U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
one)


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





For the
Quarterly Period Ended September 30, 2010


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 
o





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  oNo o





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  ̈
            
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
      (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 o      No
þ




As of
November 19, 2010, 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:Condensed
      Consolidated Statements of Income and Comprehensive
      Income
              
              1 - 2Condensed
      Consolidated Balance Sheets
              
              3 - 4Condensed
      Consolidated Statements of Cash Flows
              
              5 - 6Condensed
      Consolidated Statements of Change in Equity
              
              7Notes
      to Financial Statements
              
              8 - 21Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              22 - 36Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              37Item
      4.
              Controls
      and Procedures
              
              37PART
      II -
              OTHER
      INFORMATION
              
              37Item
      1.
              Legal
      Proceedings
              
              37Item
      1A.
              Risk
      Factors
              
              37Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              37Item
      3.
              Defaults
      upon Senior Securities
              
              37Item
      4.
              (Removed
      and Reserved)
              
              37Item
      5.
              Other
      Information
              
              37Item
      6.
              Exhibits
              
              38





Kun
Run Biotechnology, Inc.
 
 Condensed
Consolidated Financial Statements
 For
the three and nine months ended
 September
30, 2010 and 2009
 (Stated
in US dollars)
   
 
 Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Financial Statements
 Three
and nine months ended September 30, 2010 and 2009
 
 Index
to Condensed Consolidated Financial Statements
 
 
 
 PagesCondensed
      Consolidated Statements of Income and Comprehensive Income
                
                1 -
      2Condensed
      Consolidated Balance Sheets
                
                3 -
      4Condensed
      Consolidated Statements of Cash Flows
                
                5 -
      6Condensed
      Consolidated Statements of Change in Equity
                
                7Notes
      to Condensed Consolidated Financial Statements
                
                8 -
      21
  
 
 Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Statements of Income and Comprehensive Income
 For
the three and nine months ended September 30, 2010 and 2009
 (Unaudited)
 (Stated
in US Dollars)
 
 
 Three
      months ended
                                                
                                                
                                                Nine
      months endedSeptember
      30,
                                                
                                                
                                                Sepember
      30,(Unaudited)
                                                
                                                
                                                (Unaudited)2010
                                                
                                                
                                                2009
                                                
                                                
                                                2010
                                                
                                                
                                                2009Sales
      revenue
                                                
                                                $
                                                2,497,565
                                                
                                                
                                                $
                                                4,048,877
                                                
                                                
                                                $
                                                8,569,872
                                                
                                                
                                                $
                                                10,139,543Cost
      of sales
                                                
                                                
                                                884,251
                                                
                                                
                                                
                                                1,211,070
                                                
                                                
                                                
                                                2,832,378
                                                
                                                
                                                
                                                2,976,593Gross
      profit
                                                
                                                
                                                1,613,314
                                                
                                                
                                                
                                                2,837,807
                                                
                                                
                                                
                                                5,737,494
                                                
                                                
                                                
                                                7,162,950Operating
      expensesAdministrative
      expenses
                                                
                                                
                                                342,046
                                                
                                                
                                                
                                                285,889
                                                
                                                
                                                
                                                865,509
                                                
                                                
                                                
                                                678,314Research and development
      costs
                                                
                                                
                                                239,449
                                                
                                                
                                                
                                                90,335
                                                
                                                
                                                
                                                628,059
                                                
                                                
                                                
                                                189,647Selling
expenses
                                                
                                                
                                                457,817
                                                
                                                
                                                
                                                69,882
                                                
                                                
                                                
                                                859,231
                                                
                                                
                                                
                                                287,4251,039,312
                                                
                                                
                                                
                                                446,106
                                                
                                                
                                                
                                                2,352,799
                                                
                                                
                                                
                                                1,155,386Income
      from operations
                                                
                                                
                                                574,002
                                                
                                                
                                                
                                                2,391,701
                                                
                                                
                                                
                                                3,384,695
                                                
                                                
                                                
                                                6,007,564Interest income
                                                
                                                
                                                25,825
                                                
                                                
                                                
                                                49,466
                                                
                                                
                                                
                                                89,591
                                                
                                                
                                                
                                                116,426Other income
                                                
                                                
                                                53,244
                                                
                                                
                                                
                                                116,682
                                                
                                                
                                                
                                                297,114
                                                
                                                
                                                
                                                315,926Government subsidy
      income
                                                
                                                
                                                -
                                                
                                                
                                                
                                                32,768
                                                
                                                
                                                
                                                86,680
                                                
                                                
                                                
                                                40,093Change in fair value of
      warrant
                                                  liabilities - Note
      12
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                20,443
                                                
                                                
                                                
                                                -Finance costs
                                                
                                                
                                                (623
                                                )
                                                
                                                
                                                (170,622
                                                )
                                                
                                                
                                                (147,141
                                                )
                                                
                                                
                                                (428,440
                                                )Income
      before income taxes andnoncontrolling
      interest
                                                
                                                
                                                652,448
                                                
                                                
                                                
                                                2,419,995
                                                
                                                
                                                
                                                3,731,382
                                                
                                                
                                                
                                                6,051,569Income
      taxes - Note 4
                                                
                                                
                                                (139,624
                                                )
                                                
                                                
                                                (353,654
                                                )
                                                
                                                
                                                (588,431
                                                )
                                                
                                                
                                                (902,662
                                                )Net
      income before noncontrolling
                                                  interest
                                                
                                                
                                                512,824
                                                
                                                
                                                
                                                2,066,341
                                                
                                                
                                                
                                                3,142,951
                                                
                                                
                                                
                                                5,148,907Net
      income attributable tononcontrolling
      interest
                                                
                                                
                                                (4,672
                                                )
                                                
                                                
                                                (18,103
                                                )
                                                
                                                
                                                (27,805
                                                )
                                                
                                                
                                                (45,308
                                                )Net
      income attributable to Kun RunBiotechnology, Inc.
      common
                                                  stockholders
                                                
                                                $
                                                508,152
                                                
                                                
                                                $
                                                2,048,238
                                                
                                                
                                                $
                                                3,115,146
                                                
                                                
                                                $
                                                5,103,599Net
      income before noncontrolling
                                                  interest
                                                
                                                $
                                                512,824
                                                
                                                
                                                $
                                                2,066,341
                                                
                                                
                                                $
                                                3,142,951
                                                
                                                
                                                $
                                                5,148,907Other
      comprehensive incomeForeign currency
      translation
                                                  adjustments
                                                
                                                
                                                579,006
                                                
                                                
                                                
                                                31,310
                                                
                                                
                                                
                                                730,140
                                                
                                                
                                                
                                                6,209Comprehensive
      income
                                                
                                                
                                                1,091,830
                                                
                                                
                                                
                                                2,097,651
                                                
                                                
                                                
                                                3,873,091
                                                
                                                
                                                
                                                5,155,116Comprehensive
      income attributable tononcontrolling
      interest
                                                
                                                
                                                (8,729
                                                )
                                                
                                                
                                                (18,376
                                                )
                                                
                                                
                                                (32,862
                                                )
                                                
                                                
                                                (45,344
                                                )Comprehensive
      income attributable toKun
      Run Biotechnology, Inc.common
    stockholders
                                                
                                                $
                                                1,083,101
                                                
                                                
                                                $
                                                2,079,275
                                                
                                                
                                                $
                                                3,840,229
                                                
                                                
                                                $
                                                5,109,772
 
 See
the accompanying notes to condensed consolidated financial
statements
 
 -
1 -
  Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Statements of Income and Comprehensive Income (Cont’d)
 For
the three and nine months ended September 30, 2010 and 2009
 (Unaudited)
 (Stated
in US Dollars)
 
 
 Three
      months ended
                                  
                                  
                                  Nine
      months endedSeptember
      30,
                                  
                                  
                                  September
      30,(Unaudited)
                                  
                                  
                                  (Unaudited)2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Earnings
      per share attributable to KunRun Biotechnology, Inc.
      commonStockholders : - Note
      15basic
                                  
                                  $
                                  0.02
                                  
                                  
                                  $
                                  0.08
                                  
                                  
                                  $
                                  0.11
                                  
                                  
                                  $
                                  0.20diluted
                                  
                                  $
                                  0.02
                                  
                                  
                                  $
                                  0.08
                                  
                                  
                                  $
                                  0.11
                                  
                                  
                                  $
                                  0.20Weighted
      average number of sharesoutstanding
      :  basic
                                  
                                  
                                  30,228,758
                                  
                                  
                                  
                                  25,000,000
                                  
                                  
                                  
                                  27,987,862
                                  
                                  
                                  
                                  25,000,000diluted
                                  
                                  
                                  30,994,710
                                  
                                  
                                  
                                  25,000,000
                                  
                                  
                                  
                                  28,433,215
                                  
                                  
                                  
                                  25,000,000
 
 See
the accompanying notes to condensed consolidated financial
statements
  -
2 -
  Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Balance Sheets
 As
of September 30, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 
 September
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Audited)ASSETSCurrent assetsCash and cash
      equivalents
                        
                        $
                        1,302,745
                        
                        
                        $
                        810,809Trade receivables,
      net
                        
                        
                        5,213,002
                        
                        
                        
                        4,284,515Bills
receivable
                        
                        
                        91,154
                        
                        
                        
                        360,360Other receivables, prepayments
      and deposits - Note 5
                        
                        
                        4,190,226
                        
                        
                        
                        2,338,971Inventories - Note
      6
                        
                        
                        2,782,265
                        
                        
                        
                        2,248,420Amounts due from related
      companies - Note 7
                        
                        
                        2,994,816
                        
                        
                        
                        4,656,801Total current
      assets
                        
                        
                        16,574,208
                        
                        
                        
                        14,699,876Intangible assets,
      net
                        
                        
                        71,108
                        
                        
                        
                        86,551Property, plant and equipment,
      net - Note 8
                        
                        
                        10,200,001
                        
                        
                        
                        10,098,529Land use rights - Note
      9
                        
                        
                        3,727,933
                        
                        
                        
                        3,704,660Deposit for acquisition of
      property, plant and equipment
                        
                        
                        274,303
                        
                        
                        
                        418,594Deposit paid to a related
      company for acquisition ofan intangible asset
      - Note 10
                        
                        
                        10,004,451
                        
                        
                        
                        7,921,800TOTAL
      ASSETS
                        
                        $
                        40,852,004
                        
                        
                        $
                        36,930,010
 
 See
the accompanying notes to condensed consolidated financial
statements
  -
3 -
  Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Balance Sheets (Cont’d)
 As
of September 30, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 
 September
      30,
                                    
                                    
                                    December
      31,2010
                                    
                                    
                                    2009(Unaudited)
                                    
