-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J1awGHQU9sCJdzxMFJ01GSl2QIwze49e5UO9j4x0DypJBAeWno6keHilknLRUwjP QLjGV/2v+SPs2A7yUHAo+g== 0001144204-07-053091.txt : 20071005 0001144204-07-053091.hdr.sgml : 20071005 20071005151239 ACCESSION NUMBER: 0001144204-07-053091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20071005 DATE AS OF CHANGE: 20071005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Synutra International, Inc. CENTRAL INDEX KEY: 0001293593 STANDARD INDUSTRIAL CLASSIFICATION: DAIRY PRODUCTS [2020] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33397 FILM NUMBER: 071159098 BUSINESS ADDRESS: STREET 1: 15200 SHADY GROVE ROAD #350 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3018403888 MAIL ADDRESS: STREET 1: 15200 SHADY GROVE ROAD #350 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: Vorsatech Ventures, Inc. DATE OF NAME CHANGE: 20040614 10-Q 1 v089581_10q.htm Unassociated Document
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, 2007
 
or
 
¨
Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
 
For the Transition Period From                      to                       
 
Commission File number: 000-50601
     
SYNUTRA INTERNATIONAL, INC.
 
DELAWARE
 
13-4306188
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
2275 Research Blvd., Suite 500
Rockville, Maryland 20850
 
(301) 840-3888
   
Check 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(pending legal opinion), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x      No ¨  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨     Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes ¨      No x  

As of September 28, 2007, there were 54,000,713 shares of Common Stock, par value $0.0001 per share, issued and outstanding
 

 
EXPLANATORY NOTE

On August 15, 2007, Synutra International, Inc. (“Synutra” or the “Company”) filed a timely Notification of Late Filing on Form 12b-25 with the U.S. Securities and Exchange Commission (the “SEC”) to report that it would be unable to file its Quarterly Report on Form 10-Q as and for the fiscal quarter ended June 30, 2007 by the prescribed due date of August 14, 2007. Further, the Company was unable to file its Form 10-Q within the five-day extension period provided in Rule 12b-25 under the Exchange Act of 1934, as amended (the “Exchange Act”). On August 17, 2007, the Company filed a current report on Form 8-K stating that management had concluded that Synutra’s financial statements as of and for the fiscal year ended March 31, 2007 and for each fiscal quarter ended June 30, 2006, September 30, 2006 and December 31, 2006 should not be relied upon. On August 20, 2007, the Company received a staff determination letter from The Nasdaq Stock Market stating that the Company’s common stock is subject to delisting from The Nasdaq Global Market for the Company’s failure to file its Form 10-Q. Finally, on October 2, 2007, the Company filed a current report on Form 8-K announcing that Lawrence Lee, a member of Synutra’s Board of Directors, resigned from his position on the Board to become Synutra’s Chief Financial Officer.

The Company’s failure to file timely its Form 10-Q was due to management’s assessment of accounting errors and irregularities identified during the preparation of the Form 10-Q. On October 5, 2007, as a result of such assessment, the Company filed an amended Annual Report on Form 10-K with restated financial statements as of and for the year ended March 31, 2007 (the “Form 10-K/A”). The Company will file amended Quarterly Reports on Form 10-Q with restated financial statements as of and for each fiscal quarter ended September 30, 2006 and December 31, 2006, as soon as practicable. The assessment and nature of the errors and irregularities identified during the preparation of the Form 10-Q are discussed in detail in the Form 10-K/A.

Further, the Company’s dismissal of its independent registered public accounting firm, Rotenberg & Co. LLP, engagement of Deloitte Touche Tohmatsu CPA Ltd. as its new independent auditors effective July 27, 2007 and assessment of the accounting errors and irregularities identified during the preparation of this Form 10-Q are described in the Company’s previously-filed Exchange Act documents as follows:

·  
the Current Report on Form 8-K filed on July 27, 2007;
·  
the Current Report on Form 8-K/A filed on August 9, 2007;
·  
the Company’s Notification of Late Filing on Form 12b-25 filed on August 15, 2007;
·  
the Current Report on Form 8-K filed on August 17, 2007;
·  
the Current Report on Form 8-K filed on August 24, 2007; and
·  
the Current Report on Form 8-K filed on October 2, 2007.

In addition, aspects of the restatement are described in Note 3 to the Notes to Condensed Consolidated Financial Statements to this Form 10-Q.

2

 
SYNUTRA INTERNATIONAL, INC.
 
FORM 10-Q
For the Quarter Ended June 30, 2007
 
 
PART I. FINANCIAL INFORMATION
     
 
     
Item 1. Financial Statements (unaudited):
     
Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2007 and 2006
   
4
 
Condensed Consolidated Balance Sheets as of June 30, 2007 and March 31, 2007
   
5
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2007 and 2006
   
7
 
Notes to the Condensed Consolidated Financial Statements
   
8
 
 
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
20
 
 
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
30
 
 
     
Item 4T. Controls and Procedures
   
31
 
 
     
PART II. OTHER INFORMATION
     
 
     
Item 1. Legal Proceedings
   
33
 
 
     
Item 1A. Risk Factors
   
33
 
 
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
48
 
 
     
Item 3. Defaults Upon Senior Securities
   
46
 
 
     
Item 4. Submission of Matters to a Vote of Security Holders
   
46
 
 
     
Item 5. Other Information
   
46
 
 
     
Item 6. Exhibits
   
47
 
 
     
Signatures
   
48
 

3


FINANCIAL INFORMATION
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earning per share data)
(unaudited)

   
 Three Months Ended June 30
 
   
2007
 
2006
 
     
(As restated,
see note 3)
 
Net sales
 
$
67,492
 
$
49,107
 
Cost of sales
   
30,430
   
27,647
 
Gross profit
   
37,062
   
21,460
 
               
Selling & distribution expenses
   
7,574
   
5,042
 
Advertising and promotion expenses
   
18,448
   
6,474
 
               
General & administrative expenses
   
2,880
   
1,032
 
Total operating expense
   
28,902
   
12,548
 
Income from operations
   
8,160
   
8,912
 
               
Interest expense
   
2,174
   
345
 
Interest income
   
(352
)
 
(61
)
Other expenses/(income)
   
265
   
(138
)
Income before provision for income tax
   
6,073
   
8,766
 
               
Provision for income tax
   
729
   
795
 
Net income before minority interests
   
5,344
   
7,971
 
               
Minority interests
   
4
     
Net income attributable to shareholders
 
$
5,340
 
$
7,971
 
               
Other comprehensive income
   
(1,098
)
 
(39
)
Comprehensive income
   
6,438
   
8,010
 
               
Earning per share—basic
 
$
0.11
 
$
0.16
 
Earning per share—diluted
 
$
0.11
 
$
0.16
 
Weighted average common share outstanding-basic
   
50,667
   
50,001
 
               
Weighted average common share outstanding-diluted
   
50,786
   
50,001
 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
4


SYNUTRA INTERNATIONAL, INC.
CONDENCED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share information)
(Unaudited)

   
June 30, 
2007
 
March 31,
2007
 
           
ASSETS
             
Current Assets:
             
Cash and cash equivalents
 
$
116,143
 
$
20,836
 
Restricted cash
   
9,054
   
12,930
 
Accounts receivable, net of allowance for doubtful accounts of $201 and $241, respectively
   
8,703
   
6,760
 
Inventories
   
18,821
   
16,406
 
Other receivable
   
3,771
   
2,019
 
Due from related parties
   
16,749
   
11,742
 
Advances to suppliers
   
2,151
   
1,206
 
Deferred expenses and other current assets
   
602
   
252
 
Total current assets
   
175,994
   
72,151
 
               
Property, plant and equipment, net
   
63,214
   
51,472
 
Land use rights, net
   
3,051
   
3,024
 
Deferred tax assets
   
1,292
   
432
 
Other assets
   
1,214
   
192
 
               
TOTAL ASSETS
 
$
244,765
 
$
127,271
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
             
               
Current Liabilities:
             
Bank loans
 
$
83,212
 
$
53,104
 
Accounts payable
   
16,074
   
12,085
 
Due to related parties
   
4,644
   
2,935
 
Advances from customers
   
6,539
   
4,263
 
Tax payables
   
2,018
   
1,329
 
Other current liabilities
   
8,673
   
6,716
 
Total current liabilities
   
121,160
   
80,432
 
Long term debts
   
1,773
     
Deferred income
   
4,202
   
4,138
 
Total liabilities
   
127,135
   
84,570
 
Minority interest
   
372
     
Shareholders' equity:
             
Common Stock, $.0001 par value: 250,000 authorized; 54,001 and 50,001  issued and outstanding at June 30, 2007 and March 31,2007, respectively
   
5
   
5
 
Additional paid-in capital
   
76,669
   
8,226
 
Retained earnings
   
36,554
   
31,538
 
Accumulated other comprehensive income
   
4,030
   
2,932
 
Total shareholders' equity
   
117,258
   
42,701
 
               
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
244,765
 
$
127,271
 

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

 
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

   
Three Months Ended
June 30
 
   
2007
 
2006
 
       
(As restated,
see note 3)
 
Cash flow from operating activities:
             
Net income
 
$
5,340
 
$
7,971
 
Adjustments to reconcile net income to net cash provided by operating activities
             
Amortization of discount on bank loans
   
1,032
     
Depreciation and amortization
   
993
   
372
 
Bad debt expense
   
(34
)
 
(19
)
Loss on disposal of property, plant and equipment
   
45
     
Deferred income tax
   
(291
)
   
Minority interest
   
4
     
Changes in operating assets and liabilities:
             
Accounts receivable
   
(2,370
)
 
(5,878
)
Inventories
   
(254
)
 
3,325
 
Advances to suppliers
   
(924
)
 
(599
)
Due from related parties
   
(1,465
)
 
1,219
 
Other assets
   
(817
)
 
(988
)
Accounts payable
   
2,452
   
(3,766
)
Due to related parties
   
21
   
(2,097
)
Advances from customers
   
2,338
   
(177
)
Tax payables
   
681
   
(87
)
Other liabilities
   
572
   
1,079
 
Net cash provided by operating activities
   
7,323
   
355
 
               
Cash flow from investing activities:
             
Acquisition of property, plant and equipment
   
(9,124
)
 
(719
)
Disposal of investment in an subsidiary
   
(1,046
)
   
Purchases of intangible assets
   
(50
)
 
(3
)
Change in restricted cash
   
4,046
   
1,418
 
Advance to related companies
   
(3,324
)
   
Acquisition of a subsidiary
   
190
     
Net cash (used in) provided by investing activities
   
(9,308
)
 
696
 
Cash flow from financing activities :
             
Proceeds from bank loans
   
55,866
   
7,824
 
Repayment of bank loans
   
(24,959
)
 
(3,752
)
Proceeds from issuance of common stock, net of issuance costs of $145
   
65,857
       
Net cash provided by financing activities
   
96,764
   
4,072
 
               
Effect of exchange rate changes on cash and cash equivalents
   
528
   
39
 
Net change in cash and cash equivalents
 
$
94,779
 
$
5,123
 
Cash and cash equivalents, beginning of period
   
20,836
   
5,676
 
Cash and cash equivalents, end of period
 
$
116,143
 
$
10,838
 
Supplementary cash flows disclosure
             
Interest paid
 
$
1,088
 
$
345
 
Income taxes paid
 
$
537
 
$
796
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
6


SYNUTRA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. DESCRIPTION OF BUSINESS
 
Synutra International, Inc., through its subsidiary companies in the People’s Republic of China (“PRC” or “China”), is principally engaged in the production, distribution, and sales of dairy based pediatric and adult nutrition products. The Company’s extensive sales network covers 24 provinces, 227 cities, and more than 800 counties throughout China. The Company’s fiscal year end is March 31.
 
