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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 

FORM 10-Q

   
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to                 .
 
Commission file number 001-33397
 

   
SYNUTRA INTERNATIONAL, INC.
 

   
DELAWARE
 
13-4306188
(State or Other Jurisdiction of
Incorporation or Organization)
 
I.R.S. Employer
Identification No.
 
2275 Research Blvd., Suite 500
Rockville, Maryland 20850
 
(Address of Principal Executive Offices, Zip Code)
 
(301) 840-3888
(Registrant’s Telephone Number, Including Area Code)
 

   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x       No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No x
 
As of August 9, 2011, there were 57,300,713 shares of the registrant’s common stock outstanding.

 
 


 
 
 
 
 
 
 
TABLE OF CONTENTS
 
Page
 
PART I
Item 1. Financial Statements (unaudited)
1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
20
   
Item 4. Controls and Procedures
20
   
PART II
   
Item 1. Legal Proceedings
21
   
Item 1A. Risk Factors
21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
22
   
Item 3. Defaults Upon Senior Securities
22
   
Item 4. (Removed and Reserved)
22
   
Item 5. Other Information
22
   
Item 6. Exhibits
22
   
Signatures
23
 
 
 
 

 
 

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
   
June 30, 2011
   
March 31, 2011
   
(in thousands,
except share par value)
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
 
$
27,537
   
$
48,741
 
Restricted cash
   
52,778
     
37,690
 
Accounts receivable, net of allowance of $10,676 and $8,779, respectively
   
27,609
     
46,021
 
Inventories
   
94,780
     
67,372
 
Due from related parties
   
3,666
     
13,708
 
Income tax receivable
   
3,347
     
259
 
Receivable from assets disposal
   
1,736
     
1,714
 
Prepaid expenses and other current assets
   
20,900
     
11,562
 
Deferred tax assets
   
21,216
     
20,922
 
Total current assets
   
253,569
     
247,989
 
                 
Property, plant and equipment, net
   
113,528
     
109,811
 
Land use rights, net
   
6,138
     
6,096
 
Intangible assets, net
   
3,149
     
3,140
 
Other assets
   
3,656
     
4,022
 
Deferred tax assets
   
27,976
     
27,646
 
TOTAL ASSETS
 
$
408,016
   
$
398,704
 
LIABILITIES AND EQUITY
               
Current Liabilities:
               
Short-term debt
 
$
111,424
   
$
124,281
 
Long-term debt due within one year
   
67,989
     
38,131
 
Accounts payable
   
61,028
     
52,923
 
Due to related parties
   
2,166
     
2,330
 
Advances from customers
   
11,580
     
4,890
 
Other current liabilities
   
23,320
     
25,913
 
Total current liabilities
   
277,507
     
248,468
 
Long-term debt
   
51,182
     
62,722
 
Deferred revenue
   
4,450
     
4,456
 
Capital lease obligations
   
5,605
     
5,540
 
Other long-term liabilities
   
1,619
     
1,592
 
Total liabilities
   
340,363
     
322,778
 
Equity:
               
Synutra International, Inc. stockholders’ equity
               
Common stock, $.0001 par value: 250,000 authorized; 57,301 and 57,301 issued and outstanding at June 30, 2011 and March 31, 2011, respectively
   
6
     
6
 
Additional paid-in capital
   
135,440
     
135,440
 
Accumulated deficit
   
(97,953
)
   
(88,357
)
Accumulated other comprehensive income
   
29,353
     
28,204
 
Total Synutra common stockholders’ equity
   
66,846
     
75,293
 
Noncontrolling interest
   
807
     
633
 
Total equity
   
67,653
     
75,926
 
TOTAL LIABILITIES AND EQUITY
 
$
408,016
   
$
398,704
 
 
 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
 
1

 
 
 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(unaudited)
   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
(in thousands except earnings per share data)
 
Net sales
 
$
43,757
   
$
83,787
 
Cost of sales
   
27,678
     
37,426
 
Gross profit
   
16,079
     
46,361
 
                 
Selling and distribution expenses
   
12,461
     
12,626
 
Advertising and promotion expenses
   
7,008
     
10,002
 
General and administrative expenses
   
6,579
     
6,076
 
Impairment of goodwill
   
     
1,440
 
Other operating income, net
   
110
     
73
 
Income (loss) from operations
   
(9,859
   
16,290
 
                 
Interest expense
   
3,412
     
2,662
 
Interest income
   
311
     
108
 
Other income, net
   
465
 
   
167
 
Income (loss) before income tax expense (benefit)
   
(12,495
   
13,903
 
Income tax expense (benefit)
   
(3,049
   
3,795
 
Net income (loss)
   
(9,446
   
10,108
 
                 
Net income attributable to the noncontrolling interest
   
150
     
2
 
Net income (loss) attributable to Synutra International, Inc. common stockholders
 
$
(9,596
 
$
10,106
 
                 
Earnings (loss) per share – basic
 
$
(0.17
 
$
0.19
 
Earnings (loss) per share – diluted
 
$
(0.17
 
$
0.19
 
Weighted average common shares outstanding – basic
   
57,301
     
54,037
 
Weighted average common shares outstanding – diluted
   
57,301
     
54,274
 

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

 
 
2

 
 
 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)

      Three Months Ended June 30,
     
2011
     
2010
 
     
(in thousands)
 
Net income (loss)
 
