
INC.
 
 Condensed
Balance Sheets
 (unaudited)
 
 December
      31,
                              
                              
                              March
      31,2009
                              
                              
                              2009AssetsCurrent
      Assets:Cash
      and cash equivalents
                              
                              $
                              1,344,000
                              
                              
                              $
                              588,000Accounts
      receivable, less allowancefor
      doubtful accounts of $15,000 forboth
      periods
                              
                              
                              1,664,000
                              
                              
                              
                              2,669,000Inventories
                              
                              
                              5,584,000
                              
                              
                              
                              5,027,000Prepaid
      expenses
                              
                              
                              387,000
                              
                              
                              
                              338,000Total
      Current Assets
                              
                              
                              8,979,000
                              
                              
                              
                              8,622,000Property,
      Plant and Equipment, net
                              
                              
                              4,128,000
                              
                              
                              
                              4,385,000Total
      Assets
                              
                              $
                              13,107,000
                              
                              
                              $
                              13,007,000
  The
accompanying notes are an integral part of these condensed financial
statements.
  1
 
 SYNTHETECH,
INC.
 
 Condensed
Balance Sheets
 (continued)
 (unaudited)
 
 December
      31,
                                          
                                          
                                          March
      31,2009
                                          
                                          
                                          2009Liabilities
      and Shareholders’ EquityCurrent
      Liabilities:Current
      portion of long-term debt
                                          
                                          $
                                          210,000
                                          
                                          
                                          $
                                          210,000Note
      payable
                                          
                                          
                                          169,000
                                          
                                          
                                          
                                          102,000Accounts
      payable
                                          
                                          
                                          743,000
                                          
                                          
                                          
                                          1,255,000Accrued
      compensation
                                          
                                          
                                          780,000
                                          
                                          
                                          
                                          1,046,000Accrued
      income taxes
                                          
                                          
                                          32,000
                                          
                                          
                                          
                                          -Deferred
      revenue
                                          
                                          
                                          -
                                          
                                          
                                          
                                          51,000Other
      accrued liabilities
                                          
                                          
                                          17,000
                                          
                                          
                                          
                                          23,000Total
      Current Liabilities
                                          
                                          
                                          1,951,000
                                          
                                          
                                          
                                          2,687,000Long-term
      debt
                                          
                                          
                                          557,000
                                          
                                          
                                          
                                          715,000Total
      Liabilities
                                          
                                          
                                          2,508,000
                                          
                                          
                                          
                                          3,402,000Shareholders'
      Equity:Common
      stock, $.001 par value; authorized100,000,000
      shares; issued and outstanding,14,650,614
      and 14,648,614 shares
                                          
                                          
                                          15,000
                                          
                                          
                                          
                                          15,000Paid-in
      capital
                                          
                                          
                                          9,509,000
                                          
                                          
                                          
                                          9,473,000Retained
      earnings
                                          
                                          
                                          1,075,000
                                          
                                          
                                          
                                          117,000Total
      Shareholders' Equity
                                          
                                          
                                          10,599,000
                                          
                                          
                                          
                                          9,605,000Total
      Liabilities and Shareholders' Equity
                                          
                                          $
                                          13,107,000
                                          
                                          
                                          $
                                          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 Nine Months EndedDecember
      31,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Revenue
                                  
                                  $
                                  2,402,000
                                  
                                  
                                  $
                                  5,037,000
                                  
                                  
                                  $
                                  11,067,000
                                  
                                  
                                  $
                                  13,245,000Cost
      of revenue
                                  
                                  
                                  2,079,000
                                  
                                  
                                  
                                  3,416,000
                                  
                                  
                                  
                                  7,093,000
                                  
                                  
                                  
                                  9,693,000Gross
      income
                                  
                                  
                                  323,000
                                  
                                  
                                  
                                  1,621,000
                                  
                                  
                                  
                                  3,974,000
                                  
                                  
                                  
                                  3,552,000Research
      and development
                                  
                                  
                                  220,000
                                  
                                  
                                  
                                  318,000
                                  
                                  
                                  
                                  762,000
                                  
                                  
                                  
                                  950,000Selling,
      general and administrative
                                  
                                  
                                  658,000
                                  
                                  
                                  
                                  680,000
                                  
                                  
                                  
                                  2,093,000
                                  
                                  
                                  
                                  1,998,000Total
      operating expenses
                                  
                                  
                                  878,000
                                  
                                  
                                  
                                  998,000
                                  
                                  
                                  
                                  2,855,000
                                  
                                  
                                  
                                  2,948,000Operating
      income (loss)
                                  
                                  
                                  (555,000
                                  )
                                  
                                  
                                  623,000
                                  
                                  
                                  
                                  1,119,000
                                  
                                  
                                  
                                  604,000Interest
      income
                                  
                                  
                                  2,000
                                  
                                  
                                  
