Tongli Pharmaceuticals (OTC BB:TGLP)

TONGLI PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

We plan to fund operations and capital expenditures including without limitation the payments to Tonghua under the New Drug Assignment Agreement 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.

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.

The report of our independent registered public accounting firm on the financial statements for the year ended March 31, 2009 includes an explanatory paragraph indicating substantial doubt as to the our ability to continue as a going concern. We have taken certain actions and continue to implement changes designed to improve our financial results and operating cash flows. The actions include certain cost-saving initiatives and continuous development of new and existing clients.

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 equipments and approach international equity markets for additional debt and/or equity financing.

The GeoTeam® will closely track the Tongli Pharmaceuticals story. The Company recently reported weak results for its fiscal 2010 second quarter.

The company published mixed commentary, blaming negative market forces for the quarter's poor performance, adding it was unsure when this situation will abate.  see note

However, it capped off its commentary on a positive note, indicating that Company initiatives will result in "increases in revenue for the remainder of this fiscal year and beyond." 

The question of course is will the projected revenue increase result in increased profitability? It is interesting to note that Tongli has not seen a drop in its shareholder equity per share of $0.83.

The GeoTeam® will offer updates if warranted.

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures.

Source: SEC Form 10Q (For the quarterly period ending September 30, 2009)

For the three months ended September 30, 2009, our operating results were not as good as expected. Our sales revenue decreased due to:

• The general slowdown of the economy growth in China as well as the seasonal production suspension and our factory facility maintenance arranged in August 2009.
• The uncertainties of the Health Care Reforms in China also have affected the confidence of many of our regional distributors.

 As a result, these distributors have cut their orders with our company within this quarter ended September 30, 2009. Accordingly, as production and sales promotion as well as advertising campaign activities were reduced, sales of major products went down during the three months ended September 30, 2009. The combined results for the six months ended September 30, 2009 still reflected profitability, but management does not know whether this trend will continue.

In order to achieve a better operating performance for the remainder of this fiscal year and beyond, we will endeavor to continue the execution of our product channel expansion strategy which we believe may result in increased market penetration of our products and expanded revenue growth. Management also plans to emphasize expanded and enhanced marketing and sales for the remainder of this fiscal year 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 the company is not negotiating with anyone regarding the potential acquisition.

Management believes that our emphasis on further commercializing and broadening our product lines, and enhanced sales and marketing efforts will yield increases in revenue for the remainder of this fiscal year and beyond.

Tongli Pharmaceuticals is attempting to rectify its liquidity issues that still exist:

Our auditors issued an opinion in their audit report on the financial statements for the fiscal year ended March 31, 2009 expressing uncertainty about the ability of our Company to continue as a going concern. This means that there is substantial doubt that we can continue as an ongoing business without additional financing and/or generating profits from our operations. The going concern uncertainty expressed in their audit opinion could make it more difficult for us to secure additional financing on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain. If our losses continue and we are unable to secure additional financing, we may ultimately cease doing business or seek protection from creditors under applicable bankruptcy laws.

Management has taken certain actions and continues to implement changes designed to improve the Company’s financial results and operating cash flows. The actions include certain cost-saving initiatives, continuous development of new and existing clients and seeking of capital financings from management and principal stockholders. Management believes that these actions will enable the Company to move towards profitability and improve cash flow in its continuing operations through the coming year.

Source: SEC Form 10K (For the fiscal year ending March 31, 2009, page 28) 

Mr. Mingli Yao, founder and CEO of Tongli, commented: "We are continuing to grow rapidly in spite of challenging market conditions. During this reporting period we have filled key management positions, most notably hiring a new CFO with broad financial experience in the United States. Consumers continue to purchase our products, and we are actively looking for additional new products to add to our distribution pipeline."

Source: GlobeNewswire (February 17, 2009)

TGLP has shown respectable growth through its Third Quarter ended December.

• Sales increased 315% to $5.07 million
• EPS increased 400% to $ 0.15.  ($ 0.096 tax adjusted).

However, the GeoTeam® feels that investors should be aware of certain liquidity issues that could affect valuation:

• At December 31, 2008, the Company had working capital deficiency of $816,133 and an accumulated deficit of $353,405. We funded the deficit by means of a bank loan and loans from the members of our management group and advances from an entity owned by our Chairman.

• Included in our current liabilities at December 31, 2008 is a note payable to our bank in the amount of $1,009,349 (RMB6,918,273). The note is collateralized by real estate owned by our Chairman. The note has been in default since June 30, 2007, and we are negotiating with the bank a refinancing of the note. To date the bank has not taken any action against the Company.

• Our need to have raw materials available when needed causes us to advance cash to suppliers. This drain on our cash will remain unless we are able to secure a proprietary source for the volatile herbs that are a large portion of our raw material purchases.

• 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 (which has a book value of $7.1 million) 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.

Source: SEC Form 10Q (For the quarterly period ended December 31, 2008. Page 20)

The GeoTeam® will monitor the company's progress as it pertains to its liquidity situation.