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 ending June 30, 2012



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------



For the transition period from ________    to ________.



Commission file number: 000-52954



Tongli Pharmaceuticals (USA), Inc.

(Exact name of registrant as specified in
its charter)



|Delaware                                                               |  | 84-1090791                                  
|---------------------------------------------------------------------- |  | --------------------------------------------
|(State or other jurisdiction
        of incorporation or organization) |  | (IRS Employer
        Identification number)
|                                                                       |  |                                             
|14 Wall Street, 20th Floor
        New York, NY                        |  | 10005                                       
|(Address of Principal Executive Offices)                               |  | (Zip Code)                                  



212-842-8837            212-842-8837

(Registrant’s Telephone Number, Including
Area Code)



n/a

(Former name, former address and former
fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  Yes x  No  ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).  Yes  ̈  No
x



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one): Yes  ̈  No   ̈





|Large accelerated filer  ̈                     |  | Accelerated filer  ̈        
|--------------------------------------------- |  | ---------------------------
|Non-accelerated filer  ̈                       |  | Smaller reporting company x
|(Do not check if a smaller reporting company) | 



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).   Yes  ̈ No x



As of August 13, 2012, there were 13,548,122 shares of company’s
common stock issued and outstanding.











TABLE OF CONTENTS



|Cautionary Note on Forward Looking Statements | 3                                                                                    
|--------------------------------------------- | -------------------------------------------------------------------------------------
|                                              |                                                                                      
|PART I – FINANCIAL INFORMATION                | 5                                                                                    
|                                              |                                                                                      
|Item 1.                                       | Consolidated Financial Statements                                                    
|Item 2.                                       | Management’s Discussion and Analysis of Financial Condition and Results of Operations
|Item 3.                                       | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4(T).                                    | Controls and Procedures                                                              
|                                              |                                                                                      
|PART II – OTHER INFORMATION                   | 21                                                                                   
|                                              |                                                                                      
|Item 1.                                       | Legal Proceedings                                                                    
|Item 2.                                       | Unregistered Sales of Equity Securities and Use of Proceeds                          
|Item 3.                                       | Defaults Upon Senior Securities                                                      
|Item 4.                                       | Mine Safety Disclosures                                                              
|Item 5.                                       | Other Information                                                                    
|Item 6.                                       | Exhibits                                                                             
|                                              |                                                                                      
|SIGNATURES                                    | 22                                                                                   



Unless otherwise provided in this Quarterly Report on Form 10-Q,
references to “the Company,” “the Registrant,” “Tongli,” “we,” “us,”
and “our” refer to Tongli Pharmaceuticals (USA), Inc. together with its wholly-owned subsidiaries.



2







CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS



In addition to historical information,
this Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in such forward-looking statements.  We cannot give any guarantee that the
plans, intentions or expectations described in the forward looking statements will be achieved.  All forward-looking statements
involve significant risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those factors described in the “Risk Factors” section of our Annual
Report for the fiscal year ended March 31, 2012 (the “2012 10-K”).  Readers should carefully review such risk
factors as well as factors described in other documents that we file from time to time with the Securities and Exchange Commission.



In some cases, you can identify forward-looking
statements by terminology such as “guidance,” “may,” “will,” “should,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,”
“potential,” “proposed,” “intended,” or “continue” or the negative of these terms
or other comparable terminology.  You should read statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial condition or state other “forward-looking”
information.  There may be events in the future that we are not able to accurately predict or control.  You should be
aware that the occurrence of any of the events described in our risk factors and other disclosures could substantially harm our
business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price
of our securities could decline.  Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, growth rates, and levels of activity, performance or achievements.  Factors
that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include, without limitation:



| | · | our ability to obtain sufficient working capital to support our business plans;
| | - | -------------------------------------------------------------------------------



our ability to recommence operations
at our manufacturing facility;



| | · | our ability to expand our product offerings and maintain the quality of our products;
| | - | -------------------------------------------------------------------------------------



| | · | the availability of Chinese government granted rights to exclusively manufacture or co-manufacture
our products;
| | - | ----------------------------------------------------------------------------------------------------------------



| | · | the availability of Chinese national healthcare reimbursement of our products;
| | - | ------------------------------------------------------------------------------



| | · | our ability to manage our expanding operations and continue to fill customers’ orders on
time;
| | - | ----------------------------------------------------------------------------------------------



| | · | our ability to maintain adequate control of our expenses allowing us to realize anticipated revenue
growth;
| | - | -----------------------------------------------------------------------------------------------------------



| | · | our ability to maintain or protect our intellectual property;
| | - | -------------------------------------------------------------



| | · | our ability to maintain our proprietary technology;
| | - | ---------------------------------------------------



| | · | the impact of government regulation in China and elsewhere, including the support provided by the
Chinese government to the Traditional Chinese Medicine and healthcare sectors in China;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our ability to implement product development, marketing, sales and acquisition strategies and adapt
and modify them as needed;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | our ability to integrate any future acquisitions;
| | - | -------------------------------------------------



| | · | our implementation of required financial, accounting and disclosure controls and procedures and
related corporate governance policies; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



3







| | · | our ability to anticipate and adapt to changing conditions in the Traditional Chinese Medicine
and healthcare industries resulting from changes in government regulations, mergers and acquisitions involving our competitors,
technological developments and other significant competitive and market dynamics.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Readers are cautioned not to place undue
reliance on our forward-looking statements, which reflect management’s opinions only as of the date thereof.  We undertake
no obligation to revise or publicly release the results of any revision of our forward-looking statements, except as required by
law.



