Synutra International (SYUT) 10-Q 2013 Q2 Quarterly report

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 September 30, 2012

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 Noo

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 Noo

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  Nox

As of November 9, 2012, there were 57,300,713 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

Page

PART I FINANCIAL INFORMATION

Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
PART II OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Mine Safety Disclosures	26
Item 5. Other Information	26
Item 6. Exhibits	26
Signatures	27

PART I FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SYNUTRA INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars and shares in thousands, except per share data)

(UNAUDITED)

	September 30, 2012			March 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents	$	74,521		$	64,793
Restricted cash		62,978			30,425
Accounts receivable, net of allowance of $6,902 and $7,845, respectively		47,075			38,753
Inventories		77,174			75,499
Due from related parties		7,453			12,262
Income tax receivable		35			227
Receivable from assets disposal		0			1,037
Prepaid expenses and other current assets		17,881			16,320
Deferred tax assets		7,653			17,827
Total current assets		294,770			257,143
Property, plant and equipment, net		129,749			134,902
Land use rights, net		10,007			10,198
Intangible assets, net		4,363			4,377
Restricted cash		11,229			21,019
Other assets		3,059			1,367
Deferred tax assets		3,425			18,907
TOTAL ASSETS	$	456,602		$	447,913
LIABILITIES AND EQUITY
Current Liabilities:
Short-term debt	$	155,755		$	86,614
Long-term debt due within one year		50,725			40,831
Accounts payable		45,473			70,927
Due to related parties		1,888			1,655
Advances from customers		6,263			5,991
Other current liabilities		40,504			40,560
Total current liabilities		300,608			246,578
Long-term debt		98,746			92,745
Deferred revenue		4,213			4,377
Capital lease obligations		7,680			4,726
Other long-term liabilities		6,166			2,395
Total liabilities		417,413			350,821
Commitments and contingencies
Equity:
Common stockholders’ equity:
Common stock, $.0001 par value: 250,000 authorized; 57,301 and 57,301 issued and outstanding at September 30, 2012 and March 31, 2012, respectively		6			6
Additional paid-in capital		135,440			135,440
Accumulated deficit		(125,505	)		(71,620	)
Accumulated other comprehensive income		28,726			32,201
Total common stockholders’ equity		38,667			96,027
Noncontrolling interest		522			1,065
Total equity		39,189			97,092
TOTAL LIABILITIES AND EQUITY	$	456,602		$	447,913

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

1

SYNUTRA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 (Dollars in thousands, except per share data)

(UNAUDITED)

	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
Net sales	$	66,100		$	99,053	$	119,686		$	142,810
Cost of sales		48,626			57,054		84,911			84,732
Gross profit		17,474			41,999		34,775			58,078
Selling and distribution expenses		14,298			12,328		27,415			24,789
Advertising and promotion expenses		10,186			8,042		16,990			15,050
General and administrative expenses		7,162			6,672		15,019			13,251
Other operating income, net		80			70		965			180
Income (loss) from operations		(14,092	)		15,027		(23,684	)		5,168
Interest expense		3,934			3,872		7,490			7,284
Interest income		590			612		1,077			923
Other income, net		2,111			107		2,093			572
Income (loss) before income tax expense		(15,325	)		11,874		(28,004	)		(621	)
Income tax expense		29,018			3,257		26,115			208
Net income (loss)		(44,343	)		8,617		(54,119	)		(829	)
Net income (loss) attributable to the noncontrolling interest		(157	)		92		(234	)		242
Net income (loss) attributable to common stockholders	$	(44,186	)	$	8,525	$	(53,885	)	$	(1,071	)
Weighted average common stock outstanding – basic and diluted		57,301			57,301		57,301			57,301
Earnings (loss) per share – basic and diluted	$	(0.77	)	$	0.15	$	(0.94	)	$	(0.02	)

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

2

SYNUTRA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 (Dollars in thousands)

(UNAUDITED)

	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
Net income (loss)	$	(44,343	)	$	8,617	$	(54,119	)	$	(829	)
Other comprehensive income
Currency translation adjustment		(289	)		1,784		(1,287	)		2,938
Comprehensive income (loss)		(44,632	)		10,401		(55,406	)		2,109
Less: Comprehensive income (loss) attributable to noncontrolling interest		(157	)		99		(236	)		254
Comprehensive income (loss) attributable to common stockholders	$	(44,475	)	$	10,302	$	(55,170	)	$	1,855

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

3

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, 2011		57,301	$	6	$	135,440	$	(88,357	)	$	28,204		$	633		$	75,926
Net income (loss)		0		0		0		(1,071	)		0			242			(829	)
Currency translation adjustments		0		0		0		0			2,926			12			2,938
Other		0		0		0		0			0			49			49
Balance, September 30, 2011		57,301	$	6	$	135,440	$	(89,428	)	$	31,130		$	936		$	78,084
Balance, March 31, 2012		57,301	$	6	$	135,440	$	(71,620	)	$	32,201		$	1,065		$	97,092
Net loss		0		0		0		(53,885	)		0			(234	)		(54,119	)
Currency translation adjustments		0		0		0		0			(1,285	)		(2	)		(1,287	)
Disposal of subsidiaries		0		0		0		0			(2,190	)		(381	)		(2,571	)
Other		0		0		0		0			0			74			74
Balance, September 30, 2012		57,301	$	6	$	135,440	$	(125,505	)	$	28,726		$	522		$	39,189

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

4

SYNUTRA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Dollars in thousands)

