U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
one)


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





For the
Quarterly Period Ended June 30, 2009


or


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





Commission
File Number 333-141384





Kun Run Biotechnology,
Inc.


(Name of
registrant in its charter)




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





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





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





(Former
name and former address, if applicable)





Indicate
by check mark whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.


Yes
   þNo   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   ̈No
 ̈





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




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





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


Yes 
   ̈      No
  þ




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





Kun Run Biotechnology,
Inc.




Table of Contents




PagePART I -
              FINANCIAL
      INFORMATIONItem 1.
              Financial
      Statements:Condensed Consolidated Statements
      of Income and Comprehensive Income
              
              1Condensed Consolidated Balance
      Sheets
              
              3Condensed Consolidated Statements
      of Cash Flows
              
              5Notes to Financial
      Statements
              
              7Item 2.
              Management's Discussion and
      Analysis of Financial Condition and Results of
      Operations
              
              18Item 3.
              Quantitative and Qualitative
      Disclosuresabout Market
      Risk
              
              30Item 4.
              Controls and
      Procedures
              
              30PART II -
              OTHER
      INFORMATIONItem 1.
              Legal
      Proceedings
              
              31Item 1A.
              Risk
Factors
              
              31Item 2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              
              31Item 3.
              Defaultsupon Senior
      Securities
              
              31Item 4.
              Submission of Matters to a Vote of
      Security Holders
              
              31Item 5.
              Other
      Information
              
              31Item 6.
              Exhibits
              
              31







Kun
Run Biotechnology, Inc.





Condensed
Consolidated Financial Statements


For the
three and six months ended


June 30,
2009 and 2008


(Stated
in US dollars)








Kun
Run Biotechnology, Inc.


Condensed
Consolidated Financial Statements


Three
and six months ended June 30, 2009 and 2008




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 -
      6Notes
      to Condensed Consolidated Financial Statements
                
                7 -
      17







Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Income and Comprehensive Income


For
the three and six months ended June, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)


Three
      months ended
                                    
                                    
                                    Six
      months endedJune
      30,
                                    
                                    
                                    June
      30,(Unaudited)
                                    
                                    
                                    (Unaudited)2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Sales
      revenue
                                    
                                    $
                                    3,661,398
                                    
                                    
                                    $
                                    3,361,055
                                    
                                    
                                    $
                                    6,090,666
                                    
                                    
                                    $
                                    5,350,069Cost
      of sales
                                    
                                    
                                    1,019,830
                                    
                                    
                                    
                                    891,466
                                    
                                    
                                    
                                    1,765,523
                                    
                                    
                                    
                                    1,554,670Gross
      profit
                                    
                                    
                                    2,641,568
                                    
                                    
                                    
                                    2,469,589
                                    
                                    
                                    
                                    4,325,143
                                    
                                    
                                    
                                    3,795,399Operating
      expensesAdministrative
      expenses
                                    
                                    
                                    199,517
                                    
                                    
                                    
                                    267,788
                                    
                                    
                                    
                                    392,425
                                    
                                    
                                    
                                    484,855Research and developments
      costs
                                    
                                    
                                    39,428
                                    
                                    
                                    
                                    97,571
                                    
                                    
                                    
                                    99,312
                                    
                                    
                                    
                                    126,240Selling
expenses
                                    
                                    
                                    74,830
                                    
                                    
                                    
                                    143,009
                                    
                                    
                                    
                                    217,543
                                    
                                    
                                    
                                    284,080313,775
                                    
                                    
                                    
                                    508,368
                                    
                                    
                                    
                                    709,280
                                    
                                    
                                    
                                    895,175Income
      from operations
                                    
                                    
                                    2,327,793
                                    
                                    
                                    
                                    1,961,221
                                    
                                    
                                    
                                    3,615,863
                                    
                                    
                                    
                                    2,900,224Interest income
                                    
                                    
                                    66,735
                                    
                                    
                                    
                                    328
                                    
                                    
                                    
                                    66,960
                                    
                                    
                                    
                                    1,142Other income
                                    
                                    
                                    146,504
                                    
                                    
                                    
                                    93,755
                                    
                                    
                                    
                                    199,244
                                    
                                    
                                    
                                    102,596Government subsidy
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,225
                                    
                                    
                                    
                                    7,325
                                    
                                    
                                    
                                    9,625Finance costs
                                    
                                    
                                    (135,696
                                    )
                                    
                                    
                                    (130,925
                                    )
                                    
                                    
                                    (257,818
                                    )
                                    
                                    
                                    (274,621
                                    )Income
      before income taxes andnoncontrolling
      interest
                                    
                                    
                                    2,405,336
                                    
                                    
                                    
                                    1,933,604
                                    
                                    
                                    
                                    3,631,574
                                    
                                    
                                    
                                    2,738,966Income
      taxes - Note 4
                                    
                                    
                                    (354,062
                                    )
                                    
                                    
                                    1,990
                                    
                                    
                                    
                                    (549,008
                                    )
                                    
                                    
                                    (131,580
                                    )Net
      income before noncontrolling interest
                                    
                                    
                                    2,051,274
                                    
                                    
                                    
                                    1,935,594
                                    
                                    
                                    
                                    3,082,566
                                    
                                    
                                    
                                    2,607,386Net
      income attributable to noncontrollinginterest
                                    
                                    
                                    (18,116
                                    )
                                    
                                    
                                    (17,083
                                    )
                                    
                                    
                                    (27,205
                                    )
                                    
                                    
                                    (22,958
                                    )Net
      income attributable to Kun RunBiotechnology,
      Inc. common stockholders
                                    
                                    $
                                    2,033,158
                                    
                                    
                                    $
                                    1,918,511
                                    
                                    
                                    $
                                    3,055,361
                                    
                                    
                                    $
                                    2,584,428Net
      income before noncontrolling interest
                                    
                                    $
                                    2,051,274
                                    
                                    
                                    $
                                    1,935,594
                                    
                                    
                                    $
                                    3,082,566
                                    
                                    
                                    $
                                    2,607,386Other
      comprehensive incomeForeign currency translation
      adjustments
                                    
                                    
                                    (1,131
                                    )
                                    
                                    
                                    301,750
                                    
                                    
                                    
                                    (25,101
                                    )
                                    
                                    
                                    747,455Comprehensive
      income
                                    
                                    
                                    2,050,143
                                    
                                    
                                    
                                    2,237,344
                                    
                                    
                                    
                                    3,057,465
                                    
                                    
                                    
                                    3,354,841Comprehensive
      income attributable tononcontrolling
      interest
                                    
                                    
                                    (18,103
                                    )
                                    
                                    
                                    (17,572
                                    )
                                    
                                    
                                    (26,968
                                    )
                                    
                                    
                                    (23,615
                                    )Comprehensive
      income attributable to KunRun Biotechnology, Inc.
      commonstockholders
                                    
                                    $
                                    2,032,040
                                    
                                    
                                    $
                                    2,219,772
                                    
                                    
                                    $
                                    3,030,497
                                    
                                    
                                    $
                                    3,331,226





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 six months ended June, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)





Three
      months ended
                      
                      
                      Six
      months endedJune
      30,
                      
                      
                      June
      30,(Unaudited)
                      
                      
                      (Unaudited)2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Earnings
      per share attributable to Kun RunBiotechnology, Inc. common
      stockholders:basic and diluted
                      
                      $
                      0.08
                      
                      
                      $
                      0.08
                      
                      
                      $
                      0.12
                      
                      
                      $
                      0.11Weighted
      average number of sharesoutstanding:
      basic and diluted
                      
                      
                      25,000,000
                      
                      
                      
                      24,250,000
                      
                      
                      
                      25,000,000
                      
                      
                      
                      24,250,000





See the
accompanying notes to condensed consolidated financial
statements


- 2
-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





June
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)ASSETSCurrent assetsCash and cash
      equivalents
                      
                      $
                      288,127
                      
                      
                      $
                      433,599Trade receivables,
      net
                      
                      
                      4,974,007
                      
                      
                      
                      4,732,750Bills
receivable
                      
                      
                      428,040
                      
                      
                      
                      117,360Other receivables, prepayments
      and deposits
                      
                      
                      3,031,910
                      
                      
                      
                      985,683Receivables from disposal of
      properties
                      
                      
                      -
                      
                      
                      
                      2,061,793Inventories - Note
      5
                      
                      
                      1,427,526
                      
                      
                      
                      689,415Amounts due from related
      companies - Note 6
                      
                      
                      3,148,433
                      
                      
                      