4







PART I



ITEM 1.    FINANCIAL STATEMENTS



TONGLI PHARMACEUTICALS
(USA), INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS





|                                                                                                                                                                          |  | June 30, 2012 |            |  | March 31,2012 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- |  | ------------- | -
|                                                                                                                                                                          |  | (Unaudited)   |            |  |               |  
|ASSETS                                                                                                                                                                    |  |               |            |  |               |  
|Current assets:                                                                                                                                                           |  |               |            |  |               |  
|Cash                                                                                                                                                                      |  | $             | 54,294     |  |               | $
|Accounts Receivable                                                                                                                                                       |  |               | 2,316,337  |  |               |  
|Inventories                                                                                                                                                               |  |               | 74,536     |  |               |  
|Advance to suppliers                                                                                                                                                      |  |               | 1,028,826  |  |               |  
|Prepaid expense and other current assets                                                                                                                                  |  |               | 51,680     |  |               |  
|Deferred tax assets                                                                                                                                                       |  |               | 533,230    |  |               |  
|Contract deposit-current portion                                                                                                                                          |  |               | 4,279,669  |  |               |  
|Due from related parties                                                                                                                                                  |  |               | -          |  |               |  
|Total current assets                                                                                                                                                      |  |               | 8,338,572  |  |               |  
|                                                                                                                                                                          |  |               |            |  |               |  
|Long-term assets:                                                                                                                                                         |  |               |            |  |               |  
|Property and equipment, net                                                                                                                                               |  |               | 6,180,583  |  |               |  
|land use right, net                                                                                                                                                       |  |               | 4,037,983  |  |               |  
|Contract deposit-long term                                                                                                                                                |  |               | -          |  |               |  
|Total long-term assets                                                                                                                                                    |  |               | 10,218,566 |  |               |  
|                                                                                                                                                                          |  |               |            |  |               |  
|Total assets                                                                                                                                                              |  | $             | 18,557,138 |  |               | $
|                                                                                                                                                                          |  |               |            |  |               |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                      |  |               |            |  |               |  
|Current liabilties:                                                                                                                                                       |  |               |            |  |               |  
|Accounts payable                                                                                                                                                          |  | $             | 121,716    |  |               | $
|Taxes payables                                                                                                                                                            |  |               | 122,111    |  |               |  
|Accrued expenses                                                                                                                                                          |  |               | 197,624    |  |               |  
|Due to related parties                                                                                                                                                    |  |               | 4,741      |  |               |  
|Total current liabilities                                                                                                                                                 |  |               | 446,192    |  |               |  
|                                                                                                                                                                          |  |               |            |  |               |  
|Stockholders' Equity                                                                                                                                                      |  |               |            |  |               |  
|Preferred stock, $0.001 par value,authorized 1,000,000 shares; none issued and outstanding                                                                                |  |               | -          |  |               |  
|Common stock, $0.001 par value,authorized 200,000,000 shares issued and outstanding 13,428,111 and 13,294,778 shares, as of June 30, 2012 and March 31, 2012 respectively |  |               | 13,428     |  |               |  
|Additional paid-in-capital                                                                                                                                                |  |               | 8,862,566  |  |               |  
|Accumulated other comprehensive income                                                                                                                                    |  |               | 2,309,799  |  |               |  
|Retained earnings                                                                                                                                                         |  |               | 6,925,153  |  |               |  
|Total Stockholders' equity                                                                                                                                                |  |               | 18,110,946 |  |               |  
|                                                                                                                                                                          |  |               |            |  |               |  
|Total liablities and Stockholders' equity                                                                                                                                 |  | $             | 18,557,138 |  |               | $







The accompanying notes are an integral part
to the consolidated financial statements





5







TONGLI PHARMACEUTICALS
(USA), INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENT OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)





|                                                      |  | For the Three Months Ended June 30, |           
|----------------------------------------------------- |  | ----------------------------------- | ----------
|                                                      |  | 2012                                |           
|                                                      |  |                                     |           
|Revenue                                               |  | $                                   | -         
|                                                      |  |                                     |           
|Cost of sales                                         |  |                                     | -         
|                                                      |  |                                     |           
|Gross Profit                                          |  |                                     | -         
|                                                      |  |                                     |           
|Operating expenses:                                   |  |                                     |           
|General and administrative expenses                   |  |                                     | 503,593   
|Depreciation and amortization expenses                |  |                                     | 91,238    
|Selling expenses                                      |  |                                     | 19,066    
|Total operating expenses                              |  |                                     | 613,897   
|                                                      |  |                                     |           
|Operating income(loss)                                |  |                                     | (613,897  
|                                                      |  |                                     |           
|Other income(expenses):                               |  |                                     |           
|Interest income(expense)                              |  |                                     | 25        
|Total other income(expenses)                          |  |                                     | 25        
|                                                      |  |                                     |           
|Income(loss) before income taxes                      |  |                                     | (613,872  
|                                                      |  |                                     |           
|Income tax expense(credit)                            |  |                                     | (130,162  
|                                                      |  |                                     |           
|Net Income(loss)                                      |  |                                     | (483,710  
|                                                      |  |                                     |           
|Other Comprehensive income                            |  |                                     |           
|Foreign Currency Translation adjustment               |  |                                     | 233,824   
|                                                      |  |                                     |           
|Comprehensive income(loss)                            |  | $                                   | (249,886  
|                                                      |  |                                     |           
|Basic and diluted income(loss) per share              |  | $                                   | (0.04     
|                                                      |  |                                     |           
|Basic and diluted weighted average shares outstanding |  |                                     | 13,370,968







The accompanying notes are an integral part
to the consolidated financial statements





6







TONGLI PHARMACEUTICALS
(USA), INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENT OF CASH FLOWS

(UNAUDITED)





|                                                      |  | For the Three Months Ended June 30, |          
|----------------------------------------------------- |  | ----------------------------------- | ---------
|                                                      |  | 2012                                |          
|Cash flows from operating activities                  |  |                                     |          
|Net income(loss)                                      |  | $                                   | (483,710 
|Adjustments to reconcile net income(loss) to net cash |  |                                     |          
|provided by(used in)operating activities:             |  |                                     |          
|Depreciation and amortization                         |  |                                     | 142,184  
|Accrued interest- related party                       |  |                                     | -        
|Stock issued for services                             |  |                                     | 20,000   
|Deferred Tax                                          |  |                                     | (130,162 
|Changes in operating assets and liabilities:          |  |                                     | -        
|Accounts receivable                                   |  |                                     | 1,901,550
|Inventory                                             |  |                                     | (60,766  
|Prepaid expenses and other current assets             |  |                                     | 192,752  
|Accounts payable                                      |  |                                     | (312,746 
|Accrued expenses and tax payables                     |  |                                     | (763,125 
|Net cash provided by (used in) operating activities   |  |                                     | 505,977  
|                                                      |  |                                     |          
|Cash flows from investing activities                  |  |                                     |          
|Refund(Payment) of contract deposit                   |  |                                     | (575,478 
|Net cash provided by (used in) investing activities   |  |                                     | (575,478 
|                                                      |  |                                     |          
|Cash flows from financing activities                  |  |                                     |          
|Proceeds from related party loans                     |  |                                     | 100,751  
|Repayement of related party loans                     |  |                                     | -        
|Net cash provided by (used in) financing activities   |  |                                     | 100,751  
|                                                      |  |                                     |          
|Effect of exchange rate changes on cash               |  |                                     | (464     
|                                                      |  |                                     |          
|Net increase (decrease) in cash                       |  |                                     | 30,786   
|                                                      |  |                                     |          
|Cash, beginning of the period                         |  |                                     | 23,508   
|                                                      |  |                                     |          
|Cash, end of the period                               |  | $                                   | 54,294   
|                                                      |  |                                     |          
|Supplemental cash flow information                    |  |                                     |          
|During the period, cash was paid for the following:   |  |                                     |          
|Income taxes                                          |  | $                                   | -        