(UNAUDITED)

	Six Months Ended September 30,
	2012			2011
Operating activities:
Net loss	$	(54,119	)	$	(829	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,531			5,708
Bad debt expense		1,451			4,741
Deferred income tax		25,378			14
Foreign currency translation gain on disposal of subsidiaries		(2,190	)		0
Other		(341	)		122
Changes in assets and liabilities:
Accounts receivable		(9,407	)		1,624
Inventories		(2,331	)		(4,340	)
Due from related parties		4,621			5,421
Other assets		(3,232	)		(8,027	)
Accounts payable		(21,537	)		(882	)
Due to related parties		344			1,166
Advances from customers		330			(196	)
Income tax receivable		190			8
Other liabilities		6,784			4,295
Net cash provided by (used in) operating activities		(47,528	)		8,825
Investing activities:
Acquisition of property, plant and equipment		(6,830	)		(6,742	)
Change in restricted cash		(23,188	)		(24,038	)
Proceeds from assets disposal		1,808			0
Payment to minority shareholder		(386	)		0
Net cash used in investing activities		(28,596	)		(30,780	)
Financing activities:
Proceeds from short-term debt		174,287			126,967
Repayment of short-term debt		(104,472	)		(137,739	)
Proceeds from long-term debt		58,503			53,601
Repayment of long-term debt		(41,777	)		(34,499	)
Payment on capital lease obligations		(453	)		0
Net cash provided by financing activities		86,088			8,330
Effect of exchange rate changes on cash and cash equivalents		(236	)		1,537
Net change in cash and cash equivalents		9,728			(12,088	)
Cash and cash equivalents, beginning of period		64,793			48,741
Cash and cash equivalents, end of period	$	74,521		$	36,653
Supplemental cash flow information:
Interest paid		7,203			7,261
Income tax paid		535			81
Non-cash investing and financing activities:
Purchase of property, plant and equipment by accounts payable		(3,476	)		(699	)

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

5

SYNUTRA INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Synutra International, Inc. (the “Company” or “Synutra”) manufactures, distributes and sells 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 infant formula products, which are supplemented by other nutritional products, such as adult powdered milk formula and prepared baby food, 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, 2012.

The Company had a high asset liability ratio as of March 31, 2012. In addition, the Company suffered loss and cash outflows from operations for the six months ended September 30, 2012 and maintained a high asset liability ratio as of September 30, 2012. However, considering the following facts, the Company regards the going concern assumption as appropriate: 1) the Company has obtained new loans from banks; and 2) the first half’s net loss is mainly caused by allowance established on deferred tax assets, cyclicality, the short term effect of a substantial price increase beginning April 1, 2012 and management’s effort on rectifying sales channel. Accordingly, management believes the Company will be able to realize its assets and satisfy its liabilities in the normal course of business. As a result, the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.

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., its subsidiaries and Heilongjiang Shengyuan Huiren Clinical Examination Co., Ltd., 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 VIEs, the Company controls the operating activities and holds all the beneficial interests of the VIEs and has been determined to be the primary beneficiary of the VIEs. The Company has concluded that such contractual arrangements are legally enforceable. The operations associated with the consolidated VIEs are insignificant and hold deminimis assets and liabilities.

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.

6

3. INVENTORIES

The Company’s inventories at September 30, 2012 and March 31, 2012 are summarized as follows:

(In thousands)	September 30, 2012		March 31, 2012
Raw materials	$	54,248	$	51,844
Work-in-progress		13,565		6,073
Finished goods		9,361		17,582
Total	$	77,174	$	75,499

The value of goods-in-transit included in raw materials was $8.7 million and $21.4 million as of September 30, 2012 and March 31, 2012, respectively, which mainly represented the overseas purchase of milk powder and whey protein.

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

A. Classification of related party balances by name

a. Due from related parties

(In thousands)	September 30, 2012		March 31, 2012
Sheng Zhi Da Dairy Group Corporation	$	1,861	$	1,874
Beijing Honnete Dairy Co., Ltd.		936		3,181
St. Angel (Beijing) Business Service Co. Ltd.		3,786		5,987
Beijing Ao Naier Feed Stuff Co., Ltd.		870		1,220
Total	$	7,453	$	12,262

b. Due to related parties

(In thousands)	September 30, 2012		March 31, 2012
Sheng Zhi Da Dairy Group Corporation	$	1,245	$	1,156
Beijing Honnete Dairy Co., Ltd.		519		499
Beijing St. Angel Cultural Communication Co., Ltd.		121		0
Beijing Kelqin Dairy Co., Ltd.		3		0
Total	$	1,888	$	1,655

The Company had certain related party borrowings which were recorded in long-term debt. See Note 6. Except for the related party borrowings, the amount due to and due from related parties were unsecured and interest free.

7

B. Sales to related parties

In the three and six months ended September 30, 2012, the Company’s sales to related parties mainly included whey protein powder to Honnete, feed grade milk powder to Ao Naier, and powdered formula products to St. Angel (Beijing) Business Service. In the three and six months ended September 30, 2011, the Company’s sales to related parties included whey protein to Honnete, powdered formula products to St. Angel (Beijing) Business Service, and feed grade milk powder to Ao Naier.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
(In thousands)	2012		2011		2012		2011
Beijing Honnete Dairy Co., Ltd.	$	445	$	711	$	773	$	1,079
St. Angel (Beijing) Business Service Co., Ltd.		9		2,578		2,498		2,624
Qingdao Lvyin Waste Disposal Investment Management Co., Ltd.		1		0		1		0
Beijing Ao Naier Feed Stuff Co., Ltd.		56		91		56		131
Total	$	511	$	3,380	$	3,328	$	3,834

Before September 2011, St. Angel (Beijing) Business Service Co., Ltd. also acted as a sub-distributor of the Company's products. From September 2011, St. Angel (Beijing) Business Service Co., Ltd. began to make all the purchases directly from the Company. Sales of powdered formula products from independent distributors to St. Angel (Beijing) Business Service were $3.5 million for the fiscal quarter ended September 30, 2011, and $7.5 million for six months ended September 30, 2011, which were not included in the amounts disclosed above.