                      5,595,307Deferred taxes
                      
                      
                      -
                      
                      
                      
                      8,362Total
      current assets
                      
                      
                      13,298,043
                      
                      
                      
                      14,624,269Intangible
    assets
                      
                      
                      98,396
                      
                      
                      
                      111,004Property, plant and equipment,
      net - Note 7
                      
                      
                      9,373,180
                      
                      
                      
                      9,685,374Land use rights - Note
      8
                      
                      
                      3,735,775
                      
                      
                      
                      3,775,540Deposit for acquisition of
      property, plant andequipment
                      
                      
                      494,760
                      
                      
                      
                      445,691Deposit paid to a related
      company for acquisitionof an intangible asset - Note
      9
                      
                      
                      7,911,000
                      
                      
                      
                      -TOTAL
      ASSETS
                      
                      $
                      34,911,154
                      
                      
                      $
                      28,641,878





See the
accompanying notes to condensed consolidated financial
statements


- 3
-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Balance Sheets (Cont’d)


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





June
      30,
                                
                                
                                December
      31,2009
                                
                                
                                2008(Unaudited)
                                
                                
                                (Audited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
    liabilitiesTrade payables
                                
                                $
                                391,985
                                
                                
                                $
                                966,937Other payables and accrued
      expenses
                                
                                
                                2,371,943
                                
                                
                                
                                1,672,500Dividend payable to Zhonghe’s
      former/existingnoncontrolling
      stockholders
                                
                                
                                7,199
                                
                                
                                
                                7,209Income tax
    payable
                                
                                
                                960,873
                                
                                
                                
                                655,019Amount due to a related company
      - Note 6
                                
                                
                                935
                                
                                
                                
                                936Secured borrowings - Note
      10
                                
                                
                                8,973,125
                                
                                
                                
                                -Total current
      liabilities
                                
                                
                                12,706,060
                                
                                
                                
                                3,302,601Deferred taxes
                                
                                
                                15,132
                                
                                
                                
                                8,255Secured borrowings - Note
      10
                                
                                
                                329,625
                                
                                
                                
                                6,528,150TOTAL
      LIABILITIES
                                
                                
                                13,050,817
                                
                                
                                
                                9,839,006COMMITMENTS AND CONTINGENCIES- Note 11STOCKHOLDERS’
      EQUITYPreferred stock : par value of
      $0.001 per share,authorized 10,000,000 shares in
      2009 and
                                
                                
                                -
                                
                                
                                
                                -2008; none issued and
      outstandingCommon stock : par value of
      $0.001 per share,authorized
      100,000,000 shares, issued andoutstanding
      25,000,000 shares in 2009 and25,000,000
      shares in 2008
                                
                                
                                25,000
                                
                                
                                
                                25,000Additional paid-in
      capital
                                
                                
                                8,969,033
                                
                                
                                
                                8,969,033Statutory and other
      reserves
                                
                                
                                2,820,850
                                
                                
                                
                                2,820,850Accumulated other comprehensive
      income
                                
                                
                                1,576,481
                                
                                
                                
                                1,601,345Retained
    earnings
                                
                                
                                8,272,860
                                
                                
                                
                                5,217,499TOTAL
      KUN RUN BIOTECHNOLOGY, INC.STOCKHOLDERS’
      EQUITY
                                
                                
                                21,664,224
                                
                                
                                
                                18,633,727NONCONTROLLING
      INTEREST
                                
                                
                                196,113
                                
                                
                                
                                169,145TOTAL
      EQUITY
                                
                                
                                21,860,337
                                
                                
                                
                                18,802,872TOTAL
      LIABILITIES AND EQUITY
                                
                                $
                                34,911,154
                                
                                
                                $
                                28,641,878





See the
accompanying notes to condensed consolidated financial
statements


- 4
-





Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows


For
the three and six months ended June 30, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)





Six
      months ended June 30,(Unaudited)2009
                          
                          
                          2008Cash
      flows from operating activitiesNet income attributable to Kun
      Run Biotechnology,
                          
                          $
                          3,055,361
                          
                          
                          $
                          2,584,428Inc. common
      stockholdersAdjustments to reconcile net
      income attributable to Kun RunBiotechnology, Inc. to net
      cash provided by operating activities :-Depreciation
                          
                          
                          349,782
                          
                          
                          
                          338,347Amortization of intangible assets
      and land use rights
                          
                          
                          47,091
                          
                          
                          
                          34,941Deferred taxes
                          
                          
                          15,252
                          
                          
                          
                          3,043Loss on disposal of property,
      plant and equipment
                          
                          
                          183
                          
                          
                          
                          -Write-off
      of property, plant and equipment
                          
                          
                          -
                          
                          
                          
                          5,504Recovery
      of doubtful debts
                          
                          
                          (16,106
                          )
                          
                          
                          -Noncontrolling
      interest
                          
                          
                          27,205
                          
                          
                          
                          22,958Changes in operating assets and
      liabilities:Trade
    receivables
                          
                          
                          (231,840
                          )
                          
                          
                          (1,196,464
                          )Bills
    receivables
                          
                          
                          (311,132
                          )
                          
                          
                          -Other receivables, prepayments
      and deposits
                          
                          
                          (2,067,910
                          )
                          
                          
                          480,032Amounts due from related
      companies
                          
                          
                          83,244
                          
                          
                          
                          -Inventories
                          
                          
                          (739,379
                          )
                          
                          
                          97,281Trade payables
                          
                          
                          (574,072
                          )
                          
                          
                          16,320Other payables and accrued
      expenses
                          
                          
                          701,740
                          
                          
                          
                          406,624Income tax
      recoverable
                          
                          
                          -
                          
                          
                          
                          128,537Income tax
    payable
                          
                          
                          306,822
                          
                          
                          
                          -Net
      cash flows provided by operating activities
                          
                          
                          646,241
                          
                          
                          
                          2,921,551Cash
      flows from investing activitiesPayments to acquire and deposit
      for acquisitionof property, plant and
      equipment
                          
                          
                          (81,585
                          )
                          
                          
                          (755,906
                          )Proceeds from sale of property,
      plant and equipment
                          
                          
                          2,059,306
                          
                          
                          
                          -Deposit for acquisition of
      intangible asset
                          
                          
                          (322,520
                          )
                          
                          
                          -Amounts due from related
      parties
                          
                          
                          (5,244,274
                          )
                          
                          
                          (1,358,761
                          )Net
      cash flows used in investing activities
                          
                          $
                          (3,589,073
                          )
                          
                          $
                          (2,114,667
                          )





See the
accompanying notes to condensed consolidated financial statements





- 5
-




Kun
Run Biotechnology, Inc.


Condensed
Consolidated Statements of Cash Flows (Cont’d)


For
the three and six months ended June 30, 2009 and 2008


(Unaudited)


(Stated
in US Dollars)





Six
      months ended June 30,(Unaudited)2009
                                        
                                        
                                        2008Cash
      flows from financing activitiesAmounts due to related
      parties
                                        
                                        $
                                        12,116
                                        
                                        
                                        $
                                        (155,000
                                        )Dividends paid to Zhonghe’s
      former/existing noncontrollingstockholders
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,692
                                        )New bank loans
                                        
                                        
                                        2,932,000
                                        
                                        
                                        
                                        319,140Repayment of bank
      loans
                                        
                                        
                                        (146,500
                                        )
                                        
                                        
                                        (1,418,400
                                        )Contribution
      to additional paid-in capital
                                        
                                        
                                        -
                                        
                                        
                                        
                                        128Contribution
      of cash from shareholders acquiringshares of
    Zhonghe
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,208,748Distribution
      of cash to shareholders in connection withacquisition of shares of
      Zhonghe
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,208,748
                                        )Net
      cash flows provided by (used in) financing activities
                                        
                                        
                                        2,797,616
                                        
                                        
                                        
                                        (1,265,824
                                        )Effect
      of foreign currency translation on cash and cash
    equivalents
                                        
                                        
                                        (256
                                        )
                                        
                                        
                                        28,561Net
      decrease in cash and cash equivalents
                                        
                                        
                                        (145,472
                                        )
                                        
                                        
                                        (430,379
                                        )Cash
      and cash equivalents - beginning of period
                                        
                                        
                                        433,599
                                        
                                        
                                        
                                        670,919Cash
      and cash equivalents - end of period
                                        
                                        $
                                        288,127
                                        
                                        
                                        $
                                        240,540Supplemental
      disclosures for cash flow information:Cash paid for:Interest
                                        
                                        $
                                        264,708
                                        
                                        
                                        $
                                        274,576Income
      taxes
                                        
                                        $
                                        226,935
                                        
                                        
                                        $
                                        -Non-cash
      investing and financing activities:Dividend payable to Zhonghe’s
      former stockholders settled byoffsetting amounts due from
      related companies and otherpayables
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        120,965Deposit 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
-





1.
            Corporate
      information





Kun Run
Biotechnology, Inc. (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 polypeptide drugs which could be used to treat immunity dysfunction and
hyperfunction, as well as some high quality chemical drugs.