$
(9,446
 
$
10,108
 
Currency translation adjustments
   
1,154
     
579
 
Total comprehensive income (loss)
   
(8,292
   
10,687
 
Less: Comprehensive income attributable to noncontrolling interest
   
155
     
4
 
Comprehensive income (loss) attributable to Synutra International, Inc. common stockholders
 
$
(8,447
 
$
10,683
 
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
 
3

 
 
 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 (unaudited)
 
   
Synutra International, Inc. Common Stockholders
             
   
Common Stock
                               
   
Shares
   
Amount
   
Additional paid-in capital
   
Retained earnings (accumulated deficit)
   
Accumulated other comprehensive income
   
Noncontrolling Interest
   
Total equity
 
   
(in thousands)
 
Balance, March 31, 2010
    54,001     $ 5     $ 76,607     $ (48,289 )   $ 24,015     $ 593     $ 52,931  
Net income
                      10,106             2       10,108  
Issuance of common stock
    3,300       1       58,833                         58,834  
Currency translation adjustments
                            577       2       579  
Other
                                  40       40  
Balance, June 30, 2010
    57,301     $ 6     $ 135,440     $ (38,183 )   $ 24,592     $ 637     $ 122,492  
                                                         
Balance, March 31, 2011
    57,301     $ 6     $ 135,440     $ (88,357 )   $ 28,204     $ 633     $ 75,926  
Net income
                      (9,596           150       (9,446
Currency translation adjustments
                            1,149       5       1,154  
Other
                                  19       19  
Balance, June 30, 2011
    57,301     $ 6     $ 135,440     $ (97,953 )   $ 29,353     $ 807     $ 67,653  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
 
4

 

 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 
   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
(in thousands)
 
Operating activities:
           
Net income (loss)
 
$
(9,446
)  
$
10,108
 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Amortization of debt issuance costs
   
     
175
 
Depreciation and amortization
   
2,835
     
2,471
 
Bad debt expense
   
2,060
     
473
 
Goodwill and intangible asset impairment
   
     
1,700
 
Gain on disposal of property, plant and equipment
   
     
(29
)
Deferred income tax
   
7
     
6
 
Other compensation expense
   
19
     
40
 
Changes in assets and liabilities:
               
Accounts receivable
   
17,223
     
(15,965
)
Inventories
   
(26,912
)
   
(4,681
)
Due from related parties
   
9,973
     
(1,202
)
Prepaid expenses and other current assets
   
(16,732
)
   
(594
)
Accounts payable
   
7,033
     
(1,366
)
Due to related parties
   
388
     
212
 
Advances from customers
   
6,718
     
(1,865
)
Income tax receivable
   
(3,128
   
524
 
Income tax payable
   
     
3,078
 
Deferred revenue
   
(66
   
 
Other liabilities
   
1,939
     
(934
)
Net cash used in operating activities
 
$
(8,089
)
 
$
(7,849
)
                 
Investing activities:
               
Acquisition of property, plant and equipment
   
(2,050
)
   
(278
)
Change in restricted cash
   
(14,801
)
   
(7,265
)
Proceeds from assets disposal
   
     
4,824
 
Net cash used in investing activities
 
$
(16,851
)
 
$
(2,719
)
                 
Financing activities:
               
Proceeds from short-term debt
   
80,467
     
31,369
 
Repayment of short-term debt
   
(95,247
)
   
(49,511
)
Proceeds from long-term debt
   
34,928
     
49,902
 
Repayment of long-term debt
   
(17,347
)
   
(23,500
)
Proceeds from issuance of common stock
   
     
62,700
 
Issuance costs for common stock issuance
   
     
(3,866
)
Net cash provided by financing activities
 
$
2,801
   
$
67,094
 
                 
Effect of exchange rate changes on cash and cash equivalents
 
$
935
   
$
245
 
                 
Net change in cash and cash equivalents
   
(21,204
   
56,771
 
Cash and cash equivalents, beginning of year
 
$
48,741
   
$
48,693
 
Cash and cash equivalents, end of year
 
$
27,537
   
$
105,464
 
                 
Supplemental cash flow information:
               
Interest paid
   
3,260
     
2,492
 
Income tax paid
   
     
166
 
                 
Non-cash investing and financing activities:
               
Purchase of property, plant and equipment by accounts payable
   
568
     
347
 
Assets disposal by other receivable
   
     
5,315
 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
 
5

 
 
 
SYNUTRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
 
Directly or through its wholly owned subsidiary, Synutra International, Inc. (collectively with its subsidiaries, the “Company” or “Synutra”) owns all or majority of the equity interests of the entities in the People’s Republic of China (“China” or “PRC”) that are principally engaged in the production, marketing and distribution of dairy based nutritional products under the Company’s own brands in China. The Company produces, markets and sells nutritional products under the “Shengyuan” or “Synutra” name, together with other complementary brands. The Company focuses on selling premium infant formula products, which are supplemented by more affordable infant formula products targeting the mass market as well as other nutritional products, such as adult powdered formula and prepared baby food, and certain nutritional ingredients and supplements.