2. BASIS OF PRESENTATION

The Company is responsible for the unaudited condensed consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results.  The Company prepared these statements following the requirements of the SEC for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the consolidated financial statements in the Company’s Annual Report on Form 10-K/A for the year ended March 31, 2007.
 
These statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
 
Segment Reporting
 
Statement of Financial Accounting Standards (“SFAS”) No. 131, "Disclosures About Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments in annual financial statements and requires selected information of these segments be presented in interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company has determined that it operates its business in one reportable segment based upon the manner in which internal information is produced and evaluated by its chief operating decision making group, as defined under SFAS No. 131, which consists of the Company’s chief executive officer and chief financial officer.  
 
7

 
Recently Issued Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, “Defining Fair Value Measurement” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the Company’s fiscal 2009. The Company is currently evaluating the impact of adopting FAS 157 on its financial statements.  
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the Company’s fiscal 2009. The Company is currently evaluating the impact of adopting SFAS 159 on its financial statements.
 
3. RESTATEMENT
 
Subsequent to the issuance of the Company’s Quarterly Report on Form 10-Q/A Amendment No. 2 for the fiscal quarter ended June 30, 2006, filed with the SEC on February 13, 2007, management determined that the condensed consolidated statement of income for the three months ended June 30, 2006 should be restated for the following items:

Ÿ  
The amount of free products provided to our customers is revised as cost of sales for the fiscal quarter ended June 30 2006. It had been recorded as advertising and promotion expense in the Original Filing. The effects of this adjustment are an increase in cost of sales and a decrease in advertising and promotion expenses of $224,000 for the fiscal quarter ended June 30 2006.

Ÿ  
The cash consideration given to our retailers, who purchased our products directly from our distributors, is revised as a reduction of sales. It was recorded as advertising and promotion expense in the Original Filing. The effects of the reclassification are a decrease in sales and an increase in advertising and promotion expenses of $230,000 for the fiscal quarter ended June 30, 2006.

Ÿ  
In fiscal quarter ended June 30, 2006, we acquired certain fixed assets from Zheng Lan Qi County and subsequently established a new subsidiary with these assets. In conjunction with the acquisition, the local government provided an irrevocable subsidy of $4.1 million which we recognized as subsidy income for the fiscal quarter ended June 30, 2006. Subsequent to the Original Filing, we determined that the $4.1 million should be deferred and netted against the depreciation expenses for the assets acquired as this method effectively matches the related depreciation for the costs of assets with the corresponding grant income. The effect of this adjustment is a decrease in subsidy income by $4.1 million and an increase in deferred subsidy by the same amount for the fiscal quarter ended June 30, 2006. We did not recognize any of the subsidy during the fiscal year as the asset had not yet been placed in service.
 
8

 
Ÿ  
The amount of subsidy income, other than the government grant relating to Zhan Lan Qi discussed above, which used to be reported as a separate line item, has been combined into other expenses/ (income). The effect of the reclassification is an increase of $138,000 on other expenses/ (income).
 
The results of the restatement on the condensed consolidated statement of income for the three months ended June 30, 2006 are as follows:
 
   
Three Months Ended June 30, 2006
 
   
(Unaudited) 
 
(In thousands)
 
(As previously reported)
 
Restatement adjustment
 
(As restated )
 
Net sales
 
$
49,337
 
$
(230
)
$
.49,107
 
Cost of sales
   
27,423
   
224
   
27,647
 
Gross profit
   
21,914
   
(454
)
 
21,460
 
                     
Advertising and promotion expenses
   
6,928
   
(454
)
 
6,474
 
General& administrative expenses
   
994
   
38
   
1,032
 
Total operating expense
   
12,964
   
(416
)
 
12,548
 
Income from operations
   
8,950
   
(38
)
 
8,912
 
Interest expenses
   
409
   
(64
)
 
345
 
Subsidy income
   
(1,387
)
 
1,387
     
Other expenses/ (income)
   
(25
)
 
(113
)
 
(138
)
Income before provision for income tax
   
10,015
   
(1,249
)
 
8,766
 
Net income
 
$
9,220
 
$
(1,249
)
$
7,971
 
Earning per share—basic and diluted.
 
$
0.18
       
$
0.16
 

The condensed consolidated statement of cash flows for the three months ended June 30, 2006 should be restated for the following items:

Ÿ  
Impacts of the restatement of the condensed consolidated income statement discussed above.

Ÿ  
Restricted cash, included as cash and cash equivalents in the Original Filing, represents cash deposited with the banks as guarantee for the issuance of promissory notes. Under US GAAP, restricted cash does not meet the definition of cash and cash equivalents, and separate disclosure on the face of balance sheet is required. In addition, the change in the restricted cash balance, given its use to secure promissory notes, should have been presented as an investing activity. Therefore, restricted cash of $15.0 million is reclassified and is presented as an individual item on our consolidated balance sheets as of June 30, 2006. In addition, the increase in restricted cash of $4.0 million and $1.4 million is reclassified from operating to investing activities in the consolidated statements of cash flows for the three months ended June 30, 2007 and 2006 respectively.

Ÿ  
Certain advances to contractors have now been included as construction in progress in investing rather than operating activities.
 
9

 
Ÿ  
Certain short-term notes payable balances are revised as short term bank loan, as the ultimate lender of the note is an accredited financial institution.. Change in notes payable balance is recorded in cash produced from operating activities while change in short-term bank loans balances is recorded as financing activities.

Ÿ  
Previously we recorded a bank note with an original maturity of less than one year in long term liabilities, which is revised to accounts and notes payable and recorded in financing activities. Change in long term liabilities is recorded in cash produced from operating activities while change in short-term bank loans balances is recorded as financing activities.

Ÿ  
Bank loans, net is revised to be presented as borrowing and repayment separately.

The results of the restatements on the condensed consolidated statement of cash flows for the three months ended June 30, 2006 are as follows:

   
Three Months Ended June 30, 2006
 
   
(Unaudited)
 
(In thousands)
 
(As previously
reported)
 
Restatement adjustment
 
(As restated )
 
Cash flow from operating activities:
                   
Net income
 
$
9,220
   
(1,249
)
$
7,971
 
Changes in operating assets and liabilities:
                   
Advances to suppliers
   
(1,974
)
 
1,375
   
(599
)
Other current assets
   
(718
)
 
(270
)
 
(988
)
Accounts and note payable
   
820
   
(4,586
)
 
(3,766
)
Other payables and accrued liabilities
   
933
   
146
   
1,079
 
Net cash provided by operating activities
   
4,939
   
(4,584
)
 
355
 
                     
Cash flow from investing activities:
                   
Change in restricted cash
       
1,418
   
1,418
 
Net cash (used in) provided by investing activities
   
(722
)
 
1,418
   
696
 
                     
Cash flow from financing activities:
                   
Borrowing of bank loans
       
7,824
   
7,824
 
Repayment of bank loans
   
(514
)
 
(3,238
)
 
(3,752
)
Net cash provided by (used in) financing activities
   
(514
)
 
4,586
   
4,072
 
                     
Net change in cash and cash equivalents
   
3,703
   
1,420
   
5,123
 
Cash and cash equivalents, beginning of period
   
22,134
   
(16,458
)
 
5,676
 
Cash and cash equivalents, end of period
 
$
25,877
   
(15,039
)
$
10,838
 
 
10

 
4. BUSINESS COMBINATION

In May 2007, the Company acquired an 80% equity interest which was previously held by Mr. Liang Zhang, our Chief Executive Officer, in Baoquanling Shengyuan Diary Co., Ltd. (BQL) for total consideration of $ 1.41 million. As of June 30, 2007, this consideration had not been paid. Immediately after the acquisition, the Company entered into an agreement with Junchuan Ranch of Heilongjiang Province (“Junchuan Ranch”), who held the remaining 20% equity interest in BQL, to make a capital injection in an aggregate amount of $4.74 million into BQL. After the capital injection, the Company increased its holding to 94.62%. Junchuan Ranch holds the remaining 5.38% interest. In this transaction, the Company’s capital injection of $4.74 million will be used to erect a new dairy processing facility to produce infant formula products. At completion, the BQL production expansion will result in a total capacity of 18,000 tons per year of infant and pediatric nutritional products. The production technology upgrade and capacity augmentation are integral parts of the company’s long-term technological development strategy to move from the current industry practice of spray-drying technologies to dry-blending technologies in China.

The acquisition of BQL has been reflected as a transfer of assets between entities under common control and results in a change in reporting entity in accordance with SFAS 154, "Accounting Changes and Error Corrections." The Company has elected not to recast prior period financial statements and financial information for comparative purposes as BQL was not determined to be material.