The accompanying notes are an integral part
to the consolidated financial statements





7







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



| | 1. | ORGANIZATION AND BASIS OF PRESENTATION
| | -- | --------------------------------------



Tongli Pharmaceuticals
(USA), Inc.(the “Company”), through an indirect wholly-owned subsidiary, Harbin Tianmu Pharmaceuticals Co., Ltd. (“Tianmu
Pharmaceuticals”), develops, produces and sells a wide variety of pharmaceuticals and healthcare products in the People’s
Republic of China (“PRC” or “China”) that are based on traditional Chinese medicine (“TCM”).  In
August 2011, the Company formed Harbing Lvnong Plant Ltd. (“Lvnong”) to plant and sell herbs in China. Lvnong is 100%
owned by the Company’s indirect wholly-owned subsidiary, Heilongjiang Tongli Technology Co., Ltd. (“Tongli Technology”).



The accompanying
unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”) for interim financial  information and pursuant to the requirements for reporting on Form 10-Q.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of the management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Results shown for interim periods are not necessarily indicative of the results to be obtained
for a full year or any other periods. The information included in this Form 10-Q should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.



The balance sheet
as of March 31, 2012 has been derived from the audited financial statements of the Company as of that date, but does not include
all of the information and footnotes required by U.S. GAAP for the complete financial statements.



Principles of consolidation



The consolidated
financial statements include the accounts of: (i) the Company (ii) the Company’s wholly-owned subsidiary American Tony Pharmaceuticals,
Inc., a Delaware corporation (“American Tony”), (iii) American Tony’s wholly-owned subsidiary Tongli Technology,
and (iv) Tongli Technology’s wholly-owned subsidiaries, Tianmu Pharmaceuticals and Lvnong, each PRC companies.  All
significant inter-company accounts and transactions have been eliminated upon consolidation.





| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



Uses of estimates



The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting
period.  Actual results could differ from those estimates.



Fair Value of Financial Instruments



The Company adopted
ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring
fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:



Level 1-Inputs
are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.



8







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)





Level 2-Inputs
are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or
corroborated by observable market data.



Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.



The carrying amounts
reported in the balance sheets for cash, accounts receivable, inventory, prepaid expense, accounts payable and other accrued expenses
approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets
or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.



Inventory



Inventory is stated
at the lower of cost, determined using the weighted average cost method, and net realizable value.  Costs include materials,
labor and manufacturing overhead.  Net realizable value is the estimated selling price, in the ordinary course of business,
less estimated costs to complete and dispose.  Management periodically compares the cost of inventory with the market
value and an allowance is made for writing down the inventory to its market value, if lower than cost. No allowance for inventory
markdown is considered necessary for three months ended June 30, 2012 and 2011.



Harvested Chinese
herbs inventories are stated at lower of cost or market. Cost of growing herbs includes director labor and material costs accumulated
through the balance sheet date.



Impairment of Long Lived Assets



Long-lived assets,
which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated
by the assets.



The Company accounts
for the impairment of long-lived assets in accordance with the guidance of FASB ASC 360-10-20. Long-lived assets are reviewed for
impairment when circumstances indicate the carrying value of an asset may not be recoverable.  For assets that are to
be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets
is less than their carrying value.  If impairment exists, an adjustment is made to write the asset down to its fair value,
and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based
on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed
of are carried at the lower of carrying value or estimated net realizable value. Based on its review, the Company believes that,
as of December 31, 2011, there were no impairment of its long-lived assets.



Deferred income taxes



The Company accounts
for income taxes in accordance with FASB ASC 740 “Income Taxes”which requires that deferred tax assets and
liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.  In addition, ASC 740 requires recognition of future
tax benefits, such as carry-forwards, to the extent that realization of such benefits is more likely than not and that a valuation
allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management
reviews this valuation allowance periodically and makes adjustments as warranted.



9







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| | -- | ------------------------------------------------------



Foreign currency translation



Since the Company
operates primarily in the PRC, the Company’s functional currency is the Chinese Renminbi (“RMB”).  For
financial reporting purposes, RMB has been translated into United States dollars (“USD”) as the reporting currency.  Equity
accounts are translated at historical rates. Assets and liabilities are translated at the exchange rate in effect at the balance
sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders'
equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency translations are
included in accumulated other comprehensive income.



Revenue Recognition



Revenue
is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery
is completed, and no other significant obligations of the Company exist and collectability is reasonably assured.Payments
received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances fromcustomers. The Company sells primarily to distributors who subsequently sell the merchandise. The agreements with distributors
do not provide for the right of return.  Return from distributors has historically been immaterial and accordingly no
reserve is deemed necessary as of June 30, 2012 and 2011.



| | 3. | INVENTORY
| | -- | ---------



As of June 30, 2012 and March 31, 2012,
inventory consists the following:





|                |  | June 30, 2012 |        |  | March 31, 2012 |  
|--------------- |  | ------------- | ------ |  | -------------- | -
|Raw materials   |  | $             | 13,720 |  |                | $
|Work in process |  |               | 60,756 |  |                |  
|Finished goods  |  |               | 60     |  |                |  
|Total           |  | $             | 74,536 |  |                | $





| | 4. | CONTRACT DEPOSIT
| | -- | ----------------



Contract deposit
represents payments under material contracts by which the Company intends to purchase drug formula to be used in the manufacturing
and increasing its product lines.