                                    
                                    (Audited)LIABILITIES
      AND EQUITYLIABILITIESCurrent
    liabilitiesTrade payables
                                    
                                    $
                                    543,420
                                    
                                    
                                    $
                                    452,139Other payables and accrued
      expenses
                                    
                                    
                                    2,864,236
                                    
                                    
                                    
                                    3,961,125Dividend payable to Zhonghe’s
      former/existingnoncontrolling
      stockholders
                                    
                                    
                                    7,356
                                    
                                    
                                    
                                    7,209Income tax
    payable
                                    
                                    
                                    276,970
                                    
                                    
                                    
                                    815,435Secured borrowings - Note
      11
                                    
                                    
                                    673,650
                                    
                                    
                                    
                                    6,051,375Total current
      liabilities
                                    
                                    
                                    4,365,632
                                    
                                    
                                    
                                    11,287,283Deferred taxes
                                    
                                    
                                    27,927
                                    
                                    
                                    
                                    17,215Secured borrowings - Note
      11
                                    
                                    
                                    -
                                    
                                    
                                    
                                    330,075Warrant liabilities - Note
      12
                                    
                                    
                                    901,365
                                    
                                    
                                    
                                    -TOTAL
      LIABILITIES
                                    
                                    
                                    5,294,924
                                    
                                    
                                    
                                    11,634,573COMMITMENTS AND CONTINGENCIES- Note 13STOCKHOLDERS’
      EQUITYSeries A preferred stock : par
      value of $0.001 pershare, authorized 10,000,000
      shares in 2010and 2009; issued and
      outstanding 5,228,758shares in 2010 and none issued
      and outstandingin 2009 - Note
    14
                                    
                                    
                                    5,229
                                    
                                    
                                    
                                    -Common stock : par value of
      $0.001 per share,authorized
      100,000,000 shares, issued andoutstanding
      25,000,000 shares in 2010 and25,000,000
      shares in 2009
                                    
                                    
                                    25,000
                                    
                                    
                                    
                                    25,000Additional paid-in capital -
      Note 14
                                    
                                    
                                    15,287,288
                                    
                                    
                                    
                                    8,903,965Statutory and other
      reserves
                                    
                                    
                                    3,743,028
                                    
                                    
                                    
                                    3,743,028Accumulated other comprehensive
      income
                                    
                                    
                                    2,332,601
                                    
                                    
                                    
                                    1,607,518Retained
    earnings
                                    
                                    
                                    13,904,226
                                    
                                    
                                    
                                    10,789,080TOTAL
      KUN RUN BIOTECHNOLOGY, INC.STOCKHOLDERS’
      EQUITY
                                    
                                    
                                    35,297,372
                                    
                                    
                                    
                                    25,068,591NONCONTROLLING
      INTEREST
                                    
                                    
                                    259,708
                                    
                                    
                                    
                                    226,846TOTAL
      EQUITY
                                    
                                    
                                    35,557,080
                                    
                                    
                                    
                                    25,295,437TOTAL
      LIABILITIES AND EQUITY
                                    
                                    $
                                    40,852,004
                                    
                                    
                                    $
                                    36,930,010
 
 See
the accompanying notes to condensed consolidated financial
statements
  -
4 -
  Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Statements of Cash Flows
 For
the nine months ended September 30, 2010 and 2009
 (Unaudited)
 (Stated
in US Dollars)
 
 Nine
      months endedSeptember
      30,(Unaudited)2010
                            
                            
                            2009Cash
      flows from operating activitiesNet income before
      noncontrolling interest
                            
                            $
                            3,142,951
                            
                            
                            $
                            5,148,907Adjustments to reconcile net
      income before noncontrollinginterest to net
      cash provided by operating activities :-Depreciation
                            
                            
                            715,886
                            
                            
                            
                            567,910Amortization
      of intangible assets and land use rights
                            
                            
                            68,488
                            
                            
                            
                            70,521Deferred taxes
                            
                            
                            10,194
                            
                            
                            
                            27,188Loss on disposal of property,
      plant and equipment
                            
                            
                            871
                            
                            
                            
                            183Increase in (recovery of)
      provision for doubtful debts
                            
                            
                            217,451
                            
                            
                            
                            (80,012
                            )Change in fair value of warrant
      liabilities
                            
                            
                            (20,443
                            )
                            
                            
                            -Changes
      in operating assets and liabilities :-Trade receivables
                            
                            
                            (1,048,564
                            )
                            
                            
                            (218,205
                            )Bills receivables
                            
                            
                            271,622
                            
                            
                            
                            (495,604
                            )Other receivables, prepayments and
      deposits
                            
                            
                            (1,066,323
                            )
                            
                            
                            (2,037,558
                            )Amounts due from related
      companies
                            
                            
                            417,569
                            
                            
                            
                            112,564Inventories
                            
                            
                            (478,246
                            )
                            
                            
                            (814,574
                            )Trade payables
                            
                            
                            80,426
                            
                            
                            
                            (493,546
                            )Other payables and accrued
      expenses
                            
                            
                            (1,175,646
                            )
                            
                            
                            1,145,903Income tax payable
                            
                            
                            (543,884
                            )
                            
                            
                            (9,667
                            )Net
      cash flows provided by operating activities
                            
                            
                            592,352
                            
                            
                            
                            2,924,010Cash
      flows from investing activitiesPayments to acquire and deposit
      for acquisitionof property, plant and
      equipment
                            
                            
                            (460,928
                            )
                            
                            
                            (185,179
                            )Proceeds from sale of property,
      plant and equipment
                            
                            
                            273
                            
                            
                            
                            2,059,306Deposit for acquisition of
      intangible asset
                            
                            
                            (1,882,161
                            )
                            
                            
                            (322,520
                            )Amounts due from related
      parties
                            
                            
                            543,427
                            
                            
                            
                            (7,475,419
                            )Net
      cash flows used in investing activities
                            
                            $
                            (1,799,389
                            )
                            
                            $
                            (5,923,812
                            )
 
 See
the accompanying notes to condensed consolidated financial
statements
 
 -
5 -
 
 Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Statements of Cash Flows (Cont’d)
 For
the nine months ended September 30, 2010 and 2009
 (Unaudited)
 (Stated
in US Dollars)
 
 Nine
      months endedSeptember
      30,
                                (Unaudited)2010
                              
                              
                              2009Cash
      flows from financing activitiesAmounts due to related
      parties
                              
                              $
                              -
                              
                              
                              $
                              12,116Proceeds from issuance of
      preferred stock, net
                              
                              
                              6,388,552
                              
                              
                              
                              -Proceeds from issuance of
      warrants
                              
                              
                              921,808
                              
                              
                              
                              -Dividends paid to Zhonghe’s
      former/existing noncontrollingstockholders
                              
                              
                              -
                              
                              
                              
                              (935
                              )New bank loans
                              
                              
                              -
                              
                              
                              
                              2,932,000Repayment of bank
      loans
                              
                              
                              (5,721,300
                              )
                              
                              
                              (146,500
                              )Net
      cash flows provided by financing activities
                              
                              
                              1,589,060
                              
                              
                              
                              2,796,681Effect
      of foreign currency translation on cash and
                                cash
      equivalents
                              
                              
                              109,913
                              
                              
                              
                              61Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              491,936
                              
                              
                              
                              (203,060
                              )Cash
      and cash equivalents - beginning of period
                              
                              
                              810,809
                              
                              
                              
                              433,599Cash
      and cash equivalents - end of period
                              
                              
                              1,302,745
                              
                              
                              $
                              230,539Supplemental
      disclosures for cash flow information :-Cash paid for
:-Interest
                              
                              $
                              129,090
                              
                              
                              $
                              434,914Income taxes
                              
                              $
                              1,122,121
                              
                              
                              $
                              885,141Non-cash
      investing and financing activities :-Deposit for acquisition of
      intangible asset settled by offsettingamounts due from
      related companies
                              
                              $
                              -
                              
                              
                              $
                              7,589,000
 
 See
the accompanying notes to condensed consolidated financial
statements
  -
6 -
  Kun
Run Biotechnology, Inc.
 Condensed
Consolidated Statements of Change in Equity
 (Unaudited)
 (Stated
in US Dollars)
 
 
 Kun
      Run Biotechnology, Inc. common stockholdersAccumulatedCommon
      stock
                              
                              
                              Series
      A preferred stock
                              
                              
                              Additional
                              
                              
                              Statutory
                              
                              
                              otherNo.
      of shares
                              
                              
                              Amount
                              
                              
                              No.
      of
                              
                              
                              
                              
                              
                              paid-in
                              
                              
                              and
      other
                              
                              
                              comprehensive
                              
                              
                              Retained
                              
                              
                              Noncontrollingshares
                              
                              
                              Amount
                              
                              
                              capital
                              
                              
                              reserves
                              
                              
                              income
                              
                              
                              earnings
                              
                              
                              interest
                              
                              
                              TotalBalance,
      December 31, 2009
                              
                              
                              25,000,000
                              
                              
                              $
                              25,000
                              
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              8,903,965
                              
                              
                              $
                              3,743,028
                              
                              
                              $
                              1,607,518
                              
                              
                              $
                              10,789,080
                              
                              
                              $
                              226,846
                              
                              
                              $
                              25,295,437Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,115,146
                              
                              
                              
                              27,805
                              
                              
                              
                              3,142,951Foreign
      currency translationadjustments
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              725,083
                              
                              
                              
                              -
                              
                              
                              
                              5,057
                              
                              
                              
                              730,140Private
      placement - Note 14
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,228,758
                              
                              
                              
                              5,229
                              
                              
                              
                              6,383,323
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              6,388,552Balance,
      September 30, 2010
                              
                              
                              25,000,000
                              
                              
                              $
                              25,000
                              
                              
                              
                              5,228,758
                              
                              
                              $
                              5,229
                              
                              
                              $
                              15,287,288
                              
                              
                              $
                              3,743,028
                              
                              
                              $
                              2,332,601
                              
                              
                              $
                              13,904,226
                              
                              
                              $
                              259,708
                              
                              
                              $
                              35,557,080
 See
the accompanying notes to condensed consolidated financial
statements.
  -
7 -
 
 Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 1.
              Basis
      of presentation
 
 (i)
              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 accounting principles
      generally accepted in the United States of America (“US GAAP”) 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, 2009, included in our Annual
      Report on Form 10-K for the year ended December 31,
  2009.
 