                                  1,000
                                  
                                  
                                  
                                  7,000
                                  
                                  
                                  
                                  6,000Interest
      expense
                                  
                                  
                                  (32,000
                                  )
                                  
                                  
                                  (58,000
                                  )
                                  
                                  
                                  (103,000
                                  )
                                  
                                  
                                  (116,000
                                  )Income
      (loss) before income taxes
                                  
                                  
                                  (585,000
                                  )
                                  
                                  
                                  566,000
                                  
                                  
                                  
                                  1,023,000
                                  
                                  
                                  
                                  494,000Income
      taxes
                                  
                                  
                                  65,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  65,000
                                  
                                  
                                  
                                  -Net
      income (loss)
                                  
                                  $
                                  (650,000
                                  )
                                  
                                  $
                                  566,000
                                  
                                  
                                  $
                                  958,000
                                  
                                  
                                  $
                                  494,000Net
      income (loss) per common share:Basic
      income (loss) per share
                                  
                                  $
                                  (0.04
                                  )
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.03Diluted
      income (loss) per share
                                  
                                  $
                                  (
      0.04
                                  )
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.06
                                  
                                  
                                  $
                                  0.03Weighted
      average shares outstanding:Basic
                                  
                                  
                                  14,650,614
                                  
                                  
                                  
                                  14,648,179
                                  
                                  
                                  
                                  14,650,047
                                  
                                  
                                  
                                  14,638,356Diluted
                                  
                                  
                                  14,650,614
                                  
                                  
                                  
                                  14,889,293
                                  
                                  
                                  
                                  15,293,738
                                  
                                  
                                  
                                  15,196,423
 
 The
accompanying notes are an integral part of these condensed financial
statements.
  3
  SYNTHETECH,
INC.
 
 Condensed
Statements of Cash Flows
 (unaudited)
 
 For The Nine Months Ended December
      31,
                                    
                                    2009
                                    
                                    
                                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                    
                                    $
                                    958,000
                                    
                                    
                                    $
                                    494,000Adjustments
      to reconcile net income to net cash provided by (used in)
      operating activities:Depreciation
      expense
                                    
                                    
                                    396,000
                                    
                                    
                                    
                                    374,000Loss
      on retirement of equipment
                                    
                                    
                                    12,000
                                    
                                    
                                    
                                    4,000Stock-based
      compensation expense
                                    
                                    
                                    36,000
                                    
                                    
                                    
                                    62,000(Increase)
      decrease in assets:Accounts
      receivable, net
                                    
                                    
                                    1,005,000
                                    
                                    
                                    
                                    (772,000
                                    )Inventories
                                    
                                    
                                    (557,000
                                    )
                                    
                                    
                                    (1,521,000
                                    )Prepaid
      expenses
                                    
                                    
                                    151,000
                                    
                                    
                                    
                                    212,000Increase
      (decrease) in liabilities:Accounts
      payable
                                    
                                    
                                    (512,000
                                    )
                                    
                                    
                                    384,000Accrued
      compensation
                                    
                                    
                                    (266,000
                                    )
                                    
                                    
                                    248,000Accrued
      income taxes
                                    
                                    
                                    32,000
                                    
                                    
                                    
                                    -Deferred
      revenue
                                    
                                    
                                    (51,000
                                    )
                                    
                                    
                                    (953,000
                                    )Other
      accrued liabilities
                                    
                                    
                                    (6,000
                                    )
                                    
                                    
                                    (15,000
                                    )Cash
      Provided By (Used In) Operating Activities
                                    
                                    
                                    1,198,000
                                    
                                    
                                    
                                    (1,483,000
                                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property,
      plant and equipment purchases
                                    
                                    
                                    (151,000
                                    )
                                    
                                    
                                    (926,000
                                    )Cash
      Used In Investing Activities
                                    
                                    
                                    (151,000
                                    )
                                    
                                    
                                    (926,000
                                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from line of credit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    666,000Borrowings
      under long-term debt obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,050,000Principal
      payments under long-term debt obligations
                                    
                                    
                                    (158,000
                                    )
                                    
                                    
                                    (73,000
                                    )Repayment
      of note payable
                                    
                                    
                                    (133,000
                                    )
                                    
                                    
                                    (212,000
                                    )Proceeds
      from exercise of stock options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,000Cash
      Provided By (Used In) Financing Activities
                                    
                                    
                                    (291,000
                                    )
                                    
                                    
                                    1,436,000Increase
      (Decrease) in Cash and Cash Equivalents
                                    
                                    
                                    756,000
                                    
                                    
                                    
                                    (973,000
                                    )Cash
      and Cash Equivalents at Beginning of Period
                                    
                                    
                                    588,000
                                    
                                    
                                    