C. Purchases from related parties

In the fiscal quarter ended September 30, 2012, the Company purchased Lactose from Honnete, St. Angel Cultural Communication developed and implemented certain marketing strategies for the Company, and the Company purchased supplies for the employee canteen from Kelqin.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
(In thousands)	2012		2011		2012		2011
Beijing St. Angel Cultural Communication Co. Ltd.	$	169	$	0	$	339	$	0
Beijing Honnete Dairy Co., Ltd.		1,779		0		4,489		0
Beijing Kelqin Dairy Co., Ltd.		3		0		7		0
Total	$	1,951	$	0	$	4,835	$	0

8

5. PROPERTY, PLANT AND EQUIPMENT, NET

(In thousands)	September 30, 2012		March 31, 2012
Property, plant and equipment, cost:
Capital lease of building	$	5,573	$	4,321
Buildings and renovations		83,390		84,558
Plant and machinery		82,101		83,387
Office equipment and furnishings		7,846		7,986
Motor vehicles		2,938		2,951
Others		642		636
Total cost	$	182,490	$	183,839
Less: Accumulated depreciation:
Capital lease of building		532		530
Buildings and renovations		13,797		12,240
Plant and machinery		35,874		33,338
Office equipment and furnishings		3,318		2,792
Motor vehicles		2,031		1,909
Others		460		431
Total accumulated depreciation		56,012		51,240
Construction in progress		3,271		2,303
Property, plant and equipment, net	$	129,749	$	134,902

Construction in progress mainly represents headquarter renovation and manufacturing equipments.

The Company recorded depreciation expense for owned assets and capital leased assets of $3.4 million and $2.9 million for the fiscal quarters ended September 30, 2012 and 2011, respectively, and $6.8 million and $5.7 million for the six months ended September 30, 2012 and 2011, respectively.

9

6. DEBT

As of September 30, 2012 and March 31, 2012, the Company had short-term debt from PRC banks in the amount of $155.8 million and $86.6 million, respectively.  The maturity dates of the short-term debt outstanding range from October 2012 to August 2013. The weighted average interest rate on short-term debt outstanding at September 30, 2012 and March 31, 2012 was 5.0% and 5.7%, 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. The short-term debt at September 30, 2012 and March 31, 2012 were secured by the pledge of certain fixed assets totaling $13.4 million and $5.6 million, respectively; the pledge of the Company’s land use right of $1.4 million and $0.5 million, respectively; and the pledge of restricted cash deposits of $41.9 million and $15.8 million, respectively.

As of September 30, 2012 and March 31, 2012, the Company had long-term debt, including current portion, from banks in the amount of $146.6 million and $130.7 million, respectively. The maturity dates of the long-term debt outstanding range from November 2012 to June 2015. The weighted average interest rate of outstanding long-term debt at September 30, 2012 and March 31, 2012 was 5.9% and 6.6%, 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. The indebtedness at September 30, 2012 and March 31, 2012 was secured by the pledge of certain fixed assets with net book value of $16.2 million and $17.4 million, respectively; the pledge of land use right of $1.2 million and $1.2 million, respectively; and the pledge of restricted cash deposits of $32.1 million and $21.0 million, respectively.

As of September 30, 2012 and March 31, 2012, the Company had long-term loan from a related party of $2.9 million. The maturity date of the long-term related party loan principal and interest is in November 2013, and the loan is extendable on the same terms upon maturity as agreed by both parties. The interest rate of the long-term loan at September 30, 2012 and March 31, 2012 was 10.0%. The interest expense of related party loans for the quarters ended September 30, 2012 and 2011 was $72,000 and $97,000, respectively, and for six months ended September 30, 2012 and 2011 was $143,000 and $193,000, respectively.

Maturities on long-term debt are as follows:

(In thousands)	Year Ending March 31,
2013	$	5,362
2014		92,696
2015		38,009
2016		13,404
	$	149,471

7. OTHER CURRENT LIABILITIES

(In thousands)	September 30, 2012		March 31, 2012
Accrued rebate and slotting fee	$	10,158	$	3,242
Accrued product replacement cost		2,367		3,556
Payroll and bonus payables		6,255		7,978
Accrued selling expenses		3,621		3,750
Accrued advertising and promotion expenses		10,697		10,708
Other tax payable		0		2,358
Accrued rental fee		3,286		4,819
Others		4,120		4,149
Total	$	40,504	$	40,560

10

8. 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.

For the six months ended September 30, 2012, additional valuation allowance of approximately $25.4 million was provided on the deferred tax assets arising from the net operating loss carryforward of the Company's PRC subsidiaries. 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.