2.
            Basis
      of presentation





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





In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for the
three-months and six-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.





In
accordance with FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, the noncontrolling interest is
presented below stockholders’ equity.  Certain 2008 amounts in the
consolidated financial statements have been reclassified to conform to the 2009
presentation. These reclassifications have no effect on net income or
stockholders’ equity as previously reported.




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.


- 7
-





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





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 June 30, 2009, substantially all of the
Company’s cash and cash equivalents were held by major financial institutions
located in the People’s Republic of China (the “PRC”), which management believes
are of high credit quality.  With respect to trade and bills
receivables, the Company extends credit based on an evaluation of the customer’s
financial condition.  The Company generally does not require
collateral for trade receivables and maintains an allowance for doubtful
accounts of trade receivables.





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





Three
      months ended
                        June
      30
                      
                      
                      Six
      months ended
                        June
      302009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Jiangxi
      JinSheng MedicalCo., Ltd.
                      
                      $
                      400,155
                      
                      
                      $
                      -
                      
                      
                      $
                      454,410
                      
                      
                      $
                      -Chongqin
      DinghaiPharmaceutical Ltd.
                      
                      
                      340,187
                      
                      
                      
                      432,515
                      
                      
                      
                      474,157
                      
                      
                      
                      608,300$
                      740,342
                      
                      
                      $
                      432,515
                      
                      
                      $
                      928,567
                      
                      
                      $
                      608,300





Fair value of financial
instruments





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





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





As of June 30, 2009
                    (Unaudited)
                  
                  
                  As of December 31, 2008
                    (Audited)Carrying
                  
                  
                  
                  
                  
                  Carryingamount
                  
                  
                  Fair value
                  
                  
                  amount
                  
                  
                  Fair valueSecured
      borrowings
                  
                  $
                  9,302,750
                  
                  
                  $
                  9,375,011
                  
                  
                  $
                  6,528,150
                  
                  
                  $
                  6,407,755





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


- 8
-





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





Recently issued accounting
pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective for the
fiscal year beginning after December 15, 2008. The new standard has been applied
prospectively as of January 1, 2009, except for the presentation and disclosure
requirements, which have been applied retrospectively for prior periods
presented. Prior to the adoption of SFAS No. 160, the noncontrolling interests’
equity was included in other long-term liabilities in the condensed consolidated
balance sheets. Upon the adoption of SFAS 160, the noncontrolling interest is
presented within stockholders’ equity.





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





In
April 2008, the FASB issued FASB staff position (“FSP”) FAS 142-3,
Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP FAS
142-3 amends the factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other
Intangible Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after
December 15, 2008. Early adoption is prohibited. The adoption of this
standard has no material effect on the Company's financial
statements.





In April
2009, the FASB issued FSP No. 141R-1“Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies”(“FSP 141R-1”).
FSP 141R-1 amends the provisions in FASB Statement 141R for the initial
recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. FSP 141R-1 eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria in Statement 141R and instead carries forward most of the provisions in
SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent
assets and contingent liabilities acquired in evaluating the impact of SFAS
141(R). The management is in the process of evaluating the impact of adopting
this standard on the Company’s financial statements.


- 9
-





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





Recently issued accounting
pronouncements (Cont’d)





In April
2009, the FASB issued FSP No. 157-4, “Determining Whether a Market is Not Active
and a Transaction Is Not Distressed”, or FSP No. 157-4. FSP No. 157-4 clarifies
when markets are illiquid or that market pricing may not actually reflect the
“real” value of an asset. If a market is determined to be inactive and market
price is reflective of a distressed price then an alternative method of pricing
can be used, such as a present value technique to estimate fair value. FSP No.
157-4 identifies factors to be considered when determining whether or not a
market is inactive. FSP No. 157-4 would be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 and shall be applied prospectively. The adoption of
this statement has no material effect on the Company's financial
statements.





In
April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2,
“Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and FAS
No. 124-2. FSP FAS No. 115-2 and FAS No. 124-2 amends the other-than-temporary
impairment guidance in SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, for debt securities and the presentation and disclosure
requirements of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 is effective
for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
adoption of this standard has no material effect on the Company's financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,”
to require those disclosures in summarized financial information at interim
reporting periods. The FSP is effective for interim periods ending after June
15, 2009, with earlier adoption permitted for periods ending after March 15,
2009. The adoption of this standard has no material effect on the Company's
financial statements.





In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”), which sets forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 will become effective after
June 15, 2009. The adoption of this statement has no material effect on the
Company's financial statements.


- 10
-





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





Recently issued accounting
pronouncements (Cont’d)





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets. SFAS 166 removes the concept of a qualifying special-purpose entity
(QSPE) from SFAS No. 140 (“SFAS 166”), Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities (SFAS 140) and removes the
exception from applying FIN 46R. This statement also clarifies the requirements
for isolation and limitations on portions of financial assets that are eligible
for sale accounting. This statement is effective for fiscal years beginning
after November 15, 2009. SFAS 166 is effective for the Company’s year beginning
November 29, 2009. The management is in the process of evaluating the impact of
adopting this standard on the Company’s financial statements.





In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS 167”), which amends FASB Interpretation
No. 46 (revised December 2003) to address the elimination of the
concept of a qualifying special purpose entity. SFAS 167 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
SFAS 167 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. SFAS 167 shall be effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The management is in the
process of evaluating the impact of adopting this standard on the Company’s
financial statements.





In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162” (“SFAS 168”), which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with generally accepted accounting principles. SFAS 168 explicitly
recognizes rules and interpretive releases of the Securities and Exchange
Commission under federal securities laws as authoritative GAAP for SEC
registrants. SFAS 168 will become effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The management is in
the process of evaluating the impact of adopting this standard on the Company’s
financial statements.


- 11
-





4.
            Income
      taxes




United
States





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




HK





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




PRC





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





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





As
approved by the relevant tax authority in the PRC, Zhonghe, being a Foreign
Investment Enterprise, engaged in an advanced technology industry, was approved
to enjoy a further three years' preferential tax rate at 15% for 2008, 2009 and
2010.


- 12
-





5.
            Inventories





June
      30,
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)Raw
      materials
                    
                    $
                    370,580
                    
                    
                    $
                    284,837Work-in-progress
                    
                    
                    933,993
                    
                    
                    
                    260,504Finished
      goods
                    
                    
                    122,953
                    
                    
                    
                    144,074$
                    1,427,526
                    
                    
                    $
                    689,415




6.
            Amounts
      due from / to related companies





June
      30,
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)
                              
                              
                              (Audited)Amounts
      due from related parties :-Hainan
      Zhonghe Group Co., Ltd. (“Hainan ZhongheGroup”)
      - Note 6(b)
                              
                              $
                              2,516,386
                              
                              
                              $
                              4,352,639Hainan
      Zhonghe Peptide Drugs Research &Development
      Co., Ltd. (“Zhonghe Peptide”)-
      Note 6(b)
                              
                              
                              -
                              
                              
                              
                              528,120Hainan
      Heyi Pharmaceutical Co., Ltd. (“Hainan Heyi”)-
      Note 6(c)
                              
                              
                              632,047
                              
                              
                              
                              714,548$
                              3,148,433
                              
                              
                              $
                              5,595,307Amount
      due to a related party :-Dividend
      payable to Zhonghe’s former stockholderHainan
      Hekun Bronze Art Co., Ltd. (“HainanHekun”)
      - Note 6(c)
                              
                              $
                              935
                              
                              
                              $
                              936





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,
      Zhonghe Peptide, Hainan Heyi and Hainan
Hekun.





(b)
            The
      amounts are interest bearing at 5.31% per annum, unsecured and repayable
      on demand.





(c)
            The
      amounts are interest free, unsecured and repayable on
    demand.