 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-months and
nine-months 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.
  (ii)
              Going
concern
  The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business.
  In
July 2010, the Company received a notice from the Hainan Food and Drug
Administration that the agency would investigate certain products of the Company
due to production procedure concerns and at the same time the GMP license of the
Company would be suspended until the investigation is concluded.  All
operations of the production lines and all manufacturing of the medicine
products are suspended.  The agency has not concluded its
investigation.  The Company believes that due to the prolonged
investigation, it is unlikely that its production will resume any time soon and
its results of operations will be adversely impacted.  On September 3,
2010, the Company entered into a Redemption Agreement of which the Company agree
to redeem all of the 5,228,758 Series A Preferred Stock and warrants to purchase
up to 1,568,627 shares of Series A Preferred Stock for a cash consideration $9
million. More details are set forth in Note 14(b). Referring to the above
factors, substantial doubt is raised to the Company’s ability to continue as a
going concern.  The Company has no assurance with respect to the
conclusion of investigation and the Company will continue to rely on the
continuing financial support from Hainan Zhonghe Group Co., Ltd. (“Hainan
Zhonghe Group”) for its operations and redemption of above mentioned Series A
Preferred Stock and Warrants. The accompany financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
  -
8 -
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 2.
              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.
 
 As
of September 30, 2010, the Company has
two subsidiaries :-
 The
      Company'sPlace/date
      of
              
              effectiveincorporation
      or
              
              ownership
              
              Common
      stock/Company
      name
              
              establishment
              
              interest
              
              registered
      capital
              
              Principal
      activitiesKun
      Run Biotechnology
                Limited
              
              Hong
      Kong /
                May
      6, 2006
              
              100%
              
              Ordinary
      shares: Authorized and fully paid up: 10,000 shares of HK$1
      each
              
              Investment
                holdingHanian
      Zhonghe Pharmaceutical Co, Ltd. (“Zhonghe”)
              
              The
      PRC /
                April
      17, 1995
              
              99.12%
              
              Registered
      and fully paid up capital of RMB60,000,000
              
              Manufacture,
      marketing, sale and distribution
                of drugs
 
 3.
              Summary
      of significant accounting policies
 
 Principles
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 September
30, 2010, 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.




- 9
-




Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
  Concentrations of credit
risk (cont’d)
 
 During
the reporting periods, customers representing 10% or more of the Company’s
consolidated sales are :-
 Three
      months ended
                                
                                
                                Nine
      months endedSeptember
      30
                                
                                
                                September
      30(Unaudited)
                                
                                
                                (Unaudited)2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Beijing
      Ya Bao Fang DaPharmaceutical
    Ltd.
                                
                                $
                                -
                                
                                
                                $
                                424,463
                                
                                
                                $
                                -
                                
                                
                                $
                                1,005,601Hainan
      DebangPharmaceutical Co.,
      Ltd.
                                
                                
                                -
                                
                                
                                
                                442,306
                                
                                
                                
                                -
                                
                                
                                
                                -HeNan
      WanLongMedical
      Co., Ltd.
                                
                                
                                248,510
                                
                                
                                
                                -
                                
                                
                                
                                971,478
                                
                                
                                
                                -$
                                248,510
                                
                                
                                $
                                866,769
                                
                                
                                $
                                971,478
                                
                                
                                $
                                1,005,601
 
 Fair value of financial
instruments
 
 ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which fair value option was not
elected.  The Company’s financial instruments carried at fair value
include warrant liabilities only.  The required disclosure is set out
in Note 12.
 
 Except
for secured borrowings disclosed as below, the carrying amounts of the financial
assets and liabilities approximate to their fair values due to short maturities
or the applicable interest rates approximate the current market rates
:-
 
 As
      of September 30, 2010 (Unaudited)
                    
                    
                    As
      of December 31, 2009 (Audited)Carrying
                    
                    
                    
                    
                    
                    Carryingamount
                    
                    
                    Fair
      value
                    
                    
                    amount
                    
                    
                    Fair
      valueSecured
      borrowings
                    
                    $
                    673,650
                    
                    
                    $
                    660,928
                    
                    
                    $
                    6,381,450
                    
                    
                    $
                    6,362,757
 
 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.
 
 - 10
-
 
 Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements
 
 Accounting
for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers
and Servicing”, previously Statement of Financial Accounting Standards (“SFAS”)
No. 166, “Accounting for Transfers of Financial Assets - an Amendment of
Financial Accounting Standard Board (“FASB”) Statement No.
140.”).  The amended topic addresses information a reporting entity
provides in its financial statements about the transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement in transferred financial
assets.  Also, the amended topic removes the concept of a qualifying
special purpose entity, limits the circumstances in which a transferor
derecognizes a portion or component of a financial asset, defines participating
interest and enhances the information provided to financial statement users to
provide greater transparency. The amended topic is effective for the first
annual reporting period beginning after November 15, 2009 and was effective for
us as of January 1, 2010.  The adoption of this amended topic has no
material impact on the Company’s financial statements.
 
 Consolidation
of Variable Interest Entities - Amended (Included in amended Topic ASC 810
“Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No.
46(R)”).  The amended topic requires an enterprise to perform an
analysis to determine the primary beneficiary of a variable interest entity; to
require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity.  The amended topic also requires enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. The amended topic is effective for the first annual reporting period
beginning after November 15, 2009 and will be effective for us as of January 1,
2010.  The adoption of this amended topic has no material impact on
the Company’s financial statements.
 
 The FASB
issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB
Emerging Issues Task Force.”  This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting.  This update establishes a selling price hierarchy for
determining the selling price of a deliverable.  The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available.  The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is
permitted.  The management is in the process of evaluating the impact
of adopting this ASU on the Company’s financial statements.
  - 11
-
 
 Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (Cont’d)
 
 The FASB
issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements.  ASU 2010-06 amends ASC Topic 820 to require the
following additional disclosures regarding fair value measurements: (i) the
amounts of transfers between Level 1 and Level 2 of the fair value hierarchy;
(ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy
and (iii) the inclusion of information about purchases, sales, issuances and
settlements in the reconciliation of recurring Level 3
measurements.  ASU 2010-06 also amends ASC Topic 820 to clarify
existing disclosure requirements, requiring fair value disclosures by class of
assets and liabilities rather than by major category and the disclosure of
valuation techniques and inputs used to determine the fair value of Level 2 and
Level 3 assets and liabilities.  With the exception of disclosures
relating to purchases, sales, issuances and settlements of recurring Level 3
measurements, ASU 2010-06 was effective for interim and annual reporting periods
beginning after December 15, 2009.  The disclosure requirements
related to purchases, sales, issuances and settlements of recurring Level 3
measurements will be effective for financial statements for annual reporting
periods beginning after December 15, 2010.  The management is in the
process of evaluating the effect of disclosure requirements related to
purchases, sales, issuances and settlements of recurring Level 3 measurements on
the Company’s financial statements is currently not yet in a position to
determine such effects.
 
 The FASB
issued ASU No. 2010-02, “Consolidation (Topic 810) Accounting and Reporting for
Decreases in Ownership of a Subsidiary - a Scope Clarification”.  This
amendment affects entities that have previously adopted Topic 810-10 (formally
SFAS 160).  It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP.  An entity will be required to follow the
amended guidance beginning in the period that it first adopts FAS 160 (now
included in Subtopic 810-10).  For those entities that have already
adopted FAS 160, the amendments are effective at the beginning of the first
interim or annual reporting period ending on or after December 15,
2009.  The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The adoption of this ASU has no material
impact on the Company’s financial statements.
 
 In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic
855, Subsequent Events.  The update provides that SEC filers, as
defined in ASU 2010-09, are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements.  The update also requires SEC filers to evaluate
subsequent events through the date the financial statements are issued rather
than the date the financial statements are available to be
issued.  The Company adopted ASU 2010-09 upon issuance. The adoption
of this ASU has no material impact on the Company’s financial
statements.
  - 12
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 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 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.
 
 
 5.
              Other
      receivables, prepayments and
deposits
 
 September
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Audited)Other
      deposits paid
                        
                        $
                        1,136
                        
                        
                        $
                        5,486Other
      prepayments
                        
                        
                        477,319
                        
                        
                        
                        596,198Other
      receivables
                        
                        
                        416,580
                        
                        
                        
                        257,977First
      installment for redemption of SeriesA Preferred Stock and warrants
      - Note 14
                        
                        
                        748,500
                        
                        
                        
                        -Advance
      to staff for operating expenses
                        
                        
                        424,660
                        
                        
                        
                        44,295Trade
      deposits paid to suppliers
                        
                        
                        2,122,031
                        
                        
                        
                        1,435,015$
                        4,190,226
                        
                        
                        $
                        2,338,971
  - 13
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 6.
              Inventories
 
 September
      30,
                      
                      
                      December
      31,2010
                      
                      
                      2009(Unaudited)
                      
                      
                      (Audited)Raw
      materials
                      
                      $
                      593,229
                      
                      
                      $
                      471,577Work-in-progress
                      
                      
                      1,608,434
                      
                      
                      
                      1,302,181Finished
      goods
                      
                      
                      580,602
                      
                      
                      
                      474,662$
                      2,782,265
                      
                      
                      $
                      2,248,420
 
 
 7.
              Amounts
      due from related companies
 
 September
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Audited)Amounts
      due from related parties :-Hainan
      Zhonghe Group - Note 7(b)
                    
                    $
                    2,994,816
                    
                    
                    $
                    4,239,232Hainan
      Heyi Pharmaceutical Co., Ltd.(“Hainan
      Heyi”) - Note 7(c)
                    
                    
                    -
                    
                    
                    
                    417,569$
                    2,994,816
                    
                    
                    $
                    4,656,801
 
 Notes
:-
 
 (a)
              Mr.
      Xueyun Cui (“Mr. Cui”), the Company’s Chairman, sole director and the
      beneficial owner of approximately 90.09% of the Company’s outstanding
      common stock, is the ultimate controlling party of Hainan Zhonghe Group
      and Hainan Heyi.
 
 (b)
              The
      amounts are interest bearing at a benchmark rate in the PRC per annum,
      unsecured and repayable on demand.
 
