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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, 2014
 
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 x 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 8, 2014, there were 57,300,713 shares of the registrant’s common stock outstanding.
  
 
 

 
 
Page
 
PART I FINANCIAL INFORMATION
 
 
 

PART I FINANCIAL INFORMATION
 
 
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share data)
(UNAUDITED)

 
   
June 30, 2014
   
March 31, 2014
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
 
$
41,037
   
$
90,915
 
Restricted cash
   
76,215
     
67,211
 
Accounts receivable, net of allowance of $2,439 and $2,851, respectively
   
14,429
     
17,763
 
Inventories
   
77,347
     
83,986
 
Due from related parties
   
3,515
     
3,109
 
Income tax receivable
   
239
     
244
 
Receivable from disposal of a subsidiary
   
22,494
     
0
 
Assets held for sale
   
2,793
     
0
 
Prepayments, tax receivables and others
   
31,937
     
22,028
 
Total current assets
   
270,006
     
285,256
 
                 
Property, plant and equipment, net
   
151,755
     
145,833
 
Land use rights, net
   
8,789
     
10,957
 
Intangible assets, net
   
4,249
     
4,270
 
Restricted cash
   
92,395
     
100,533
 
Due from related parties
   
2,096
     
2,355
 
Other assets
   
2,180
     
1,479
 
TOTAL ASSETS
 
$
531,470
   
$
550,683
 
LIABILITIES AND EQUITY
               
Current Liabilities:
               
Short-term debt
 
$
90,471
   
$
115,917
 
Long-term debt due within one year
   
91,326
     
91,505
 
Accounts payable
   
46,191
     
39,616
 
Due to related parties
   
1,509
     
1,556
 
Advances from customers
   
16,481
     
15,692
 
Income tax payable
   
1,511
     
0
 
Other current liabilities
   
33,961
     
45,980
 
Total current liabilities
   
281,450
     
310,266
 
Long-term debt
   
159,605
     
160,533
 
Deferred government subsidy
   
4,030
     
4,247
 
Capital lease obligations
   
7,871
     
7,898
 
Other long-term liabilities
   
6,212
     
6,483
 
Total liabilities
   
459,168
     
489,427
 
                 
Equity:
               
Common stockholders’ equity:
               
Common stock, $.0001 par value: 250,000 authorized; 57,301 and 57,301 issued and outstanding at June 30, 2014 and March 31, 2014, respectively
   
6
     
6
 
Additional paid-in capital
   
135,440
     
135,440
 
Accumulated deficit
   
(86,639
)
   
(104,579
)
Accumulated other comprehensive income
   
23,178
     
30,529
 
Total common stockholders’ equity
   
71,985
     
61,396
 
Noncontrolling interest
   
317
     
(140
Total equity
   
72,302
     
61,256
 
                 
TOTAL LIABILITIES AND EQUITY
 
$
531,470
   
$
550,683
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
  (Dollars in thousands, except per share data)
(UNAUDITED)

   
Three Months
Ended June 30,
 
   
2014
   
2013
 
Net sales
 
$
85,975
   
$
82,205
 
Cost of sales
   
47,212
     
46,124
 
Gross profit
   
38,763
     
36,081
 
Selling and distribution expenses
   
12,593
     
14,771
 
Advertising and promotion expenses
   
9,702
     
8,476
 
General and administrative expenses
   
7,255
     
6,452
 
Gain on disposal and liquidation of subsidiaries
   
14,962
     
367
 
Government subsidies
   
128
     
165
 
Income from operations
   
24,303
     
6,914
 
Interest expense
   
4,837
     
3,887
 
Interest income
   
1,688
     
1,087
 
Other income, net
   
69
     
741
 
Income before income tax expense
   
21,223
     
4,855
 
Income tax expense
   
2,826
     
79
 
Net income
   
18,397
     
4,776
 
Net income attributable to the noncontrolling interest
   
457
     
1
 
Net income attributable to common stockholders
 
$
17,940
   
$
4,775
 
                 
Weighted average common stock outstanding – basic and diluted
   
57,301
     
57,301
 
Earnings per share – basic and diluted
 
$
0.31
   
$
0.08
 

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


SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Dollars in thousands)
(UNAUDITED)

   
Three Months
Ended June 30,
 
   
2014
   
2013
 
Net income
 
$
18,397
   
$
4,776
 
Other comprehensive income (loss), net of tax:
               
    Foreign currency translation adjustments
               
Unrealized translation gain (loss) during the period
   
(340
) 
   
552
 
Less: Reclassification adjustment for gains included in net income
   
(7,011
) 
   
0
 
    Subtotal
   
(7,351
) 
   
552
 
Other comprehensive income (loss), net of tax
   
(7,351
) 
   
552
 
Comprehensive income
   
11,046
     
5,328
 
Less: Comprehensive income attributable to noncontrolling interest
   
457
     
1
 
Comprehensive income attributable to common stockholders
 
$
10,589
   
$
5,327
 

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

SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
  (Dollars and shares in thousands)
(UNAUDITED)

   
Synutra International, Inc. Stockholders’ Equity
             
   
Common Stock
                               
   
Shares
   
Amount
   
Additional
paid-in
capital
   
Retained
earnings (accumulated
deficit)
   
Accumulated
other comprehensive
income
   
Noncontrolling
Interest
   
Total
equity
 
Balance, March 31, 2013
   
57,301
   
$
6
   
$
135,440
   
$
(135,508
)
 
$
28,828
   
$
441
   
$
29,207
 
Net income
   
0
     
0
     
0
     
4,775
     
0
     
1
     
4,776
 
Other comprehensive
income, net of
tax of nil
   
0
     
0
     
0
     
0
     
552
     
0
     
552
 
Balance, June 30, 2013
   
57,301
   
$
6
   
$
135,440
   
$
(130,733
)
 