9. 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					Six Months Ended
	September 30,					September 30,
(In thousands except for per share data)	2012			2011		2012			2011
Net income (loss) attributable to common stockholders	$	(44,186	)	$	8,525	$	(53,885	)	$	(1,071	)
Weighted average common stock outstanding – basic and diluted		57,301			57,301		57,301			57,301
Earnings (loss) per share - basic and diluted	$	(0.77	)	$	0.15	$	(0.94	)	$	(0.02	)

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 all periods presented as they would be anti-dilutive.

10. 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.

11

11. SEGMENT REPORTING

The Company focuses on selling infant formula products, which are supplemented by 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						Six Months Ended
	September 30,						September 30,
(In thousands)	2012			2011			2012			2011
NET SALES TO EXTERNAL CUSTOMERS
Powdered formula	$	50,090		$	79,109		$	100,545		$	119,272
Baby food		45			108			110			173
Nutritional ingredients and supplements		1,350			160			3,476			613
All other		14,615			19,676			15,555			22,752
Net sales	$	66,100		$	99,053		$	119,686		$	142,810
INTERSEGMENT SALES
Powdered formula	$	12		$	0		$	12		$	0
Baby food		45			61			281			180
Nutritional ingredients and supplements		1,858			2,761			4,099			4,940
All other		0			623			51			1,139
Intersegment sales	$	1,915		$	3,445		$	4,443		$	6,259
GROSS PROFIT
Powdered formula	$	21,345		$	38,845		$	39,778		$	55,781
Baby food		(522	)		(436	)		(875	)		(692	)
Nutritional ingredients and supplements		(654	)		(624	)		(1,694	)		(756	)
All other		(2,695	)		4,214			(2,434	)		3,745
Gross profit	$	17,474		$	41,999		$	34,775		$	58,078
Selling and distribution expenses		14,298			12,328			27,415			24,789
Advertising and promotion expenses		10,186			8,042			16,990			15,050
General and administrative expenses		7,162			6,672			15,019			13,251
Other operating income, net		80			70			965			180
Income (loss) from operations		(14,092	)		15,027			(23,684	)		5,168
Interest expense		3,934			3,872			7,490			7,284
Interest income		590			612			1,077			923
Other income net		2,111			107			2,093			572
Income (loss) before income tax expense	$	(15,325	)	$	11,874		$	(28,004	)	$	(621	)

(In thousands)	September 30, 2012			March 31, 2012
TOTAL ASSETS
Powdered formula	$	519,749		$	436,284
Baby food		24,277			24,928
Nutritional ingredients and supplements		83,378			33,292
All other		133,290			170,386
Intersegment elimination		(304,092	)		(216,977	)
Total	$	456,602		$	447,913

12

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.

13

Overview of Our Business

We are a leading infant formula company in China. We principally manufacture, distribute and sell dairy based nutritional products under the “Shengyuan” or “Synutra” brand, together with sub brands in mainland China. We focus on selling infant formula products, which are supplemented by other nutritional products, such as adult powdered milk formula and prepared baby food, and certain nutritional ingredients and supplements. We sell our products through an extensive nationwide sales and distribution network covering all provinces and provincial-level municipalities in mainland China. As of September 30, 2012, this network comprised over 680 independent distributors and over 730 independent sub-distributors who sell our products in over 63,000 retail outlets.

We currently have three 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 Helanruniu;

● Baby food segment: Baby food segment covers the sale of prepared baby food for babies and children. It includes the brand of Huiliduo;

● 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 surplus milk powder and whey protein to industrial customers.

Executive Summary

We initiated a “gold miner” marketing strategy (“the Strategy“) in September 2012 to strengthen our management of sales channel, aiming at more effective use of the marketing and promotional expenditures and improving net profit. In the past, we provided discounts to distributors to offset part of the marketing and promotional expenditures incurred at retail outlets. As part of the Strategy, we are now centrally monitoring the spending in each retail outlet to ensure more efficient allocation of marketing and promotional expenditures. We will terminate our relationship with those retail outlets with low sales volume and low yield rate on the slotting fees, and focus our resources on those retail outlets with high sales volume and high yield rate on the slotting fees. In order to strengthen our management of sales channel, we are also setting up an inventory tracking system to track our products from factory all the way to the retail outlets to prevent distributors from selling out of their permitted area. We aim to complete the implementation of the Strategy by December 2012 or January 2013, and we estimate, by then, we will keep less than half of the existing retail outlets.

We started to communicate the Strategy to our distributors in August 2012. While most distributors welcome the Strategy as it strengthens our control on sales channel and promotes more orderly competition among distributors, some of them have reduced their recent order amount as the Strategy may have negative short term impact on their performance. The reduced order from distributors as we implement the Strategy, together with the significant purchases by distributors prior to our price increase effective on April 1, 2012 resulted in the lower sales volume of the fiscal quarter ended September 30, 2012 compared to the prior year period. We estimate the Strategy will continue to negatively impact our short term performance, as gross sales may decrease and we may incur expenses in terminating relationship with certain retail outlets, but we believe the successful implementation of the Strategy is vital to the health of our sales channel system and hence our long term performance.