2.
BASIS OF PRESENTATION

The Company is responsible for the unaudited condensed consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared these statements following the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company’s Annual Report on Form 10-K and its subsequent amendments, if any, for the fiscal year ended March 31, 2011.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. Under that assumption, it is expected that assets will be realized and liabilities will be satisfied in the normal course of business. In August 2010, there were several media reports alleging the Company’s infant formula products caused symptoms of hormone-triggered sexual prematurity in infants in the Hubei province of China. Although the Ministry of Health (“MOH”) of China conducted tests on samples of the Company’s products and concluded that there was no link between the infant milk powder products and premature development in infants, the Company’s business was significantly impacted. As a result, the Company experienced a net loss and negative cash flows from operations in the year ended March 31, 2011. However, considering the sales order amount has been increasing quarter by quarter, and the Company has unused committed and available bank standby credit facilities, the Company regards the going concern assumption as appropriate. The Company will be able to realize its assets and satisfy its liabilities in the normal course of business. As a result, the accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.

The unaudited condensed consolidated financial statements include the financial statements of Synutra International, Inc. and its subsidiaries, its consolidated variable interest entity, Beijing Shengyuan Huimin Technology Service Co., Ltd., and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

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

3.
INVENTORIES
 
The Company’s inventories at June 30, 2011 and March 31, 2011 are summarized as follows:
 
   
June 30, 2011
   
March 31, 2011
   
(In thousands)
 
Raw materials
 
$
68,702
   
$
52,817
 
Work-in-progress
   
5,260
     
4,262
 
Finished goods
   
20,818
     
10,293
 
Total
 
$
94,780
   
$
67,372
 
 
 The value of goods-in-transit included in raw materials was $21.4 million and $26.4 million as of June 30, 2011 and March 31, 2011, respectively, which mainly represented the overseas purchase of milk powder and whey protein.
 
 
6

 
 
 
4.
DUE FROM (TO) RELATED PARTIES AND RELATED PARTY TRANSACTIONS

A.
Classification of related party balances by name

a.
Due from related parties
 
   
June 30, 2011
   
March 31, 2011
   
(In thousands)
 
Sheng Zhi Da Dairy Group Corporation
 
$
1,823
   
$
1,800
 
Beijing Honnete Dairy Co., Ltd.
   
406
     
7,419
 
St. Angel (Beijing) Business Service Co. Ltd.
   
1,437
     
528
 
Beijing Dongan Hengxin Property Development Co., Ltd.
   
     
3,961
 
Total
 
$
3,666
   
$
13,708
 

b.
Due to related parties

   
June 30, 2011
   
March 31, 2011
   
(In thousands)
 
Sheng Zhi Da Dairy Group Corporation
 
$
1,487
   
$
1,639
 
Beijing Honnete Dairy Co., Ltd.
   
523
     
534
 
Beijing St. Angel Cultural Communication Co., Ltd.
   
156
     
157
 
Total
 
$
2,166
   
$
2,330
 

The Company had certain related party borrowings which were recorded in long-term debt. See Note 7. Except for the related party borrowings, the amount due to and due from related parties were unsecured and interest free.
 
B.
Sales to related parties
 
In the fiscal quarters ended June 30, 2011 and 2010, the Company’s sales to the related parties included whey protein to Beijing Honnete Dairy Co., Ltd. and powdered formula products to St. Angel (Beijing) Business Service Co., Ltd.

     
Three Months Ended June 30,
 
     
2011
     
2010
 
     
(In thousands)
 
Beijing Honnete Dairy Co., Ltd.
 
$
368
   
$
172
 
St. Angel (Beijing) Business Service Co., Ltd.
   
46
     
150
 
Total
 
$
414
   
$
322
 
 
St. Angel (Beijing) Business Service Co., Ltd. also acts as a subdistributor of the Company. Sales of powdered formula products from our distributors to St. Angel (Beijing) Business Service was $4.0 million and $7.6 million for the fiscal quarter ended June 30, 2011 and 2010, respectively, which was not included in the above table of sales transaction amount.
 
C.
Purchases from related parties
 
In the fiscal quarters ended June 30, 2011 and 2010, the Company’s purchase from related parties included marketing materials from St. Angel Cultural Communication, which engages in television designing and programming.

     
Three Months Ended June 30,
 
     
2011
     
2010
 
     
(In thousands)
 
Beijing St. Angel Cultural Communication Co. Ltd.
 
$
165
   
$
52
 
 
 
 
7

 
 

5.
 PREPAID EXPENSES AND OTHER CURRENT ASSETS

   
June 30, 2011
   
March 31, 2011
 
   
(In thousands)
 
Prepaid expense
 
$
3,973
   
$
3,573
 
Prepaid other taxes
   
14,712
     
6,781
 
Advance to suppliers
   
1,139
     
396
 
Other
   
1,076
     
812
 
Total
 
$
20,900
   
$
11,562
 

6.
PROPERTY, PLANT AND EQUIPMENT, NET
 
   
June 30, 2011
   
March 31, 2011
 
   
(In thousands)
 
Property, plant and equipment, cost:
           
Capital lease of building
 
$
5,636
   
$
5,563
 
Buildings
   
53,631
     
52,686
 
Plant and machinery
   
79,389
     
78,015
 
Office equipment and furnishings
   
3,512
     
3,431
 
Motor vehicles
   
2,640
     
2,606
 
Others
   
497
     
437
 
Total cost
 
$
145,305
   
$
142,738
 
Less: Accumulated depreciation:
               
Capital lease of building
   
411
     
371
 
Buildings
   
9,702
     
8,947
 
Plant and machinery
   
27,285
     
25,070
 
Office equipment and furnishings
   
2,315
     
2,139
 
Motor vehicles
   
1,578
     
1,472
 
Others
   
385
     
371
 
Total accumulated depreciation
   
41,676
     
38,370
 
Construction in progress
   
9,899
     
5,443
 
Property, plant and equipment, net
 
$
113,528
   
$
109,811
 

Construction in progress mainly represents manufacturing equipment and facilities, leasehold improvements, and milk collection station.
 