5. INVENTORIES

The Company's inventories at June 30, 2007 and March 31, 2007 are summarized as follows:
 
 
 
June 30, 
2007  
 
March 31, 
2007
 
(In thousands )
         
Raw materials
 
$
3,030
 
$
4,522
 
Work-in-progress
   
10,577
   
7,714
 
Finished goods
   
3,952
   
3,217
 
Packing materials and other consumables  
   
1,262  
   
953
 
Total Inventories  
 
$
18,821 
 
$
16,406
 
 
6. DUE FROM/(TO) RELATED PARTIES  

A. Classification of related party balances by name

a. Due from related parties
   
 
 
June 30, 
2007
 
March 31, 
2007
 
(In thousands)
         
Beijing Honnete Dairy Corporation Ltd
 
$
14,354
 
$
7,207
 
Beijing Kelqin Dairy Co. Ltd
   
2,118
   
3,015
 
Beijing Luding Xueyuan Trading Co. Ltd
   
277
   
80
 
Heilongjiang Baoquanling Sheng Yuan Dairy Co. Ltd
   
   
978
 
Beijing Ao Naier Feed Stuff LLC
   
   
462
 
Total Due from Related Companies
 
$
16,749  
 
$
11,742 
 
 
11

 
b. Due to related parties

 
 
June 30, 
2007
 
March 31, 
2007
 
(In thousands )
         
Beijing Kelqin Dairy Co. Ltd
 
$
1,622
 
$
863
 
Sheng Zhi Da Dairy Group Corporation
   
2,959
   
1,338
 
Beijing Honnete Dairy Corporation Ltd
   
60
   
 
St. Angel (Beijing Business Service)
   
3
   
5
 
Beijing Luding Xueyuan Trading Co. Ltd
   
   
1
 
Heilongjiang Baoquanling Sheng Yuan Dairy Co.,Ltd
       
728
 
Total Due to Related Companies
 
$
4,644
 
$
2,935
 

Above-mentioned entities are considered related parties to the Company because they are affiliates of the Company under the common control of the Company’s major shareholder.

B. Classification of related party balances by nature

a. Due from related parties

   
June 30, 
2007
 
March 31, 
2007
 
(In thousands)
         
Trade receivables
 
$
2,395
 
$
4,535
 
Advance to suppliers
   
11,030
   
7,207
 
Other advance
   
3,324
   
 
Total
 
$
16,749
 
$
11,742
 

Advance to suppliers relates to an agreement between the Company and Beijing Honnette Dairy Corporation Limited for a guaranteed whey protein supply of 3,000 tons within the period of six months from July 1 to December 31, 2007.

b. Due to related parties

   
June 30, 
2007
 
March 31, 
2007
 
(In thousands)
         
Trade payables
 
$
1,685
 
$
1,685
 
Other payables
   
2,959
   
1,250
 
Total
 
$
4,644
 
$
2,935
 

Of the above-mentioned other payable, an amount of $1.41 million relates the consideration to be paid to Sheng Zhi Da Dairy Group Corporation for the acquisition of BQL.

12


7. PROPERTY, PLANT AND EQUIPMENT, NET

   
June 30, 
2007
 
March 31, 
2007
 
(In thousands)
         
Cost:
             
Buildings and leasehold improvements
 
$
18,418
 
$
16,638
 
Plant and machinery
   
25,340
   
23,284
 
Office equipment and furnishings
   
2,033
   
1,984
 
Motor vehicles
   
  1,147
   
1,040
 
 
   
46,938
   
42,946
 
Less: Accumulated depreciation:
             
Buildings and leasehold improvement
   
2,008
   
1,798
 
Plant and machinery
   
4,187
   
3,450
 
Office equipment and furnishings
   
536
   
472
 
Motor vehicles
   
  540
   
590
 
Total of accumulated depreciation
   
   7,271
   
  6,310
 
Construction in progress
   
23,547
   
14,836
 
Property, plant and equipment, net
 
$
  63,214
 
$
51,472
 

The Company had pledged certain of its property, plant and equipment as collateral to secure bank loans with financial institutions in the PRC. The amounts of assets pledged at cost were $27.0 million and $32.7 million as of June 30 and March 31, 2007, respectively.

8. LAND USE RIGHTS

   
June 30,
2007
 
March 31, 
2007
 
(In thousands)
         
Cost:
 
$
3,223
 
$
3,177
 
Less: Accumulated amortization:
   
172
   
153
 
Land use right, net
 
$
  3,051
 
$
3,024
 

The Company recorded amortization expense of $18,918 and $9,000 for the three months ended June 30, 2007 and 2006, respectively.

9. BANK LOANS AND WARRANTS
 
On April 19, 2007, the Company entered into a Loan Agreement with ABN AMRO Bank N.V., Hong Kong branch (“ABN”), in an amount of $35 million. The principal amount and any unpaid accrued interest thereon, are due on October 19, 2007. The loan was personally guaranteed by Mr. Liang Zhang, the Company’s Chief Executive Officer, and his spouse. 
 
In addition, pursuant to a USD facility side letter agreement dated April 19, 2007 between the Company and ABN, the Company is obligated to issue warrants to purchase up to 400,000 shares of the common stock. Upon Closing, 200,000 shares were issued at $8.84 per share. The remaining 200,000 shares will be issued on the earlier of (i) the completion of a private placement of debt or a loan to the Company in amount sufficient to repay the loans, or (ii) on October 19, 2007.  
 
13

 
The 200,000 warrants issued upon consummation of the loan agreement are exercisable. All of the warrants may be exercised up to the third anniversary of the completion of a Qualified Public offering, as defined in the warrant agreement.
 
The fair value of the warrants was $2,711,760 at the grant date, estimated on the basis of the Black-Scholes-Merton option-pricing formula with the following assumptions:
 
   
2007
 
Expected volatility
   
43.86
%
Risk-free interest rate
   
4.66
%
Expected dividend yield
   
0.00
%
Contractual life of the warrant (years)
   
4.2
 
 
The proceeds of the 2007 loan were allocated to the debt and the warrants based on their relative values, resulting in $32,413,313 and $2,586,687 being allocated to the debt and warrants, respectively. This amount has been recorded as an increase to additional paid in capital with a corresponding debt discount, which is being amortized over the term of the loan utilizing the effective interest method.
 
The above loan agreement was attached with financial covenants that do not permit (1) the Company’s consolidated interest coverage ratio as of the end of any fiscal quarter to be lower than 4.00; (2) the Company’s consolidated leverage ratio as of the end of any fiscal quarter to be higher than 4.25. The Company has performed an analysis of the above ratios and confirmed that these financial covenants have been satisfied as of June 30, 2007.
 
   As at June 30, 2007 and March 31, 2007, the Company had short-term loans from banks in the amount of $83 million and $53 million, respectively, bearing interest ranging from 5.85% to 7.82% per annum. Such loans are extendable for terms of no less than one year to June 2008. The loans were secured by the pledge of certain fixed assets held by the Company and its subsidiaries. The value of the fixed assets pledged was $27 million and $32.7 million as of June 30, 2007 and March 31, 2007, respectively.  
 
As at June 30, 2007, BQL had a 3 year long-term loan from Junchuan Ranch of Heilongjiang Province in the amount of $1.77 million bearing interest 3.24% per annum. The loan was secured by the pledge of certain fixed assets held by BQL and by a personal guarantee from the Company’s Chief Executive Officer and his spouse.
 
14


10. INCOME TAXES
 
The Company’s income before income taxes was comprised of the following for the three months ended June 30, 2007 and 2006, respectively.
 
   
Three Months Ended June 30,
 
   
2007
 
2006
 
 (In thousands )
     
(As Restated)
 
United States
 
$
(1,467
)
$
26
 
PRC
   
 7,540
   
8,740
 
Total Income Before Tax
 
$
 6,073
 
$
8,766
 
 
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

The Company adopted the provisions of FIN 48 effective April 1, 2007. Based on its FIN 48 analysis documentation, the Company has made its assessment of the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical merits, and has measure the unrecognized tax benefits associated with the tax positions. As of April 1, 2007, the Company has recorded FIN 48 liabilities of approximately USD 375,473 for its PRC subsidiaries. It also recognized interest and/or penalties associated to the uncertain tax positions of USD 31,515 in the FIN 48 tax provision.
 
For the quarter ended June 30, 2007, the unrecognized tax benefit did not change significantly and the amount of interest and penalties related to uncertain tax position is immaterial.

The years 2001 to 2007 remain subject to examinationby the PRC tax authorities.

The Company has concluded that there are no material uncertain tax positions for the U.S. subsidiary. The years 2003 to 2007 remain subject to examination by the United States tax authorities.
 
Undistributed earnings of the Company’s PRC subsidiaries of approximately USD 39 million at June 30, 2007, are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the PRC.

15

 
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, which will take effect beginning January 1, 2008. The Company’s PRC subsidiaries will then measure and pay enterprise income tax pursuant to the New Tax Law. Under the new tax law, foreign investment enterprise and domestic companies are subject to a uniform tax rate of 25%. The new tax law provides a five-year transition period from its effective date for those enterprises which were established before the promulgation date of the new tax law and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations.

Income taxes are calculated on a separate entity basis. There currently is no tax benefit or burden recorded in the United States.

The provisions for income taxes for the three months ended June 30, 2007 and 2006, respectively, are summarized as follows:

   
Three Months Ended June 30,
 
   
2007
 
2006
 
       
(As restated)
 
(In thousands )
     
 
 
Current
 
$
990
 
$
795
 
Deferred tax benefit
   
(261
)
 
 
Total
 
$
729
 
$
795
 

11. COMMON STOCK

On May 24, 2007, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Warburg Pincus Private Equity IX, L.P. (the “Investor”), pursuant to which the Investor agreed to acquire 4 million shares of common stock (the “Common Shares”), par value $0.0001 per share, of the Company for an aggregate purchase price of $66 million, net of issuance costs of $ 145,000. The closing of the transaction took place on June 15, 2007. The Company intends to use the net proceeds from this financing for general corporate purposes. Pursuant to the terms of the Purchase Agreement so long as the Investor owns at least 50% of the Common Shares acquired by the Investor pursuant to the Purchase Agreement, the Investor shall have the right to designate a person to serve on the Board of Directors of the Company (the “Investor Designee”), and the Company agreed to use its best efforts to nominate and cause the Investor Designee to be elected to the Company’s Board of Directors.