                                    1,062,000Cash
      and Cash Equivalents at End of Period
                                    
                                    $
                                    1,344,000
                                    
                                    
                                    $
                                    89,000Non-Cash
      Financing Activities:Insurance
      premiums financed with notes payable
                                    
                                    $
                                    200,000
                                    
                                    
                                    $
                                    322,000
 
 The
accompanying notes are an integral part of these condensed financial
statements.
  4
 
 SYNTHETECH,
INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 (Information
as of December 31, 2009 and for the three and nine month
 periods
ended December 31, 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 February 11, 2010, 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:
 
 December
      31,
                        
                        
                        March
      31,2009
                        
                        
                        2009Cash
                        
                        $
                        30,000
                        
                        
                        $
                        -Cash
      equivalents
                        
                        
                        1,314,000
                        
                        
                        
                        588,000$
                        1,344,000
                        
                        
                        $
                        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 December 31, 2009 and March 31, 2009 was
$15,000.  For the nine month periods ended December 31, 2009 and 2008,
Synthetech’s provision for credit losses were insignificant.
 
 Concentrations of Credit and Market
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 December 31, 2009, two customers had
accounts receivable balances of 20% 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 nine months of fiscal 2010, sales to
three customers, each exceeding 10% of revenue for the nine month period,
accounted for approximately 68% of Synthetech’s revenue.  During the
first nine months of fiscal 2009, sales to three customers, each exceeding 10%
of revenue for the nine month period, accounted for approximately 42% 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.
 
 Synthetech
reports a liability, if any, for unrecognized tax benefits resulting from
uncertain income tax positions taken or expected to be taken in an income tax
return.  Estimated interest and penalties, if any, are recorded as a
component of income taxes.  No liability has been recorded for uncertain
tax positions, or related interest or penalties.  Fiscal years 2007
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.
  7
 
 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 J 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 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 Nine MonthsEnded December 31,
                                                          
                                                          
                                                          Ended December 31,2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2009
                                                          
                                                          
                                                          2008Net
      income (loss)
                                                          
                                                          $
                                                          (650,000
                                                          )
                                                          
                                                          $
                                                          566,000
                                                          
                                                          
                                                          $
                                                          958,000
                                                          
                                                          
                                                          $
                                                          494,000Basic,
      weighted average shares
                                                          
                                                          
                                                          14,650,614
                                                          
                                                          
                                                          
                                                          14,648,179
                                                          
                                                          
                                                          
                                                          14,650,047
                                                          
                                                          
                                                          
                                                          14,638,356Dilutive
      effect of stock options
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          241,114
                                                          
                                                          
                                                          
                                                          643,691
                                                          
                                                          
                                                          
                                                          558,067Diluted,
      weighted average shares
                                                          
                                                          
                                                          14,650,614
                                                          
                                                          
                                                          
                                                          14,889,293
                                                          
                                                          
                                                          
                                                          15,293,738
                                                          
                                                          
                                                          
                                                          15,196,423Basic
      income per share
                                                          
                                                          $
                                                          (
      0.04
                                                          )
                                                          
                                                          $
                                                          0.04
                                                          
                                                          
                                                          $
                                                          0.07
                                                          
                                                          
                                                          $
                                                          0.03Diluted
      income per share
                                                          
                                                          $
                                                          (0.04
                                                          )
                                                          
                                                          $
                                                          0.04
                                                          
                                                          
                                                          $
                                                          0.06
                                                          
                                                          
                                                          $
                                                          0.03
  8
 
 Recently Issued Accounting
Pronouncements:  In September 2009, Synthetech adopted “The FASB Accounting Standards
Codification”and“The Hierarchy of
Generally Accepted Accounting Principles.”  “The Hierarchy of Generally Accepted
Accounting Principles” establishes only two levels of U.S. generally
accepted accounting principles (GAAP): (1) authoritative and
(2) nonauthoritative. The “FASB Accounting Standards
Codification” (the Codification) is now the
source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification will become nonauthoritative.  Synthetech
began to use the new guidelines and numbering system prescribed by the
Codification when referring to GAAP in this filing.  As the
Codification was not intended to change or alter existing GAAP, it did not have
any impact on Synthetech’s consolidated financial statements.
  In
October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, “Multiple-Deliverable Revenue
Arrangements,” which addresses how revenues should be allocated among all
products and services included in Synthetech’s sales arrangements. It
establishes a selling price hierarchy for determining the selling price of each
product or service, with vendor-specific objective evidence (VSOE) at the highest level,
third-party evidence of VSOE at the intermediate level, and a best estimate at
the lowest level. It replaces “fair value” with “selling price” in revenue
allocation guidance. It also significantly expands the disclosure requirements
for such arrangements. ASU 2009-13 will be effective prospectively for sales
entered into or materially modified in fiscal years beginning on or after June
15, 2010.  The FASB permits early adoption of ASU 2009-13, applied
retrospectively, to the beginning of the year of adoption.  Synthetech
is currently evaluating the impact of ASU 2009-13 on its financial
statements.
 