$
29,380
   
$
442
   
$
34,535
 
                                                         
Balance, March 31, 2014
   
57,301
   
$
6
   
$
135,440
   
$
(104,579
)
 
$
30,529
   
$
(140
)
 
$
61,256
 
Net income
   
0
     
0
     
0
     
17,940
     
0
     
457
     
18,397
 
Other comprehensive
income, net of
tax of nil
   
0
     
0
     
0
     
0
     
(7,351
   
0
     
(7,351
Balance, June 30, 2014
   
57,301
   
$
6
   
$
135,440
   
$
(86,639
)
 
$
23,178
   
$
317
   
$
72,302
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
(UNAUDITED)

   
Three Months Ended June 30,
 
   
2014
   
2013
 
Operating activities:
           
Net income
 
$
18,397
   
$
4,776
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
4,701
     
3,495
 
Bad debt reversal
   
(691
   
(413
Inventory write down
   
630
     
1,902
 
Gain on disposal and liquidation of subsidiaries
   
(14,962
)
   
(367
)
Other
   
137
     
46
 
Changes in assets and liabilities:
               
Accounts receivable
   
(933
   
6,333
 
Inventories
   
1,119
     
7,164
 
Due from related parties
   
(413
   
(358
Prepayments, tax receivables and others
   
(1,098
   
(3,534
)
Accounts payable
   
4,839
     
(1,492
Due to related parties
   
(47
   
(228
Advances from customers
   
781
     
(3,279
)
Income tax receivable/payable
   
(10
)
   
1
 
Other current and noncurrent liabilities
   
(9,138
   
(10,710
Net cash provided by operating activities
   
3,312
     
3,336
 
                 
Investing activities:
               
Acquisition of property, plant and equipment
   
(29,873
)
   
(2,284
)
Change in restricted cash
   
(883
)
   
(1,976
)
Proceeds from assets disposal
   
311
     
106
 
Net proceeds from disposal of subsidiaries
   
3,634
     
358
 
Net cash used in investing activities
   
(26,811
)
   
(3,796
)
                 
Financing activities:
               
Proceeds from short-term debt
   
15,838
     
42,297
 
Repayment of short-term debt
   
(41,251
)
   
(54,730
)
Proceeds from long-term debt
   
27,252
     
40,776
 
Repayment of long-term debt
   
(28,348
)
   
(26,347
)
Payment on capital lease obligations
   
(35
)
   
(104
)
Net cash provided by (used in) financing activities
   
(26,544
)
   
1,892
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
165
     
452
 
                 
Net change in cash and cash equivalents
   
(49,878
)
   
1,884
 
Cash and cash equivalents, beginning of period
   
90,915
     
79,050
 
Cash and cash equivalents, end of period
 
$
41,037
   
$
80,934
 
                 
Supplemental cash flow information:
               
Interest paid
 
$
4,708
   
$
3,782
 
Income tax paid
   
1,582
     
75
 
                 
Non-cash investing and financing activities:
               
Purchase of property, plant and equipment included in accounts payable
 
$
9,471
   
$
7,228
 
Disposal of a subsidiary included in receivables
   
22,494
     
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
SYNUTRA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES

Synutra International, Inc. and its subsidiaries (hereinafter collectively referred to as the “Company” or “Synutra”) are principally engaged in production, distribution and sales of dairy based nutritional products under the “Shengyuan” or “Synutra” line of brands in the People’s Republic of China (“China” or “PRC”). The Company focuses on selling powdered formula products for infant and adult, and also engages in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements.

2.
BASIS OF PRESENTATION

The Company is responsible for the unaudited consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US 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 US 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 for the fiscal year ended March 31, 2014.

As of June 30, 2014, the Company has an asset liability ratio of 86%, which is defined as total liabilities divided by total assets, and negative working capital of $11.4 million. However, the Company regards the going concern assumption as appropriate considering the following mitigating factors:

·
The Company managed to reverse the trend contributing to losses incurred in first half of fiscal 2013 by seven consecutive quarters of income from operations;
 
·
The Company had positive cash flows from operations since the second half of fiscal 2013; and

·
As of June 30, 2014, the Company had an unused credit facility of $48.8 million which could be used when purchasing materials and the purchased inventory is used as pledge. The facility is not unconditionally committed as the bank may refuse to fund if there is a material adverse change to the Company’s operations. However, for normal operational needs, it provides a backup source of liquidity.
 
Based on the above factors, management believes that adequate sources of liquidity will exist to fund the Company’s working capital and capital expenditure requirements, and to meet its short term debt obligations, other liabilities and commitments as they become due. Accordingly, management believes the Company will be able to realize its assets and satisfy its liabilities in the normal course of business.

The unaudited 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. (the variable interest entity, or "VIE"), in which it has a controlling financial interest. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. US GAAP provides guidance on the identification and financial reporting for entities over which control is achieved through means other than voting interests, which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  Through the contractual arrangements between the Company and the VIE, the Company controls the operating activities and holds all the beneficial interests of the VIE and has been determined to be the primary beneficiary of the VIE. The Company has concluded that such contractual arrangements are legally enforceable. The operations associated with the consolidated VIE are insignificant and hold de minimis assets and liabilities.

Net income or loss of a subsidiary is attributed to the Company and to the noncontrolling interests either on the basis of relative ownership interest or in accordance with contractual agreements that specify a different allocation, such as in the case of VIE. Noncontrolling interests in subsidiaries are presented separately from the Company's equity therein.

All inter-company accounts and transactions have been eliminated in consolidation.