14

Three Months Results of Operations

Below is a summary of selected comparative results of operations for the quarters ended September 30, 2012 and 2011:

	Three Months Ended September 30,
(In thousands, except per share data)	2012			2011		% Change
Net sales	$	66,100		$	99,053		-33%
- Powdered formula segment		50,090			79,109		-37%
Cost of sales		48,626			57,054		-15%
- Powdered formula segment		28,745			40,264		-29%
Gross profit		17,474			41,999		-58%
- Powdered formula segment		21,345			38,845		-45%
Gross Margin		26%			42%
- Powdered formula segment		43%			49%
Income (loss) from operations		(14,092	)		15,027		-194%
Interest expense, net		3,344			3,260		3%
Income (loss) before income tax expense (benefit)		(15,325	)		11,874		-229%
Income tax expense		29,018			3,257		791%
Net income (loss)		(44,343	)		8,617		-615%
Net income (loss) attributable to common stockholders	$	(44,186	)	$	8,525		-618%
Weighted average common stock outstanding – basic and diluted		57,301			57,301
Income (loss) per share – basic and diluted	$	(0.77	)	$	0.15		-618%

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 September 30, 2012, which was RMB 6.3410 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 November 2, 2012, the mid rate was RMB 6.3045 to $1.00.

15

Net Sales

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

	Three Months Ended September 30,						% Change in
(In thousands, except percentage data)	2012		2011		% Change		Volume		Price
Powdered formula	$	50,090	$	79,109		-37%		-36%		-1%
Baby food		45		108		-58%
Nutritional ingredients and supplements		1,350		160		744%
All other		14,615		19,676		-26%
Net sales	$	66,100	$	99,053		-33%

Net sales of our powdered formula segment include powdered formula products for infants, children and adults. The decrease of net sales of our powdered formula products was mainly due to the following factors:

● Sales volume of powdered formula products for the fiscal quarter ended September 30, 2012 was 4,605 tons, as compared to 7,228 tons for the same period in the previous year, due primarily to the significant purchase by distributors prior to our price increase effective on April 1, 2012, and the reduced order from distributors as we implement the Strategy as discussed above.

● The average selling price of our powdered formula products for the fiscal quarter ended September 30, 2012 was $10,877 per ton, compared to $10,945 per ton for the same period in the previous year. Average selling price is calculated as net sales of powdered formula segment, after deducting sales discounts, divided by sales volume. The constant average selling price was the result of the price increase we instituted on April 1, 2012, reduced by increased discount per ton. We provided sales discounts to offset part of the marketing and promotional expenditures incurred at retail outlets. The discount does not fluctuate directly with current period sales because it is based on a prorated annual estimate.

The sales volume and average selling price exclude the amount of free products provided to customers, which is recorded as a cost of sales in the period. The prior year period sales volume and average selling price had been adjusted for consistency.

The product mix in baby food segment is comprised mainly of prepared baby food, such as cooked meat and vegetables. We currently focus our efforts on the powdered formula segment, and did not develop the baby food segment as planned.

The product mix in nutritional ingredients and supplements segment is comprised of external sales of chondroitin sulfate to third parties, and inter-segment sales of microencapsulated DHA and ARA to the powdered formula segment. While the international market price of chondroitin sulfate is at a historically low level compared to our cost and we incurred gross loss on our chondroitin sulfate sales, we have experienced a significant increase in sales to certain international pharmaceutical companies in the fiscal quarter ended September 30, 2012.

Our Other business mainly includes sales of surplus milk powder, whey protein and feed grade milk powder. The decrease is mainly due to the decrease in sales of imported milk powder to industrial customers to $12.1 million in the fiscal quarter ended September 30, 2012, from $16.0 million in the same period in the prior year, and the decrease in sales of raw milk to nil in the fiscal quarter ended September 30, 2012, from $1.4 million in the same period in the prior year.

16

Cost of Sales

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

	Three Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Powdered formula	$	28,745	$	40,264		-29%
Baby food		567		544		4%
Nutritional ingredients and supplements		2,004		784		156%
All other		17,310		15,462		12%
Cost of sales	$	48,626	$	57,054		-15%

The decrease in the cost of sales of the powdered formula segment was mainly due to the decrease in sales volume, partially offset by the increased cost of whey protein powder. 

The increase in the cost of sales of nutritional ingredients and supplements segment was mainly due to the sales of chondroitin sulfate to certain international pharmaceutical companies as discussed above.

The increase in cost of Other business was mainly due to the increase in the cost of whey protein powder to $1.8 million for the fiscal quarter ended September 30, 2012 from $0.3 million for the prior year period, partially offset by the decrease in the cost of imported milk powder to $14.4 million in the fiscal quarter ended September 30, 2012 from $14.9 million in the fiscal quarter ended September 30, 2011.

Gross Profit and Gross Margin

	Three Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Gross profit	$	17,474	$	41,999		-58%
- Powdered formula		21,345		38,845		-45%
Gross Margin		26%		42%
- Powdered formula		43%		49%

The decrease in gross margin of powdered formula segment was mainly due to increased cost of whey protein powder in the fiscal quarter ended September 30, 2012.

The gross loss and negative gross margin of Other business was mainly due to that we sold surplus imported milk powder at current low market price, while we purchased at a higher price.

Expenses

	Three Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Selling and distribution expenses	$	14,298	$	12,328		16%
Advertising and promotion expenses		10,186		8,042		27%
- Advertising expenses		3,877		3,174		22%
- Promotion expenses		6,309		4,868		30%
General and administrative expenses		7,162		6,672		7%
Other operating income, net		80		70		14%

17

Selling and distribution expenses primarily include compensation expense for sales staff, freight charges, travel expense and service charge for our customer loyalty program. The increase in selling and distribution expenses in the fiscal quarter ended September 30, 2012 from the same period in the previous year was mainly due to the increase in a service charge for our consumer loyalty program administered by a third party since the fourth quarter of fiscal year 2012.