 NOTE
C.           STATEMENTS
OF CASH FLOWS
 
 Supplemental
cash flow disclosures:
 For the Three Months
                          
                          
                          For the Nine MonthsCash Paid
                          
                          Ended December 31,
                          
                          
                          Ended December 31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Interest
                          
                          $
                          32,000
                          
                          
                          $
                          58,000
                          
                          
                          $
                          103,000
                          
                          
                          $
                          116,000Taxes
      paid
                          
                          $
                          33,000
                          
                          
                          $
                          -
                          
                          
                          $
                          33,000
                          
                          
                          $
                          -
  9
 
 NOTE
D.           INVENTORIES
 
 The major
components of inventories, net of reserves, are as follows:
 
 December 31,
                        
                        
                        March 31,2009
                        
                        
                        2009Finished
      products
                        
                        $
                        2,052,000
                        
                        
                        $
                        1,782,000Work
      in process
                        
                        
                        1,822,000
                        
                        
                        
                        1,403,000Raw
      materials
                        
                        
                        1,710,000
                        
                        
                        
                        1,842,000$
                        5,584,000
                        
                        
                        $
                        5,027,000
 
 NOTE
E.            PROPERTY,
PLANT AND EQUIPMENT
 
 Property,
plant and equipment and depreciable lives are summarized as
follows:
  Depreciable
                                          Life
                                        
                                        
                                        December 31,
                                        
                                        
                                        March 31,In Years
                                        
                                        
                                        2009
                                        
                                        
                                        2009Land
                                        
                                        
                                        
                                        
                                        $
                                        241,000
                                        
                                        
                                        $
                                        241,000Buildings
                                        
                                        15
      – 40
                                        
                                        
                                        
                                        1,617,000
                                        
                                        
                                        
                                        1,617,000Machinery
      and equipment
                                        
                                        5 –
      17
                                        
                                        
                                        
                                        3,509,000
                                        
                                        
                                        
                                        3,371,000Laboratory
      equipment
                                        
                                        5 –
      17
                                        
                                        
                                        
                                        1,476,000
                                        
                                        
                                        
                                        1,409,000Furniture
      and fixtures
                                        
                                        3 –
      5
                                        
                                        
                                        
                                        130,000
                                        
                                        
                                        
                                        120,000Construction
      in process
                                        
                                        
                                        
                                        
                                        
                                        17,000
                                        
                                        
                                        
                                        95,0006,990,000
                                        
                                        
                                        
                                        6,853,000Less:Accumulated
      depreciation
                                        
                                        
                                        
                                        
                                        
                                        (2,862,000
                                        )
                                        
                                        
                                        (2,468,000
                                        )$
                                        4,128,000
                                        
                                        
                                        $
                                        4,385,000
  10
 
 NOTE
F.            ACCRUED
COMPENSATION
 
 Accrued
compensation consists of the following:
 December 31,
                    
                    
                    March 31,2009
                    
                    
                    2009Employee
      incentives
                    
                    $
                    467,000
                    
                    
                    $
                    742,000Accrued
      vacation
                    
                    
                    266,000
                    
                    
                    
                    242,000Accrued
      compensation
                    
                    
                    47,000
                    
                    
                    
                    62,000$
                    780,000
                    
                    
                    $
                    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 December
31, 2009, Synthetech had no borrowings outstanding under the facility and
approximately $1.7 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.           NOTES
PAYABLE
 
 During
November and December 2009, Synthetech financed an aggregate of $200,000 of
annual premiums for certain of its insurance policies under two separate
financing agreements.  As of December 31, 2009, remaining payments
under the first financing agreement consist of seven monthly installments of
$15,891, including interest at a rate of 3.6%.  Remaining monthly
payments under the second financing agreement consist of seven monthly payments
of $8,511, including interest, at a rate of 3.6%. The aggregate amount
outstanding under the two financing agreements as of December 31, 2009 was
$169,000.
  11
  NOTE
I.             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 December 31, 2009
      was $392,000.
 
 ·
              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 December 31, 2009 was
    $375,000.
 