The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
 
 
3.
DISPOSAL OF A SUBSIDIARY
 
In June 2014, the Company sold its wholly owned subsidiary in the powdered formula segment, Zhangjiakou Chahaer Dairy Co., Ltd. (“Zhangjiakou”) to Rightcom Co., Ltd. (the “Purchaser”) for a total cash consideration of $28.1 million to be paid in three installments. As of June 30, 2014, the Company has completed all of the closing procedures with the exception of the re-registration of land use right certificate and has effectively transferred its control on Zhangjiakou to the Purchaser. As the result of the sale, the Company recorded a $15.0 million in gain ($11.9 million after tax), which was calculated as the total of the excess of the sale proceeds over the net book value of the assets transferred of $20.1 million and reclassification of foreign currency translation gain of $7.0 million from Other Comprehensive Income. The Purchaser made a 20% payment of $5.6 million and a 60% payment of $16.9 million in May and July 2014 respectively, with the remaining 20% payment of $5.6 million to be paid upon the completion of the re-registration of land use right certificate. The Company considers the re-registration of land use right certificate with the relevant government bureaus to be administrative in nature and expect that the procedure will be completed before December 2014.

Prior to the sale, the Company used Zhangjiakou to process high oil whey power to use in its production of powered formula products. Concurrently with the disposal, the Company has entered into agreements with Zhangjiakou, under which the Company will continue to engage Zhangjiakou in processing at least 16,000 tons of whey powder for the Company over the next two years.
 
4.
ASSETS HELD FOR SALE

In July 2014, the Company entered into a share purchase agreement (the “SPA Huiliduo”) with Beijing Jinkangpu Food Technology Co., Ltd. (the “Jinkangpu”), a third party, to sell to Jinkangpu all of the equity interests it holds in Beijing Shengyuan Huiliduo Food Technology Co., Ltd.(the “Beijing Huiliduo”), a subsidiary in food segment which ceased operation in November 2012, for a total consideration of RMB 8.3 million (equivalent to $1.3 million). The assets of Beijing Huiliduo mainly represent buildings and land use right, which were recorded in the assets held for sale as of June 30, 2014. The Company expects to record immaterial disposal gain in the second quarter of fiscal 2015.

5.
INVENTORIES  
 
The Company’s inventories at June 30, 2014 and March 31, 2014 are summarized as follows:
 
(In thousands)
 
June 30, 2014
   
March 31, 2014
 
Raw materials
 
$
47,633
   
$
44,981
 
Work-in-progress
   
15,535
     
12,342
 
Finished goods
   
14,179
     
26,663
 
Total
 
$
77,347
   
$
83,986
 

The value of goods-in-transit included in raw materials was $13.8 million and $11.4 million as of June 30, 2014 and March 31, 2014, respectively, which mainly represented the purchase of milk powder and whey powder from international sources.

The Company recorded lower of cost or market provisions for inventory of $0.6 million and $1.9 million for the quarter ended June 30, 2014 and 2013, respectively.


6.
RELATED PARTIES AND RELATED PARTY TRANSACTIONS

A.
Related party balances

a.
Due from related parties, including current and non-current portion
 
(In thousands)
 
June 30, 2014
   
March 31, 2014
 
Sheng Zhi Da Dairy Group Corporation
 
$
1,918
   
$
1,918
 
Beijing Honnete Dairy Co., Ltd.
   
0
     
2
 
St. Angel (Beijing) Business Service Co. Ltd.
   
3,545
     
3,451
 
Beijing St. Angel Cultural Communication Co., Ltd.
   
0
     
6
 
Beijing Ao Naier Feed Stuff Co., Ltd.
   
148
     
87
 
Total
 
$
5,611
   
$
5,464
 

b.
Due to related parties
 
(In thousands)
 
June 30, 2014
   
March 31, 2014
 
Sheng Zhi Da Dairy Group Corporation
 
$
878
   
$
876
 
Beijing Honnete Dairy Co., Ltd.
   
479
     
478
 
Beijing St. Angel Cultural Communication Co., Ltd.
   
152
     
202
 
Total
 
$
1,509
   
$
1,556
 
 
The amount due to and due from related parties were unsecured and interest free.

B.
Sales to and services for related parties
 
In the quarter ended June 30, 2014, the Company’s sales to related parties mainly included feed grade milk powder sold to Ao Naier and powdered formula products sold to St. Angel (Beijing) Business Service. Other immaterial transactions with related parties included renting office spaces to Honnete, Ao Naier, St. Angel (Beijing) Business Service and St. Angel Cultural Communication. In the quarter ended June 30, 2013, the Company’s sales to related parties mainly included feed grade whey powder to Ao Naier, and powdered formula products to St. Angel (Beijing) Business Service.
  
     
Three Months
Ended June 30,
 
(In thousands)
   
2014
     
2013
 
Beijing Honnete Dairy Co., Ltd.
 
$
2
   
$
2
 
St. Angel (Beijing) Business Service Co., Ltd.
   
473
     
906
 
Beijing Ao Naier Feed Stuff Co., Ltd.
   
53
     
43
 
Beijing St. Angel Cultural Communication Co., Ltd.
   
6
     
0
 
Total
 
$
534
   
$
951
 

C.
Purchases from related parties
 
In the quarter ended June 30, 2014 and 2013, St. Angel Cultural Communication implemented certain marketing activities for the Company.
 
     
Three Months
Ended June 30,
 
(In thousands)
   
2014
     
2013
 
Beijing St. Angel Cultural Communication Co. Ltd.
 