- 13
-





7.
            Property,
      plant and equipment, net


June
      30,
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)Costs
      :-Buildings
                      
                      $
                      6,256,361
                      
                      
                      $
                      5,892,393Plant
      and machinery
                      
                      
                      5,043,866
                      
                      
                      
                      4,233,317Furniture,
      fixtures and equipment
                      
                      
                      276,472
                      
                      
                      
                      273,588Leasehold
      improvements
                      
                      
                      108,999
                      
                      
                      
                      118,645Motor
      vehicles
                      
                      
                      713,307
                      
                      
                      
                      714,28012,399,005
                      
                      
                      
                      11,232,223Accumulated
      depreciation
                      
                      
                      (3,224,474
                      )
                      
                      
                      (2,882,383
                      )Construction
      in progress
                      
                      
                      198,649
                      
                      
                      
                      1,335,534Net
                      
                      $
                      9,373,180
                      
                      
                      $
                      9,685,374





As of
June 30, 2009, buildings with carrying value of $3,027,631 acquired from the
former shareholder of Zhonghe on December 31, 2007, have been pledged for a bank
loan granted to Zhonghe (Note 10a(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.




8.
              Land
      use rights





The
carrying amount of land use rights as of June 30, 2009 represents two separate
land use rights acquired from the former stockholder of Zhonghe on September 29,
2007 and December 31, 2007 respectively.  The land use right with
carrying value of $2,268,291 as of June 30, 2009 was pledged to the bank for the
loans granted to Zhonghe (Note 10a(ii)).  The legal title of the
pledged land use right has not been transferred to Zhonghe after the acquisition
as such transfer can only be done after the related bank loans granted to
Zhonghe are fully settled in 2010.  Pursuant to a trust agreement,
both parties agreed that the former stockholder of Zhonghe will continue to hold
the legal title of the pledged land for Zhonghe until the full settlement of
related bank loans has been made by Zhonghe.





The legal
title of the remaining land use right with carrying value of $1,467,484 as of
June 30, 2009 has not been transferred to Zhonghe after the
acquisition.  Pursuant to a trust agreement, both parties agreed that
the former stockholder of Zhonghe will continue to hold the legal title of the
land for Zhonghe until the completion of the legal title
transfer.


- 14
-





9.
            Deposit
      paid to a related company for acquisition of an intangible
      asset





On March
23, 2009, Zhonghe entered into an agreement with Zhonghe Peptide to acquire a
technology know-how in relation to the production of a new drug at a total
consideration of RMB60 million. As of June 30, 2009, RMB54 million (equivalent
to $7.91 million) was paid to Zhonghe Peptide as a deposit.  The
transaction is expected to be completed by the end of 2009.




10.
            Secured
      borrowings


June
      30,
                          
                          December
      31,2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Audited)Short-term
      loansBank
      loanShort-term
      loan, interest bearing at 6.37 % per annum
                          
                          $
                          2,930,000
                          
                          
                          $
                          -Long-term
      loans - current portion
                          
                          
                          6,043,125
                          
                          
                          
                          -8,973,125
                          
                          
                          
                          -Long-term
      loansBank
      loan (Note a)-
      due 2009, interest bearing at 8.28% per annum
                          
                          
                          5,713,500
                          
                          
                          
                          5,868,000Other
      loan (Note b)-
      due 2010, interest free
                          
                          
                          329,625
                          
                          
                          
                          330,075-
      due 2011, interest free
                          
                          
                          329,625
                          
                          
                          
                          330,0756,372,750
                          
                          
                          
                          6,528,150Less:
      current maturities
                          
                          
                          (6,043,125
                          )
                          
                          
                          -329,625
                          
                          
                          
                          6,528,150$
                          9,302,750
                          
                          
                          $
                          6,528,150




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





(i)
            Buildings
      with carrying value of $3,027,631 (Note 7);
and





(ii)
            Land
      use rights with carrying value of $2,268,291 (Note
  8).


- 15
-





10.
            Secured
      borrowings (Cont’d)





(b)
              The
      other loan, which was granted to Zhonghe by the PRC local government
      authority, is interest-free and secured by the buildings disposed at
      considerations of $442,233 in 2008 to a third party. The other loan has
      not been 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 loan 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 loan has
      been made by Zhonghe.





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




11.
            Commitments
      and contingencies




(a)
              Capital
      commitment
 
 As of
June 30, 2009, the Company had capital commitments amounting to $1,186,842 in
respect of the acquisition of property, plant and equipment and intangible asset
which were contracted for but not provided in the financial
statements.
 
 (b)
              Operating lease
      arrangement
 
 As of
June 30, 2009, the Company had no non-cancellable operating lease.
 
 (c)
              Contingencies
 
 As of
June 30, 2009, the Company had no contingencies.




12.
            Defined
      contribution plan





Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rate of 29% of the average salaries for the latest fiscal year-end of
Hainan Province Haikou Shi to a defined contribution retirement scheme organized
by a state-sponsored social insurance plan in respect of the retirement benefits
for the Company's employees in the PRC.  The only obligation of the
Company with respect to retirement scheme is to make the required contributions
under the plan.  No forfeited contribution is available to reduce the
contribution payable in the future years.  The defined contribution
plan contributions were charged to the condensed consolidated statements of
income. The Company contributed $36,580 and $42,876 for the six months ended
June 30, 2009 and 2008 respectively.


- 16
-





13.
            Segment
      information





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





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





14.
            Related
      party transactions





Apart
from the transactions as disclosed in notes 6, 7, 8 and 9 to the financial
statements, the Company has entered into the following transactions with its
related parties :-





Related
      parties
                      
                      Type
      of
                        transactions
                      
                      Three
      months ended
                        June
      30,
                        (Unaudited)
                      
                      
                      Six
      months ended
                        June
      30,
                        (Unaudited)2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Hainan
      Heyi
                      
                      Sales
                      
                      $
                      58,583
                      
                      
                      $
                      486,654
                      
                      
                      $
                      306,168
                      
                      
                      $
                      488,176Hainan
      Zhonghe Group
                      
                      Interest
      income
                      
                      $
                      66,511
                      
                      
                      $
                      -
                      
                      
                      $
                      66,511
                      
                      
                      $
                      -




15.
            Subsequent
      events





Effective
this quarter, the Company implemented SFAS No. 165. This standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
The adoption of SFAS 165 did not impact our financial position or results of
operations. The Company evaluated all events or transactions that occurred after
June 30, 2009 up through August 14, 2009, the date these financial
statements were issued. During this period, the Company did not have any
material recognizable subsequent events.


- 17
-


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 currentexpectations 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 forecastsor 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 ofthis 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 corporationorganized 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.





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
derivativesas 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 sharesare quoted for trading on the
Over-The-Counter Bulletin Board in the United States of
America.





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





Thereafter, on August 21, 2008, Kun Run
entered into a Stock Purchase Agreement (the “Exchange Agreement”) with the shareholders of the Company.
The terms of the Exchange Agreement were consummated and the acquisition was
completed on September 16, 2008. As a result of the transaction, the Company
issued a total of 24,250,000 shares of its common voting
stock to Xueyun Cui (“Mr.
Cui”) and LiqiongYang, 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 theshareholders 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
forcancellation 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.


- 18
-





Summary of significant accounting
policies





Principle of
consolidation





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





Use of
estimates





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





Fair value
of financial instruments





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





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





Concentrations
of credit
risk





Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents and trade receivables. As ofJune 30, 2009, substantially all of the
Company’s cash and cash equivalents were held by
major financial institutions located in the People’s Republic of China (the “PRC”), which management believes are of high
credit quality. With respect to trade receivables, the Company extends credit
based on an evaluation of the customer’s financial condition. The Company
generally does not require collateral for trade receivables and maintains an
allowance for doubtful accounts of trade receivables.




Results of
Operations




Three months endedJune 30, 2009 and 2008




The information set forth below has been
derived from ourfinancial statements for the three months
endedJune 30, 2009and three months endedJune 30, 2008.