As of June 30, 2012 and March 31, 2012,
contract deposit consists the following:





|                             |  | June 30, 2012 |           |  | March 31, 2012 |  
|---------------------------- |  | ------------- | --------- |  | -------------- | -
|Contract deposit-Tonghua (1) |  | $             | 3,487,137 |  |                | $
|Contract deposit-Xinyu (2)   |  |               | 792,532   |  |                |  
|                             |  |               | 4,279,669 |  |                |  
|Less: current portion        |  |               | -         |  |                |  
|Total                        |  | $             | 4,279,669 |  |                | $





10







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



| | 4. | CONTRACT DEPOSIT (Continued)
| | -- | ----------------------------



| | (1) | On March 21, 2010, the Company entered into a New Drug Assignment Agreement (the “Tonghua
Agreement”) with Tonghua Yisheng Pharmaceuticals Company Limited (“Tonghua”) pursuant to which the Company agreed
to purchase a new drug candidate, called Nafarelin, from Tonghua for a purchase price of RMB33,000,000 (approximately $4.85 million).
The total purchase price is payable in three installments: 33% of the total purchase price (approximately $1.6 million) was paid
upon execution of the Tonghua Agreement in March 2010; another 33% (approximately $1.6 million) was paid in March 2011 (although
it is required to be paid upon conclusion of third clinical trial for the product pursuant to the terms of the Tonghua Agreement)
and the balance is payable upon conclusion of the transfer.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Nafarelin
is a proposed treatment for endometriosis and prostate cancer. At a minimum, completion of the third phase clinical trail is a
pre-condition to receipt of the New Drug Approval Certificate from the SFDA. The SFDA new drug approval procedure is separate and
distinct from the patent prosecution procedure. To date, neither Tonghua nor the Company has applied or intend to apply for patent
protection for Nafarelin or the formula or process related to Nafarelin. Once Tonghua is granted the New Drug Approval Certificate
for Nafarelin, according to pharmaceutical laws of PRC, the Company, as the assignee of the New Drug Approved Certificate, shall
receive 4 years of exclusive protection.  As described below, the Company regards such protection period as the appropriate
amortization period. The patent protection is irrelevant for purposes of amortization in determining the life of the drug as the
Company will not apply for patent protection for Nafarelin.



The
Company is not responsible for conducting or paying for any clinical trial and/or research and development in connection with the
new drug application for Nafarelin. Pursuant to the Tonghua Agreement, Tonghua shall continue the research, development and clinical
trial work for Nafarelin until the SFDA grants the New Drug Approval Certificate and the product is ready to be marketed. Tonghua
is listed as the applicant for the SFDA new drug approval process for this product. Once SFDA approval is obtained, the Company
will be able to consummate the assignment and enjoy the protection afforded by the New Drug Approval Certificate. In addition,
the Company’s ability to commercialize this new product also requires assistance and cooperation from Tonghua, which Tonghua
is obligated to provide to us under the Tonghua Agreement.



Under
PRC law, the SFDA’s New Drug Approval Certificate grants certain exclusive protections to approved new drugs, meaning that
the subject formula may not be manufactured by other parties in China. The exclusive protection periods for the new drugs vary
from 4 to 12 years depending on the category of the new drug. Because the Company shall be the beneficiary of the exclusive protection
during the applicable period (the so-called “new drug approval period”), upon consummation of the transaction contemplated
by the Tonghua Agreement, the Company will regard the protection period as the appropriate amortization period. Based on ASC 805-50-30
“Initial Measurement on Acquisition of Assets Rather Than a Business” and ASC350-30 ”General Intangibles
Other Than Goodwill”, the total payment pursuant to the Tonghua Agreement will be recorded as an intangible asset once the
Company obtains the SFDA New Drug Approval Certificate and will be amortized over the term of the new drug protection period.



Based
on a written mutual understanding between the Company and Tonghua, any payments the Company made to Tonghua under the Tonghua Agreement
will be refunded if SFDA approval is not abtained for Nafarelin. Such mutual understanding, although the Company believes to be
binding, was not explicitly stipulated in the Tonghua Agreement or otherwise memorialized. As such, the first two installment under
the Tonghua Agreement was accounted as a deposit and the remaining last installment payment will be also accounted as deposits
until the New Drug Approval Certificate is obtained, at which point the total payment will be recorded as intangible asset and
amortized over the term of the new drug protection period.The Tonghua Agreement also provides that the Company and Tonghua will
compensate one another for all losses incurred by the other party if the purchase is not concluded due to reasons attributable
to the offending party.





11









TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)







| | 4. | CONTRACT DEPOSIT (Continued)
| | -- | ----------------------------



On
June 6, 2012, the Company entered into a Termination Agreement with Tonghua pursuant to which the Tonghua Agreement was terminated.
Pursuant to the Termination Agreement, Tonghua will refund prepayment of RMB 22,000,000 (approximate to $3.5 million) in four
installments. The first installment of RMB5, 000,000 (approximately $794,000) will be refunded prior to August 30, 2012, the second
installment of RM6, 000,000 (approximately $950,000) will be refunded prior to November 30, 2012, the third installment of RMB8,000,000
(approximately $1.3 million) will be refunded prior to February 28, 2013 and the last installment of RMB3,000,000 (approximately
$476,000) will be refunded prior to May 30, 2013.



| | (2) | On April 30, 2012, the Company entered into Xinyu Breath Spray purchase agreement with Harbin Junde
Healthcare product Company. Pursuant to the agreement, the total purchase price is RMB8,500,000(approximately $1.33 million). The
Company will pay 50% of the purchase price after commencement of the Xinyu Breath Spray purchase agreement and pay the rest of
the purchase price after the Company manufactured three batches of Xinyu Breath Spray that meet the quality standards of the product. 
The Company paid RMB 5,000,000 (approximately $793,000) to Harbin Junde Healthcare product Company since the purchase agreement
was entered.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | LAND USE RIGHT
| | -- | --------------



The executive
offices and manufacturing facilities of the Company’s subsidiary Tianmu Pharmaceuticals are located in the Limin Pharmaceutical
Technology Park in the City of Harbin, which is the capital of Heilongjiang Province in The People’s Republic of China.  In
2008, Tianmu Pharmaceuticals paid RMB 2.7 million (approximate to $400,000) to local government to obtain a land use right of 50,000
square meters for 50 years for manufacturing purposes. The Company amortizes this land use right on a straight-line basis over
50 years.