The Company recorded depreciation expense of $2.8 million and $2.4 million for the fiscal quarters ended June 30, 2011 and 2010, respectively.
 
 
 
8

 
 
 
7.
DEBT

As of June 30, 2011 and March 31, 2011, the Company had short-term debt from PRC banks in the amount of $111.4 million and $124.3 million, respectively.  The maturity dates of the short-term debt outstanding range from July 2011 to June 2012. The weighted average interest rate on short-term debt from banks outstanding at June 30, 2011 and March 31, 2011was 5.8% and 5.0%, respectively. The short-term debt from banks at June 30, 2011 and March 31, 2011were secured by the pledge of certain fixed assets held by the Company of $24.2 million and $24.4 million, respectively; the pledge of the Company’s land use right of $0.8 million and $0.8 million, respectively; and the pledge of cash deposits of $17.2 million and $16.8 million, respectively.
 
As of June 30, 2011 and March 31, 2011, the Company had long-term debt, including current portion, from banks in the amount of $114.3 million and $96.1 million, respectively. The maturity dates of the long-term debt outstanding range from August 2011 to May 2013. The weighted average interest rate of outstanding long-term debt at June 30, 2011 and March 31, 2011was 6.2% and 6.0%, respectively. The indebtedness at June 30, 2011 and March 31, 2011 was secured by the pledge of certain fixed assets of $8.0 million and $8.0 million, respectively; the pledge of land use right of $1.9 million and $1.9 million, respectively; and the pledge of cash deposits of $11.2 million and nil, respectively.

As of June 30, 2011 and March 31, 2011, the short-term and long-term debt contracts with banks did not include covenant clauses.

Apart from borrowings from banks, the Company had a long-term loan from related parties of $4.9 million as of June 30, 2011, including principal of $3.9 million and accumulated interest of $1.0 million, and $4.8 million as of March 31, 2011. The maturity date of this related party loan is in November 2013, and is extendable on the same terms upon maturity as agreed by both parties. The interest rate at June 30, 2011 and March 31, 2011 was both 10.0%. The interest expense of related party loans for the fiscal quarters ended June 30, 2011 and 2010 were both $97,000.

8.
OTHER CURRENT LIABILITIES

   
June 30, 2011
   
March 31, 2011
 
   
(In thousands)
 
Accrued sales deduction
 
$
2,459
   
$
3,898
 
Payroll and bonus payables
   
5,330
     
5,193
 
Accrued selling and marketing expenses
   
1,309
     
1,486
 
Accrued advertising and promotion expenses
   
10,575
     
11,726
 
Accrued pre-maturity related research fund
   
960
     
1,174
 
Others
   
2,687
     
2,436
 
Total
 
$
23,320
   
$
25,913
 

9.
INCOME TAXES

 The effective tax rate is based on expected income (loss), statutory tax rates and incentives available in the various jurisdictions in which the Company operates. For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision (benefit) in accordance with the ASC No. 740-270, “Income tax – Interim reporting” (previously FIN 18, " Accounting for Income Taxes in Interim Period "). As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.

10.
EARNINGS (LOSS) PER SHARE
 
For purposes of calculating basic and diluted earnings (loss) per share, the Company used the following weighted average common shares outstanding:
 
   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
(In thousands except for per share data)
 
Net income (loss) attributable to common stockholders
 
$
(9,596
 
$
10,106
 
Basic weighted average common shares outstanding
   
57,301
     
54,037
 
Dilutive potential common shares from warrants
   
     
237
 
Diluted weighted average shares outstanding
   
57,301
     
54,274
 
Earnings (loss) per share-basic
 
$
(0.17
 
$
0.19
 
Earnings (loss) per share-diluted
 
$
(0.17
 
$
0.19
 

The Company granted The Royal Bank of Scotland N.V. (“RBS”) warrants to purchase 400,000 shares of common stock in connection with a loan we had with RBS in fiscal year 2008. These warrants were excluded from the computation of diluted earnings per share for the fiscal quarter ended June 30, 2011 as they would be anti-dilutive.

 
 
9

 
 
 
11.
SEGMENT REPORTING
 
The Company focuses on selling premium infant formula products, which are supplemented by more affordable infant formula products targeting the mass market as well as other nutritional products, such as adult powdered formula and prepared baby food, and certain nutritional ingredients and supplements. The activities of each segment are as follows:
 
Powdered Formula - Sales of powdered infant and adult formula products.
 
Baby Food - Sales of prepared baby food for babies and children.
 
Nutritional Ingredients and Supplements - Sales of nutritional ingredients and supplements such as chondroitin sulfate, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”).
 
“All Other” includes non-core businesses such as sales of ingredients and materials to industrial customers.
 
The Company’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting.