16


12. ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The following provides a summary of comprehensive income :

   
June 30, 
2007
 
March 31, 
2007
 
(In thousands)
         
Beginning Accumulated Comprehensive Income
 
$
2,932
 
$
1,056
 
Change in accumulated translation adjustment
   
1,098
   
1,876
 
Accumulated Comprehensive Income
 
$
4,030
 
$
2,932
 

13. NET INCOME PER SHARE (EPS)

For purposes of calculating basic and diluted earnings per share, we used the following weighted average common shares outstanding (in thousands,):

   
Three Months Ended June 30,
 
   
2007
 
2006
 
       
(As restated)
 
(In thousands)
     
 
 
Net income
 
$
5,340
 
$
7,971
 
Basic weighted average common shares outstanding
   
50,667
   
50,001
 
Dilutive potential common shares from warrants
   
119
     
Diluted weighted average shares outstanding
   
50,786
   
50,001
 
Net income per share - basic
 
$
0.11
 
$
0.16
 
Net income per share - diluted
 
$
0.11
 
$
0.16
 

14. COMMITMENTS AND CONTINGENCIES

A. Purchase Commitments

As of June 30, 2007, the Company had outstanding commitments in the amount of $11.1 million for the purchase of whey protein.

B. Capital commitments

As of June 30, 2007, the Company’s capital commitments amounted to $2.9 million in relation to asset improvement and plant expansion.  

C. Lease commitments

The Company is a party to various operating leases involving offices and warehouses. Total rental expenses for operating leases are $99,000 and $66,000 for the three months ended June 30, 2007 and 2006, respectively.

17

 
D. Legal proceedings

None.

E. Guarantees

As at June 30, 2007, the Company had a guarantee given to the Zhangbei Branch of the Agriculture Bank of China in respect of bank loans of $1.1 million in total extended to 104 farmers in the Zhangbei Area. Total amount of bank loans under this guarantee arrangement was $1.1 million as of March 31, 2007. These bank loans mature on December 25, 2007. The potential loss from this guarantee could not be estimated as the Company was unable to assess the financial position of individual farmers. However, based on general economic information available for this area, the Company believes that these loans will be repaid by the farmers upon maturity. Therefore, no liability was recorded on the balance sheet in relation to these guarantees.

18


 
Sections of this Form 10-Q including, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations above, 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,” “will,” “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 below in PART II. OTHER INFORMATION -- Item 1A. Risk Factors could cause our actual results to differ materially from those described in the forward-looking statements.  Unless required by law, we undertake 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 we file from time to time with the SEC, particularly our Quarterly Reports on Form 10-Q, Annuak Report on form 10-K and any Current Reports on Form 8-K.

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 Exchange Act, 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 1-202-551-8090.  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.

EXECUTIVE OVERVIEW 
 
Through its seven operating subsidiaries in China, the Company is engaged in different stages of the development, production, packaging, marketing and sales of dairy based nutritional products for infants, children, pregnant women and nursing mothers, and other adults. These products are manufactured through typical dairy spray-drying processes that combine fresh cow milk, whey protein, various lipids and fatty acids, in addition to other nutrients including a variety of vitamins and minerals. These products are retail-packaged and sold under the brand names of Super, U-Smart, U-Strong, and National Standards. The Company sells its products in 24 provinces, 264 cities and more than 1,320 counties in China through its direct sales force, third-party wholesalers, and retail supermarkets. Approximately 90% of the Company’s net sales for the three months ended June 30, 2007 was from pediatric nutritional products and the rest from adult nutritional and other products. The Company continues to produce and sell retail packaged rice cereals, which extends its diary based nutritional product lines. As supplemental foods to infant and children formula products, management believes that rice cereal products possess significant market potential. The Company also exports chondroitin sulfate, or cartilage, a nutraceutical supplement ingredient for distribution and sale in North American markets.

19

 
Since the fiscal year ended March 31, 2007, the Company has continued to experience significant growth in the premium infant formula products and line extensions. These premium products and line extensions were designed to capture the fastest growing segment of the infant formula market in China. Building on expanded production capacities through new installations and acquisition in the previous year, the Company is implementing new production processes aimed at enhancing manufacturing efficiency and cost reduction. The Company is also focusing on research and development efforts to improve quality and stability of certain key ingredients and nutrients while reducing cost.

The Company continues to carry out its integrated marketing program that leverages its vast existing sales network throughout the country and builds on expanded advertising and marketing campaigns targeting both national and regional or local audiences. Key to the integrated marketing program is a focused team of marketing professionals with medical and healthcare expertise and experience in the fields of women’s health and pediatric nutrition. Other components to this companywide program include enhancing consistency in customer communications on brand image and product messages, increasing customer care and feedback responses, integrating customer data collection with customer service activities and direct sales efforts, and expanding consumer education and outreach programs, all aimed at solidifying the Company’s lead in brand recognition among domestic manufacturers and achieving broader recognition among the market leaders in China.

On May 24, 2007, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Warburg Pincus Private Equity IX, L.P. (the “Investor”), pursuant to which the Investor agreed to acquire 4 million shares of common stock (the “Common Shares”), par value $0.0001 per share, of the Company for an aggregate purchase price of $66 million, net of issuance costs of $ 145,000. The closing of the transaction took place on June 15, 2007. The Company intends to use the net proceeds from this financing for general corporate purposes. Pursuant to the terms of the Purchase Agreement so long as the Investor owns at least 50% of the Common Shares acquired by the Investor pursuant to the Purchase Agreement, the Investor shall have the right to designate a person to serve on the Board of Directors of the Company (the “Investor Designee”), and the Company agreed to use its best efforts to nominate and cause the Investor Designee to be elected to the Company’s Board of Directors.

20

 
RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Net Sales
 
Net Sales for the three months ended June 30, 2007 increased by $18.4 million or 37.4% to $67.5 million from $49.1 million for the three months ended June 30, 2006. The increase in the volume of products sold was due in part to greater market penetration as a result of the implementation of various incentive programs to the sales force, such as aligning bonuses with sales performance down to the store level, and increased promotional efforts in the medium sized city markets and rural markets. We believe that these incentive programs enhanced the sales force productivity of our sales force. In addition, the Company launched a series of advertising campaigns which have boosted the popularity of the Company’s products. Our sales volume has not been significantly affected by seasonal changes.
 
The net sales of our traditional main products, such as the dairy based nutritional products for infants, children and adults under the brand names of Super, U-Smart, U-Strong, and National Standards, increased by $24.0 million, or 71.0% to $57.8 million for the three months ended June 30, 2007 from $33.8 million for the three months ended June 30, 2006, principally as a result of the following factors:

a.
The tons sold of traditional products increased to 8,200 tons in the three months ended June 30, 2007 from 5,700 tons in the three months ended June 30, 2006, resulting in an increase of $14.8 million in gross sales.
 
b.
Higher average selling price also contributed to the increase of gross sales. For the three months ended June 30, 2007, the average selling price of the Company’s traditional main products increased from $5,930 to $7,040 per ton, resulting in an increase of $9.2 million in gross sales.
 
Net sales of nutritional supplement ingredients were $5.8 million and $8.5 million for the three months ended June 30, 2007 and 2006, respectively, a decrease of $2.7 million or 31.8%. The Company’s toll drying, blending, and packaging services generated $2.6 million and $6.7 million for the three months ended June, 2007 and 2006, respectively, a decrease of $4.1 million or 67.2%. The [net] sales of industry material, anhydrous milk-fat, non-fat dry milk were $1.3 million and $75,000 for three months ended June 30, 2007 and 2006, respectively, an increase of $1.2 million. The overall decrease in the sales of these ancillary products and services was, mainly due to the scarcity of whey protein and the Company’s inability to sell ancillary products to other industry customers.
 
In the three months ended June 30, 2007, the Company achieved approximately 98.9% of its sales revenue of the $57.8 million in traditional products through its wholesale distributor networks and about 1.1% through supermarket retailers. Of the total $33.8 million of main products sales generated in the three months ended June 30, 2006, about 98.8% were from distributors and about 1.2% from supermarket retailers.
 
Management believes that the overall infant formula industry in China is experiencing rapid growth due to improved purchasing power and increased consumer recognition for branded products. Management also believes Synutra’s brand name product lines have gained recognition in its marketplaces and has captured a greater portion of the increased growth experienced by the industry.

21

 
Cost of Sales

Cost of sales for the three months ended June 30, 2007 increased to $30.4 million from $27.6 million for the three months ended June 30, 2006. The 10.1% increase in cost of sales of $2.8 million was a result of increases in both the price and volume of raw materials purchased.  

The cost of sales for traditional products increased by $8.3 million, or 61.9% to $21.7 million for the three months ended June 30, 2007 from $13.4 million for the three months ended June 30, 2006. The increase of 2,500 tons sold of the traditional main products resulted in a $5.9 million increase in cost. Due to the increase in sales of our premium products, the average cost per unit increased by $300 per metric ton, resulting in a $2.5 million increase in cost of sales for the three months ended June 30, 2007.

The cost of nutritional supplement ingredients was $5.4 million and $7.4 million for the three months ended June 30, 2007 and 2006, respectively, a decrease of $2.0 million or 27.0%. The cost of ancillary services for toll drying, blending, and packaging was $2.5 million and $6.8 million for the three months ended June 30, 2007 and 2006 respectively, a decrease of $4.3 million or 63.2%. The cost of sales of industrial materials, anhydrous milk-fat, and non-fat dry milk were $838,000 and $44,000 for the three months ended June, 2007 and 2006 respectively, an increase of $794,000.

Prices of raw milk and whey protein, which are major components of the cost of sales of our traditional products, have experienced increases during the year. Management expects that the prices of these materials may continue to rise due to a general increases in commodities prices, especially for agriculture products. This will in turn affect the unit cost of sales for our products.

Gross Profit

Gross profit was $37.1 million or 54.9% of sales for the three months ended June 30, 2007, compared to $21.5 million or 43.7% of sales for the three months ended June 30, 2006, an increase of $15.6 million or 72.7%, primarily due to the sales of traditional products which contributed $36.1 million or 97.3% of gross profits for the three months ended June 30, 2007, versus $20.5 million or 95.3% gross profits for the three months ended June 30, 2006.
 
In the three months ended June 30, 2007, the Company experienced increases in both gross profit and gross margin. This increase was primarily a result of increased volume of products sold and increased average selling prices recorded during the period. Due to the implementation of targeted sales incentive programs, sales of the higher margin lines of products increased more, contributing to the increase in gross margin.