Three months endedJune 30,(unaudited)2009
                                  
                                  
                                  2008% as oftotal
                                    revenue
                                  
                                  
                                  
                                  
                                  
                                  % as of total
                                    revenue
                                  
                                  
                                  % ChangeSales
    revenue
                                  
                                  $
                                  3,661,398
                                  
                                  
                                  
                                  100%
                                  
                                  
                                  $
                                  3,361,055
                                  
                                  
                                  
                                  100%
                                  
                                  
                                  
                                  9%Cost of
    sales
                                  
                                  
                                  1,019,830
                                  
                                  
                                  
                                  28%
                                  
                                  
                                  
                                  891,466
                                  
                                  
                                  
                                  27%
                                  
                                  
                                  
                                  14%Gross
profit
                                  
                                  $
                                  2,641,568
                                  
                                  
                                  
                                  72%
                                  
                                  
                                  $
                                  2,469,589
                                  
                                  
                                  
                                  73%
                                  
                                  
                                  
                                  7%




- 19
-





Sales
Revenue





Revenues for thethree months endedJune 30,2009 were $3.66million, an increase of $300,343, or9% over revenues for thesameperiodof2008. This increase was mainly attributable
to the increase in sales of our products and services. Revenues by product
categories wereas
follows:




Three months endedJune 30,(unaudited)2009
                              
                              
                              2008Product
                              
                              
                              
                              
                              as of total
                              
                              
                              
                              
                              
                              as of total
                              
                              
                              %sales %
                              
                              
                              
                              
                              
                              sales %
                              
                              
                              ChangesTP-5
    ProductsTP-5 for injection
      (1mg)
                              
                              $
                              444,640
                              
                              
                              
                              12%
                              
                              
                              $
                              591,900
                              
                              
                              
                              18%
                              
                              
                              
                              -25%TP-5 for injection
      (10mg)
                              
                              311,150
                              
                              
                              
                              9%
                              
                              
                              282,297
                              
                              
                              
                              8%
                              
                              
                              
                              10%TP-5 pre-filled injection
      1ml:1mg
                              
                              346,502
                              
                              
                              
                              9%
                              
                              
                              339,066
                              
                              
                              
                              10%
                              
                              
                              
                              2%TP-5 pre-filled injection
      1ml:10mg
                              
                              628,967
                              
                              
                              
                              17%
                              
                              
                              532,465
                              
                              
                              
                              16%
                              
                              
                              
                              18%Sub-total ( TP-5
      products)
                              
                              1,731,259
                              
                              
                              
                              47%
                              
                              
                              1,745,728
                              
                              
                              
                              52%
                              
                              
                              
                              -1%Other
    productsSomatostatinfor injection
      3mg
                              
                              144,488
                              
                              
                              
                              4%
                              
                              
                              345,634
                              
                              
                              
                              10%
                              
                              
                              
                              -58%Thymosin Alpha 1 for injection
      1.6mg
                              
                              1,380,153
                              
                              
                              
                              38%
                              
                              
                              927,871
                              
                              
                              
                              28%
                              
                              
                              
                              49%DDAVP Injection
      1ml:4ug
                              
                              307,499
                              
                              
                              
                              8%
                              
                              
                              240,268
                              
                              
                              
                              7%
                              
                              
                              
                              28%DDAVP Injection
      1ml:15ug
                              
                              58,735
                              
                              
                              
                              2%
                              
                              
                              74,751
                              
                              
                              
                              2%
                              
                              
                              
                              -21%Granisetron Hydrochloride
      Injection 3ml:3mg
                              
                              30,894
                              
                              
                              
                              1%
                              
                              
                              26,103
                              
                              
                              
                              1%
                              
                              
                              
                              18%Ozagrel Sodium for Injection
      80mg/40mg
                              
                              7,017
                              
                              
                              
                              0%
                              
                              
                              700
                              
                              
                              
                              0%
                              
                              
                              
                              902%Others
                              
                              1,353
                              
                              
                              
                              0%In Total
                              
                              $
                              3,661,398
                              
                              
                              
                              100%
                              
                              
                              $
                              3,361,055
                              
                              
                              
                              100%
                              
                              
                              
                              9%




For the three months ended June 30,
2009, the sales of our major products, TP-5 products, were $1.73 million,
accounting for 47% of total sales, decreasedby $14,469, or 1% from $1.75 million
for the three months ended June 30, 2008.Amongthe TP-5 product category,the pre-filled products had a steady
increase compared to the traditional TP-5 products for injectionbecause of its increased safety, ease of
use and the flexibility to self-administraterthe medication at home. The revenuefrom TP-5 for pre-filled injection
increased $103,938, representing a 12% increase from the same period of
2008.At the same time,
since TP-5 products have been in the maturing stage in China market, to
strengthen our competitive advantage and insure steady sales volume, we reduced the average
price of TP-5for injection (1mg and 10mg)products. Thus, the revenue from TP-5 for
injection(1mg and 10mg) decreased $118,407,
representing a 14% decrease from the same period of 2008. We believe our TP-5
productswill continue to
hold a strong market share in China market in the near future because of our
more competitive price with superior quality and brand
recognition.





Thymosin Alpha 1 for injectiongraduallybecame our best selling
productsince its superior
curative effects andstrong
market acceptance,contributing
$1,380,153in revenue (38% of total sales) for the
three months ended June 30, 2009, representing a 49% increase from the same
period of 2008.





Meanwhile, DDAVP generated
$366,234, or 10% of total sales for the three
months ended June 30, 2009, an increase of 16% from $315,019 for the same period
in 2008.The main reason of
increase was that the product has gradually become more acceptable due to its
effective clinicalperformance. We believe it will continue to generate more revenue inthenear future.




Cost of
Sales and Gross Profit





Cost of goods sold was $1,019,830 for the three months ended June
30, 2009, as compared to $891,466 for the same period in 2008. Cost of
goods sold was 28% of total revenue for the three months ended June 30, 2009, as
compared to 27% of total revenue for the same period in 2008. The increase in
cost of sales as a percentage of revenue was mainly dueto theincreased sales of lower profit margin
products including Thymosin Alpha 1 for injection 1.6mg and
DDAVP.





Gross profit as a percentage of net
revenue decreased to 72% in the three months ended June 30, 2009
from73% in the same period in 2008due to the increase in cost of goods sold as
a percentage of revenueasdiscussed
above.


- 20
-




Three months ended June 30,(unaudited)2009
                                      
                                      
                                      2008as of total
                                        revenue
      %
                                      
                                      
                                      
                                      
                                      
                                      as of total
                                        revenue
      %
                                      
                                      
                                      %ChangesOperating
      expenses:Administrative
      expenses
                                      
                                      $
                                      199,517
                                      
                                      
                                      
                                      5%
                                      
                                      
                                      $
                                      267,788
                                      
                                      
                                      
                                      8%
                                      
                                      
                                      
                                      -25%Research
      and development costs
                                      
                                      
                                      39,428
                                      
                                      
                                      
                                      1%
                                      
                                      
                                      97,571
                                      
                                      
                                      
                                      3%
                                      
                                      
                                      
                                      -60%Selling
      expenses
                                      
                                      
                                      74,830
                                      
                                      
                                      
                                      2%
                                      
                                      
                                      143,009
                                      
                                      
                                      
                                      4%
                                      
                                      
                                      
                                      -48%313,775
                                      
                                      
                                      
                                      8%
                                      
                                      
                                      508,368
                                      
                                      
                                      
                                      15%
                                      
                                      
                                      
                                      -38%Income
      from operations
                                      
                                      $
                                      2,327,793
                                      
                                      
                                      
                                      64%
                                      
                                      
                                      $
                                      1,961,221
                                      
                                      
                                      
                                      58%
                                      
                                      
                                      
                                      19%





Administrative
Expenses





Administrative
expenses primarily consist of depreciation, salaries and other related costs for
personnel in executive and other administrative functions. Other significant
costs included amortization of intangible assets, urban real estate tax.
Administrative expenses for the three months ended June 30, 2009 and 2008 were
$199,517 (5% of total sales) and $267,788 (8% of total sales), respectively,
representing a decrease of $ 68,271. The decrease in administrative expenses was
primarily attributable to the decrease of $ 37,051 in depreciation expenses due
to the disposal of non-productive properties in October 2008, as well as the
decrease of $28,058 in salaries due to our expense-control plan.





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 June 30, 2009 were
$39,428, or 1% of total sales, a $58,143 decrease from $97,571 for the same
period of 2008. In order to achieve better R&D results, the Company has
purchased drugs including Entecavir this year from outside research
institutions. Thus, R&D expenses were reduced.





Selling
Expenses





Selling
expenses, including distribution expenses, were $74,830, or 2% of total sales,
for the three months ended June 30, 2009 as compared to $143,009, or 4% of the
total sales for the same period in 2008, representing a decrease of $68,179. The
decrease was mainly due to the reduction of additional sales tax. According to
China Tax Regulations, a foreign invested company is exempt from City
Construction Tax and Education Supplementary Tax from September 2008 onwards.
The Company has been a U.S. listed company, and accordingly, a foreign invested
company and is exempt from the relevant taxes.