 Scheduled
long-term debt principal repayments under the term loan facilities are as
follows:
 
 Years
      ending March 31,2010
                      
                      $
                      52,0002011
                      
                      
                      210,0002012
                      
                      
                      505,000Total
                      
                      $
                      767,000
 
 NOTE
J.            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
December 31, 2009, a total of 284,850 shares were available for issuance under
the 2005 Plan.
  12
 
 Stock
Option Activity
 
 A summary
of the changes in stock options outstanding under Synthetech’s 2005 Plan and
otherwise during the nine months ended December 31, 2009 is presented
below:
 
 Weighted
                                        
                                        
                                        Weighted
                                          AverageNumber
                                        
                                        
                                        Average
                                        
                                        
                                        Remaining
                                        
                                        
                                        AggregateOf
                                          Options
                                        
                                        
                                        Exercise
                                          Price
                                        
                                        
                                        Contractual Term
                                          (years)
                                        
                                        
                                        Intrinsic
                                          ValueOptions
      outstanding, March 31, 2009
                                        
                                        
                                        2,595,400
                                        
                                        
                                        $
                                        0.92
                                        
                                        
                                        
                                        6.6Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        (2,000
                                        )
                                        
                                        $
                                        0.29Forfeited
                                        
                                        
                                        (230,000
                                        )
                                        
                                        $
                                        1.62Options
      outstanding, December 31, 2009
                                        
                                        
                                        2,363,400
                                        
                                        
                                        $
                                        0.85
                                        
                                        
                                        
                                        6.1
                                        
                                        
                                        $
                                        715,000Options
      exercisable, December 31, 2009
                                        
                                        
                                        1,879,021
                                        
                                        
                                        $
                                        0.94
                                        
                                        
                                        
                                        5.5
                                        
                                        
                                        $
                                        500,000
 
 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 December 31, 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 December 31,
2009.  This amount changes based upon changes in the fair market value
of Synthetech’s stock.
 
 As of
December 31, 2009, $122,000 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.
 
 No
options were granted during the first nine months of fiscal
2010.    The weighted-average fair value of stock options
issued during fiscal 2009 were determined utilizing the assumptions
below:
 
 For the Three Months
                      
                      
                      For the Nine MonthsEnded December 31,
                      
                      
                      Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Expected
      price volatility
                      
                      
                      -
                      
                      
                      
                      61
                      %
                      
                      
                      -
                      
                      
                      
                      61
                      %Risk-free
      interest rate
                      
                      
                      -
                      
                      
                      
                      1.58
                      %
                      
                      
                      -
                      
                      
                      
                      1.58
                      %Expected
      term in years
                      
                      
                      -
                      
                      
                      
                      6.00
                      
                      
                      
                      -
                      
                      
                      
                      6.00Dividend
      yield
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Weighted
      average grant date fair value
                      
                      
                      -
                      
                      
                      $
                      0.28
                      
                      
                      
                      -
                      
                      
                      $
                      0.28
  13
 
 Stock-based
compensation expense was allocated as follows:
 
 For the Three Months
                                      
                                      
                                      For the Nine MonthsEnded December 31,
                                      
                                      
                                      Ended December 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Stock-based
      compensation expense:Cost
      of revenue
                                      
                                      $
                                      2,000
                                      
                                      
                                      $
                                      18,000
                                      
                                      
                                      $
                                      8,000
                                      
                                      
                                      $
                                      48,000Operating
      expenses
                                      
                                      
                                      7,000
                                      
                                      
                                      
                                      9,000
                                      
                                      
                                      
                                      28,000
                                      
                                      
                                      
                                      14,000Stock-based
      compensation expensebefore
      income taxes
                                      
                                      
                                      9,000
                                      
                                      
                                      
                                      27,000
                                      
                                      
                                      
                                      36,000
                                      
                                      
                                      
                                      62,000Income
      tax benefit
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      stock-based compensationexpense
      after income taxes
                                      
                                      $
                                      9,000
                                      
                                      
                                      $
                                      27,000
                                      
                                      
                                      $
                                      36,000
                                      
                                      
                                      $
                                      62,000
  14
  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; the
impact of any 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 impact of a potential new operating
facility in the San Diego, California area; 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.
  15
 
 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
 For the
third quarter of our fiscal year ending March 31, 2010, Synthetech reported
revenue of $2.4 million, gross income of $323,000 and a net loss of $650,000, or
$0.04 per share.  These results compared to revenue, gross income and
net income for the third quarter of fiscal 2009 of $5.0 million, $1.6 million
and $566,000, respectively.
 
 Revenue
for the first nine months of fiscal 2010 was $11.1 million.  Related
gross income was $4.0 million and net income was $958,000, or $0.07 per basic
share, which were improvements compared to gross revenue of $3.6 million and net
income of $494,000 for the first nine months of fiscal 2009 on revenue of $13.2
million.
 
 Revenue
declined for the three and nine months ended December 31, 2009 primarily due to
fewer orders relating to large-scale projects, in part we believe due to order
deferrals by certain customers in light of market and regulatory conditions, as
discussed below.
 
 The net
loss for the three months ended December 31, 2009 compared to the net income for
the prior year’s corresponding period is primarily attributable to the decrease
in revenue of $2.6 million between the two periods.
 
 The
improvement in gross income for the nine months ended December 31, 2009 compared
to the corresponding period for the prior fiscal year is attributable primarily
to: more favorable product mix; raw material and other cost reductions; and
improved throughput and efficiencies.
 