$
115
   
$
121
 
 
 
 
7.
PROPERTY, PLANT AND EQUIPMENT, NET 

(In thousands)
 
June 30, 2014
   
March 31, 2014
 
Property, plant and equipment, cost:
           
Capital lease of building
 
$
5,743
   
$
5,744
 
Buildings and renovations
   
78,669
     
86,769
 
Plant and machinery
   
64,549
     
88,007
 
Office equipment and furnishings
   
10,836
     
11,507
 
Motor vehicles
   
2,574
     
3,452
 
Others
   
1,067
     
1,103
 
Total cost
 
$
163,438
   
$
196,582
 
Less: Accumulated depreciation:
               
Capital lease of building
   
858
     
813
 
Buildings and renovations
   
15,082
     
17,986
 
Plant and machinery
   
35,311
     
48,942
 
Office equipment and furnishings
   
6,262
     
6,400
 
Motor vehicles
   
1,691
     
2,491
 
Others
   
661
     
637
 
Total accumulated depreciation
   
59,865
     
77,269
 
Construction in progress
   
48,182
     
26,520
 
Property, plant and equipment, net
 
$
151,755
   
$
145,833
 

Construction in progress mainly represents construction and equipment purchase for the French subsidiary as of June 30, 2014 and March 31, 2014

The Company recorded depreciation expense for owned assets and capital leased assets of $4.6 million and $3.5 million for the quarter ended June 30, 2014 and 2013, respectively.

8.
DEBT

As of June 30, 2014 and March 31, 2014, the Company had short-term debt from banks of $90.5 million and $115.9 million, respectively.  The maturity dates of the short-term debt outstanding range from July 2014 to March 2015. The weighted average interest rate on short-term debt outstanding at June 30, 2014 and March 31, 2014 was 4.2% and 4.9%, respectively. Certain portion of these debts use floating interest rates, which are calculated based on the benchmark lending interest rate published by China’s central bank or on LIBOR. The short-term debt at June 30, 2014 and March 31, 2014 were secured by the pledge of certain inventory purchased under letter of credit of $15.8 million and nil, respectively; the pledge of certain fixed assets totaling $5.2 million and $5.3 million, respectively; the pledge of the Company’s land use right of nil and $3.9 million, respectively; and the pledge of restricted cash deposits of $15.2 million and $17.0 million, respectively.
 
As of June 30, 2014 and March 31, 2014, the Company had long-term debt, including current portion, from banks of $250.9 million and $252.0 million, respectively. The maturity dates of the long-term debt outstanding range from July 2014 to May 2019. The weighted average interest rate of outstanding long-term debt at June 30, 2014 and March 31, 2014 was 4.5% and 4.6%, respectively. Certain portion of these debts use floating interest rates, which are calculated based on the benchmark lending interest rate published by China’s central bank or on LIBOR. The indebtedness at June 30, 2014 and March 31, 2014 was secured by the pledge of restricted cash deposits of $103.0 million and $82.0 million, respectively.

Maturities on long-term debt, including current and non-current portion, subject to mandatory redemption are as follows:

(In thousands)
 
Twelve Months Ended
 
June 30, 2015
 
$
91,326
 
June 30, 2016
   
147,325
 
June 30, 2017
   
0
 
June 30, 2018
   
0
 
June 30, 2019
   
12,280
 

The borrowings denominated in currencies other than RMB were $160.2 million and $138.3 million as of June 30, 2014 and March 31, 2014, respectively.

The Company has unused long term loan facilities for Synutra France of €55.5 million (equivalent to $75.7 million) with banks, with cash deposit of $16.3 million as a pledge which was recorded under restricted cash noncurrent portion as of June 30, 2014. These debts use floating interest rates, which are calculated based on LIBOR. The maturity periods of these debts range from 59 months to 8 years, commencing from the actual drawdown date. As of June 30, 2014, the Company has used €9.0 million (equivalent to $12.3 million) of the above facilities, which will become due in May 2019.

The total amount of interest cost incurred was $5.2 million and $3.9 million, and the amount thereof that has been capitalized was $0.3 million and nil, for the quarter ended June 30, 2014 and 2013, respectively.

 
9.
OTHER CURRENT LIABILITIES  
 
(In thousands)
 
June 30, 2014
   
March 31, 2014
 
Accrued discount, rebate and slotting fee
 
$
13,475
   
$
18,911
 
Payroll and bonus payables
   
4,301
     
9,469
 
Accrued selling expenses
   
3,329
     
6,793
 
Accrued advertising and promotion expenses
   
7,299
     
5,593
 
Accrued rental fee
   
408
     
366
 
Accrued interest expense
   
726
     
832
 
Others
   
4,423
     
4,016
 
Total
 
$
33,961
   
$
45,980
 

10.
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”. 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.

The Company considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Company's ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax law.

11.
EARNINGS (LOSS) PER SHARE

For purposes of calculating basic and diluted earnings per share, the Company used the following weighted average common stocks outstanding:
 
   
Three Months
Ended June 30,
 
(In thousands except for per share data)
 
2014
   
2013
 
Net income attributable to common stockholders
 
$
17,940
   
$
4,775
 
Weighted average common stock outstanding – basic and diluted
   
57,301
     
57,301
 
Earnings per share – basic and diluted
 
$
0.31
   
$
0.08
 

The Company granted ABN AMRO Bank N.V., Hong Kong Branch (now known as The Royal Bank of Scotland N.V. (“RBS”)) warrants to purchase 400,000 shares of common stock in connection with the RBS Loan in fiscal year 2008. These warrants were excluded from the computation of diluted earnings per share for the period ended June 30, 2013 as they would be anti-dilutive. The warrant agreement expired on June 30, 2013.


12.
SEGMENT REPORTING

The Company focuses on selling powdered formula products for infants and adults, and also engages in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements. The activities of each segment are as follows:
 
Powdered Formula - Sales of powdered infant and adult formula products.
 