Selling and Distribution Expenses

Selling and distribution expenses increased by $2.5 million or 50% to $7.5 million for the three months ended June 30, 2007, as compared to $5.0 million for the three months ended June 30, 2006. The increase in selling and distribution expenses was partially due to increased transportation and travel expenses in proportion to the increase in sales volume. In addition, total compensation to the sales force increased by $847,341 from $1.6 million in the three months ended June 30, 2006 to $2.4 million in the three months ended June 30, 2007, due to the implementation of incentive program and the increase in the number of sales people from 1,881 at June 30, 2006 to 2,125 at June 30, 2007 in response to expanding business and greater market penetration. Shipping and handling expenses increased by $232,513 from $943,791 in the three months ended June 30, 2006 to $1.2 million in the three months ended June 30, 2007, in proportion to the increase in sales and travel expenses increased by $201,000 from $410,000 in the three months ended June 30, 2006 to $611,000 in the three months ended June 30, 2007. The Company continued to expand its selling efforts both in rural and urban areas by utilizing motorized marketing and sales teams to expand the reach of its products and to build brand image by participating in trade shows and in other marketing activities. These efforts accounted for most of the increases in expenses.

22

 
Advertising and Promotion Expenses

   
Three Month Ended June 30
 
   
 (Unaudited)
 
(In thousands)
 
2007
 
2006
 
Change in $
 
Change in %
 
                   
Advertising
 
$
5,521
 
$
715
 
$
4,806
   
672.2
%
Sales promotion  
   
12,927
   
5,759
   
7,168
   
124.5
%
Total  
 
$
18,448
 
$
6,474
 
$
11,974
   
185.0
%

Advertising and sales promotion increased by $12.0 million or 185.0% to $18.4 million for the three months ended June 30, 2007, as compared to $6.5 million for the three months ended June 30, 2006, as a result of increased advertising and promotional activities. The major components of advertising and sales promotion expenses are placement of advertisements with major media outlets and points of sale and community promotional activities.

General and Administrative Expenses

General and administrative expenses increased by $1.8 million or 179.0% to $2.9 million for the three months ended June 30, 2007, as compared to $1.0 million for the three months ended June 30, 2006. Most of the increases were for staff salaries, management expenses, and legal, accounting, and consulting costs related to corporate transactions and the costs associated with operating as a U.S. public company.

Income from Operations

The sales increase of $18.4 million or 37.44% and the cost of sales increase of $2.8 million, or 10.0% for the three months ended June 30, 2007 had led to a gross profit increase by $15.6 million or 72.7% compared to the three months ended June 30, 2006. Operational expenses also increased by approximately $16.4 million from $12.5 million for the three months ended June 30, 2006 to $28.9 million for the respective period ended June 30, 2007. As a result, income from operations was $8.2million for the three months ended June 30, 2007, as compared to $8.9 million for the three months ended June 30, 2006, a decrease of $752,000 or 8.4%.

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Interest Expense
 
Interest expense increased by $1.8 million to $2.2 million for the three months ended June 30, 2007, as compared to $345,000 for the three months ended June 30, 2006, due to the amortization of debt discount and increased borrowings.

Provision for Income Taxes

The provision for income taxes, which is computed on a per subsidiary basis, was $729,000 and $795,000 for the three months ended June 30, 2007 and 2006, respectively. The effective tax rate of the Company was 12% and 9% for the three months ended June 30, 2007 and 2006, respectively. The effective income tax rate for the three months ended March 31, 2007 differs from the prior quarter amount due to tax holiday effecting of certain PRC entities.
 
Net Income Attributable to Shareholders

Net income attributable to shareholders for the three months ended June 30, 2007 decreased by $2.6 million or 33.0% to $5.3 million from $8.0 million for the three months ended June 30, 2006 due to the factors discussed above.
 
Earnings Per Share
 
Basic and diluted earnings per share were $0.11 for three months ended June 30, 2007 and $0.16 for three months ended June 30, 2006.

CHANGE IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
The Company’s financial condition has improved during the three months ended June 30, 2007. The cash and cash equivalent balance increased by $95.3 million to $116.1 million at June 30, 2007, as compared to $20.8 million at March 31, 2007.

In April 2007, we entered a loan agreement with ABN AMRO Bank, N.V., Hong Kong branch (“ABN”) pursuant to which ABN agreed to loan us $35 million with the principal and interest due in six months. The proceeds of the loans have been used to make investments in one of our subsidiaries, BQL, to fund the construction of new production facilities, to establish a joint venture for the production of Chondroitin (a dietary and nutritional supplement), to purchase fixed assets for the production of nutritional food bars, and to establish a joint venture that will offer prenatal diagnostic and genetic testing services.
 
The above loan agreement was attached with financial covenants that do not permit (1) the Company’s consolidated interest coverage ratio as of the end of any fiscal quarter to be lower than 4.00; (2) the Company’s consolidated leverage ratio as of the end of any fiscal quarter to be higher than 4.25. The Company has performed an analysis of the above ratios and confirmed that these financial covenants have been satisfied as of June 30, 2007.
 
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On June 15, 2007, we also completed a transaction pursuant to a purchase agreement dated May 24, 2007 with Warburg Pincus Private Equity IX, L.P. (“Warburg”) whereby Warburg purchased 4 million shares of common stock, par value $0.0001 per share, for an aggregate purchase price of $66 million, net of issuance costs of $145,000. The proceeds from this transaction are intended for general corporate purposes.

Net cash provided by operating activities for the three months ended June 30, 2007 was $7.3 million, resulting from net income of $5.3 million, non-cash items not affecting cash flows of $1.8 million, partly offset by $234,000 of changes in working capital. The changes in working capital for the three months ended June 30, 2007, were primarily related to (i) a $2.4 million increase in accounts receivable; (ii) a $1.2 million increase in inventory and advances to suppliers and (iii) a $1.5 million increase in due from related parties, partly offset by a $6.1 million increase in accounts payable, due to related parties, advances from customers, other liabilities, tax payable and deferred income. The increase in these working capital balances was primarily related to increases in business volume. Non-cash items were primarily associated with deferred income tax benefit, depreciation and amortization of property and equipment and amortization of debt issuance costs.  Net cash provided by operating activities for the three months ended June 30, 2006 was $355,000, resulting from net income of $8.0 million, non-cash items not affecting cash flows of $353,000 and $8.0 million of changes in working capital.  The changes in working capital for the three months ended June 30, 2006, were primarily related to a $5.9 million increase in accounts receivable, offset by a $2.7 million decrease in inventory and advances to suppliers and a $1.2 million decrease in due from related parties, partly offset by a $5.0 million decrease in accounts payable, due to related parties, advances from customers and other liabilities.  The change in these working capital balances are primarily related to increases in business volume.  Non-cash items were primarily associated with depreciation and amortization of property and equipment. 

Net cash used in investing activities was $9.3 million for the three months ended June 30, 2007, as compared to $696,000 for the three months ended June 30, 2006. This was due primarily to the Company’s plant expansion to increase its production capabilities. Cash invested in purchases of property and equipment was $9.1 million and $719,000 in the three months ended June 30, 2007 and 2006, respectively.

Net cash provided by financing activities was $96.7 million for the three months ended June 30, 2007, as compared to $4.1 million for the three months ended June 30, 2006. The cash provided by financing activities during the three months ended June 30, 2007 was primarily related to the proceeds from short term bank loans of $55.8 million and proceeds from the issuance of common stock of $65.8 million, partially offset by the repayment of short term borrowings of $25 million. Net cash provided by financing activities for the three months ended June 30, 2006 was primarily related to the proceeds from short term bank loans of $7.8million partially offset by the repayment of short term borrowings of $3.8.

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During the fiscal year ending March 31, 2008, we intend to continue to work to expand our product lines and product mix, as well as our product distribution network throughout China. We believe our existing cash, cash from operations and credit facilities at June 30, 2007 are adequate to fund our operations for at least the next twelve months.


As disclosed in footnote 13 to the unaudited Condensed Consolidated Financial Statements, we do not have any special purpose entities or off-balance sheet financing arrangements. However, we do guarantee certain bank loans to farmers as discussed in footnote 13.

CONTRACTUAL OBLIGATIONS

A. Purchase Commitments

As of June 30, 2007, the Company had outstanding commitments in the amount of $11.1 million for the purchase of whey protein.

B. Capital commitments

As of June 30, 2007, the Company’s capital commitments amounted to $2.9 million in relation to asset improvement and plant expansion.  

C. Lease commitments

The Company is a party to various operating leases involving offices and warehouses. Total rental expenses for operating leases are $99,000 and $66,000 for the three months ended June 30, 2007 and 2006, respectively.

D. Legal proceedings

None.

E. Guarantees

As at June 30, 2007, the Company had a guarantee given to the Zhangbei Branch of the Agriculture Bank of China in respect of bank loans of $1.1 million in total extended to 104 farmers in the Zhangbei Area. Total amount of bank loans under this guarantee arrangement was $1.1 million as of March 31, 2007. These bank loans mature on December 25, 2007. The potential loss from this guarantee could not be estimated as the Company was unable to assess the financial position of individual farmers. However, based on general economic information available for this area, the Company believes that these loans will be repaid by the farmers upon maturity. Therefore, no liability was recorded on the balance sheet in relation to these guarantees.
 
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CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our latest Annual Report on Form 10-K/A. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may differ from these estimates.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K/A have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.
Additionally, due to the adoption of FIN 48 (as described in Note 10 to the unaudited condensed consolidated financial statements), we have revised our policy on income taxes with respect to accounting for uncertain tax positions. We consider our policy on income taxes to be a critical accounting policy due to the significant level of estimates, assumptions and judgments and its potential impact on our consolidated financial statements. We have included below a description of our accounting policy for income taxes, which reflects changes to our accounting policy for uncertain tax positions.

Income Taxes

Our effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions.

In accordance with SFAS No. 109, “Accounting for Income Taxes,” we recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. At least quarterly, we assess the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of a realization of a deferred tax asset. To the extent recovery is unlikely, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the year such determination is made.
 
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APB Opinion No. 23, “Accounting for Income Taxes, Special Areas,” does not require U.S. income taxes to be provided on foreign earnings when such earnings are indefinitely reinvested offshore. We periodically evaluate our investment strategies with respect to each foreign tax jurisdiction in which we operate to determine whether foreign earnings will be indefinitely reinvested offshore and, accordingly, whether U.S. income taxes should be provided when such earnings are recorded.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48) effective April 1, 2007. In accordance with FIN 48, we recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.