 Results
for the first nine months of fiscal 2010 includes $493,000 of employee
incentives compared to $300,000 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 nine months of fiscal 2010, Synthetech generated $1.2 million in cash
from operations and used $291,000 to repay borrowings and $151,000 for capital
expenditures.  The outstanding balance on our credit facility at both
March 31, 2009 and December 31, 2009 was $-0-.  Working capital
increased $1.1 million to $7.0 million as of December 31, 2009, compared to $5.9
million at March 31, 2009.
  16
 
 Market
Overview
 During
the fourth quarter of fiscal 2010 we expect to open a small laboratory facility
in San Diego, California.  The facility will be designed for the
manufacture of small-scale laboratory projects. The leased laboratory facility
is in the process of being identified and will initially be staffed by two
newly-hired chemists with experience in the synthesis of small
molecules.  We believe that some of the small-scale business generated
from this new facility will have the potential to mature into larger drug
development projects which can be manufactured in our facility in Albany,
Oregon.
 
 We
believe that in recent years Synthetech has been able to capitalize on new
revenue opportunities because of its 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 our experienced 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.
 
 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 nine months of fiscal 2010 and 2009 was as
follows:
 
 Customer
                
                For the Nine Months Ended December 31,Market Category
                
                2009
                
                
                2008Major and mid-size pharmaceutical
                
                $
                6,678,000
                
                
                $
                5,394,000Contract
      drug synthesis
                
                
                2,561,000
                
                
                
                3,956,000Emerging
      biopharmaceutical
                
                
                1,454,000
                
                
                
                1,476,000Medical
      device
                
                
                235,000
                
                
                
                1,956,000Established
      biopharmaceutical
                
                
                52,000
                
                
                
                338,000Other
                
                
                87,000
                
                
                
                125,000Total
      revenue
                
                $
                11,067,000
                
                
                $
                13,245,000
  17
 
 Information
relating to the above table includes the following:
 
 ·
              Increased
      revenue in the first nine 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.
 
 ·
              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.
 
 ·
              Despite
      the difficult economic environment, we continue to receive new orders and
      significant inquiries from some of our emerging biopharmaceutical
      customers.
 
 ·
              Medical
      device revenue for the first nine 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 to mid fiscal
  2011.
 
 ·
              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 December 31, 2009 and 2008 was approximately $2.7 million
and $10.1 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 and smaller orders during fiscal
2010.  We expect that most of the December 31, 2009 backlog will ship
during the fourth quarter of fiscal 2010, which ends March 31,
2010.
 
 Customer
inquiries remain active and there are multiple large projects where Synthetech
is pursuing orders.  Over the past three quarters, customers have
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.  Given this environment, we continue to focus on
expanding our project pipeline and further developing a culture of improving
operational efficiencies and cost reductions.
  18




During
recent years a substantial portion of Synthetech’s annual revenue has been
derived from multiple customers’ development projects that target a common
indication. Management commonly refers to this indication as Synthetech’s
“franchise” business.  While this franchise business had a significant
impact on our operating results in the first quarter of fiscal 2010, it has been
in a temporary quiet cycle for the second and third quarters of fiscal
2010.  This fluctuation is not uncommon for projects moving through
clinical development.  For the first nine months of fiscal 2010,
approximately 33% 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.





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






19






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 Nine Months EndedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of revenue
                
                
                86.6
                
                
                
                67.8
                
                
                
                64.1
                
                
                
                73.2Gross
      income
                
                
                13.4
                
                
                
                32.2
                
                
                
                35.9
                
                
                
                26.8Research
      and development
                
                
                9.1
                
                
                
                6.3
                
                
                
                6.9
                
                
                
                7.2Selling,
      general and administrative
                
                
                27.4
                
                
                
                13.5
                
                
                
                18.9
                
                
                
                15.1Total
      operating expenses
                
                
                36.5
                
                
                
                19.8
                
                
                
                25.8
                
                
                
                22.3Operating
      income (loss)
                
                
                (23.1
                )
                
                
                12.4
                
                
                
                10.1
                
                
                
                4.5Interest
      income
                
                
                0.0
                
                
                
                0.0
                
                
                
                0.1
                
                
                
                0.0Interest
      expense
                
                
                (1.3
                )
                
                
                (1.2
                )
                
                
                (1.0
                )
                
                
                (0.8
                )Income
      (loss) before income taxes
                
                
                (24.4
                )
                
                
                11.2
                
                
                
                9.2
                
                
                
                3.7Income
      taxes
                
                
                (2.7
                )
                
                
                -
                
                
                
                (0.5
                )
                
                
                -Net
      income (loss)
                
                
                (27.1
                )%
                
                
                11.2
                %
                
                
                8.7
                %
                
                
                3.7
                %




Revenue





Revenue
of $2.4 million for the third quarter of fiscal 2010 decreased by $2.6 million,
or 52%, from revenue of $5.0 million for the third quarter of fiscal
2009.  Revenue of $11.1 million for the first nine months of fiscal
2010 decreased by $2.2 million, or 16%, from $13.2 million for the first nine
months 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 from two
large-scale projects was $893,000 during the third quarter of fiscal
2010.  Revenue earned from six large-scale projects was $3.6 million
during the third quarter of fiscal 2009.