Foods - Sales of prepared foods for babies, children and adult.
 
Nutritional Ingredients and Supplements - Sales of nutritional ingredients and supplements such as chondroitin sulfate to external customers, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”) to powdered formula segment.
 
Other business - Other business includes non-core businesses such as ancillary sales of excess or unusable 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,
 
(In thousands)
 
2014
   
2013
 
NET SALES TO EXTERNAL CUSTOMERS
           
Powdered formula
 
$
82,209
   
$
68,079
 
Foods
   
41
     
86
 
Nutritional ingredients and supplements
   
1,668
     
6,344
 
Other business
   
2,057
     
7,696
 
Net sales
 
$
85,975
   
$
82,205
 
INTERSEGMENT SALES
               
Powdered formula
 
$
1
   
$
14
 
Foods
   
0
     
0
 
Nutritional ingredients and supplements
   
3,490
     
2,233
 
Other business
   
0
     
239
 
Intersegment sales
 
$
3,491
   
$
2,486
 
GROSS PROFIT (LOSS)
               
Powdered formula
 
$
39,835
   
$
36,281
 
Foods
   
(439
   
(328
Nutritional ingredients and supplements
   
(187
   
(168
Other business
   
(446
   
296
 
Gross profit
 
$
38,763
   
$
36,081
 
Selling and distribution expenses
   
12,593
     
14,771
 
Advertising and promotion expenses
   
9,702
     
8,476
 
General and administrative expenses
   
7,255
     
6,452
 
Gain on disposal and liquidation of subsidiaries
   
14,962
     
367
 
Government subsidies
   
128
     
165
 
Income from operations
   
24,303
     
6,914
 
Interest expense
   
4,837
     
3,887
 
Interest income
   
1,688
     
1,087
 
Other income, net
   
69
     
741
 
Income before income tax expense
 
$
21,223
   
$
4,855
 

 
(In thousands)
 
June 30, 2014
   
March 31,
2014
 
TOTAL ASSETS
           
Powdered formula
 
$
531,223
   
$
567,051
 
Foods
   
16,440
     
16,692
 
Nutritional ingredients and supplements
   
47,972
     
49,039
 
Other business
   
154,549
     
131,876
 
Intersegment elimination
   
(218,714
)
   
(213,975
)
Total
 
$
531,470
   
$
550,683
 
 

 
 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.
 
 
Overview
 
We are a leading infant formula company in China. We principally engage in the production, distribution and sale of dairy based nutritional products under the “Shengyuan” or “Synutra” line of brands in the PRC. We focus on selling powdered formula products for infant and adult, and also engage in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements. We sell most of our products through an extensive nationwide sales and distribution network covering all provinces and provincial-level municipalities in mainland China. As of June 30, 2014, this network comprised over 680 independent distributors and over 550 independent sub-distributors who sell our products in approximately 23,000 retail outlets.

We currently have four reportable segments which are:

Powdered formula segment: Powdered formula segment covers the sale of powdered infant and adult formula products. Major brands include Super, U-Smart, My Angel and Dutch Cow;
   
Foods segment: Foods segment covers the sale of prepared baby foods for babies, children and adults under the brand of Huiliduo. In June 2013, we introduced prepared adult foods for patients with special nutritional needs after surgical operations;
   
Nutritional ingredients and supplements segment: Nutritional ingredients and supplements segment covers the production and sale of nutritional ingredients and supplements such as chondroitin sulfate to third parties, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”) to powdered formula segment;
   
Other business segment: our other business includes non-core businesses such as ancillary sales of excess or unusable ingredients and materials to industrial customers.
 
Executive Summary
 
After the successful implementation of our Gold Mining Strategy as described in the Annual Report on Form 10-K for the fiscal year ended March 31, 2014, we are now focusing on strategic marketing initiatives to increase consumer interaction with our brands and drive overall market penetration. We believe direct communication with end consumers is important in strengthening our brand image.
 
During the fiscal first quarter, we disposed our Zhangjiakou manufacturing facility to optimize our future capacity after the operation of French Project commences, and we also signed contracts with Zhangjiakou to secure the high oil processing of whey power in the next two years. Additionally, we entered into a share purchase agreement with a third party in July 2014 to dispose Beijing Huiliduo Food Co., Ltd. in order to improve our asset utilization. The assets of Beijing Huiliduo are comprised of buildings and land use right which are currently idle.

We obtained formal approval for the environmental impact study of French Project in July 2014. We have finished most of the road and underground pipe network, and have begun to work on the foundation of buildings.

 
Three Months Results of Operations

Below is a summary of selected comparative results of operations for the three months ended June 30, 2014 and 2013:

   
Three Months
Ended June 30,
       
(In thousands, except per share data)
 
2014
   
2013
   
%
Change
 
Net sales
 
$
85,975
   
$
82,205
     
5%
 
 - Powdered formula segment
   
82,209
     
68,079
     
21%
 
Cost of sales
   
47,212
     
46,124
     
2%
 
 - Powdered formula segment
   
42,374
     
31,798
     
33%
 
Gross profit
   
38,763
     
36,081
     
7%
 
 - Powdered formula segment
   
39,835
     
36,281
     
10%
 
Gross Margin
   
45%
     
44%
     
3%
 
 - Powdered formula segment
   
49%
     
53%
     
-9%
 
Income from operations
   
24,303
     
6,914
     
252%
 
Interest expense, net
   
3,149
     
2,800
     
13%
 
Income before income tax expense
   
21,223
     
4,855
     
337%
 
Income tax expense
   
2,826
     
79
     
*
 
- Effective tax rate
   
13.3%
     
1.6%
     
*
 
Net income
   
18,397
     
4,776
     
285%
 
Net income attributable to common stockholders
 
$
17,940
   
$
4,775
     
276%
 
Weighted average common stock outstanding – basic and diluted
   
57,301
     
57,301
         
Earnings per share – basic and diluted
 
$
0.31
   
$
0.08
     
276%
 
* not meaningful

Net Sales
 
Our net sales by reportable segments are shown in the table below:

   
Three Months
Ended June 30,
         
% Change in
 
(In thousands, except percentage data)
 
2014
   
2013
   
%
Change
   
Volume
   
Price
 
Powdered formula
 
$
82,209
   
$
68,079
     
21%
     
-1%
     
22%
 
Foods
   
41
     
86
     
-52%
                 
Nutritional ingredients and supplements
   
1,668
     
6,344
     
-74%
                 
Other business
   
2,057
     
7,696
     
-73%
                 
Net sales
 
$
85,975
   
$
82,205
     
5%
                 

Net sales of our powdered formula segment include powdered formula products for infants, children and adults. The increase in net sales of our powdered formula products was mainly due to the following factors:
 
 
Sales volume of powdered formula products for the three months ended June 30, 2014 was 5,680 tons, as compared to 5,744 tons for the same period in the previous year.
 
 
The average selling price of our powdered formula products for the three months ended June 30, 2014 was $14,473 per ton, compared to $11,852 per ton for the same period in the previous year. Average selling price is calculated as net sales, after deducting sales discounts and rebates, divided by sales volume. We provided sales discounts and rebates to offset part of the marketing and promotional expenditures incurred at retail outlets. The increase in average selling price is mainly due to our ability to better control discounts as a result of the continued positive impacts of our Gold Mining Strategy.
 
The sales volume and average selling price exclude the amount of free products provided to customers, which is recorded as cost of sales in the period.
 
The product mix in the foods segment is comprised of prepared baby food and adult food, such as cooked meat and vegetables. In June 2013, we launched prepared adult food under this segment for patients with special nutritional needs after surgical operations. In October 2013, we recruited a sales staff of approximately 100, and placed our adult food products with approximately 3,500 retail outlets in December 2013. Currently, we are still adjusting our marketing strategy for the adult food products based on reactions from customers. We recognize sales when we are paid by the retail outlets due to the uncertainty in collectability.

 
The product mix in nutritional ingredients and supplements segment is mainly comprised of external sales of chondroitin sulfate materials to certain international pharmaceutical companies. As the price of these materials is negotiated yearly with the customers and the price of raw material has increased significantly recently, we suspended major orders from pharmaceutical companies, and intend to renegotiate the price with them.

Our Other business mainly included sales of milk powder, whey powder, packing materials, feed-grade milk powder and whey powder, and other raw materials. The decrease in sales of our Other business was mainly due to the decreased sales volume of milk powder.

Cost of Sales
 
Our cost of sales by reportable segments is shown in the table below:

   
Three Months
Ended June 30,
       
(In thousands, except percentage data)
 
2014
   
2013
   
%
Change
 
Powdered formula
 
$
42,374
   
$
31,798
     
33%
 
Foods
   
480
     
414
     
16%
 
Nutritional ingredients and supplements
   
1,855
     
6,512
     
-72%
 
Other business
   
2,503
     
7,400
     
-66%
 
Cost of sales
 
$
47,212
   
$
46,124
     
2%
 
 
The increased total cost of sales of the powdered formula segment was mainly due to the increased price in raw material of milk powder and increased testing and maintenance expenses on machineries during the production license renewal process.
 
The decrease in the cost of sales of nutritional ingredients and supplements segment was mainly due to decreased sales volume of chondroitin sulfate to certain international pharmaceutical companies as discussed above.

The decrease in cost of our Other business was mainly due to the decreased sales volume of milk powder.
 
Gross Profit and Gross Margin
 
   
Three Months
Ended June 30,
       
(In thousands, except percentage data)
 
2014
   
2013
   
%
Change
 
Gross profit
 
$
38,763
   
$
36,081
     
7%
 
- Powdered formula
   
39,835
     
36,281
     
10%
 
Gross margin
   
45%
     
44%
         
- Powdered formula
   
49%
     
53%
         

The decrease in gross margin was mainly due to the margin decrease in the powdered formula segment. The decrease in gross margin of the powdered formula segment was mainly due to a price increase in raw material of milk powder and an increase in testing and maintenance expenses on machineries during the production license renewal process, partially offset by the increased average selling price as discussed above.
 

Expenses

   
Three Months
Ended June 30,
       
(In thousands, except percentage data)
 
2014
   
2013
   
%
Change
 
Selling and distribution expenses
 
$
12,593
   
$
14,771
     
-15%
 
Advertising and promotion expenses
   
9,702
     
8,476
     
14%
 
 - Advertising expenses
   
1,524
     
493
     
209%
 
 - Promotion expenses
   
8,178
     
7,983
     
2%
 
General and administrative expenses
   
7,255
     
6,452
     
12%
 
Gain on disposal and liquidation of subsidiaries
   
14,962
     
367
     
*
 
Government subsidies
   
128
     
165
     
-22%
 
* not meaningful

Selling and distribution expenses primarily include compensation expense for sales staff, freight charges and travel expense. The decrease in selling and distribution expenses was mainly due to our severance pay for the sales staff we laid off in the prior year period.

Advertising expenses primarily include media expenses paid to TV stations and e-commerce providers. We believe the influence from traditional TV advertising has diminished recently and as a result we have substantially cut back advertising on TV stations. Instead, we have shifted our advertising focus to e-commerce providers, mostly for our specialty infant formula products with special nutritional focus. Promotion expenses primarily include promotional products provided to end customers, and service charge for our consumer loyalty program administered by a third party. Based on our brand positioning, we believe direct communication with end customers is a more cost effective way to market our product compared to mass media advertising. As a result, we now allocate more resources to such promotional activities.