Advertising expenses primarily include media expenses paid to national and local TV stations. The increase in advertising expenses in the fiscal quarter ended September 30, 2012 was due to our decision to pull back our advertising efforts in the same period in the previous year. Promotion expenses primarily include promotional products to end customers. The increase in promotion expenses in the fiscal quarter ended September 30, 2012 was mainly due to more consumer loyalty program expenses for end customers.

General and administrative expenses primarily include salaries for staff and management, headquarter rental expense, and bad debt expense. The increase in general and administrative expenses in the fiscal quarter ended September 30, 2012 from the same period in the previous year was mainly due to the increased depreciation expense related to the new headquarter renovation.

Other operating income represented the receipt of general purpose subsidies from local governments.

Interest Expense and Interest Income

Interest expense remained constant in the fiscal quarter ended September 30, 2012 compared to the same period in the previous year, as a result of increased loan balance, and decreased average interest rate as we used more trade financing with lower interest rates.

Interest income remained constant in the fiscal quarter ended September 30, 2012 compared to the same period in the previous year.

Other Income, Net

Other income for the fiscal quarter ended September 30, 2012 mainly include foreign currency translation gains of $2.2 million reclassified from accumulated comprehensive income as a result of substantial completion of the disposal of Heilongjiang Baoquanling Shengyuan Dairy Co., Ltd. and Heilongjiang Baoquanling Shengyuan Dairy Cow Breeding Co., Ltd.

Income Tax Expense

The increase in income tax expense was primarily due to $25.4 million charge from the increase in the valuation allowance for deferred tax assets attributable to net operating loss carryforwards of certain PRC subsidiaries and derecogntion of $3.6 million income tax benefit for the loss incurred for the three months ended June 30, 2012.

Net Income (Loss) Attributable to Noncontrolling Interest

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

Net Income (Loss) Attributable to Common Stockholders

As a result of the foregoing, net loss attributable to common stockholders for the fiscal quarter ended September 30, 2012 was $44.2 million, compared to a net income of $8.5 million for the same period in the previous year.

18

Six Months Results of Operations

Below is a summary of selected comparative results of operations for the six months ended September 30, 2012 and 2011:

	Six Months Ended September 30,
(In thousands, except per share data)	2012			2011			% Change
Net sales	$	119,686		$	142,810			-16%
- Powdered formula segment		100,545			119,272			-16%
Cost of sales		84,911			84,732			0%
- Powdered formula segment		60,767			63,491			-4%
Gross profit		34,775			58,078			-40%
- Powdered formula segment		39,778			55,781			-29%
Gross Margin		29%			41%
- Powdered formula segment		40%			47%
Income (loss) from operations		(23,684	)		5,168			-558%
Interest expense, net		6,413			6,361			1%
Loss before income tax expense		(28,004	)		(621	)		*
Income tax expense		26,115			208			*
- Effective tax rate		-93.3%			-33.5%
Net loss		(54,119	)		(829	)		*
Net loss attributable to common stockholders	$	(53,885	)	$	(1,071	)		*
Weighted average common stock outstanding – basic and diluted		57,301			57,301
Loss per share – basic and diluted	$	(0.94	)	$	(0.02	)		*

*  not meaningful 

19

Net Sales

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

	Six Months Ended September 30,						% Change in
(In thousands, except percentage data)	2012		2011		% Change		Volume		Price
Powdered formula	$	100,545	$	119,272		-16%		-19%		4%
Baby food		110		173		-36%
Nutritional ingredients and supplements		3,476		613		467%
All other		15,555		22,752		-32%
Net sales	$	119,686	$	142,810		-16%

Net sales of our powdered formula segment include powdered formula products for infants, children and adults. The decrease of net sales of our powdered formula products was mainly due to the following factors:

● Sales volume of powdered formula products for the six months ended September 30, 2012 was 8,985 tons, as compared to 11,137 tons for the same period in the previous year, due primarily to the significant purchase by distributors prior to our price increase effective on April 1, 2012, and the reduced order from distributors as we implement the Strategy as discussed above.

● The average selling price of our powdered formula products for the six months ended September 30, 2012 was $11,190 per ton, compared to $10,710 per ton for the same period in the previous year. Average selling price is calculated as net sales of powdered formula segment, after deducting sales discounts, divided by sales volume. The increase in average selling price was mainly due to the price increase we instituted on April 1, 2012, partially offset by increased discount per ton. We provided sales discounts to offset part of the marketing and promotional expenditures incurred at retail outlets. The discount does not fluctuate directly with current period sales because it is based on a prorated annual estimate.

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 prior year period sales volume and average selling price had been adjusted for consistency.

The product mix in baby food segment is comprised mainly of prepared baby food, such as cooked meat and vegetables. We currently focus our efforts on the powdered formula segment, and did not develop the baby food segment as planned.

The product mix in nutritional ingredients and supplements segment is comprised of external sales of chondroitin sulfate to third parties, and inter-segment sales of microencapsulated DHA and ARA to the powdered formula segment. While the international market price of chondroitin sulfate is at a historically low level compared to our cost and we incurred gross loss on our chondroitin sulfate sales, we have experienced a significant increase in sales to certain international pharmaceutical companies in the six months ended September 30, 2012.

Our Other business mainly includes sales of surplus milk powder, whey protein and feed grade milk powder. The decrease in sales of Other business was mainly due to decrease in imported milk powder sales from $16.0 million for six months ended September 30, 2011 to $12.2 million for the six months ended September 30, 2012, and decreased raw milk sales from $2.9 million for six months ended September 30, 2011 to nil for the six months ended September 30, 2012.

