U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
one)


þ
            Quarterly
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
Quarterly Period Ended March 31, 2009


or


o
            Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934





Commission
File Number 333-141384





Kun Run Biotechnology, Inc.





(Name of
registrant in its charter)




Nevada
                
                98-0517550(State
      or other jurisdiction
                  of
      incorporation or organization)
                
                (I.R.S.
      Employer Identification No.)





Free
      Trade Zone
                  168
      Nanhai Avenue, Haikou City
                  Hainan
      Province
                  People’s
      Republic of China
                
                570216(Address
      of principal executive offices)
                
                (Zip
      Code)





Issuer's
telephone number:  86-898-6680-2207





(Former
name and former address, if applicable)





Indicate
by check mark whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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
   þNo   ̈





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  ̈





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




Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer o
      (Do not check if a smaller
                reporting
      company)
              
              Smaller
      reporting company þ





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




As of May
14, 2009, the Registrant had 25,000,000 shares of common stock
outstanding.





Kun
Run Biotechnology, Inc.




Table of
Contents




PagePART
      I -
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements:
                
                3Condensed
      Consolidated Statements of Income and Comprehensive
      Income
                
                5Condensed
      Consolidated Balance Sheets
                
                6Condensed
      Consolidated Statements of Cash Flows
                
                8Notes
      to Financial Statements
                
                10Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                15Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                20Item
      4.
                Controls
      and Procedures
                
                20PART
      II -
                OTHER
      INFORMATION
                
                21Item
      1.
                Legal
      Proceedings
                
                21Item
      1A.
                Risk
      Factors
                
                21Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                21Item
      3.
                Defaults
      upon Senior Securities
                
                21Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                21Item
      5.
                Other
      Information
                
                21Item
      6.
                Exhibits
                
                21




2


Kun
Run Biotechnology, Inc.





Condensed
Consolidated Financial Statements


For the
three months ended


March 31,
2009 and 2008


(Stated
in US dollars)


3





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Financial Statements


Three
months ended March 31, 2009 and 2008





Index to
Condensed Consolidated Financial Statements





PagesCondensed
      Consolidated Statements of Income and Comprehensive Income
                
                5Condensed
      Consolidated Balance Sheets
                
                6 -
      7Condensed
      Consolidated Statements of Cash Flows
                
                8 -
      9Notes
      to Condensed Consolidated Financial Statements
                
                10
      - 13




4


Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Income and Comprehensive Income


For
the three months ended March 31, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)


Three
      months endedMarch
      31,(unaudited)2009
                              
                              
                              2008Sales
      revenue
                              
                              $
                              2,429,268
                              
                              
                              $
                              1,989,014Cost
      of sales
                              
                              
                              745,693
                              
                              
                              
                              663,204Gross
      profit
                              
                              
                              1,683,575
                              
                              
                              
                              1,325,810Operating
      expensesAdministrative
      expenses
                              
                              
                              192,908
                              
                              
                              
                              217,067Research and development
      costs
                              
                              
                              59,884
                              
                              
                              
                              28,669Selling
expenses
                              
                              
                              142,713
                              
                              
                              
                              141,071395,505
                              
                              
                              
                              386,807Income
      from operations
                              
                              
                              1,288,070
                              
                              
                              
                              939,003Interest income
                              
                              
                              225
                              
                              
                              
                              814Other income
                              
                              
                              52,740
                              
                              
                              
                              51,480Government subsidy
      income
                              
                              
                              7,325
                              
                              
                              
                              400Finance costs
                              
                              
                              (122,122
                              )
                              
                              
                              (143,696
                              )Income
      before income taxes and noncontrolling interest
                              
                              
                              1,226,238
                              
                              
                              
                              848,001Income
      taxes - Note 4
                              
                              
                              (194,946
                              )
                              
                              
                              (133,570
                              )Net
      income before noncontrolling interest
                              
                              
                              1,031,292
                              
                              
                              
                              714,431Net
      income attributable to noncontrolling interest
                              
                              
                              (9,089
                              )
                              
                              
                              -Net
      income attributable to Kun Run Biotechnology, Inc.common
    stockholders
                              
                              $
                              1,022,203
                              
                              
                              $
                              714,431Net
      income before noncontrolling interest
                              
                              $
                              1,031,292
                              
                              
                              $
                              714,431Other
      comprehensive incomeForeign currency translation
      adjustments
                              
                              
                              (23,970
                              )
                              
                              
                              454,775Comprehensive
      income
                              
                              
                              1,007,322
                              
                              
                              
                              1,169,206Comprehensive
      income attributable to noncontrolling interest
                              
                              
                              (8,865
                              )
                              
                              
                              -Comprehensive
      income attributable to Kun Run Biotechnology, Inc.common
    stockholders
                              
                              $
                              998,457
                              
                              
                              $
                              1,169,206Earnings
      per share attributable to Kun Run Biotechnology, Inc.common
      stockholders:basic and
    diluted
                              
                              $
                              0.04
                              
                              
                              $
                              0.03Weighted
      average number of shares outstanding:basic and
    diluted
                              
                              
                              25,000,000
                              
                              
                              
                              24,250,000





See the
accompanying notes to condensed consolidated financial statements




5




Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets


As
of March 31, 2009 and December 31, 2008


(Stated
in US Dollars)





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)ASSETSCurrent assetsCash and cash
      equivalents
                      
                      $
                      334,427
                      
                      
                      $
                      433,599Trade receivables,
      net
                      
                      
                      4,628,931
                      
                      
                      
                      4,732,750Bills
receivable
                      
                      
                      -
                      
                      
                      
                      117,360Other receivables, prepayments
      and deposits
                      
                      
                      1,035,892
                      
                      
                      
                      985,683Receivables from disposal of
      properties
                      
                      
                      474,070
                      
                      
                      
                      2,061,793Inventories - Note
      5
                      
                      
                      947,150
                      
                      
                      
                      689,415Amounts due from related
      companies
                      
                      
                      2,095,544
                      
                      
                      
                      5,595,307Amount due from a
      director
                      
                      
                      3,628
                      
                      
                      
                      -Deferred taxes
                      
                      
                      12,742
                      
                      
                      
                      8,362Total current
      assets
                      
                      
                      9,532,384
                      
                      
                      
                      14,624,269Intangible
    assets
                      
                      
                      104,624
                      
                      
                      
                      111,004Property, plant and equipment,
      net - Note 6
                      
                      
                      9,536,509
                      
                      
                      
                      9,685,374Land use rights - Note
      7
                      
                      
                      3,753,084
                      
                      
                      
                      3,775,540Deposit for acquisition of
      property, plant and equipment
                      
                      
                      464,060
                      
                      
                      
                      445,691Deposit paid to a related
      company for acquisition ofan intangible asset - Note
      8
                      