On December 20,
2010, the Company entered into a contract with a non-affiliated individual to acquire rights to use a parcel of land and fixtures
thereon for twenty years (from December 20, 2010 to December 30, 2030) for RMB20 million (approximately $3 million). RMB12 million
(equivalent to $1,817,541) was paid upon execution of the contract in December 2010. The balance was required to be paid within
20 days after the conveyance of a list of land and fixtures. Due to the nature of the subject parcel of land, there is no PRC government
approval or recording required for the transfer of land use right. The Company paid the outstanding balance under the contract
on February 21, 2011 and the transfer was concluded in March 2011. As such, the total contract price was recorded as long-term
assets and is amortized over the twenty years use right period.



In March 2011,
the Company entered into a supplemental contract with the same third-party to acquire a nearby fish pond for twenty years with
total contract price of RMB 5.5 million (approximate to $0.85 million). The Company will use this fish pond to provide water supply
to the planted traditional Chinese medicine. Total amount of this contract was amortized on a straight-line basis over twenty years.



As of June 30, 2012 and March 31, 2012,
land use rights consist of the following:





|                               |  | June 30, 2012 |           |   | March 31, 2012 |  
|------------------------------ |  | ------------- | --------- | - | -------------- | -
|Land use rights                |  | $             | 4,469,876 |   |                | $
|Less: Accumulated amortization |  |               | (431,893  | ) |                |  
|                               |  | $             | 4,037,983 |   |                | $





The
amortization expense for the three months ended June 30, 2012 and 2011 was $52,891and $51,437 respectively.



12







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



| | 6. | DUE TO/(FROM) RELATED PARTIES
| | -- | -----------------------------



Due to/(from) related parties consist
of the following:





|                                                           |  | June 30, 2012 |          |   | March 31, 2012 |  
|---------------------------------------------------------- |  | ------------- | -------- | - | -------------- | -
|Due from Harbin Tianmu Real Estate Development Co. Ltd (a) |  | $             | (398,898 | ) |                | $
|Due to Yao, Mingli, Chairman of the Company                |  |               | 570,324  |   |                |  
|Due to(from) US Hua Sky International Investment LLC (b)   |  |               | (53,090  | ) |                |  
|Due from Tianmu Investment Co. Ltd (c)                     |  |               | (4,755   | ) |                |  
|Due from Yao, Yuan, a shareholder of the Company (d)       |  |               | (108,840 | ) |                |  
|Total                                                      |  | $             | 4,741    |   |                | $





(a) Harbin Tianmu Real Estate Development Co., Ltd. is an entity
owned by our Chairman, Mr. Mingli Yao.

(b) US Hua Sky International Investment LLC is an entity owned
by our Chairman, Mr. Mingli Yao

(c)Tianmu Investment Co., Ltd. is an entity partially owned
by our Chairman, Mr. Mingli Yao.

(d) Ms. Yuan Yao is the daughter of Mr. Mingli
Yao.



Mr. Mingli Yao has personally guaranteed
the loan receivable from Harbin Tianmu Real Estate Development Co. Ltd and Tianmu Investment Co. Ltd. If theloan has not been repaid
in the year ended March 31, 2013, Mr. Yao has agreed to offset the balance due to him referenced above.



| | 7. | STOCKHOLDERS’ EQUITY
| | -- | --------------------



On May 10, 2012,
the Company issued 133,333 common shares to its legal counsel Ellenoff Grossman & Schole LLP for services rendered. The Company
recorded the fair value of $20,000 for these issued shares.



| | 8. | TAXES
| | -- | -----



| | (a) | Corporation income tax (“CIT”)
| | --- | ------------------------------



The Company’s
Chinese subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises,
which are generally subject to tax at a new statutory rate of 25%. As of June 30, 2012, for the Company’s PRC entities remain
open for statutory examination by PRC tax authorities.



The Company is
incorporated in the United States.  It had net operating loss carry forwards for United States income tax purposes amounted
to $1,956,227 and $1,871,117 for the three months ended June 30, 2011 and the year ended March 31, 2012 respectively, which may
be available to reduce future years' taxable income in the United States. These carry forwards will expire between 2028 and 2030.
Management doesn't expect to remit any of its net income back to the United States in the foreseeable future.  Accordingly,
the Company recorded a full valuation allowance as of June 30, 2012 and March 31, 2012.



The reconciliation
of income tax expense at the U.S. statutory rate at 35% in 2012 and 2011, to the Company’s effective tax is as follows:





|                                          |  | June 30, 2012 |          |   | June 30, 2011 |  
|----------------------------------------- |  | ------------- | -------- | - | ------------- | -
|U.S. Statutory income tax rate            |  | $             | (214,855 | ) |               | $
|Taxable difference between U.S. and China |  |               | 52,876   |   |               |  
|Change in valuation allowance             |  |               | 31,817   |   |               |  
|Effective income tax                      |  | $             | (130,162 | ) |               | $





13







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



The provisions for income taxes for
the three months ended June 30, 2012 and 2011 are summarized as follows:





|                              |  | For the Three Months Ended June 30, |         
|----------------------------- |  | ----------------------------------- | --------
|                              |  | 2012                                |         
|Current                       |  | $                                   | -       
|Deferred - United States      |  |                                     | (29,788 
|Deferred - China              |  |                                     | (132,191
|Change in Valuation Allowance |  |                                     | 31,817  
|Total                         |  | $                                   | (130,162







The components of income (loss) before
income taxes from China and U.S. for the three months ended June 30, 2012 and 2011 were as follows:





|                         |  | For the Three Months Ended June 30, |         
|------------------------ |  | ----------------------------------- | --------
|                         |  | 2012                                |         
|China                    |  | $                                   | (528,762
|United States            |  |                                     | (85,110 
|Income before income tax |  | $                                   | (613,872





| | (b) | Value added tax (“VAT”)
| | --- | -----------------------



Enterprises or
individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value
added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on the sales of the finished products.



| | (c) | Other taxes
| | --- | -----------



The Company is also subject to 5% of
business tax, 7% of City Construction Tax and 5% of Education Fees based on VAT.



| | 9. | COMMITMENTS AND CONTINGENCIES
| | -- | -----------------------------



On June 28, 2012,
the Company signed the lease agreement for the Company’s New York office located in Flushing, Queens which will have a rental
arrangement of $1,749 per month. Pursuant to the lease agreement, the term of the lease is from August 2012 to July 2013. Four
months rental were waived. $3,498 was paid as security deposit in June, 2012. As of June 30, 2012, the Company was obligated to
pay $13,992 under the lease agreement.



| | 10. | VULNERABILITY DUE TO OPERATIONS IN PRC
| | --- | --------------------------------------



The Company’s
operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government
has been pursuing economic reform policies for more than thirty years, no assurance can be given that the PRC government will continue
to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen

circumstances
affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s
pursuit of economic reforms will be consistent or effective.