   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
(In thousands)
 
NET SALES TO EXTERNAL CUSTOMERS
           
Powdered formula
 
$
40,163
   
$
79,244
 
Baby food
   
65
     
82
 
Nutritional ingredients and supplements
   
453
     
 
All other
   
3,076
     
4,461
 
Net sales
 
$
43,757
   
$
83,787
 
INTERSEGMENT SALES
               
Powdered formula
 
$
   
$
 
Baby food
   
119
     
74
 
Nutritional ingredients and supplements
   
2,179
     
3,734
 
All other 
   
516
     
472
 
Intersegment sales
 
$
2,814
   
$
4,280
 
GROSS PROFIT
               
Powdered formula
 
$
16,936
   
$
45,054
 
Baby food
   
(256
   
(9
Nutritional ingredients and supplements
   
(132
   
 
All other 
   
(469
   
1,316
 
Gross profit
 
$
16,079
   
$
46,361
 
Selling and distribution expenses
   
12,461
     
12,626
 
Advertising and promotion expenses
   
7,008
     
10,002
 
General and administrative expenses
   
6,579
     
6,076
 
Impairment of goodwill
   
     
1,440
 
Other operating income, net
   
110
     
73
 
Income (loss) from operations
   
(9,859
   
16,290
 
Interest expense
   
3,412
     
2,662
 
Interest income
   
311
     
108
 
Other income, net
   
465
     
167
 
Income (loss) before income tax expense (benefit)
 
$
(12,495
 
$
13,903
 


   
June 30, 2011
   
March 31, 2011
 
   
(In thousands)
 
TOTAL ASSETS
           
Powdered formula
 
$
406,647
   
$
398,801
 
Baby food
   
27,677
     
26,991
 
Nutritional ingredients and supplements
   
30,633
     
32,637
 
All other
   
148,140
     
138,385
 
Intersegment elimination
   
(205,081
)
   
(198,110
)
Total
 
$
408,016
   
$
398,704
 
 
 
 
10

 
 
 
12.
CONTINGENCIES
 
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Claims have been made against the Company from time to time. The Company intends to contest each lawsuit vigorously. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.
 
13.
SUBSEQUENT EVENTS

There was no material event to be reported.
 
 
 
11

 

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

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

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

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.synutra.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
 
 
 
12

 
 
Overview
 
We are a leading infant formula company in China. We principally produce, market and sell our products under the “Shengyuan” or “Synutra” name, together with other complementary brands in mainland China. We focus on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. We sell our products through an extensive nationwide sales and distribution network covering 30 provinces and provincial-level municipalities in China. As of June 30, 2011, this network comprised over 630 independent distributors and over 1,000 independent sub-distributors who sell our products in over 69,000 retail outlets.
 
We currently have three reportable segments which are:

o
Powdered formula segment: Powdered formula segment covers the sale of powdered infant and adult formula products. It includes the brands of Super, U-Smart, My Angel, Mingshan and Helanruniu;
   
o
Baby food segment: Baby food segment covers the sale of prepared baby food for babies and children. It includes the brand of Huiliduo;
   
o
Nutritional ingredients and supplements segment: Nutritional ingredients and supplements segment covers the production and sale of nutritional ingredients and supplements such as chondroitin sulfate, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”).
 
Our Other business includes non-core businesses such as sales of milk powder, whey protein and raw milk to industrial customers.

In August 2010, there were several media reports alleging our infant formula products caused symptoms of hormone-triggered sexual prematurity in infants in the Hubei province of China (the media reports, together with the reactions thereto, the “prematurity event”). In response to such media reports, the Ministry of Health (“MOH”) of China conducted tests on samples of our products and concluded that there was no link between our infant milk powder products and premature development in infants.

The following table shows our results as impacted by the prematurity event and our efforts to recover from it:

   
Fiscal Year 2011
   
Fiscal Year 2012
 
   
First
   
Second
   
Third
   
Fourth
   
First
 
   
(in thousands)
 
Powdered formula segment
                             
- Net sales
 
$
79,244
   
$
37,285
   
$
20,722
   
$
48,318
   
$
40,163
- Gross profit
   
45,054
     
10,645
     
3,332
     
19,280
     
16,936
 
- Gross margin
   
56.9%
     
28.6%
     
16.1%
     
39.9%
     
42.2%
 
                                         
Overall
                                       
- Income (loss) from operations
   
16,290
     
(26,101
)
   
(24,100
)
   
(6,431
)
   
(9,859
)

* Excluding the net sales of $16.6 million discussed below which was recorded in July 2011.

Due to a delay in the shipment of high oil whey powder from our overseas supplier during the quarter ended June 30, 2011, we produced high oil whey powder at our Zhangjiakou plant to make up for the shortfall. However, we detected an excess amount of Enterobacter Sakazakii, a kind of bacteria, during our quality control procedures which prompted us to stop the production process and conduct a thorough cleaning of the production line. This cleaning process took time and caused the shipments of certain customer orders to be delayed until July. As a result, a portion of the sales that would have been recognized during the quarter were delayed to the next quarter and our results for the quarter ended June 30, 2011 were negatively impacted. Had the delayed shipments been made on time, we would have had an additional $16.6 million in net sales in the quarter. As the production at the Zhangjiakou plant has returned to normal and our overseas supplier makes its deliveries on time, we do not expect similar delays in shipments to customers to occur in future quarters.

In addition, we have significantly reduced our industrial milk powder sales, which was recorded in Other business, during the quarter ended June 30, 2011 to zero from $26.6 million in the prior quarter. As discussed in our prior filings, the sale of industrial milk powder is not part of our core business. Depending on our cash flow situation, we may adjust the amount of industrial milk powder imported and sold.
 