A number of years may elapse before a particular matter for which we have recorded a liability related to an unrecognized tax benefit is audited and finally resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the effective tax rate and may require the use of cash in the period of resolution. Our liability for unrecognized tax benefits is generally presented as non-current. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current.

We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. For the quarter ended June 30, 2007, the unrecognized tax benefit did not change significantly and the amount of interest and penalties related to uncertain tax position is immaterial.

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CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable. The Company is exposed to the following risk factors:
 
(i) Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The Company also has a concentration of credit risk as its export of protein product to North America is through a single importer in the US. Amount due from this importer accounts for a significant proportion of the Company’s total account receivables.

(ii) Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.

(iii) Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 5% per annum. The Company's income and cash flows are substantially independent of changes in market interest rates. The Company has no significant interest-bearing assets. The Company's policy is to maintain all of its borrowings in fixed rate instruments.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Please refer to footnote 2 to the condensed consolidated financial statements for detailed discussion.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There were no material changes in quantitative or qualitative disclosure about market risk during the three months ended June 30, 2007. For additional information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations as presented in our Annual Report on Form 10-K/A for the year ended March 31, 2007.
 
The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expected future rates.
 
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We did not experience any material changes in interest rate exposures during the three months ended June 30, 2007.  Based upon economic conditions and leading market indicators at June 30, 2007, we do not foresee a significant adverse change in interest rates in the near future.
 
As of June 30, 2007, the carrying value of our debt is $83.2 million.  We estimate that the fair market value of our debt approximated the carrying value as of June 30, 2007 due to the short term nature of these obligations.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of June 30, 2007, the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information we are required to disclose in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. We have concluded, based on that evaluation, that as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the reasonable assurance level because of the identification of material weaknesses in our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures.

Management’s assessment identified the following material weaknesses:

1. The Company did not maintain a sufficient complement of personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with the Company’s complex financial accounting and reporting requirements and low materiality thresholds.

2. The Company did not have a robust antifraud and risk assessment process in place to regularly monitor and document the procedures, programs and controls related to its financial reporting.

3. The Company did not have effective controls to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis.

Due to these material weaknesses in internal control over financial reporting -- as evidenced by the significant number and magnitude of out-of-period adjustments identified during the year-end closing process and the resulting restatements -- management has concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level. Further, management understands that these material weaknesses, if not remediated, could result in the Company not being able to meet its regulatory filing deadlines or cause a material misstatement in the future.

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Remediation and Changes in Internal Control over Financial Reporting

The Company is in the process of developing and implementing remediation plans to address our material weaknesses in our internal control over financial reporting by adopting and implementing the Sarbanes Oxley Act for the Company's fiscal year ending March 31, 2008. During the second quarter of 2008, management conducted a program to plan the remediation of all identified material weaknesses and significant deficiencies using a risk-based approach based on the “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). These plans contemplate various changes in process, procedures, policy, training and organizational design, and are currently being implemented. In addition, the Company will hire and/or appoint new managers in the accounting area and engage accounting professionals from external resources to address internal control weaknesses related to technical accounting.

The following specific remedial actions are in process to address the material weaknesses in our internal control over financial reporting described above:

1. Reorganize and restructure the Company’s corporate accounting staff (“Corporate Accounting”) by (1) revising the reporting structure and establishing clear roles, responsibilities, and accountability, (2) hiring additional technical accounting personnel to address the Company's complex accounting and financial reporting requirements, and (3) assessing the technical accounting capabilities at our subsidiaries to ensure the right complement of knowledge, skills, and training.

2. Improve period-end closing procedures by (1) requiring all significant non-routine transactions to be reviewed by Corporate Accounting, (2) ensuring that account reconciliations and analyses for significant financial statement accounts are reviewed for completeness and accuracy by qualified accounting personnel, (3) implementing a process that ensures the timely review and approval of complex accounting estimates by qualified accounting personnel and subject matter experts, where appropriate, and (4) developing better monitoring controls at Corporate Accounting and at our subsidiaries and (5) documenting and implementing antifraud programs and controls as well as comprehensive risk assessment procedures, programs and controls.

As previously noted, management has augmented the resources in Corporate Accounting by utilizing external resources in technical accounting areas and will implement additional closing procedures during the remainder of fiscal 2008. As a result, management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the condensed consolidated financial statements as and for the fiscal quarter ended June 30, 2007 in this Form 10-Q, fairly present in all material respects the financial condition and results of operations of the Company in conformity with accounting principles generally accepted in the United States of America.

Other than as described above, management does not believe that there have been any other changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2007, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline.
 
RISKS RELATED TO OUR BUSINESS
 
Synutra is subject to intense competition in which it may not be able to compete effectively.
 
Synutra’s business is subject to intense competition, changes in consumer preferences and local economic conditions. Most of these competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than Synutra has any may be able to respond more quickly than it scan to new or changing opportunities and customer requirements. Increased competition can reduce sales for Synutra. To be successful, Synutra must continue to:
 
 
·
promote its brands successfully;
 
 
 
 
·
anticipate and respond to new consumer trends;
 
 
 
 
·
develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products;
 
 
 
 
·
improve productivity; and
 
 
 
 
·
respond effectively to changing prices for raw materials.
 
The willingness of consumers to purchase Synutra’s brands depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economy brands, and the volume of its products could suffer accordingly.
 
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Mothers may not use Synutra’s infant formula products and elect to breastfeed their babies.
 
Synutra’s results of operations will be affected by the number of mothers who choose not to use its products and choose to breastfeed their babies. There is data available that suggests that breastfeeding a baby has many health benefits for the baby. Breastfeeding in infancy is likely to reduce the risk of cardiovascular disease-in adult life as well as helping a baby develop a strong immune system. Mother’s milk has all the nutrients that a baby requires and some babies may have difficulty absorbing the nutrients from infant formula and may suffer side effects from the supplemental nutrients provided in formula. Some mothers may have trouble breastfeeding and therefore infant formula is the next best alternative. However, to the extent that popular literature, cultural pressure and medical advice advocate that mothers breastfeed their babies, there could be a reduced demand for Synutra’s products and its revenues could be adversely affected.
   
Strengthening brand portfolios through increased education and awareness.
 
One element of the growth strategy of Synutra is to strengthen its brand portfolios through active programs of consumer education and awareness of its products. Synutra intends to improve communications to its customers about the nutritional value and quality of its products. There can be no assurance that it will be successful in this growth strategy and that sales volume will be increased.
 
Synutra must identify changing consumer preferences and develop and offer products to meet their preferences.
 
Consumer preferences evolve over time and the success of Synutra’s products depends on Synutra’s ability to identify the tastes and nutritional needs of its customers and to offer products that appeal to their preferences. Synutra introduces new products and improved products from time to time and incurs significant development and marketing costs. If Synutra’s products fail to meet consumer preference, then Synutra’s strategy to grow sales and profits with new products will be less successful.

If Synutra does not achieve the appropriate cost structure in the highly competitive industry, its profitability could decrease.
 
Synutra’s success depends in part on its ability to achieve the appropriate cost structure and be efficient in a highly competitive industry. Synutra’s products are marketed in the premium branded market, however, it may not be successful in marketing these products at a higher price point. Synutra is currently implementing profit-enhancing initiatives that impact its marketing, sales, operations and information systems functions. These initiatives include: elimination of duplicative costs and overhead; consolidation of selected plants and support functions; efforts to streamline and improve Synutra’s ability to do business with its customers, and distributors and brokers. If Synutra does not continue to manage costs and achieve additional efficiencies, its competitiveness and profitability could decrease.
 
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Synutra may be subject to product liability claims and product recalls, which could negatively impact its profitability.
 
Synutra sells products for human consumption, which involves risks such as product contamination or spoilage, product tampering and other adulteration of its products. Synutra may be subject to liability if the consumption of any of its products causes injury, illness or death. In addition, Synutra will voluntarily recall products in the event of contamination or damage. A significant product liability judgment or a widespread product recall may negatively impact Synutra’s profitability for a period of time depending on product availability, competitive reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that Synutra’s products caused illness or injury could adversely affect Synutra’s reputation with existing and potential customers and its corporate and brand image. Synutra does not have liability insurance with respect to product liability claims. Any product liabilities claims could have a material adverse effect on its business, operating results and financial condition.
 
Commodity price increases will increase operating costs and may reduce profits.
 
Synutra uses many different commodities including fresh milk, whey protein powder and energy. Commodities are subject to price volatility caused by commodity market fluctuations, supply and demand, currency fluctuations, and changes in governmental agricultural programs. Commodity price increases will result in increases in raw material costs and operating costs. Synutra may not be able to increase its product prices to offset these increased costs; and increasing prices may result in reduced sales volume and profitability. It does not fully hedge against changes in commodity prices and its hedging strategies may not work as planned.
 
Synutra may not be able to sustain market acceptance for its services and products.
 
Synutra has established limited brand recognition in China. Failure to establish a brand and presence in the marketplace on a timely basis could adversely affect its financial condition and operating results. Moreover, Synutra cannot be sure that it will successfully complete the development and introduction of new products or product enhancements or that any new products developed will achieve acceptance in the marketplace. It may also fail to develop and deploy new products and product enhancements on a timely basis. In addition, currently Synutra only sells its products in China. It may seek to expand its distribution to South and Southeast Asia. There can be no assurance that Synutra will be able to expand its distribution in the future or that any such expansion will be successful. Furthermore, there can be no assurance that any expansion will not have a material adverse effect on the operating results of Synutra, particularly while it is implementing such expansion and the costs associated with any expansion.
 
If Synutra fails to comply with the many laws applicable to its business, it may incur significant fines and penalties.
 
Synutra’s facilities and products are subject to many laws and regulations administered by the Industry and Commerce Management and Administration (ICMA) Bureau, the Taxation Registration Office, Health and Hygiene Permitting Office (HHP), Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), and the State Food and Drug Administration Bureau (SFDA) relating to the processing, packaging, storage, distribution, advertising, labeling, quality, and safety of food products. Synutra’s failure to comply with applicable laws and regulations could subject it to administrative penalties and injunctive relief, civil remedies, including fines, injunctions and recalls of its products. It is possible that change to such laws, more rigorous enforcement of such laws or Synutra’s current or past practices, could have a material adverse effect on Synutra’s business, operating results and financial condition. Further, additional environmental, health or safety issues relating to matters that are not currently known to management may result in unanticipated liabilities and expenditures.
 