                      
                      7,032,000
                      
                      
                      
                      -TOTAL
      ASSETS
                      
                      $
                      30,422,661
                      
                      
                      $
                      28,641,878




See the
accompanying notes to condensed consolidated financial
statements


6





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets (Cont’d)


As
of March 31, 2009 and December 31, 2008


(Stated
in US Dollars)





March
      31,
                                        
                                        
                                        December
      31,2009
                                        
                                        
                                        2008(Unaudited)
                                        
                                        
                                        (Audited)LIABILITIES
      AND EQUITYLIABILITIESCurrent
    liabilitiesTrade payables
                                        
                                        $
                                        1,033,866
                                        
                                        
                                        $
                                        966,937Other payables and accrued
      expenses
                                        
                                        
                                        2,336,010
                                        
                                        
                                        
                                        1,672,500Dividend payable to Zhonghe’s
      former/existingnoncontrolling
      stockholders
                                        
                                        
                                        7,199
                                        
                                        
                                        
                                        7,209Income tax
    payable
                                        
                                        
                                        851,659
                                        
                                        
                                        
                                        655,019Amount due to a related
      company
                                        
                                        
                                        935
                                        
                                        
                                        
                                        936Secured borrowings - Note
      9
                                        
                                        
                                        5,713,500
                                        
                                        
                                        
                                        -Total current
      liabilities
                                        
                                        
                                        9,943,169
                                        
                                        
                                        
                                        3,302,601Deferred taxes
                                        
                                        
                                        10,048
                                        
                                        
                                        
                                        8,255Secured borrowings - Note
      9
                                        
                                        
                                        659,250
                                        
                                        
                                        
                                        6,528,150TOTAL
      LIABILITIES
                                        
                                        
                                        10,612,467
                                        
                                        
                                        
                                        9,839,006COMMITMENTS AND CONTINGENCIES- Note 10STOCKHOLDERS’
      EQUITYPreferred stock : par value of
      $0.001 per share, authorized10,000,000 shares in 2009 and
      2008, none issued andoutstanding
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common stock : par value $0.001
      per share; authorized100,000,000 shares, issued and
      outstanding 25,000,000shares in 2009 and 25,000,000
      shares in 2008
                                        
                                        
                                        25,000
                                        
                                        
                                        
                                        25,000Additional paid-in
      capital
                                        
                                        
                                        8,969,033
                                        
                                        
                                        
                                        8,969,033Statutory and other
      reserves
                                        
                                        
                                        2,820,850
                                        
                                        
                                        
                                        2,820,850Accumulated other comprehensive
      income
                                        
                                        
                                        1,577,599
                                        
                                        
                                        
                                        1,601,345Retained
    earnings
                                        
                                        
                                        6,239,702
                                        
                                        
                                        
                                        5,217,499TOTAL
      KUN RUN BIOTECHNOLOGY, INC. STOCKHOLDERS’EQUITY
                                        
                                        
                                        19,632,184
                                        
                                        
                                        
                                        18,633,727NONCONTROLLING
      INTEREST
                                        
                                        
                                        178,010
                                        
                                        
                                        
                                        169,145TOTAL
      EQUITY
                                        
                                        
                                        19,810,194
                                        
                                        
                                        
                                        18,802,872TOTAL
      LIABILITIES AND EQUITY
                                        
                                        $
                                        30,422,661
                                        
                                        
                                        $
                                        28,641,878




See the
accompanying notes to condensed consolidated financial
statements


7





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows


For
the three months ended March 31, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)





Three
      months ended
                                  March
      31,(Unaudited)2009
                                
                                
                                2008Cash
      flows from operating activitiesNet income attributable to Kun
      Run Biotechnology, Inc.common
      stockholders
                                
                                $
                                1,022,203
                                
                                
                                $
                                714,431Adjustments to reconcile net
      income attributable to Kun RunBiotechnology,
      Inc. to net cash provided by operating activities:Depreciation
                                
                                
                                162,634
                                
                                
                                
                                171,413Amortization of intangible
      assets and land use rights
                                
                                
                                23,537
                                
                                
                                
                                17,219Deferred taxes
                                
                                
                                (2,587
                                )
                                
                                
                                (10,818
                                )Gain on disposal of property,
      plant and equipment
                                
                                
                                183
                                
                                
                                
                                5,425Provision for doubtful
      accounts
                                
                                
                                77,622
                                
                                
                                
                                -Noncontrolling
      interest
                                
                                
                                9,089
                                
                                
                                
                                -Changes in operating assets and
      liabilities :-Trade
    receivables
                                
                                
                                19,744
                                
                                
                                
                                349,794Bills
    receivables
                                
                                
                                117,200
                                
                                
                                
                                -Other receivables, prepayments
      and deposits
                                
                                
                                (70,531
                                )
                                
                                
                                (25,675
                                )Amounts due from related
      companies
                                
                                
                                (92,163
                                )
                                
                                
                                (234,660
                                )Inventories
                                
                                
                                (258,675
                                )
                                
                                
                                (5,753
                                )Trade payables
                                
                                
                                68,248
                                
                                
                                
                                26,695Other payables and accrued
      expenses
                                
                                
                                665,790
                                
                                
                                
                                (91,174
                                )Income tax
    payable
                                
                                
                                197,533
                                
                                
                                
                                -Income tax
      recoverable
                                
                                
                                -
                                
                                
                                
                                137,381Net
      cash flows provided by operating activities
                                
                                
                                1,939,827
                                
                                
                                
                                1,054,278Cash
      flows from investing activitiesPayments to acquire and deposit
      for acquisition ofproperty, plant and
      equipment
                                
                                
                                (27,156
                                )
                                
                                
                                (301,206
                                )Proceeds from sale of property,
      plant and equipment
                                
                                
                                1,584,913
                                
                                
                                
                                -Amount due from a
      director
                                
                                
                                (3,628
                                )
                                
                                
                                (55,002
                                )Amounts due from related
      companies
                                
                                
                                (3,446,055
                                )
                                
                                
                                -Net
      cash flows used in investing activities
                                
                                $
                                (1,891,926
                                )
                                
                                $
                                (356,208
                                )




See the
accompanying notes to condensed consolidated financial
statements


8





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows (Cont’d)


For
the three months ended March 31, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)





Three
      months ended
                              31
      March,(Unaudited)2009
                            
                            
                            2008Cash
      flows from financing activitiesDividend paid to Zhonghe’s
      former/existing noncontrollingstockholders
                            
                            $
                            -
                            
                            
                            $
                            (6,943
                            )New bank loans
                            
                            
                            -
                            
                            
                            
                            4,194,000Repayment of bank
      loans
                            
                            
                            (146,500
                            )
                            
                            
                            (5,277,450
                            )Net
      cash flows used in financing activities
                            