Substantially
all of the Company’s businesses are transacted in RMB, which is not freely convertible. The Peoples Bank of China or other
banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China. Approval of
foreign currency payments by the Peoples Bank of China or other institutions requires submitting a payment application form together
with suppliers’ invoices, shipping documents and signed contracts.



14







TONGLI PHARMCEUTICAL (USA), INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(UNAUDITED)



Since the Company
has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions
on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments
to its shareholders outside of China may be limited.



The Company’s
business depends on maintaining licenses of its current products from SFDA. Obtaining licenses for additional products can be expensive
and is usually time consuming. Failure to obtain the required licenses can cause the Company’s business plan to be delayed.
If the delays prevent the Company from generating positive cash flows or introducing a significant number of products, there will
be a material adverse effect on the Company.



| | 11. | SUBSEQUENT EVENTS
| | --- | -----------------



The Company has
evaluated events after the date of these financial statements through the date that these financial statements were issued and
no subsequent event is required to be disclosed.



15







Item 2. Management’s Discussion
and Analysis of Financial Conditions of Operations.



The following
discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported
in the financial statements of Tongli Pharmaceuticals (USA) Inc. for the three months ended 2012 and 2011, and should be read in
conjunction with such financial statements and related notes included in this report. Those statements in the following discussion
that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results
and the timing of the events may differ materially from those contained in these forward looking statements due to a number of
factors, including those discussed in the “Cautionary Note on Forward Looking Statements” set forth above.



Company Overview



Tongli Pharmaceuticals
(USA), Inc.(“the Company”), through its indirectly wholly-owned subsidiaries, Harbin Tianmu Pharmaceuticals Co., Ltd.
(“HTP” or “Tianmu Pharmaceuticals”) and Harbin Lvnong Plant Ltd.(“Lvnong”), develops, produces
and sells a wide variety of pharmaceuticals and healthcare products in the People’s Republic of China (“PRC”
or “China”) that are based on traditional Chinese medicine, or TCM. The Company’s
main products include cholesterol reduction pill, mouthwash, anti-inflammatory tablet, Panax and Radix Polygoni Capsule and calcium
supplement. These products are sold through distributors or directly to customers; no service is required of the Company after
sales are made.  The Company’s primary customers are drug stores and hospitals located in China.



The Company owns
all of the outstanding capital stock of American Tony Pharmaceutical, Inc., a Delaware corporation (“American Tony”).
American Tony is a holding company.  In February 2007, American Tony acquired, through its wholly-owned subsidiary, Heilongjiang
Tongli Technology Co., Ltd., a PRC company (“Tongli Technology”), all of the registered capital of Harbin Tianmu Pharmaceuticals
Co., Ltd. (“Tianmu Pharmaceuticals”), a corporation organized under the laws of the PRC on November 26, 1999.   Tianmu
Pharmaceuticals is our principal operating subsidiary and is engaged in developing, manufacturing and marketing pharmaceutical
and health care products that incorporate elements of Chinese Traditional Medicine with elements of western medicine.



In August 2011,
we formed HarbingLvnong Plant Ltd. (“Lvnong”) to plant and sell herbs in China. Lvnong is 100% owned by Tongli Technology.



Development and Strategy



Suspension
of Operations



For
the three months ended June 30, 2012, we did not generate any revenue because (as initially disclosed in our Annual Report on
Form 10-K for the periodending March 31, 2012) our productionwas interrupted
by the breakdown of a boiler and related pipeline at our manufacturing facilities in January 2012. As
of the date of this report, most of equipment and production lines are still undergoing adjustments and have not resumed production
except production line of Radix Polygoni Capsule, which resumed production in July 2012. We
anticipate the full production will resume in September 2012. We anticipate there may not be as much revenue generated during
the quarter ended September 30, 2012 compared to the same period last year as a result of this situation.





Panax and Radix Polygoni Capsule



In October, 2010,
we began to manufacture and sell our new product Panax and Radix Polygoni Capsule. This new product has helped us to generate about
52% of our total sales for the three months ended June 30, 2011. We believe that this new product have great market potential and
will continue to generate sustainable income for our company in the foreseeable future.



Xinyu Breath
Spray



On April 30, 2012,
we entered into Xinyu Breath Spray Purchase Agreement (“Xinyu Purchase Agreement”) with Harbin Junde Healthcare Product
Company (“Harbin Junde”). Pursuant to the Xinyu Purchase Agreement, we will acquire the right to manufacture the Xinyu
Breath Spray at the total purchase price of RMB 8,500,000 (approximately $1.33 million). We will pay 50% of the purchase price
at time of closing of the Xinyu Purchase Agreement and pay the rest of the purchase price after we manufacture three batches of
Xinyu Breath Spray that meet the quality standards of product. We paid RMB 1,370,000 (approximately $214,508) on March 29, 2012
and RMB 3,630,000 (approximately $568,369) on May 30, 201, which includes the first installment payment of RMB 4,250,000 and RMB
750,000 for other payment orally agreed by the parties. On July 2, 2012, the Company entered into a supplementary agreement to
record the oral agreement the parties reached in May with regard to our payment obligation in respect to inspection fees, improvement
fees and raw material fees.



Xinyu Breath Spray
was marketed primarily through adware. The major markets include supermarkets, hotels and internet. We have two medium-size packages
with two flavors for the product, one for man and another for woman. We are targeting to high-end consumers.



We anticipate we will start production
of Xinyu Breath Spray in September  2012.



16







Land Parcel



On December 20,
2010, we entered into a contract with third party to acquire the right to use a parcel of land for twenty years (from December
20, 2010 to December 30, 2030) with a total contract price of RMB 20 million (approximate to $3 million).  We started
to use this parcel of land to plant the traditional Chinese medicine in 2011. We paid RMB 12 million (equivalent to $1,817,541)
in December 2010 and RMB 8 million (equivalent to $1,211,694) in February 21, 2011.