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Synutra’s quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in volatility of its stock price.
 
Synutra’s quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter. This may lead to volatility in its stock price. The factors that are likely to cause these variations may include the introduction of new products or services by Synutra or its competitors and a combination of the other adverse developments as discussed in these risk factors.
 
Nondisclosure agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
 
In order to protect Synutra’s proprietary technology and processes, it also relies in part on nondisclosure agreements with its employees, licensing partners, consultants, agents and other organizations to which it discloses its proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases it could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of its proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect its competitive business position. Since Synutra relies on trade secrets and nondisclosure agreements, in addition to patents, to protect some of its intellectual property (such as its infant formula), there is a risk that third parties may obtain and improperly utilize its proprietary information to its competitive disadvantage.
  
Synutra does not have long term contracts with its fresh milk suppliers.
 
Synutra typically has not entered into written long terms agreements with its fresh milk suppliers. As a result, suppliers may, without notice or penalty, terminate their relationship with Synutra at any time. Synutra typically purchases fresh milk from multiple dairy farmers and cooperatives without long term contract arrangements. Failure to receive fresh milk in a timely manner could have a material adverse effect on Synutra’s business, operating results and financial condition.
 
Synutra does not have long term contracts with its customers.
 
Synutra typically has not entered into written long terms agreements with customers. As a result, customers may, without notice or penalty, terminate their relationship with Synutra at any time. In addition, even if customers should decide to continue their relationship with Synutra, there can be no guarantee that they will purchase the same amounts of products as in the past. Any loss of a customer, or decrease in the volume of products purchased by a customer could have a material adverse effect on Synutra’s business, operating results and financial condition.
 
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Loss of key executives and failure to attract qualified management could limit growth and negatively impact operations.
 
Synutra depends highly upon its senior management team. It will continue to depend on operations management personnel with industry experience. At this time, Synutra does not know the availability of such experienced management personnel or how much it may cost to attract and retain such personnel. The loss of the services of any member of senior management or the inability to hire experienced operations management personnel could have a material adverse effect on the operations and financial condition of Synutra.
 
Failure to effectively respond to product and business crises could negatively impact brand image, business reputation, and results.
 
In times of possible market crisis involving any of Synutra’s products, Synutra management may not be able to respond to such events in a timely and effective manner. Such failure and/or inadequacy could occur due to the growth of management and having many layers of management within Synutra’s management structure as the company grows. For example, one of Synutra’s competitors did not respond quickly to a localized consumer complaint over a test result of out-of-spec iodine levels has resulted in damage to this brand image and may have had a material adverse effect on its results of operations. If Synutra’s management does not respond quickly and appropriately to any quality control issues or customer complaints, it could have a material adverse effect on its results of operations and financial condition.

If we fail to effectively expand our operations and capacity to satisfy demand for our products, our results of operations and business prospects could be impaired.

Our future success depends on our ability to expand our business to address growth in demand for our current and future products. To accomplish this expansion, we have to continuously monitor and address our capital resource needs. For example, during this fiscal quarter the Company entered into a loan agreement with ABN and a common stock purchase agreement with Warburg Pincus Private equity IX, L.P. to raise $35 million and $66 million, respectively. We have also entered into various short term loan agreements with banks in China. We used the capital obtained from such transactions to (i) make investments in one of our subsidiaries, BQL, (ii) fund the construction of new processing facilities, (iii) establish a joint venture for the production of Chondroitin, and (iv) purchase fixed assets. Our ability to add production capacity and increase output is subject to significant risks and uncertainties, including:
 
 
·
 
the availability of additional funding to build new processing facilities, make additional investments in our subsidiaries, acquire additional businesses or production facilities, purchase additional fixed assets and purchase other raw materials on favorable terms or at all;
 
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·
 
our management and minimization of delays and cost overruns caused by problems with dairies; and
 
 
·
 
our receipt of any necessary government approvals or permits that may be required to expand our operations in a timely manner or at all.
 
Our failure to effectively expand our capacity will harm our operating results and our business prospects.

Our business is capital intensive and our growth strategy may require additional capital which may not be available on favorable terms or at all.

We believe that our current cash, cash flow from operations and the proceeds from our financing initiatives with ABN and Warburg Pincus will be sufficient to meet our present and reasonably anticipated cash needs. We have, in the past, entered into loan agreements and common stock purchase agreements in order to raise additional capital. We may, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our manufacturing capacity or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
 
Our rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results.
 
To accommodate our anticipated growth, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system. Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.
 
If we fail to accurately project market demand for our products, our business expansion plan could be jeopardized and our financial condition and results of operations will suffer.
 
We plan to increase our annual manufacturing capacity to meet an expected increase in demand for our products. Our decision to increase our manufacturing capacity was based primarily on our projected increases in our sales volume and growth in the size of the nutrition product market in China. If actual customer sales are less than our projected market demand, we will likely suffer overcapacity problems and may have to leave capacity idle, which may reduce our overall profitability and hurt our financial condition and results of operations.
 
37

 
Part of our strategy involves the development of new products, and if we fail to timely develop new products or we incorrectly gauge the potential market for new products, our financial results will be adversely affected.
 
We plan to utilize our in-house research and development capabilities to develop new products that could become new sources of revenue for us in the future and help us to diversify our revenue base. Our future research and development efforts will be focused on expanding our product offering beyond dairy-based nutritional products, such as Chondroitin, rice-based cereals and nutritional food bars. If we fail to timely develop new products or if we miscalculate market demand for new products that we develop, we may not be able to grow our sales revenue at expected growth rates and may incur expenses relating to the development of new products that are not offset by sufficient sales revenue generated by these new products.

RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA

The Chinese Legal System
 
The practical effect of the People's Republic of China legal system on Synutra’s business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several provinces. Similarly, the accounting laws of the People's Republic of China mandate accounting practices that are not entirely consistent with US Generally Accepted Accounting Principles. The Chinese accounting laws require that an annual "statutory audit" be performed in accordance with the People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises be maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation.
 
Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
 
38

 
Changes in the laws and regulations in The Peoples Republic of China may adversely affect Synutra’s ability to conduct its business.
 
As Chinese corporations, all of Synutra’s operating subsidiaries are subject to the Company Law of The Peoples Republic of China and more specifically to the Foreign Company provisions of the Company Law and the Law on Foreign Capital Enterprises of the People's Republic of China. Additionally, as a food manufacturing company, Synutra is subject to the laws and regulations from Health and Hygiene Permitting Office (HHP), Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), and the State Food and Drug Administration Bureau (SFDA). Changes in existing laws or new interpretations of such laws may have a significant impact on our methods and costs of doing business. For example, new legislative proposals for product pricing, approval criteria and manufacturing requirements may be proposed and adopted. Such new legislation or regulatory requirements may have a material adverse effect on our financial condition, results of operations or cash flows. In addition, we will be subject to varying degrees of regulation and licensing by governmental agencies in The Peoples Republic of China. There can be no assurance that the future regulatory, judicial and legislative changes will not have a material adverse effect on Synutra’s Chinese operating subsidiaries, that regulators or third parties will not raise material issues with regard to its Chinese subsidiaries or its compliance or non-compliance with applicable laws or regulations or that any changes in applicable laws or regulations will not have a material adverse effect on our operations.
 
Economic reform issues may have an adverse impact on the business.
 
Although the Chinese government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
 
 
·
Synutra will be able to capitalize on economic reforms;
 
 
 
 
·
The Chinese government will continue its pursuit of economic reform policies;
 
 
 
 
·
The economic policies, even if pursued, will be successful;
 
 
 
 
·
Economic policies will not be significantly altered from time to time; and
 
 
 
 
·
Business operations in China will not become subject to the risk of nationalization.
 
Negative impact upon economic reform policies or nationalization could result in a total investment loss in Synutra’s common stock.
 
Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect Synutra's operations.
 
39

 
Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.

To date reforms to China's economic system have not adversely impacted Synutra's operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that Synutra will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
 
Synutra may have difficulty establishing adequate management, legal and financial controls in The Peoples Republic of China.
 
The People’s Republic of China historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. Synutra may have difficulty in hiring and retaining a sufficient number of qualified employees to work in The Peoples Republic of China. As a result of these factors, it may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
 
Capital outflow policies in The Peoples Republic of China may hamper Synutra’s ability to remit income to the United States.
 
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations may require that Synutra comply with complex regulations for the movement of capital. In order to comply with these regulations it may have to revise or change the banking structure of the company or its subsidiaries Although management believes that Synutra is currently in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change it may not be able to remit all income earned and proceeds received in connection with its operations to the U.S.
 
40

 
It will be extremely difficult to acquire jurisdiction and enforce liabilities against Synutra’s officers, directors and assets based in The Peoples Republic of China.
 
Because all of directors and most of Synutra’s executive officers, including Liang Zhang, the chairman of the Board of Directors and Chief Executive Officer, are Chinese citizens and reside in China it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against Synutra and/or its officers and directors by a stockholder or group of stockholders in the U.S. Furthermore, because the majority of its assets are located in The Peoples Republic of China it would also be very difficult to access those assets to satisfy an award entered against Synutra in U.S. court.
 
Synutra may face obstacles from the political system in The Peoples Republic of China.
 
Foreign companies conducting operations in The Peoples Republic of China face significant political, economic and legal risks. The political system in The Peoples Republic of China, including a strong bureaucracy, may hinder Western investment. Another obstacle to foreign investment is corruption. There is no assurance that Synutra will be able to obtain recourse, if desired, through The Peoples Republic of China’s less developed judicial systems.
 
RISKS RELATED TO THE COMPANY’S COMMON STOCK
 
The Company’s stock is thinly traded, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell a significant number of your shares.
 
The shares of the Company’s common stock are currently thinly-traded on the Nasdaq Global Market, meaning that the number of persons interested in purchasing its common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that the Company is a small to mid cap company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if it came to the attention of such persons, they tend to be risk-averse and may be reluctant to follow the Company. As a consequence, there may be periods of several days or more when trading activity in the shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. The Company cannot give you any assurance that a broader or more active public trading market for its common shares will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, the Company can give you no assurance that you will be able to sell your shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares.
 