                            
                            (146,500
                            )
                            
                            
                            (1,090,393
                            )Effect
      of foreign currency translation on cash and cash
    equivalents
                            
                            
                            (573
                            )
                            
                            
                            19,475Net
      decrease in cash and cash equivalents
                            
                            
                            (99,172
                            )
                            
                            
                            (372,848
                            )Cash
      and cash equivalents - beginning of period
                            
                            
                            433,599
                            
                            
                            
                            670,919Cash
      and cash equivalents - end of period
                            
                            $
                            334,427
                            
                            
                            $
                            298,071Supplemental
      disclosures for cash flow informationCash paid for
:-Interest
                            
                            $
                            121,520
                            
                            
                            $
                            143,400Income taxes
                            
                            $
                            -
                            
                            
                            $
                            137,381Non-cash
      investing and financing activitiesDividend payable to Zhonghe’s
      former stockholders settled byoffsetting amounts
      due from related companies and otherpayables
                            
                            $
                            -
                            
                            
                            $
                            120,961Deposit for acquisition of
      intangible asset settled by offsettingamounts due from
      related companies
                            
                            $
                            7,032,000
                            
                            
                            $
                            -




See the
accompanying notes to condensed consolidated financial
statements


9





1.
            Corporate
      information





The
Company was incorporated in the State of Nevada on March 10,
2006.  The Company’s shares are quoted for trading on the
Over-The-Counter Bulletin Board in the United States of America.





The
Company is principally engaged in manufacture, marketing, sale and distribution
of drugs and its products could be used to treat immunity dysfunction and
hyperfunction.




2.
            Basis
      of presentation





The
accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the “SEC”) including the
instructions to Form 10-Q and Regulation S-X.  Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted from these statements pursuant to such
rules and regulation and, accordingly, they do not include all the information
and notes necessary for comprehensive consolidated financial statements and
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2008, included in our Annual Report on Form 10-K
for the year ended December 31, 2008.





In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for the
three-month periods have been made.  Results for the interim period
presented are not necessarily indicative of the results that might be expected
for the entire fiscal year.





In
accordance with Financial Accounting Standard Board (“FASB”) Statement No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, the noncontrolling interestis presented
below
stockholders’ equity. Certain 2008
amounts in the consolidated financial statements have been reclassified to
conform to the 2009 presentation. These reclassifications have no effect on net
incomeor
stockholders’ equity as previously reported.




3.
            Summary
      of significant accounting policies





Principle of
      consolidation





The
      condensed consolidated financial statements include the accounts of the
      Company and its subsidiaries.  All significant inter-company
      accounts and transactions have been eliminated in
      consolidation.





Concentrations of
      credit risk





Financial
      instruments that potentially subject the Company to significant
      concentrations of credit risk consist principally of cash and cash
      equivalents and trade and bills receivables.  As of March 31,
      2009, substantially all of the Company’s cash and cash equivalents were
      held by major financial institutions located in the People’s Republic of
      China (the “PRC”), which management believes are of high credit
      quality.  With respect to trade and bills receivables, the
      Company extends credit based on an evaluation of the customer’s financial
      condition.  The Company generally does not require collateral
      for trade receivables and maintains an allowance for doubtful accounts of
      trade receivables.




During
the reporting periods, customers represented 10% or more of the Company’s
condensed consolidated sales are :-




Three
      months endedMarch
      31,(Unaudited)2009
            
            
            2008Beijing
      Ya Bao Fang Da Pharmaceutical Ltd.
            
            $
            271,607
            
            
            $
            -




10




3.
              Summary
      of significant accounting policies
(Cont’d)


Fair value of financial
instruments





The
Company adopted SFAS 157 on January 1, 2008.  The adoption of SFAS 157
did not materially impact the Company’s financial position, results of
operations or cash flows.





Statement
of Financial Accounting Standards No. 107 “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”) requires the disclosure of the estimated
fair value of financial instruments including those financial instruments for
which the Financial Accounting Standards No. 159 fair value option was not
elected.  Except for secured borrowings disclosed as below, the
carrying amounts of the financial assets and liabilities approximate to their
fair value due to short maturities or the applicable interest rates approximate
current market rates:-





As
      of March 31, 2009
                    (Unaudited)
                  
                  
                  As
      of December 31, 2008
                    (Audited)Carrying
                  
                  
                  
                  
                  
                  Carryingamount
                  
                  
                  Fair
      value
                  
                  
                  amount
                  
                  
                  Fair
      valueSecured
      borrowings
                  
                  $
                  6,372,750
                  
                  
                  $
                  6,382,844
                  
                  
                  $
                  6,528,150
                  
                  
                  $
                  6,407,755





The fair
values of secured borrowings are estimated using discounted cash flow analysis,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.





Recently issued accounting
pronouncements





In May
2008, the FASBissued SFAS
No.162, “The Hierarchy of Generally Accepted Accounting
Principles”.  Effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.  The Board does not expect that this Statement will result
in a change in current practice. However, transition provisions have been
provided in the unusual circumstance that the application of the provisions of
this Statement results in a change in practice.  The adoption of this
statement has no material effect on the Company's consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the fiscal year beginning after December 15,
2008.  The effect on the Company's consolidated financial statements
arising from adoption of this guidance has been stated in Note 2.




In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS No. 141 (Revised) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The adoption of this statement has no material effect on the Company's
consolidated financial statements.





In April
2009, the FASB issued three FASB Staff Positions (FSP’s) to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” provides
guidelines for making fair value measurements more consistent with the
principles presented in SFAS No.157. FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” enhances consistency in
financial reporting by increasing the frequency of fair value disclosures. FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments,” provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment losses on
securities. These three FSP’s are effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. We adopted the provisions of these FSP’s for the period
ending March 31, 2009. The management is in the process of evaluating the impact
these FSP’s will have on the Company’s consolidated financial statements upon
adoption.




11




4.
            Income
      taxes





United
States





Kun Run
Biotechnology, Inc. is subject to the United States Federal and state income tax
at a statutory rate of 35%.  No provision for the U.S. Federal income
taxes have been made as the Company had no taxable income in this jurisdiction
for the reporting period.





Hong
Kong





Kun Run
Biotechnology Ltd. was incorporated in Hong Kong and subject to Hong Kong
profits tax at a tax rate of 16.5%. No provision for Hong Kong profits tax has
been made as the Company has no taxable income during the reporting
period.





PRC





The
Company’s subsidiary, Hanian Zhonghe Pharmaceutical Co, Ltd. (“Zhonghe”), is
registered and operates in Hainan Province, the PRC, and recognized as
“Manufacturing Enterprise Located in Special Economic Zone”.  As a
result, Zhonghe is entitled to a preferential corporate income tax (“CIT”) rate
of 15% up to December 31, 2007.