20

Cost of Sales

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

	Six Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Powdered formula	$	60,767	$	63,491		-4%
Baby food		985		865		14%
Nutritional ingredients and supplements		5,170		1,369		278%
All other		17,989		19,007		-5%
Cost of sales	$	84,911	$	84,732		0%

The decrease in the cost of sales of the powdered formula segment was mainly due to the decrease in sales volume, partially offset by the increased cost of whey protein powder. 

The increase in the cost of sales of nutritional ingredients and supplements segment was mainly due to the sales of chondroitin sulfate to certain international pharmaceutical companies as discussed above.

Our Other business mainly includes sales of surplus milk powder, whey protein and feed grade milk powder. The decrease in cost of Other business was mainly due to decreased imported milk powder cost of $14.5 million for the six months ended September 30, 2012, compared to $15.1 million for the six months ended September 30, 2011, and decreased raw milk cost of zero for the six months ended September 30, 2012, compared to $2.8 million for the six months ended September 30, 2011, partially offset by the increase in whey protein powder cost and feed grade milk powder cost.

Gross Profit and Gross Margin

	Six Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Gross profit	$	34,775	$	58,078		-40%
- Powdered formula		39,778		55,781		-29%
Gross Margin		29%		41%
- Powdered formula		40%		47%

The decrease in gross margin of powdered formula segment was mainly due to increased cost of whey protein powder for the six months ended September 30, 2012.

The gross loss and negative gross margin of Other business was mainly due to that we sold surplus imported milk powder at current low market price, while we purchased at a higher price.

Expenses

	Six Months Ended September 30,
(In thousands, except percentage data)	2012		2011		% Change
Selling and distribution expenses	$	27,415	$	24,789		11%
Advertising and promotion expenses		16,990		15,050		13%
- Advertising expenses		6,748		5,461		24%
- Promotion expenses		10,242		9,589		7%
General and administrative expenses		15,019		13,251		13%
Other operating income, net		965		180		436%

21

Selling and distribution expenses primarily include compensation expense for sales staff, freight charges, travel expense and service charge for our customer loyalty program. The increase in selling and distribution expenses in the six months ended September 30, 2012 from the same period in the previous year was mainly due to the increase in a service charge for our consumer loyalty program administered by a third party since the fourth quarter of fiscal year 2012.

Advertising expenses primarily include media expenses paid to national and local TV stations. The increase in advertising expenses in the six months ended September 30, 2012 was due to our decision to pull back our advertising efforts in the same period in the previous year. Promotion expenses primarily include promotional products to end customers. The increase in promotion expenses in the six months ended September 30, 2012 was mainly due to more customer loyalty program expenses for end customers.

General and administrative expenses primarily include salaries for staff and management, headquarter rental expense, and bad debt expense. The increase in general and administrative expenses in the six months ended September 30, 2012 from the same period in the previous year was mainly due to the increased office supplies expense as we moved into our new headquarters, and the increased depreciation expense related to the new headquarter renovation.

Other operating income represented the receipt of general purpose subsidies from local governments.

Interest Expense and Interest Income

The increase in interest expense in the six months ended September 30, 2012 from the same period in the previous year was mainly due to an increase in average borrowing balance, partially offset by decreased average interest rate as we used more trade financing with lower interest rates.

The increase in interest income in the six months ended September 30, 2012 from the same period in the previous year was mainly due to an increase in average restricted cash balance, which earned a higher interest rate than cash and cash equivalents.

Other income, net

Other income for the six months ended September 30, 2012 mainly include foreign currency translation gains of $2.2 million reclassified from accumulated comprehensive income as a result of substantial completion of the disposal of Heilongjiang Baoquanling Shengyuan Dairy Co., Ltd. and Heilongjiang Baoquanling Shengyuan Dairy Cow Breeding Co., Ltd.

Income Tax Expense

The increase in income tax expense was primarily due to $25.4 million charge from the increase in the valuation allowance for deferred tax assets attributable to net operating loss carryforwards of certain PRC subsidiaries and loss incurred for the six months ended September 30, 2012.

Net Income (Loss) Attributable to Noncontrolling Interest

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

Net Loss Attributable to Common Stockholders

As a result of the foregoing, net loss attributable to common stockholders for the six months ended September 30, 2012 was $53.9 million, compared to a net loss of $1.1 million for the same period in the previous year.

22

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. Cash flows from financing activities primarily represent proceeds and repayments of borrowings.

Cash and cash equivalents totaled $74.5 million at September 30, 2012, of which $73.8 million was held outside of the United States.

The accompanying 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. Management believes the Company has the ability to meet its financial obligations as they come due, for at least the next twelve months and will continue as a going concern.

On September 17, 2012, the Company entered into a partnership 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 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 will build a new drying facility in Carhaix, France, intended to manufacture powdered milk and fat-enriched demineralized whey. Pursuant to the partnership agreement, the operational commissioning of the Site will take place no later than January 2, 2015. In the event of a delay beyond January 2, 2015 and save for limited exceptions, the Company undertakes to compensate, according to the circumstance, Sodiaal or Euroserum for the loss incurred as a result of such delay. The loss incurred by Sodiaal or Euroserum in case of a delay of the operational commissioning of the new drying facility beyond January 2, 2015 shall amount to the loss of profits actually suffered, as the case may be, by Sodiaal or Euroserum under the milk supply agreement or the whey supply agreement. The estimated cost to build is € 90 million (approximately $117 million). The Company is still negotiating with the banks and plans to finance a major part of the amount with long-term borrowings from the banks, and the remaining amount with its own funds. 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, to satisfy the production needs of the new drying facility. If the Company purchased less than the agreed amount, the Company should compensate Sodiaal or Euroserum for the loss suffered. The Company shall obtain approvals of the Chinese government within six months of the execution of the partnership agreement, failing which, the agreement shall be deemed terminated without penalty. As of November 9, 2012, the Company is in the process of obtaining approvals from the Chinese government.