 (c)
              The
      amounts are interest free, unsecured and repayable on
    demand.
  - 14
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 8.
              Property,
      plant and equipment, net
 
 September
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Audited)Costs
      :-Buildings
                        
                        $
                        7,155,934
                        
                        
                        $
                        6,825,521Plant
      and machinery
                        
                        
                        6,091,144
                        
                        
                        
                        5,439,929Furniture,
      fixtures and equipment
                        
                        
                        308,958
                        
                        
                        
                        290,140Leasehold
      improvements
                        
                        
                        121,071
                        
                        
                        
                        118,645Motor
      vehicles
                        
                        
                        709,951
                        
                        
                        
                        714,28114,387,058
                        
                        
                        
                        13,388,516Accumulated
      depreciation
                        
                        
                        (4,461,008
                        )
                        
                        
                        (3,675,288
                        )Construction
      in progress
                        
                        
                        273,951
                        
                        
                        
                        385,301Net
                        
                        $
                        10,200,001
                        
                        
                        $
                        10,098,529
 
 As of
September 30, 2010, buildings with carrying value of $2,889,614 acquired from
the former shareholder of Zhonghe on December 31, 2007, have been pledged for a
bank loan granted to Zhonghe (Note 11a(i)).  Accordingly the legal
title of the buildings cannot be transferred to Zhonghe until the bank loan is
fully repaid in 2010.  Pursuant to two separate trust agreements, both
parties agreed that the former shareholder of Zhonghe will continue to hold the
legal title of the abovementioned pledged buildings for Zhonghe until the full
settlement of related bank loan has been made by Zhonghe.  The related
bank loan was fully settled in April, 2010 and the transfer of legal title to
Zhonghe is in progress.
 
 9.
              Land
      use rights
 
 The
carrying amount of land use rights as of September 30, 2010 represents two
separate land use rights acquired from Hainan Zhonghe Group on September 29,
2007 and December 31, 2007 respectively.  The land use right with
carrying value of $2,262,598 as of September 30, 2010 was pledged to the bank
for the loans granted to Zhonghe (Note 11a(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.  Pursuant to a trust agreement,
both parties agreed that Hainan Zhonghe Group 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 related bank loan was fully
settled in April, 2010 and the transfer of legal title to Zhonghe is in
progress.
  - 15
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 10.
              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”), a related company under
the common control of Mr. Cui, to acquire a technology know-how in relation to
the production of a new drug at a total consideration of RMB60
million.  As of September 30, 2010, RMB60 million (equivalent to $8.84
million) was paid to Zhonghe Peptide as a deposit, which was settled by
offsetting the amount due from Zhonghe Peptide of $7.59 million and by cash of
$1.25 million. The transaction is expected to be completed in December
2010.
 
 On April
19, 2010, Zhonghe entered into an agreement with Hainan Zhonghe Group, a related
company under the common control of Mr. Cui, to acquire a technology know-how in
relation to the production of a new drug at a total consideration of RMB3.6
million.  As of September 30, 2010, RMB3.6 million (equivalent to
$0.53 million) was paid to Hainan Zhonghe Group as a deposit, which was settled
by cash.  The transaction is expected to be completed in
2011.
 
 On April
19, 2010, Zhonghe entered into an agreement with Zhonghe Peptide, a related
company under the common control of Mr. Cui, to acquire a technology know-how in
relation to the production of a new drug at a total consideration of RMB3.2
million.  As of September 30, 2010, RMB3.2 million (equivalent to
$0.47 million) was paid to Zhonghe Peptide as a deposit, which was settled by
cash.  The transaction is expected to be completed in
2011.
 
 
 11.
              Secured
      borrowings
 
 September
      30,
                              
                              
                              December
      31,2010
                              
                              
                              2009(Unaudited)
                              
                              
                              (Audited)Short-term
      loansBank
      loan and other loanLong-term
      loans - current portion
                              
                              $
                              673,650
                              
                              
                              $
                              6,051,375Long-term
      loansBank
      loan (Note a)-
      due 2010, interest bearing at 8.28% per annum
                              
                              
                              -
                              
                              
                              
                              5,721,300Other
      loan (Note b)-
      overdue, interest free (Note c)
                              
                              
                              336,825
                              
                              
                              
                              --
      due 2010, interest free
                              
                              
                              -
                              
                              
                              
                              330,075-
      due 2011, interest free
                              
                              
                              336,825
                              
                              
                              
                              330,075673,650
                              
                              
                              
                              6,381,450Less:
      current maturities
                              
                              
                              (673,650
                              )
                              
                              
                              (6,051,375
                              )-
                              
                              
                              
                              330,075$
                              673,650
                              
                              
                              $
                              6,381,450
  - 16
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 11.
              Secured
      borrowings (cont’d)
 
 (a)
              The
      above bank loans were secured by the following
  :-
 
 (i)
              Buildings
      with carrying value of $2,889,614 (Note 8);
and
 
 (ii)
              Land
      use rights with carrying value of $2,262,598 (Note
  9).
 
 (b)
              The
      other loans, which were granted to Zhonghe by the PRC local
      governmentauthority, are interest-free and secured by the buildings
      disposed at considerations of$442,233 in 2008 to a third party. The other
      loans were not discounted to its present value 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.
 
 (c)
              The
      other loan amounted to RMB2,250,000 (equivalent to $336,825) was overdue
      as atSeptember 30, 2010. According to the loan agreement dated December
      31, 2006, amonthly surcharge of 0.6% will be levied on the overdue
      balance. The Company is in the course of negotiation with the PRC local
      government authority.
 
 During the reporting periods, there was
no covenant requirement under the facilitiesgranted to the Company.
 
 
 12.
              Warrant
      liabilities
 
 In
accordance with ASC 815, the six-year warrants, which were issued in a private
placement completed as of April 30, 2010 as stated in Note 14(a), to purchase up
to 1,568,627 shares of Series A Preferred Stock are not considered indexed to
the Company’s own equity and should be classified as derivative financial
liability at fair value for each reporting period.  Accordingly, a part of
the net proceed from the private placement amounting to $921,808 representing
the fair value at initial recognition, was allocated to warrant
liabilities.
 
 The fair
value of theses warrants was calculated using trinomial model.  The
assumptions that were used to calculate fair value of the warrants as of
September 30, 2010 are as follows :-
 
 -
Expected volatility of 92.431%
 -
Expected dividend yield of 0%
 -
Risk-free interest rate of 2.065%
 -
Expected lives of 5.8 years
 -
Exercise price of $1.53 per share
 
 As of
September 30, 2010, the fair value of warrant liabilities was $901,365, and
corresponding gain on change in fair value of warrant liabilities of $20,443 was
recognized in the condensed consolidated statement of income and comprehensive
income for the nine months ended September 30, 2010.
  - 17
-
 
 Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 12.
              Warrant
      liabilities (cont’d)
 
 Fair
value accounting : ASC 820 establishes a valuation hierarchy for disclosure of
the inputs to fair value measurement. This hierarchy prioritizes the inputs into
three broad levels as follows :-
 
 Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
 
 Level 2 -
Observable inputs other than quoted prices in active markets for identical
assets or  liabilities.
  Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.
 
 The
warrant liabilities are determined by using Level 3 inputs.  The
following tables summarize the changes in Level 3 items measured at fair value
on a recurring basis on our balance sheet during the period ended September 30,
2010 :-
 
 WarrantliabilitiesBalance,
      January 1, 2010
                      
                      $
                      -Purchase,
      issuances and settlements
                      
                      
                      921,808Total
      gains (realized/unrealized)
                      
                      
                      (20,443
                      )Transfer
      in and/or out of Level 3
                      
                      
                      -Balance,
      September 30, 2010
                      
                      $
                      901,365
 
 13.
              Commitments
      and contingencies
 
 (a)
              Capital
      commitment
 
 As of
September 30, 2010, the Company had capital commitments amounting to$198,672 in
respect of the acquisition of property, plant and equipment and intangibleasset
which were contracted for but not provided in the financial
statements.
 
 (b)
              Operating lease
      arrangement
 
 As of
September 30, 2010, the Company had no non-cancellable operating
lease.
 
 (c)
              Contingencies
 
 As of
September 30, 2010, the Company had no contingencies.
  - 18
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 14.
              Series
      A Preferred Stock and additional paid-in
capital
 
 AdditionalNumber
      of
                    
                    
                    
                    
                    
                    paid-inshares
                    
                    
                    Amount
                    
                    
                    capitalBalance,
      January 1, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    8,903,965Private
      Placement - Note 14(a)
                    
                    
                    5,228,758
                    
                    
                    
                    5,229
                    
                    
                    
                    6,383,323Balance,
      September 30, 2010
                    
                    
                    5,228,758
                    
                    
                    $
                    5,229
                    
                    
                    $
                    15,287,288
 
 (a)
              As
      of April 30, 2010, the Company completed a private placement of 5,228,758
      Series A Preferred Stock and warrants to purchase up to 1,568,627 shares
      of Series A Preferred Stock at an exercise price of $1.53 per share for a
      gross proceed of $8,000,000 with related issuance expenses of
      $689,640.  The warrants may be exercised if the Company fails to
      achieve certain net income thresholds for the fiscal year
      2010.  In accordance with ASC 815, these warrants are not
      considered indexed to the Company’s own stock and should be classified as
      derivative financial liability at fair value for each reporting period.
      Part of the net proceeds amounting to $921,808, representing the fair
      value at initial recognition, was allocated to warrant liabilities with
      remaining balance of $6,388,552 recorded in the Company’s equity at
      initial recognition.  The Series A Preferred Stockholder has
      right to vote on an as converted basis together with holders of the
      Company's common stock as a single class, except that the Company shall
      not, without the affirmative vote or consent of the holders of a
      majority of the shares of the Series A Preferred Stock outstanding at the
      time, separately as a class, (i) increase or decrease the authorized
      amount of the Common Stock or any class or series of preferred stock, (ii)
      authorize or designate any new class or series of stock or
      other securities convertible into equity securities of the Company
      ranking on a parity with or senior to the Series A Preferred Stock
      or increase the authorized or designated number of any such
      new class or series, (iii) amend, alter or repeal the provisions of
      the Series A Preferred Stock, (iv) consummate an acquisition or asset
      transfer (as such terms are defined in the Company's Series A Preferred
      Stock Certificate of Designation, (v) repurchase or redeem shares of
      the Company's Common Stock, (vi) amend or waive any provision of
      the Company's Articles of Incorporation or By-Laws so as to
      affect materially and adversely any right, preference, privilege or voting
      power of the Series A Preferred Stock, (vii) increase or decrease the
      authorized size of the Company's Board of Directors, (viii) pay or declare
      dividends on or make any distribution, or (ix) issue debt in excess of
      $250,000 (unless such issuance of debt has been approved by a
      majority of the Company's Board of Directors). Regarding dividend rights,
      Series A Preferred Stockholders shall receive dividends in preference
      to common stockholders, and are entitled to a cash dividend of
      6% per annum payable only when, as and if declared by the board of
      directors and is non-cumulative. The management considers that it is
      unlikely that the Series A Preferred Stockholders will
      have the put right pursuant to Section 4.15 of the Securities
      Purchase Agreement dated as of April 17, 2010 by and among the Company,
      each purchaser and the key stockholder and accordingly
      classified it as equity.
 