The PRC’s
legislative body, the National People’s Congress, adopted the unified CIT Law on
March 16, 2007.  This new tax law replaces the existing separate
income tax laws for domestic enterprises and foreign-invested enterprises and
became effective on January 1, 2008.  Under the new tax law, a
unified income tax rates is set at 25% for both domestic enterprises and
foreign-invested enterprises.  However, there will be a transition
period for enterprises, whether foreign-invested or domestic, that are currently
receiving preferential tax treatments granted by relevant tax
authorities.  Enterprises that are subject to an enterprise income tax
rate lower than 25% may continue to enjoy the lower rate and will transit into
the new tax rate over a five year period beginning on the effective date of the
CIT Law. In accordance with the guideline, enterprise is subject to the tax rate
of 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012
respectively during the transition period. Enterprises that are currently
entitled to exemptions for a fixed term will continue to enjoy such treatment
until the exemption term expires.





As
approved by the relevant tax authority in the PRC, Zhonghe, being a Foreign
Investment Enterprise ("FIE"), engaged in an advanced technology industry, was
approved to enjoy a further three years' preferential tax rate at 15% for 2008,
2009 and 2010 ("Advanced Technology Industry Tax Benefit").  In
addition, Zhonghe was entitled to a special tax concession (“Tax Concession”)
that allows an amount up to 40% of the qualifying domestic capital expenditures
(as defined and approved under the relevant PRC income tax rule) to be used as
an offset against the excess of the current year's CIT over the prior year's
CIT. This special tax concession was terminated by the National People’s
Congress on January 1, 2008.




5.
            Inventories





March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)Raw
      materials
                    
                    $
                    383,893
                    
                    
                    $
                    284,837Work-in-progress
                    
                    
                    348,078
                    
                    
                    
                    260,504Finished
      goods
                    
                    
                    215,179
                    
                    
                    
                    144,074$
                    947,150
                    
                    
                    $
                    689,415





6.
            Property,
      plant and equipment




March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)Costs:Buildings
                        
                        $
                        5,884,360
                        
                        
                        $
                        5,892,393Plant
      and machinery
                        
                        
                        4,239,963
                        
                        
                        
                        4,233,317Furniture,
      fixtures and equipment
                        
                        
                        277,827
                        
                        
                        
                        273,588Leasehold
      improvements
                        
                        
                        118,483
                        
                        
                        
                        118,645Motor
      vehicles
                        
                        
                        713,307
                        
                        
                        
                        714,28011,233,940
                        
                        
                        
                        11,232,223Accumulated
      depreciation
                        
                        
                        (3,037,453
                        )
                        
                        
                        (2,882,383
                        )Construction
      in progress
                        
                        
                        1,340,022
                        
                        
                        
                        1,335,534Net
                        
                        $
                        9,536,509
                        
                        
                        $
                        9,685,374








12




7.
            Land
      use rights





The
carrying amount of land use rights as of March 31, 2009 represents two separate
land use rights acquired from the former stockholder of Zhonghe on September 29,
2007 and December 31, 2007 respectively.  The land use right with
carrying value of $2,278,825 as of March 31, 2009 was pledged to the bank for
the loans granted to Zhonghe (Note 9a (ii)).  The legal title of the
pledged land use right has not been transferred to Zhonghe after the acquisition
as such transfer can only be done after the related bank loans granted to
Zhonghe are fully settled in 2010.  Pursuant to a trust agreement,
both parties agreed that the former stockholder of Zhonghe will continue to hold
the legal title of the pledged land for Zhonghe until the full settlement of
related bank loans has been made by Zhonghe.





The legal
title of the remaining land use right with carrying value of $1,474,259 as of
March 31, 2009 has not been transferred to Zhonghe after the
acquisition.  Pursuant to a trust agreement, both parties agreed that
the former stockholder of Zhonghe will continue to hold the legal title of the
land for Zhonghe until the completion of the legal title transfer.




8.
            Deposit
      paid to a related company for acquisition of an intangible
      asset





On March
23, 2009, Zhonghe entered into an agreement with Hainan Zhonghe Peptide Drugs
Research & Development Co., Ltd. (“Zhonghe Peptide”), which is subject to
the common control of the Company’s management, to acquire a technology know-how
in relation to the production of a new drug, with total cash consideration of
RMB60 million. As of March 31, 2009, RMB48 million (equivalent to $7.03 million)
was paid to Zhonghe Peptide as a deposit.  The transaction is expected
to be completed by the end of 2009.





9.
            Secured
      borrowings





March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)Short-term
      loanBank loan (Note
    a)Short-term loan,
      interest rate at 8.28% per annum
                        
                        $
                        5,713,500
                        
                        
                        $
                        -Long-term
      loanBank loan (Note
    a)- due 2010,
      interest rate at 8.28% per annum
                        
                        
                        -
                        
                        
                        
                        5,868,000Other loan (Note
      b)- due 2010,
      interest free
                        
                        
                        329,625
                        
                        
                        
                        330,075- due 2011,
      interest free
                        
                        
                        329,625
                        
                        
                        
                        330,075659,250
                        
                        
                        
                        6,528,150$
                        6,372,750
                        
                        
                        $
                        6,528,150




(a)
            The
      above bank loans were secured by the following
  :-





(i)           Buildings
with carrying value of $3,059,786 (Note 6); and





(ii)           Land
use rights with carrying value of $2,278,825 (Note 7).





(b)
            The
      other loans, which were granted to Zhonghe by the PRC local government
      authority, are interest-free and secured by the buildings disposed at
      considerations of $442,233 in 2008 to a third party and repayable on June
      30, 2010 and 2011.  The other loans were not discounted to their
      present values as the effect of discounting is immaterial.  The
      legal title of the pledged buildings has not been transferred to the third
      party as the related other loans granted to Zhonghe has not been settled
      until 2011.  Pursuant to a trust agreement, both parties agreed
      that Zhonghe will continue to hold the legal title of the pledged
      buildings until the full settlement of related other loans has been made
      by Zhonghe.





During
the reporting periods, there was no covenant requirement under the facilities
granted to the Company.




13




10.
            Commitments
      and contingencies





(a)           Capital
commitment





As of
March 31, 2009, the Company had capital commitments amounting to $2,042,358 in
respect of the acquisition of property, plant and equipment and intangible asset
which were contracted for but not provided in the financial
statements.





(b)           Operating lease
arrangement





As of
March 31, 2009, the Company had no non-cancellable operating lease.





(c)           Contingencies





As of
March 31, 2009, the Company had no contingencies.