 
13

 
 
 
As a result of the delayed delivery discussed above, our net sales of powdered formula segment for the fiscal quarter ended June 30, 2011 decreased by 16.9% to $40.2 million from $48.3 million for the previous quarter. Our gross profit of the powdered formula segment for the fiscal quarter ended June 30, 2011 decreased by 12.2% to $16.9 million from $19.3 million for the previous quarter. Our net loss attributable to Synutra International, Inc. common stockholders for the fiscal quarter ended June 30, 2011 was $9.6 million, as compared to $8.5 million for the previous quarter. 

Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the mid rate published by the People’s Bank of China, or the mid rate, as of June 30, 2011, which was RMB6.4716 to $1.00. We make no representation that the Renminbi amounts referred to in this Quarterly Report on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On August 5, 2011, the mid rate was RMB 6.4451 to $1.00.
 
Critical Accounting Policies and Estimates

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended March 31, 2011 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates”. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may differ from these estimates.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.
 
 
 
14

 
 
 
RESULTS OF OPERATIONS
Three months ended June 30, 2011 and 2010

Net Sales
 
Net sales for the fiscal quarter ended June 30, 2011 decreased by 47.8 % to $43.8 million from $83.8 million for the same period in the previous year. This decrease in net sales was mainly due to the decrease in net sales of the powdered formula segment, as the business was significantly and negatively affected by the prematurity event, and delayed delivery of certain powdered formula products discussed above.

Powdered formula segment
 
Net sales of our powdered formula products, including infant powdered formula and other powdered formula products for children and adults under our Super, U-Smart, My Angel, Mingshan and Helanruniu brand names accounted for 91.8% of our total sales for the fiscal quarter ended June 30, 2011. Net sales of our powdered formula products for the fiscal quarter ended June 30, 2011 decreased by 49.3% to $40.2 million from $79.2 million for the same period in the previous year, primarily as a result of the following factors:  
 
 
·
Sales volume of powdered formula products decreased by 46.0% to 4,513 tons for the fiscal quarter ended June 30, 2011 from 8,364 tons for the same period in the previous year, due primarily to the reduction in consumer demand caused by the prematurity event, and delayed delivery of certain powdered formula products discussed above.
 
 
·
The average selling price of our powdered formula products for the fiscal quarter ended June 30, 2011 decreased by 6.1% to $8,899 per ton from $9,474 per ton for the same period in the previous year. The decrease in average selling price is mainly due to the prematurity event. While we provided discounts to our distributors at a pre-event level, since our sales volume decreased after the event, it resulted in a reduction in the average selling price. As we recover from the prematurity event, the discounts have decreased as a percentage of sales, our average selling price has been improving and is returning to nearly the level before the prematurity event.
 
Baby food segment
 
Net sales of baby food segment for the fiscal quarter ended June 30, 2011 were $65,000, as compared to $82,000 for the same period in the previous year. The products in this segment comprised mainly of prepared baby food, such as cooked meat and vegetables. Because of the prematurity event, we focused our efforts during the quarter on the recovery of the powdered formula segment, and did not develop the baby food segment as planned.
 
Nutritional ingredients and supplements segment
 
Net sales of nutritional ingredients and supplements segment was $453,000 and nil for the fiscal quarter ended June 30, 2011 and 2010, respectively. The products in this segment comprised mainly of chondroitin sulfate sold to third parties. The production plant was conducting procedures to improve its technology in the 2010 period, as a result, there was no sales in that period. There were also inter-segment sales of $2.2 million of nutritional ingredients, such as microencapsulated DHA and ARA, which were used in the production of powdered infant formula products, as compared to $3.7 million for the same period in the previous year.
 
Other

Other sales for the fiscal quarter ended June 30, 2011 were $3.1 million, which mainly included sales of raw milk to industrial customers, as compared to $4.5 million for the same period in the previous year.  
 
 
 
15

 
 
Cost of Sales
 
Cost of sales for the fiscal quarter ended June 30, 2011 decreased by 26.0% to $27.7 million from $37.4 million for the same period in the previous year. The decrease in the cost of sales is mainly led by the decrease sales of powdered formula products.
 
Powdered formula segment
 
Cost of sales for the powdered formula segment for the fiscal quarter ended June 30, 2011 decreased by 32.1% to $23.2 million from $34.2 million for the same period in the previous year. The decrease in the cost of sales is due primarily to the decrease in sales volume caused by the prematurity event and the delayed delivery of certain powdered formula products discussed above, even though the price of raw materials increased, which increased our cost of sales.
 
Baby food segment
 
Cost of sales for the baby food segment for the fiscal quarter ended June 30, 2011 was $321,000, as compared to $91,000 for the same period in the previous year.
 
Nutritional ingredients and supplements segment
 
Cost of sales for the nutritional ingredients and supplements segment was $585,000 and nil for the fiscal quarter ended June 30, 2011 and 2010, respectively.

Other
 
Other cost of sales for the fiscal quarter ended June 30, 2011 was $3.5 million, which mainly included the cost of sales of raw milk to industrial customers, as compared to $3.1 million for the same period in the previous year.
 
Gross Profit and Gross Margin
 
As a result of the foregoing, gross profit for the fiscal quarter ended June 30, 2011 decreased by 65.3% to $16.1 million from $46.4 million for the same period in the previous year. Gross profit for our powdered formula products for the fiscal quarter ended June 30, 2011 decreased by 62.4% to $16.9 million from $45.1 million for the same period in the previous year.
 