 - 19
-
 
 Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 14.
              Series
      A Preferred Stock and additional paid-in capital
  (cont’d)
 
 (b)
              On
      September 3, 2010, the Company entered into a Redemption Agreement with
      Caduceus Asia Partners, L.P. (“Caduceus”), under the terms of which the
      Company agreed to redeem all of the 5,228,758 Series A Preferred Stock and
      warrants to purchase up to 1,568,627 shares of Series A Preferred Stock
      from Caduceus for a cash consideration of $9 million (“Redemption Price”).
      All Series A Preferred Stock and warrants shall sell assign, transfer,
      convey and deliver to the Company upon full payment of the Redemption
      Price. Upon redemption of the Series A Preferred, the Series A Preferred
      shall be cancelled and shall not be issuable by the
      Company.  Upon surrender of the warrants to the Company, all of
      the Series A Stockholder’s right, title and interest in and to the
      warrants shall be extinguished. As of September 30, 2010, the Company made
      the first installment of approximately $0.75 million to Caduceus and the
      Company has classified such payment into other receivables, prepayments
      and deposits in its condensed consolidated balance
  sheets.
 
 15.
              Earnings
      per share
 
 The
following table sets forth the computation of basic and diluted earnings per
share (“EPS”) for the periods indicated :-
 
 Three
      months ended
                                      
                                      
                                      Nine
      months endedSeptember
      30,
                                      
                                      
                                      September
      30,(Unaudited)
                                      
                                      
                                      (Unaudited)2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Numerator:Net
      income attributable to Kun RunBiotechnology,
      Inc. commonstockholders
                                      
                                      $
                                      508,152
                                      
                                      
                                      $
                                      2,048,238
                                      
                                      
                                      $
                                      3,115,146
                                      
                                      
                                      $
                                      5,103,599Less
      : Change in fair value ofwarrant
      liabilities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (20,443
                                      )
                                      
                                      
                                      -$
                                      508,152
                                      
                                      
                                      $
                                      2,048,238
                                      
                                      
                                      $
                                      3,094,703
                                      
                                      
                                      $
                                      5,103,599Denominator:Weighted
      average commonshares
      used to compute basicEPS
      - Note a
                                      
                                      
                                      30,228,758
                                      
                                      
                                      
                                      25,000,000
                                      
                                      
                                      
                                      27,987,862
                                      
                                      
                                      
                                      25,000,000Dilutive
      potential from assumedconversions
      of warrant
                                      
                                      
                                      765,952
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      445,353
                                      
                                      
                                      
                                      -Weighted
      average common sharesused
      to compute diluted EPS
                                      
                                      
                                      30,994,710
                                      
                                      
                                      
                                      25,000,000
                                      
                                      
                                      
                                      28,433,215
                                      
                                      
                                      
                                      25,000,000Earnings
      per share - Basic
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      0.08
                                      
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.20Earnings
      per share - Diluted
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      0.08
                                      
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.20
  - 20
-
  Kun
Run Biotechnology, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)
 
 
 15.
              Earnings
      per share (cont’d)
 
 Note a :
The weighted average common shares used to compute basic EPS include
theoutstanding Series A Preferred Stock as it has common stock feature (Note
14).
 
 16.
              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 and comprehensive income.  The Company contributed $84,061 and
$58,210 for the nine months ended September 30, 2010 and 2009
respectively.
 
 17.
              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
ASC 280 “Segments Reporting” (previously SFAS 131).
 
 18.
              Related
      party transactions
 
 Apart
from the transactions as disclosed in notes 7, 8, 9, and 10 to the financial
statements, the Company has entered into the following transactions with its
related parties which are subject to the common control of the Company’s
management :-
 
 Related
      parties
                  Type
      of transactions
                  
                  Three
      months ended
                    September
      30,
                    (Unaudited)
                  
                  
                  Nine
      months ended
                    September
      30,
                    (Unaudited)2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Hainan
      Heyi
                  Sales
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,733
                  
                  
                  $
                  306,168Hainan
      Zhonghe Group
                  Interest
      income
                  
                  $
                  -
                  
                  
                  $
                  49,184
                  
                  
                  $
                  62,105
                  
                  
                  $
                  115,695
 
 19.
              Subsequent
      events
 
 The
Company evaluated all events or transactions that occurred through the date the
financial statements were issued and determined that there is no material
recognizable nor subsequent events or transactions which would require
recognition or disclosure in the financial statements.




- 21
-




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. “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.


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 as well as chemical products. 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.


- 22
-





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% of the issued and outstanding shares of the
Company’s common stock.





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 September 30, 2010, 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.




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





ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which fair value option was not
elected.  The Company’s financial instruments carried at fair value
include warrant liabilities only.  The required disclosure is set out
in Note 12.





Except
for secured borrowings disclosed as below, the carrying amounts of the financial
assets and liabilities approximate to their fair values due to short maturities
or the applicable interest rates approximate the current market rates
:-


- 23
-





As ofSeptember30, 2010
                      (Unaudited)
                    
                    
                    As of December 31, 2009
                      (Audited)Carrying
                    
                    
                    
                    
                    
                    Carryingamount
                    
                    
                    Fair value
                    
                    
                    amount
                    
                    
                    Fair valueSecured
      borrowings
                    
                    $
                    673,650
                    
                    
                    $
                    660,928
                    
                    
                    $
                    6,381,450
                    
                    
                    $
                    6,362,757





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




Results of
Operations




Three months ended September 30,
2010and 2009




The information set forth below has been
derived from our financial statements for the three months ended September 30,
2010and threemonths ended September 30,
2009.





Three months ended September 30,(unaudited)2010
                                                                    
                                                                    2009% as of total
                                                                      revenue
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    % as of total
                                                                      revenue
                                                                    
                                                                    
                                                                    % ChangesSales
    revenue
                                                                    
                                                                    $
                                                                    2,497,565
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    $
                                                                    4,048,877
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    
                                                                    -38
                                                                    %Cost of
    sales
                                                                    
                                                                    
                                                                    884,251
                                                                    
                                                                    
                                                                    
                                                                    35
                                                                    %
                                                                    
                                                                    
                                                                    1,211,070
                                                                    
                                                                    
                                                                    
                                                                    30
                                                                    %
                                                                    
                                                                    
                                                                    -27
                                                                    %Gross
profit
                                                                    
                                                                    $
                                                                    1,613,314
                                                                    
                                                                    
                                                                    
                                                                    65
                                                                    %
                                                                    
                                                                    $
                                                                    2.837,807
                                                                    
                                                                    
                                                                    
                                                                    70
                                                                    %
                                                                    
                                                                    
                                                                    -43
                                                                    %





Sales
Revenue





Revenues
for the three months ended September 30, 2010 were $2.50 million, representing a
decrease of $1.55 million, or 38% over revenues for the same period of
2009. This decrease was mainly attributable to the decrease in sales of our
products and services. In July 2010, the company received a notice from the
Hainan Food and Drug Administration that the agency would investigate certain
products of the Company due to production procedure concerns and at the same
time the GMP license of the Company would be suspended until the investigation
is concluded.  As result of the notice, the Company ceased its
production of all products. Most of the products’ sales were from
stockpile.





Revenues by product categories were as
follows:


- 24
-





ThreemonthsendedSeptember30,(unaudited)2010
                                          
                                          
                                          2009Product
                                          
                                          
                                          
                                          
                                          as of total
                                          
                                          
                                          
                                          
                                          
                                          as of totalsales %
                                          
                                          
                                          
                                          
                                          
                                          sales %
                                          
                                          
                                          %ChangesTP-5
      ProductsTP-5 for injection
      (1mg)
                                          
                                          $
                                          333,041
                                          
                                          
                                          
                                          13
                                          %
                                          
                                          $
                                          415,184
                                          
                                          
                                          
                                          10
                                          %
                                          
                                          
                                          -20
                                          %TP-5 for injection
      (10mg)
                                          
                                          
                                          167,850
                                          
                                          
                                          
                                          7
                                          %
                                          
                                          
                                          247,013
                                          
                                          
                                          
                                          6
                                          %
                                          
                                          
                                          -32
                                          %TP-5 pre-filled injection
      1ml:1mg
                                          
                                          
                                          98,410
                                          
                                          
                                          
                                          4
                                          %
                                          
                                          
                                          317,934
                                          
                                          
                                          
                                          8
                                          %
                                          
                                          
                                          -69
                                          %TP-5 pre-filled injection
      1ml:10mg
                                          
                                          
                                          261,116
                                          
                                          
                                          
                                          10
                                          %
                                          
                                          
                                          967,247
                                          
                                          
                                          
                                          24
                                          %
                                          
                                          
                                          -73
                                          %Sub-total ( TP-5
      products)
                                          
                                          
                                          860,417
                                          
                                          
                                          
                                          34
                                          %
                                          
                                          
                                          1,947,378
                                          
                                          
                                          
                                          48
                                          %
                                          
                                          
                                          -56
                                          %Other
    productsSomatostatin for injection
      3mg
                                          
                                          
                                          156,701
                                          
                                          
                                          
                                          6
                                          %
                                          
                                          
                                          201,698
                                          
                                          
                                          
                                          5
                                          %
                                          
                                          
                                          -22
                                          %Thymosin Alpha 1 for injection
      1.6mg
                                          
                                          
                                          1,162,279
                                          
                                          
                                          
                                          46
                                          %
                                          
                                          
                                          1,326,439
                                          
                                          
                                          
                                          33
                                          %
                                          
                                          
                                          -12
                                          %DDAVP Injection
      1ml:4ug
                                          
                                          
                                          215,888
                                          
                                          
                                          
                                          9
                                          %
                                          
                                          
                                          369,282
                                          
                                          
                                          
                                          9
                                          %
                                          
                                          
                                          -42
                                          %DDAVP Injection
      1ml:15ug
                                          
                                          
                                          69,513
                                          
                                          
                                          
                                          3
                                          %
                                          
                                          
                                          138,781
                                          
                                          
                                          
                                          3
                                          %
                                          
                                          
                                          -50
                                          %Granisetron Hydrochloride
      Injection 3ml:3mg
                                          
                                          
                                          15,382
                                          
                                          
                                          
                                          1
                                          %
                                          
                                          
                                          35,878
                                          
                                          
                                          
                                          1
                                          %
                                          
                                          
                                          -57
                                          %Ozagrel Sodium for Injection
      80mg/40mg
                                          
                                          
                                          17,385
                                          
                                          
                                          
                                          1
                                          %
                                          
                                          
                                          777
                                          
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          2137
                                          %Others
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          28,644
                                          
                                          
                                          
                                          1
                                          %
                                          
                                          
                                          -100
                                          %In Total
                                          
                                          $
                                          2,497,565
                                          
                                          
                                          
                                          100
                                          %
                                          
                                          $
                                          4,048,877
                                          
                                          
                                          
                                          100
                                          %
                                          
                                          
                                          -38
                                          %




For the
three months ended September 30, 2010, the sales of our major products, TP-5
products, were $0.86 million, accounting for 34% of total sales, representing a
decrease of $1.09 million, or 56%, from $1.95 million for the three months
ended September 30, 2009.