11.
            Defined
      contribution plan





Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rate of 29% of the average salaries for the latest fiscal year-end of
Hainan Province Haikou Shi to a defined contribution retirement scheme organized
by a state-sponsored social insurance plan in respect of the retirement benefits
for the Company's employees in the PRC.  The only obligation of the
Company with respect to retirement scheme is to make the required contributions
under the plan.  No forfeited contribution is available to reduce the
contribution payable in the future years.  The defined contribution
plan contributions were charged to the condensed consolidated statements of
income. The Company contributed $16,863 and $22,899 for the three months ended
March 31, 2009 and 2008 respectively.




12.
              Segment
      information
 
 The
Company is solely engaged in the manufacture, marketing, sale and distribution
of drugs.  Since the nature of the products, their production
processes, the type of their customers and their distribution methods are
substantially similar, they are considered as a single reportable segment under
SFAS 131, “Disclosures about Segments of an Enterprise and Related
Information”.





All of
the Company’s long-lived assets and revenues classified based on the customers
are located in the PRC.




13.
            Related
      party transaction





Apart
from the transactions as disclosed in notes 6, 7 and 8 to the financial
statements, the Company has entered into the following transaction with a
related party which is subject to the common control of the Company’s
management:





Type
      of
                          
                          Three
      months endedRelated
      party
                          transaction
                          
                          March
      31,(Unaudited)2009
                          
                          
                          2008Hainan
      Heyi Pharmaceutical Co.,
      Ltd.
                          Sales
                          
                          $
                          247,585
                          
                          
                          $
                          1,522




14


Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations




In
addition to historical information, this document contains forward-looking
statements regarding business prospects, financial trends and accounting
policies that may affect our future operating results, financial position and
cash flows. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. We use words such as “will,’’
“anticipate,’’ “estimate,’’ “expect,’’ “project,’’ “intend,’’ “plan,’’
“believe,’’ “target,’’ “forecast’’ and other words and terms of similar meaning
in connection with any discussion of future operating or financial performance.
In particular, they include statements relating to future actions, prospective
products and services, future performance or results of current and anticipated
products and services, sales efforts, capital expenditures, expenses, interest
rates, the outcome of contingencies, such as legal proceedings, and financial
results.




There are
possible developments that could cause our actual results to differ materially
from those forecasts or implied in the forward-looking statements. You are
cautioned not to place undue reliance on these forward-looking statements, which
are current only as of the date of this filing. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.




Except as
otherwise indicated by the context, references in this document to “Company,”
“we,” “us,” or “our” are references to the combined business of Kun Run
Biotechnology, Inc. and its wholly-owned subsidiaries, including Kun Run
Biotechnology Ltd., a Hong Kong corporation and Hainan Zhonghe
 Pharmaceutical Co., Ltd., a corporation organized under the laws of the
People’s Republic of China. References to “China” and “PRC” are references to
“People’s Republic of China.” References to "RMB" are to Renminbi, the legal
currency of China, and all references to “$” are to the legal currency of the
United States.





Overview




We are
engaged, through Hainan Zhonghe Pharmaceutical Co., Ltd. (“Zhonghe”), our China
based indirect subsidiary, in the development, manufacture, marketing and sale
of prescription polypeptide drugs. Our principal products are polypeptide
derivatives. Our products are sold primarily in China and through Chinese
domestic pharmaceutical distributors licensed by the Chinese
government. Our manufacturing and sales facilities are located in the City
of Haikou, Hainan Province.




Corporate
History




Kun Run
Biotechnology, Inc. formerly known as Aspen Racing Stables, Inc. (“Aspen”), was
incorporated in the State of Nevada on March 10, 2006. The Company’s shares
are quoted for trading on the Over-The-Counter Bulletin Board in the United
States of America.





Kun Run
Biotechnology, Ltd., our non operating Hong Kong holding subsidiary (“Kun Run”),
was incorporated on May 6, 2006 under the name Max Talent Industrial Ltd which
changed to its present name on February 25, 2008.   On March 24, 2008,
Kun Run completed its acquisition of 60.12% equity interest of Zhonghe, a
company organized under the laws of the People’s Republic of China (“PRC”) on
April 17, 1995 and has since been engaged in the manufacture and sale of
polypeptide drugs. On May 27, 2008, Kun Run acquired an additional 39% equity
interest of Zhonghe, resulting in a 99.12% ownership of Zhonghe.





Thereafter,
on August 21, 2008, Kun Run entered into a Stock Purchase Agreement (the
“Exchange Agreement”) with the shareholders of the Company. The terms of the
Exchange Agreement were consummated and the acquisition was completed on
September 16, 2008. As a result of the transaction, the Company issued a total
of 24,250,000 shares of its common voting stock to Xueyun Cui (“Mr. Cui”) and
Liqiong Yang, the shareholders of Kun Run and their designees, in exchange for
100% of the capital stock of Kun Run, resulting in Kun Run becoming our
wholly-owned subsidiary, and the shareholders of Kun Run and their designees
owning approximately 97% of the issued and outstanding shares of the common
stock of Aspen. In addition, Trixy Asyniux-Walt, the original shareholder
of Aspen, returned 1,000,000 of her shares to the Company for cancellation and
as of the closing owns 750,000 shares of the Company’s common stock which
constitutes approximately 3% f the issued and outstanding shares of the
Company’s common stock. 1,000,000 of the shares issued to Mr. Xueyun Cui were
put into an escrow pursuant to a Make Good Escrow Agreement entered between Mr.
Xueyun Cui and the escrow agent on September 16, 2008.





Summary
of significant accounting policies





Principle of
consolidation





The
accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in the United States
of America. The condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.




Use of
estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories, deferred income taxes and the
estimation on useful lives and residual values of property, plant and
equipment, intangible assets. Actual results could differ from those
estimates.





Fair value of financial
instruments





The
Company adopted SFAS 157 on January 1, 2008. The adoption of SFAS 157 did not
materially impact the Company’s financial position, results of operations or
cash flows.





Statement
of Financial Accounting Standards No. 107 “Disclosures about Fair Value of
Financial Instruments” (“SFAS 107”) requires the disclosure of the
estimated fair value of financial instruments including those financial
instruments for which the Financial Accounting Standards No. 159 fair value
option was not elected. Except for secured borrowings, the carrying amounts of
the financial assets and liabilities approximate to their fair value due to
short maturities or the applicable interest rates approximate current market
rates. The fair values of secured borrowings are estimated using discounted
cash flow analysis, based on the Company’s current incremental borrowing rates
for similar types of borrowing arrangements.




15




Concentrations of credit
risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables. As of March 31, 2009, substantially all of the Company’s cash and
cash equivalents were held by major financial institutions located in the
People’s Republic of China (the “PRC”), which management believes are of high
credit quality. With respect to trade receivables, the Company extends credit
based on an evaluation of the customer’s financial condition. The Company
generally does not require collateral for trade receivables and maintains an
allowance for doubtful accounts of trade receivables.