General and administrative expenses primarily include salaries for staff and management, depreciation, office rental, office supplies and bad debt expense. The increase was mainly due to landscaping expenses incurred for our Qingdao facility as we retrofitted the whole factory in connection with the upgrades for its production license renewal.
 
Gain on disposal of subsidiaries represented gain on the disposal of Zhangjiakou to a third party of $15.0 million in the quarter ended June 30, 2014, and a diagnostic subsidiary to a third party of $367,000 in the quarter ended June 30, 2013.

Government subsidies represented the receipt of general purpose subsidies from local governments.

Interest Expense and Interest Income
 
   
Three Months
Ended June 30,
       
(In thousands, except percentage data)
 
2014
   
2013
   
%
Change
 
Interest expense
 
$
4,837
   
$
3,887
     
24%
 
Interest income
   
1,688
     
1,087
     
55%
 

The increase in interest expense was mainly due to an increase in loan balance, and an increase in bank charges for opening standby letters of credit.

The increase in interest income was mainly due to an increase in average restricted cash balance, which earned a higher interest rate than cash and cash equivalents.
 
Income Tax Expense
 
Income tax expense for the three month ended June 30, 2014 was mainly for the transaction gain of the Zhangjiakou disposal.

Net Income (Loss) Attributable to Noncontrolling Interest

Net income (loss) attributable to noncontrolling interest represents the interest held by third parties in Meitek Technology (Qingdao) Co., Ltd.

Net Income Attributable to Common Stockholders
 
As a result of the foregoing, net income attributable to common stockholders for the three months ended June 30, 2014 was $17.9 million, compared to $4.8 million for the same period in the previous year.
 

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash on hand, 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, and restricted cash used as security against letter of credits, bank acceptance bills and short-term and long-term borrowings. Cash flows from financing activities primarily represent proceeds and repayments of borrowings. In addition, while there can be no assurance that we will be able to refinance our short-term bank borrowings as they become due, historically, we have renewed or rolled over most of our bank loans after the maturity date of the loans and we believe we will continue to be able to do so.

Cash and cash equivalents totaled $41.0 million at June 30, 2014, of which $39.1 million was held outside of the United States.

As of June 30, 2014, we have an asset liability ratio of 86%, which is defined as total liabilities divided by total assets, and negative working capital of $11.4 million. However, we regard the going concern assumption as appropriate considering the following mitigating factors:

·
The Company managed to reverse the trend contributing to losses incurred in the first half of fiscal 2013 with seven consecutive quarters of income from operations;

·
The Company had positive cash flows from operations since the second half of fiscal 2013; and

·
As of June 30, 2014, the Company had an unused credit facility of $48.8 million which could be used when purchasing materials and the purchased inventory is used as a pledge. The facility is not unconditionally committed as the bank may refuse to fund if there is a material adverse change to the Company’s operations. However, for normal operational needs, it provides a backup source of liquidity.
 
Based on the above factors, management believes that adequate sources of liquidity will exist to fund the Company’s working capital and capital expenditure requirements, and to meet its short term debt obligations, other liabilities and commitments as they become due. Accordingly, management believes the Company will be able to realize its assets and satisfy its liabilities in the normal course of business.

On September 17, 2012, the Company entered into a partnership framework agreement, a milk supply agreement, a whey supply agreement, a whey powder supply agreement, and a technical assistance agreement with Sodiaal Union, a French agricultural cooperative company (“Sodiaal”), and/or Euroserum SAS (“Euroserum”), a French subsidiary of Sodiaal, relating to a long-term industrial and commercial partnership between Sodiaal and the Company. Under these agreements, the Company undertakes to build a new drying facility (the “French Project”) in Carhaix, France, intended to manufacture powdered milk and fat-enriched demineralized whey. The Company committed to purchase, and Sodiaal and Euroserum committed to sell, 288 million liters of milk per year for ten years, an amount of whey equivalent to 24,000 tons of 70% demineralized pre-concentrated dry whey extract per year for ten years, and 6,000 tons of 70% demineralized whey powder per year, or an equivalent quantity of liquid whey, for ten years, at market based prices at the time of purchase, to satisfy the production needs of the new drying facility. If the Company purchases less than the agreed amount, the Company would compensate Sodiaal or Euroserum for the loss suffered. The Company has decided to add 50,000 tons of packaging and warehousing capacity for powdered formula products to the French Project. As a result, the updated estimated cost to build the facility is approximately Euro 136.0 million (equivalent to $185.6 million). The Company plans to finance a majority of the cost with long-term project financing, and the remaining part of the project with cash on hand and operating cash flow.

Recent developments of the French Project include:
 
 
·
On March 20, 2013, the Company received the required approvals from China's National Development and Reform Commission and Ministry of Commerce for the project;

 
·
In September 2013, the Company received the construction permit for the project from the municipal government of Carhaix;

 
·
We have signed long term loan facilities of €64.5 million (equivalent to $88.0 million) with banks, and used €9.0 million (equivalent to $12.3 million) facility; and

 
·
After we were informed that the environmental impact study resulted in a positive opinion in March 2014, we obtained the formal approval of the environmental impact study in July 2014, which is the last major government approval we need during the construction phase.