Cash Flows

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

	Six Months Ended September 30,
(In thousands)	2012			2011
Cash flow provided by/(used in):
Operating activities
Net loss	$	(54,119	)	$	(829	)
Depreciation and amortization		6,531			5,708
Bad debt expense		1,451			4,741
Deferred income tax		25,378			14
Foreign currency translation gain on disposal of subsidiaries		(2,190	)		0
Other		(341	)		122
Changes in assets and liabilities		(24,238	)		(931	)
Total operating activities		(47,528	)		8,825
Investing activities		(28,596	)		(30,780	)
Financing activities		86,088			8,330
Effect of foreign currency translation on cash and cash equivalents		(236	)		1,537
Net increase/(decrease) in cash and cash equivalents	$	9,728		$	(12,088	)

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Cash flow used in operating activities in the period is a result of the net loss incurred, non-cash expense and income, and changes in working capital. The changes in working capital for the six months ended September 30, 2012 were primarily related to $21.5 million decrease in accounts payable, $9.4 million increase in accounts receivable, and $6.8 million increase in other liabilities. In the six months ended September 30, 2012, we spent $142.0 million to purchase raw materials and other production materials, $26.0 million in staff compensation and social welfare, $13.2 million in income and other taxes, $34.7 million in operating expenses, $7.2 million in interest, and received $175.6 million from our customers.

Cash flow used in investing activities represents $6.8 million payment for our new headquarter renovation and purchase of equipment, $23.2 million outflow for restricted cash required as a pledge for new loans and as a collateral for new letters of credit, $1.8 million in proceeds from disposed assets, and $0.4 million payment to minority interest shareholders during the six months ended September 30, 2012.

Cash flow used in financing activities mainly represents net cash inflow of $69.8 million of short-term loans and net cash inflow of $16.7 million of long-term loans, and $0.5 million payment for capital leased assets.

Outstanding Indebtedness

For information on our short-term and long-term borrowings, see “Item 1. Financial Statements—Note 6”.

Capital Expenditures

Our capital expenditures were $3.0 million and the corresponding cash outflow was $6.8 million for the six months ended September 30, 2012, which mainly represented expenditure for our new headquarter renovation and purchase of equipment.

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.

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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, 2012.

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 Interim 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 September 30,2012.

Based on such evaluation, the Company’s Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of September 30, 2012, the Company’s disclosure controls and procedures were not 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 Interim Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Chief Executive Officer and Interim Chief Financial Officer’s conclusion regarding the Company’s disclosure controls and procedures is based solely on management’s conclusion that the Company’s internal control over financial reporting was not effective, as described below.

As of September 30, 2012, we had the following material weakness:

● The Company lacks a Chief Financial Officer with requisite skills to perform a sufficient review of the US GAAP consolidated financial statements and related footnote disclosures. As a result, the Company was unable to effectively operate period-end financial reporting and disclosure controls related to unusual and complex transactions.

Changes and Proposed Changes in Internal Control over Financial Reporting

The Company is in the process of developing and implementing remediation plans to address the material weakness in our internal control over financial reporting. We intend to implement measures during the year ending March 31, 2013 to address the material weakness. This includes our continued effort to search for a qualified candidate to replace the Chief Financial Officer who resigned on August 29, 2011, and implement alternative controls on period-end financial reporting and disclosure process related to unusual and complex transactions.

Other than as described above, there have not been any other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2012, 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. As described above, we plan to implement changes to our internal controls over financial reporting for the year ending March 31, 2013.

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 PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

 As of September 30, 2012, 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 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.

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, 2012. There have been no material changes to these risks and uncertainties during the quarter ended September 30, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit Number	Description
10.1	Partnership framework agreement among Sodiaal Union, Shengyuan Nutritional Food Co., Ltd. and Synutra France International SAS, dated September 17, 2012
10.2	Milk supply agreement among Sodiaal Union, Shengyuan Nutritional Food Co., Ltd. and Synutra France International SAS, dated September 17, 2012
10.3	Whey supply agreement among Euroserum SAS, Sodiaal Union, Shengyuan Nutritional Food Co., Ltd. and Synutra France International SAS, dated September 17, 2012
10.4	Fat-enriched or non fat-enriched demineralized whey powder supply agreement among Euroserum SAS, Shengyuan Nutritional Food Co., Ltd. and Synutra France International SAS, dated September 17, 2012
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—September 30, 2012 and March 31, 2012, (ii) the Consolidated Statements of Operations—Three and Six Months Ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income(Loss)—Three and Six Months Ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Equity—Six Months Ended September 30, 2012 and 2011, (v) the Consolidated Statements of Cash Flows—Six Months Ended September 30, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements.*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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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:  November 9, 2012	By:	/s/ Liang Zhang
		Name:	Liang Zhang
		Title:	Chief Executive Officer and Chairman
	By:	/s/ Weiguo Zhang
		Name:	Weiguo Zhang
		Title:	Interim Chief Financial Officer and President

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