During
the first nine months of fiscal 2010, Synthetech supported seven large-scale
projects contributing $7.0 million in revenue for the
period.   During the first nine months of fiscal 2009, eight
large-scale projects contributed $7.4 million to revenue.  Six of
these eight projects were also large-scale projects in the first nine months of
fiscal 2010.






20




As
discussed above, large-scale project revenue for the first nine months of fiscal
2010 includes $235,000 in revenue in support of a medical device project
compared to $2.0 million in the comparable period of fiscal
2009.  Medical device revenue for the first nine 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 $772,000 and $5.8 million in the third quarter and
first nine months of fiscal 2010, respectively, compared to $2.5 million and
$6.5 million in the third quarter and first nine 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 third quarter of fiscal 2010 decreased $1.3 million to $323,000,
or 13% of revenue, compared to gross income of $1.6 million, or 32% of revenue,
for the third quarter of fiscal 2009.  Gross income for the first nine
months of fiscal 2010 increased $422,000, to $4.0 million, or 36% of revenue,
compared to gross income of $3.6 million, or 27% of revenue, for the first nine
months of fiscal 2009.





The
decrease in gross income for the three months ended December 31, 2009 compared
to the corresponding period for the prior fiscal year is primarily attributable
to the decrease in revenue of $2.6 million between the two periods.





The
improvement in gross income for the nine months ended December 31, 2009 compared
to the corresponding period for the prior fiscal year is attributable primarily
to: a more favorable product mix; raw material and other cost reductions; and
improved throughput and efficiencies.





Manufacturing
department costs incurred during the third quarter and first nine months of
fiscal 2010 decreased $369,000 and $631,000, respectively, compared to the
comparable periods of fiscal 2009.  Compensation and related costs,
and operating costs such as maintenance and supplies decreased between the
respective periods primarily as a result of Synthetech’s cost reduction
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.





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






21




Operating
Expenses





R&D
Expense.  Research and development (R&D) expense for the
third quarter of fiscal 2010 decreased $98,000 to $220,000, or 9% of revenue,
compared to $318,000, or 6% of revenue, for the third quarter of fiscal
2009.  R&D expense in the first nine months of fiscal 2010
decreased $188,000 to $762,000, or 7% of revenue, compared to $950,000, or 7% of
revenue, in the first nine months of fiscal 2009.  The decreases in
R&D expense between these periods included:




·
            aggregate
      decreases during the third quarter and first nine months of fiscal 2010 in
      compensation and related costs of $100,000 and $149,000, respectively,
      primarily due to the transfer of an R&D chemist to the Production
      Department and certain temporary vacancies, partially offset by general
      increases in salaries and benefits;




·
            decreases
      during the third quarter and first nine months of fiscal 2010 in
      laboratory supplies of $13,000 and $53,000, respectively;
    and




·
            net
      decreases during the third quarter and first nine months of fiscal 2010 in
      various expenses of $44,000 and $92,000,
  respectively;




partially
offset by:




·
            relative
      increases during the third quarter and first nine months of fiscal 2010 of
      $59,000 and $106,000, 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 nine months of fiscal 2010 and 2009 were
$73,000 and $179,000, respectively.




SG&A
Expense.  Selling, general and administrative (SG&A) expense in the
third quarter of fiscal 2010 decreased $22,000 to $658,000, or 27% of revenue,
compared to $680,000, or 14% of revenue, in the third quarter of fiscal
2009.





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





·
            an
      aggregate $124,000 decrease in compensation expense, comprised of a
      decrease in employee incentives of
$123,000;





partially
offset by:





·
            an
      increase in outside services and professional fees of $72,000 in support
      of business advisory and marketing services;
and





·
            a
      net increase in various expenses of
$30,000.




22




SG&A
expense in the first nine months of fiscal 2010 increased $95,000 to $2.1
million, or 19% of revenue, compared to $2.0 million, or 15% of revenue, in the
first nine months of fiscal 2009.