 
Cash Flows

The following table sets forth, for the periods indicated, certain information relating to our cash flows:

   
Three Months
Ended June 30,
 
(In thousands)
 
2014
   
2013
 
Cash flow provided by/(used in):
           
Operating activities
               
Net income
 
$
18,397
   
$
4,776
 
Depreciation and amortization
   
4,701
     
3,495
 
Bad debt expense (reversal)
   
(691
   
(413
Inventory write down
   
630
     
1,902
 
Gain on disposal and liquidation of subsidiaries
   
(14,962
   
(367
Other
   
137
     
46
 
Changes in assets and liabilities
   
(4,900
)
   
(6,103
)
Total operating activities
   
3,312
     
3,336
 
Investing activities
   
(26,811
)
   
(3,796
)
Financing activities
   
(26,544
)
   
1,892
 
Effect of foreign currency translation on cash and cash equivalents
   
165
     
452
 
Net change in cash and cash equivalents
 
$
(49,878
)
 
$
1,884
 

Cash flow provided by operating activities was a result of the net income of $18.4 million, as adjusted for non-cash expense and income items of $10.2 million, and an increase in working capital of $4.9 million. In the three months ended June 30, 2014, we spent $55.1 million to purchase raw materials and other production materials, $15.9 million in staff compensation and social welfare, $10.1 million in taxes, $20.6 million in operating expenses, $4.7 million in interest, $0.1 million in land lease, received $109.7 million from our customers, $25,000 from government subsidy and $0.2 million from interest payments.

Cash flow used in investing activities in the three months ended June 30, 2014 represents $29.9 million payment for the purchase of property, plant and equipment, $0.9 million outflow for restricted 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, $0.3 million in proceeds from disposed assets, and $3.6 million proceeds from disposal of Zhangjiakou.

Cash flow used in financing activities in the three months ended June 30, 2014 mainly represents net cash outflow of $25.4 million from short-term loans and net cash outflow of $1.1 million from long-term loans, and $35,000 payment for assets under capital leases.

Outstanding Indebtedness
 
For information on our short-term and long-term borrowings, see “Item 1.  Financial Statements – Note 8.”

Capital Expenditures
 
Our capital expenditures were $31.1 million and the corresponding cash outflow was $29.8 million for the three months ended June 30, 2014, which mainly represented expenditures for our drying facility project in France.

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.
 
 
 Recent Accounting Pronouncements

In April 2014, the FASB issued a new pronouncement which amends to change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organizations results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. We do not anticipate material impacts to our financial position and result of operations upon adoption.

In May 2014, the FASB issued a new pronouncement which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
 
 
·
Step 1: Identify the contract(s) with a customer.
 
 
·
Step 2: Identify the performance obligations in the contract.
 
 
·
Step 3: Determine the transaction price.
 
 
·
Step 4: Allocate the transaction price to the performance obligations in the contract.
 
 
·
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

An entity should apply the amendments in this ASU using one of the following two methods:

1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
 
 
·
For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
 
 
·
For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
 
 
·
For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
 
2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
 
 
·
The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.
 
 
·
An explanation of the reasons for significant changes.
 
We do not anticipate material impacts to our financial position and result of operations upon adoption.

 
 
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, 2014.

 
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our 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, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2014, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit 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 our management, including the 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 our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the three months ended June 30, 2014, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

 PART II OTHER INFORMATION

 
As of June 30, 2014, the end of the period covered by this report, the Company was subject to various legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, the Company does not believe current legal proceedings and claims 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.
 

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, 2014. There have been no material changes to these risks and uncertainties during the three months ended June 30, 2014.


None.


None.


Not applicable.


Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934

Pursuant to Section 13(r) of the Securities Exchange Act of 1934, we, Synutra International, Inc., may be required to disclose in our annual and quarterly reports to the Securities and Exchange Commission (the “SEC”), whether we or any of our “affiliates” knowingly engaged in certain activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by US economic sanctions. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Because the SEC defines the term “affiliate” broadly, it includes any entity under common “control” with us (and the term “control” is also construed broadly by the SEC).

The description of the activities below has been provided to us by Warburg Pincus LLC (“WP”), affiliates of which: (i) are members of our board of directors and (ii) beneficially own more than 10% of the equity interests of, and have the right to designate members of the board of directors of Santander Asset Management Investment Holdings Limited (“SAMIH”). SAMIH may therefore be deemed to be under common “control” with us; however, this statement is not meant to be an admission that common control exists.

The disclosure below relates solely to activities conducted by SAMIH and its non-U.S. affiliates that may be deemed to be under common “control” with us. The disclosure does not relate to any activities conducted by us or by WP and does not involve our or WP’s management. Neither we nor WP has had any involvement in or control over the disclosed activities of SAMIH, and neither we nor WP has independently verified or participated in the preparation of the disclosure. Neither we nor WP is representing to the accuracy or completeness of the disclosure nor do we or WP undertake any obligation to correct or update it.
 
We understands that SAMIH’s affiliates intend to disclose in their next annual or quarterly SEC report that an Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the NPWMD designation, holds two investment accounts with Santander Asset Management UK Limited. The accounts have remained frozen throughout 2013 and the first half of 2014. The investment returns are being automatically reinvested, and no disbursements have been made to the customer.  In the first half of 2014, the total revenue for the Santander Group in connection with the investment accounts was £23,200 whilst net profits were negligible relative to the overall profits of Banco Santander, S.A.
 


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)
     
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets—June 30, 2014 and March 31, 2014, (ii) the Consolidated Statements of Operations—Three Months Ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Comprehensive Income(Loss)—Three Months Ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Equity—Three Months Ended June 30, 2014 and 2013, (v) the Consolidated Statements of Cash Flows—Three Months Ended June 30, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements.
  
 
 
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 8, 2014
 
By:
/s/ Liang Zhang
 
       
Name:
Liang Zhang
 
       
Title:
Chief Executive Officer and Chairman
 
 
     
By:
/s/ Ning Cai
 
       
Name:
Ning Cai
 
       
Title:
Chief Financial Officer