In addition, in
March 2011, we entered into a supplemental contract with the same third-party to acquire the right to use a nearby fish pond for
twenty years with total contract price of RMB 5.5 million (approximate to $0.85 million). RMB5,270,665 (approximately $825,000)
was paid as of March 31, 2012. We used this fish pond to provide water supply to the traditional Chinese medicine field.



Marketing and
sales



Management plans
to continue to emphasize on expanding and enhancing marketing and sales in the fiscal year 2013 and beyond.  Part of
this strategy involves increasing and improving marketing and sales activities to enhance the market position of our key products
and to increase the sales of other products by expanding our sales force, solidifying our distribution network and expanding market
segment coverage, and increasing marketing and promotional activities. Management also plans to selectively pursue strategic acquisition
opportunities to further consolidate our resources and expand our market coverage. We believe that such initiatives will provide
effective means to broaden our product lines, expand our market coverage and complement our research and development capabilities.
As of the date of this report, we are not engaged in any material discussions regarding any potential acquisition.



Subject to
the recommencement of our manufacturing capability, management believes that our emphasis on further commercializing and
broadening our product lines, enhanced sales and marketing efforts create the potential for increases in revenue in fiscal
2013 and beyond.



Discussion
of Operating Results



Operating results
for the three months ended June 30, 2012 and 2011



Revenues, cost of sales and gross
profit



We did not generate
any revenue for the three months ended June 30, 2012. The lack of  revenue during
the three months ended June 30, 2012 was due to the fact that the manufacturing process was interrupted by the breakdown
of a boiler and related pipeline in January, 2012. As of the date of this report, most of
equipment and production lines are still undergoing repairs except production line of Radix Polygoni Capsule, which has resumed
production in July 2012.



The Company had distribution contracts
with various distributors during the three months ended June 30, 2011to sell its products in China.  The Company manufactures
its products and ships the products to distributors based on the sales order from distributors each month.  Revenue is
recognized at the time of the shipment.  No return is allowed, unless there is a quality problem.  During the
three months ended June 30, 2011, there were no returns from distributors or customers.  Distributors normally make payments
upon receiving the products; however, in some cases, the Company may extend credit to certain creditable distributors for certain
period until the next shipment.



As we discussed above, we didn’t
generate any revenues for the three months ended June 30, 2012. Therefore, we also didn’t incur any cost of goods for the
three months ended June 30, 2012. Additionally, the gross profit for the period in this year is not a good indicator of what our
gross profits normally are. For example, for the three months ended June 30, 2011, we generated $2,568,392 in gross profit.



Operating
expenses



Total operating
expenses increased by approximately $240,321 for the three months ended June 30, 2012 from $373,576 for the three months ended
June 30, 2011 to $613,897 for the three months ended June 30, 2012, representing a 64.3% increase. The increase in our
total operating expense for the three months ended June 30, 2012 as compared to the prior comparative period was primarily
related to repairing for broken boiler.



Interest
income (expense)



Interest expense
was $0 for the three months June 30, 2012 compared to interest expense of $13,933 for the three months ended June 30,
2012. Interest expense for the period was only related to the loans to related parties.



Income tax expense (Credit)



All of our net
income for the three months ended June 30, 2011 was from Tianmu Pharmaceuticals, which conducts substantially of our operation
in the PRC. Our Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which
are generally subject to tax at a new statutory rate of 25% on income reported in the statutory financial statements after appropriate
tax adjustments.



We had income
tax credit of $130,162 for the three months ended June 30, 2012 that results from net losses of current period.



17







Net income
(loss)



As
a result of the disruption in our manufacturing capability as described above, we reported net loss of $483,710 for the three
months ended June 30, 2012, as compared to the net income of $1,600,308 for the three months ended June
30, 2011.



Other comprehensive
income



We operate primarily
in the PRC and the functional currency of our operating subsidiary is RMB. RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions.  No representation is intended
to imply that the RMB amounts could have been, or could be, converted, realized or settled into USD at the rate on June 30,
2012 or at any other rate.



The value of RMB
against USD may fluctuate and is affected by changes in political and economic conditions. Our revenues, costs and financial assets
are mostly dominated in RMB while our reporting currency is the U.S. dollar. Accordingly, this may result in gains or losses from
currency translation on our financial statements.



Translation adjustments
resulting from this process amounted to a gain of $233,824 and $242,692 as of June 30, 2012 and 2011, respectively.  The
balance sheet amounts with the exception of equity at March 31, 2012 were translated at 6.3885 RMB to 1.00 USD as compared
to 6.3089 RMB to 1.00 USD at June 30, 2012. The equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the three months ended June 30, 2012 and 2011 were 6.3078 RMB and 6.4984 RMB,
respectively.



Liquidity
and Capital Resources



Liquidity is the ability of a company
to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.
We have financed our operation and capital expenditures through cash from operations as well as loans from shareholders and an
entity owned by our Chairman. As of the date of this report, we do not have any outstanding bank loans.



As of June 30, 2012 and March 31, 2012,
due to (from) related parties consists the following:





|                                                           |  | June 30, 2012 |          |   | March 31, 2012 |  
|---------------------------------------------------------- |  | ------------- | -------- | - | -------------- | -
|Due from Harbin Tianmu Real Estate Development Co. Ltd (a) |  | $             | (398,898 | ) |                | $
|Due to Yao, Mingli, Chairman of the Company                |  |               | 570,324  |   |                |  
|Due to(from) US Hua Sky International Investment LLC (b)   |  |               | (53,090  | ) |                |  
|Due from Tianmu Investment Co. Ltd (c)                     |  |               | (4,755   | ) |                |  
|Due from Yao, Yuan, a shareholder of the Company           |  |               | (108,840 | ) |                |  
|Total                                                      |  | $             | 4,741    |   |                | $



As of June 30,
2012, the balance of due from Harbin Tianmu Real Estate Development Co. Ltd. was 398,898.Harbin Tianmu Real Estate Development
Co., Ltd. is an entity owned by our Chairman, Mr. Mingli Yao. Due from US Hua Sky International Investment LLC was $53,090. US
Hua Sky International Investment LLC is an entity owned by our Chairman, Mr. Mingli Yao. Due from Tianmu Investment Co. Ltd was
$4,755. Tianmu Investment Co., Ltd. is an entity partially owned by our Chairman, Mr. Mingli Yao.