Income from Operations





Income
from operations was $2.33 million for the three months ended June 30, 2009, an
increase of 19% from $1.96 million for the same period in 2008. The increase was
mainly due to the decrease of the above described costs and
expenses.


- 21
-




Three months ended
      June 30,(unaudited)2009
                                  
                                  
                                  2008as of
      total
                                  
                                  
                                  
                                  
                                  
                                  as of
      total
                                  
                                  
                                  %revenue %
                                  
                                  
                                  
                                  
                                  
                                  revenue %
                                  
                                  
                                  ChangesIncome
      from operations
                                  
                                  $
                                  2,327,793
                                  
                                  
                                  
                                  64%
                                  
                                  
                                  $
                                  1,961,221
                                  
                                  
                                  
                                  58%
                                  
                                  
                                  
                                  19%Interest
      income
                                  
                                  
                                  66,735
                                  
                                  
                                  
                                  2%
                                  
                                  
                                  
                                  328
                                  
                                  
                                  
                                  0%
                                  
                                  
                                  
                                  20,246%Other
      income
                                  
                                  146,504
                                  
                                  
                                  
                                  4%
                                  
                                  
                                  93,755
                                  
                                  
                                  
                                  3%
                                  
                                  
                                  
                                  56%Government
      subsidy income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  9,225Finance
      costs
                                  
                                  
                                  (135,696
                                  )
                                  
                                  
                                  -4%
                                  
                                  
                                  (130,925)
                                  
                                  
                                  
                                  -4%
                                  
                                  
                                  
                                  4%Income
      before income taxes and noncontrolling interest
                                  
                                  
                                  2,405,336
                                  
                                  
                                  
                                  66%
                                  
                                  
                                  1,933,604
                                  
                                  
                                  
                                  58%
                                  
                                  
                                  
                                  24%Income
      taxes
                                  
                                  
                                  (354,062
                                  )
                                  
                                  
                                  -10%
                                  
                                  
                                  1,990
                                  
                                  
                                  
                                  0%
                                  
                                  
                                  
                                  -17,892%Net
      income before noncontrolling interest
                                  
                                  
                                  2,051,274
                                  
                                  
                                  
                                  56%
                                  
                                  
                                  $
                                  1,935,594
                                  
                                  
                                  
                                  58%
                                  
                                  
                                  
                                  6%Net
      income attributable to noncontrolling interest
                                  
                                  
                                  (18,116
                                  )
                                  
                                  
                                  0%
                                  
                                  
                                  (17,083
                                  )
                                  
                                  
                                  1%
                                  
                                  
                                  
                                  6%Net
      income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                                  
                                  
                                  2,033,158
                                  
                                  
                                  
                                  56%
                                  
                                  
                                  
                                  1,918,511
                                  
                                  
                                  
                                  57%
                                  
                                  
                                  
                                  6%Earnings
      per share:Basic
      and diluted
                                  
                                  $
                                  0.08
                                  
                                  
                                  
                                  
                                  
                                  $
                                  0.08Weighted
      average number of shares outstanding :Basic
      and diluted
                                  
                                  
                                  25,000,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  24,250,000





Interest
income





Interest
income increased by $66,407 to $66,735 for the three months ended June 30, 2009
from $328 for the same period of 2008. The increased interest income was mainly
accrued from the amount due from Zhonghe Group, at an interest rate of 5.31% per
annum.





Other
Income





For the
three months ended June 30, 2009, other income was $146,504, representing
three-month’s rental income paid by Sinopep Pharmaceutical Inc. (“Sinopep”).
This rental income will also be paid in the next two quarters as our partial
raw-material factory is leased to Sinopep for a year since the beginning of
2009.





Finance
Costs





Three months ended June
      30,(unaudited)2009
                
                
                2008
                
                
                %
      ChangesBank
      charges
                
                
                470
                
                
                
                1,062
                
                
                
                -56%Discounting
      charges
                
                
                458
                
                
                
                9,150
                
                
                
                -95%Interest
      expenses
                
                
                142,647
                
                
                
                120,710
                
                
                
                18%Exchange
      (gain) loss
                
                
                (7,879
                )
                
                
                3$
                135,696
                
                
                $
                130,925
                
                
                
                4%




- 22
-


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 June 30, 2009, we incurred interest expenses of
$142,647, as comparedto $120,710forthe same period
in 2008. The increase of interest expenses was related primarily to the secured
borrowings which balance increased approximately $2.81 million as of June
30, 2009 as compared to that of June 30, 2008. For protection against the
rising price of raw materials, in April 2009, the Company obtained $2.93 million
in short-term loan from a local bank to purchase partial important raw
materials. The loan period was from April 15, 2009 to January 14, 2010 with
interest rate of 6.37 % per annum.





Net
Income





Net
income increased by 6% to $2.03 million for the three months ended June 30, 2009
from $1.92 million for the same period of 2008 due to increased
revenue and reduced costs and expenses as described above.





Earnings per
share





Earnings
per share for the three months ended June 30, 2009 was $0.08 per share for both
basic and diluted shares, the same for both basic and diluted shares for the
same period of 2008.





Six
months ended June 30, 2009 and 2008




The
information set forth below has been derived from our financial statements for
the six months ended June 30, 2009 and six months ended June
30, 2008.





Six months ended
      June 30,(unaudited)2009
                          
                          2008% as of total
                            revenue
                          
                          
                          
                          
                          % as of total
                            revenue
                          
                          
                          % ChangesSales
      revenue
                          
                          $
                          6,090,666
                          
                          
                          
                          100%
                          
                          
                          $
                          5,350,069
                          
                          
                          
                          100%
                          
                          
                          
                          14%Cost
      of sales
                          
                          
                          1,765,523
                          
                          
                          
                          29%
                          
                          
                          
                          1,554,670
                          
                          
                          
                          29%
                          
                          
                          
                          14%Gross
      profit
                          
                          $
                          4,325,143
                          
                          
                          
                          71%
                          
                          
                          $
                          3,795,399
                          
                          
                          
                          71%
                          
                          
                          
                          14%





Sales
Revenue





Revenues
for the six months ended June 30, 2009 were $6.09 million, an increase of
$740,597, or 14% over revenues for the same period of 2008. This increase
was mainly attributable to the increase in sales of our products and services.
Revenues by product categories were as follows:


- 23
-





Six
      months ended June 30,
                            (unaudited)2009
                          
                          
                          2008as of total
                          
                          
                          
                          
                          
                          as of totalProduct
                          
                          
                          
                          
                          sales%
                          
                          
                          
                          
                          
                          sales%
                          
                          
                          %ChangesTP-5
      ProductsTP-5
      for injection (1mg)
                          
                          $
                          773,403
                          
                          
                          
                          13%
                          
                          
                          $
                          848,738
                          
                          
                          
                          16%
                          
                          
                          
                          -9%TP-5
      for injection (10mg)
                          
                          
                          426,766
                          
                          
                          
                          7%
                          
                          
                          
                          391,925
                          
                          
                          
                          7%
                          
                          
                          
                          9%TP-5
      pre-filled injection 1ml:1mg
                          
                          
                          477,614
                          
                          
                          
                          8%
                          
                          
                          
                          708,666
                          
                          
                          
                          14%
                          
                          
                          
                          -33%TP-5
      pre-filled injection 1ml:10mg
                          
                          
                          1,070,583
                          
                          
                          
                          17%
                          
                          
                          
                          876,081
                          
                          
                          
                          16%
                          
                          
                          
                          22%Sub-total
      ( TP-5 products)
                          
                          
                          2,748,366
                          
                          
                          
                          45%
                          
                          
                          
                          2,825,410
                          
                          
                          
                          53%
                          
                          
                          
                          -3%Other
      productsSomatostatin
      for injection 3mg
                          
                          
                          427,535
                          
                          
                          
                          7%
                          
                          
                          
                          527,487
                          
                          
                          
                          10%
                          
                          
                          
                          -19%Thymosin
      Alpha 1 for injection 1.6mg
                          
                          
                          2,151,277
                          
                          
                          
                          35%
                          
                          
                          
                          1,366,842
                          
                          
                          
                          26%
                          
                          
                          
                          57%DDAVP
      Injection 1ml:4ug
                          
                          
                          554,010
                          
                          
                          
                          9%
                          
                          
                          
                          399,929
                          
                          
                          
                          7%
                          
                          
                          
                          39%DDAVP
      Injection 1ml:15ug
                          
                          
                          130,163
                          
                          
                          