Anti-takeover provisions in the Company’s certificate of incorporation could affect the value of its stock.
 
The Company’s Certificate of Incorporation contains certain provisions that could be an impediment to a non-negotiated change in control. In particular, without stockholder approval, the Company can issue up to 20,000,000 shares of preferred stock with rights and preferences determined by the Company’s Board of Directors. These provisions could make a hostile takeover or other non-negotiated change in control difficult, so that stockholders would not be able to receive a premium for their common stock.
 
41

 
Potential issuance of additional common and preferred stock could dilute existing stockholders.
 
The Company is authorized to issue up to 250,000,000 shares of common stock. To the extent of such authorization, the Company’s Board of Directors has the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of the common stock offered hereby. The Company is also authorized to issue up to 20,000,000 shares of preferred stock, the rights and preferences of which may be designated in series by the Board of Directors. Such designation of new series of preferred stock may be made without stockholder approval, and could create additional securities which would have dividend and liquidation preferences over the common stock offered hereby. Preferred stockholders could adversely affect the rights of holders of common stock by:
 
 
·
exercising voting, redemption and conversion rights to the detriment of the holders of common stock;
 
 
 
 
·
receiving preferences over the holders of common stock regarding or surplus funds in the event of its dissolution or liquidation;
 
 
 
 
·
delaying, deferring or preventing a change in control of the Company; and

 
·
discouraging bids for its common stock.
 
The Company’s existing directors, executive officers and principal stockholders hold a substantial amount of its common stock and may be able to prevent other stockholders from influencing significant corporate decisions.
 
As of March 31, 2007, the Company’s directors and executive officers and their affiliates beneficially own approximately 87.31% of its outstanding common stock, based on the most recent filings by such parties with the SEC as of that date. These stockholders, if they act together, may be able to direct the outcome of matters requiring approval of the stockholders, including the election of its directors and other corporate actions such as:
 
 
·
its merger with or into another company;
 
 
 
 
·
a sale of substantially all of its assets; and
 
 
 
 
·
amendments to its certificate of incorporation.
 
The decisions of these stockholders may conflict with its interests or those of the Company’s other stockholders.
 
42

 
Substantial sales of common stock could cause stock price to fall.
 
As of June 18, 2007, the Company had outstanding 54,000,713 shares of common stock, of which approximately 52,907,415 shares were “restricted securities” (as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended). The shares of restricted stock are eligible for public resale under Rule 144. Although Rule 144 restricts the number of shares that any one holder can sell during any three-month period under Rule 144, because more than one stockholder holds these restricted shares, a significant number of shares could legally be sold commencing in one year from the date of acquisition. No prediction can be made as to the effect, if any, that sales of the shares subject to Rule 144 sales commencing in one year, or the availability of such shares for sale, will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for its common stock and could impair its ability to raise capital through the sale of its equity securities.

The market price of the Company’s stock may be adversely affected by market volatility.
 
The market price of the Company’s common stock is likely to be volatile and could fluctuate widely in response to many factors, including:
 
 
·
announcements of technological innovations by the Company or its competitors;
 
 
 
 
·
announcements of new products or new contracts by the Company or its competitors;
 
 
 
 
·
actual or anticipated variations in its operating results due to the level of expenses and other factors;
 
 
 
 
·
changes in financial estimates by securities analysts and whether its earnings meet or exceed such estimates;
 
 
 
 
·
conditions and trends in the baby food and other industries;
  
 
·
new accounting standards;
 
 
 
 
·
general economic, political and market conditions and other factors; and
 
 
 
 
·
the occurrence of any of the risks described in this Form 10-K.

The market price of the Company’s stock may be adversely affected by the Restatement.

The Company’s assessment of accounting errors and irregularities identified during the preparation of the Form 10-Q has resulted in the restatement of the Company’s financial statements as of and for the year ended March 31, 2007 and as and for each fiscal quarter ended June 30, 2006, September 30, 2006 and December 31, 2006. The results of the Restatement include a decrease in net income and earnings per share for the affected fiscal periods. These adverse changes to the Company’s results of operations and financial condition could result in a loss of investor confidence and adversely affect the market price of the Company’s common stock.
 
43

 
Failure to achieve and maintain effective internal control over financial reporting in accordance with rules of the SEC promulgated under Section 404 of the Sarbanes-Oxley Act could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.

Under rules of the SEC promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, the Company is required to furnish a report by our management on our internal control over financial reporting. In the course of our assessment of the effectiveness of our internal control over financial reporting as of June 30, 2007, which assessment was conducted during this fiscal quarter in connection with the preparation of this report, the Company identified certain material weaknesses in our internal control over financial reporting. These material weaknesses in our internal control over financial reporting, as described in Item 4T. Controls and Procedures, as well as any other weaknesses or deficiencies that may exist or hereafter arise or be identified, could harm our business and operating results, and could result in adverse publicity and a loss in investor confidence in the accuracy and completeness of our financial reports, which in turn could have a material adverse effect on our stock price, and, if such weaknesses are not properly remediated, could adversely affect our ability to report our financial results on a timely and accurate basis.

Although we believe that we have and are taking steps to remediate these material weaknesses, as described in Item 4T. Controls and Procedures, we cannot assure you that this remediation will be successful or that additional deficiencies or weaknesses in our controls and procedures will not be identified. In addition, we cannot assure you that our independent registered public accounting firm will agree with our assessment that our material weaknesses have been remediated.

Failure to satisfy Nasdaq listing requirements may have an adverse effect on our stock price.

On August 20, 2007, the Company received a staff determination letter from The Nasdaq Stock Market stating that the Company’s common stock is subject to delisting from The Nasdaq Global Market for the Company’s failure to file a quarterly report on Form 10-Q for the period ended June 30, 2007 with the SEC by the required deadline. Timely filing of annual and periodic reports with the SEC is required for continued listing under Nasdaq Marketplace Rule 4310(c)(14). The Company has appealed Nasdaq’s determination and requested a hearing before the Nasdaq Listing Qualification Panel (the “Panel”). This appeal and request for a hearing has stayed the suspension of trading in the Company’s common stock pending a decision by the Panel, and the Company’s stock will remain listed during this time period. Further, the Company believes that the Restatement and the filing of this Form 10-Q with the SEC will result in the Panel’s grant of the Company’s request for continued listed. However, there can be no assurance that the Panel will grant the Company’s request.
 
44

 
We may be unable to establish and maintain an effective system of internal control over financial reporting, and as a result we may be unable to accurately report our financial results or prevent fraud. 

We are subject to provisions of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act will require that we include a report from management on our internal control over financial reporting in our annual report on Form 10-K beginning with our annual report for the fiscal year ending March 31, 2008. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. Our management may conclude that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree and may decline to attest to our management’s assessment or may issue an adverse opinion. Any of these outcomes could result in a loss of investor confidence in the reliability of our reporting processes, which could materially and adversely affect the trading price of your shares.

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

On May 24, 2007, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Warburg Pincus Private Equity IX, L.P. (the “Investor”), pursuant to which the Investor agreed to acquire 4 million shares of common stock (the “Common Shares”), par value $0.0001 per share, of the Company for an aggregate purchase price of $66,000,000. The Company claims an exemption from the registration Requirements of the Securities Act of 1933 (the “Act”) for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investors are accredited investors and/or qualified institutional buyers, the investors had access to information about the Company and their investment, the investors took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

45



EXHIBIT
NO.
 
DOCUMENT DESCRIPTION
 
 
 
3.1
 
Articles of Incorporation (1)
3.2
 
Bylaws (1)
10.1
 
Share Exchange Agreement dated as of June 14, 2005 (2)
10.2
 
License and Supply Agreement dated as of September 1st , 2003 (3)
10.3
 
Agreement between he Company and the Department of Finance of Zheng Lan Qi (County) of Inner Mongolia, with Amendment and Schedule (4)
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 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 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).
 
(1)
Incorporated herein by reference from the Registrant’s Form 10SB126 filed with the Securities and Exchange Commission on June 15, 2005.
(2)
Incorporated herein by reference from the Registrant’s Form 8-K filed with Securities and Exchange Commission on July 21, 2005.
(3)
Incorporated herein by reference from the Registrant’s Form 10-KSB filed with the Securities and Exchange Commission on June 29, 2006.
(4)
Incorporated herein by reference from the Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 9, 2006.
 
46


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: October 5, 2007 
By:  
/s/ Liang Zhang
 
Name:  Liang Zhang
 
Title:   Chief Executive Officer  

47

 
EX-31.1 2 v089581_ex31-1.htm
EXHIBIT 31.1
 
SARBANES-OXLEY SECTION 302(A) CERTIFICATION
PRINCIPAL EXECUTIVE OFFICER
 
I, Liang Zhang, certify that:
 
(1)
I have reviewed this Quarterly Report on Form 10-Q of Synutra International, Inc.;
 
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
 
(4)
The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
   
 
(b)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(c)
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
 
(5)
The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
 
 
 

 
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
 
Date: October 5, 2007  
By:  
/s/Liang Zhang
 
Liang Zhang
Chief Executive Officer

 
 

 
 
EX-31.2 3 v089581_ex31-2.htm
EXHIBIT 31.2
 
SARBANES-OXLEY SECTION 302(A) CERTIFICATION
PRINCIPAL FINANCIAL OFFICER
 
I, Lawrence Lee, certify that:
 
(1)
I have reviewed this Quarterly Report on Form 10-Q of Synutra International, Inc.;
 
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
 
(4)
The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(c)
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
 
(5)
The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
 
 
 

 
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
 
Date: October 5, 2007
By:  
/s/ Lawrence Lee
 
Lawrence Lee
Chief Financial Officer

 
 

 
 
EX-32.1 4 v089581_ex32-1.htm
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of SYNUTRA INTERNATIONAL, INC. (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date here of (the “report”), I, Liang Zhang, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
 
Dated this 5th day of October, 2007.
By:  
/s/ Liang Zhang
 
Liang Zhang
Chief Executive Officer

 
 

 
 
EX-32.2 5 v089581_ex32-2.htm
EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of SYNUTRA INTERNATIONAL, INC. (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date here of (the “report”), I, Lawrence Lee, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
 
Dated this 5th day of October, 2007.
By:  
/s/ Lawrence Lee
 
Lawrence Lee
Chief Financial Officer
 
 
 

 
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