Our overall gross margin decreased to 36.7% for the fiscal quarter ended June 30, 2011 from 55.3% for the same period in the previous year. Our gross margin for powdered formula segment was 42.2% for the fiscal quarter ended June 30, 2011, as compared to 56.9% for the same period in the previous year.
 
Selling and Distribution Expenses
 
Selling and distribution expenses for the fiscal quarter ended June 30, 2011 decreased slightly to $12.5 million from $12.6 million for the same period in the previous year. The major portion of selling and distribution expenses is compensation expense for the sales staff, which does not fluctuate along with the net sales in the short term as we accrue bonus each quarter, and make payment at year end.
 
Advertising and Promotion Expenses
 
Advertising and promotion expenses for the fiscal quarter ended June 30, 2011 decreased by 29.9% to $7.0 million from $10.0 million for the same period in the previous year. Advertising expenses for the fiscal quarter ended June 30, 2011, which accounted for 32.6% of total advertising and promotion expenses, decreased by 59.8% to $2.3 million from $5.7 million for the same period in the previous year, as we reduced the expenditure on media advertising and refocused our efforts on training in-store promoters to generate more sales by making more home visits, more phone calls and conducting more educational programs. Promotion expenses for the fiscal quarter ended June 30, 2011, which accounted for 67.4% of total advertising and promotion expenses, increased by 9.4% to $4.7 million from $4.3 million for the same period in the previous year, which was mainly due to increased printing cost of brochures that we give our customers as free gifts while doing home visits or conducting educational program.
  
 
 
16

 
 
General and Administrative Expenses
 
General and administrative expenses for the fiscal quarter ended June 30, 2011 increased by 8.3% to $6.6 million from $6.1 million for the same period in the previous year. The increase was mainly due to the increase in bad debt allowance.
 
Impairment of goodwill

No goodwill impairment occurred in the fiscal quarter ended June 30, 2011. Impairment of goodwill for the fiscal quarter ended June 30, 2010 was $1.4 million, which represented the difference between the estimated fair value and carrying value of goodwill generated in the acquisition of the baby food business.
 
Other Operating Income, Net
 
Other operating income for the fiscal quarter ended June 30, 2011 increased to $110,000 from $73,000 for the same period in the previous year. The income represented general purpose government subsidy from a local government.
 
Interest Expense

Interest expense for the fiscal quarter ended June 30, 2011 increased to $3.4 million from $2.7 million for the same period in the previous year. The increase was mainly due to the increase in weighted average interest rate of borrowings from PRC banks, as China’s central bank raised benchmark lending rates several times since October 2010.

Interest Income
 
Interest income for the fiscal quarter ended June 30, 2011 increased to $311,000 from $108,000 for the same period in the previous year. The increase was mainly due to the increase in restricted cash, which had a higher interest rate than cash and cash equivalent.
 
Other Income, Net
 
Other income for the fiscal quarter ended June 30, 2011 was $465,000, which was mainly due to Renminbi appreciating against the U.S. dollar. Other income for the fiscal quarter ended June 30, 2010 was $167,000. We purchase milk powder and whey protein from New Zealand and Europe, and these transactions were mostly dominated in U.S. dollars.
 
Income Tax Benefit
 
As a result of the loss generated, we recorded an income tax benefit of $3.0 million for the fiscal quarter ended June 30, 2011, as compared to income tax expense of $3.8 million for the same period in the previous year. Our effective tax rate decreased to 24.4% for the fiscal quarter ended June 30, 2011 from 27.3% for the same period in the previous year, which was mainly due to the valuation allowance for net operating loss carryforward of certain subsidiaries.
 
Net income (Loss) Attributable to Synutra International, Inc. Common Stockholders
 
As a result of the foregoing, net loss attributable to Synutra International, Inc. for the fiscal quarter ended June 30, 2011 was $9.6 million, as compared to net income of $10.1 million for the same period in the previous year.

 
17

 
 
 
Liquidity and Capital Resources
 
Our primary sources of liquidity are cash from operations and available borrowings. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of cash for inventory purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditures for equipment and buildings. Cash flows from financing activities primarily represent borrowings from banks, and for the fiscal quarter ended June 30, 2010, it also includes the issuance of 3.3 million shares of common stock, with net proceeds of approximately $58.8 million.

Our cash and cash equivalent decreased from $48.7 million as of March 31, 2011 to $27.5 million as of June 30, 2011. As we improve our financial performance and decrease operating cash outflow, we believe that our future cash and cash equivalent will be sufficient for our operating needs. Depending on our cash flow situation, we may adjust the amount of industrial milk powder imported and sold.
 
The following table sets forth, for the periods indicated, certain information relating to our cash flows:
 
   
Three Months Ended June 30,
 
   
2011
   
2010
 
     
(in thousands)
 
Net cash used in operating activities
 
$
(8,089
)
 