                          2%
                          
                          
                          
                          178,914
                          
                          
                          
                          3%
                          
                          
                          
                          -27%Granisetron
      Hydrochloride Injection 3ml:3mg
                          
                          
                          50,991
                          
                          
                          
                          1%
                          
                          
                          
                          37,671
                          
                          
                          
                          1%
                          
                          
                          
                          35%Ozagrel
      Sodium for Injection 80mg/40mg
                          
                          
                          26,745
                          
                          
                          
                          1%
                          
                          
                          
                          13,816
                          
                          
                          
                          0%
                          
                          
                          
                          94%Others
                          
                          
                          1,579
                          
                          
                          
                          0%In
      Total
                          
                          $
                          6,090,666
                          
                          
                          
                          100%
                          
                          
                          $
                          5,350,069
                          
                          
                          
                          100%
                          
                          
                          
                          14%




For the
Six months ended June 30, 2009, the sales of our major products, TP-5
products, were $2.75 million, accounting for 45% of total sales,
decreased by $77,044, or 3% from $2.83 million for the six months ended
June 30, 2008. The decrease was due to increased competition within the
TP-5 market, and we reduced the price of TP-5 for injection (1mg and 10mg)
to maintain our competitive edge and our market share.





Thymosin
Alpha 1 for injection was still our best selling product with increased brand
recognition and market acceptance, contributing $2,151,277 in revenue
(35% of total sales) for the six months ended June 30, 2009, representing a 57%
increase from the same period of 2008.





Meanwhile,
DDAVP generated $684,173, or 11% of total sales for the six months ended June
30, 2009, an increase of 18% from $578,843 for the same period in 2008. The main
reason of increase was that the product has gradually become more acceptable due
to its effective clinical performance. We believe it will continue to generate
more revenue in the near future.




Cost of Sales and Gross
Profit





Cost of
goods sold was $1,765,523 for the six months ended June 30, 2009, as compared to
$1,554,670 for the same period in 2008. Cost of goods sold was 29% of total
revenue for the six months ended June 30, 2009, almost the same percentage of
total revenue for the same period in 2008.




Gross
profit as a percentage of net revenue was 71% in the six months ended June 30,
2009. The gross margin remained relatively unchanged as compared to the
same period in 2008.





Six months ended June 30,(unaudited)2009
                      
                      
                      2008as of total
                        revenue %
                      
                      
                      
                      
                      
                      as of total
                        revenue %
                      
                      
                      %
      ChangeOperating
      expenses:Administrative
      expenses
                      
                      $
                      392,425
                      
                      
                      
                      6%
                      
                      
                      $
                      484,855
                      
                      
                      
                      9%
                      
                      
                      
                      -19%Research
      and development costs
                      
                      99,312
                      
                      
                      
                      2%
                      
                      
                      126,240
                      
                      
                      
                      2%
                      
                      
                      
                      -21%Selling
      expenses
                      
                      217,543
                      
                      
                      
                      4%
                      
                      
                      284,080
                      
                      
                      
                      5%
                      
                      
                      
                      -23%709,280
                      
                      
                      
                      12%
                      
                      
                      895,175
                      
                      
                      
                      17%
                      
                      
                      
                      -20%




- 24
-


Administrative
Expenses





Administrative
expenses primarily consist of depreciation, salaries and other related costs for
personnel in executive and other administrative functions. Other significant
costs included amortization of intangible assets, urban real estate tax.
Administrative expenses for the six months ended June 30, 2009 and 2008 were
$392,425 (6% of total sales) and $484,855 (9% of total sales), respectively. The
decrease in administrative expenses was primarily attributable to decreases in
traveling expenses and salaries for the six months ended June 30, 2009 since we
implemented an expense-control plan after we became a listed
company.





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 six months ended June 30, 2009 were
$99,312, or 2% of total sales, a $26,928 decrease from $126,240 for the same
period of 2008. In order to achieve better R&D results, the Company has
purchased drugs including Entecavir this year from an outside research
institution. Thus, R&D expenses were reduced.





Selling
Expenses





Selling
expenses, including distribution expenses, were $217,543, or 4% of
total sales, for the six months ended June 30, 2009 as compared to $284,080 for
the six months ended June 30, 2008. This represents an decrease of $66,537, or
23 %. This decrease is mainly due to the reduction of additional sales
tax. According to China Tax Regulations, a foreign invested company is
exempt from City Construction Tax and Education Supplementary Tax from September
2008 onwards. The Company has been a U.S. listed company, and accordingly, a
foreign invested company and is exempt from the relevant taxes.





Income from
Operations





Income
from operations was $3.62 million for the six months ended June 30, 2009, an
increase of 25% from $2.90 million for the same period in 2008.




Six months ended June
      30,(unaudited)2009
                            
                            
                            2008as of
      total
                            
                            
                            
                            
                            
                            as of
      total
                            
                            
                            %revenue
      %
                            
                            
                            
                            
                            
                            revenue
      %
                            
                            
                            ChangesIncome
      from operations
                            
                            $
                            3,615,863
                            
                            
                            
                            59%
                            
                            
                            $
                            2,900,224
                            
                            
                            
                            54%
                            
                            
                            
                            25%Interest
      income
                            
                            
                            66,960
                            
                            
                            
                            1%
                            
                            
                            
                            1,142
                            
                            
                            
                            0%
                            
                            
                            
                            5,763%Other
      income
                            
                            
                            199,244
                            
                            
                            
                            3%
                            
                            
                            
                            102,596
                            
                            
                            
                            2%
                            
                            
                            
                            94%Government
      subsidy income
                            
                            
                            7,325
                            
                            
                            
                            0%
                            
                            
                            
                            9,625
                            
                            
                            
                            0%
                            
                            
                            
                            -24%Finance
      costs
                            
                            
                            (257,818
                            )
                            
                            
                            -4%
                            
                            
                            
                            (274,621
                            )
                            
                            
                            -5%
                            
                            
                            
                            -6%Income
      before income taxes and noncontrolling interest
                            
                            
                            3,631,574
                            
                            
                            
                            59%
                            
                            
                            
                            2,738,966
                            
                            
                            
                            51%
                            
                            
                            
                            33%Income
      taxes
                            
                            
                            (549,008
                            )
                            
                            
                            -9%
                            
                            
                            
                            (131,580
                            )
                            
                            
                            -2%
                            
                            
                            
                            317%Net
      income before noncontrolling interest
                            
                            
                            3,082,566
                            
                            
                            
                            50%
                            
                            
                            $
                            2,607,386
                            
                            
                            
                            49%
                            
                            
                            
                            18%Net
      income attributable to noncontrolling interest
                            
                            
                            (27,205
                            )
                            
                            
                            0%
                            
                            
                            
                            (22,958
                            )
                            
                            
                            1%
                            
                            
                            
                            18%Net
      income attributable to Kun Run Biotechnology, Inc. common
      stockholders
                            
                            
                            3,055,361
                            
                            
                            
                            50%
                            
                            
                            
                            2,584,428
                            
                            
                            
                            48%
                            
                            
                            
                            18%Earnings
      per share:Basic and
      diluted
                            
                            $
                            0.12
                            
                            
                            
                            
                            
                            
                            $
                            0.11Weighted
      average number of shares outstanding :Basic
      and diluted
                            
                            
                            25,000,000
                            
                            
                            
                            
                            
                            
                            
                            24,250,000




- 25
-


Interest
income





Interest
income increased by $65,818 to $66,960 for the six months ended June 30, 2009
from $1,142 for the same period of 2008. The increased interest income was
mainly accrued from the amount due from Zhonghe Group, at an interest rate of
5.31% per annum.





Other
Income





For the
six months ended June 30, 2009, other income was $199,244, mainly attributable
to six-month’s rental income paid by Sinopep Pharmaceutical Inc. The rental
income will also be paid in the next two quarters as our partial raw-material
factory is leased to Sinopep for a year since the beginning of
2009.