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




·
            an
      aggregate $131,000 increase in compensation expense for the first nine
      months of fiscal 2010, comprised of an increase in employee incentives of
      $108,000 and various net increases in compensation and related benefit
      costs;




partially
offset by:





·
            a
      net decrease in various expenses of
$36,000;




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 third quarter and first nine months of fiscal 2010 was $32,000
and $103,000 respectively, compared to $58,000 and $116,000, 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





Income
tax expense of $65,000 for the third quarter and first nine months of fiscal
2010 is composed of taxes calculated under the Federal alternative minimum tax
and a new form of minimum tax recently approved by the voters in the State of
Oregon, neither of which may be offset by Synthetech’s net operating loss
carryforwards.  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, the net loss for the third quarter of fiscal
2010 was $650,000 and net income for the first nine months of fiscal 2010 was
$958,000.  Net income for the third quarter and first nine months of
fiscal 2009 was $566,000 and $494,000, respectively.






23






LIQUIDITY AND CAPITAL
RESOURCES





Synthetech’s
cash and cash equivalents totaled $1.3 million at December 31, 2009, compared to
$588,000 at March 31, 2009.





At
December 31, 2009, Synthetech had 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
nine-month period of $958,000, non-cash charges for depreciation of $396,000,
stock-based compensation of $36,000 and a loss on the retirement of equipment of
$12,000, partially offset by repayments of long-term debt of $158,000 and
capital expenditures of $151,000.





We
generated cash in our operating activities of $1.2 million in the first nine
months of fiscal 2010, compared to cash used in operating activities of $1.5
million in the first nine months of fiscal 2009.





In the
first nine months of fiscal 2010, net income of $958,000, adjusted for non-cash
charges of $444,000, contributed $1.4 million to cash provided by operating
activities.  Accounts receivable decreased $1.0 million to $1.7
million at December 31, 2009, from $2.7 million at March 31, 2009, primarily due
to a decrease in revenue between the two quarters.  Inventory
increased $557,000 to $5.6 million at December 31, 2009, from $5.0 million at
March 31, 2009.  Inventory has increased as part of Synthetech’s
business strategy to maintain stocks of commonly sold
items.  Primarily as a result of the renewal of insurance premiums,
prepaid expenses increased $49,000 to $387,000 at December 31, 2009, from
$338,000 at March 31, 2009.  During the third quarter, Synthetech
financed $200,000 of insurance premiums which have been adjusted from the
Condensed Statements of Cash Flows.  Accounts payable decreased
$512,000 to $743,000 at December 31, 2009, from $1.3 million at March 31,
2009.  The decrease in accounts payable is reflective of the decrease
in planned production activity between the two periods.  Accrued
compensation, which is primarily composed of accrued employee incentives,
accrued vacation pay and accrued compensation, decreased $266,000 to $780,000 at
December 31, 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 $6,000
to $17,000 at December 31, 2009, from $23,000 at March 31, 2009.





Cash used
in investing activities consists of expenditures for capital
equipment.  Capital expenditures for the first nine months of fiscal
2010 were $151,000, compared to $926,000 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.





Cash used
in financing activities for the first nine months of fiscal 2010 was $291,000,
compared to cash provided by financing activities of $1.4 million in the first
nine months of fiscal 2009.  During the first nine months of fiscal
2010 Synthetech had scheduled debt repayments of $291,000.  During the
first nine months of fiscal 2009 Synthetech had net borrowings of $666,000 on
its line of credit, $1.1 million of borrowings pursuant to a long-term
promissory note, scheduled debt repayments of $285,000 and proceeds from the
exercise of stock options of $5,000.






24






Cash and
cash equivalents increased $756,000 during the first nine months of fiscal 2010,
to $1.3 million at December 31, 2009, from $588,000 at March 31,
2009.




Over the
past three quarters, customers have appeared more cautious in placing orders and
we believe that some order decisions are being deferred as a result of
customers’ responding to the downturn in the economic environment, potential
difficulties in the credit markets 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 believe that this environment has
unfavorably impacted the third quarter of fiscal 2010 and may have an
unfavorable impact on future quarters.





As noted
above, for the first nine 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 did so 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 December 31, 2009 we had $1.3 million of cash and cash
equivalents, $1.7 million of accounts receivable, no outstanding borrowings
under our line of credit, and our backlog was $2.7 million.  Our line
of credit facility matures in September 2010 and our term loans mature in May
and November of 2011.  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 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 is to accounts controlled by our lender.  If the
recent 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 December 31, 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.






25




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
December 31, 2009 and March 31, 2009 was $15,000.  Synthetech’s
provisions for credit losses for the first nine 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.




26







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.  Allocation of revenue to individual elements which would
qualify for separate accounting is based on the estimated fair value of the
respective elements.






27




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.






28




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 third
quarter ended December 31, 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.






29




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.






30




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


31




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:   February
      11, 2010
                        By:
                        /s/ Gregory R. HahnGregory
      R. HahnPresident
      and Chief Executive OfficerDate:   February
      11, 2010
                        By:
                        /s/ Gary A. WeberGary
      A. WeberVice
      President Finance andChief
      Financial Officer


32