$
(7,849
)
Net cash used in investing activities
   
(16,851
   
(2,719
Net cash provided by financing activities
   
2,801
     
67,094
 
Effect of foreign currency translation on cash and cash equivalents
   
935
     
245
 
Net cash flow
 
$
(21,204
 
$
56,771
 

Cash Flows from Operating Activities
 
Net cash used in operating activities was $8.1 million and $7.8 million for the fiscal quarter ended June 30, 2011 and 2010, respectively. Net cash used in operating activities for the fiscal quarter ended June 30, 2011 included net loss of $9.4 million, non-cash items not affecting cash flows of $4.9 million, and a $3.6 million increase in working capital. The changes in working capital for the fiscal quarter ended June 30, 2011, were primarily related to a $26.9 million increase in inventories, $16.7 million increase in prepaid expense and other current assets, and partially offset by $17.2 million decrease in accounts receivable, $10.0 million decrease in due from related parties, $7.0 million increase in accounts payable, and $6.7 million increase in advance from customers. We purchased more milk powder from Fonterra in March as the milk powder price was rising at that time, and the milk powder arrived in our Qingdao plant this quarter. The finished goods also increased, due to the delayed delivery discussed in the overview section. In the fiscal quarter ended June 30, 2011, we spent $65.7 million to purchase raw materials and other production materials, $11.6 million in staff compensation and social welfare, $7.6 million in other taxes, $20.0 million in selling and distribution, advertising and promotion, and general and administrative expenses, $3.3 million in interest payment, and received $100.0 million from our customers.
 
 
 
18

 
 
 
 Cash Flows from Investing Activities
 
Net cash used in investing activities was $16.9 million and $2.7 million for the fiscal quarter ended June 30, 2011 and 2010. Cash invested in purchases of property and equipment was $2.1 million and $0.3 million for the fiscal quarter ended June 30, 2011 and 2010, respectively. Cash outflow for restricted cash was $14.8 million and $7.3 million for the fiscal quarter ended June 30, 2011 and 2010, respectively. Restricted cash represents cash deposited with banks as security against the issuance of letters of credit for the import of raw materials and as pledges for certain short-term and long-term borrowings.
 
 Cash Flows from Financing Activities
 
Net cash provided by financing activities was $2.8 million and $67.1 million for the fiscal quarter ended June 30, 2011 and 2010. Cash provided by financing activities during the fiscal quarter ended June 30, 2011 was primarily related to the difference between the $115.4 million in short and long-term loans received from banks and the $112.6 million in short and long-term loans repaid to banks.
  
Outstanding Indebtedness
 
For information on our short-term and long-term borrowings, see “Item 1. Financial Statements—Note 7.”
 
Contractual Obligations

For information on our contractual obligations, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Tabular Disclosure of Contractual Obligations.”as presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. 

Capital Expenditures
 
Our capital expenditures for the fiscal quarter ended June 30, 2011 was $2.1 million, as compared to $0.3 million for the same period in the previous year.

Off-Balance Sheet Arrangements
 
We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 
 
19

 
 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There is no material change in the information reported under Item 7A, “Foreign Exchange Risk”, “Inflation”, “Interest Rate Risk”, “Concentration of Credit Risk” and “Commodities Risk” contained in our Form 10-K for the fiscal year ended March 31, 2011.

ITEM 4.  CONTROLS AND PROCEDURES
 
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report.
 
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2011, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (a) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2011, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
 
 
20

 
 
 
 
PART II
OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
 As of June 30, 2011, the end of the period covered by this report, the Company was subject to  legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Other than as discussed below, in the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. The Company intends to contest each lawsuit vigorously but should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially and adversely affected.

On March 29, 2010, U.S. District Judge Deborah Chasanow for the District of Maryland ordered the dismissal of a complaint filed January 15, 2009 on behalf of 54 Chinese families alleged to be affected by melamine contamination, against Synutra International, Inc. and Synutra Inc. (Jiali Tang, et al vs. Synutra International, Inc., et al.), alleging negligent or intentional infliction of personal injury, negligent or intentional infliction of emotional distress, battery, breach of warranty, fraudulent or negligent misrepresentation, seeking compensation for punitive damages in the amount of US$500 million, together with any compensatory damages. In an opinion issued the same date of the order above, the court sided with the Company’s positions and granted the motion to dismiss on the grounds of forum non conveniens. The court also granted the motion to file under seal a response to a Notice of Recent Development filed by the Plaintiffs. In considering the motion to dismiss on the grounds of forum non conveniens, the court examined both the availability and adequacy of the alternative forum in China as well as how public and private interests favor the choice of forum. In addition, taking into account that an “alternative compensation plan is undisputedly available to Plaintiffs,” the court ruled that “a conditional dismissal will not be employed to protect the Plaintiffs’ rights to pursue a judicial remedy in the alternative forum.” On June 28, 2010, the plaintiffs filed an opening brief of appeal of the dismissal order.  In response, the Company filed an opposing brief on July 28, 2010 with the court of appeals. The plaintiffs’ reply brief was filed on August 16, 2010. On March 22, 2011, the court of appeals for the Fourth Circuit heard oral argument and now has the appeal under advisement. Management believes the possibility of a significant loss from this lawsuit is remote. Therefore, no accrual has been established for any potential loss in connection with this lawsuit.

ITEM 1A. RISK FACTORS

For information regarding the risks and uncertainties affecting our business, please refer to “Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. There have been no material changes to these risks and uncertainties during the fiscal quarter ended June 30, 2011.
 
 
 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6.  EXHIBITS
 
 
Exhibit Number
 
 
Description
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
   
SYNUTRA INTERNATIONAL, INC.
 
       
       
Date:  August 9, 2011  
By:
/s/ Liang Zhang
 
       
Name:
Liang Zhang
 
       
Title:
Chief Executive Officer and Chairman
 
           
     
By:
/s/ Donghao Yang
 
       
Name:
Donghao Yang
 
       
Title:
Chief Financial Officer
 
 
 
 
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