Finance
Costs





Six months ended
      June 30,(unaudited)2009
                
                
                2008
                
                
                Changes %Bank
      charges
                
                
                1,073
                
                
                
                1,358
                
                
                
                -21
                %Discounting
      charges
                
                
                3,034
                
                
                
                25,542
                
                
                
                -88
                %Interest
      expenses
                
                
                261,590
                
                
                
                247,718
                
                
                
                6
                %Exchange
      (gain) loss
                
                
                (7,879)
                
                
                
                3$
                257,818
                
                
                $
                274,621
                
                
                
                -6
                %





Discounting
charges





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





Interest
Expense





For the
six months ended June 30, 2009, we incurred interest expenses of
$261,590, as compared to $247,718 for the same period in 2008. The
interest expenses were related primarily to the secured borrowings which
balance increased approximately $2.77 million as of June 30, 2009 as compared to
that of June 30, 2008. For prevention against the rising price of raw
materials, in April 2009, we obtained a $2.93 million in short-term loan from
the local bank to purchase partial important raw materials. The loan period was
from April 15, 2009 to January 14, 2010 with interest rate of 6.37 % per annum.
Thus, the loan also contributes to the increase of interest expenses in the
amount of $34,771.





Income
taxes





Income
taxes increased by $ 417,428 to $549,008 for the six months ended June 30, 2009
from $131,580 for the same period of 2008. The main reason of this increase was
that we were entitled to the benefits of Tax Concession from purchasing
domestic equipment and facility in 2008, but this Tax Concession has been
cancelled in 2009 by Tax Bureau.





Net
Income





Net
income increased by 18% to $3.06 million for the six months ended June 30, 2009
from $2.58 million for the same period of 2008 due to increased
revenue and reduced costs and expenses described above.





Earnings per
share





Earnings
per share for the six months ended June 30, 2009 was $0.12 per share for both
basic and diluted shares, as compared with $0.11 per share for both basic and
diluted shares for the same period of 2008.


- 26
-


Liquidity
and Capital Resources





Cash





As of
June 30, 2009, our principal sources of liquidity consisted of cash and cash
equivalents of $288,127, representing an increase of $47,587, or 20%, as
compared with our cash balance of $240,540 as of June 30, 2008. The Company’s
cash and cash equivalents consist of cash on hand and deposits with commercial
banks. We believe our cash and cash equivalents are highly liquid and do not
anticipate any losses with respect to such cash balances.





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





Cash Flow
                
                Six Months Ended June 30,
                  (Unaudited)2009
                
                
                2008Net
      cash provided by operating activities
                
                $
                646,241
                
                
                $
                2,921,551Net
      cash used in investing activities
                
                
                (3,589,073
                )
                
                
                (2,114,667
                )Net
      cash provided by (used in) financing activities
                
                
                2,797,616
                
                
                
                (1,265,824
                )Effect
      of foreign currency translation on cash and cash
      equivalents
                
                
                (256
                )
                
                
                28,561Net
      cash flow
                
                $
                (145,472
                )
                
                $
                (430,379
                )




Operating
Activities





Net cash
provided by operating activities was $646,241 for the six months ended June
30, 2009, a decrease of $2.28 million from the net cash provided by operating
activities of $2.92 million for the same period in 2008. The decreased cash flow
was primarily attributed to the $2.5 million increase in prepayment and
deposits. In April 2009, considering the outbreak of the H1N1 virus
globally, the management team decided to store enough raw materials to meet the
rapid products demand in the domestic market. Thus, we had a prepayment to our
supplier to guarantee the timely supply of raw materials.





Investing Activities





Net cash
used in investing activities for the six months ended June 30, 2009 was $3.59
million, an increase of $1.47 million from net cash used in investing activities
of $2.11 million for the same period of 2008. The increase in net cash used in
investing activities was mainly due to payment deposit for acquisition of one
new drug, Entecavir (Entecavir Capsules (0.5mg; 1mg), Entecavir Tablets (0.5mg;
1mg)), partially offset by cash proceeds from sale of property, plant and
equipment.





Financing Activities





Net cash
provided in financing activities for the six months ended June 30, 2009 was $2.8
million as compared to $1.27 million used in financing activities in the same
period of 2008. The increase was mainly due to the new short-term bank loan of
$2.93 million. The loan period was from April 15, 2009 to January 14, 2010 with
interest rate of 6.37 % per annum.





As a
result of the total cash activities, we believe our working capital will be
sufficient to sustain our operations and current anticipated expansion
level.


- 27
-


Off-Balance
Sheet Arrangements




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




Recently
issued accounting pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective for the
fiscal year beginning after December 15, 2008. The new standard has been applied
prospectively as of January 1, 2009, except for the presentation and disclosure
requirements, which have been applied retrospectively for prior periods
presented. Prior to the adoption of SFAS No. 160, the noncontrolling interests’
equity was included in other long-term liabilities in the condensed consolidated
balance sheets. Upon the adoption of SFAS 160, the noncontrolling interest is
presented within stockholders’ equity.





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





In
April 2008, the FASB issued FASB staff position (“FSP”) FAS 142-3,
Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP FAS
142-3 amends the factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other
Intangible Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after
December 15, 2008. Early adoption is prohibited. The adoption of this
standard has no material effect on the Company's financial
statements.





In April
2009, the FASB issued FSP No. 141R-1“Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies”(“FSP 141R-1”).
FSP 141R-1 amends the provisions in FASB Statement 141R for the initial
recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. FSP 141R-1 eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria in Statement 141R and instead carries forward most of the provisions in
SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent
assets and contingent liabilities acquired in evaluating the impact of SFAS
141(R). The management is in the process of evaluating the impact of adopting
this standard on the Company’s financial statements.





In April
2009, the FASB issued FSP No. 157-4, “Determining Whether a Market is Not Active
and a Transaction Is Not Distressed”, or FSP No. 157-4. FSP No. 157-4 clarifies
when markets are illiquid or that market pricing may not actually reflect the
“real” value of an asset. If a market is determined to be inactive and market
price is reflective of a distressed price then an alternative method of pricing
can be used, such as a present value technique to estimate fair value. FSP
No. 157-4 identifies factors to be considered when determining whether or
not a market is inactive. FSP No. 157-4 would be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 and shall be applied prospectively. The
adoption of this statement has no material effect on the Company's financial
statements.


- 28
-


In
April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2,
“Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and FAS
No. 124-2. FSP FAS No. 115-2 and FAS No. 124-2 amends the other-than-temporary
impairment guidance in SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, for debt securities and the presentation and disclosure
requirements of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 is effective
for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
adoption of this standard has no material effect on the Company's financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,”
to require those disclosures in summarized financial information at interim
reporting periods. The FSP is effective for interim periods ending after June
15, 2009, with earlier adoption permitted for periods ending after March 15,
2009. Adoption of FSP FAS 107-1 and APB 28-1 is not expected to have a material
impact on the Company’s financial statements.





In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”), which sets forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 will become effective after
June 15, 2009. The adoption of this statement has no material effect on the
Company's financial statements.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets. SFAS 166 removes the concept of a qualifying special-purpose entity
(QSPE) from SFAS No. 140 (“SFAS 166”), Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities (SFAS 140) and removes the
exception from applying FIN 46R. This statement also clarifies the requirements
for isolation and limitations on portions of financial assets that are eligible
for sale accounting. This statement is effective for fiscal years beginning
after November 15, 2009. SFAS 166 is effective for the Company’s year beginning
November 29, 2009. The management is in the process of evaluating the impact of
adopting this standard on the Company’s financial statements.





In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS 167”), which amends FASB Interpretation
No. 46 (revised December 2003) to address the elimination of the
concept of a qualifying special purpose entity. SFAS 167 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity and the obligation to absorb
losses of the entity or the right to receive benefits from the
entity. Additionally, SFAS 167 provides more timely and useful information
about an enterprise’s involvement with a variable interest entity. SFAS 167
shall be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The management is in the
process of evaluating the impact of adopting this standard on the Company’s
financial statements.





In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which
establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied in the
preparation of financial statements in conformity with generally accepted
accounting principles. SFAS 168 explicitly recognizes rules and interpretive
releases of the Securities and Exchange Commission under federal securities laws
as authoritative GAAP for SEC registrants. SFAS 168 will become effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The management is in the process of evaluating the impact of
adopting this standard on the Company’s financial statements.


- 29
-


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 June 30, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


- 30
-





PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





None.




Item
1A. Risk Factors





Not
required.




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





None.




Item
3. Defaults Upon Senior Securities





None.




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





None.




Item 5. Other Information
..





None.




Item
6.  Exhibits




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




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




- 31
-





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:
      August 14, 2009
                    By:
                    /s/ Xiaoqun YeXiaoqun
      Ye, Chief Executive Officer(Principal
      Executive
Officer)





Date:
      August 14, 2009
                  By:
                  /s/ Yan LinYan
      Lin, Chief Accounting Officer(Principal
      Financial
Officer)




- 32
-