Mr. Mingli Yao has personally guaranteed
the loan receivable from Harbin Tianmu Real Estate Development Co. Ltd and Tianmu Investment Co. Ltd. If the loan could not been
repaid during the year ended March 31, 2013, Mr. Yao has agreed to offset the balance due to him referenced above.



We plan to fund operations
and capital expenditures with cash from operations, as well as loans from major shareholders and management members and
their affiliates.  We might also pursue sources additional financing in the form of debt, equity or convertible
security offerings. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to
us, or at all. The disruption of our manufacturing capability has adversely impacted our cash flow and may also require us to
seek financing.



Total current assets decreased to approximately
$8.3 million as of June 30, 2012 as compared to $9.1 million at March 31, 2012.  The primary changes in our current assets
during this period were from changes in accounts receivable and a reclassification of part of contract deposit to current. The
decrease of accounts receivable from approximately $4.1 million at March 31, 2012 to approximately $2.3 million as of June 30,
2012 was due to collection from customers.



Our current liabilities as of June 30,
2012 were approximately $0.45 million compared to $1.50 million as of March 31, 2012. The decrease in our current liabilities during
this period was mainly from the decrease in tax payable.



18







The growth of
our company will require additional debt and/or equity financing.  Currently we have budgeted $3.5 million for capital improvements.
We intend to pursue additional debt financing which could be secured by our property and equipment and approach international equity
markets for additional debt and/or equity financing.  To date we have no commitment from any source for the funds we require.



Discussion of Cash Flow



Comparison of
cash flows results for the three months ended June 30, 2012 and 2011 is summarized as follows:





|                                                    |  | June 30, 2012 |          |   | June 30, 2011 |  
|--------------------------------------------------- |  | ------------- | -------- | - | ------------- | -
|Net cash provided by (used in) operating activities |  | $             | 505,977  |   |               | $
|Net cash provided by (used in) investing activities |  |               | (575,478 | ) |               |  
|Net cash provided by (used in) financing activities |  |               | 100,751  |   |               |  
|Effect of exchange rate changes on cash             |  |               | (464     | ) |               |  
|Net increase (decrease) in cash                     |  |               | 30,786   |   |               |  
|Cash, beginning of period                           |  |               | 23,508   |   |               |  
|Cash, end of period                                 |  | $             | 54,294   |   |               | $





Operating activities



Cash flows provided
by operating activities for the three months ended June 30, 2012 amounted to $505,977, which consists of our net loss of $483,710,
and adds back noncash adjustments of $32,022 (including depreciation and amortization of $142,184, stock issued for services of
$20,000 and deferred tax asset of $130,162) and offset by net changes in operating assets and liabilities, primarily including
increase of accounts receivable of $1,901,550 which represented the collected amount from our customers during the period, an decrease
in accrued expenses and tax payable of 763,125.



Cash flows used
in operating activities for the three months ended  June 30, 2011 amounted to $708,810, which consist of our net income
of $1,600,308, adds back noncash adjustments of $161,626(including depreciation of property and equipment of $86,705, amortization
of land use right of $51,161, accrued interest expense on related party loan of $13,933, stock issued for services of $18,793 and
deferred tax asset of $8,966) and offset by net changes in operating assets and liabilities, primarily including increase of accounts
receivable of $1,702,097 which represented the temporarily uncollected amount from our increased credit sales during the period,
a increase in inventory of 722,920 to stock raw materials to avoid the potential raw material price increase in the near future.



Investing
activities



Net cash used
in investing activities for the three months ended June 30, 2012 amounted to $575,478 which consists of repayment of contract deposit
from the termination agreement with Lanhai and acquisition of property and equipments.



Net cash provided
by investing activities for the three months ended June 30, 2011 amounted to $307,767 which consists of refund of contract deposit
from the Termination Agreement pursuant to Lanhai.



Financing
activities



Cash flows provided
by by financing activities amounted to $100,751 for the three months ended June 30, 2012, which consists of proceeds and repayment
of related party loan.



Cash flows used
in by financing activities amounted to $142,108 for the three months ended June 30, 2011, which consists of repayment of related
party loan by the same amount.



Off-Balance
Sheet Arrangements



As of the date of this report, we do not
have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction,
agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation
arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets
transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.



Inflation



Inflation has not had a material impact on our business and
we do not expect inflation to have a material impact on our business in the near future.



19







ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



Not applicable.



ITEM 4T.  CONTROLS AND PROCEDURES



We seek to maintain disclosure controls
and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange
Act of 1934, as amended ( the “Exchange Act”)  is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.



Evaluation of Disclosure
Controls and Procedures.



As of June 30, 2012, the end of the fiscal
quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating
effectively as of June 30, 2012. Our disclosure controls and procedures were not effective because of certain “material
weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting”
section in Item 9A of our annual report for the fiscal year ended March 31, 2012. As of June 30, 2012, we had not completed the
remediation of these material weaknesses.



Limitations on the
Effectiveness of Disclosure Controls.



Readers are cautioned that our management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent
all fraud and material error.  An internal control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals
under all potential future conditions.



Changes in Internal
Control over Financial Reporting



There were no changes in our internal control
over financial reporting during the three months ended June 30, 2012 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting, except as disclosed above



20







PART II - OTHER INFORMATION



Item 1.     Legal
Proceedings



From time to time, we may become involved
in various lawsuits and legal proceedings, which arise in the ordinary course of business. We are currently not aware of any such
legal proceedings or claims that will have, individually or in the aggregate, a material adverse affect on our business, financial
condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm business.



Item 2.     Unregistered
Sales of Equity Securities and Use of Proceeds



None.



Item 3.     Defaults
Upon Senior Securities



None.



Item 4.     Mine
Safety Disclosures



Not applicable.



Item 5.     Other
Information



None.



Item 6.     Exhibits



(a)  Exhibits



|Exhibit No. |  | Description                                                                                                                                      
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|31.1*       |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                    
|31.2*       |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                    
|32.1*       |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2*       |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



21







SIGNATURES



In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                | Tongli Pharmaceuticals (USA), Inc.                                                        
|--------------- | ------------------------------------------------------------------------------------------
|                |                                                                                           
|August 14, 2012 | By:                                                                                       
|                | Mingli Yao
        Chief Executive Officer
        (Principal Executive Officer)          
|                |                                                                                           
|August 14, 2012 | By:                                                                                       
|                | Li Li
        Chief Financial Officer
        (Principal Financial and Accounting Officer)





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