Results
of Operations




Three
months ended March 31, 2009 and 2008




The
information set forth below has been derived from our financial statements for
the three months ended March 31, 2009 and three months ended March 31,
2008.





Three months ended
      March 31,(unaudited)2009
                                              
                                              2008% as of total
                                                revenue
                                              
                                              
                                              
                                              
                                              % as of total
                                                revenue
                                              
                                              % ChangeSales
      revenue
                                              
                                              $
                                              2,429,268
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              
                                              $
                                              1,989,014
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              
                                              22
                                              %Cost
      of sales
                                              
                                              
                                              745,693
                                              
                                              
                                              
                                              31
                                              %
                                              
                                              
                                              
                                              663,204
                                              
                                              
                                              
                                              33
                                              %
                                              
                                              
                                              12
                                              %Gross
      profit
                                              
                                              $
                                              1,683,575
                                              
                                              
                                              
                                              69
                                              %
                                              
                                              
                                              $
                                              1,325,810
                                              
                                              
                                              
                                              67
                                              %
                                              
                                              
                                              27
                                              %




Sales Revenue





Revenues
for the three months ended March 31, 2009 were $2.43 million, an increase of
$440,254, or 22% over revenues for the same period of 2008. This increase
was mainly attributable to the increase in sales of our products and services.
Revenues by product categories were as follows:




Three
      months ended March 31,(unaudited)2009
                                                                      
                                                                      2008as of total
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      as of totalProduct
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      sales
      %
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      sales
      %
                                                                      
                                                                      %
      ChangesTP-5
      ProductsTP-5
      for injection (1mg)
                                                                      
                                                                      $
                                                                      328,764
                                                                      
                                                                      
                                                                      
                                                                      14
                                                                      %
                                                                      
                                                                      $
                                                                      256,838
                                                                      
                                                                      
                                                                      
                                                                      13
                                                                      %
                                                                      
                                                                      
                                                                      28
                                                                      %TP-5
      for injection (10mg)
                                                                      
                                                                      
                                                                      115,616
                                                                      
                                                                      
                                                                      
                                                                      5
                                                                      %
                                                                      
                                                                      
                                                                      109,628
                                                                      
                                                                      
                                                                      
                                                                      5
                                                                      %
                                                                      
                                                                      
                                                                      5
                                                                      %TP-5
      pre-filled injection 1ml:1mg
                                                                      
                                                                      
                                                                      131,111
                                                                      
                                                                      
                                                                      
                                                                      5
                                                                      %
                                                                      
                                                                      
                                                                      369,600
                                                                      
                                                                      
                                                                      
                                                                      19
                                                                      %
                                                                      
                                                                      
                                                                      -65
                                                                      %TP-5
      pre-filled injection 1ml:10mg
                                                                      
                                                                      
                                                                      441,616
                                                                      
                                                                      
                                                                      
                                                                      18
                                                                      %
                                                                      
                                                                      
                                                                      343,616
                                                                      
                                                                      
                                                                      
                                                                      17
                                                                      %
                                                                      
                                                                      
                                                                      29
                                                                      %Sub-total
      ( TP-5 products)
                                                                      
                                                                      
                                                                      1,017,107
                                                                      
                                                                      
                                                                      
                                                                      42
                                                                      %
                                                                      
                                                                      
                                                                      1,079,682
                                                                      
                                                                      
                                                                      
                                                                      54
                                                                      %
                                                                      
                                                                      
                                                                      -6
                                                                      %Other
      productsSomatostatin
      for injection 3mg
                                                                      
                                                                      
                                                                      283,047
                                                                      
                                                                      
                                                                      
                                                                      11
                                                                      %
                                                                      
                                                                      
                                                                      181,853
                                                                      
                                                                      
                                                                      
                                                                      9
                                                                      %
                                                                      
                                                                      
                                                                      56
                                                                      %Thymosin
      Alpha 1 for injection 1.6mg
                                                                      
                                                                      
                                                                      771,125
                                                                      
                                                                      
                                                                      
                                                                      32
                                                                      %
                                                                      
                                                                      
                                                                      438,971
                                                                      
                                                                      
                                                                      
                                                                      22
                                                                      %
                                                                      
                                                                      
                                                                      76
                                                                      %DDAVP
      Injection 1ml:4ug
                                                                      
                                                                      
                                                                      246,511
                                                                      
                                                                      
                                                                      
                                                                      10
                                                                      %
                                                                      
                                                                      
                                                                      159,661
                                                                      
                                                                      
                                                                      
                                                                      8
                                                                      %
                                                                      
                                                                      
                                                                      54
                                                                      %DDAVP
      Injection 1ml:15ug
                                                                      
                                                                      
                                                                      71,427
                                                                      
                                                                      
                                                                      
                                                                      3
                                                                      %
                                                                      
                                                                      
                                                                      104,163
                                                                      
                                                                      
                                                                      
                                                                      5
                                                                      %
                                                                      
                                                                      
                                                                      -31
                                                                      %Granisetron
      Hydrochloride Injection 3ml:3mg
                                                                      
                                                                      
                                                                      20,097
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      11,568
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      74
                                                                      %Ozagrel
      Sodium for Injection 80mg/40mg
                                                                      
                                                                      
                                                                      19,729
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      13,116
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      50
                                                                      %Others
                                                                      
                                                                      
                                                                      225
                                                                      
                                                                      
                                                                      
                                                                      0
                                                                      %In
      Total
                                                                      
                                                                      $
                                                                      2,429,268
                                                                      
                                                                      
                                                                      
                                                                      100
                                                                      %
                                                                      
                                                                      $
                                                                      1,989,014
                                                                      
                                                                      
                                                                      
                                                                      100
                                                                      %
                                                                      
                                                                      
                                                                      22
                                                                      %








For the
three months ended March 31, 2009, the sales of our major products, TP-5
products, were $1.02 million, accounting for 42% of total sales,
decreasing by $62,575, or 6% from $1.08 million for the three months ended
March 31, 2008. Within the TP-5 product category, the revenue from TP-5 for
injection increased $77,914, representing a 21% increase from the same period of
2008. We reduced the price of TP-5 for injection due to heated
competition within the TP-5 market, which drove a significant growth in sales
volume and resulted in an increased level of income.





Thymosin
Alpha 1 for injection became our best selling
product, contributing $771,125 in revenue (32% of total sales) for the
three months ended March 31, 2009, representing a 76% increase from the same
period of 2008. This increase was due to a strong market acceptance of its
curative effects.





Meanwhile,
DDAVP generated $317,938, or 13% of total sales for the three months ended March
31, 2009, an increase of 21% from $263,824 for the same period in 2008. The
Somatostatin for injection also contributed $283,047 in revenue, 11% of the
total sales, for the three months ended March 31, 2009, a 56% increase from
$181,853 for the same period in 2008 due to increased brand
recognition.