Thymosin
Alpha 1 contributed $1,162,279 in revenue, or 46% of total sales, for the three
months ended September 30, 2010, representing a 12% decrease from the same
period of 2009.





DDAVP
generated $285,401 in revenue, or 12% of total sales, for the three months ended
September 30, 2010, representing a decrease of 44% from $508,063 for the same
period in 2009.





Cost of Sales and Gross
Profit





Cost of
goods sold was $884,251 for the three months ended September 30, 2010, as
compared to $ 1,211,070 for the same period in 2009. Cost of goods sold was
35% of total revenue for the three months ended September 30, 2010, as
compared to 30% of total revenue for the same period in 2009. The increase in
cost of sales as a percentage of revenue was mainly due to the ceased
production.





Gross
profit as a percentage of net revenue decreased to 65% for the three months
ended September 30, 2010 from 70% for the same period in 2009 due to the
increase in cost of goods sold as a percentage of revenue.


- 25
-





Three months ended September 30,(unaudited)2010
                                                            
                                                            
                                                            2009as of total
                                                              revenue%
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            as of total
                                                              revenue%
                                                            
                                                            
                                                            %ChangesOperating
      expenses:Administrative
      expenses
                                                            
                                                            $
                                                            342,046
                                                            
                                                            
                                                            
                                                            14
                                                            %
                                                            
                                                            $
                                                            285,889
                                                            
                                                            
                                                            
                                                            7
                                                            %
                                                            
                                                            
                                                            20
                                                            %Research and development
      costs
                                                            
                                                            
                                                            239,449
                                                            
                                                            
                                                            
                                                            10
                                                            %
                                                            
                                                            
                                                            90,335
                                                            
                                                            
                                                            
                                                            2
                                                            %
                                                            
                                                            
                                                            165
                                                            %Selling
      expenses
                                                            
                                                            
                                                            457,817
                                                            
                                                            
                                                            
                                                            18
                                                            %
                                                            
                                                            
                                                            69,882
                                                            
                                                            
                                                            
                                                            2
                                                            %
                                                            
                                                            
                                                            555
                                                            %1,039,312
                                                            
                                                            
                                                            
                                                            42
                                                            %
                                                            
                                                            
                                                            446,106
                                                            
                                                            
                                                            
                                                            11
                                                            %
                                                            
                                                            
                                                            133
                                                            %Income from
      operations
                                                            
                                                            $
                                                            574,002
                                                            
                                                            
                                                            
                                                            23
                                                            %
                                                            
                                                            $
                                                            2,391,701
                                                            
                                                            
                                                            
                                                            59
                                                            %
                                                            
                                                            
                                                            -76
                                                            %





Administrative
Expenses





Administrative
expenses primarily consist of depreciation and salaries and other related costs
for personnel in executive and other administrative positions. Other significant
costs included amortization of intangible assets and urban real estate tax.
Administrative expenses for the three months ended September 30, 2010 and 2009
were $342,046 (14% of total sales) and $285,889 (7% of total sales),
respectively, representing an increase of $56,157. The increase in
administrative expenses was primarily attributable to the ceased production and
non-operating expenses.





Research and
Development Costs





Research and development costs
consist primarily of expenses incurred in clinical trials, drug
registration and usage of trial specimens for our new products. Research and
development expenses for
the three months ended September 30, 2010were $239,449, or10% of total sales, an$149,114increase from $90,335 for the same period
of 2009.Theincrease ofR&D costis related to launching andpreparation expenses for products in
the Company’s pipeline.





Selling
Expenses





Selling expenses, including distribution
expenses, were $457,817, or18% of total sales, for the three months
ended September 30, 2010,as compared to $69,882, or2% of the total sales for the same period
in 2009,representing anincrease of $387,935. Theincrease was mainly attributableto theincreasedof $266,406in provisions for doubtful
debts.





Income from
Operations





Income
from operations was $574,002 for the three months ended September 30, 2010, a
decrease of 76% from $2.4 million for the same period in 2009. The decrease was
mainly due to the decrease of revenues and increase costs and expenses as
described above.


- 26
-





Three months ended September 30,(unaudited)2010
                                                                    
                                                                    
                                                                    2009as oftotal
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    as oftotalrevenue %
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    revenue %
                                                                    
                                                                    
                                                                    %ChangesIncome from
      operations
                                                                    
                                                                    $
                                                                    574,002
                                                                    
                                                                    
                                                                    
                                                                    23
                                                                    %
                                                                    
                                                                    $
                                                                    2,391,701
                                                                    
                                                                    
                                                                    
                                                                    59
                                                                    %
                                                                    
                                                                    
                                                                    -76
                                                                    %Interest
    income
                                                                    
                                                                    
                                                                    25,825
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    %
                                                                    
                                                                    
                                                                    49,466
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    %
                                                                    
                                                                    
                                                                    -48
                                                                    %Other
income
                                                                    
                                                                    
                                                                    53,244
                                                                    
                                                                    
                                                                    
                                                                    2
                                                                    %
                                                                    
                                                                    
                                                                    116,682
                                                                    
                                                                    
                                                                    
                                                                    3
                                                                    %
                                                                    
                                                                    
                                                                    -54
                                                                    %Government subsidy
      income
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    32,768
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    %
                                                                    
                                                                    
                                                                    -100
                                                                    %Finance
    costs
                                                                    
                                                                    
                                                                    (623
                                                                    )
                                                                    
                                                                    
                                                                    0
                                                                    %
                                                                    
                                                                    
                                                                    (170,622
                                                                    )
                                                                    
                                                                    
                                                                    -4
                                                                    %
                                                                    
                                                                    
                                                                    -99
                                                                    %Income before income taxes and
      noncontrolling interest
                                                                    
                                                                    
                                                                    652,448
                                                                    
                                                                    
                                                                    
                                                                    26
                                                                    %
                                                                    
                                                                    
                                                                    2,419,995
                                                                    
                                                                    
                                                                    
                                                                    60
                                                                    %
                                                                    
                                                                    
                                                                    -73
                                                                    %Income
taxes
                                                                    
                                                                    
                                                                    (139,624
                                                                    )
                                                                    
                                                                    
                                                                    -6
                                                                    %
                                                                    
                                                                    
                                                                    (353,654
                                                                    )
                                                                    
                                                                    
                                                                    -9
                                                                    %
                                                                    
                                                                    
                                                                    -61
                                                                    %Net income before noncontrolling
      interest
                                                                    
                                                                    
                                                                    512,824
                                                                    
                                                                    
                                                                    
                                                                    20
                                                                    %
                                                                    
                                                                    
                                                                    2,066,341
                                                                    
                                                                    
                                                                    
                                                                    51
                                                                    %
                                                                    
                                                                    
                                                                    -75
                                                                    %Net income attributable to
      noncontrolling interest
                                                                    
                                                                    
                                                                    (4,672
                                                                    )
                                                                    
                                                                    
                                                                    0
                                                                    %
                                                                    
                                                                    
                                                                    (18,103
                                                                    )
                                                                    
                                                                    
                                                                    0
                                                                    %
                                                                    
                                                                    
                                                                    -74
                                                                    %Net income attributableto KunRun Biotechnology, Inc. common
      stockholders
                                                                    
                                                                    
                                                                    508,152
                                                                    
                                                                    
                                                                    
                                                                    20
                                                                    %
                                                                    
                                                                    
                                                                    2,048,238
                                                                    
                                                                    
                                                                    
                                                                    51
                                                                    %
                                                                    
                                                                    
                                                                    -75
                                                                    %Earnings per share:Basic
                                                                    
                                                                    $
                                                                    0.02
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    0.08Diluted
                                                                    
                                                                    $
                                                                    0.02
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    0.08Weighted average number of
      shares outstanding :Basic
                                                                    
                                                                    
                                                                    30,228,758
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    25,000,000Diluted
                                                                    
                                                                    
                                                                    30,994,710
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    25,000,000


- 27
-





Interest
income





Interest
income decreased by $23,641 to $25,825 for the three months ended September 30,
2010 from $49,466 for the same period of 2009. The reduction was mainly due to
that the amount due from Zhonghe Group had been paid , at a interest rate of
5.31% per annum.





Other
Income





For the
three months ended September 30, 2010, other income was $53,244, representing
three-month’s rental income paid by Sinopep Pharmaceutical Inc. (“Sinopep”). Our
partial raw-material factory is leased to Sinopep for the term of one year since
the beginning of 2009.





Finance
Costs





Three months ended September 30,(unaudited)2010
                              
                              
                              2009
                              
                              
                              % ChangesBank
charges
                              
                              $
                              590
                              
                              
                              $
                              417
                              
                              
                              
                              41
                              %Discounting
      charges
                              
                              
                              -
                              
                              
                              
                              5,878
                              
                              
                              
                              -100
                              %Interest
      expenses
                              
                              
                              28
                              
                              
                              
                              164,327
                              
                              
                              
                              -100
                              %Exchange (gain)
      loss
                              
                              
                              5
                              
                              
                              
                              0
                              
                              
                              
                              100
                              %$
                              623
                              
                              
                              $
                              170,622
                              
                              
                              
                              -100
                              %




Discounting
Charges





Discounting charges represented bank
charges/penalties on withdrawal of cash on discounted bills before the maturity
date.





Interest
Expense





For the
three months ended September 30, 2010, we incurred interest expenses of
$28, as compared to $164,327 for the same period in 2009. Aside from
$673,650 of the government interest-free loan, the Company has paid off all
existing loans before June 30, 2010. Thus, the interest expense decreased
significantly.





Net
Income





Netincomedecreased by75% to $508,152for the three months ended September
30, 2010from $2.05 million for the same
period of 2009due to reduced revenue andincreasedcosts and expenses as described
above.





Earnings per
share





Earnings per share for the
three months ended
September 30, 2010was $0.02per share for both basic and diluted
shares, compared with $0.08per share for both basic and
diluted shares for the same period of 2009.


- 28
-





Nine months ended September 30,
2010and 2009




The information set forth below has been derived from our
financial statements for the nine months ended September 30, 2010and nine months ended September
30, 2009.