Cost ofSalesand Gross
Profit





Cost of
goods sold was $745,693 for the three months ended March 31, 2009, as compared
to $663,204 for the same period in 2008. Cost of goods sold was 31% of
total revenue for the three months ended March 31, 2009, as compared to 33% of
total revenue for the same period in 2008. The decrease in cost of sales as a
percentage of revenue was mainly due to the increased sales of high profit
margin products including Somatostatin, DDAVP and Thymosin Alpha 1.




Gross
profit as a percentage of net revenue increased to 69% in the three months ended
March 31, 2009 from 67% in the same period in 2008 due to the decrease in
cost of goods sold as a percentage of revenue discussed above.




16





Three months ended
      March 31,(unaudited)2009
                            
                            2008as of total
                              revenue
      %
                            
                            
                            
                            
                            as of total
                              revenue
      %
                            
                            change%Operating
      expenses:Administrative
      expenses
                            
                            $
                            192,908
                            
                            
                            
                            8
                            %
                            
                            $
                            217,067
                            
                            
                            
                            11
                            %
                            
                            
                            -11
                            %Research
      and development costs
                            
                            
                            59,884
                            
                            
                            
                            2
                            %
                            
                            
                            28,669
                            
                            
                            
                            1
                            %
                            
                            
                            109
                            %Selling
      expenses
                            
                            
                            142,713
                            
                            
                            
                            6
                            %
                            
                            
                            141,071
                            
                            
                            
                            7
                            %
                            
                            
                            1
                            %395,505
                            
                            
                            
                            16
                            %
                            
                            
                            386,807
                            
                            
                            
                            19
                            %
                            
                            
                            2
                            %Income
      from operations
                            
                            $
                            1,288,070
                            
                            
                            
                            53
                            %
                            
                            $
                            939,003
                            
                            
                            
                            47
                            %
                            
                            
                            37
                            %





Administrative
Expenses





Administrative
expenses primarily consisted of depreciation, salaries and other related costs
for personnel in executive and other administrative functions. Other significant
costs included amortization of intangible assets, urban real estate tax.
Administrative expenses for the three months ended March 31, 2009 and 2008 were
$192,908 (8% of total sales) and $217,067 (11% of total sales), respectively.
The decrease in administrative expenses was primarily attributable to decreases
in traveling expenses for the three months ended March 31, 2009.





Research and DevelopmentCosts





Research
and development costs consisted primarily of expenses incurred
in clinical trial, drug registration and usage of trial specimens for
our new products. Research and development expenses for the three months
ended March 31, 2009 were $59,884, or 2% of total sales, a 109% increase from
$28,669 for the same period of 2008. We currently have more potential
peptide drugs under development and, therefore, incurred more expenses as
compared with the same period in 2008.





Selling
Expenses





Selling
expenses, including distribution expenses, were $142,713, or 6% of
total sales, for the three months ended March 31, 2009. The selling expenses
remained relatively unchanged as compared to the same period in
2008, which were $141,071, or 7% of the total sales.





Income from Operations





Income
from operations was $1.29 million for the three months ended March 31, 2009, an
increase of 37% from $939,003 for the same period in 2008.





Three months ended
      March 31,(unaudited)2009
                                      
                                      2008as of
      total
                                      
                                      
                                      
                                      
                                      as of
      totalrevenue
      %
                                      
                                      
                                      
                                      
                                      revenue
      %
                                      
                                      %
      ChangesInterest
      income
                                      
                                      $
                                      225
                                      
                                      
                                      
                                      0
                                      %
                                      
                                      $
                                      814
                                      
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      -72
                                      %Other
      income
                                      
                                      
                                      52,740
                                      
                                      
                                      
                                      2
                                      %
                                      
                                      
                                      51,480
                                      
                                      
                                      
                                      3
                                      %
                                      
                                      
                                      2
                                      %Government
      subsidy income
                                      
                                      
                                      7,325
                                      
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      400
                                      
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      1,731
                                      %Finance
      costs
                                      
                                      
                                      (122,122
                                      )
                                      
                                      
                                      -5
                                      %
                                      
                                      
                                      (143,696
                                      )
                                      
                                      
                                      -7
                                      %
                                      
                                      
                                      -15
                                      %Income
      before income taxes
                                      
                                      
                                      1,226,238
                                      
                                      
                                      
                                      50
                                      %
                                      
                                      
                                      848,001
                                      
                                      
                                      
                                      43
                                      %
                                      
                                      
                                      45
                                      %Income
      taxes
                                      
                                      
                                      (194,946
                                      )
                                      
                                      
                                      -8
                                      %
                                      
                                      
                                      (133,570
                                      )
                                      
                                      
                                      -7
                                      %
                                      
                                      
                                      46
                                      %Net
      income before noncontrolling interest
                                      
                                      
                                      1,031,292
                                      
                                      
                                      
                                      42
                                      %
                                      
                                      
                                      714,431
                                      
                                      
                                      
                                      36
                                      %
                                      
                                      
                                      44
                                      %Net
      income attributable to noncontrolling interest
                                      
                                      
                                      (9,089
                                      )
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      -Net
      income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                                      
                                      $
                                      1,022,203
                                      
                                      
                                      
                                      42
                                      %
                                      
                                      $
                                      714,431
                                      
                                      
                                      
                                      36
                                      %
                                      
                                      
                                      43
                                      %Net
      income before noncontrolling interest
                                      
                                      
                                      1,031,292
                                      
                                      
                                      
                                      42
                                      %
                                      
                                      
                                      714,431
                                      
                                      
                                      
                                      36
                                      %
                                      
                                      
                                      44
                                      %Other
      comprehensive income:Foreign
      currency translation adjustments
                                      
                                      
                                      (23,970
                                      )
                                      
                                      
                                      -1
                                      %
                                      
                                      
                                      454,775
                                      
                                      
                                      
                                      23
                                      %
                                      
                                      
                                      -105
                                      %Comprehensive
      income
                                      
                                      
                                      1,007,322
                                      
                                      
                                      
                                      41
                                      %
                                      
                                      
                                      1,169,206
                                      
                                      
                                      
                                      59
                                      %
                                      
                                      -14
                                      %Noncontrolling
      interests
                                      
                                      
                                      (8,865
                                      )
                                      
                                      
                                      0
                                      %
                                      
                                      -Total
      comprehensive income
                                      
                                      $
                                      998,457
                                      
                                      
                                      
                                      41
                                      %
                                      
                                      $
                                      1,169,206
                                      
                                      
                                      
                                      59
                                      %
                                      
                                      
                                      -15
                                      %Earnings
      per share : Basic and diluted
                                      
                                      $
                                      0.04
                                      
                                      
                                      
                                      
                                      
                                      $
                                      0.03Weighted
      average number of shares outstanding :Basic
      and diluted
                                      
                                      
                                      25,000,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      24,250,000




Other
Income





For the
three months ended March 31, 2009, other income was $52,740, representing
three-month’s rental income paid by Sinopep Pharmaceutical Inc.