Nine months ended September 30,(unaudited)2010
                                      
                                      2009% as of total
                                        revenue
                                      
                                      
                                      
                                      
                                      % as of total
                                        revenue
                                      
                                      
                                      % ChangesSales
    revenue
                                      
                                      $
                                      8,569,872
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      $
                                      10,139,543
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      -15
                                      %Cost of
    sales
                                      
                                      
                                      2,832,378
                                      
                                      
                                      
                                      33
                                      %
                                      
                                      
                                      2,976,593
                                      
                                      
                                      
                                      29
                                      %
                                      
                                      
                                      -5
                                      %Gross
profit
                                      
                                      $
                                      5,737,494
                                      
                                      
                                      
                                      67
                                      %
                                      
                                      $
                                      7,162,950
                                      
                                      
                                      
                                      71
                                      %
                                      
                                      
                                      -20
                                      %





Sales
Revenue





Revenues
for the nine months ended September 30, 2010 were $8.57 million, representing a
decrease of $1,569,671, or 15%, over revenues for the same period of 2009.
This decrease was mainly attributable to the decrease in sales of our products
and services. Revenues by product categories were as follows:




Nine months ended September 30,
                                    (unaudited)2010
                                  
                                  
                                  2009as of total
                                  
                                  
                                  
                                  
                                  
                                  as of totalProduct
                                  
                                  
                                  
                                  
                                  sales %
                                  
                                  
                                  
                                  
                                  
                                  sales %
                                  
                                  
                                  % ChangesTP-5
    ProductsTP-5 for injection
      (1mg)
                                  
                                  $
                                  1,123,159
                                  
                                  
                                  
                                  13
                                  %
                                  
                                  $
                                  1,188,587
                                  
                                  
                                  
                                  12
                                  %
                                  
                                  
                                  -6
                                  %TP-5 for injection
      (10mg)
                                  
                                  
                                  606,746
                                  
                                  
                                  
                                  7
                                  %
                                  
                                  
                                  673,779
                                  
                                  
                                  
                                  7
                                  %
                                  
                                  
                                  -10
                                  %TP-5 pre-filled injection
      1ml:1mg
                                  
                                  
                                  325,582
                                  
                                  
                                  
                                  4
                                  %
                                  
                                  
                                  795,548
                                  
                                  
                                  
                                  8
                                  %
                                  
                                  
                                  -59
                                  %TP-5 pre-filled injection
      1ml:10mg
                                  
                                  
                                  938,325
                                  
                                  
                                  
                                  11
                                  %
                                  
                                  
                                  2,037,830
                                  
                                  
                                  
                                  20
                                  %
                                  
                                  
                                  -54
                                  %Sub-total ( TP-5
      products)
                                  
                                  
                                  2,993,812
                                  
                                  
                                  
                                  35
                                  %
                                  
                                  
                                  4,695,744
                                  
                                  
                                  
                                  47
                                  %
                                  
                                  
                                  -36
                                  %Other
    productsSomatostatin for injection
      3mg
                                  
                                  
                                  429,771
                                  
                                  
                                  
                                  5
                                  %
                                  
                                  
                                  629,233
                                  
                                  
                                  
                                  6
                                  %
                                  
                                  
                                  -32
                                  %Thymosin Alpha 1 for injection
      1.6mg
                                  
                                  
                                  3,940,433
                                  
                                  
                                  
                                  46
                                  %
                                  
                                  
                                  3,477,716
                                  
                                  
                                  
                                  34
                                  %
                                  
                                  
                                  13
                                  %DDAVP Injection
      1ml:4ug
                                  
                                  
                                  876,204
                                  
                                  
                                  
                                  10
                                  %
                                  
                                  
                                  923,292
                                  
                                  
                                  
                                  9
                                  %
                                  
                                  
                                  -5
                                  %DDAVP Injection
      1ml:15ug
                                  
                                  
                                  235,773
                                  
                                  
                                  
                                  3
                                  %
                                  
                                  
                                  268,944
                                  
                                  
                                  
                                  3
                                  %
                                  
                                  
                                  -12
                                  %Granisetron Hydrochloride
      Injection 3ml:3mg
                                  
                                  
                                  61,579
                                  
                                  
                                  
                                  1
                                  %
                                  
                                  
                                  86,869
                                  
                                  
                                  
                                  1
                                  %
                                  
                                  
                                  -29
                                  %Ozagrel Sodium for Injection
      80mg/40mg
                                  
                                  
                                  32,300
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  27,522
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  17
                                  %Others
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  30,223
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  -100
                                  %In Total
                                  
                                  $
                                  8,569,872
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  $
                                  10,139,543
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  -15
                                  %


- 29
-


For the
nine months ended September 30, 2010, the sales of our major products, TP-5
products, were $3.00 million, accounting for 35% of total sales,
decreased by $1.70 million, or 36% from $4.70 million for the nine months
ended September 30, 2009. The ceased production was the main reason of the sales
decrease.





Thymosin
Alpha 1 for injection was still our best selling product with increased brand
recognition and market
acceptance,    contributing $3.94 million in revenue
(46% of total sales) for the nine months ended September 30, 2010, representing
a 13% increase from the same period of 2009. Despite the ceased production in
July 2010, the sales of Thymosin Alpha 1 increased significantly in the first
two quarter.





DDAVP
generated $1,111,977 in revenue, or 13% of total sales, for the nine months
ended September 30, 2010, representing a decrease of 7% from $1,192,236 for the
same period in 2009.




Cost of Sales and Gross
Profit





Cost of
goods sold was $2,832,378 for the nine months ended September 30, 2010, as
compared to $2,976,593 for the same period in 2009. Cost of goods sold was
33% of total revenue for the nine months ended September 30, 2010, as compared
to 29% of total revenue for the same period in 2009.





Gross
profit as a percentage of net revenue was 67% for the nine months ended
September 30, 2010, representing a decrease from 71% for the same period of
2009. As a result of increased market competition, the average selling price for
many of the Company’s products were lower in the nine months ended September 30,
2010.





Nine months ended September 30,(unaudited)2010
                                                      
                                                      
                                                      2009as of total
                                                        revenue %
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      as of total
                                                        revenue %
                                                      
                                                      
                                                      %ChangesOperating
      expenses:Administrative
      expenses
                                                      
                                                      $
                                                      865,509
                                                      
                                                      
                                                      
                                                      10
                                                      %
                                                      
                                                      $
                                                      678,314
                                                      
                                                      
                                                      
                                                      7
                                                      %
                                                      
                                                      
                                                      28
                                                      %Research and development
      costs
                                                      
                                                      
                                                      628,059
                                                      
                                                      
                                                      
                                                      7
                                                      %
                                                      
                                                      
                                                      189,647
                                                      
                                                      
                                                      
                                                      2
                                                      %
                                                      
                                                      
                                                      231
                                                      %Selling
      expenses
                                                      
                                                      
                                                      859,231
                                                      
                                                      
                                                      
                                                      10
                                                      %
                                                      
                                                      
                                                      287,425
                                                      
                                                      
                                                      
                                                      3
                                                      %
                                                      
                                                      
                                                      199
                                                      %2,352,799
                                                      
                                                      
                                                      
                                                      27
                                                      %
                                                      
                                                      
                                                      1,155,386
                                                      
                                                      
                                                      
                                                      12
                                                      %
                                                      
                                                      
                                                      104
                                                      %Income from
      operations
                                                      
                                                      $
                                                      3,384,695
                                                      
                                                      
                                                      
                                                      40
                                                      %
                                                      
                                                      $
                                                      6,007,564
                                                      
                                                      
                                                      
                                                      59
                                                      %
                                                      
                                                      
                                                      -44
                                                      %





Administrative
Expenses





Administrative
expenses primarily consist of depreciation and salaries and other related costs
for personnel in executive and other administrative positions. Other significant
costs included amortization of intangible assets and urban real estate tax.
Administrative expenses for the nine months ended September 30, 2010 and 2009
were $865,509 (10% of total sales) and $678,314 (7% of total sales),
respectively. The increase in administrative expenses was primarily attributable
to the ceased production. The depreciation of production department assets,
production staff's salary and other related expenses were charged to
administrative expenses after the factory's production was
ceased.


- 30
-





Research and Development
Costs





Research
and development costs consist primarily of expenses incurred in clinical
trials, drug registration and usage of trial specimens for our new products.
Research and development expenses for the nine months ended September 30, 2010
were $628,059, or 7% of total sales, representing a $438,412 increase from
$189,647 for the same period of 2009. The increase in R&D costs was directly
related to launching and preparation expenses for 4 products in the Company’s
pipeline that are expected to commence production in 2010.





Selling
Expenses





Selling
expenses, including distribution expenses, were $859,231, or 10% of
total sales, for the nine months ended September 30, 2010 as compared to
$287,425 for the nine months ended September 30, 2009. This represents an
increase of $571,806, or 199%. The increase was mainly attributable to the
increased of $278,076 in provisions for doubtful debts and non-operating
expenses.





Income from
Operations





Income
from operations was $3.38 million for the nine months ended September 30, 2010,
representing a decrease of 44% from $6.01 million for the same period in
2009.




Nine months ended September 30,(unaudited)2010
                                                    
                                                    
                                                    2009as oftotal
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    as oftotalrevenue%
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    revenue%
                                                    
                                                    
                                                    %ChangesIncome from
      operations
                                                    
                                                    $
                                                    3,384,695
                                                    
                                                    
                                                    
                                                    40
                                                    %
                                                    
                                                    $
                                                    6,007,564
                                                    
                                                    
                                                    
                                                    59
                                                    %
                                                    
                                                    
                                                    -44
                                                    %Interest
    income
                                                    
                                                    
                                                    89,591
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    116,426
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    -23
                                                    %Other
income
                                                    
                                                    
                                                    297,114
                                                    
                                                    
                                                    
                                                    3
                                                    %
                                                    
                                                    
                                                    315,926
                                                    
                                                    
                                                    
                                                    3
                                                    %
                                                    
                                                    
                                                    -6
                                                    %Government subsidy
      income
                                                    
                                                    
                                                    86,680
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    40,093
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    116
                                                    %Change in fair value of warrant
      liabilities
                                                    
                                                    
                                                    20,443
                                                    
                                                    
                                                    
                                                    0
                                                    %
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    100
                                                    %Finance
    costs
                                                    
                                                    
                                                    (147,141
                                                    )
                                                    
                                                    
                                                    -2
                                                    %
                                                    
                                                    
                                                    (428,440
                                                    )
                                                    
                                                    
                                                    -4
                                                    %
                                                    
                                                    
                                                    -66
                                                    %Income before income taxes and
      noncontrolling interest
                                                    
                                                    
                                                    3,731,382
                                                    
                                                    
                                                    