17




Finance
Costs





Three months ended
      March 31,FINANCE
      COSTS
                      
                      (unaudited)2009
                      
                      
                      2008
                      
                      
                      Changes %Bank
      charges
                      
                      
                      602
                      
                      
                      
                      296
                      
                      
                      
                      103
                      %Discounting
      charges
                      
                      
                      2,576
                      
                      
                      
                      16,392
                      
                      
                      
                      -84
                      %Interest
      expenses
                      
                      
                      118,944
                      
                      
                      
                      127,008
                      
                      
                      
                      -6
                      %$
                      122,122
                      
                      
                      $
                      143,696
                      
                      
                      
                      -15
                      %





Discounting
Charges





Discounting
charges represented bank charges/penalties on discounted bills transferred to
banks to require cash before the maturity date.





Interest
Expense





For the
three months ended March 31, 2009, we incurred interest expenses of
$118,944, as compared to $127,008 for the same period in 2008. The
interest expenses were related primarily to the secured borrowings which
balance changed little as of March 31, 2009 as compared to that of March 31,
2008.





Net
Income





Net
income increased by 43% to $1.02 million for the three months ended March 31,
2009 from $714,431 for the same period of 2008 due to increased
revenue and reduced costs and expenses described above.





Earnings per
share





Earnings
per share for the three months ended March 31, 2009 was $0.04 per share for both
basic and diluted shares, as compared with $0.03 per share for both basic and
diluted shares for the same period of 2008.




Liquidity and Capital
Resources





Cash





As of
March 31, 2009, our principal sources of liquidity consisted of cash and cash
equivalents of $334,427, representing a decrease of $99,172, or 23%, as compared
with our cash balance of $433,599 as of March 31, 2008. The Company’s cash
and cash equivalents consist of cash on hand and deposits with commercial banks.
We believe our cash and cash equivalents are highly liquid and do not anticipate
any losses with respect to such cash balances.





The
following table provides detailed information about our net cash flow for the
periods presented in this report:





(All
amounts in thousands of U.S. dollars)


Cash
      Flow
                  
                  Three Months Ended March
      31,
                    (Unaudited)2009
                  
                  
                  2008Net
      cash provided by operating activities
                  
                  $
                  1,940
                  
                  
                  $
                  1,054Net
      cash used in investing activities
                  
                  
                  (1,892
                  )
                  
                  
                  (356
                  )Net
      cash used in financing activities
                  
                  
                  (147
                  )
                  
                  
                  (1,090
                  )Net
      cash flow
                  
                  $
                  (99
                  )
                  
                  $
                  (373
                  )




Operating
Activities





Net cash
provided by operating activities was approximately $1.94 million for the three
months ended March 31, 2009, an increase of $885,549 from the net cash
provided by operating activities of $1.05 million for the same period in 2008.
The increased cash flow was primarily attributed to the increase of our
revenue by $440,254 in the first quarter of 2009 as compared with the
corresponding period in 2008. Increases in other payables and accrued
expenses also contributed to increase in cash provided by operating
activities. We believe that our cash flow generated from operating
activities will be sufficient to sustain our operations for at least
the next twelve months.





Investing
Activities





Net cash
used in investing activities for the three months ended March 31, 2009 was $1.89
million, an increase of $1.54 million from net cash used in investing activities
of $356,208 for the same period of 2008. The increase in net cash used in
investing activities was mainly due to amounts due from related companies,
partially offset by cash proceeds from sale of property, plant and
equipment.





Financing
Activities





Net cash
used in financing activities for the three month ended March 31, 2009 was
$146,500, reflecting repayment of bank loans during the period.




18




Off-Balance
Sheet Arrangements




The
Company does not have any off-balance sheet arrangements.




Recently
Issued Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the fiscal year beginning after December 15, 2008. In
accordance with FASB Statement No. 160, the noncontrolling interest is presented
below stockholders’ equity. Certain 2008 amounts in the consolidated
financial statements have been reclassified to conform to the 2009 presentation.
These reclassifications have no effect on net income or stockholders’ equity as
previously reported.





In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The adoption of this statement has no material effect on the Company's
consolidated financial statements.





In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”. Effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Board does not expect that this Statement will result in a change in current
practice. However, transition provisions have been provided in the unusual
circumstance that the application of the provisions of this Statement results in
a change in practice. The adoption of this statement has no material effect on
the Company's consolidated financial statements.





In April
2009, the FASB issued three FASB Staff Positions (FSP’s) to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” provides
guidelines for making fair value measurements more consistent with the
principles presented in SFAS No.157. FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” enhances consistency in
financial reporting by increasing the frequency of fair value disclosures. FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments,” provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment losses on
securities. These three FSP’s are effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. We adopted the provisions of these FSP’s for the period
ending March 31, 2009. The management is in the process of evaluating the impact
these FSP’s will have on the Company’s consolidated financial statements upon
adoption.




19




Item
3. Quantitative and Qualitative Disclosures about Market Risk.




Not
required.




Item
4. Controls and Procedures.




Evaluation of disclosure controls
and procedures.




Our
management, including the chief executive officer and the chief accounting
officer, carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report pursuant to Rule 13a-15(e) or 15d-15(e) promulgated under
the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on
this evaluation, our chief executive officer and chief accounting officer
concluded that, as of the evaluation date, our disclosure controls and
procedures were effective to provide a reasonable level of assurance that the
information required to be disclosed in the reports filed or submitted by us
under the Exchange Act was recorded, processed, summarized and reported within
the requisite time periods.




Changes
in Internal Control over Financial Reporting




There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




20




PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





None.




Item
1A. Risk Factors





Not
required.




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





None.




Item
3. Defaults Upon Senior Securities





None.




Item
4. Submission of Matters to a Vote of Security Holders





None.




Item 5. Other Information
..





None.




Item
6.  Exhibits




The
following exhibits are hereby filed as part of this Quarterly Report on Form
10-Q.




Exhibit
                  Number
                
                Description31.1
                
                Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                
                Certification
      of Chief Accounting Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.32
                
                Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350




21




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant certifies that it has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.





Kun
      Run Biotechnology, Inc.Date:
      May 15, 2009
                  By:
                  /s/
      Xiaoqun YeXiaoqun
      Ye, Chief Executive Officer(Principal
      Executive
Officer)





Date:
      May 15, 2009
                    By:
                    /s/
      Yan LinYan
      Lin, Chief Accounting Officer(Principal
      Financial
Officer)




22