                                                    43
                                                    %
                                                    
                                                    
                                                    6,051,569
                                                    
                                                    
                                                    
                                                    60
                                                    %
                                                    
                                                    
                                                    -38
                                                    %Income
taxes
                                                    
                                                    
                                                    (588,431
                                                    )
                                                    
                                                    
                                                    7
                                                    %
                                                    
                                                    
                                                    (902,662
                                                    )
                                                    
                                                    
                                                    -9
                                                    %
                                                    
                                                    
                                                    -35
                                                    %Net income before noncontrolling
      interest
                                                    
                                                    
                                                    3,142,951
                                                    
                                                    
                                                    
                                                    36
                                                    %
                                                    
                                                    
                                                    5,148,907
                                                    
                                                    
                                                    
                                                    51
                                                    %
                                                    
                                                    
                                                    -39
                                                    %Net income attributable to
      noncontrolling interest
                                                    
                                                    
                                                    (27,805
                                                    )
                                                    
                                                    
                                                    0
                                                    %
                                                    
                                                    
                                                    (45,308
                                                    )
                                                    
                                                    
                                                    0
                                                    %
                                                    
                                                    
                                                    -39
                                                    %Net income attributable to Kun Run
      Biotechnology, Inc. common stockholders
                                                    
                                                    $
                                                    3,115,146
                                                    
                                                    
                                                    
                                                    36
                                                    %
                                                    
                                                    $
                                                    5,103,599
                                                    
                                                    
                                                    
                                                    50
                                                    %
                                                    
                                                    
                                                    -39
                                                    %Earnings per share:Basic
                                                    
                                                    $
                                                    0.11
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    0.20Diluted
                                                    
                                                    $
                                                    0.11
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    0.20Weighted averagenumber of shares outstanding :Basic
                                                    
                                                    
                                                    27,987,862
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    25,000,000Diluted
                                                    
                                                    
                                                    28,433,215
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    25,000,000


- 31
-





Interest
income





Interest
income decreased by $26,835 to $89,591 for the nine months ended September 30,
2010 from $116,426 for the same period of 2009. The reduction was mainly due to
that the amount due from Zhonghe Group had been paid in May 2010, at a interest
rate of 5.31% per annum.





Other
Income





For the
nine months ended September 30, 2010, other income was $297,114, mainly
attributable to rental income paid by Sinopep Pharmaceutical Inc. and writing
back of bad debt. Our partial raw-material factory is leased to Sinopep for a
year since the beginning of 2009.





Change in fair value of
warrant liabilities





As of
September 30, 2010, the fair value of warrant liabilities was $901,365, and
corresponding gain on change in fair value of warrant liabilities of $20,443 was
recognized in the condensed consolidated statement of income and comprehensive
income for the three and nine months ended September 30, 2010.





Finance
Costs





Nine months ended September 30,(unaudited)2010
                              
                              
                              2009
                              
                              
                              %ChangesBank
charges
                              
                              $
                              1,975
                              
                              
                              $
                              1,489
                              
                              
                              
                              33
                              %Discounting
      charges
                              
                              
                              8,117
                              
                              
                              
                              5,876
                              
                              
                              
                              38
                              %Interestexpenses
                              
                              
                              129,090
                              
                              
                              
                              428,954
                              
                              
                              
                              -70
                              %Exchange (gain)
      loss
                              
                              
                              7,959
                              
                              
                              
                              (7,879
                              )
                              
                              
                              101
                              %$
                              147,141
                              
                              
                              $
                              428,440
                              
                              
                              
                              -66
                              %





Discounting
charges





Discounting
charges represent bank charges/penalties on early withdrawals of cash on
discounted bills.


- 32
-





Interest
Expense





For the
nine months ended September 30, 2010, we incurred interest expenses of
$129,090, as compared to $428,954 for the same period in 2009. Aside
from the $673,650 in government interest-free loan, the Company has paid off all
existing loans before June 30, 2010. Thus the interest expense had decreased
significantly.





Income
taxes





Income
taxes decreased by $314,231 to $588,431 for the nine months ended September 30,
2010 from $902,662 for the same period of 2009. The decrease was primarily due
to the decrease of operating profit.





Net
Income





Net
income decreased by approximately $1.98 million, or 39%, to $3.12 million
for the nine months ended September 30, 2010 from $5.10 million for the same
period of 2009.  The decrease was due to reduced revenue and
increased costs and expenses described above.





Earnings per
share





Earnings
per share for the nine months ended September 30, 2010 was $0.11 per share for
both basic and diluted shares, as compared with $0.20 per share for both basic
and diluted shares for the same period of 2009.





Liquidity and Capital
Resources





Cash





As of September 30, 2010, our principal sources of liquidity
consisted of cash and cash equivalents of $1,302,745, representing anincreaseof $1,072,206, or465%, as compared with our cash balance of
$230,539as of September 30, 2009. The Company’s cash and cash equivalents consist of
cash on hand and deposits with commercial banks.





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





Cash Flow
                      
                      Nine Months Ended September30,
                        (Unaudited)2010
                      
                      
                      2009Net cash provided by operating
      activities
                      
                      $
                      592,352
                      
                      
                      $
                      2,924,010Net cash used in investing
      activities
                      
                      
                      (1,799,389
                      )
                      
                      
                      (5,923,812
                      )Net cash provided by (used in)
      financing activities
                      
                      
                      1,589,060
                      
                      
                      
                      2,796,681Effect of foreign currency
      translation on cash and cash equivalents
                      
                      
                      109,913
                      
                      
                      
                      61Net cash
    flow
                      
                      $
                      491,936
                      
                      
                      $
                      (203,060
                      )




Operating
Activities





Net cash
provided by operating activities was $592,352 for the nine months ended
September 30, 2010, representing a decrease of $2.33 million from the net cash
provided by operating activities of $2.92 million for the same period in 2009.
The significant decrease was due to the ceased production in July 2010.
Accordingly, the decrease of sales led to the declined operating activities cash
flow.


- 33
-





Investing
Activities





Net cash
used in investing activities for the nine months ended September 30, 2010 was
$1.80 million, representing a decrease of $4.12 million from net cash used in
investing activities of $5.92 million for the same period of 2009.





Financing
Activities





Net cash
provided in financing activities for the nine months ended September 30, 2010
was $1.59 million, as compared to $2.80 million used in financing activities for
the same period of 2009. Since we completed a private placement with net
proceeds of $7.3 million in April 2010, we also paid off $5.7 million in
existing loans and did not borrow any new loan during the nine months ended
September 30, 2010.





Off-Balance Sheet
Arrangements




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


- 34
-




Recently issued accounting
pronouncements





Accounting
for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers
and Servicing”, previously Statement of Financial Accounting Standards (“SFAS”)
No. 166, “Accounting for Transfers of Financial Assets - an Amendment of
Financial Accounting Standard Board (“FASB”) Statement No.
140.”).  The amended topic addresses information a reporting entity
provides in its financial statements about the transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement in transferred financial
assets.  Also, the amended topic removes the concept of a qualifying
special purpose entity, limits the circumstances in which a transferor
derecognizes a portion or component of a financial asset, defines participating
interest and enhances the information provided to financial statement users to
provide greater transparency. The amended topic is effective for the first
annual reporting period beginning after November 15, 2009 and was effective for
us as of January 1, 2010.  The adoption of this amended topic has no
material impact on the Company’s financial statements.





Consolidation
of Variable Interest Entities - Amended (Included in amended Topic ASC 810
“Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No.
46(R)”).  The amended topic requires an enterprise to perform an
analysis to determine the primary beneficiary of a variable interest entity; to
require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity.  The amended topic also requires enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. The amended topic is effective for the first annual reporting period
beginning after November 15, 2009 and will be effective for us as of January 1,
2010.  The adoption of this amended topic has no material impact on
the Company’s financial statements.





The FASB
issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB
Emerging Issues Task Force.”  This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting.  This update establishes a selling price hierarchy for
determining the selling price of a deliverable.  The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available.  The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is
permitted.  The management is in the process of evaluating the impact
of adopting this ASU on the Company’s financial statements.





The FASB
issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements.  ASU 2010-06 amends ASC Topic 820 to require the
following additional disclosures regarding fair value measurements: (i) the
amounts of transfers between Level 1 and Level 2 of the fair value hierarchy;
(ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy
and (iii) the inclusion of information about purchases, sales, issuances and
settlements in the reconciliation of recurring Level 3
measurements.  ASU 2010-06 also amends ASC Topic 820 to clarify
existing disclosure requirements, requiring fair value disclosures by class of
assets and liabilities rather than by major category and the disclosure of
valuation techniques and inputs used to determine the fair value of Level 2 and
Level 3 assets and liabilities.  With the exception of disclosures
relating to purchases, sales, issuances and settlements of recurring Level 3
measurements, ASU 2010-06 was effective for interim and annual reporting periods
beginning after December 15, 2009.  The disclosure requirements
related to purchases, sales, issuances and settlements of recurring Level 3
measurements will be effective for financial statements for annual reporting
periods beginning after December 15, 2010.  The management is in the
process of evaluating the effect of disclosure requirements related to
purchases, sales, issuances and settlements of recurring Level 3 measurements on
the Company’s financial statements is currently not yet in a position to
determine such effects.


- 35
-





The FASB
issued ASU No. 2010-02, “Consolidation (Topic 810) Accounting and Reporting for
Decreases in Ownership of a Subsidiary - a Scope Clarification”.  This
amendment affects entities that have previously adopted Topic 810-10 (formally
SFAS 160).  It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP.  An entity will be required to follow the
amended guidance beginning in the period that it first adopts FAS 160 (now
included in Subtopic 810-10).  For those entities that have already
adopted FAS 160, the amendments are effective at the beginning of the first
interim or annual reporting period ending on or after December 15,
2009.  The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The adoption of this ASU has no
material impact on the Company’s financial statements.





In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic
855, Subsequent Events.  The update provides that SEC filers, as
defined in ASU 2010-09, are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements.  The update also requires SEC filers to evaluate
subsequent events through the date the financial statements are issued rather
than the date the financial statements are available to be
issued.  The Company adopted ASU 2010-09 upon issuance. The adoption
of this ASU has no material impact on the Company’s financial
statements.


- 36
-




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 September 30, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





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. (Removed and Reserved)




Item
5. Other Information





None.


- 37
-




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.


- 38
-


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:
      November 19, 2010
              By:
              /s/ Xiaoqun YeXiaoqun
      Ye, Chief Executive Officer(Principal
      Executive Officer)





Date:
      November 19, 2010
              By:
              /s/ Yan LinYan
      Lin, Chief Accounting Officer(Principal
      Financial Officer)


- 39
-